Arena Pharmaceuticals Files A Prospectus Supplement - Should Investors Be Concerned?

| About: Arena Pharmaceuticals, (ARNA)

On July 23 Arena Pharmaceuticals (NASDAQ:ARNA) filed a rule 424B prospectus supplement relating to an earlier prospectus filed in April of 2012. The twitter feeds of stock mavens including Jon Najarian (OptionMonster) and BioRunUp lit up with tweets about a new secondary offering from ARNA. Najarian's tweet was particularly inaccurate, claiming that "ARNA files 8.6 million shares common." This naturally had some ARNA longs scrambling for information. Here is what is really going on.

In April of 2012, ARNA filed a prospectus (see link above) registering 8,631,410 shares of common stock to be sold by certain stockholders (not by the company itself). The reason for this original filing related to warrants that were issued to Deerfield (a well known bio-tech financier that ARNA has turned to in the past). Deerfield held warrants for the 8.6 million shares with an exercise price of $1.75 and an expiry date of July 17, 2015. The warrants were part of a financing arrangement done in January of 2012 and ARNA was obligated to register the shares once the warrants became exercisable so that Deerfield could sell the shares when desired.

In the most recent filing, ARNA supplemented the April prospectus indicating that the selling stockholder for 1,491,310 shares is now BTIG, LLC. Deerfield apparently has sold warrants to BTIG, LLC. Given that the warrants are well in-the-money and exercisable, ARNA chose to update the SEC filings to reflect ownership accurately.

As noted in the filing, Arena treats the shares to be issued due to the warrants as if they are outstanding as soon as the warrants are exercisable.

Note, Arena receives no cash from this transaction, and the warrants themselves have a cashless exercise provision so Arena will most likely not be receiving cash when they are exercised either. (They received proceeds when the warrants were originally issued.)

All in all, today's filing means that BTIG, LLC now owns warrants for 1.49 million shares of ARNA. This is not a new secondary offering and does not change the shares outstanding. When the already issued warrants are exercised, the shares outstanding increases, but most analysts probably have already factored all outstanding warrants into their financial projections. Although ARNA currently has some 182.5 million shares outstanding, once all warrants are accounted for, the true share count is more like 235 million. This is a well-know fact.

As for who the buyer is, BTIG's website describes them as:

Founded by expert traders, BTIG specializes in global trading and fund services for hedge funds, mutual funds, separate accounts and family offices" They go on to describe themselves by saying "we have the expertise and global resources to effectively source natural liquidity and execute discrete equity block and program trades in virtually any market. We are adept at executing even the most sensitive trades with minimal market impact, maintaining the confidentiality and anonymity of our clients at all times.

That last sentence is particularly interesting. BTIG is effectively a "dark pool" of liquidity. The recent prospectus supplement filing indicates that they are replenishing their supply of ARNA to the tune of 1.49 million shares. Whether this particular transaction helps a short cover or an institution go long is unclear but the fact that BTIG specializes in dealing with hedge funds and institutions indicates that the institutions have begun paying more attention to Arena now that their first drug, Belviq has been approved by the FDA.

The filing is really a non-event for ARNA shareholders and longs should be comfortable staying long. The fact that folks like Jon Najarian can tweet inaccurate information should come as no surprise. In the rush to be the first to break news, a cursory read of the filing probably lead to the misstatement. Tweets and message board posts may be useful as a pointer to issues to be researched, but ARNA longs, like holders of any stock, especially in the speculative bio-tech sector, should always do their own due diligence before buying or selling.

Disclosure: I am long ARNA.