BUY OR SELL-Will Vivus setback trim obesity drugmaker shares?

* Investors see safer bet in Arena after Vivus setback

* Vivus could still win Qnexa approval – analyst

* Vivus slumps 58 pct, Orexigen down 12 pct

* Arena rises 19 pct

By Lewis Krauskopf

NEW YORK, July 16 (BestGrowthStock) – Investors may be wondering
how to play the tantalizing but failure-laden arena for obesity
drugs after U.S. health advisers voted against Vivus Inc’s
(VVUS.O: ) Qnexa.

The U.S. Food and Drug Administration advisers on Thursday
expressed concerns about the drug’s safety, including worries
the once-daily pill could cause depression, memory loss and
potential birth defects. [ID:nN15201757]

Shares of Vivus tumbled 58 percent to $5.07 in afternoon
Nasdaq trading on Friday, shedding all of the gains rung up in
the past year on hopes that Qnexa would be the first new diet
pill to reach the market in a decade.

The Qnexa review reverberated to shares of two other
companies with prescription weight-loss drugs under FDA review,
Orexigen Therapeutics Inc (OREX.O: ) and Arena Pharmaceuticals
Inc (ARNA.O: ).

Orexigen, whose drug Contrave is expected to be vetted by
an FDA panel in December, saw its shares drop 12 percent to
$4.40.

Shares of Arena, whose lorcaserin is set to be reviewed in
September, were up 19 percent to $4.68. However, the shares
climbed as high as $5.72 on Thursday as investors grew
optimistic about the outcome of the Vivus panel.

How should investors play the obesity drugmakers now? Are
there opportunities, or does the Vivus setback mean these drugs
will struggle to reach the market?

BUY

At around $5, Vivus shares look attractive, said JMP
Securities analyst Jason Butler, who believes the game is not
over for Qnexa and has a price target of $12 for Vivus. “I
would be buying Vivus down here,” Butler said.

“Obviously, the risk of a delay is increased now, but
nobody on that panel said this drug should not be approved,” he
said. “They said we need more data.”

“Right now, everyone is assuming this is dead,” he added.

The FDA is expected to act on the Qnexa application by Oct.
28, and Butler thinks there is at least a 50 percent chance the
drug will win approval within the next six months.

The FDA panel’s focus on Vivus’ safety could bode well for
Arena’s lorcaserin, according to JPMorgan analyst Cory
Kasimov.

Kasimov noted that lorcaserin has two years of controlled
safety data, with no clear adverse safety signal. After the
Qnexa panel review, he raised his rating on Arena shares to
“overweight” from “neutral” and increased his year-end price
target to $6 from $5.

“While we are still not moved by the modest efficacy, we
have long been comforted by lorcaserin’s seemingly benign
safety and impressed by ARNA’s recent execution,” Kasimov said
in a research note, citing the company’s recent partnership
deal with Japan’s Eisai (4523.T: ).

Orexigen shares also look good in light of the Qnexa
review, said JMP Securities analyst Charles Duncan.

While the review confirmed that the obesity area is a
“risky space,” Duncan said, “many of the issues that were
raised were definitely not broad obesity statements; they were
much more Qnexa-specific statements, and I think that Contrave
does not have for several reasons the same risk liabilities.”

Duncan said the safety concerns cited for Qnexa have not
been seen in the two drugs that comprise Contrave, bupropion
and naltrexone, which are already sold individually.

Orexigen management also has an advantage because the
Contrave panel review is the last of the three, so they can
study the others, Duncan said.

“At these prices, you’re definitely paid to take risk,”
said Duncan, who has a $13 share price target on Orexigen.

PROCEED WITH CAUTION

Even with Vivus’ steep share decline on Friday, Jefferies &
Co analyst Thomas Wei says it’s time to dump the stock. After
the panel review, Wei downgraded the shares to “underperform”
and dropped his price target to $3 from $9.

Wei said there was a “very low probability” that the FDA
would disregard the advisers’ rejection and approve Qnexa
near-term.

The analyst’s new valuation “assumes that there is high
risk to the approval of Qnexa, a delay of three years to a 2014
launch under an assumption that the FDA requires significant
new data prior to approval, and significant expense incurred by
the company to complete new safety studies,” he said in a
research note.

JMP’s Butler said that with the panel for lorcaserin
looming, he would hesitate to scoop up Arena shares.

“On top of the increased regulatory risk for the whole
space, I just think we don’t have enough of the safety data yet
… to know what the FDA is really going to be focusing on,”
said Butler, who rates Arena shares “market perform.”

While Butler acknowledges there may be limited downside to
Arena shares, “I’m looking for more information as we go into
the panel.”

While analyst sentiment remains bullish on Orexigen shares,
JPMorgan’s Kasimov lowered his price target to $8 from $13
following the Vivus panel.

Kasimov, who kept his “overweight” rating, said he expects
concerns relating to blood pressure levels to be “a major
overhang,” given the cardiovascular focus of the Vivus panel.
(Reporting by Lewis Krauskopf; editing by John Wallace)

BUY OR SELL-Will Vivus setback trim obesity drugmaker shares?