Arena Pharmaceuticals (ARNA) shot up 73.4% Friday anticipating the FDA Advisory Committee's vote in favor of Lorcaserin's benefit / risk profile for weight management.
The potential profits for Arena Pharmaceuticals are incredible considering an estimated weight loss market of $20 billion in the U.S. alone. Here is what the findings for the drug found:
- Year One: it helped patients achieve highly significant categorical and absolute weight loss.
- Year Two: it helped them maintain their weight loss.
- Other Improvements: cholesterol improvement at the 15mg-20mg levels
- Studies revealed that the weight loss was dosage dependent. Weight loss with increased dosage was statistically significant.
After the announcement of the FDA approval, Jefferies Financial upgraded Arena Pharmaceutical to buy from underperform. It appears the company was reluctant to take sides because it might have had hesitations as to whether the FDA panel would give a go ahead with the drug or not. But- they saw enough to convince them that the drug will receive full approval on June 27. Based upon estimated sales of $1.5 billion by 2020, the company gave the stock a new price target of '9' from a previous hesitant- '1.'
Another company with a recent weight loss approval drug--Vivus(VVUS)-- pioneered the same path Arena just took. The FDA advisory committee endorsed the anti-obesity drug Qnexa in the last week of February 2012.The committee voted 20 to 2 to recommend approval of Qnexa, which is a combination of two existing drugs, the appetite suppressant phentermine and the anti-seizure medication topiramate. At this time, the stock jumped from 10.55 close the day before to an 18.73 close the next day. That was on February 23rd. Today the stock trades at 24.70-that is an additional 31.8% ride from its original spike.
The Options Play
Considering the approval of the drug and the timing coming at the end of June, we believe it may not be hard for the stock to rise to '7' right after or just before approval. For this reason, a straight up option buy might be the best option for additional income opportunities with the company. The July 2012 call with a strike of '7' is (priced at $1.20) and would be our recommendation. Once the stock touches this level, it could be resold for a profit.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.