Arena Pharmaceuticals (ARNA) received a low price target of just $6.00 from Credit Suisse that could send many Arena longs to the medicine cabinet in search of nitro glycerin tablets. The price target is a full 35% discount from recent trading prices of the equity. Arena has dropped about 6% in recent trading to around $8.64.
The report, issued in the past week, focuses on the potential of the market for weight loss, the length of time people will be on treatment, and the competitive landscape that includes Vivus (VVUS) and now Orexigen Therapeutics (OREX).
Ironically, while establishing a low price target on Arena, Credit Suisse established coverage on Orexigen with a $13 price target. Orexigen currently trades at $5.64. Essentially Credit Suisse is seeing a 35% dip in ARNA while also seeing a 130% increase in OREX.
While it is easy for a investor invested into an equity to be critical of any analyst or firm that establishes a low price target or downgrade, the reality is that even if disappointed, an investor can learn quite a bit by understanding various sentiments and why they exist.
Essentially Credit Suisse sees the prescription weight loss market as a $3.5 billion landscape and that Arena will fall short of what they term as lofty expectations. Part of that concern rests with the concept that three companies will be in the marketplace and that makes $3.5 billion less attractive. While this may be partially true, defining the market will not be that easy, and it is not anticipated that Orexigen can even get a product to market until at least 2014. This gives Vivus and Arena about two years to establish, define, and market their respective products. Being among the first to market should not be underestimated.
Lofty expectations is another matter altogether. I have received email after email from Arena investors giving me every reason under the sun why Arena will dominate and that it will soon be a $50 stock. I love enthusiasm, but I also like to take things one step at a time.
In my opinion, it is interesting how a firm can establish lofty expectations on one equity and at the same time say that expectations are too lofty on another. It is a quandary that will likely never be fully solved, but in the end, perhaps it is just another opinion that is trying to pick a winner. We have seen it with the banter between those invested in Arena and those invested in Vivus.
One consideration which I feel is a distinct advantage for Arena is the benefits it demonstrated in trials for Type 2 diabetes. This condition is more frequent in people that suffer from obesity, and being able to treat two conditions with one pill could establish a unique market for Arena.
Another advantage for the segment as a whole is very theoretical in nature and has to do with the perception of people. In general people like to feel good about themselves. Diet products are a major industry that typically have people switching from one over the counter product to another in search of the solution that works for them. From a perception standpoint, the existence of a prescription drug that deals with weight may be seen as better or advantageous. If patients exhibit success, there is potential for the product to go viral.
While I think it is healthy to look at a conservative model on the market, I also believe in looking at it in an aggressive manner. Typically there is a happy medium in there somewhere. Arena is awaiting a letter from the DEA, and then will be able to take the next step in getting to market. There is real potential that Arena's Belviq weight loss product can be in the market in 2012.
Once on the market, and after a quarter of sales, analysts, the street, and investors will have a much clearer picture of the real potential involved. Personally I look at the Credit Suisse report as modeling the low end of the spectrum. Perhaps, Credit Suisse has done those long term fans and investors in Arena a favor creating new buying opportunities.
Disclosure: I am long ARNA.