Arena Pharma Poised to Rally on Positive FDA Panel Vote
Reza is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
On May 10, Arena Pharma (NASDAQ: ARNA) is scheduled to appear before a FDA panel of experts that will make a recommendation on Lorcaserin, Arena's obesity medication. Studying the various social networking, discussion boards, blogs, and news, one can quickly sense two groups of participants: Those who are strongly convinced that Lorcaserin will be approved, and those who seem so determined to recommend that people should sell their shares. That by itself is fascinating to watch. While the latter group is much more vocal, typing their sell signs in capital letters, the former group is relatively quiet because there is not much that can be said or done until the panel reviews Arena's case.
I don't believe any disparaging remarks published on these forums would persuade those who have held on this close to the finish line to sell. Looking at the content of these negative messages, I could not detect any reasonable argument against approval. And it's fascinating to ask why parties who suspect against approval would spend so much energy disparaging the company. If they're so sure about their stance why not try to short the stock, then sit back and wait, similar to what longs have done?
I have spoken to several medical doctors who are convinced Lorcaserin will get approved. I don't see any of them going out there shouting at people to buy the stock -- they don't need to -- they've taken positions and are waiting for FDA approval. I am inclined to conclude, as a result of these observations, that the "bears" are not so sure of their case. Furthermore, it is rational to conclude given a short interest of over 40 million shares, the so-called "bears" might in fact have a "bullish" sentiment -- in other words, are predicting approval because if they were truly bears they would hope for the stock to rise before the AdComm and short into that rally. Instead they seem to be trying to keep the price down, perhaps as a way of controlling what in my opinion is inevitable: a strong rally in the share price following AdComm's strong vote of confidence.
One medical doctor voiced his dismay at the unfounded negative propaganda in a statement he published. Here's an extract:
"The greed of a few are attempting to undermine the health of our nation through their hedge funds and coordinated negative propaganda... they don't give a damn about the drug or the national economy weighted down by obesity and its health expenditures. They just want to make money. But at what what cost to everyone else? They have the money to get people to "throw the fight" or "fix the game," which many people feel happened at the last Advisory Committee where suddenly without warning a tumor issue with skewed data in rats which doesn't pertain to humans was brought up... Call and email your congressman, senator, FDA, SEC, Mrs. Obama, etc. This is not just about Lorcaserin or Arena, it is about the health, happiness and future well being of the US and the world..."
Some parties have voiced their concerns to the FDA about conflict of interest in the Arena AdComm, and in particular a waiver that was granted to Dr. Dan Bessesen (by issuing a waiver, the FDA allows panel members who have conflicts of interest to participate in a panel when for example there's a shortage of specialists). Two Republican congressmen (Burr, Coburn) are trying to overturn the conflict of interest regulations that the FDA instated in 2007 following the Dendreon (NASDAQ: DNDN) saga.
The FDA has also been accused of leakage of insider information. In her 2008 disturbing article "Bush's FDA - Perpetual Leaker of Insider Information," Evelyn Pringle cites the Dendreon case as an example and states "The steady leaking of insider information about products under review by the FDA has caused enormous losses for average American investors since the Bush Administration took control of the agency." Let us hope the FDA has improved during the Obama Administration.
There is concern that the playing field may not be level, but I believe given the strength of Arena's data, Lorcaserin will get approved. Perhaps the 40+M short interest feels the same given the level of effort by anonymous posters to disparage Arena. Journalists such as TheStreet's Adam Feuerstein have been doing their part in spreading negativity about Arena. Adam's efforts do not concern me when I recall his boss's statement:
"What's important when you are in that hedge-fund mode is to not do anything remotely truthful because the truth is so against your view, that it's important to create a new truth, to develop a fiction"
The last couple of weeks have been absolutely insane. At times a full page of messages (40) scrolls off every 10 minutes. Some have resembled this level of disparagement to pre-approval Provenge, but much more intense. A thread titled "Straight from DNDN playbook" stated: "Same misfits and scare tactics...same result. Enjoy DNDN part deux." Another wrote:
"In all my years of trading biotechs. I have never seen as much bashing and fear tactics as I have seen with ARNA. Not even DNDN was this bad and it went fom $2.50's to $52.00 bamb!"
Dr. Steven Vig, who treats obese patients, has performed extensive research on Lorcaserin and has been accumulating Arena shares. He finds similarities between Arena and Dendreon:
"I have not sold a single share of Arena in 3 years, and I use drops in the stock price to pick up additional shares … a couple of years ago I bought Dendreon at $3.68 and sold it for $54 a share … !"
On May 8, the FDA will release Briefing Documents. In 2010 this was a bad day for Arena, as the briefing docs contained an element of surprise, which made the stock plunge. I have read on some blogs that a similar outcome is predicted by the bears, not due to any rationale except the notion that if something happens once it may happen again. From a scientific standpoint this conclusion is extremely weak.
