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The FDA Will Reject This Drug… And Take This Stock Down

 February 02, 2011 03:11 PM

by Marc Lichtenfeld, Healthcare Specialist

If you needed evidence that safety is arguably the most critical aspect when it comes to investing in the biotech sector, then look no further than Orexigen Therapeutics (Nasdaq: OREX).

The stock suffered a spectacular implosion on Tuesday after the Food & Drug Administration rejected the company's obesity drug, Contrave. Regulators asked Orexigen to run another clinical trial, due to side-effects concerning the heart.

[Related -Futures Down Ahead Of Service Sector Data; Compugen Ltd. (CGEN) Soars]

It's a stark reminder that the FDA continues to take drug safety issues seriously. How seriously? I'll let this 5-day chart of Orexigen show you.

The FDA's rejection of Contrave came hot on the heels of two other obesity drug rejections in recent months – from Arena Pharmaceuticals (Nasdaq: ARNA) and Vivus (Nasdaq: VVUS).

Investors in those stocks suffered devastating losses, too…

[Related -iShares NASDAQ Biotechnology Index (ETF) (IBB): 3 Biotechs Up 132% In 2013 With Huge Upside Potential]

Prior to the FDA decisions, investors frequently asked me which of the stocks they should buy, assuming that at least one of the drugs would get approved.

But I never recommended any of the companies because I was concerned about safety issues.

Speaking of which, here's another prime drug candidate to get crushed at the hands of the FDA…

The FDA: Masters of Drug Destiny

Make no mistake, the FDA is very conservative when it comes to safety. No matter how effective a drug may be, regulators will not approve it for the mass market if they're concerned about safety issues.

They're essentially stewards for the community, but they're also engaging in that common tactic known as "CYA" – Cover Your… (Well, you know the rest!) You need only look back to drug scandals like Vioxx to understand why the FDA doesn't want to have to respond to an angry public or face multi-million-dollar lawsuits if people start getting sick or dying due to an approved drug.

But despite safety concerns, many investors still put blinders on when it comes to certain drug companies.

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