Arena Pharmaceuticals, Inc. (NASDAQ: ARNA) is surging after the FDA approved its weight loss pill called BELVIQ.  In fact, now that shares have reopened after having been halted this stock is up a sharp 33% at $11.81 and the absolute high today was $13.50.  We have already seen more than 50 million shares trade and the prior 52-week high was $11.99.

What happens when biotechs get a huge rally and they want to bolster their balance sheet?  They often issue secondary offerings.  It would seem safe that Arena would take advantage of this, and frankly it should seem logical to sell more shares.

Under its agreement with Eisai, Arena will manufacture and supply the finished commercial product from its facility in Switzerland and Eisai will market and distribute BELVIQ in the United States. We are now expecting that the drug will launch late in 2012 or maybe in 2013 pending a DEA designation because this is classified as a ‘scheduled drug.’

The company filed an Automatic Shelf Registration statement (S-3ASR) back in May and noted, “We may, from time to time, offer to sell shares of our common stock in amounts, at prices and on terms described in one or more supplements to this prospectus. We may also authorize one or more free writing prospectuses to be provided to you in connection with these offerings.”

That May filing was after an S-3 filing with the Exchange Commission on November 8, 2011 for up to $50 million to raise in a mixed securities of any combination of Common Stock, Preferred Stock, Debt Securities, Warrants, and/or Units.  The company actually sold 11 million shares at $5.50 per share and considering the overallotment option it sold some 12,650,000 in May of this year.

As of March 30, 2012, Arena had $88.2 million in cash and it had $90.2 million in long-term debt, with total equity of $44.8 million and a net tangible assets of $33.5 million.  That cash from the offering in May came to about $69.5 million in gross proceeds and if the fees are 7% or so then it would come to almost $65 million in net proceeds before considering any quarterly cash burn rates.

The pre-burn new cash balance would be close to $153 million versus what is a $2.1 billion market cap.  The question to ask is whether or not Arena needs or wants more cash to launch the product.  Since its stock has now more than doubled since its offering, maybe it might want to consider going back to the till.

Maybe Arena does not need the capital, maybe it does.  Investors should watch for a filing followed by a spot secondary as at least being a possibility now.  If you wanted to raise capital less than two months ago and your stock has risen by 100%, what would most CEOs and CFOs decide to do? First they may sell some of their own shares but they may also raise capital again to bolster the company’s books as shares have hit a new high since 2007.

JON C. OGG

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