Investors and industry pundits have gotten caught in this shift already. Last year, when VIVUS, Inc. (NASDAQ:VVUS) and Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) were trying to gain FDA approval for their respective obesity drugs, it seemed likely to me and a lot of other biotech veterans that the drugs would be rejected. The FDA had already turned down the drugs once. VIVUS’ Qsymia had birth-defect side effects; Arena’s Belviq had a laundry list of issues that kept it from getting approved the first time. The third player, Orexigen Therapeutics, Inc. (NASDAQ:OREX) , was required to run a large trial to prove that its drug, Contrave, didn’t cause heart problems before the drug could be approved.
Except the safety-first FDA did an about face and approved Qsymia and Belviq. It’s even signaled to Orexigen that its pathway to approval could be sped up.
If you sat on the sidelines, you missed out on a spike after the FDA advisory committees and the approvals, but at least you didn’t lose any money.
Unless you shorted the stocks, of course. Getting back to how I opened this article: The easiest way to make money in this sector has been to bet against the uniformed crowd. Cult investors are more likely to be optimistic about a drug’s chances than overly pessimistic. Shorting was always risky, but with the uncertainty, it’s even more so now.
Investors can limit the risk by buying put options, which allow you force the seller of the put to buy shares at a predefined price. If the shares fall below that level, you can buy shares and collect the difference between the two. The most you can lose is the cost to buy the put.
More risk-adverse investors would be best off sitting out these questionable approvals altogether until it becomes clear exactly how the new regulations will affect FDA approvals.
Who will win the obesity drug market?
Can VIVUS pick up its lagging sales and fend off the competition, or will Arena Pharmaceuticals reign supreme in the obesity space? If you’re in the dark, grab copies of The Motley Fool’s premium research reports on VIVUS and Arena Pharmaceuticals to stay up to date. Senior biotech analyst Brian Orelli gives investors the must-know information, including an in-depth look at the obesity market and reasons to buy and sell both stocks. Click now for an exclusive look at Arena and VIVUS — complete with a full year of free updates — today.
The article The FDA Made Biotech Investing Harder (But More Lucrative) originally appeared on Fool.com and is written by Brian Orelli.
Fool contributor Brian Orelli has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson and Vertex Pharmaceuticals. The Motley Fool owns shares of Johnson & Johnson.
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