A recent Seeking Alpha article proposed to answer the long-standing question about a possible short seller conspiracy surrounding Arena Pharmaceuticals (ARNA) and its FDA-approved anti-obesity drug Belviq. While the article certainly took an in-depth look at some of the market forces presently affecting ARNA's share price, it didn't delve into the heart of the conspiracy theory, and in it, some of the lingering questions regarding DEA scheduling. As such, I believe the article essentially missed its stated goal, and an opportunity to educate investors on some key issues currently surrounding Belviq.
In this article, I first look at some "evidence" for a conspiracy theory that is defined by a priori criteria (standards set before collecting data), and then discuss the findings in light of the current DEA scheduling process of Belviq. I believe the conclusions drawn will be both entertaining and enlightening to ARNA investors.
Conspiracy theories seem to dominate the comments section of nearly every article written about Arena Pharmaceuticals--whether it be Seeking Alpha or Motley Fool. The basic idea is the following: Short sellers took a massive bet against the FDA approval of Belviq and are now underwater in the stock. To recover their losses, short sellers (presumably hedge funds) are putting out false information about Belviq's risk profile, Belviq's market potential, and finally, attempting to even delay DEA scheduling to cause investor fatigue. Longs that are prone to believe such theories have attributed ARNA's tight trading range to these factors.
Authors such as myself and Spencer Osborne have repeatedly tried to explain the current PPS in the context of normal market forces, which has been met with "resistance", to put it lightly, by the conspiracy theorists. With that in mind, I will give in to the conspiracy theory crowd for a moment, and look at the position from an unbiased, scientific perspective.
With any scientific study, we need to have a systematic, logical method for collecting data, and a clear, testable hypothesis. The hypothesis is easy enough: Short sellers are purposely putting out false, yet believable, information in hopes of lowering ARNA PPS. In regards to the methods, I believe the DEA scheduling process lends itself nicely to a possible test of this process. Specifically, the DEA scheduling closed its public comments on January 18th, 2013. These comments should contain clear evidence, based on priori definitions, for a possible short seller conspiracy. To have a possible impact on DEA scheduling, I believe the comments opposing the recommended Class IV scheduling of Belviq should meet the following criteria:
1. Be from a source with credentials (M.D., Ph.D., etc.) working in the healthcare field.
2. Contain specific details about Belviq clinical trials, yet distort them so they appear to be a negative, instead of a positive for the drug.
Upon closing, the DEA had received 69 unique comments from the public on DEA scheduling for Belviq. After reading over each and every one of them, I believe only one comment clearly met the pre-defined criteria, with another two being close. The one comment that met these criteria is very interesting and worth a read by ARNA investors. After a brief summary of Belviq's history with the FDA, this particular letter to the DEA states the following:
"I am a licensed, actively practicing physician in the United States writing to express my strong support for the scheduling of lorcaserin as a controlled substance. However, I am concerned with the DEA's proposed Schedule IV designation for this medication and feel strongly that, prior to making a final ruling, the DEA should give further consideration that lorcaserin might instead be more appropriately placed into a more stringent Schedule of the CSA."
So this presumed medical doctor is arguing that Belviq should receive a more stringent classification than Schedule IV. To support this case, this person slightly misrepresents multiple sources and facts concerning Belviq. For example, this person relies extensively on several arguments from an earlier letter to the DEA from Robert S. Mansbach, Ph.D., who painstakingly laid out the potential addiction profile for lorcaserin. Dr. Mansbach's letter starts off sounding like he is also arguing for a stricter scheduling for Belviq, but eventually concludes with the following:
"Placement of lorcaserin into Schedule IV of the CSA would ensure oversight by the prescribing health professional and provide needed controls over the distribution of this product (e.g., restrictions on mail-order prescriptions). Schedule IV would not represent an overly onerous restriction on patient access, as a valid prescription would allow for up to five refills. "
This person's primary source of information is therefore taken out of context, and fails to note the source's ultimate conclusion, i.e., that Schedule IV is an appropriate designation for Belviq at the current time. Interestingly enough, this person fails to give an actual name or the name of their employer. By contrast, every single medical doctor that wrote the DEA with a letter of support provided both their name and employer in the public comments, presumably to back the letter's authenticity. As such, I have a hard time believing this was a real doctor, but perhaps a paid professional with an agenda.
The other two potential letters from short sellers failed to meet both of the aforementioned criteria, and therefore do not merit discussion. Even so, one does give an interesting misrepresentation of Belviq's clinical trials, and the other was supposedly from an alleged Nurse Practitioner who was so vague in their critique that they lost all sense of authority. I felt both letters would be easily disregarded by the DEA.
Overall, I do not find one well-written yet intentionally misleading letter to the DEA from an alleged doctor or credible evidence of an organized, well-funded plan to take down Belviq, and Arena Pharmaceuticals. Rather, there is a much more parsimonious explanation for the DEA scheduling delay, if you choose to call it that.
The fact is that there hasn't been a real scheduling delay for Belviq. That is a myth brought on by overly optimistic statements by Arena Pharmaceuticals, who mistakenly believed Belviq would receive final scheduling before the end of 2012. Since 2006, the average time for DEA scheduling for a drug after NDA approval has been a whopping 200 days. Lusedra, for example, took a stunning 328 days to receive final DEA scheduling.
The truth is less intriguing than a hedge fund-based conspiracy, but it is the truth nonetheless. Industry professionals are generally frustrated with what they deem a highly inefficient government bureaucracy brought on by the Controlled Substances Act. Their recommendations to fix the problem have been to initiate the scheduling process in parallel with the NDA approval process, instead of the stepwise process we have now (i.e., NDA approval followed by scheduling). The FDA and DEA have yet to heed their recommendations, leading to the problem we have with Belviq today.
In sum, there is little empirical evidence to support a full blown conspiracy against Belviq, but rather an inefficient governmental process working against the company and investors alike. With the 30-day hold likely to be upheld by the DEA for Belviq, a commercial launch therefore appears to be at least another 2 months away, perhaps longer. As a result, I expect ARNA shares to remain in their tight trading range until this uncertainty is removed and the company can go forward with its business plan.