Updated with analyst comments, new stock price.



) -- The infants of women exposed during pregnancy to a component of


(VVUS) - Get Report

weight-loss drug Qnexa had a higher rate of oral birth defects compared to infants not exposed to the drug during pregnancy, according to interim study results released Wednesday night.

Vivus shares are down $2, or 19%, to $8.33 in Thursday's pre-market session. The drop in Vivus' share price reflects investor concerns that the higher rate of birth defects observed with the Qnexa component may jeopardize the company's efforts at getting the weight-loss drug approved next year.

Peter Tam, Vivus' president, said in a statement that the prevalance of birth defects detected from Wednesday's study were in line with previously reported studies and that the company was sharing the new data with the U.S. Food and Drug Administration.

Vivus, in its Wednesday night announcement, was careful not to draw any conclusions from the birth defect study and didn't say whether the results made Qnexa's approval any more or less likely. The company isn't holding an investor conference call.

Women in the first trimester of pregnancy who took the epilepsy drug topirimate, one of two active ingredients that make up Vivus' Qnexa, were at a two-fold risk of giving birth to a child with a cleft lip or palate compared to women who also took topirimate previously but not during pregnancy.

The actual rate of oral birth defect in women who took topirimate during pregnancy was 0.29% compared to 0.16% in women with prior exposure to the drug.

In another analysis, pregnant women who took topirimate during the first trimester were five times more likely to give birth to a child with an oral birth defect compared to a control group of pregnant women not exposed to topirimate. Here, the actual rate of cleft lips and palate was 0.36% versus 0.07%, although Vivus said the rate of birth defects in the control group of women may be artificially low due to random error.

U.S. regulators have

previously issued safety warnings

about the risk of cleft lips and palates in children born to women who took topirimate during pregnancy.

The FDA rejected Qnexa in October 2010 due to concerns about the risk of birth defects, among other reasons. Regulators asked Vivus to conduct a follow-on safety study in which it examined medical records of pregnant women exposed to topirimate to better assess the birth-defect risk. Preliminary results from this study, dubbed Fortress, were what Vivus announced Wednesday.

Even before the Fortress results were known, Vivus resubmitted Qnexa to FDA, seeking approval for use only in men and women who can no longer get pregnant.

FDA is expected to convene an advisory panel of outside experts in the first quarter of next year to review Qnexa. The birth-defect findings from the Fortress study are expected to play a big part at that advisory panel despite the fact that Vivus isn’t seeking FDA's approval to use Qnexa in women of childbearing age -- yet.

If FDA and its advisory panel deem the risk of birth defects unacceptably high, Qnexa could be rejected a second time or approved with a severely restricted label that limits the drug's sales.

Still unaddressed also is the potential that FDA asks Vivus to conduct a large cardiovascular safety study prior to approving Qnexa. This is what FDA is asking

Orexigen Therapeutics


to do with its weight-loss drug Contrave, also rejected once already.

Arena Pharmaceuticals

(ARNA) - Get Report

, another weight-loss drug competitor rejected by FDA last year, is expected to resubmit to FDA before the end of the year.

In a research note to clients, J.P. Morgan analyst Cory Kasimov expressed satisfaction with the birth defect results issued Wednesday because the 2-5-fold higher risk for cleft lips and palates was below a 10-fold risk that investors and weight-loss physicians have identified as a "rough line in the sand" signaling an unacceptable safety risk.

Kasimov does acknowledge, however, that FDA's threshold of risk is not known.

"Our comfort notwithstanding, we acknowledge complexity of results is open to interpretation, which for controversial arena like obesity and stock with

an approximately 19% short interest can be a recipe for volatility," writes Kasimov.

Jefferies analyst Thomas Wei looks at the same Fortress results and sees more risk. "These data leave us more cautious for a broad approval covering women of child bearing age," he writes, adding,"The data may even affectVVUS’ limited indication filing, as the FDA may need to consider the risk of birth defects in determining the strictness of the risk management program to put into place. This, along with our residual concerns on cardiovascular safety testing, makes us incrementally more cautious on Qnexa regulatory prospects."

JMP Securities analyst Jason Butler is more confident in Qnexa's prospects following Wednesday's data release. "In our view, top-line results fromFortress provide increased comfort that topiramate does not cause an unacceptable risk of oral cleft. We anticipate that these data will support approval of Qnexa in 2Q12, both in the U.S. (with an initial label including a contraindication for women of childbearing potential) and the EU (for men and women)."

Vivus estimates that 108 million Americans are obese and eligible for Qnexa therapy. Of these, 82 million are either men or women who can no longer have children and would therefore still be candidates for Qnexa even if the drug was shown to have an unacceptable high birth-defect risk.

Jefferies' Wei, a noted Vivus bear, estimates the population of non-child bearing people potentially eligible for Qnexa is more like 27-37 million.

"If sales in a limited indication could reach $500-600m at peak, we would derive a probability unadjusted discounted cash flow valuation for Vivus of only $9-10

per share, generally in line with the current stock price," Wei wrote in a recent research note.

Vivus' Qnexa consists of two currently approved drug: The generic weight-loss drug phentermine and topirimate, a drug used to treat epilepsy and migraine, marketed as Topomax by

Johnson & Johnson

(JNJ) - Get Report


FDA is expected to make its approval decision on Qnexa on April 17, 2012.

--Written by Adam Feuerstein in Boston.

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Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback;

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