Assessing Arena's APD334 Drug Candidate Ahead Of Clinical Read-Outs

| About: Arena Pharmaceuticals, (ARNA)


APD334 is in clinical trials for ulcerative colitis.

Celgene, AbbVie, Pfizer, and Takeda are in the space or about to enter.

If APD334 can meet or exceed competition, then a good partnership could be in the wings.

Arena Pharmaceuticals (NASDAQ:ARNA) investors are pinning a lot of hopes on the company's pipeline. The pipeline drug viewed to have the most potential is known as APD334. This drug is an orally available S1P1 receptor modulator discovered by Arena, which the company retains the worldwide rights for. APD334 is believed to therapeutic potential in autoimmune diseases such as ulcerative colitis. The drug candidate is an S1P1 receptor modulator. S1P1 receptors have been demonstrated to be involved in the modulation of several biological responses, including lymphocyte trafficking from lymph nodes to the peripheral blood. By isolating subpopulations of lymphocytes in lymph nodes, fewer immune cells are available in the circulating blood to effect tissue damage.

Arena developed a strategy of seeking approvals for treatment of ulcerative colitis first, though the drug could have many more possible indications added to the list as time passes. One reason that ulcerative colitis was sought as a first indication was that the clinical trials to gain possible approval are likely faster, less subjective, and market entry may be attractive.

Many Arena investors like to compare APD334 to Ozanimod from Celgene (NASDAQ:CELG). This comparison gained popularity when Celgene bought Receptos for $7.2 billion. Celgene recently announced positive results in a clinical trial of its own, while results from APD334 are expected in early 2017.

A comparison to Celgene is tempting, but understanding the overall market in the space is likely prudent. Have you heard of Humira from AbbVie (NYSE:ABBV)? If not, you should have. It is the best-selling drug on the market, and did about $13 billion in sales in 2014. Before you get to excited, Humira has an extensive label that includes rheumatoid arthritis, plaque psoriasis, Crohn's disease, pediatric Crohn's disease, ulcerative colitis, psoriatic arthritis, ankylosing spondylitis, and polyarticular juvenile idiopathic arthritis. This can give you an idea of its potential, but there are many clinical trials to go before APD344 can enjoy such a diverse label from one drug. That being said, potential partners would be well aware of the various indications that could be tackled.

Pfizer (NYSE:PFE) is another player in the space. It already has Xeljanz approved for rheumatoid arthritis, but is in the midst of clinical trials for an indication in treating ulcerative colitis. This week, the company announced positive results in a phase 3 trial. Pfizer had recently sought an indication for Xeljanz in treating plaque psoriasis, but did not fare well. Even with that setback, Xeljanz annual sales are over $100 million.

Takeda (TKPF) is in the space as well. Arena investors are likely familiar with that name, because the company was the marketing partner for a competitor to Arena's Belviq. Takeda is another big pharma player with a lot of muscle. Its entrant into the space is an injection called Entyvio. The name may ring a bell because it is heavily advertised on television. Entyvio is approved for the treatment of ulcerative colitis and Crohn's disease. This drug was approved in mid-2014, and people are already talking "blockbuster".

"Analysts have projected blockbuster-level sales for Entyvio by 2020, and Takeda sees it hitting at least twice that. In the company's 2015 year-end financial presentation, Takeda wrote that Entyvio is "on the way to over $2 billion in peak sales" and reported that Entyvio's third quarter sales made it the company's No. 4 selling drug. Total Entyvio sales for 2015 were about $530 million (59.3 billion yen) versus $250 million (27.8 billion yen) for 2014. The drug was approved by the FDA in May 2014; it launched in June."

What does all of this mean for Arena investors? Well, as with anything, there are positives and negatives. The market is certainly hot, and the potential is huge. That being said, the market has some big players in it that will do everything they can to dominate the space. In my opinion, there are a few critical steps for Arena and its investors. The first critical step is getting good top line read-outs in the current phase 2 clinical trial. The second is shopping for the right partner.

In my opinion, assuming top line results are good, getting the right partner is critical. Even if a small to mid-sized player has what seems to be a great offer, the wise choice may be a big player that is willing to compete with the likes of Pfizer, Celgene, Takeda, and AbbVie. Even if APD334 is deemed to be superior for ulcerative colitis, marketing can be the differentiator in terms of what get scripted. The right deal is far more critical than the deal with the most up-front cash.

Some investors may think it is wise to wait until phase 3 trials before partnering. I do not think that Arena has the luxury of waiting that long. While the company does have cash, financing a phase 3 trial for ulcerative colitis is not baked into the valuation. In addition, having a partner after successful phase 2 results allows that partner to participate in financing clinical trials for other indications.

In a perfect world, Arena needs a partner with deep pockets that can not only market the drug for an approved indication, but can finance approvals outside the United States and drive clinical trials for additional indications. There are plenty of big players that might be willing to step up to the plate, but as you can see from the names already here, there are some big players that likely would have no interest.

For Arena investors, I know it is tempting to look at drug candidates in a vacuum and hear the glowing reports from the company. But you owe it to yourself to see the field as a whole, consider who is in it, and what dynamics could be at play. For the right partner, an outright sale of Arena may not be out of the question, but we should not get ahead of ourselves.

The bottom line is this. With Arena currently sitting at about $1.70, the prospects of APD334v alone represent some substantial upside, while the downside risk is about as low as it could be. I happen to believe APD334 is the crown jewel of the Arena pipeline at the moment, and feel that what we have seen thus far in early trials, in combination with the size of the potential market represents a buying opportunity over the next several months that will evaporate as 2016 comes to a close and anticipation of good results is more common. Set aside Arena's approved anti-obesity drug Belviq for a moment and consider this a pipeline play, and more specifically a play on APD334. 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.