Arena Pharma Files for EMA Application, Hopes to Cure Weight Loss
Today, Arena Pharma (NASDAQ: ARNA) announced that the EMA had accepted its application for lorcaserin, its weight loss drug. The drug has come a long way from its previous FDA panel appearance, in which the drug suffered a 9-7 vote against recommendation. Obesity affects nearly one-third of Americans, with another one-third being overweight. The large population has prompted at least one Wall Street analyst to predict that the drug would be prescribed to millions, if not tens of millions of people upon approval. While Europeans do not have the same rate of obesity, the drug would still have potential given that many overweight people struggle to lose weight using natural methods.
Lorcaserin has competed against two other weight loss drugs in development from rivals Vivus (NASDAQ: VVUS) and Orexigen Therapeutics (NASDAQ: OREX). Many medical professionals believe that lorcaserin has shown a great deal of efficacy in clinical trials, with the majority of enrolled patients showing at least a 5% decrease in weight over the life of the study for the majority of patients. The FDA has cited a small risk of developing cancer as a side effect of the drug, and it will be up to Arena to disprove that fact before the FDA makes its approval decision on June 27.
While many medical experts tout a nutritious diet and exercise as the primary way to maintain a healthy weight, many patients suffer from genetic or medical conditions which prevent them from losing significant weight. Obesity can lead to serious conditions such as cancer, diabetes, and heart disease and the FDA panel noted that the side effects of lorcaserin could be offset given the benefits, as a new weight loss drug has not been marketed since 1999, when Roche unveiled Xenical for obese patients.
Arena carries the hopes of hundreds of millions of people on its back. Obesity is clearly an issue which affects many people, and lorcaserin could be the closest thing to a magic pill for those who have trouble losing weight naturally. While analysts have projected a peak of $500 million in yearly sales, those projections could be light if some overweight patients opt to forego traditional weight management strategies and seek the "magic pill" instead.
If you believe that lorcaserin will be approved and become a blockbuster drug, consider these options:
- Buy shares of Arena. Despite the recent appreciation in price, many analysts believe that the stock could run much higher if the drug becomes a major blockbuster.
- Buy shares of competitors Vivus and Orexigen Therapeutics. Both companies shares appreciated on the recent Vivus panel decision and could see further upside if the FDA approves their drugs.
If you believe that the FDA will continue to question the safety profile of lorcaserin and give Arena a CRL, consider these trades:
- Go short Arena. Despite the optimism for Vivus's recent panel success, many analysts do not believe that Arena has a comparable risk-reward profile.
- Go short Vivus or Orexigen. The degree of optimism over weight loss drugs has driven both companies' shares higher, and a failure by Vivus to obtain approval would be devastating for investors in both companies.
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