Flash Alert – 3.30.09 – Arena’s Lorcaserin Works; Stock Down Anyway

Arena Pharmaceuticals (ARNA) announced their Phase III lorcaserin obesity drugs this morning, and the news was excellent, although not perfect. Importantly, the drug was well-tolerated and showed little impact on heart valve function. Management said that if the second Phase III trial results due in September are similar, lorcaserin will easily meet the FDA safety standard.

Equally important, the drug worked, achieving high statistical significance over the placebo on every primary endpoint. The three endpoints in order of importance were the proportion of patients achieving 5% or greater weight loss after 12 months, the difference in mean weight loss compared to placebo after 12 months, and the proportion of patients achieving 10% or greater weight loss after 12 months.

Endpoint #1: 47.5% of lorcaserin patients lost greater than or equal to 5% of their body weight from baseline compared to 20.3% in the placebo group. This result satisfies the efficacy benchmark in the most recent FDA draft guidance.

Endpoint #2: Average weight loss of 5.8% of body weight, or 12.7 pounds, was achieved in the lorcaserin group, compared to 2.2% of body weight, or 4.7 pounds, in the placebo group. Statistical separation from placebo was observed by Week 2, the first post-baseline measurement.

Endpoint #3: 22.6% of lorcaserin patients lost greater than or equal to 10% of their body weight from baseline, compared to 7.7% in the placebo group.

So why is the stock down? Because Lorcaserin patients who completed 52 weeks of treatment according to the protocol lost an average of 8.2% of body weight, or 17.9 pounds, compared to 3.4%, or 7.3 pounds, in the placebo group. There is draft FDA guidance that the FDA would like to see a five percentage point spread between body weight loss on the drug versus the placebo. This showed only a 4.8 percentage point spread, so ARNA was clobbered.

Let’s put this into quick perspective. If the drug group had lost less than half a pound more – 0.41 pounds to be exact – lorcaserin would have met the 5% draft standard. Another way to think of it is that the lorcaserin group lost over twice as much weight in a year as the placebo group. Or put it this way: Lorcaserin packed two years of weight loss into one.

I’ve read much of the bearish commentary, and even the analysts who downgraded the stock admit:
– the drug worked
– it appears to be safe
– the FDA probably will approve it
– doctors will use it

So why downgrade the stock? Because they think the lack of a full five percentage point spread will make it difficult to partner the drug.

What baloney! As if they won’t be able to partner an obesity drug that works! But the only way for Arena to lose is to be unable to partner the drug before their money runs out, a danger I mentioned in my original write-up. And the only way for the short sellers to win is for Arena to lose, or at least to have so many people convinced that Arena will lose that they sell their stock to the shorts, allowing them to cover gracefully. Today’s volume hit 33.7 million shares, and even adjusting for Nasdaq’s double counting, 16.8 million shares traded. There were 15 million shares held short on March 10, so congratulations to the shorts. They turned a huge win for the company into a 25% loss for the stock.

Are the Arena April $7.50 calls (UGG DU) dead meat? Well, probably – that’s why they closed at two cents today. But with the top-line data in hand, the company could announce the obvious: It is already in serious negotiations with several potential partners for a licensing deal with a large up-front payment and double-digit royalties. That’s all they would have to say to run the stock into double-digits, and it would remove the last justification for being bearish. So hang onto the calls until expiration.

In addition, now that we know lorcaserin works and is safe, this is the time to buy ARNA up to $5 for a $20+ target. We will get the partnership agreement, followed or preceded by the second Phase III trial results in September, followed by an FDA filing in December-January, followed by FDA approval around October 2010. In the meantime, Arena will release a stream of additional data at various scientific meetings. It’s hard to say how quickly the $20 target will be hit, but I think it is reasonable to expect it by the FDA filing at the end of this year.