Positive market news flow should normally lift market sentiment and stock prices related to that news. The lift is positively correlated to the strength of 'positivity' of the news. If the market signals thumbs-down then, in majority of the cases, it means that the market is skeptical about the reliability of the news or data. Arena Pharmaceuticals (Nasdaq: ARNA) is the latest stock that underscores this theory.
On the recent blue Monday Arena Pharmaceuticals released positive Phase III data on its obesity drug, Lorcaserin, hoping that its stock price would rally up. The company claimed that Lorcaserin had proven to be safe and effective. However, on that Monday, the stock slumped 28% instead. There are valid reasons for the market’s thumbs-down to Arena’s positive news flow regarding Lorcaserin. But, first let us look at what the FDA guidelines suggest regarding efficacy benchmarks regarding a drug to be approved.
Efficacy benchmarks
In general, a product can be considered effective for weight management if after 1 year of treatment either of the following occurs:
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The difference in mean weight loss between the active-product and placebo-treated groups is at least 5 percent and the difference is statistically significant
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The proportion of subjects who lose greater than or equal to 5 percent of baseline body weight in the active-product group is at least 35 percent, approximately double the proportion in the placebo-treated group, and the difference between groups is statistically significant. -FDA
According to Arena, 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 (p<0.0001). This indicates that Lorcaserin failed to achieve 5% mean weight loss above what placebo could achieve. So, this result doesn’t satisfy the efficacy benchmark in the most recent FDA draft guidance. This was one of the prime reasons why investors greeted the stock thumbs-down.
According to Arena, 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. So, this result satisfies the efficacy benchmark in the most recent FDA draft guidance. This was the reason why stock slumped only 28% and not heavily.
Though Lorcaserin failed the 5% difference metric, it made it on the other metric that can lead to approval, the responder analysis.
