Arca Biopharma Rallies On New Plans For A Phase III Trial

was a very boring ticker in 2013 until the company provided an update on a proposed clinical trial for a trial fibrillation for the company’s flagship drug Gencaro (bucindolol hydrochloride) after the closing bell on January 29th.

The market’s response was overwhelmingly positive, which was shown as ABIO closed over 73% higher the next day. Yet another day later, the stock almost broke $1/share, although it seems that a good number of investors brought the price of ABIO back down to earn with profit-taking pressures. Why is this phase III trial so exciting?

Well, for one thing, Gencaro is just about the only thing that ABIO shareholders could get excited about since it’s the only compound in the company’s pipeline. Secondly, it targets a large number of patients with its intended indication (atrial fibrillation) which makes its market capitalization of ~$10 million quite cheap at first glance.

The proposed phase III adaptive design trial, which is now called the GENETIC-AF trial, will have 620 patients. The intention is to compare Gencaro to metoprolol CR/XL for the prevention of atrial fibrillation for patients that already have cardiovascular conditions (in this case, heart failure and left ventricular dysfunction (HFRF).

What I think is particular interesting is the genetic component of the trial. Patients that are tested to be homozygous (having 2 copies of 1 gene) for the beta-1 adrenergic receptor gene make up the entirety of the trial’s population. They did this because it was shown in another clinical trial (the “BEST” trial) that these patients in particular had the best responses to Gencaro in the prevention of atrial fibrillation. Luckily for Arca, about 50% of the US population has this genotype, which means that Gencaro could target a truly enormous patient population if it managed to reach the drug market.

There are about 2.3 million adults in the United States with atrial fibrillation (with a heavy skew towards the elderly population). Arca Biopharma estimates 2.7 million. This means that Gencaro, at its very best, could target about 1.4 million adults if its indication were restricted for use in patients that are homozygous for the beta-1 adrenergic receptor. On top of this, the prevalence of atrial fibrillation as a whole is expected to increase dramatically throughout the next few years due to an aging population. This is an enormous patient population for a company worth $10 million.

If you look at the volume and price action in ABIO throughout the last few sessions, one can infer that there is major interest in the stock from a large number of buyers who seem to be chasing the “catalyst potential” of Gencaro’s new phase III trial. You can also see that this rally was marred by substantial profit taking on Friday (February 1st), although this seems to be a temporary stall in a larger trend. ABIO looks like it wants to break $1/share, although there are also quite a few things to worry about going forward.

For one, investors should take into consideration Arca’s intention to secure financing for this phase III, which means that they will have to either form a partnership with another pharmaceutical company or perform an equity financing. This means that shareholders might see their ABIO get diluted in the near future – never a pleasant process for those who are involved. Also, while the formation of a partnership between Arca and another company may be good for the short run, t could cut into the market potential for the drug drastically depending on the terms dictated in any contracts that are signed.

Overall, I think ABIO is your typical run-up play. The company’s valuation is extremely low right now, which reduces the downside risk dramatically in the long run. The catch is that the company may be quite cash-strapped as it attempts to finance a 620 patient phase III trial, so financing in the near future is something that must be done. I think there is a high chance that ABIO will do an equity financing, which means that the stock is almost guaranteed to drop after the announcement. Investors may want to wait for this event prior to buying into ABIO.