Arena Insider Sells Shares - Worry?

| About: Arena Pharmaceuticals, (ARNA)

Arena (NASDAQ:ARNA) CFO Robert Hoffman exercised options on 71,250 shares and sold them on April 1, 2013. Should investors worry? The simple answer is no, but that did not stop my email box from overflowing with communications from both longs of the stock as well as detractors. My response regarding the sale is actually quite simple.

People will sell a stock for any number of reasons and when stock options are a part of a person's compensation package it should come as no surprise when some of that money is taken off of the table.

In the case of CFO Robert Hoffman, he has substantial wealth tied up in stock options. In fact, he has options on 285,000 shares of Arena at an exercise price of $1.81. This past month 71,250 of those options vested (which Hoffman exercised at $1.81 and sold at $8.21), leaving 213,750 more option shares in his balance that vest over the next three years. On top of the options held by Hoffman he holds another 19,570 shares.

The transaction of April 1st netted the executive about $456,000. One can not blame an individual for making some money on what they have been working on for a long time. In particular when there is still a substantial amount of shares and options held.

  • The 19,570 shares still held carry a current value of about $160,000
  • The 213,750 options carry a current value of $1,750,000
  • Combined the current value of shares and options still held by Hoffman is just over $1,900,000.

As with anyone, prudent investing and money management is something that needs to be considered. Hoffman has a substantial amount of his wealth tied to a single investment, that being Arena. Any time a single investment makes up a substantial part of your portfolio, you run the risk of calamity and the potential of substantial gain. For some, mitigating risk through diversification is very important.

In the end, only Mr. Hoffman knows his exact reason for selling. Personally I do not see it as a bearish sentiment by Mr. Hoffman. He held his core position and still has options on over 200,000 shares. In contrast, I would not have seen it as bullish had he exercised the options and simply sold enough to cover the taxes. Simply stated, the numbers are not big enough here to get excited about on either the bullish or bearish side of the equation. The only excitement surrounding these sales will likely be limited to passionate followers of the stock in banter with passionate detractors of the stock.

Arena could be days away from launching Belviq. The launch and initial sales, not Hoffman's options, will tell the story. If you are already in it is worth waiting to see the results of early sales. If you are not in, you could speculate and jump in now, or see some sales first and then jump in with a better understanding of how the company is going to perform. The potential here is big, and risk to the downside has become less of a concern with the equity price being depressed lately. Stay tuned!

Disclosure: I am long ARNA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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