Arena Gets A Hair Cut - What's Next

| About: Arena Pharmaceuticals, (ARNA)

Investors in Arena Pharmaceuticals (NASDAQ:ARNA) will wake up today to see that the equity has taken a haircut and tumbled down toward $9.00 per share. In fact, in pre-market the equity even dipped below $9. The move came on the heels of an 8K filed by Arena regarding the progress, or lack of progress in Europe, regarding its anti-obesity drug Belviq.

The news announced by Arena was not taken well by the Street, as it appears that a decision from Europe may be a few more months away.

"We have received the Day 180 List of Outstanding Issues from the EMA's Committee for Medicinal Products for Human Use, or CHMP. The issues will need to be addressed before the CHMP can recommend BELVIQ for marketing approval in the EU. The major objections relate to previously identified non-clinical and clinical issues, including tumors in rats, valvulopathy and psychiatric events, and the CHMP requests that we further justify BELVIQ's overall benefit-risk balance taking these issues into consideration.

In accordance with the CHMP's process, we have been asked to address the issues in writing. The CHMP also plans to consult with independent experts who will provide recommendations on the outstanding issues. In addition to the written response, we have been invited by the CHMP to provide an oral explanation.

The CHMP is expected to reach its final opinion on the BELVIQ MAA by Day 210, which we continue to expect in the first half of 2013."

While this news is certainly not positive in nature, it is not the end of the world either. Expansion into Europe has always been part of the Arena plan, but what's next is a state side launch of Belviq. That should happen as early as March of 2013. The only thing we are waiting for on a U.S. launch is the comment and response period on DEA scheduling to run its course. At the moment Europe is secondary and clearly not a walk in the park.

In many ways this event could present an opportunity for long-term as well as active traders. It is no secret that Arena has presented trading ranges that are like candy to an active investor. $1.00 to $2.00 swings have been happening with this equity with some regularity. More often than not savvy active traders have been the benefactor of this. What is different now is that Arena is very close to a U.S. launch and we will now have actual numbers to focus on.

I have stated in the past that investors in this equity need to be aware that there are heavy bets on both sides of the fence when it comes to Arena. This has the impact of limiting upside as well as downside. In my opinion an Arena near $8 and change presents a decent opportunity for reset once again, and another baseline. This is about the level where those wanting to buy in will do so, and those looking to close short positions will do so as well. Essentially, at a price that reaches the $8s (or close), there is a brief alignment of interest from both the long and short side of the house.

In my opinion the next catalyst for Arena will be the quarterly call and the launch of Belviq in the U.S. Investors should not lose focus on the progress in Europe, but that is not currently going to be the driver. What will become important over the coming weeks is the level of expectation attached to the U.S. launch. While investors all hope to see a successful launch, it is the expectations that will rule the day. When competitor Vivus (NASDAQ:VVUS) launched its drug, Qsymia, expectations for the sector were quite lofty and the company took a haircut of its own due to that fact. Hopefully Arena will outline a realistic outline for launch success and garner a bit more control over exactly what is expected.

The key here is that bad news, such as what we saw today, can present an opportunity as long as investors focus on the right things. Using terms like "blockbuster" and "skyrocket" do not really help Arena and in fact can set the stage for disappointment. Perhaps the biggest factor investors need to consider is what expectation level Wall Street has rather than anything else.

Disclosure: I am long ARNA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have no position in Vivus