Is Arena's Run Legit or Sure to Burst?

In the run up to next week’s U.S. Food and Drug Administration (FDA) decision on Arena Pharmaceuticals’ (ARNA) weight-loss drug, investors have been sending the biotech’s stock up. However, there’s no way to know if this growing stock will have staying power or fall back down after the decision is announced.

In the last three months, Arena’s stock price has increased by 368% and shares hit a 52-week high on Wednesday. By late afternoon on Friday, the stock was up for the day by 4%. However, all of this excitement has to be taken with a grain of salt.

On June 27, the FDA will rule on Arena’s obesity drug, lorcaserin. In May the FDA’s advisory panel voted to approve the drug, causing the company’s stock price to jump 74% in one day, from $3.66 to $6.36. While the FDA does not have to follow the panel’s advice, it usually does.

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According to Gregg Greenberg and Adam Feuerstein of TheStreet.com, investors should stay cautious despite the run up of Arena’s stock. All of this heavy buying before the decision could lead to serious selling, because some of these investors are just in it for the short-term.

“These are momentum traders — they’re going to move on either before the FDA rules on June 27 or soon after,” Feuerstein said in a TheStreet.com video. “That’s just the nature of biotech investing these days.”

So even though lorcaserin has a good chance of being approved, and this would be a huge milestone for Arena, investors shouldn’t jump the gun because they see this run up in Arena’s stock price.

Competition for lorcaserin includes two drugs that haven’t been approved yet — Vivus’ Qnexa and Orexigen Pharmaceuticals’ Contrave — and the only FDA-approved obesity drug, Xenical from Roche. If lorcaserin is approved on Wednesday, it will have a huge advantage over its competitors.

What is important about lorcaserin is that in Phase III trials it didn’t seem to have the sorts of side effects that other weight loss drugs have. The side effects of Xenical are what have kept Roche’s drug from becoming a huge success.

The information contained in this article should not be construed as investment advice or as a solicitation to buy or sell any stock.

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