Arena Pharma And The Fat Lady's Song

Updated with current stock price.

NEW YORK ( TheStreet) -- Last month, Arena Pharmaceuticals ( ARNA) received a positive vote from the FDA's Endocrinologic and Metabolic Drugs Advisory Committee for the use of lorcaserin to treat obesity. The company did an admirable job parrying panelists' questions and the FDA's skepticism and earned an 18-to-4 recommendation for approval, with one abstention. On Wednesday, Arena faces its next hurdle: the Prescription Drug User Fee Act (PDUFA) date for lorcaserin, better known as the FDA's approval decision date for the obesity drug.

Lorcaserin might receive final approval this week, but I think a three-month delay or another complete response letter (CRL) is more likely. As I have said in the past, I expect the FDA will require a Risk Evaluation and Mitigation Strategy (REMS) to minimize inappropriate use of the drug and the risk of an unexpected safety debacle. (The sting of repeated obesity drug fiascos -- American Home Products' fenfluramine-phentermine, known as Fen-phen, and Abbott's ( ABT) Meridia in the U.S., and Sanofi's ( SNY) rimonabant in Europe -- won't go away any time soon.) Ultimately though, I think lorcaserin will be approved for sale in the US (and probably Europe, although a decision from European regulators won't come until early-to-mid 2013).

My advice to lorcaserin bulls would be to cherish the moment but sell the stock. (Some investors are doing just that; Arena shares fell 15% Friday after and another 1% Monday after nearly tripling since the FDA panel.) This is as good as it gets. If you're one of the lucky few that can find shares to borrow, congrats -- you've got a good short.

I doubt lorcaserin will be the mega-blockbuster that bulls expect. History is on my side -- no obesity drug has ever even come close to reaching $1 billion in US sales -- and the company's clinical data contain some worrisome red flags. (Admittedly, I didn't think lorcaserin would be approved until after I read the FDA briefing documents; the comments section will likely overflow with vitriol from those who wrongly think that background disqualifies my opinion.)

My primary concern is the drug's modest effect size. In Arena's Phase III studies, named BLOOM and BLOSSOM, lorcaserin recipients lost only 3.7% and 3.0% of their body weight, respectively, after adjusting for the placebo group (all patients in the study also had intensive dietary counseling). That's not a very big impact, especially given the baseline demographics (patients, roughly 80% of whom were female, weighed 220 lbs on average).

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