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Why The Huge Volume Spike In Arena?

|Includes:Arena Pharmaceuticals, Inc. (ARNA)

Yesterday's 58M share volume in Arena Pharmaceuticals (NASDAQ:ARNA) was unprecedented. Not even after Arena's 2010 Advisory Committee did so many shares trade hands. What caused this volume spike? It certainly was not the announcement that Arena's EU Marketing Application had been accepted. That should have been a non-event, just like when the FDA accepted their resubmitted NDA in the US, it was a non-event. So what caused Arena to be the largest traded issue on Monday on the NASDAQ after an impressive 17M volume on Friday? After all, if the 58M spike on Monday was the result of a news event, then why did it trade 400% of its average volume on Friday preceding the news?

Some have said Partnership or even a Buyout, which both could be the case. Arena did guide that they will look to partner Lorcaserin for Europe after FDA approval but that could change with the right deal. What about a Buyout? It is possible for many reasons but I also feel it is unlikely. Big Pharma tends to buy earlier in the process or after approval to minimize the risk. It is more likely they would scoop-up Arena if they can garner FDA approval and before it is approved in the EU. That is the only way they could own Arena for less than $3B in my opinion. Perhaps the volume spiked because of a bidding war?

I think there is a better explanation for this drastic uptick in volume on March 23rd and March 26th - A Citizens Petition filed with the FDA. On March 20th, a group of concerned citizens consisting of Arena Investors, Healthcare Professionals, Medical Doctors, Attorneys and Toxicologists filed an official Citizens Petition for the approval of Lorcaserin. You can read a copy of the petition here: This is a formal document that will receive a formal review and response from the Agency.

The Citizens Petition is a complete and impressive effort that documents scientifically why Lorcaserin should be approved. The details provided in the document clearly show that based on scientific best practice and precedent, that there is zero carcinogenic risk with Lorcaserin. It shows step by step how Arena has addressed each item from the Complete Response Letter the FDA issued Arena in 2010.

The Citizens Petition should have hit the Federal Register by March 23rd; however I don't see it in there when conducting a search. Regardless, retail investors did learn about the Citizens Petition on the 20th through posts on message boards and it probably started making its way around trading desks late last week, then took some time for analysts to review and provide their opinion. Institutions and Hedge Funds rely on their own analysts and expert networks to determine their investment strategy. When Arena was valued at $250M, it was trading like it had no more than a 10% chance of approval so most have viewed it as a long-shot. Perhaps "The Street" is re-evaluating Arena's chances after the Citizens Petition has unequivocally shown that there is no undue risk with Lorcaserin, it is effective and does improve all comorbitity factors including a compelling benefit for 20M Type II diabetics and 50M Pre-diabetics.

Often, a single firm will change their analysis of an issue by their own research and move it to a buy list for an orderly acquisition without running up the stock price. In this case, you have the entire professional investment community receive access to a body of work that most institutional analysts wouldn't even have the knowledge or skills to create themselves. This Citizens Petition is hard to argue with. You would have to come up with scientific literature that would disprove the data outlined in this document, something most retail investors and most professional investors can't do. In fact, perhaps even the FDA won't be able to dispel the facts documented in the Petition. And if that is the case, then
Arena's chances have to be re-evaluated by the market.

In 2010, prior to the last Advisory Committee for Lorcaserin, Arena's market cap was over $1B. I think most investors who have done their due diligence would agree that Arena has a much better chance of getting through the FDA this year than they did 2 years ago. As such, shouldn't the marketcap also be at least $1B prior to May 10th if Arena has at least a 50% chance of scoring a goal? If you combine that with a 2nd shot a goal in the second half of the year for approval in Europe, then perhaps a $1B value is even low since Arena didn't have that 2nd chance in 2010?

The realization by The Street that the chances are decent that Arena can get Lorcaserin through at least one, if not both, regulatory agencies in 2012 is causing a re-pricing of those chances in Arena's stock price. Thanks to the Citizens Petition, institutions were left scrambling with the same conclusion, at the same time and generated an unprecedented volume in the stock price. That is why Arena traded 58M shares yesterday and should follow-up with good volume for the rest of the week. There will be pullbacks of course but if you believe the content of the Citizens Petition and that there is greater than a 50% chance Lorcaserin has a positive Advisory Committee vote - then the stock price should be over $5 before May 1st.

Disclosure: I am long ARNA.

Stocks: ARNA