Buy, Sell, or Hold: Arena Pharmaceuticals

When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether it's possible upside outweighs its risks. Let's look at Arena Pharmaceuticals (NAS: ARNA) today and see why you might want to buy, sell, or hold it.

Founded in 1997, Arena is a biopharmaceuticals company with a market capitalization of about half a billion dollars. That means that it hasn't yet proved itself to be a solid and reliable generator of gobs of cash, but it's also small enough that it has a lot of room for growth, should it execute its strategies well.

One reason to like Arena is that it focuses on some promising areas -- diseases and conditions that affect many people and therefore hold the promise of significant potential profits. It mainly addresses cardiovascular, central nervous system, inflammatory, and metabolic diseases. But currently investors are locked in on obesity-drug candidate lorcaserin, and as the company notes in one of its presentations, some 36% of Americans are obese -- so this drug has huge market potential.

Of course, as with all companies developing drugs, it's easy to get excited about all the potential -- and easy to forget that without ultimate FDA approval, all that potential is not realized. And the road to FDA approval (which is never a sure thing to begin with) takes many years and can cost hundreds of millions of dollars.

Some have gotten more hopeful about the prospects for lorcaserin because of the promising situation of a competitor drug, VIVUS's (NAS: VVUS) Qnexa. An advisory panel voted 20-2 to support approval. That's not any kind of guarantee for Arena, though, as it knows. Along with Orexigen Therapeutics (NAS: OREX) , it has already had the FDA dismiss weight-loss treatments.

Late last year, Piper Jaffray upgraded Arena's rating to (ironically) "overweight," with the analyst noting that its weight-loss drug was "the safest weight-loss therapy for the majority of obese patients" and that "a marked improvement in the regulatory environment" could lead to a positive outcome for the company in 2012. It looks as if VIVUS might reach approval first, but if Arena also receives approval and it's seen as safer, that could serve the company well.

It's also useful to remember that Arena has other drugs in its pipeline -- which is important for biotechnology concerns.

Arena Pharmaceuticals has not been profitable in the past few years, but in its favor is that its losses have been shrinking. It carries a fair amount of long-term debt, too, but that has been nearly halved over the past two years.

Like just about every company, Arena Pharmaceuticals has its downsides, too. A look at its financial statements will offer some reasons to consider selling or steering clear. For one thing, though its net losses have been shrinking, they're still losses, and sizable ones. Current assets such as cash have been shrinking, too. Furthermore, the FDA has not been kind to "lifestyle" drugs and has shown a proclivity for overturning positive advisory-committee votes when safety is at all a question.

Remember, too, that the biotechnology business is a difficult one. It's not enough to get an effective drug on the market -- the drug also has to make the most sense for doctors and patients. As an example, consider Dendreon's (NAS: DNDN) promising prostate-cancer vaccine, Provenge. It made its debut with good marks but has struggled to garner the sales many expected, as the high cost of the vaccine has made doctors hesitant to prescribe.

Given the reasons to buy or sell Arena, it's not unreasonable to decide to just hold off. You might want to just wait. You might wait for one or more drugs to receive FDA approval. You might wait for one or more drugs to start generating a solid (and growing) revenue stream. You might wait for Arena to be posting consecutive quarters of net gains, not losses.

The verdict
I think I'll be holding off on Arena Pharmaceuticals, at least for now. Its upside is attractive, though, and the company would be good to keep an eye on. In the meantime, there are plenty of compelling stocks out there. For example, check out our special free report, "Discover the Next Rule-Breaking Multibagger," to learn about a rapidly growing health care stock outside the biotechnology field.

At the time thisarticle was published Longtime Fool contributorSelena Maranjian, whom you canfollow on Twitter, holds no position in any company mentioned. Check out herholdings and a short bio. The Motley Fool owns shares of Dendreon. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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