2 catalysts could boost Arena before 2013
After FDA approval of its obesity drug, the biotech now awaits a DEA letter and the final decision from the EMA.
By Greg Jensen, OptionsANIMAL
Pharmaceuticals continue to be a strong point for the health care sector. Since the approval of its the obesity drug Belviq, Arena Pharmaceuticals (ARNA) shares have lived up to the saying "Buy the hype and sell the news."
Leading up to the Food and Drug Administration's first OK for a weight-loss drug in a lucky 13-years, the small-cap biotech's stock moved from $2 in May to an intraday high of $13.50 on June 27, the day of the approval.
Since then, shares have fallen and traded as low as $6.95 in early August. Today, shares stand a little taller than $9. The whipsaw action could leave shareholders bit confused about what to do next.
The good news for investors is that Arena has a few catalysts that could drive the stock higher in the next 90-days.
First up, the company is waiting on the final DEA write-up on its new drug, which is necessary before Belviq can be brought to market. There isn't a timeline for the agency's letter, but we believe it is likely before the year comes to a close.
While the DEA letter's timing is uncertain, a final decision from the European Medicines Agency's for the anti-obesity drug is clearer. ARNA recently received the EMA's 120 day assessment report. The EMA's Committee for Medicinal Products for Human Use is obliged to reach a decision within 210 days. This means Arena should get a thumbs up or down from Europe no later than November 12, 2012.
According to the latest data from Eurostat, Europeans are less fat than their American counterparts. However, the number of obese people, defined as a body mass index of 30 or more, on the continent is growing. In the U.S., 26.8% of females and 27.6% of males have a BMI of 30 or more. In Europe, obesity ranges from between 8.0% and 23.9% for women and between 7.6% and 24.7% for men, depending on country. Romanians are the thinnest and the British the largest.
Overall, analysts project that Belviq could generate as much as $2 billion in revenue. Profits could equal $500 million, or more than $2 per share in earnings using a 25% net margin. Long-term, the potential is attractive to investors and prospective acquirers.
Investors who want to participate fully in Arena Pharmaceuticals as the story unfolds should consider owning the stock. With the FDA approval for Belviq in pocket, I feel the downside for the stock is limited.
While January 2013 call options give investors enough space to capitalize on gains should ARNA receive the DEA write-up and EMA clearance, we just aren't comfortable with the high premium investors must pay. Rather, options investors might consider writing out-of-the money covered calls as the European deadline approaches and volatility increases.
It worked well for shareholders with the FDA approval as rumors became reality.
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