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In this article, I will feature one biotech stock that has seen intensive insider selling during the last 30 days. Intensive insider selling can be defined by the following three criteria:

  1. The stock was sold by three or more insiders within one month.
  2. The stock was not purchased by any insiders in the month of intensive selling.
  3. At least two sellers decreased their holdings by more than 10%.

Arena Pharmaceuticals (NASDAQ:ARNA) engages in discovering, developing, and commercializing novel drugs that target G protein-coupled receptors in the therapeutic areas of cardiovascular, central nervous system, inflammatory, and metabolic diseases.

(click to enlarge)

Insider selling during the last 30 days

Here is a table of Arena's insider-trading activity during the last 30 days by insider.

NameTitleTrade DateShares SoldRule 10b5-1Current OwnershipDecrease In Ownership
Scott BiceDirectorJan 925,000Yes23,628 shares51.4%
Donald BelcherDirectorJan 930,000Yes68,728 shares30.4%
Steven SpectorEVPJan 933,334Yes101,794 shares24.7%
Dominic BehanCSOJan 1033,332Yes483,000 shares6.5%

There have been 121,666 shares sold by insiders during the last 30 days. All these shares were sold pursuant to a Rule 10b5-1 plan.

SEC Rule 10b5-1 is a regulation enacted by the United States Securities and Exchange Commission (SEC) in 2000. The SEC states that Rule 10b5-1 was enacted in order to resolve an unsettled issue over the definition of insider trading, which is prohibited by SEC Rule 10b-5. After Rule 10b5-1 was enacted, the SEC staff publicly took the position that canceling a planned trade made under the safe harbor does not constitute insider trading, even if the person was aware of the inside information when canceling the trade. This staff interpretation raises the possibility that executives can exploit this safe harbor by entering into 10b5-1 trading plans before they have inside information while retaining the option to later cancel those plans based on inside information.

For example, a CEO of a company could call a broker on January 1 and enter into a plan to sell a particular quantity of shares of his company's stock on March 1, find out terrible news about his company on February 1 that will not become public until April 1, and then go forward with the March 1 sale anyway, saving himself from losing money when the bad news becomes public. Under the terms of Rule 10b5-1(b) this is insider trading because the CEO "was aware" of the inside information when he made the trade. But he can assert an affirmative defense under Rule 10b5-1(c), because he planned the trade before he learned the inside information.

In general, it is a safer way for an insider to sell shares pursuant to a Rule 10b5-1 trading plan than without it.

Insider selling by calendar month

Here is a table of Arena's insider-trading activity by calendar month.

MonthInsider selling / sharesInsider buying / shares
January 2014121,6660
December 201300
November 201320,0000
October 201300
September 2013220,0000
August 201300
July 201300
June 201300
May 201383,7500
April 201371,2500
March 201300
February 201300
January 201300

There have been 516,666 shares sold, and there have been zero shares purchased by insiders since January 2013. The month of January 2014 is the only month with intensive insider selling.

Financials

Arena reported the third-quarter financial results on November 7 with the following highlights:

Revenue$3.6 million
Net loss$17.2 million
Cash$180.7 million
Debt$73.5 million

Pipeline and upcoming milestones

In June 2012, the US Food and Drug Administration approved Arena's internally discovered drug, Belviq. Arena is focused on commercializing Belviq in the United States and ultimately in additional territories. In addition to commercializing Belviq as a monotherapy for chronic weight management, Arena intends to explore Belviq's therapeutic potential in combination with other drugs and for other indications.

(Source: January presentation)

Competition

Arena's competitors include Vivus (NASDAQ:VVUS), and Orexigen Therapeutics (NASDAQ:OREX). Here is a table comparing these companies.

CompanyARNAVVUSOREX
Market Cap:1.45B918.39M617.36M
Employees:29312141
Qtrly Rev Growth (yoy):1.4166.680.00
Revenue:76.81M39.00M3.43M
Gross Margin:0.810.69N/A
EBITDA:-13.01M-176.72M-88.56M
Operating Margin:-0.28N/A-25.88
Net Income:-17.26M-214.01M-88.64M
EPS:-0.08-2.12-0.98
PEG (5 yr expected):3.78-0.09-0.54
P/S:18.1323.94188.08
Insider Ownership:0.60%0.50%11.49%

Only Arena and Vivus have commercial sales currently. Arena has the second-lowest insider ownership among these three companies.

Here is a table of these competitors' insider-trading activities during the last 12 months.

CompanyInsider buying / sharesInsider selling / shares
VVUS593,84410,654
OREX

0

264,767

Only Arena has seen intensive insider selling during the last 30 days.

Conclusion

There have been four different insiders selling Arena, and there have not been any insiders buying Arena during the last 30 days. Three of these four insiders decreased their holdings by more than 10%. Arena has an insider ownership of 0.60%.

I believe Vivus could be the best pick out of these three weight loss companies currently based on the insider buying and relatively low valuation.

Source: Arena Pharmaceuticals: 4 Different Insiders Have Sold Shares This Year