Shifting Gears On Arena

| About: Arena Pharmaceuticals, (ARNA)
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With only a couple of weeks left in the first quarter of 2013, there are some dynamics that investors in Arena (NASDAQ:ARNA) need to begin to think about and prepare for. These dynamics do not really impact the direction of the company, but are more involved with timing. In other words, they can present perceived negatives or positives which can impact the price of the equity. This is about being a savvy investor and being ready to play these items more than it is about any sentiment in the company.

It is no secret that Arena is getting close to being able to launch its anti-obesity drug Belviq. It is also no secret that Arena is due to receive $65 million in payments from Eisai when the DEA finalizes scheduling on Belviq. Lastly, it is no secret that the DEA has not yet made a finalized schedule, and it is somewhat of an unknown as to when this will happen.

Here Is What You Need To Know

  1. Many current analyst models have built in a $65 million payment from Eisai into the Q1 revenues. This money is not yet in the coffers of Arena, and unless the DEA waives the 30-day wait period, it will not be possible to see this money in the Q1 financials of arena. If you are a savvy investor, you will be thinking about this. What happens if the Street is slow to update its models and the perception is that arena misses the street expectations? Typically an equity will drop on that news. A savvy investor (whether bullish, bearish, or an active trader) can plan for that news. Further, an options player can take advantage of this as well. There are only 10 trading days left in the quarter. As of right now, the only way these revenue hit the books is for the DEA to approve and waive the 30-day waiting period. Place your bets.
  2. Because the launch of Belviq is being delayed from expected dates, the numbers for Q2 and the balance of the year will also need to be adjusted. If the $65 million does not hit the books in Q1, it will likely hit in Q2. This means that current expectations in Q2 may well be undervalued. It is becoming apparent, thanks to this lump sum payment from Eisai, that Q2 could turn out to be more healthy than analysts are looking for. This is yet another aspect of this equity that savvy investors can take advantage of.
  3. Arena and Belviq need some time to develop and bear fruit. The delays associated with the DEA will carry impacts for 2013 estimates. There was a point in time when analysts were looking at 2013 as a year that would have 12 months of sales. That number then shifted to about 10 months, then about 9 months. If the DEA does not give the waiver, and does not provide a finalized schedule soon, we will need to start considering that the year may only deliver 7 or 8 months worth of sales. The timing is not helpful for 2013, and savvy investors will want to begin to understand and model this vs. analyst expectations. I would imagine that this allows for some pretty interesting options plays as all of this develops.

The key here is not whether you are bullish or bearish. The key is that the timeframe that most were anticipating may shift slightly and that has the potential to impact this quarter as well as the balance of the year. What is at play here is not company performance, but rather the timing of company performance vs. expectations. The shift in timing could be enough, when analysts catch up with these factors, to modify expectations downward for the balance of 2013. Again, this is not saying that the analyst has had a change in sentiment, but rather has now had to adjust the model to show some of the benefit in 2014 that would have come in 2013 if the anti-obesity drug Belviq was able to launch earlier.

Why is this important for investors? Because there can be opportunity to time things ahead of the rest of the market figuring these items out. By example, the $65 million payment from Eisai in Q1 means a very positive quarterly conference call in late April. If that payment delays until Q2 then the late April call about financials will not be positive, but instead it will happen at the Q2 quarterly call in late July. Can you see how timing an options play or a stock play at the correct time could offer substantial reward?

While the delay in getting a decision may be frustrating, there could also be an opportunity in it for savvy investors. There is little doubt that Belviq will obtain its DEA final scheduling at some point. This is a known issue and is somewhat built into the price of the stock. At this point, the timing could be the wild card that traders are looking for. Pay close attention to the timing and pick your action points carefully.

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.