Arena Pharmaceuticals: Right Stock, Wrong Time (ARNA)

Merely expressing an opinion on Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) over the past year and a half has been a miserable experience. When I was bullish on the weight-loss drug company in early May of last year, I was criticized. Then when I was bearish on the stock after Belviq (Lorcaserin at the time) was approved in June of that year, a whole different batch of people gave me a rough time regarding my then-bearish stance on ARNA. Now, I'm thick-skinned, so I don't mind even the "colorful disagreements". Just for the record, though, I was right on both counts. Arena Pharmaceuticals soared between late May and late June, and then in late June - when it should have been rallying in the afterglow of a drug's approval - the stock floundered its way into a slow, grinding downtrend.

I don't bring it up to gloat; I have been wrong before, and I'll be wrong again. I bring it up because I know it's about to happen again. See, I've seen what's happening to ARNA right now happen to other stocks dozens of times, and it usually ends poorly, at least in the near-term. [Like I said, I fully expect the same "colorful disagreements" this time around, so to head them off at the pass as much as possible.....]

That's not to say Arena Pharmaceuticals is doomed, because it isn't. It's just to say the weight of excessive - and now unmet - expectations from the company is still bearing down on the stock, but it's yet to run its full course and exhaust itself.

So what is it that happened? In simplest terms, hype happened.... the worst thing that could ever happen to a stock.

Though the drug was only up for approval in June of 2012, speculators began filing in during the last quarter of 2011, optimistic that Lorcaserin/Belviq would get the green light after the FDA rejected the drug in October of 2010. It's not that the Food & Drug Administration completely trashed the weight loss drug, but it did send the company back to the beginning of Phase 3 trials to gather more information on it. Indeed, there was still enough hope - and information- surrounding Lorcaserin from that first new-drug application to brew up plenty of buying interest the second time around.

The hype was so great, in fact, that it may have been Arena Pharmaceuticals' biggest pitfall.

As is too often the case in the world of biotech, hype and hope become fact and certainty leading up to a drug's approval. It's easy pickin's for the pumpers, and the media loves to regurgitate a story that's resonating with traders who are already hanging on every word anybody says about the company. There's just one problem with that scenario, which ARNA fell victim to - hype can end up being so strong, there's no possible way such a stock can live up to those expectations. As disappointment becomes the reality, the stock fades. That's what happened to Arena Pharmaceuticals, and that's why it's been deteriorating ever since what should have been its biggest bullish catalyst ever.

Fast forward to today. We've given the stock a little more than a year for the post-approval dust to settle; that's more than enough time for any bullishness to materialize of it was going to. It didn't. Instead, ARNA has slowly wiggled its way into technical trouble. Thing is, the clues say it's about to get worse before it can get better.

To really do the idea justice, let's zoom out to a weekly chart and pinpoint the problems Arena shares are struggling with right now which will likely get worse as time moves along.

For starters, ARNA has broken under a key floor at $7.40. More than that, it's gotten into a groove beneath $7.40. It tried to snap back above that level last week, but all it took was a brush of the 100-day moving average line to tumble back under the $7.40 mark; the bears aren't playing around here.

Perhaps worse than turning a floor into a ceiling is the fact that Arena Pharmaceuticals, Inc. shares' 100-day and 200-day moving average lines are both sloped downward now, affirming that this isn't just a little volatility - the long-term undertow is bearish.

The frustrating part is that the company and Belviq have value. But, it could take another year or more - now that the DEA finally classified the drug - before it gets any traction. Shareholders aren't going to hold the stock at the $7.00 area waiting on revenue to ramp up. The mood has already soured, and with the selling momentum already developing, odds are good the market will see the glass as half empty for at least a couple more quarters. It's not fair, but it is the way things are.

Bottom line? I'm looking for ARNA to make a hard landing, at which time I'll become a long-term bull. That could happen late this year or early next year. I'm not so worried about the "when" as I am the "what it will look like". I've got a nagging feeling it's going to be a very pronounced capitulation that will be terrifying at the time, but a buying opportunity in retrospect. The damage inflicted thus far is just too great to avoid the hard-landing. (You'll know it when you see it.) It's got nothing to do with the company though.

Welcome to the game.

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