An article posted by Shane Blackmon Friday on the Seeking Alpha Site seemed to cause an upheaval in the trading of stock of Arena Pharmaceuticals stock. Mr. Blackmon cited that the stock was overvalued and should be sold. Many took his advice. But upon reflection of his article I noted that this type of situation has occurred in the past with many biopharma stocks and the onion must be peeled back to get a real understanding of what took place on Friday.
According to who you follow and what you read many reasons caused Fridays Flash Crash. Many hedge funds who placed their bets against approval of Lorcaserin, Arenas candidate obesity drug to be approved on June 27th, were losing a great deal of money. These big boys are not supposed to do that. So how do they get out of these losing positions so close to approval date? The answer ofcourse is what is called a "Bear Raid" or a "flash crash". Many not so savvy traders placed "stop orders" on their stock so that if the price drops to the selected level, their shares sell based on that stop order.
When Mr. Blackmons article hit it was used to incite a chain reaction that took millions of shares away from people who had stop orders in place. Within a 10 minute period Arena Stock dropped from $12.00 to $7.80 before rebounding to close at $9.88.
What is interesting to note is that a similar article was written on Thursday on Seeking Alpha which had to be removed because of the inaccuracies that were stated. Mr. Blackmon stated that the move up in Arena Stock from $2 to $12 in such a short period of time could not continue and the stock should be sold. Well Mr. Blackmon got his wish along with all those hedge funds who were able to escape their short positions because of the well timed article.
Meanwhile, Ted Tenthoff Piper Jaffray, stated "Our expectation is for approval this year" and expects an outright approval of Lorcaserin on June 27th or after a short delay by the FDA to finalize clearing the drug.
Throughout this last 48 hours nothing at Arena or at the FDA has occurred to cause these wild gyrations. What is true is that institutional ownership of Arena stock has skyrocketed along with the share price. Arena has not received any notice of delay with only 3 trading days left before the FDA decision. It is highly unlikely that a delay would occur so close to the voting date. This was the result of games played by rich people who feed upon retail investors to ensure they win. To be sure investing in biotechs is like betting in Las Vegas. The house usually wins. However, if you were smart enough not to allow these games to trick you out of your shares you should be well awarded with an FDA approval.
Disclosure: I am long ARNA.