Arena Pharmaceuticals, Inc. (ARNA)

[BIDWACKIE]

Why do I feel the Barrons article is favoring the competitors?


<Investors are still giddy about last week's vote by an FDA advisory panel to support Arena Pharmaceuticals' experimental obesity drug.

The advisory committee's 18-4 vote (with one abstention) late Thursday recommending the agency approve the drug is a big win for Arena Pharmaceuticals (ticker: ARNA). The company is among a group of drug makers with new weight-loss drugs that the FDA could allow on the market after years in which no new treatments were approved.

After more than doubling last week – with shares surging 73% on Friday alone -- the stock rose another 4% to $6.61 in Monday afternoon trading.

The market is essentially saying that FDA approval is a done deal. And the agency traditionally does follow the advice of its advisory panel, though it's not required.

Still, investors should think twice before chasing this stock at current levels given that Arena and its drug lorcaserin still face several hurdles including the need to address lingering safety concerns and competition from a rival drug considered safer and more efficacious.

As is often the case with highly anticipated new drugs, euphoria drives expectations. The potential market for an effective and safe weight-loss drug is indeed enormous given that more than a third of adult Americans are obese and another third is overweight.

But the key words to remember are "safe" and "effective." The field is littered with the corpses of failed efforts by other drug companies.

Lorcaserin is one of three drugs vying for FDA approval. Vivus (VVUS) and Orexigen Therapeutics (OREX) are also seeking approval for their obesity medications. And it could be quite a battle.

In February, an advisory committee recommended the agency approve Vivus' drug Qnexa for weight loss. The FDA hasn't acted on it yet.

The federal agency rejected Arena's lorcaserin in 2010, citing "modest weight loss" and concerns about a study that linked the drug to mammary tumors in rats. Arena returned to the FDA with new data showing that 38% of patients on the drug had weight loss of 5% or more in a year, compared with 16% of patients on a placebo.

The FDA is slated to render a decision on June 27, though that could get delayed.

Even if the drug is approved next month, analysts believe the company will be required to perform post-approval studies regarding cardiovascular risks.

Meanwhile, Vivus' Qnexa is expected to hit the U.S. market first. That and Qnexa's superior efficacy will make it "the obesity therapy of choice," wrote Leerink Swann analyst Steve Yoo in a research note published Friday.

Also working against lorcaserin are questions about whether an echocardiogram – a sonogram of the heart —should be required before the drug is prescribed. It's a costly test, and added to "the lower efficacy compared to Qnexa could limit lorcaserin's use," wrote Oppenheimer analyst Bret Holley in a research note published Friday.

Of course, obesity is a lucrative market for drug makers, and could offer plenty of room for multiple therapies. And even a runner-up drug can generate big sales. And Leerink's Yoo upgraded Arena to Outperform predicting that lorcaserin could hit the market by next March.

But given the big move by Arena's stock price last week, caution is warranted. Investors don't react well to doubt or disappointment, so the stock will remain volatile.

And with so many once high-flying drug stocks eventually falling victim to gravity, a little caution in this case could go a long way.>

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