Vivus PDUFA: A Momentous Chance for Wall Street to Catch Up with Arena
Reza is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Wall Street has been banking on Vivus (NASDAQ: VVUS) for a long time under two assumptions: a) Qnexa will get approved b) Arena's (NASDAQ: ARNA) Belviq will not get approved. The former will be decided shortly by the FDA. The latter turned out to be a false assumption that caught Wall Street by surprise, and as a consequence left institutions with only around 25% ownership of Arena.
If you look at successful public companies, most of their shares are owned by institutions, and a comparison of companies similar to Arena shows the institutional ownership for Arena would need to at least double, if not triple, in order to keep up with its peers.
The shares that institutions will want to buy, for the most part, are in retail investors' hands, mostly awaiting the many catalysts on the horizon. These include European partnership & approval, launch, revenue, and acquisition, so my guess is that many retail investors are not in a hurry to sell.
However, retail investors tend to be more emotional than institutions, and because it's their own money at stake, they tend to be more cautious, prone to psychological techniques that professionals use to influence buy and sell decisions. One of these techniques is the use of extreme volatility; when a stock suddenly tanks, some people tend to get afraid and sell. Other "FUD" (fear uncertainty doubt) techniques used by professionals include using message board bashers and, as Jim Cramer puts it, building a fiction to deceive and trick people. Of course, these techniques are unethical and immoral, however legal they may be.
Wall Street used plenty of these techniques on Arena based on the assumption that Belviq would never get approved. Aside from the demand from institutions, short interest is humongous. So not only did institutions fail to buy when they should have, hedge funds loaded up on shorted shares, which they shouldn't have, thus providing a double-barrel demand for Arena shares.
Vivus' PDUFA provides a unique -- and possibly the final -- opportunity for Wall Street to load up on shares of Arena at these levels. It started on July 16, the day before PDUFA, when shares started getting walked down toward the close with large lots on the "offer," which is unusual for large sellers to reveal unless they want to publicize and boast about the walk-down in order to make its effect more dramatic. This walk-down could simply have been hedge funds and market makers orchestrating another bear-raid. It continued after-hours.
Wall Street seems inclined, or rather needs to, put on its best and possibly final show during this unique momentous event of Qnexa PDUFA in order to scoop up as many retail shares of Arena as it can, including taking out stop-loss orders.
Consensus among some investors is that any drop in Arena as a result of Vivus' approval will be short-lived. The two streams of demand mentioned above are enough, in my opinion, to fuel Arena to new highs regardless of other catalysts. Others believe Arena will rise on Qnexa approval due to sector-sympathetic effect, and the fact that a major uncertainty is removed, i.e., whether Qnexa is an immediate player and if so at what dosage (which should answer the lingering questions about efficacy). A Qnexa rejection or Complete Response Letter ("CRL", i.e., non-approval) could send Arena to the upper teens.
I believe Qnexa will be approved and some on Wall Street will try, as they've already started, to create panic and scoop up retail shares. I have dry powder available to take advantage of any short-lived pull back.
I am long ARNA. This article is not an investment advice. Please do your own research. To find out more about my interests visit www.rezamusic.com and to join my mailing list email me on (info at rezamusic dot com). The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.
