Thursday, June 5, 2014

Another Budding "Buy the Rumor, Sell the News" Biotech Opp. (ARNA, VVUS, ETRM)

Look out VIVUS, Inc. (NASDAQ:VVUS) and Arena Pharmaceuticals, Inc. (NASDAQ:ARNA). There's a new weight-loss player ready to take aim at your target market, and its name is EnteroMedics Inc. (NASDAQ:ETRM). If the recent action from ETRM is any indication, the market thinks it could be a real threat to your weight-loss ventures.

Of course, anyone more than a little familiar with EnteroMedics knows the current bullish interest in ETRM hasn't always been the case. This is the same stock that cratered from $2.88 to $1.26 in February of this year when the company announced its primary device - the VBLOC obesity-control device - failed to meet its clinical trial's goals. So what, pray tell, has pushed the stock up from the February low of $0.81 to the current price of $1.27? Hope, for starters.

Although the clinical trial being performed in the U.S. for the FDA ultimately failed, it's not as if the Food and Drug Administration told the company "don't call us, we'll call you." In fact, the device actually does work - the folks in the trial who used the VBLOC technology did lose more weight than the placebo/control group. They just didn't lose an amount that ETRM was hoping for. Just for the record (and perspective), the device is approved for use in Europe and Australia; clearly there's something positive about it. EnteroMedics is still in talks with the FDA regarding the device, with a decision from the agency expected sometime in the first half of 2014.

But is it really a threat to Arena Pharmaceuticals or VIVUS? Maybe.

It's not exactly an apples-to-apples comparison. Belviq from ARNA and Qsymia from VVUS are both orally-taken pills, while the VBLOC technology is a device implanted into a body to make that individual feel full, and in turn stimulates the metabolism of a meal. It's not as crazy as it sounds. Qsymia is an appetite suppressant that chemically indices the release of norepinephrine, and has nothing to do with the burning of calories. Belviq's mechanism of action is the activation of the brain's response to serotonin, which can make an individual feel satiated. But a device implant? It's no crazier than a pacemaker. Point being, it's not like the approach will be too bizarre for the FDA or potential consumers. Indeed, there are many overweight individuals who would prefer not to put an unnatural chemical into their body. At least the VBLOC implant only does what the human body would/should normally be capable of on its own.

With all that being said, the most compelling part of EnteroMedics Inc. right now isn't that it could make a dent in the massive weight-loss market where Arena Pharmaceuticals are already getting a head start. What's most exciting here is that ETRM shares are making technical progress consistent with clues seen in front of major rallies.

For starters, on the weekly chart of this stock we can see how it's rocked its way out of a long-term wedge pattern, and above the upper edge of that triangle shape.

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That alone is a bullish clue, but things get even more bullish when we can zoom into a more detailed daily chart of EnteroMedics.

The basic gist of the bullish undertow is clear in the daily timeframe as well, but what shows up on the daily chart of ETRM is the way the bullish volume has really started to pour in over the past four weeks, and how the stock's on the verge (as in maybe today) of hurdling the 200-day moving average line (green). It's also only pennies away from moving above the July peak of $1.37. Any move above those two levels would be, and should be, bullishly catalytic. It may be needlessly cautious to wait for that move, however.

One thing to bear in mind... this may be an idea "buy the rumor/sell the news" scenario, meaning any of the potential gains here are likely to be seen well before any FDA decision is unveiled. Both VVUS and ARNA shares made their biggest gains leading up to their key FDA announcements, and both stocks have struggled following that news. It's not logical or rationale, but it is a trading reality.

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