SAN DIEGO ( TheStreet) --Rats! U.S. regulators rejected Arena Pharmaceuticals' ( ARNA - Get Report) weight-loss drug lorcaserin.

That's "rats," as in darn, what a disappointing (but not unexpected) setback for Arena. And "rats," as in regulators want to see a lot more data with regard to high doses of lorcaserin possibly causing breast cancer and brain tumors in the rodent species, according to an Arena-issued press release.

The U.S. Food and Drug Administration also labeled the efficacy of lorcaserin as "marginal" and requested data from a completed but not yet released study of lorcaserin in patients with type II diabetes, according to Arena.

The FDA approves a drug when its benefits outweigh the risks. For lorcaserin, the scale is tipped in the wrong direction. Lorcaserin barely works and the drug's safety is suspect.

Arena is not going to give up on lorcaserin, of course, but convincing the FDA to approve the drug at some point in the future will be challenging. At a minimum, the diabetes trial result needs to mimic the weight loss we've seen from the previous lorcaserin studies, and without any new safety issues cropping up. Then, the re-review of the rat cancer data has to come out benign.

Will all that new data be enough to satisfy the FDA and compel the agency to approve lorcaserin? Perhaps, but don't get too confident. Ask Amylin Pharmaceuticals ( AMLN) what can happen to a drug that just about everyone believes is approvable upon second review. When the FDA has its doubts, new questions crop up and another complete response letter is issued.

The FDA's rejection of lorcaserin was bad but it could have been worse. The agency could have requested new clinical trials immediately; instead regulators seem willing to let Arena first appeal for lorcaserin's approval with data that are either in the company's possession today or will soon be, in the case of the diabetes study.

If Arena can't alleviate the FDA's concerns with existing data, however, new clinical studies may be required, according to the company's summary of the FDA's complete response letter.

Arena supporters appear to be whistling past the potential need for new lorcaserin studies and simply declaring victory today. Michael Murphy, author of the New World Investor newsletter and a longtime Arena bull, told his subscribers Saturday that the FDA's complete response letter was "mild," "face-saving" and a "huge win," for Arena and its investors. Murphy predicted that lorcaserin would be approved as early as February but no later than April 2011.

Murphy also insinuated that hedge funds were responsible for Arena and lorcaserin's troubles at the FDA. It's a conspiracy theory he's been pushing since mid September when an FDA advisory panel voted against lorcaserin's approval.

"The best part of this outcome is that the FDA is on notice that they need to get off their high horse and do what they are supposed to do -- honestly review drugs," Murphy wrote in a "Flash Alert" posted to his website Saturday. "The second best part is IF anyone was being paid by a certain Connecticut hedge fund, those folks just learned their lackeys might not always be able to deliver."

Murphy doesn't explain how Arena might manage to resubmit all the lorcaserin data requested by FDA to allow for an April 2011 approval. Arena won't even meet with FDA to discuss the complete response letter until next month. The re-examination of the rat cancer data by independent experts is likely to take months, not weeks, and the data from the diabetes trial, even if announced next month, will also take time to be fully analyzed and readied for submission to the FDA.

And the FDA, once it receives the lorcaserin resubmission, will almost certainly take six months to review all the new data. That's the length of the review period called for when a company submits significant amounts of new data in response to a complete response letter, according to FDA regulations.

Jason Butler, a biotech analyst at JMP Securities, says the FDA's complete response letter for lorcaserin "reinforces the view that there is no path forward for locaserin until the preclinical toxicity signals are addressed. Right now I don't see how, let alone when, this can be achieved. The end-of-review meeting with the FDA could bring clarity but right now I don't see this drug being on the market in the next 18-24 months."

"They Arena have a path forward but the climb is steep," adds Ramsay Baghdadi, a healthcare policy analyst with Prevision Policy and Concept Capital.

Arena shares closed Friday at $1.63, ahead of the company's announcement regarding lorcaserin's rejection by FDA. The stock has lost 76% of its value since Sept. 13 when FDA posted a negative review of lorcaserin to its web site in advance of the Sept. 15 advisory panel meeting.

Before new action is taking with lorcaserin, FDA is expected to make an approval decision on Vivus' ( VVUS - Get Report) obesity drug Qnexa on Thursday, Oct. 28. A third obesity drug, Orexigen Therapeutics' ( OREX) Contrave, will be reviewed by an FDA advisory panel on Dec. 7.

--Written by Adam Feuerstein in Boston.

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