There Is No Conspiracy Against Arena Pharmaceuticals

| About: Arena Pharmaceuticals, (ARNA)

Arena Pharmaceuticals' (NASDAQ:ARNA) weight loss drug Belviq™ received FDA approval back on June 27, 2012. The stock soared. Many investors jumped on the stock figuring this was the next blockbuster drug. Since then, the stock has slumped and can't seem to get out of the gate. The DEA initially scheduled Belviq™ as a low-risk Schedule IV drug on December 19, 2012. The 30-day DEA comment period ended January 18, 2013 but the DEA has yet to finalize its ruling making Belviq a Schedule IV drug. Once that happens, another 30-day waiting period must take place before sales may begin, unless this period is waived by the DEA. But the DEA has yet to finalize its ruling. Many impatient investors are asking "why?" and the stock price has languished. Some have questioned if a conspiracy exists against Arena.

What forces have acted against ARNA to bring the share price down?

Several forces have been in play to keep the share price of Arena from rising. First, and foremost is the fact that many hedge funds and other institutional buyers originally bet against ARNA and for its main drug rival Qysimia™, produced by Vivus (NASDAQ:VVUS). As it turns out, they guessed wrongly.

Or, perhaps, it would be better to say they guessed stupidly. Qysimia™ consists of the drug Phentermine with its sordid history of heart problems and the potential to cause cleft palate in unborn children from mothers who took the drug during pregnancy. The Hippocratic Oath does not permit doctors to prescribe medicines that have too high a risk of harm to a patient. Thus, Qysimia™ would appear to have a much smaller potential market than Belviq™ due to the simple fact that all women of child-bearing age (16-40) would be excluded from consideration as Qysimia patients. This is a huge cohort and denies a large slice of the obesity pie to Vivus. So, even though Qysimia may actually help lose more weight in patients, fewer patients will be able to use the drug.

The initial rise in the share price of ARNA after FDA approval was expected as investors learned of the approval news. Undoubtedly, some of the rise could also be attributed to short covering from those who had bet against Arena. So why has the stock price come down more than 30% since its post-approval highs and then languished?

The second force acting against Arena's share price consists of hedge funds and other institutional buyers switching horses, moving from Vivus to Arena. Over the past ten months, institutional ownership of Vivus has declined while ownership of Arena increased. Massive short selling of the stock has had the effect of forcing the price down to a more "reasonable" entry point.

Any shareholder, who foolishly had stop-loss orders on their holdings any time within weeks after the FDA approval, lost those holdings when bear raids became a regular feature of trading in Arena stock. A quick look at the volume and price movement charts easily confirms what was going on. Huge intraday price swings on massive trade volume were clearly evident in the charts. These conditions are the playground for bear raids on a stock.

Massive sell orders were entered overwhelming the system and striking the price down within seconds. As the stock price crashed through stop-loss brake points, those shares sold, adding to the cascade. At a predetermined lower price, massive buying of the stock then took place, snatching up all available shares and sending the volume spiking to levels that exceeded those that preceded the drop. A nice little bear raid. Only it wasn't little and it happened many, many times over days, weeks, and now months since Belviq™'s approval.

Institutional investors continue to add to their holdings of ARNA

When Belviq™ was approved on June 27, 2012, institutional ownership of ARNA was in the neighborhood of 23% of outstanding shares. As of March 28, 2013 SEC 13-F filings show institutional ownership had nearly doubled to 45.4%. A deeper investigation into the numbers also leads to the conclusion that even now more institutional funds are buying into the stock than selling out, and that more funds are adding to their holdings than are shedding shares. This is all very positive for the long-term prospects of ARNA shareholders.

Many traders continue to short Arena. The short interest on ARNA is huge. Within the past two weeks, short interest has rivaled its high for the past 52 weeks at 61,373,872 shares. Volume has dropped to lows not seen in a year. More importantly, the days to cover has increased to 11.6 from a recent low of 3.6 in mid-January. As a general rule, when days-to-cover extend beyond 10, the potential for a short squeeze increases.

The previous high short interest occurred on November 15, 2012. A month and four days later, the DEA came out with its initial scheduling of Belviq™. Perhaps this latest short interest high point presages a DEA final scheduling on Friday April 19, 2013? Only time will tell. Investors cannot know when, only that there will be a date certain at some point.

So, is there a conspiracy against Arena Pharmaceuticals, Inc.?

The DEA has yet to release its scheduling on Belviq. This is an important new drug and prudence and caution should be expected from the agency responsible for public safety and oversight. We could be seeing the set up to a massive short squeeze when the DEA final scheduling does occur. Some traders are shorting the stock in an attempt to drive the share price lower. Perhaps they are hoping to grab a stake and not get caught too badly in the short squeeze that is bound to occur once DEA scheduling is announced. My suggestion on ARNA for other current shareholders: don't fold, hold your shares and go for the ride of a lifetime. There is no "conspiracy" against Arena Pharmaceuticals, Inc. The DEA will release its schedule in due time. Shareholders with a bit of smarts and a good dose of fortitude should be able to make a nice profit from continuing to own the shares.

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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