Wednesday, April 22, 2009 | Biotech analysts were not surprised last month when San Diego-based Arena Pharmaceuticals’ stock tumbled after the company announced good, but not great, Phase 3 trail results on its obesity drug lorcaserin. Wall Street is an unforgiving place.

But in hindsight, some analysts are wondering why Arena CEO Jack Lief was so confident that his drug would have superior results, and why he was so public about his feelings before the results were in. And there is a sense that the stock — down 46 percent since the day before results came out — might not have endured such a drubbing had Lief tempered his optimism.

“It is not unusual that Wall Street will punish a stock because of efficacy,” said Jonas Alsenas, a biotech analyst with Boston-based Leerink Swan & Co. “What is extremely unusual is for a company CEO to be elevating expectations.”

Lief told analysts and reporters in the months leading up to the trial results that the drug would be proven safe, and that average weight loss by obese and overweight patients would be significant. “We will be announcing very important results of a very important study,” Lief told in February. “We have expressed confidence that the results will be positive.”

Lief then detailed lorcaserin’s strong Phase 2 results, which showed a third of the patients taking the drug lost 5 percent of their body weight or more without diet or exercise, and it did not have the dangerous side effects that had derailed previous obesity drugs. “That is why I am so excited,” Lief said at the time.

Showing stellar results in clinical trials required by U.S. Food and Drug Administration is crucial for any biotech, but it goes double for those developing obesity drugs. The FDA sets a very high safety bar for obesity drugs, especially since the 1990s-era scandal surrounded fen-phen, an FDA-approved drug that ended up damaging the heart valves of some patients.

And there is a lot of competition — as many as 20 companies are developing obesity drugs. Arena is one of at least three in San Diego. La Jolla-based Orexigen Therapeutics is in late-stage trials with a drug called Contrave, and Amylin Pharmaceuticals announced last year that it is working on an obesity drug.

As it turned out, lorcaserin’s Phase 3 trial results were mixed. The results, released on March 30, showed that lorcaserin was safe and even lowered cholesterol and blood pressure. However, it met only one of the two weight-loss benchmarks established by the FDA.

Almost half of the patients taking lorcaserin lost at least 5 percent of their body weight, compared with 20 percent of patients taking a placebo. That cleared one of the FDA hurdles. But it fell short of the FDA’s second mandate that people taking the drug lose, on average, 5 percent more weight than people on the placebo. The results showed that the average weight loss was 3.6 percent more for those on the drug.

The drug is still on track to earn FDA approval because it met one of the standards. But that it fell 1.4 percent short of the average weight-loss goal made Wall Street think less of its potential as a blockbuster. The stock dropped by 28 percent to $3.23 on the day the trial results were announced.

At the time, Lief told the Union Tribune that he wouldn’t be surprised if the stock rose after analysts “figured out what all the data mean.” That is not what happened. The stock closed Wednesday at $2.41, down another 25 percent from the day results were announced.

This puts Arena in a difficult spot. The company is on track to run out of cash by the fourth quarter of this year, according to Alsenas, and the low stock price makes the prospect of raising money through an equity financing difficult.

“If they raise equity it will be very dilutive — they would have to give up a lot more shares to get enough funding,” said Meera Venu, an analyst with Morningstar.

Another option for Arena would be to find a large pharmaceutical company to partner with on lorcaserin. But this is not a market in which people are willing to take risks. “It is an absolute drought out there, there is no money,” said John McCamant of Bay Area-based said.

Given this environment, the analysts said Lief should have focused his comments before the trials on lorcaserin’s safety, a big issue with obesity drugs, rather than guaranteeing that it would beat a number.

“He pointed to the right centerfield bleachers and then just whiffed,” Alsenas said.

As a result, there might have been what Alsenas calls “hate selling” among investors, which happens when people want to dump a company from their portfolio because they are angry because it failed to meet their high expectations.

McCamant said Lief’s credibility on Wall Street was damaged, especially because he had been promising strong results for so long. “It is imperative that you deliver,” McCamant said. “If you tell people X is going to happen, X better happen.”

Lief and other Arena’s spokesman David Walsey did not return a reporter’s calls in recent days. Instead, the company issued a statement through its outside public relations firm.

“The results demonstrate that lorcaserin has the potential to become an effective and very well tolerated therapy that can be used by the millions of people who need to reduce their weight,” the statement read. “Treatment with lorcaserin resulted in significant improvements compared to placebo in several cardiovascular risk factors, including cholesterol, triglycerides and blood pressure.”

The statement also mentioned a second study, the results of which are expected to be released later this year, which might show better weight-loss results. Analysts, however, are skeptical because similar studies usually yield similar results. “We don’t really see a reason to be too optimistic,” Venu said.

McCamant said he is pessimistic about Arena not only because of the issues with lorcaserin, but because the company doesn’t have a strong overall pipeline of drugs. Alsenas shares those concerns, but said that despite the other issues lorcaserin could end up a big seller because of its high marks for safety.

“It is part of our positive thesis on the stock,” Alsenas said. “If I am a physician, and an obese middle-aged lady comes in needing to loose 10-to-20 percent of her body weight, I would be thinking about safety.”

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