Banking On Behavior: The Curious Case Of 2 Drug Makers Post-FDA Approval

Includes: ARNA, VVUS
by: Matt Schilling

Are both Arena Pharmaceuticals (NASDAQ:ARNA) and VIVUS Inc (NASDAQ:VVUS) presenting investors with a long-term buying opportunity based on their respected post-FDA stock performance? I think they are, and here is a clear demonstration as to why.

On August 7th VIVUS Inc. will announce its first quarterly earnings report since the approval of its weight-loss drug, Qsymia. Approximately 48 hours later, on August 9th, Arena Pharmaceuticals will follow suit when it announces its first quarterly earnings report since receiving FDA approval for its weight-loss drug, Belviq. Analysts are expecting ARNA to post a loss of -$0.08/share on revenue of $7.38 million and expect VVUS to post a loss of -$0.23/share on sales of $102 million. That said, I wanted to examine both companies' performance since their respected FDA approvals, their recent EPS performance and growth outlook for the upcoming quarter and full year, and demonstrate the clear buying opportunity both companies are presenting to potential shareholders.

Post-FDA Approval Performance

Ever hear the saying, "Buying the Hype, Selling the News", well if you have there isn't a better case for such a statement then when we compare the pre- and post- FDA approval behavior of both Arena and VIVUS. An FDA approval can send a stock through the roof; however both of these stocks have been unable to sustain positive performance since June 27th and July 18th respectively. Arena Pharmaceuticals which was first to receive FDA approval on June 27th has seen its stock fall 36.44% and VIVUS who received approval has fallen 26.69% since July 18th.

I can only assume that investors bought the hype leading up to the approvals, and sold on the news when the drugs were approved. In the case of Arena Pharmaceuticals the stock had been up 83.71% between 5/27/2012 and 6/27/2012, hence the buying of hype leading up to the decision date. VIVUS, on the other hand, was up only 8.45% during the 30-day period leading up to the approval of Qsymia, hence presenting a secondary variable for my hype argument. The sell-offs of both companies don't necessarily concern me, because both drugs are expected to generate significant revenues for both companies.

Prior EPS Performance

One of the ancillary catalysts that present an interesting secondary variable to potential shareholders is a company's EPS trends. The last four earnings announcements for Arena Pharmaceuticals have been disappointing at best, and although the next two announcements may also fall short, there's a light at the end of the tunnel. Beginning with the June 2011 quarterly results which were in-line, the subsequent quarterly estimates were missed by an average of 19.83%, and if it weren't for a recent FDA approval I wouldn't be bullish on ARNA at all. The light at the end of tunnel could come as early as Q4 2012, when the company is expected to receive a milestone payment with regard to Belviq, somewhere in the neighborhood of $65 million. The prior EPS performance with regard to VVUS isn't much to write home about either, with the company missing in three of the last four quarters by an average of 41.33% with the only bright spot coming during the September 2011 quarter, when VVUS surpassed estimates by 23.10%.

Quarterly & Full Year Outlook

When stocks such as Arena and VIVUS receive an FDA approval but haven't reported any drug related sales any attempt to gauge growth tends to be very difficult, even though its seemingly quite obvious and potential investors should consider this before establishing a position. Even though both drugs have been approved, they haven't come to market yet, and therefore sales of these drugs can't be considered contributing variables toward each company's growth. With that said analysts are estimating Arena will demonstrate positive growth of 50.00% for the upcoming quarter and 58.80% for the year. On the other hand, Vivus isn't expected to perform anywhere near as well with estimations calling for quarterly negative growth of -15.00% and full year negative growth of -48.20%.

Final Analysis

Should potential investors bank on the behavior of both ARNA and VVUS in effort to secure a position prior to the effect on long-term earnings both Belviq and Qsymia will have? Yes. In my opinion the behavior demonstrated by both companies post-FDA approval is simply a sign that traders were buying the hype and selling on the news, even though it was a very positive long-term catalyst.

How would I react in terms of their respected earnings announcements? If the announcements are positive I'd add to my position, probably at a considerable premium to Monday's closing price, but nevertheless it would be a great move. If the either of the EPS announcements were substantially negative, we could see a significant sell-off and a further drop in share price. Slight misses or slight beats may have little or no significant effect on either stock; however I'd remain cautious if the misses were more than 15% off the estimated numbers.

Disclosure: I am long ARNA, VVUS.