Tuesday, 11 July 2017

Citigroup And Leerink Create Fake News On Arena Pharmaceuticals To Pump Up Its Share Price For A Secondary

EDIT 7/13: We have closed off our short around $24. The pricing of the offering was at $24.

Arena Pharmaceuticals, Inc. (ARNA) rose 41% from $18.39 to $26.00 on 15 million volume on Tuesday, after the company announced "positive Phase 2 results for ralinepag, an investigational, long-acting, orally administered prostacyclin receptor agonist under development for the treatment of pulmonary arterial hypertension". This is obviously a very positive development for the company. But given that this is a Phase 2, ralinepag is still years away from a New Drug Application being accepted by the FDA, assuming all goes well with Phase 3, and it will cost a lot to navigate through the FDA approval process. ARNA added $240 million in market cap on Tuesday, a fairly high amount for Phase 2 results.

Immediately after the market closed, ARNA got to work on trying to secure the cash resources needed to develop ralinepag by announcing a $150 million offering of common shares. The release states that: "Citigroup, Leerink Partners, Cantor Fitzgerald & Co. and UBS Investment Bank are acting as joint book-running managers for the offering.  JMP Securities is acting as a co-manager for the offering." The terms, including the price of the shares in the offering, were not announced.

Minutes after ARNA announced the offering, two of the bookrunners released updated price targets on ARNA in an attempt to stop the bleeding afterhours. Citi increased its target on ARNA from $23 to $37 and Leerink increased its target on ARNA from $47 to $53.

While ARNA has done what an early-stage pharma company is supposed to do, we smell a rat from the supposedly unbiased firms that happen to have gotten the bookrunning business and are so quick to upgrade the targets. Are these targets not supposed to be based on reasoned, thorough and complete analysis? How can these firms come up with a price target based on reasoned, thorough and complete analysis when the denominator (number of shares) in their valuation isn't even defined thanks to the unknown price of the offering? They are just throwing out made up targets to try to inflate the stock price as much as possible before the secondary. Either to help fill it or to get suckers to buy shares high so that the hedge funds participating in the offering can short the stock at a higher price and cover from the offering.

At what price will the offering be filled? We think $22.50. The underwriters have an option to purchase up to an additional $22.5 million of shares of its common stock at the public offering price, This $22.50 number fits extremely well with that. In the meantime we hold a short position on ARNA and will continue to hold it until we see the pricing of the secondary.

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Disclosure:We are short ARNA

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