Arena Takedown - Is It Fair?

Sep.12.12 | About: Arena Pharmaceuticals, (ARNA)

Arena Pharmaceuticals (NASDAQ:ARNA) has developed a weight loss drug, Belviq, that is one of only a couple that have received FDA approval in the last decade. The company is awaiting DEA approvals, and then it can begin marketing what appears to many a blockbuster drug. Sales of Belviq could begin as early as late 2012 and this has investors and Wall Street excited, sending the stock to over $9.00 per share. Combine this with rumors of a possible buyout and there is little wonder why Arena saw a nice climb over the past month.

Over the past week Arena has been trending downward and now sits just above $8. Credit Suisse initiated coverage on the equity and established a $6 price target that has many passionate investors crying foul. The reasoning of these investors appears to be sound and warranted, but there are a couple of sides to every story.

What I am going to say here may be frustrating to some, but it is what it is. The market has many players in it and understanding the fundamental story of an equity is not always a recipe for investing success. Sometimes it is more advantageous to understand how the market is actually played than a moral philosophy of what is right and wrong. I know this will ire some, but it is reality.

In theory investment banks have a wall between the activities and position of the bank and the analysts opinions. In practice that may seem impossible, so investors should make an effort to understand the possibility and plan a strategy that takes advantage of it.

Arena Pharmaceuticals is on the cusp of releasing what many hope is a monumental drug (Belviq) in a monumental category (obesity). There is plenty of reason to see massive potential. In fact, many do see that potential, and that is exactly what drives the stock upward.

What we need to realize is that betting on potential is great, but we need to comprehend that we are betting on an unproven potential. What creates value is real success and real numbers. I happen to believe that the potential of Arena will develop into impressive numbers as soon as the end of this year (if released by then). I also know that this equity saw a rise upward on FDA approval and rumor of a buyout. The FDA approval is now past and digested, as is the buyout speculation. What we are left with is the potential of Belviq.

To their credit, Credit Suisse stated that Arena may not meet up to lofty expectations and I have seen some pretty lofty expectations. To their detriment, Credit Suisse also assigned lofty expectations to another drug by Orexigen because they have a pending drug in the same category. The issue is that Orexigen is a couple of years away from a realistic market debut.

Had Credit Suisse simply stopped at valuation concerns on Arena the low price target, while perhaps undeserved, would have been more palatable to investors. The combination of a low price target on Arena, a high price target on Orexigen, and the fact that Credit Suisse is buying Arena shares all add up to investors wondering whether or not the market is stacked against them.

While what is happening to Arena may not seem fair, we all have watched the market for quite some time, and the rules of the market, fair or not, need to carry weight in a trading strategy. Some will voice complaints and frustration while others will look for an edge and perhaps add to their positions. If you believe in the long term prospects of Arena, and believe that Belviq is a compelling market changer, and are holding out for that day, then you are likely worrying about something that you shouldn't be.

Analysts have opinions. Some are bullish and some are bearish. Take it all with a grain of salt. Look at the opinions, even if you do not agree with them. Likely there are many out there that will agree, and that will impact the equity in some form or another.

Fair does not really have a place in the market as frustrating as that may be. Savvy thinking does. Support is at $7.10 and is moderately strong. Resistance is at $8.75 and is very strong. Arena sits in the middle. Arena is now below all meaningful moving averages and volume is lighter than normal. Perhaps consolidation is in order now. Watch things closely over the next few days, and remember, word from the DEA could come at any time and that would be positive.

Disclosure: I am long ARNA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.