Arena has worked closely with the FDA since the CRL was issued in 2010 and has addressed all the points raised in the CRL. Most doctors and researchers I speak to believe the Briefing Documents will not contain any element of surprise. Even the so-called surprise in the 2010 BD's was known to Arena, which chose to not publicize them before the meeting because they believed there was no risk to humans. Today we have even stronger evidence about safety.
Also keep in mind what happened in 2010 was partly due to FDA not having a toxicologist on the panel.
Following outrage by the public, the FDA wrote a letter expressing regret:
"In hindsight, FDA regrets that no toxicologist participated in the meeting."
Many believe this shortcoming contributed to the negative vote in 2010. Arena's world in 2012 looks very different -- with all the CRL issues addressed, new data, and hopefully a competent, balanced, unbiased panel, I believe Arena has a great chance of obtaining a strong positive panel recommendation.
Short sellers/bears, however, still seem to hope for a repeat of 2010. I believe that anyone still short Arena is either uninformed about the scope and depth of the data, which clearly supports approval, or there are no shares available for covering without causing a rally, or they genuinely believe in a rejection, but this option needs a rational footing that to date I have not seen. The most common arguments I have seen from bears and shorts is about issues in 2010 -- but those have been resolved.
In my last Motley Fool article I spelled out the case for safety and efficacy -- two subjects that on May 10 the FDA panel will focus on. An extensive citizens' petition presents a detailed case of why Lorcaserin should be approved. A strong positive vote will pave the way for FDA approval on June 27. A positive FDA vote will mark the first obesity drug to be approved in over a decade. Reviews of the obesity drug candidates of both Vivus (NASDAQ: VVUS) and Orexigen Therapeutics (NASDAQ: OREX) are also in process but Arena currently has the earliest PDUFA date.
Arena may get European approval later in 2012. They have a manufacturing facility at the heart of Europe, in the western part of Switzerland. A person I spoke to at that facility said they're ready for the green light from the FDA. The facility will provide Lorcaserin supply worldwide.
One of the key impacts of a positive AdComm vote and subsequent FDA approval is the change in investor profile in Arena. Currently only 30% of Arena's float is owned by institutions (vs. 77% of Vivus, 38% of Orexigen). Many analysts are sitting on the sidelines with regards to Arena, awaiting AdComm results. This is understandable as both the science and data are very complex and only specialists are able to deeply understand and interpret the data. So the eyes of Arena investors and the followers of the obesity drug space are on the May 10 AdComm session.
The meeting will be held in Silver Spring, MD, close to FDA headquarters and will be webcast (for a viewing fee). It will go from 8 a.m. to 5 p.m., with about an hour to be dedicated to public speakers. Based on what I have heard from people who went in 2010, space will be limited and it's anticipated that it will be a full house. Arena's shares will probably not trade on May 10 and reopen to investors on May 11 (which happens to be the birthday of the author, educator, philosopher, J. Krishnamurti. Short sellers who are hoping for a repeat of 2010 might benefit from reading his book Freedom From The Known).
In closing, here's a quote by Dr. Ralph Ryback, yet another medical doctor who is convinced Lorcaserin should be approved:
"The importance of this safe medication [Lorcaserin] is that diets don't work long term for most people and you can't lose much weight by exercise. Eighty percent of people who lose weight by dieting alone put it back on within a year. Only two to five percent of people keep lost weight off in the long haul. Moreover, you have to exercise almost two hours to burn off the calories in a bagel and then many of you will be hungrier afterwards. Exercise tones and increases muscle mass, which improves health and glucose utilization, but decreasing food intake is approximately 85% of weight loss.
The average American intuitively understands this, which is why they seek out and consume numerous over-the-counter diet pills and drinks made here and overseas, despite potential toxicity, to control their appetite and hence their weight. They are faced with an equally determined food industry that chemically formulates food to increase its consumption, often by increasing appetite.
Lorcaserin specifically affects the HT-2c serotonin receptor for appetite or satiety, resulting in significant and safe weight loss with few side effects such as a transient headache. Lorcaserin has been studied in about 7,700 humans. In one controlled study, 66.4% of those who completed the study lost at least 5% of their weight, with 36% losing at least 10%. In another study, the mean weight loss was 8.2%, which is 16.4 pounds for a 200-pound person. In another study with Type 2 diabetic patients, the patients not only lost weight but their fasting blood glucose fell 27 points and their hemoglobin A1c dropped by 0.9 points, which is similar to the results of several diabetic drugs without their adverse side effects."
Please bear in mind the above reflects my opinions and is not investment advice. Please do your own research about making investment decisions. Investing carries risks, specially pre-approval biotech. Consult an investment professional for investment advice. The author is neither an investment professional nor a doctor nor a biotech expert. To find out more about the author's interests, please visit www.rezamusic.com.
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