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Arena Pharmaceuticals (NASDAQ:ARNA) has taken a 15% hair cut on the day of its earnings release. While several numbers missed expectations, it can be explained away in the fact that the anti-obesity drug Belviq has yet to launch as it still awaits final DEA scheduling. What is likely the biggest driver of the sudden stock price decline is the fact that Arena has pulled its application for marketing authorization in Europe.

Investors once looked at Arena as having more potential than competitor Vivus (NASDAQ:VVUS) because Vivus was rejected in Europe and many felt that European approval for Belviq was a sure thing. This obviously is not the case. A company does not pull an application if it believes it has a decent shot at approval at the current time. A company pulls an application because there is likely a fundamental issue that makes current approval unlikely. This news is a huge concern for investors in that while the company can always re-apply, the drug was not the sure thing many had assumed it was.

The fact that investors have been led down a path believing that Europe was going to add to the potential of the company is most unfortunate. Arena, over the past several months, has done very little to offer up any warning that the story in Europe was anything more than a process that will take time. Instead, what we are seeing is a stark reversal from common thinking and a sudden drop in potential value of the company. The reaction is likely overblown, but this process now will take more time, a situation that is not conducive to fast moving share appreciation.

Ever since the FDA approved Belviq last year, there has existed a large collection of investors that assigned "Blockbuster" status to Belviq. These same bullish investors indicated time and time again that the potential was greatly expanded because Belviq would have Europe to itself. Throughout this time period, we were fortunate enough to be able to use Vivus's sales of Qsymia as a proverbial measuring stake to help determine the size and scope of the prescription anti-obesity sector. Personally, seeing what was happening with Vivus, I took on a much more cautious approach (to the frustration of many bullish investors) with Arena and its potential. This is not an "I told you so," but caution seems to have been well placed.

What is an investor to do now? Well, my first thought would be to catch the religion of being a bit more cautious with this equity. Once launched, Belviq will be limiting its sales to the U.S. market (at least in the short to mid term), which has been tepid for Vivus and Qsymia thus far. There is potential here, but it is likely far more measured than many had once thought.

There will be a day soon when the DEA offers final scheduling and Arena can launch in the United States. That presents the biggest opportunity at the moment. When Arena bottoms out on the heels of the European news, it will present a buying opportunity in preparation for DEA news. There is a play here if you can be disciplined enough to rethink your stances on what this equity will deliver in the near, mid, and longer term. Stay tuned.

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.

Source: Arena Falls, Pulls Anti-Obesity Application In Europe