Arena Pharmaceuticals (Nasdaq: ARNA ) is down more than 14% the past two days, presumably as word spread that the biotech was raising funds. The company sold 11 million shares at $5.50 per share, a steep discount to the $7 it hit after the advisory panel endorsed its obesity drug lorcaserin last week.
Is Arena raising capital now because management is worried that lorcaserin might not get approved? That's certainly part of it. If you assume Arena will go up on an approval -- and that that seems very reasonable given the $1 billion market cap -- it would be cheaper to raise capital after approval of the drug.
Arena doesn't seem to need the money between now and June 27, when the Food and Drug Administration is scheduled to make a decision about lorcaserin. The biotech had $88 million in the bank at the end of the first quarter. Even if you assume the FDA might delay that decision by three months if Arena turns in extra paperwork -- a REMS or a post-marketing study -- there still seems to be enough in the coffers to make it to an approval.
But there's a thought in biotech that when the cookie jar gets passed around, you take a cookie. And Arena's jar is relatively full; shares were trading close to $2 just last month. It's an ironic analogy for an obesity drug maker, but you can't really fault the company for following conventional wisdom.
Remember, approvals are never a sure thing. Advisory panel recommendations can give you confidence, but a lorcaserin approval isn't guaranteed. Neither is VIVUS' (Nasdaq: VVUS ) Qnexa, which scored a larger margin of victory than lorcaserin in its advisory panel meeting. Even a unanimous recommendation isn't enough. Schering-Plough's Bridion got one, but the FDA rejected it, and Merck (NYSE: MRK ) , the drug's new owner, still hasn't gained approval in the U.S. yet.
Rather than being worried that management thinks lorcaserin will get rejected, I'd view them as being realistic about the situation. Raising capital now is a hedge against a downturn, which is no different from having investors buy a put or take some profits and reduce the size of their holdings before the binary event.
Perhaps the most interesting thing about the capital raise is that institutional investors, which usually fund these types of secondary offerings, weren't willing to buy at anything higher than $5.50 per share. A discount is fairly common, but solid companies with expected upswings can price their secondary offerings close to the market price. Ironwood Pharmaceuticals (Nasdaq: IRWD ) , for instance, sold shares in February at the market closing price, and shares traded up even higher the following day.
Arena's secondary-offering buyers are probably overly conservative, but I'd keep their valuation in mind when deciding whether to hedge your own bet on Arena.
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