I am going to be a bit critical of Arena (NASDAQ:ARNA) in this piece. Some readers may not appreciate what will be said, so be forewarned. First and foremost, I did not attend the Annual Shareholders meeting, thus, what I am about to report is hearsay. That being said, there were many investors at the meeting that did communicate with company management.
What I am going to discuss here is communication with the street and communication with shareholders.
It has been reported to me that Arena stated something to the effect of "Mexico is on hold" with regard to the status of the Belviq application there filed by Eisai. Again, having not been at the meeting, I can not confirm exactly what was said, or even IF something to this effect was said. That is why this post is an instablog and not an article.
What could such a statement mean?
- Eisai placed the application on hold
- Mexico placed the application on hold
- There is a hold because approval was not likely
- There was a hold because more data is needed
- There was a poor choice of words by Arena management and "on hold" meant that there was not status update
At the end of the day, we do not know. That means that the information is now left to the imagination of shareholders, the street, analysts, and anyone that follows the equity. Essentially, what we have now is a giant question mark. Giant question marks do not usually help an equity appreciate. Arena should be very much aware that anything discussed at a shareholder meeting is going to get back out to the street. Communications need to be clear, concise, and straight to a point that does not lead people down paths on a wild goose chase.
It has also been said that at the same shareholder meeting that the status in Canada would be "soon". Again, this is now something that sets imaginations swirling. Is soon 1 to 3 months? Is soon 3 to 6 months? Is soon perhaps as much as 9 months? Is this a hint that the application is progressing well? What may seem like an innocuous statement can take on a life of its own, and often does. This is especially true when companies have a large retail shareholder base.
In the past there have been more than a few times that disclosure by management seemed to be lacking in presentation, timing, or both. Last year shareholders learned of the withdrawal of the Belviq application in Europe at a quarterly conference call. This year we learned of rejection of the application in Switzerland by having to comb through 10K and 10Q filings. Now, in theory, we learn of a possible delay in Mexico at an annual shareholder meeting that is not recorded for all shareholders to review. If you are one of several dozen that can take the time to attend you are fortunate in that at least you have the information given as first hand. If not, the rumor mill becomes your source of information.
Part of managing a public company is managing expectations of the street as well as investors. In my opinion current management has not really been very good at that. From "sales will be $150 million or $200 million", to what the phentermine trials mean, to what the smoking cessation trials mean, to applications in countries, to withdrawals and rejections in countries mean, it has been one thing after the next.
If application in a country deserves an 8k, wouldn't status updates deserve an 8k? We have received them in the past. Why not now?
The problem here is the trust of investors, analysts, and the street. Imagine an analyst modeling sales projections and trying to think two years ahead. Imagine if that analyst is building in sales in Mexico. I realize that bad news is never something that a company wants to put out, but things are worse if you build a mis-trust.
Again, I have no idea if management said that Mexico was on hold, or that Canada would happen "soon", but given past actions by Arena and the reaction to those actions, one would think that management would be more scripted in what is said in public.
Another issue is when the company should disclose material events. I have received communications that carry an opinion that since Eisai is the company that is filing the applications that Arena does not have to report material information regarding them. This is not at all true. As a public company, Arena carries a responsibility to shareholders to report material events. Partnering up with another company does not in any way relieve that obligation. There are times that a company may deem that a piece of information is not material, and thus not disclose it, but that is the subject for another day. One would expect that if an application in a country is worthy of disclosure, that a withdrawal, rejection, or official hold of that same application would be material. That being said, drug applications take time. I would not expect the company to issue an 8k that says the process in Mexico continues.
What I would consider fair to investors is outlining some appropriate expectations and ensuring that there is no room for seeing those exaggerated. The company could, for example, in a quarterly update or even a conference outline that a drug application is expected to take 18 months and then outline updates each quarter even if the statement is that their original time-lines are still what is anticipated.
Giving credit where credit is due, Jack Leif's last appearance on CNBC was good, concise, framed things clearly, and did not allow for to much interpretation one way or the other. Another example of framing expectations right was the guidance issued by the company. It set a realistic baseline on revenue from sales that is attainable, and not grossly under-promising. Shareholder communication and setting expectations is an art form. You do not want to dial into home plate per se, but you do want folks to at least be in the stadium parking lot.
Disclosure: The author is long ARNA.