Arena Pharmaceuticals (ARNA) Stock Crippled By Risk, Dilution

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Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) stock has been on quite a roller coaster ride in 2015. A few weeks ago, ARNA shares roared 76% higher in a single day after positive early-stage trials for an autoimmune disease treatment gave investors a sense of giddy optimism.

arena pharmaceuticals arna stock crippled risk dilutionSince then, ARNA stock plateaued and then sold off steeply as euphoria waned and the company rather suddenly diluted shareholders through a secondary stock offering.

Even after the steep pullback, shares of Arena Pharmaceuticals are still up more than 35% in 2015, easily trumping the pitiful 1.3% year-to-date losses of the S&P.

Despite its tremendous year-to-date gains, ARNA stock isn’t for the faint of heart, and its decision on Wednesday to dilute shareholders with a 21- to 24-million-share secondary offering reeks of desperation and makes obvious a troubling fact: ARNA stock is absolutely crippled with risk.

Here’s why.

Sudden Share Dilution an Ominous Sign

On Tuesday, minutes after the closing bell, Arena Pharmaceuticals announced that it would be selling additional shares of ARNA stock. The disclosure did not mention when the company planned to sell these additional shares or how much it wanted to sell.

The suspense did not last long, though.

At 8:45 a.m. on Wednesday — a full 45 minutes before the market open — Arena Pharmaceuticals announced the issuance and sale of 21 million shares of ARNA stock to underwriters Jefferies LLC and Piper Jaffray & Co. at an undisclosed price. The two underwriters were also given options to purchase up to 3 million additional shares of ARNA stock within 30 days if market prices were favorable.

There are a couple of bottom-line takeaways for the individual investor here:

  • You were diluted overnight: With just over 220 million shares outstanding, the 21 million secondary offering amounts to a 9.5% dilution. If the options are exercised, the total dilution will be about 10.9%. On Wednesday, ARNA stock fell 10.96%, which means Wall Street is expecting the fuller dilution.
  • You were left out of the action: By announcing its intention to offer additional shares of ARNA stock after hours one day and proceeding with the offering before the opening bell the next day, the common investor had no time to react to the situation.
  • Last but certainly not least, Arena Pharmaceuticals could pull this move again. In fact, future dilution could be much, much worse. The amended S-3 filed with the SEC on Tuesday says it all:

“As of the date of this prospectus, our amended and restated certificate of incorporation, as amended, authorizes us to issue 367,500,000 shares of common stock…”

The next sentence in the document reminds the horrified reader that just over 220.4 million shares of common stock were outstanding on January 16, 2015.

ARNA also told investors on Tuesday that sales of BELVIQ — a chronic weight management drug and the company’s only FDA-approved product — would probably fall in the fourth quarter of 2014. Not entirely shocking, since BELVIQ faces competition from Contrave by Orexigen Therapeutics, Inc. (NASDAQ:OREX) and Qsymia, a similar drug from Vivus, Inc. (NASDAQ:VVUS).

To top it all off, Arena Pharmaceuticals has been burning through cash recently, with cash and equivalents slumping from $256 million in Q1 2014 to $188 million in Q3 2014. For context, ARNA’s revenue came in at just over $8 million in its most recent quarter.

Arena Pharmaceuticals is more liquid today than it was to begin the week — there’s no doubt about that. But in shoring up its balance sheet, it gave investors a glimpse of its hand, and it wasn’t pretty. I saw a company rightfully fearful about its own ability to be economically viable with its only product, BELVIQ.

If you want to take a flier and bet on Arena’s pipeline, go right ahead. But I wouldn’t touch ARNA stock with a ten-foot pole.

As of this writing John Divine held no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/01/arena-pharmaceuticals-arna/.

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