When the discussion turns to Arena Pharmaceuticals (ARNA), there is no shortage of opinion, passion, and banter. This tends to happen with speculative stocks that gain in popularity. While many think it is an "us against them" situation, the savvy investor steps back, watches the ongoing battle and makes profitable trades along the way. Most of my articles are geared toward the short and mid term, active traders, and people seeking an entry point. Personally I have only made my initial buy at $7.32 and one sale (I sold half of my stake) at $10.50. If I were to apply my profits from the sale to Arena, my cost average is about $4.15.
Long ago I learned to minimize my attachment to any company. It was a hard lesson to learn, but it made me a better investor. I learned that no matter what I thought, or what my due diligence told me, that it was the expectations of the big players that set the stage for runs or dips in an equity. If expectations are too high, even good numbers can send a stock crashing. If expectations are too low, the company can make a bull run that impresses even the most bullish investors.
Recently, Seeking Alpha contributor EnhydrisPECorp wrote an article titled, "Arena Is Still A Great Short". What I found ironic about the piece was not the stance taken by the author, but the fact that he arrived at a three month prescription level of about 40,000 and felt that this was a bad number and good reason to short the company. You see, I myself have outlined 40,000 prescriptions in three months as good performance, and the type of start the equity needs to see to meet Eisai's (ESALY.PK) sales goal of $200 million in the first 10 months.
When I have outlined my 40,000 script level as good I have come under fire from passionate longs stating that my estimates were way too low and that Arena would quickly become a blockbuster. If one were to consider an initial launch of about 15,000 patients in month 1, apply a reasonable growth rate, and consider drop-outs one would arrive at enough prescriptions to equate to about $250 in sales in the first year. Ironically, even partner Eisai is not targeting blockbuster status ($1 billion in 1 year) until the year 2020. My "Good" model of performance has Arena getting to the lowest level of bonuses and price adjustments outlined between Arena and Eisai.
Seeking Alpha readers get to see varied opinion on an equity. That is a very good and healthy thing. Some readers do not agree with my stances. Some do not agree with the stances of EnhydrisPECorp. What we do know is that institutions have been increasing ownership and there is a substantial short position in the company. Essentially, there is a proverbial boxing match happening and we are finally entering the final rounds. There have been times where a bullish stance has paid off, and times when a bearish stance has paid off.
One thing to remember is that for many months Arena traded in a pattern that was a dream for more active investors. An active investor could place a bet just after another month passed without DEA or European approval news, ride up the wave of the next month, sell, and reopen another position on the dip when no news materialized. In contrast, I just described a person that goes long, sells on a run, then goes long again after the equity retraces. Now consider this. The exact same trading can happen by shorting at the highs, covering at the lows, and then shorting again at a high. Neither method is good or bad. They are simply playing the same dynamic by employing differing strategies.
To his credit, EnhydrisPECorp has developed a model to arrive at a conclusion. To his credit, he published that for readers to consider. Whether I (or you) agree or disagree with his opinion does not really matter. What matters is that we all have more data and more opinions to work with. EnhydrisPECorp and I both have the 3 month prescription level at 40,000 and arrived at vastly different opinions of what that means. He calls it a reason to short, and I call it good performance that will allow this company to, at a minimum, maintain its stock price and demonstrate potential for growth.
Many are anticipating that we are a few weeks away from getting the final answer on which boxer will win. In my opinion, the only way that happens is if one side gets a knock-out. If prescriptions come in at my "Great" level of 75,000, then those that bet short may need to re-think their strategy quickly as it would appear that a knockout would have happened. However, if sales come in at just 20,000 or 25,000, then the longs may need to think quick because the shorts will win the battle. Bear in mind that the battle over Arena is not limited to just Belviq, but as stated, I am looking at the short and mid term. Arena has a pretty good pipeline in the works.
If there is not a knockout, we may see this battle continue for a couple of quarters. That would play to the advantage of savvy active traders and would be frustrating for those betting big on the positive and negative side. You see, even though both sides in this battle feel that they have the winning strategy, the scorecard is essentially a draw at this point.
If you step back and look at the sector from a distance you will see that the Arena launch of Belviq carries a lot of importance for more than just investors in Arena. We have Vivus (VVUS) and its anti-obesity drug Qsymia. Vivus is in the midst of a different battle. That company has an active 10% shareholder, First Manhattan, vying to take control of the Board of Directors at the July annual meeting. First Manhattan believes that current Vivus management did a poor job with the launch of Qsymia and that Vivus should seek out a partner in a similar fashion to what Arena did with Eisai. You can bet your bottom dollar that Vivus, First Manhattan, and investors will be watching the channel checks of Belviq sales closely as that annual meeting approaches. You see, the performance of Belviq will answer questions for Vivus investors as well.
Another group watching the Belviq launch closely will be Orexigen (OREX) investors. Orexigen has an anti-obesity drug, Contrave, of its own in the pipeline getting ready for the FDA approval process. If the sector shows potential, then Orexigen investors may breathe a sigh of relief. If the sector is simply okay, then Orexigen investors may not be quite as excited about the prospects of a third anti-obesity drug.
Simply stated, the launch and initial results of prescription sales will carry a lot of weight in how investors in the entire sector react. Investors will need to be on their toes. While we may see a potential run on excitement about the Belviq launch prior to June 7th, it is the initial channel checks that will tell the story.
When I sold half of my Arena position months ago it was because I saw an opportunity that I felt was better. I still carried a belief in the potential of Arena and kept half of my position. I was fortunate to double my money (I have not sold that equity yet) on the other investment. While I had hoped that the Arena launch would have been about 3 months earlier than it has been, I am still holding based on what I feel is a company and a drug that have potential to deliver a meaningful appreciation in the stock price.
My bet is that the launch of Belviq will deliver answers. I feel that there is enough potential to keep my skin in the game on the long side, but I will be watching closely. Remember, potential means that you have not done anything yet. The prescription numbers will determine if the potential is real and if I become more of an active trader in this equity, hold for a longer haul, or simply step aside. The key date is not a run going into the launch, but about a week or two after the launch when channel checks begin to come out. Be ready, this equity will make moves on any channel check news.
Additional disclosure: I have no position in Vivus or Orexigen. For clarity, and to answer a question e-mailed to me, I have outlined my Arena trades in the article. I have never traded Vivus or Orexigen in any way long, short, or options.