After obtaining a double following the Adcomm spike on May 10, the bears in Arena Pharmaceuticals (ARNA) were finally allowed on the playground and they really made a mess of things last Friday. Dropping 35% in true flash crash fashion, the stock has since recovered as those looking to play the biotech lottery are hoping to cash in on approval euphoria.
While euphoria buying could easily take the name well past the recent highs around $12, anyone looking to make said gamble should be cognizant of a few things.
Exit, Stage Left
While the recent inverted hammer is forecasting strength going into Tuesday, anyone that is not in it for the duration (holding through the FDA decision on Wednesday) needs to get out Tuesday as Wednesday will likely be too late.
When these sort of biotech stocks get such a large event they are often halted for the entirety of the trading day. When Arena and Vivus (VVUS) had their adcomms, their respective stocks were halted well before and well after the actual announcement. There is a better than good chance that the stock will not be open from trading on Wednesday as the decision is awaited so anyone without the gumption to hold long through the decision should exit stage left before the bell rings Tuesday.
Drop It Like Its Hot
Hopefully the recent price action has instilled a little bit of reality in those holding ARNA shares. While the run up has been amazing, especially since January, we are nearing fair value in the shares before the company has even sold pill one on the market. Sure, it's a buy out target. Sure, it'll be first to market. Sure, it'll be more marketable than Qnexa. That all is a longer term consideration and should be put on the back burner when considering the trade for approval.
If the drug is approved the stock will fly back up, at least to the $12 highs we have seen so far. At that point euphoria could run it up to $15 or even higher if things get really out of hand, but trees don't grow to the sky and at some point profit taking and bear raids will have ARNA back in more reasonable valuation territory.
I was too conservative when I called for ARNA to test for strength before the announcement but I believe that anyone holding past the initial euphoria phase after approval needs to realize that there is a better than good likelihood that their shares will be able to be purchased again at a lower price in the near future.
Buying at the open on Tuesday and selling before the close should be a no-brainer but unless you really are willing to roll the dice on Wednesday, getting out early is the best policy otherwise an untimely halt will put you and your money at the mercy of the FDA.