Arena Investors Need To Pay Attention To Celgene And Ozanimod

Summary

• Arena's Etrasimod is seen as a competitor to Ozanimod.
• Celgene acquired Ozanimod in a $7.2 billion deal.
• Ozanimod may have issues that will delay its development.  This could be good for Arena.

Sometimes when one creates comparisons between their product and the product of someone else, there can be unintended consequences. Arena Pharmaceuticals (ARNA) has spent the better part of the last 18 months making direct comparisons between its new drug candidate Etrasimod and a candidate of Celgene (CELG) called Ozanimod. The drugs have similar characteristics and target some of the same receptors.

One of the main reasons that Arena was drawing comparisons is that Celgene saw enough potential in Ozanimod to acquire Receptos for $7.2 billion. If Arena has a drug that can rival a drug that was just acquired for $7.2 billion, that is a good thing. As clinical data began to come in, it was apparent that Etrasimod may actually be a better candidate on three fronts. This trifecta was dosing, safety, and clinical results. When this became evident, Arena stepped up its sales pitch on Etrasimoid in a big way. After all, better dosing profiles, better safety profiles, and better clinical results are nothing to sneeze at.

Recently, Celgene had a bit of a hiccup with the FDFA on Ozanimod, and this week Morgan Stanley speculated that this hiccup could delay progress by 1-3 years. That is very substantial and the Morgan Stanley report sent Celgene stock down as much as 6%.

The concern expressed by Morgan Stanley was simple. The data on Ozanimod presented an active metabolite produced by the drug. It is speculated that the FDA could demand more trials and data to better understand the issue. Simply stated this could be a "more data needed" situation.

This brings us back to Arena Pharmaceuticals and its constant comparisons to the Celgene drug. In some ways Arena has hitched its wagon to Celgene and Ozanimod. Ozanimod has always been further along in clinical trials, so Arena had a bit of a "me too" mentality as it was seeking to bolster the value of the company and specifically this drug candidate. The danger here is that some investors less familiar with the company or science may assume that Arena's Etrasimod might have a similar problem.

Let me put your mind at ease, if only slightly. Arena has already stated in presentations that there are no uncharacterized metabolites associated with Etrasimod. In simple terms, it appears that Arena's drug does not have the same problem that Celgene's drug is seeing. What is critical now is that management get that word out there. Until management makes it crystal clear with direct statements that these same issues do not exist with Etrasimid, there will be seeds of doubt. Personally, I feel that Arena CEO Amit Munshi will not fear making such a bold statement, and the Q1 call is the time to do it.

I have been bullish on Arena, and the Celgene news makes me more bullish. If Celgene sees material delay in getting Ozanimod to the finish line, it could mean that Arena's Etrasimod will leapfrog and become the first to market. This could make potential partners more eager to step up to the plate as well. Yesterday, it appeared that Etrasimod would be a fast follower to market. Today, it is not unreasonable to imagine that Etrasimod could get to the finish line first. These dynamics make Arena stock more compelling than it was just 24 hours ago. The two critical components that can drive the stock are a clear statement by management, followed by the FDA accepting the phase 3 trial of Etrasimod in Q3. Take advantage of the fact that many in the market do not know what you have just read. Stay Tuned!

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.