Orexigen is Already Following the Wrong the Path (ARNA, VVUS, OREX)

If you're curious as to why shares of Orexigen Therapeutics, Inc. (NASDAQ:OREX) are tanking following what was seemingly good news, you only have to look at the sagas of Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) and VIVUS, Inc. (NASDAQ:VVUS) to find your answer. Both ARNA and VVUS shares fell - precipitously - after each of those companies came up with similar (though better, technically) news. The downside for OREX shares is, not only are they apt to struggle for the same dynamic/technical reason VIVUS and Arena shares did, but the market has had a chance to see a major fundamental reason that Orexigen could be in trouble.

On the off chance that you're reading this but haven't heard the news, Orexigen Therapeutics has affirmed that its weight-loss drug, Contrave, does not increase heart disease risks as was feared by the Food & Drug Administration when the agency rejected the drug back in 2011. It was NOT an approval of the drug. OREX will need to resubmit the new drug application, with the heart-risk data addendum, before getting the FDA's marketing blessing. That could happen as soon as sometime in mid-2014.

Still, it's not like Contrave and Orexigen Therapeutics, Inc. aren't well-known and well-understood here. The market knows the proverbial score, and in some ways, a successful drug trial can be just as catalytic for a stock as an actual approval can. What gives? In simplest terms, OREX is yet-another biotech victim of the "buy the rumor, sell the news" phenomenon, which sends stock skyward when good news is expected but before it becomes official, but sends that same stock plunging once the expected news is officially announced.

And if you don't think it happens (particularly within the weight loss arena), think again. It's exactly what happened to VIVUS and Arena Pharmaceuticals in the middle of last year when each company actually won the Food & Drug Administration's marketing approval. ARNA ran up from the $1.75 are in March of last year to a high of $13.50 by late June. That peak, however, came the exact same day its weight-loss drug Belviq was approved. It should have been a spark for a huge rally (at least according to the buzz at the time), but it ended up being the beginning of the end for Arena Pharmaceuticals shares. Not only did the stock's price never exceed $13.50, it reached a low of $4.05 just a couple of months ago.

As for VIVUS, its stock saw a similar runup right up to the approval of its weight-loss drug Qsymia in mid-July. It peaked at $31.21 immediately after the drug was approved, but within four months shares of VVUS had fallen to a value of less than $10.00. The stock hit a low of $8.00 just a few weeks ago... a far cry from the projected price of $50 to $60 per share the market was talking about before and after the drug had been approved.

Some investors will be quick to point out that that Arena's Belviq was held up by the DEA's feet-dragging on classifying the drug. Fair enough. The stock started to deteriorate well before that impasse materialized, however.

Fans and followers of Orexigen Therapeutics may respond by saying the actual PDUFA (approval) date is yet to do its work, and that OREX could still rally quite nicely leading up to that news. Yes, it's possible that could happen, but to say the weight-loss pill bubble has been popped is an understatement - traders may not be as euphoric with Orexigen as they were with Arena Pharmaceuticals and VIVUS.

How's that? Sales of Belviq in the third quarter only totaled $4.8 million in Q3, and Qsymia's revenue in the third quarter was a mere $6.4 million, AND IT'S BEEN ON THE MARKET FOR A YEAR. Yes, it takes a while to get sales going, but given the hype and projections surrounding these drugs (some had predicted sales of Belviq would reach $400 million by 2015, while Qsymia sales were supposed to be as strong as $1 billion per year by 2020), these are exceedingly slow starts, and suggest the market is nowhere near as strong as first presumed. It would be surprising to see investors becoming optimistic about diet pills again. 

Bottom line: OREX shares are struggling for understandable reasons, and frankly, that's probably as it should be.

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