Wednesday, March 26, 2008

Lorcaserin's safety data should result in a good partnership deal for Arena Pharmaceuticals

On March 17th, Arena Pharmaceuticals (ARNA) reported that they will continue with phase III trials after an independent review of unblinded data showed no cardiac safety concerns for the weight loss drug, Lorcaserin. This was a rather important result for Arena because there had been concerns that it may have similar heart valve problems that plagued fen-phen, which targeted the same receptor. I have written in the past about the differences in the selectivity in these drugs which theoretically is enough to avoid the cardiac side effects (click here to see that article). However, data released last week is the proof that the FDA needs to assure this product is safe. This also prooves that they have great scientists and good judgement.

These results should also pave the way for a potentially lucrative partnership for Arena. The product is at least two years away from the market but it has blockbuster written all over it. Given the current challenges of product development at big pharmaceutical companies, I believe finding a partner and good terms may be easy. There is also a good chance that the company may get bought out because its valuations make the purchase more appealing to a big pharma partner.

I had originally recommended this stock at $17.39 in 2006. I had assumed Lorcaserin, then in phase II, would have a quicker path to market. Today at $6.94, and with successful safety results, ARNA is a great value. I anticipate a deal announced sometime this year (I also said the same thing in 2006, so this advice may not be worth much!). However, I resisted recommending to average down on this stock until safety data was out. Now that a lot of the risk is out, I recommend to average down or open a new position at these levels.

But don't expect a quick return on this investment. The biotech index has been getting hammered recently. I don't think this is due to fundamentals of biotech stocks. In fact DNA, GENZ, BIIB and a host of other stocks have reported decent earnings reports and good guidance for 2008. My guess is that this is a byproduct of hedge fund managers chasing commodities such as oil, wheat and gold for a quick return and selling all other assets to raise cash for their gambles. These are the same guys who were betting on the real estate bubble and the bubble in the past. Do you see a trend yet? Once the commodity bubble bursts money should return to fundamentally sound sectors such as the biotech.

Disclosure: The author does not have a position in ARNA at the time of publication of this article.