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Part of investing in any pharmaceutical is assessing what the company has in the pipeline. While current drugs drive the financial health of a company, it is the potential in the pipeline that makes up for significant costs, and hopefully a significant future. Some pipeline drugs never make it out of trials, but when one does, it now graduates to a money contributing facet of the company.

Arena (NASDAQ:ARNA) announced this week that its drug, APD354, will be entering a phase 1 clinical trial. The company wants to develop the drug for use in autoimmune diseases. Specifically, APD334 is an orally available drug that targets the S1P1 receptor for the potential treatment of conditions such as multiple sclerosis, psoriasis and rheumatoid arthritis.

The phase 1 study is randomized, double-blind and placebo-controlled. The purpose is to evaluate the safety, tolerability and pharmacokinetics of single-ascending doses of APD334. There will be 64 healthy adult volunteers that will participate in the trial.

The importance and timing of this announcement should be a key to investors. Because of Arena's anti-obesity drug Belviq, and drug partner Eisai carrying a substantial belief in its success, Arena has plenty of cash on hand to progress in further research and development. Whereas the announcement of a new trial for an upstart firm might typically be worrisome, with Arena the story differs.

Even if sales of Belviq are on the modest side of the equation, the costs associated with that drug are already well in hand. Eisai is responsible for a lot of the additional testing related to that drug. The Eisai deal essentially gives Arena to focus money, time and energy on growth of new revenue streams and APD334 is an example of that in action.

One very bullish aspect of Arena is that the company already possess the financial muscle to keep the R & D side of its business rolling without a massive worry about added debt or share dilution. That same situation may not exist with other upstart equities in the sector.

Certainly a phase 1 trial will not send Arena on a stock run today, but as time progresses it could be an important factor down the road. For the moment it is the anti-obesity drug Belviq that will drive this stock. A U.S. launch of Belviq is expected soon. The drug already has FDA approval and is simply awaiting scheduling by the DEA.

For Arena investors, strategy can be quite interesting. If you were fortunate enough to get in prior to FDA approval you are sitting on an equity that you bought at $2 which now trades at $8. If you are like me, and in at $7.40 or so, your strategy surrounding the short term may differ from those that got in earlier.

The development of a phase 1 trial for APD334 gives an added level of potential to those who entered the equity at higher levels. This could be enough of a catalyst to keep that class of investors holding onto the equity longer. The more potential there is, the more an equity is likely to be held. The key is that APD334 is now more of a reality than it was prior to his announcement.

The short term on Arena has been an active trader's dream for months now, while the long term potential has always been a bit of a shining star for the equity. It is the short term trading beauty that had me sell half of my position at $10.50 a couple of months ago, but the long term potential that has kept me holding the other half of my shares. The bigger that the "real" (as in announced) Arena pipeline gets, the more stable the equity will become.

Investors should bear in mind that this equity will be shifting more toward performance based valuation when the anti-obesity drug Belviq launches.

Disclosure: I am long ARNA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Arena Adds To Pipeline