Why Arena Pharmaceuticals Stock Is Getting Hammered Today

By George Budwell Markets Fool.com

What happened

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Shares of Arena Pharmaceuticals (NASDAQ: ARNA), a small cap biotech,are down by more than 16% right Tuesday morning as the result of a $69 million public offering that was announced prior to the opening bell. According to the press release, the company also grantedthe underwriters a 30day option to purchase another 9 million shares of common stock.

Image source: Getty Images.

So what

While it's never a great idea to tap the public markets for funds when your share price is dangerously close to the Nasdaq minimum bid of $1 per share, Arena didn't have much choice in this case. The company, after all, is facing a likely spike in its quarterly burn rate after deciding to pivot toward its clinical pipeline of early- to mid-stage candidates and move on from its first commercial product, Belviq. Compounding matters, Arena only had about $90 million in cash remaining, according to its last stated cash position.

Now what

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Arena's strategy is to try to advance itsexperimentalpulmonary arterial hypertension (PAH) drug, ralinepag, into a late-stage trial in an expedited manner. To do so, the drug needs to hit the mark in its ongoing mid-stage trial that's scheduled to produce a top-line data readout by mid-year. That said,ralinepag's value proposition ultimately revolves around it becoming a so-called "best-in-class" medicine within a rapidly maturing PAH market.

As that's a particularly tall order, especially for a company with rather limited resources like Arena, and investors may want to be extra cautious with this highly volatile biotech stock. That's not to sayralinepag -- or any of the biotech's other clinical candidates -- won't eventually strike gold in their clinical programs, but Arena doesn't have much room left for error at this point.

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George Budwell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.