4 Lessons From a Review of Arena Articles

Sep.19.10 | About: Arena Pharmaceuticals, (ARNA)

Arena (NASDAQ:ARNA) took its share of lumps Thursday after the FDA advisory panel recommended against approval. Though it did not trade then, it was down Friday pre-market to approximately $2.12. And to think it was about $8 just a few weeks ago. What was fascinating about this run up and downfall was the number of posts and comments on Seeking Alpha about Arena.

I counted the number of articles and blogs by writers over the past six months. I counted both blogs and articles, since some blogs could have been accepted by the editors as articles but were not. Fourteen authors had opined on Arena, some more than once. Of the fourteen, only five were negative, and nine were positive. The five who were negative got plenty of comments, most of them personal, and only a few giving rational counter arguments. Since they were correct, I for one tip my hat to Joseph Krueger, Penn Bioinvestor, Baskin Financial, Tungsten, and John Tucker. I also compliment some of the latter group for remaining calm and civilized despite some vitriolic attacks on them.

There are a few lessons to be learned:

1. Don't discount naysayers. Being short is dangerous financially, and therefore shorts have to do their homework. I learned my lesson from David Tice when he shorted Tyco (NYSE:TEL) (I was long Tyco, and after listening to him, sold my positions for a small profit instead of taking a huge loss).

2. Keep in mind what Peter Lynch said about investing in what you know. If you don't know biotech, stay away. One comment I found particulary amusing was by a medical doctor who discounted the rat findings by saying he would keep the findings in mind when a rat visited his clinic for weight loss. Anybody who has dealt with the FDA and has had to discuss toxicology should have known better. Don't be arrogant about what you know, and especially about what you don't know.

3. Don't invest with emotions. It was obvious that many comments were emotional and not based on much scientific understanding of the issues involved. Some comments were scientifically sound and they did add to the discussion, but they were far fewer than the less useful kind.

4. Don't try to second-guess the FDA. If you haven't dealt with them, you don't know what their perspective is. They have seen many more products, studies, and trials than anyone else has, and when they ask questions or raise an issue, there usually is a good reason. A favorite pastime of many in the pharmaceutical industry is to think of the FDA as a foolish, over-zealous safety obsessed organization. That is far from the truth. The FDA does an excellent job of balancing safety and efficacy. And while those who lost money over ARNA may disagree, they are ultimately there to protect the safety of the public.

Disclosure: No positions