Arena Investors Hope Celgene Trial A Harbinger For Future Returns

| About: Arena Pharmaceuticals, (ARNA)


Celgene's Ozanimod was acquired in a $7.2 billion deal with Receptos.

Arena's APD334 is oft compared to Ozanimod.

Arena has APD334 in Phase 2 trials for Ulcerative Colitis.

Investors in Arena Pharmaceuticals (NASDAQ:ARNA) might have seen some interesting news from competitor Celgene (NASDAQ:CELG) which should bring about a bit of excitement as well as caution to the equity. Celgene announced results of a Phase 2 clinical trial of Ozanimod in the treatment of Ulcerative Colitis (UC).

From one perspective, it is good to see a stock such as Celgene respond well to positive results in a Phase 2 UC clinical trial. Celgene's stock is up about 2.5% on the news. From another perspective, it shows that Ozanimod is tracking ahead of APD334 in the clinical trial process, which could mean the competition is getting to the market on a UC indication first.

Celgene's Phase 2 UC trail called TOUCHSTONE evaluated the efficacy and safety of 0.5 mg and 1 mg doses of ozanimod compared with placebo after eight weeks of treatment. The trial included 197 patients with moderate to severe active ulcerative colitis. Patients who achieved a clinical response at week 8 continued with their original treatment through week 32 in a maintenance phase.

At week 8, although there was an apparent numerical dose response in the proportion of patients reaching histologic remission, defined as a Geboes score less than 2, there were no significant differences. However, at week 32, 31% of patients on ozanimod 1 mg achieved histologic remission compared with 8% on placebo. In the 0.5 mg arm, 23% achieved histologic remission.

For Arena investors, a bar has now been set by a competing drug. Arena is anticipating its own Phase 2 clinical trial results in early 2017. If Arena's APD334 can meet the bar set by Ozanimod, then some of the same excitement surrounding the results of the Celgene trial can be enjoyed by those invested into Arena. If APD334 can demonstrate superiority (even if it is subjective), the equity could react very nicely.

The reason I am invested in Arena is for its pipeline potential. The company has 5 drugs at various stages of development, but the drug with the most potential in my opinion is APD334. It is my opinion that this drug, on its own, could justify the entire market cap of Arena by itself. APD334 is actually a full autoimmune drug. Ulcerative Colitis is simply one possible application of the drug. The decision to start with Ulcerative Colitis as an indication likely rested on the ability to carry an easier and faster path to approval.

Arena is essentially a developer of drug candidates and seems to have its hands on a potential winner with APD334. Ultimately, Arena will seek out a partner for this drug as well as others. The parallels between APD334 and Celgene's Ozanimod were drawn last year when Celgene acquired Receptos. Arena benefited from the deal by being viewed as a derivative play in the space. Some investors may get overexcited and assign improper valuations. While tempting, the reasonable path is to simply grasp that there is a decent potential here as a baseline.

At current prices, Arena may seem a bargain. The company is not without challenges. Its anti-obesity drug Belviq has seen poor sales and has not delivered cash to the bottom line in amounts that allow the equity to appreciate. The current cash situation at Arena is such that the company is seeking to partner a few compounds. As an investor myself, I would like to see Arena hold off on partnering APD334 until after the Phase 2 results are available in early 2017. That means potentially partnering some of the smaller drug candidates a bit early. It is my opinion that the risk of early partnerships on other aspects of the pipeline could deliver the reward of a robust partnership for APD334 some time in mid-2017.

Now that we see some results that APD334 can be compared to, it gives investors an instant barometer if APD334 carries all of the potential that the company and analysts assign to it.

The risk here is the balance of 2016 and the cash position of Arena. If the company can get through the balance of this year without any missteps, it can set up a building market anticipation of the APD334 results. Arena has the potential of a few cash milestones this year, which could help the company navigate through the next several months. The real big win is if Arena can stretch its cash to the readouts of the Phase 2 APD334 clinical trial. For those on the sidelines, consider it an opportunity to cherry-pick shares at opportune moments. In my opinion, prices under $1.50 are very attractive with lower risk. Prices above $1.50 carry the potential risk of a misstep dropping the stock back to about $1.30. There is no need to rush into this equity in my opinion, but paying attention is well worth your while. Stay Tuned!

Disclosure: I am/we are 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.

Additional disclosure: I have no direct position in Celgene, but I did see it in a fund that my 401K is invested in.