Accumulation phase for ARNA over?

Shares of Arena Pharmaceuticals surged today, after consolidating below $4.50 for several weeks, as the shorts and market makers ran the stops. Nervous Nellies are out of the trade--only the strong hands remain, including large institutional holdings by Deerfield Capital, Federated Investors, and Wellington Management, all reknown for being savvy, long-term value holders. Recent investments by Barclays and Winslow Management boost an already strong roster of institutional ownership. Couple that with recent insider purchases by six of eight members of the Board of Directors, and it was just a matter of time before shares of ARNA spiked up in anticipation of announcement of Blossom results, the second of two pivotal Phase III clinical trials for Lorcaserin, the weight management drug with blockbuster potential.

ARNA CEO Jack Lief has indicated that Blossom top-line results will be announced by "the end of September". Short-term traders may want to accumulate tradeable shares in anticipation of the run-up as we approach said announcement, and sell before the news in a low-risk trade. Long-term investors like myself, however, have been slowly accumulating core holdings with an exit strategy post-pivotal events, including Blossom results in September, New Drug Application submission in December, and potential PDUFA in October, 2010. Because Lorcaserin's potential is enormous (some analysts forecast a $10 billion market annually), I will retain a long-term core holding.

This ameliorates the possibility of an announcement of a marketing partnership with a big pharmaceutical company, which would also cause the shares of ARNA to spike up. Traders in and out of ARNA may miss the train. A partnership seems likely, based on previous clinical trial data on Lorcaserin. Safety and efficacy point towards FDA approvability, as Lorcaserin selectively stimulates the 5-HT2C seratonin receptor, a G protein coupled receptor (GPCR) located in the hypothalamus. Stimulation of this GPCR is associated with feeding behavior and satiety.

Most importantly, Lorcaserin's specificity to the 5-HT2C receptor means it doesn't stimulate the other subtypes, 5-HT2A and 5-HT2B. These other subtypes are linked to cardiac valvulopathy, which caused the massive recall of phen-fen, for which Wyeth has paid out $21 billion in a class action lawsuit. Hence, Lorcaserin is both efficacious AND safe.

The weight management sector is wide open, littered with previous failures by big pharmaceutical companies, and a few marginally effective treatments with adverse side effects, some potentially serious. With the safest treatment in the market, and first-mover status relative to their two competitors: OREX's Contrave and VVUS' Qnexa--both generic compounds with a large exclusion criteria and label warnings, ARNA's Lorcaserin has the biggest commercialization potential.

Disclosure: Long ARNA shares.