Tuesday, September 7, 2010

Crunch Time for Arena, What's the Play?

Crunch time is officially here for Arena Pharmaceuticals. This blog has been chronicling this equity for weeks. Arena (ARNA) is a small player with essentially one significant drug, lorcaserin. Lorcaserin is a unique entity, a new chemical, which targets the hypothalmus satiety center. When used, lorcaserin induces weight loss by giving the user a sense of fullness.

A similar acting drug, fenfluramine, is no longer available. Part of the famous Fen-Phen fatty combination drug, fenfluramine caused heart valve issues and damage. Thus far and with particular attention to the test subjects' heart valves, lorcaserin has not been associated with any valvular disease. In fact, lorcaserin appears remarkably safe to date.

The second part of any FDA evaluation is efficacy. In long term evaluations, lorcaserin is associated with a 5% or more loss of weight. While not spectacular, it definitely has a positive effect. Most commentators believe that the overall efficacy assessment will hold water with the looming FDA Panel review. That review is scheduled September 15-16. Crunch time is here.

Generally the FDA follows the recommendations of their scientific Panels. Indeed, next week's Advisory Committee's evaluation is the biggest moment in Arena's history. It goes without saying that a Committee thumbs up is worth billions of dollars. No one argues that the market for a successful weight reduction drug is not ripe for help.

ARNA hit a $8 high a month or so ago. It has wallowed in the $6.50-$7.00 range through the languid, low volume days of August. Well, school is back in session. The Labor Day holiday's passing signals that the boys are back in town. And now the fun begins in earnest.

Assuming no eleventh hour safety or efficacy torpedoes, ARNA is going higher. How high? Naturally, there is now way to know, but $13 seems like a reasonable target. Whether the halt price is $10 or $15 or whatever is the crap shoot. Once the Committee goes into seclusion to hash out its position, trading in ARNA will stop. Consequently, a trader or investor (there is a difference) needs to make a play in due course. Be advised.

Buy now, sell on the way up, good. Buy now, sell just before the halt and make a profit, good. Buy now, sell half or so at a higher price and let the rest ride through the halt, good. Buy now and hold, good, too. No matter what, any play has the potential to make a profit. So, any play is good play. Single, double, triple or homer, all base hits, all good.

There will be increasing activity in ARNA over the next eight days. Right now the roller coaster is aimed skyward, climbing to the high point, ready to make its first free fall. The roller coaster ride lasts eight days. Climb, fall, climb, fall, twist and turn... Whether you get in the car or watch from the ground, a roller coaster is one exhilarating experience.

Qnexa, another fat drug, has just run the gauntlet facing lorcaserin. Vivus (VVUS) ran up to $13 and change before its Committee review. One the drug was rejected, VVUS plummeted to the $4's and now has moved back into the $6's. If on the other hand Qnexa had been favored by the Committee, VVUS would likely be a $18 equity.

A corollary play is Orexigen (OREX), the maker of Contrave. This is possibly the real winner. No matter what happens to ARNA, win or lose, OREX goes higher. The maker of the third of 2010's fat trinity chemicals goes to the plate in October. In the short term, OREX has to go higher. Check out ARNA's price in the immediate aftermath of the VVUS announcement. Some players made a lot of money in the ARNA trade post the VVUS fall. Is a position in OREX the way to go through the halt? Hmm. Another play, buy ARNA, let it run up to the halt, sell, take the profit and then take a position in OREX. Then get ready to make a move in the post halt trading period with OREX. Hmm.

The market opens in a few hours. Let the games begin. Wheeeee...

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