Bad News For Celgene May Be Good News For Arena (NYSE:PFE)

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Summary

Celgene gets RFT Letter from FDA regarding Ozanimod.
Celgene Acquired Ozanimod by buying out Receptos for $7.2 billion.
Arena touts Etrasimod as best in class.

Arena Pharmaceuticals' (ARNA) investors have long thought that its drug Etrasimod was a potential best in class candidate despite the head start that a competing drug Ozinamod possessed. That head start led to Celgene (CELG) buying out Receptos for about $7.3 billion two years ago. Time has passed and Etrasimod is now getting close to moving into a phase 3 clinical trial for ulcerative colitis.

Last week Celgene took a hit on its stock on the news that the FDA forwarded a "Refusal To File" letter regarding an NDA for treating multiple sclerosis with Ozanimod. Essentially it was reported that the FDA took exception to a lack of information. In the letter the FDA noted, "the FDA determined that the nonclinical and clinical pharmacology sections in the NDA were insufficient to permit a complete review."

To be clear, this is not a rejection letter. Ozanimod is still progressing through the required FDA steps. That being said, the setback means that Arena has just narrowed the gap between potential launches. For its part, Arena is planning on conducting head to head comparisons to drive what it sees as key advantages for Etrasimod over the Celgene offering.

The result of this news is that Arena is now trading above $44 per share at a time when the company seems to be attracting more institutional investors and has wind in its sails from analyst price targets, some of which are more loftier than the current trading price.

What seems to be happening is that Arena is chewing up analysts' price targets earlier than analysts have projected, and that could make analysts revisit their respective models and assign new price targets.

It has been my opinion that Arena is a prime merger or buyout candidate in 2018. The company has several near term catalysts on clinical trials for various drugs that have a real potential to deliver value. Celgene made its play for Receptos a couple of years ago and will likely ride out that decision no matter what. It will likely even do well given that it is seeking treatment paths that differ slightly from what Arena is seeking. Therein lies the benefit of Ozanimod and Etrasimod. These drugs can treat more than one condition.

In my opinion there are a few different plays that an investor can make with Arena here. Investors looking for a quick score can play the possibility of analysts adjusting models upward and the binary events relating to clinical trial announcements, and possible M&A activity. Meanwhile, investors with a longer term outlook can play the M&A possibilities as well as possible future partnership deals on drugs in phase 2 and phase 3 clinical trials. Either way, it is always a good thing when both near term and longer term outlooks are in alignment.

Arena currently has a market cap of about $1.7 billion, little debt, and enough cash to push its pipeline forward aggressively. Even with the recent runup in price, there is still plenty of room for a deal that would treat investors quite well. Whether you believe a deal of $5 billion, $10 billion, or $15 billion is in the cards, all are multiples higher than current pricing. Stay Tuned!

This article was written by

Spencer Osborne

4.11K Followers

Spencer Osborne assesses equities in a data supported realistic manner that is often missing in analysis that the average retail investor receives. His analysis is what investors NEED to hear rather than what they WANT to hear. He believes that the foundation of an equity price is based on what is probable rather than what is possible, and the trade focuses on possible near term catalysts and news. Smart investing is understanding how the market works and how that market mentality impacts a given equity. Spencer believes that investors should model their expectations and maintain a critical eye on whether those expectations are being met. If an invesor finds herself making excuses for missing the mark, then they are losing objectivity.

Analyst’s 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.

I have no position in Celgene

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