Since trading at $10 on many occasions last summer, 2012, Arena (ARNA) shares remained range-bound between $8 and $10. If the market for obesity is so large and promising for Arena's BELVIQ, then the rally for Arena shares above $10 just a few days ago would have been sustainable. Instead, the market voted in the short-term, and looked for any reasons to be bearish on the company.
The long-term outlook for Arena is bright, but bears will continue to keep shares range-bound, due to 5 main factors in the short term. The factors influencing Arena's share price in the short-term are discussed below.
1) Short-Selling Volume
Short interest in shares of Arena rose steadily throughout 2012, where it remains above 50 million. Short interest spiked higher by 21.2% when Arena shares dropped to around $8 in mid-November, 2012:
Avg. Daily Share Volume
Days To Cover
(Data Source: Nasdaq.com)
Short-sellers are confident that Arena shares will drop, which is not a surprise. Arena was trading at just $2 last May, and the dramatic rise is viewed as unsustainable. Fundamentally, investors should anticipate that the commercial launch of BELVIQ should have less operational challenges than other drug makers launching a new product to market. Marketing partner Eisai (ESALY.PK) is expected to ensure a successful initial launch. This would be in contrast to the challenges faced by Vivus (VVUS). Even discounting the impact of safety concerns for Qsymia, Vivus reported far lower revenue from the launch. For the quarter, Vivus shares are down nearly 40%, closing recently at $13.63. When sales begin for Belviq, a short-squeeze could help push shares even higher if Arena executes its operational plan effectively.
2) Institutional Ownership Rising
166 institutions reported owning a position in Arena, with 93 holders increasing a position by 35.6 million shares, 24 initiating a new position with 17.3 million shares, and 55 holders decreasing ownership by just 6.1 million shares. Institutions now represent 45.4% of ownership.
As operational risks dissipate, marketing ramps up, and investor worry abates, institutional investors could increase their position in Arena.
3) Marketing in Europe
Arena disclosed in an SEC filing the status of the marketing approval for BELVIQ in the European Medicines Agency ("EMA") filed in March 2012. The company said it:
"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."
A final opinion on the BELVIQ MAA will be made by Day 210, which would be by the first half of 2013. The recent sell-off in Arena removes the premium investors previously needed to pay in speculating an earlier decision. This implies that there will be substantial upside by holding shares well-before the first half of 2013.
4) Marketing Partnership a Competitive Advantage
Arena has Eisai, a marketing partner for Belviq, which will give the company an advantage over Vivus. The weak launch by Vivus gives Arena less competitive pressure, and room to make a very strong initial launch. Elsewhere, upside is even greater: Vivus does not a presence in the EU, giving Arena an advantages in this region.
5) Low Bar Set for Initial Sales Forecast
Analysts are not expecting initial sales for Arena to be strong. In November 2012, Jeffries lowered its 2013 sales forecast by 70%, or to 35 million. An analyst at J.P. Morgan forecast sales of $74 million for 2013, growing to $481 million in 2016.
The lower expectation gives more room for Arena to exceed expectations. Strong interest by physicians in prescribing Belviq, helped by effective marketing by Eisai raises the odds that the 2013 sales forecasts are too low.
Arena's two-day drop between Friday January 18 and Monday January 22 2013 provides another entry point for investors. The investment is suitable for investors who can tolerate the short-term moves inherent in a company launching a new product to market. Initial sales could in fact be weak, which would benefit of short-sellers. 2013 is still an inflection point for Arena. As Belviq sales begin, short-sellers remain at risk in betting against the company. Institutional investors will raise their position in the company if Belviq proves to be the preferred obesity drug to prescribe to patients.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ARNA over the next 72 hours.