PropThink: More Money, Same Problems; OREX Gains on Public Offering

By Jake King

Word from Orexigen Therapeutics OREX Wednesday that it will be raising capital in the form of an equity offering came as little surprise to investors, and the market is taking the news positively during Thursday's trading session. OREX gapped up from $5.52 at the open and trades at $5.75 in the early afternoon as investors take confidence in the drug-developer's newly-fortified cash position. The company announced three days ago that Contrave - the third weight-loss drug facing the FDA this year - may be eligible for an accelerated review and approval process. The stock traded off 7% in Monday's session regardless, as investors feared a capital raise may be on the horizon after OREX initiated a $150M shelf registration in September.

As of September 30, OREX had 108.3M in cash, equivalents and marketable securities (Orexigen also reported preliminary 3Q financials), and this week's stock offering may raise as much as $65M in net proceeds. The company is on solid ground financially - hence Thursday's gains - and OREX price action now relies heavily on the company's discussions with the FDA. Any concrete evidence that Orexigen will be permitted to resubmit the Contrave New Drug Application ahead of an interim analysis from the Light Study will galvanize investors. With all of this excitement, its easy to forget that Contrave is still in the clinic. The drug lacks safety data from the ongoing Light Study - pivotal information - and will then need an FDA approval to make that final leap from the clinic to the market. And while obesity is a growing issue, Contrave's slice of the cake is slowly shrinking with predecessors Belviq and Qsymia - from Arena ARNA and Vivus VVUS - already on the market.

We're talking about at least a year before the doctor starts writing out Contrave prescriptions, so playing OREX predominantly for short-term gains makes the most sense. Management sounded confident that the FDA would allow some sort of fast-track review for Contrave, and details on that agreement might appear before the end of the year. Interim safety data from the Light Study should come in the first half of 2013, most likely in the second quarter if enrollment continues at a good pace. That said, these are binary events and require a healthy appetite for risk. OREX's recent weakness and bounce might make for a fast technical trade, but quick profit-taking is wise with this volatile stock. Take a look at PropThink's report on Merge Healthcare MRGE for an undervalued opportunity in the healthcare IT industry that has some more fundamental substance.

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