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Tuesday, October 17, 2006

Arena Pharmaceuticals: Will Cramer Talk It UP Every Day Or Will the Company Do a Secondary?

Arena Pharmaceuticals (ARNA) has been trading up and up. You may assign the merger environment, and you may assign its drug promises. Cramer is the real reason this stock has traded up, and not just once.

ARNA traded at $12.75 just on October 3, then Cramer touted the ARNA stock as the next cheap small biotech that would be cheap and easy to acquire after his pick Myogen (MYOG) was acquired. The next trading day ARNA closed at $13.78, and at $14.45 the day after that. Then Cramer spoke to the CEO of the company yesterday, and ARNA closed up $0.37 at $15.58, and now it is up another 4% at $16.21 today after Cramer talked it up again for a merger hopeful.

"Arena is not done going up," Cramer said on his daily radio show. "It has done remarkable work against diabetes and obesity, and it could get a takeover bid tomorrow."

ANRA's market cap is now $767 million, and the stock on last look intraday is up some 27% from before Cramer went out on the stock initially. The funny thing is that it doesn't look like it really has smarter money involved at all. The NOV $15 PUT contracts last traded at $0.50, and they only show an open interest of 506 contracts. That means that only 50,600 shares have been "protected" from downside with options. Even the OCT $15 PUTS that expire this Friday only have 803 contracts listed as the open interest; and 1,450 contracts are listed in the open interest for the $12.50 PUTS expiring Friday.

Cramer said the company's weight loss drug candidate as an obesity treatment is what is so attractive about the company. The treatment is called Lorcaserin and it is in Phase 3 clinical trials. Cramer noted that it has strong cash reserves to keep it going, and as of June 30 it posted $264.4 million in cash and short-term investments with only $42.5 million in total debt on the balance sheet.

A.G.Edwards, who has a Buy rating on it, has an $18 target. UBS put a $20 target on it in June when it started it with a Buy. The company has already sold 9.5 million shares earlier in the year, and they have a filing that went into effect that was filed August 31 covering up to 12.5 million shares. The shares closed at $12.27 on August 31 and had been under $10 back in July. It also only had 47.4 million shares outstanding before that filing.

The purpose files for the potential offering was for the clinical and preclinical development of our internally discovered drug candidates, for discovery research for new drug candidates, and for general corporate purposes, including working capital. Since that filing went in, Merck ended its athersclerosis drug study and J&J (JNJ) extended its Type II diabetes drug candidate study with the company.

When secondaries come out they tend to do it after decent stock moves. The company presents at the BIO INVESTOR FORUM 2006 at 12:20 PM PACIFIC TIME on October 18, which is tomorrow. This means that investors could get another slug of positive news, and then a formal secondary offering announcement. It may not even be in that order, and it may not even occur. The company has already been positive. Maybe they can show more positive data, but it would seem that they have had a fair day already.

If an upcoming secondary ends up coming it does not appear that the street is overly concerned that it could face an instant 25% additional dilution. Since it is years before any expected profits it may not matter immediately, but that formal secondary offering could come now that the shares have climbed back up. Maybe it will get acquired and maybe it won't, but it is up this much so far just on hopes of that happening.

Jon C. Ogg
October 17, 2006
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