Arena: What's It Really Worth?

Sep.17.13 | About: Arena Pharmaceuticals, (ARNA)

Fundamental analysis is the core of price valuation for any stock. So what is it? My apologies in advance for all those who will read this and say but I already know all this stuff.

Since I don't have my Barron's Finance and Investment Handbook handy at the moment let's check the intertubes for some insight.

Fundamental Analysis abridged versions:

businessdictionary.com

Method of evaluating a security by investigating intrinsic value of the business issuing the security with consideration of competitive advantage, earnings growth, sales revenue growth, market share, financial reserves, and quality of management reflected in financial statements.

In contrast technical analysis is indicated to rely largely on past and present movements in market price to estimate future value.

wikipedia.org

Involves analyzing financial statements and health, management and competitive advantage, and its competitors and markets. Bottom up: investor starts with specific business, regardless of industry/region. Top down: Global economics including international and national indicators, regional/industry analysis of sales, price levels and competition in order to identify high quality investment potentials.

investopedia.com

Method of evaluating security by attempting to measure intrinsic value by examining related economic, financial and other qualitative and quantitative factors. Attempting to study everything that can affect securities' value from macroeconomic to company specific factors.

Application of Fundamental Analysis

The general goal in fundamental analyses is to determine a value that can be compared with the current price.

That combined with an investor's own risk/value ratio is the general or specific guide that investors use.

Add to this the notion of long and short-term investing. Long investors are looking further down the road and short-term investors are often trying to take advantage of market fluctuations in order to gain profit.

Add to that either real or perceived market manipulation and one can see that the risk factors are determined by one's own tolerance and/or capacity to ride the waves, or lose investment value.

Simply put it's really hard to know for sure, especially in the short term.

Spec. Value

Now, toss in speculation. Spec. investments are based more on potential than sales. As we all know Arena's (NASDAQ:ARNA) Belviq, like Vivus's (NASDAQ:VVUS) Qsymia, did not come out of the gate bucking like blockbusters. The market opportunity is huge (no pun intended). But the product price may be a high hurdle for customers. The problem of obesity and the potential for insurance coverage still lies in the speculative, but it may not be such a far fetched idea that insurance will cover such medications more in the future since the cost of not dealing with the issue has even larger costs (no pun intended).

The Bel-Phen combo as well as Bel-Met still is in speculation mode as well. That, and the potential for use in smoking cessation, potentially could massively expand (no pun intended) the market. Either in part, or on whole, this may tip the scales (pun intended) toward moving consumer pull marketing and greatly expanding (stop that punning, I mean it...) sales potential.

Bel-Phen, Bel-Met, Smoking CessationClick to enlarge

So here we are. Sales have started for Belviq, and it looks like an OK start, but nothing to have a parade about yet. The stock price has relaxed its way down to the upper $5 to lower $6 range as of Sep. 16/17, 2013. Arena announced on Sept. 16, 2013, that "Eisai Inc.'s marketing activities for BELVIQ® (lorcaserin HCl) as the US launch campaign enters its consumer phase."

On the objective side:

Arena's GPCR targeting technology is indicated to work. In Belviq (Locaserin) this first entry into the market with this new technology applied to a weight reduction medication, Belviq is highly effective in its target group (47.1% of patients lose 5% of body weight while 22.4% lose 10%). It works. On the downside, you have to try it to know whether it works for you. Possibly new ways of identifying patients that fit in the "effective" group will be developed.

Long-term investors might speculate off of that objective knowledge that this is a first test of a new technology that may prove effective in other medications as well. Trials are underway for other medications at this time.

If this technology is sound, then long-term investment is warranted. Indications are relatively positive. Longer term analysis may show new issues to be considered. The data in the studies thus far shows that this drug works and has a relatively good safety profile.

In the short term beware of rattlesnakes. Sometimes roads have potholes in them and there is always the potential of short manipulation. While it's possible that we may being base building in this range, only time will tell. If sales begin to pick up in the next weeks/months, so likely will the stock price follow.

So it really depends on your risk tolerance and how long or short your investment horizon is. No magic tell-all here. No crystal ball. Simply put, the price of the stock is a reflection of its perceived value in relation to its actual and indicated value. Ultimately, when you buy in is up to you. Consumers are only now being introduced to the fact that Belviq even exists.

In my opinion, in a world where there are indications that our genes are being modified by the foods we intake, our brains are indicated to being influenced by overdosing on high-fructose sugars, which are indicated to cause insulin rushes and reduce leptin response, along with changes in food intake habits that are not being curtailed but rather promoted by the food industry. Until individuals are more aware of the issues involved in obesity, or governments begin to look seriously at cause factors, such medications will be a significant part of the solution to the obesity epidemic.

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.