When
Arena Pharmaceuticals (Nasdaq: ARNA) released positive Phase III data on its obesity drug, Lorcaserin, many people expected shares to take off.
After all, the company’s press release on Monday confirmed that the drug had proven to be safe and effective.
But in a classic example of just how volatile and unpredictable the biotech sector can be, the stock slumped 28% instead. While the news was good on the surface, the problem was that Lorcaserin didn’t help patients lose 5% more of their body weight than placebo. The 5% figure is a guideline that the FDA uses for approvability - and investors punished the stock for not meeting that requirement.
Let’s dig into the story and apply the lessons from it to investing in the biotech sector…
Investing in the Biotech Sector Is Not Easy
In fact, I’d argue that it requires more due diligence than just about any other sector, simply because of its unpredictable nature and that the science sometimes can’t match people’s hopes for a drug. And when there’s a lot of buzz around an important drug that tackles obesity - one of America’s leading healthcare problems - it can exacerbate the fallout.
Even the very best investors in the biotech space have had stocks blow up on them after bad clinical trial data. It’s part of the business. As I’ve said here before, when you try to capture the potential enormous gains that biotech has to offer, you take on some extra risk.
With Arena Pharmaceuticals, that risk outweighed the reward - and I outlined my reasons why at the Investment U Conference in St. Petersburg, Florida just this past weekend.
How to Find Winners in the Biotech Boom
As I explained in my workshop, “How to Find Winners in the Biotech Boom,” there were a few things about Arena’s story that I found risky…
- Competition: Whenever possible, I like biotech companies with drugs/devices that face little or no competition. But several other companies, including Vivus (Nasdaq: VVUS) and Orexigen Therapeutics (Nasdaq: OREX), have obesity drugs that are in late-stage development. So even if Lorcaserin was effective and Arena had “first mover” advantage, it would likely face competition in the near future.
- Results: In Phase II trials, Vivus’ and Orexigen’s data was stronger than Arena’s. Moreover, Vivus has already shown effectiveness in one Phase III trial.
