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Two pharmaceutical stocks demonstrate portfolio pitfalls and rewards

By Chris Lau for Kapitall.

Obesity is a medical problem that now has drug treatment options. Prior to FDA approval, investor interest in Arena Pharmaceuticals (ARNA) soared. Since the FDA approved Belviq, Arena began to market and sell the drug. Sales are steady but not as strong as initially thought. This creates an opportunity in pharmaceutical stocks for investors with a long term time horizon.

Arena results miss

Arena reported quarterly results on May 12 2014 that missed consensus estimates. The company lost $0.12 per share on revenue of $6.8 million. The weak results validated the short-selling thesis for the bears. Moreover, the short float is high, at 23.19 percent.

Despite the short-term challenges, Arena is showing improving business performance. Expenses rose 29.9 percent in Q1, compared to the 183.3% growth in revenue. Prescriptions are also up 31% (based on IMS Health data). Institutional ownership is strong. Most importantly, Arena and its partner Eisai are expanding its sales force and availability worldwide.

In the value space, Theravance (THRX) is down nearly 35 percent from its yearly high. Short float is 22.3%. Theravance reported weak quarterly earnings on May 6. The company reported revenue of just $0.17 million and a loss of $0.62 per share. To boost shareholder value and to become more focused, Theravance is spinning out Theravance Biopharma on June 2. Biopharma will hold the “discovery, development, and commercialization of small molecule product candidates” in such areas as bacterial infections and respiratory diseases. Theravance Inc. will become a Royalty Management Company. The latter will begin paying a dividend of $0.25 per share quarterly.

Risks still high

Stock price volatility will be the biggest risk for Theravance and Arena in the near term, but the future for both companies is bright. Investors should add these two companies to their watch list and consider buying them on weakness.

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