Arena Pharmaceuticals (ARNA) is supposed to release phase 3 data on its new obesity drug, lorcaserin, at the end of March 2009. Data from this first of three ongoing Phase 3 trials will likely cause a big move in the stock. Buying the stock based on the expectation of good news would at first seem to be a pure gamble.
At second glance it might be better than that. The stock is currently at $4.43. It has just rallied off a bottom which has good technical support (approx. $3.90 to $4). On Feb. 12, 2009, the stock had reached a near term high of $7.42. At about that time, the market really started to tumble. It could be argued that ARNA simply tumbled with the market. Hence the recent top may be a more accurate reflection of its somewhat speculative worth. Since the market has not yet rallied significantly, it is a very positive sign that ARNA has rallied by 10+%. Yet this is still a very questionable reason to invest.
Let’s look at the competitors. There seem to be three major new obesity drug candidate companies. They seem to all be developing in roughly the same time line. Vivus (VVUS) announced good results from a phase 3 trial of its obesity drug candidate, Qnexa, on Dec. 11, 2008. Orexigen Therapeutics (OREX) announced “mixed” results from a clinical trial of its obesity candidate drug, Contrave, on Jan. 9, 2009. OREX argued that its results still do meet FDA benchmarks for approval.
The fact that both of these companies reported at least decent results would tend to argue that the likelihood for a good result from ARNA is high. In addition, ARNA announced on Feb. 18, 2009 an initiation of a Phase 2 clinical trial of an orally administered niacin receptor agonist drug candidate to treat atherosclerosis (a collaboration with Merck (MRK)). Furthermore, at least one analyst has recently increased his estimate for the value of ARNA’s obesity drug in the market. These things should give ARNA significant upside potential in the near term.
Looking again at the technical picture, the expectation for the extent of the near term price rise due to good Phase 3 results by ARNA would be the recent top put in February 12, 2009 -- $7.42. It could go higher, but $7.42 would be a technical resistance point. The expectation for a “mixed” result might be about $3, which was approximately the base of the Oct. 2008 low. It seems unlikely that a completely negative result will be reported. Some hint of that would have leaked out by now. Plus the competitor companies’ results simply do not argue for this as a significant possibility.
In sum, it looks like there is a “most likely” potential for a $3 gain, while there is a “less likely” potential for a $1.50 loss. Stops at $3.70 might be able to curb some of the loss, if there is one. Overall this investment seems like a good bet to make in the current market. Good news from ARNA could swamp out almost any further bad news from the markets. Plus if the markets started to rally significantly, ARNA could shoot through the roof on further appreciation due to the overall market rally. A near term price appreciation to the $11 to $12 range is not technically out of the range of possibility.
With all of this in mind, Arena looks like a better gamble. It’s all really about “risk/reward”. Naturally if you feel strongly that the overall market is going to fall 20% in the next 20 days, you probably do not want to take this gamble. If you feel a mixed (or even a good) performance of the overall markets for the rest of March is more likely, this investment possibility may have some appeal. Many analysts are forecasting at least a slight rally after the huge recent fall. This might occur at a sweet spot for this investment opportunity.
Disclosure: Long ARNA.