Shares of Arena Pharmaceuticals (ARNA) have been consolidating in an ever tighter range since the June 27th approval of their obesity drug BELVIQ. Today the company issued a press release about advancing one of their pipeline drug candidates, APD811 for pulmonary arterial hypertension, into a second Phase I clinical trial which is a multiple dose, dose ranging and safety study. We believe that ARNA may be poised for a move back to the $11 range in the coming weeks due to pending catalysts as outlined herein.
Upward Triangle Trading Pattern
ARNA has been trading in an upward triangle trading pattern ever since the initial post-approval sell-off. The top resistance line of the pattern is at $9.45 while the lower support line has been steadily increasing. as shown in the chart below (historical price data from Yahoo Finance).
Without further catalysts, the support and resistance lines of the triangle converge by Mid November indicating that a break in the trend either up or down is bound to happen soon.
Upcoming Catalysts Likely to Drive the Stock Price
In addition to today's pipeline advancement news, ARNA has three other near-term catalysts, namely:
- The company's response to the 120 day list of questions from the EU for the European application for BELVIQ,
- Q3 earnings release
- DEA scheduling of BELVIQ
On or around October 25th, ARNA will be submitting their response to the EU's 120 day list of questions. The company previously guided that they would be responding to the 120 day questions within the standard 90 day time period which is set to run out on October 25th. It is unclear whether or not the company will issue a press release for the submission of the response, or simply disclose this matter in their next quarterly earnings release. Recall that the EU approval clock stops when the agency sends the drug sponsor the 120 day list of questions. Once ARNA responds to the list of questions, the clock starts up again, and the EU has 60 days to factor in the response and either come up with a decision, or send out the 180 day list of outstanding issues.
ARNA's Q3 earning release is tentatively set for November 5th. Since ARNA is still pre-revenue, earning projections are pretty much meaningless right now. What is significant about the event is that the quarterly conference call will provide additional details of the APD811 program, updates relating to the EU approval process, as well as possibly, an update on EU partnership negotiations during the quarterly conference call.
ARNA's strongest near-term catalyst will be the DEA notice of proposed rule making regarding scheduling of BELVIQ under the controlled substances act. While no exact timeline for DEA scheduling is set, the company has guided that they expect the matter to be resolved by the end of the year which suggests that the proposed rule should be forthcoming sometime in the beginning of November to allow for the public comment period. We've written about the DEA scheduling process in some detail in a previous article. Once DEA scheduling is complete, ARNA's marketing partner Eisai (ESALY.PK) will be able to begin marketing BELVIQ. Once DEA's final rule is published, it goes into effect after 30 days.
October options expiration is next week. Due to the large open interest in October $9 strike calls and puts, there is a possibility for strike price pinning heading into op.ex. We note that the support line for the ascending triangle falls at $8.60 on op. ex. further reinforcing this possibility.
Should strike price pinning occur, watch for a quick reversal of ARNA's price immediately following op. ex. as both the Q3 earnings release and DEA scheduling inch closer.
To get the earliest indication of the DEA scheduling, investors should check the online edition of the Federal Register.
We anticipate that, based on the recent low of around $7.25 and recent highs around $9.30, an upside breakout for ARNA could have room to run to the $11 to $11.50 range with initial resistance in the $9.90 to $10 range.
In the absence of DEA scheduling news prior to op.ex. we expect that shares will remain range bound. Watch for the $9 support level to hold at op.ex. to confirm that the ascending triangle pattern is not breaking to the downside. Should the stock successfully re-test the support line, the next move upward should push above resistance as investor anticipation builds regarding both the EU submission and DEA scheduling.
Disclosure: I am long ARNA. This Article was written by Rajesh Patel, Ph.D., Red Acre's Managing Director for Equities