Monday, October 18, 2010

Arena's Last Stand

Arena Pharmaceuticals, a small one trick pony drug company, meets destiny October 22. Lorcaserin, Lorqess, is its weight loss product. Unfortunately, the FDA Metabolic Panel review gave the product a thumbs down on September 16. The vote was not overwhelming in the negative (9-6), but negative nonetheless. Lorcaserin is effective, but the problem resided in some unexplained issues of rat mammary tumors.

Shareholders and other observers were blindsided by this negative information. Class action lawsuits have predictably arisen, but these are silly. If Arena doesn't get an approval from the FDA the company will be broken and worth little. If the FDA votes against its Panel's advice, which it does on rare occasions, the suits would me moot.

The share price has hovered in the $1.70 range since the September debacle. Assuming an FDA negative vote, the shares will become worthless. On the other hand, the long longshot positive vote by the FDA would give the shareholder an impressive reward. What to do if you are a shareholder?

The smart move is to dump shares and take the losses on the chin. For riverboat gamblers, hold on and go broke or go rich. Keep all of the shares and hope for the best. Another alternative would be a 90/10 or 75/25 or similar move. That is, sell 90% of shares, take the loss and keep 10%. The 10% remaining position gives the gambler a shot to recoup losses if the near impossible approval were to occur.

So far the Panel has gunned down two of the three fat drugs. (Besides Lorqess, Qnexa took the heat in July). Contrave by Orexigen (OREX) is coming up for Panel review. Maybe the Panel will relent on it's hard ball position? Would OREX be a good move? Hmm.

There are no easy answers in the fat drug market. While there is a great need for an effective treatment for obesity, the FDA, for now, appears recalcitrant in not embracing this group of drugs. OK, pays your money, takes your choice. October 22 is coming, soon. And so it goes.

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