Why Shares of Orexigen Therapeutics, Inc. Cratered Today

By Markets Fool.com

Although we don't believe intiming the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

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What: Shares of Orexigen Therapeutics continued their recent slide today, dropping another 15% on heavy volume.

Orexigen's dramatic plunge is the result of the fallout over its early disclosure of interim results from the cardiovascular outcomes trial known as the "Light Study" for the company's fat-fighting pill Contrave. Earlier this year, Orexigen's management disclosed some extremely early stage results, via a patent application, suggesting that the drug might actually reduce the risk of heart attack and stroke in obese patients.

Since then, Orexigen's marketing partner for Contrave,Takeda Pharmaceuticals , the Food and Drug Administration, as well as the lead investigators of the Light Study, have all said that the disclosure is tantamount to tampering. And now, the FDA is now requiring Orexigen to run a new study to ensure that the drug doesn't increase the risk of adverse cardiovascular events. As a result, Orexigen and Takeda announced yesterday that there are terminating the Light Study.

As part of the announcement, we also learned that Takeda is seeking to exit its collaboration agreement with Orexigen, citing a "material breach of the agreement" as the reason. The two companies will now enter into a disputeresolution process that could include arbitration.

So what: Contrave's U.S. launch was off to a much stronger start than its rivals from Arena Pharmaceuticals and VIVUS . And the company's diet pill was the first to gain a regulatory approval in Europe under the brand name Mysimba.

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Although management is trying to downplay the conflict between the two companies, this contract dispute is almost certainly going to slow the drug's commercial launch.

Now what: I think the real hidden danger is that the FDA decides to pull Contrave from the market now that the Light Study won't be completed as planned. The agency, after all, was none-too-pleased with Orexigen for spilling the beans, so to speak.

So, there is a growing chance that Orexigen could be stuck funding a large cardiovascular outcomes trials without a marketing partner, and without revenue coming from U.S. sales of the diet pill. This might be a low probability "nightmare scenario", but it's a possibility nonetheless that investors need to come to grips with today. That's why you may want to shy away from this falling knife for the time being.

The article Why Shares of Orexigen Therapeutics, Inc. Cratered Today originally appeared on Fool.com.

George Budwell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.