Arena Postscript

When I heard that people were paying 65% to borrow ARNA shares to sell short, I knew that others were probably selling short without borrowing.  I also knew that my odds of winning on the trade just got much worse.  I had seen this movie before, after all.

But sometimes the movie has a surprise ending, where the company survives and investors who stayed with it actually get rewarded (DNDN).  Problem is, that happy ending may take years to happen, and my short strangle options expire tomorrow.

So, I will end up owning a big slug of Arena shares tomorrow unless I buy out those puts, and the lawyers have already started picking at the corpse in their race to the courthouse claiming fraud, even though the company is protesting like the Monty Python plague victim that they aren’t dead yet.

Right now my plan is to sell covered calls as long as I can get 10% or more in premium dollars by selling calls that struck near my net cost (around $3.60 a share, so I’ll look at both $3 and $4 calls).

I followed the last half hour or so of a live blog of the hearing provided by Minyanville.  That blogger did give better coverage than I’m reading this morning in the wire service groupspeak.  For example, from that live blog, I found out that the tumors in rats couldn’t be replicated in mice.

Does that mean I’m happy about not knowing about the rat tumors?  Of course not.  It does mean that the likelihood of human cancer is quite a bit lower.  After all, even when I was an optimistic college kid, I had the cynical opinion that research grants and laboratories cause cancer in rats.  Nothing I’ve seen over the past 40 years has changed that opinion.

The company is out this morning saying they were disappointed that no cancer experts were on the advisory panel.  But let’s be clear — an advisory panel vote doesn’t always mean approval, even when the advisory panel votes heavily in favor of approval, as with Dendreon’s Provenge in March of 2007.

There were several developmental diet drugs facing this stage of the approval process this fall, and Arena is the second company to go before a doctors’ review panel.  Like Vivus before it, the doctors rendered a split decision recommending against  approval.

Search for the easy way to shed pounds has gone on for centuries, with ancient Greeks using diuretics and laxatives.  Today’s obesity epidemic in the US only makes the reward more attractive.

So far, most approaches have failed.

That won’t stop pharma companies from trying, nor will it stop consumers from eagerly adopting any treatment that promises to help them lose weight beyond what they can lose by eating less and exercising more.  Remember Phen-Fen?  That took two drugs, one approved in 1959, and another in 1972, and turned them into the wonder diet pill of the 90’s until people started dieing of heart attacks.

I suspect Arena will keep at it, and that they will come up with test results that can be approved.  Just not right now.



6 Responses to Arena Postscript

  1. Jesse Livermore says:

    Just a note on the rat cancer – the reason mice didn’t get cancer is they were tested with much smaller doses. If I recall correctly, larger doses made them die from seizure. This is all available in the FDA’s briefing documents. What’s more, plenty of things cause cancer in rats, but very few things cause the particular types of tumors seen in these studies. I think there is very legitimate concern that lorcaserin could pose cancer risk in humans, and it makes a lot of sense to investigate it further before releasing this drug into the marketplace.

    By the way, the fact that management didn’t disclose the rat data earlier is massively dishonest, and they deserve to be sued. If you care at all about management being trustworthy, I’d avoid this stock.

    • hhill51 says:

      Pretty harsh assessment. Are you an MD? I have to wonder why the FDA approved human tests since these rat tumor results were already available….
      I took half the potential loss today, so that’s how I voted with my money.
      I do believe some of the same slimebags who shorted DNDN are involved here, but I don’t have the jets to fight them. At least this time they aren’t preventing a direct life-saver from coming to market to enhance their trading profits like they did with Provenge.

      • Jesse Livermore says:

        PhD. The rat tumor results actually came in after the Phase III trials had begun, according to ARNA’s conference call this morning. “Preclinical” is a technical term; it doesn’t literally mean the studies were completed before the clinical trials. It’s pretty standard for a 2-year-long carcinogenesis study to complete while Phase II/III human trials are ongoing.
        One great line from the CC this morning. An analyst asked what had killed the mice, and one of the ARNA guys says it’s indeterminate, that they would simply come in every morning to find several dead mice. The CEO breaks in to say, “They were upside-down.”

      • hhill51 says:

        Glad I took some losses today. (Well, not exactly glad, but know it was the right thing to do)

  2. BTW, DNDN had much better data at the time of the AC meeting – which was positive.

    • hhill51 says:

      Agreed. But the hedge fund short sellers obviously “owned” some influence on the FDA panel for Provenge, and the drug got shot down. The other pieces of the pattern — small investors excited, huge and very expensive short-selling, surprisingly negative stories blasted through the press — that stuff is all from the same playbook. I fully expect to see that it was heavily sold with fails to deliver when the mid-September list comes out.
      I’m far less “invested” in this one than I was in Dendreon, and honestly think that 10 or 20 lbs in weight loss is a benefit that doesn’t come close to customized vaccine treatment for cancer.
      I’ve even taken some hefty losses today, so I’ll care less as this sits in my portfolio for who knows how long. If I can sell covered calls every quarter or so, and if they do the job of showing cancer safety, there’s a good chance I’ll turn a profit on what I’ll own next Monday.
      Next time I see an amazing binary vol play like this, I’ll look at getting long the Iron Condor options play.

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