Arena - What Now?

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 |  About: Arena Pharmaceuticals, Inc. (ARNA), Includes: VVUS
by: Mina Shaker

In case you have been sleeping under a rock, Arena Pharmaceutical's (NASDAQ:ARNA) weight loss drug, Lorcaserin, was approved by an advisory board on Thursday afternoon. Friday, the stock sky rocketed up over 90 percent and closed up over 75 percent in the green, but the fun is just beginning. At the end of June, the FDA will be taking this past vote into consideration, and decide on whether this drug will be approved for marketing. Based on the advisory board's decision, most analysts agree that the FDA will approve Lorcaserin.

This is not the first time the FDA has met Lorcaserin. In 2010, the advisory committee's recommendation of not approving the drug was followed by the FDA. Their recommendation was for more testing based on a) the statistical significance of weight loss, b) the possibility of pathologies including cancer and heart valve problems and c.) the combination of a. and b. in the form of a risk/benefit analysis. Every drug released has side effects or problems but the question for this advisory board was, is the benefit of a small amount of weight loss worth the risk of cancer or heart pathology. Most of the experts on the panel agreed that it was.

So you missed the big jump, what now? Here are a few possibilities for you.

  1. Vivus (VVUS) is another company offering a weight loss drug. The approval of Lorcaserin in late June could mean a big increase in the stock value of VVUS. Lorcaserin will be the first weight loss drug to be passed in a decade. If Lorcaserin passes, investors will see the VVUS drug, Qnexa, as more likely to pass, driving the stock price up. If Lorcaserin fails, investors may expect Qnexa to enter the market, unopposed, again, driving prices up. VVUS may be the fairly safe play.
  2. For all you options players out there, a variation on a straddle may be your best bet. Chances are, Lorcaserin will pass. Buy a Call option at the money and hedge it with a Put, somewhere around the $4.00 strike. If the drug does not pass, the stock price will surely go lower than $4. In fact, it will probably go lower than $2, based on what it was trading before the advisory committee's vote.
  3. For you dare devils, you could keep it simple and just buy ARNA. It may not be too late if the stock goes down a bit between now and the end of June.

Disclosure: I am long ARNA.