When Jefferies released a research note for Arena Pharmaceuticals (ARNA) with a target price of $12, shares subsequently fell to around $6.90 since the analysis. Similar to other pharmaceutical plays, Arena traded higher ahead of the release of weight-loss drug Belviq on the market. Obesity is a growing problem, and Belviq has a large market to address, but whether the value of the company will be driven upwards depends on a few key results.

[Read more from Kapitall: 6 Cash-Rich Healthcare Stocks Look Undervalued​]

Results to Watch

Investors should watch the following before asserting a more positive sentiment on Arena:

1.     Weekly prescriptions for Belviq

2.     Effective advertising

3.     Rising coverage for Belviq from insurance companies

In the near term, short sellers could dictate the depressed share price for Arena. Short float is around 28%. Bets against Arena have risen steadily since April. The only time short selling declined was between April 15 and April 30, 2013:

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Alternative Investments

Vivus (VVUS) is often considered as an alternative investment to Arena. Bearishness for Vivus is also high, with short float at 29.4%. Vivus recently released Qsymia, and scripts for the obesity drug could be growing. Regardless of the actual rate of prescriptions, both Qsymia and Belviq should experience stronger sales in the future. It takes time for the market to gain acceptance of a new drug in the market. Other companies in the pharmaceutical space to research are illustrated in the chart below:

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Disclosure: Author has a long position in Arena Pharmaceuticals


Written by  Chris Lau, Kapitall contributor. Monthly returns sourced from Zacks Investment Research.