SAN DIEGO (TheStreet -- Maybe the hedge funds were right about hating Arena Pharmaceuticals (ARNA - Get Report)?

Arena shares fell sharply Tuesday after medical reviewers working for the U.S. Food and Drug Administration said the company's experimental weight-loss drug lorcaserin was effective only by a "slim margin" and raised safety questions.

The FDA issued its lorcaserin review ahead of an advisory panel meeting to review the drug on Thursday.

The concerns raised by FDA in its lorcaserin review echoed those voiced by healthcare buy-side investors in a poll conducted last week. In the survey of 30 respondents, mainly hedge funds who invest in biotech stocks, 75% predicted a negative vote against lorcaserin's approval at Thursday's FDA advisory panel.

Arena shares were down 36% to $4.37 in recent Tuesday trading.

In its review, FDA said lorcaserin failed to meet one of the agency's efficacy benchmarks for weight loss while meeting a second efficacy hurdle by a "slim margin."

As expected, FDA raised questions about whether or not lorcaserin's safety data rules out the risk of patients developing heart valve problems. The safety data from two large phase III studies demonstrated a low incidence of valvulopathy tied to lorcaserin that was similar to placebo. But the FDA's statistical analysis of the heart safety data pooled from the two studies suggests Arena may not have entirely met the agency's criteria.

Also expected, FDA raised concerns about psychiatric and memory problems related to lorcaserin.

In a new twist, FDA reviewers also highlighted a potential lorcaserin cancer risk in rats seen when animals were administered the drug at high doses for two years. No difference in cancer rates between lorcaserin- and placebo-treated patients was seen in clinical trials.

It's important to note that FDA drug reviews released ahead of advisory panel meetings are often sharply critical and sometimes do not accurately predict the ultimate vote of the panel's outside experts.

Arena, however, enters the fray of an FDA advisory panel amid a regulatory environment obsessed with drug safety and (so far) unkind to obesity drugs. In July, a similar FDA panel voted against Vivus' ( VVUS - Get Report) obesity drug Qnexa, citing unacceptable safety risks and the lack of long-term safety data. That same panel struggled with a debate over the heart safety risks of GlaxoSmithKline's ( GSK) diabetes drug Avandia.

On Wednesday, an FDA panel will re-examine the status of Abbott Labs' ( ABT - Get Report) currently approved weight-loss drug Meridia in light of new data associating the drug to an increase in heart attack and strokes. European regulators have already pulled Meridia from the market and the editors of the prestigious New England Journal of Medicine have called on the FDA to do the same thing here.

The panel of experts who will debate Meridia and its heart safety issues on Weds. will reconvene Thursday to review Arena's lorcaserin, and as we now know, the debate will focus on the questionable efficacy and safety of the drug.

Arena's management and the analyst and investors who support the company cite lorcaserin's lack of serious side effects and two years of safety data showing patients are free from any additional cardiovascular safety problems as strong evidence that will compel both the FDA and its advisory panel to support the drug's approval.

Even lorcaserin's efficacy is unfairly maligned, Arena supporters claim, because in studies the drug helped far more patients achieve clinically meaningful weight loss than placebo -- as much as currently approved weight-loss drugs and enough to meet FDA's efficacy thresholds.

Vivus shares were down 2% to $6 while Orexigen Therapeutics ( OREX), developers of another obesity drug under FDA review, were down 7% to $4.78.

--Written by Adam Feuerstein in Boston.

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