Arena Pharmaceuticals Inc., the maker of a weight-loss pill under consideration for approval by U.S. regulators, sank the most in two months after Seeking Alpha warned the stock may drop following a 10-day increase.
Arena fell 15 percent to $9.88 at 4 p.m. New York time, the biggest decline since April 18. The shares had gained every day since June 8 to a four-year high of $11.68 yesterday.
Arena’s drug, lorcaserin, received the backing in May of an advisory panel to the U.S. Food and Drug Administration, which voted 18-4 that the benefits of the medicine outweigh the risks. The FDA is scheduled to decide by June 27. Lorcaserin is one of three obesity drugs bidding to become the first approved by the agency in more than a decade.
“Shares have already fully priced in the approval,” Shane Blackmon, a contributor to the Seeking Alpha investing website, wrote today. “You should be selling and taking profits in Arena right now.”
The stock’s reaction shows how many retail investors are trading Arena shares, and how speculative trading around the FDA’s decision has become, said Ted Tenthoff, an analyst with Piper Jaffray & Co. in New York.
“Seeking Alpha is mostly read by retail investors,” Tenthoff said in a telephone interview today. “The fact that the article had so much movement on the stock tells me two things: It was largely retail that has driven the stock higher, and also it just shows the speculative nature of the investment around this approval.”
As the San Diego-based company’s stock rose, so did its short interest, a measure of bets the shares will fall. About 20 percent of Arena’s stock is sold short, the second most of the stocks Tenthoff covers, he said.
“As this retail volume and momentum has driven the stock higher, we’re seeing a short squeeze,” Tenthoff said.
A short sale is one in which stock is borrowed and sold, with the hope of profit by repurchasing the shares later at a lower price to be returned to the lender.
Tenthoff, who said Piper Jaffray helped Arena with a recent financing, recommends buying the shares.
“Our expectation is for approval this year,” he said. He anticipates the FDA will either approve lorcaserin outright, or delay approval for 90 days before clearing the medicine.
A competing drug called Qnexa from Vivus Inc., of Mountain View, California, was delayed by three months at the FDA in April after winning support from an advisory panel. Regulators, which said they needed more time to review additional materials for proposed post-marketing studies, will decide on that medicine by July 17.
An approval would be the first of a weight-loss drug since Roche Holding AG’s Xenical in 1999. Both medicines and a third, from La Jolla, California-based Orexigen Therapeutics Inc., were previously turned down by the FDA.