Tomorrow makes for an interesting set of circumstances that might make it worthy to buy Arena Pharmaceuticals (ARNA) today. Arena Pharmaceuticals has already received FDA approval for its main obesity drug, “Belviq”. Now, tomorrow VIVUS (VVUS) will see the FDA decision on whether to grant approval to its “Qnexa” drug, also meant to treat obesity. Two things can happen:
- Qnexa is not approved. If Qnexa is not approved, Arena will find itself with less competition in the obesity market. As such, even if VVUS takes a plunge, it’s quite likely that ARNA will head up because of the lower competition to its already-approved medicine.
- Qnexa is approved. If Qnexa is approved, then VVUS will rally strongly, and it is likely that ARNA will follow somewhat due to being in the same sector. Sure, competitive pressure can mean ARNA doesn’t move much, but when an equity in a given sector jumps, many of peers also see some upside pressure.
The other stock in the sector
There is a third stock in the obesity drug sector. Orexigen Therapeutics (OREX). Here things aren’t so clear cut. Although OREX’s stock would benefit from a Qnexa approval, due to speculation that its own drug would also get approved, it’s likely that OREX would also drop if Qnexa fails to get approval.
Due to this unique set of circumstances, it seems like buying ARNA today will make for a decent long trade going into FDA’s decision about VVUS’s Qnexa tomorrow, with either decision (approval/refusal) seemingly having a good chance of producing upside for ARNA stock over the short term.
As it stands, going into the decision ARNA’s market capitalization, at $2.04 billion, is actually smaller than VVUS at $2.71 billion, and ARNA already has an approved obesity drug.
Disclosure: I have 6 option positions in ARNA , but Mr Santos may initiate a long position in ARNA over the next 72 hours.