In case you hadn't heard, a multitude of fat busting drugs are coming up for FDA approval in the next few months.
First on the block is Arena Pharmaceutical's (ARNA) drug Locaserin that is up for FDA approval on June 27th. While not the most effective during clinical trials of the three that are up to bat, it had fewer significant side effects and could be marketed to a wider audience than Vivus' (VVUS) Qnexa which is up for approval in July.
While Qnexa was more effective during clinical trials, the fact that it will be restricted from use by women considering pregnancy will allow Locaserin to have a broader uptake in the market.
Understandably having first mover advantage in the market along with a broader audience gives ARNA the potential to fulfill the market valuation that is it currently sporting and then some.
Trees Growing to the Sky
ARNA the stock has been on a tear recently.
(Click to enlarge)
In the last three months the stock has moved from $1.76 to it's most recent close of $8.07. Already a 359% gain in 3 months and the company hasn't even sold a single pill.
Yowza! This is why people play in biotechs.
After popping on the approval of Vivus' Stendra (Insert erection jokes here) the stock rocketed to the stratosphere even once the FDA Advisory panel voted 18-4-1 for Locaserin to be considered for FDA approval.
Right now, all of the technicals are saying way overbought on the daily charts with the recent pop above $8 on increasing volume but potentially showing a spinning top candle on today's action.
Trading Plan
The spinning top we saw on Wednesday should lead to a decline in the shares in the near term. I would expect the stock to fall down at least to the 5/11 high at $7.01 and would not be surprised if it closed this week below $7.
Going into next week the stock will be volatile and I would not try and pick up any shares until it hit some support level. My initial buy target to play the ARNA Locaserin approval lottery is around $6.25 or so. There is the possibility that they do the same thing they did with Qnexa and extend the approval out 60 days but as there are less side effect concerns with the ARNA drug, I would not be surprised if they obtained approval on June 27th.
After approval I would wait one day after the initial euphoria for the stock to overshoot fair value and then short using the top from the approval day as my stop loss. More than likely the short covering and euphoric buying will offer a quick short opportunity once people calm down.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
