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ARNA: Are You Selling Into A Blast-Off?

|About: Arena Pharmaceuticals, Inc. (ARNA), Includes: VVUS

Rather go to bed without dinner than to rise in debt. -Benjamin Franklin

Media Skepticism: ARNA still has GREAT potential regardless of the negative media it has recently received in regard to its new drug Belviq. There is no need to get into the analysis here of all of the different projections for how Arena Pharmaceuticals (NASDAQ:ARNA) will fair depending on how its new weight-loss drug, Belviq, performs on the open retail market. I have read upwards of 30 articles discussing many hypothetical situations ranging from a nightmarish outlook to ARNA becoming an immediate candidate for buyout from another company thereby shooting its share price through the roof.

There truly is no average when attempting to discern if more analysts think it will go up or down. There are just too many opinions out there and from some of the articles I read it seems certain people would love it to go down only to make a better profit in the near future. My conclusion through all of this jargon is that ARNA is still a good 'buy' at present levels, having closed at $7.50/share on Monday June 17th. That is not to say ARNA will just go up from here! I think we are in for some media-driven volatility which could cause the price to go up in the near-term but could do exactly the opposite.

2-Part Plan: My reasoning is that from some of the worst outlooks analysts have presented, ARNA is still under-priced. The key to making money from this investment is two-fold.

1. Buy ARNA where you believe you have paid a good price (hopefuly that is not a new idea for your investing methodology), and as already mentioned I think $7.50 is a good price.

2. When ARNA rises, execute stop-losses at margins low enough NOT to get knocked out by the day-traders (with the higher volatility one has to be careful of the daily swings so as not to be washed out of the stock with a stop-loss that was just too close to the current price...that is of course unless you're satisfied with your gains). I am looking and waiting for ARNA to achieve better than $9/share, and quite possibly $12. In other words somewhere between 20-60% gain from Monday's close.

(3.) If you have little tolerance for LOSS: this may not be the investment for you, or determine EXACTLY what your risk tolerance is and place a stop-loss immediately after purchasing ARNA. (I would not suggest this route as the volatility of the stock price will very likely cause an unnecessary loss, maybe better just to stay away)

arna chart click image for more info

This one year chart of ARNA clearly shows the volatility.

Likely Outcomes: As with any stock ARNA will either go up or down, but let's try to be more realistic and succinct as to possible numbers here.

The downside will mostly be determined by the weekly, monthly, and quarterly sales numbers of Belviq. However, even if the short-term numbers are ok, negative media articles have a strong sway on this stock and can unfairly move it down. If for some reason Belviq flops as a profitable enterprise, ARNA will suffer a decline in share price which could blow through its 52-week low of 6.95 to be next supported at $6.69 and $6.61. Beyond that, we're looking at one of those doomsday articles being correct and support only exists down in the $5 range. With Vivus Inc. (NASDAQ:VVUS), one of ARNA's competitors, we saw that scenario come to fruition. In anticipation of its weight-loss drug, Qysmia, being released, and after all the hype from getting through the FDA approval process, it soared all the way to $30/share. After getting far less than expected sales results, and some complications therein, it crashed to around $10/share. Not a pretty picture!

So why take the risk? The upside is very positive! Analysts all differ in the way they crunch the numbers for ARNA:

  • Belviq beats all expectations: ARNA $14-$17 (or potentially more if that happens and ARNA gets bought out)
  • Belviq sales are mediocre: ARNA $11-$14
  • Belviq does not meet expectations but still achieves numbers at the bottom of most hypothetical scenarios: ARNA around $9

The timeframe for this suggested investment is somewhere between 3 months (after a full quarter's worth of sales numbers from Belviq) and 2 years or more. After the dust settles from the initial hype of the Brand New Drug, the actual sales numbers will tell a truer story of ARNA's future. This will take at least a couple months if not a year or more, as it's just too profitable to write negative articles and therefore one can fully expect to see many of them in the upcoming months regardless of the actual results. But no matter how many 'naysayers' join that club, if Belviq performs well, the fundamentals of the company will prevail in the long-run and ARNA will rise.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ARNA over the next 72 hours. 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.