Arena Announces Prospectus To Sell $150 Million In Stock

Summary

• Company will price $150 million offering.
• Underwriters can add on another $22.5 million.
• News comes after positive clinical trial results.

I was about half way through an article that was to discuss debt, dilution, or partnership. The concept behind the article was that I felt Arena Pharmaceuticals (ARNA) would want to garner cash, and that it needed to come from one of those three places. In all honesty, I would have been a fan of adding some debt as a first choice. Instead, the company is choosing a path of dilution.

Arena announced today that it intends to raise $150 million in cash through the sale of stock. The underwriters also have an option to raise that tally by $22.5 million. I am going to call this what it is. Dilution. Existing shareholders will see their stakes diluted by between 18% and 22% depending on what price the company is able to obtain.

As much as dilution frustrates me, it is part of the Wall street way of life with speculative companies. Whether investors like it or not, Arena is a small player in the grand scheme of not only the street, but pharma as well.

If dilution was going to happen, better to see it at a number above $20 per share than one substantially below. My readers know full well that I try to offer realistic opinion and stances. Nothing is ever 100% roses, nor is it 100% manure.

What I Do Not Like

• It is dilution. I now own a smaller piece of the company than I did before
• Dilution can put the brakes on any run. It is a short term dynamic, but unfettered runs do allow us to see what is possible.
• The share count is increasing, and this begins to erase the dynamic of the rarity of shares we experienced after the reverse split.
• It tells us that the big banks are not yet looking at Arena as a company to lend to at decent rates.

What I Do Like

• The company is now flush with cash
• A big bank account means that Arena has leverage in ANY negotiation.
• Arena can now negotiate without desperation.
• Arena's cash means leverage and the ability to find the right deals.

In my opinion this company had a very valuable learning experience with the anti-obesity drug Belviq. It cut a deal with Eisai that assumed massive success. That success never came to fruition, and neither Arena, nor Eisai were able to make meaningful money with the drug. The company spent the better part of 18 months in stagnation hoping that Belviq would miraculously take off. It was also a learning experience for many investors.

In my opinion, current management is making some pretty good moves, and the timing of potential catalysts is such that the company can advance forward on different fronts. Arena has a decently mature pipeline. It will cost money to advance, but is also at a stage where a potential suitor might be interested in not only the later stage drugs, but the ones following as well. Pharma is competitive and sometimes timing is more critical than the efficacy of a drug candidate. I do not know if the timing will align for Arena, but I do know that the recent phase II results on Ralinepag were very promising.

In summary, the 20% dilution is not great news, but hardly terrible news either. I wish Arena was in a position to take on some debt at reasonable rates, but the company is not at a stage where that could happen. I like the leverage that having plenty of cash brings to the table. I like that Arena can now afford to be a bit more picky when contemplating a deal. I feel that current management will be savvy enough to know a great deal when it sees it. Hopefully Arena investors will now be better able to be less emotional with the stock and understand that a reset has happened. Stay Tuned!

Analyst’s Disclosure: I am/we are 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.