Orexigen Options Suggest Contrave Diet Pill May Avoid Arena, Vivus Delays

Orexigen Therapeutics Inc. option traders are placing record bets the biotechnology company will succeed where two rivals have failed in introducing the first U.S. prescription diet pill in a decade.

The number of bullish contracts known as calls rose 139 percent last month to a record 59,340, increasing twice as fast as open interest for puts to sell. A Food and Drug Administration advisory panel will consider whether to approve Orexigen’s Contrave on Dec. 7.

Investors are growing more confident that La Jolla, California-based Orexigen, which is losing money for a sixth straight year, will start breaking out of a slump that erased 59 percent of equity value since Orexigen’s April 2007 initial public offering. The most popular options wagers are for the stock, which closed at $4.89 yesterday, to climb to $6, $7, or $11 before this month’s contracts expire Dec. 17.

“There’s been accumulators of calls every single day,” said Lillian Seidman Davis, an options strategist at Miller Tabak & Co. in New York. “Some people are playing it for a potential double.”

The December $6 calls had the fastest growth over the past month, followed by the same month’s $7 and $11 calls, and together account for 28 percent of all 105,243 outstanding Orexigen contracts, according to data compiled by Bloomberg.

Orexigen rose 58 cents, or 12 percent, to $5.47 at 4 p.m. New York time in Nasdaq Stock Market composite trading, ending a five-day slump. The stock has dropped 26 percent this year.

Staff Report

The FDA is scheduled to release a staff report for panel discussion tomorrow and issue a final decision by Jan. 31. The agency usually follows the recommendations of its advisory panels, though it isn’t required to do so.

Contrave, the company’s first product, helped obese people lose an average of as much as 8.1 percent of their body weight, or 17 pounds (7.7 kilograms), after 56 weeks in a study reported in July. The most common side effect was nausea, experienced by almost one-third of patients taking the drug.

The pill contains bupropion, an antidepressant also used to quit smoking, and naltrexone, a treatment for alcohol and painkiller addiction. The medicines target different parts of the brain that influence appetite and cravings. While the drugs are commonly used, high blood pressure, seizures, liver injury and suicide are among the significant safety risks noted in the prescribing information.

Japanese Partner

Orexigen and its partner, Takeda Pharmaceutical Co., based in Osaka, Japan, say they have learned how to tackle the FDA review of safety and effectiveness by watching what caused the delays in October of competing medicines from Mountain View, California-based Vivus Inc. and San Diego-based Arena Pharmaceuticals Inc.

“We have paid close attention to these regulatory interactions and have been applying any learnings to our own regulatory review in preparation for our advisory committee review in December,” Orexigen Chief Executive Officer Michael Narachi said on a Nov. 3 conference call with investors. “The recent advisory committee meetings highlighted the importance of clearly articulating risk-mitigation plans.”

The company declined to comment on its option trading when contacted by Bloomberg News.

Implied volatility, the key gauge of option prices, for at- the-money Orexigen options expiring in 30 days has more than doubled in the past month to 316.66 and reached a record 357.50 on Nov. 17. Options are pricing in a move below $1.65 or above $8 after the FDA panel decision, Seidman said.

Call Spread

Seidman is recommending clients who own the shares and expect the stock to rally on the decision buy a December $8 call while selling two of the December $11 calls, a strategy known as a 1X2 call spread. The trade costs almost nothing because the investor collects a premium from selling the two calls at the higher strike price, offsetting the cost of the purchase.

The FDA panel voted 10-6 against Vivus’s experimental weight-loss drug Qnexa in July because of concerns about potential risks of birth defects, depression and increased weight loss. The FDA asked the company Oct. 28 to submit two- year study results, details about heart risks and a plan to prevent use during pregnancy before Qnexa may be approved as early as next year.

Arena’s lorcaserin, the least effective of the three pills under review, was considered to be the safest until potential cancer risks arose during the FDA review and the advisory panel voted 9-5 against the drug in September. Arena and partner Eisai Co., of Tokyo, said Oct. 23 that they must submit additional data to win approval and may need new studies.

“The options market is implying that Orexigen’s medicine will get approved,” said Ophir Gottlieb, head of client services at Livevol Inc., a San Francisco-based provider of options market analytics. “Since the other two diet pills failed, Orexigen may have a better chance of getting approval, simply because this is an illness that needs to be addressed and maybe they’ve learned something from the previous failures.”

To contact the reporters on this story: Catherine Larkin in Washington at clarkin4@bloomberg.net; Jeff Kearns in New York at jkearns3@bloomberg.net.

To contact the editors responsible for this story: Reg Gale at rgale5@bloomberg.net; Nick Baker at nbaker7@bloomberg.net.

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