Arena Pharmaceuticals Inc (NASDAQ:ARNA) has been a pretty tough stock to hold over the last five years. The company traded for more than $90 a share back in August 2012. By May 1 this year, it went for just $13 a piece – a total decline across the period of more than 85%. This month, however, shareholders are getting something of a long-awaited reprieve. On Monday, Arena gained more than 40% in after-hours trading and, as the session opened on Tuesday, continued to gain strength. At time of writing, Arena trades for $27.55 – a 50% premium on its weekly open and a more than 111% premium on the just mentioned May lows.
Here is a look at what is behind this dramatic move and a critical look at what is likely to happen next from a market capitalization perspective.
Many reading might already be familiar with this company, with said familiarity rooted in a weight loss product called Belviq. For those that aren’t, and for those whose familiarity with Arena is rooted solely in the just mentioned product, chances are impressions of the company aren’t particularly positive. The company basically limped along the development pathway with Belviq towards a questionable regulatory approval and, as the drug matured into commercialization phase, it never really managed to gain any traction. It missed sales targets pretty much across the board and this led Arena to renegotiate an agreement with partner Eisai Co Ltd, which acquired the rights to Belviq earlier this year.
In the wake of this failure, Arena shifted its attention to a drug called ralinepag.
The drug is a pulmonary arterial hypertension (PAH) candidate, which is a market currently dominated by big Pharma incumbent Johnson & Johnson (NYSE:JNJ). Specifically, Johnson & Johnson currently sells a drug called Selexipag, which is marketed under the brand name Uptravi, to this patient population, having picked the asset as part of its acquisition of Actelion last month.
During 2016, and subsequent to its approval, Selexipag generated more than $250 million in sales and analysts estimate that this could increase to more than $800 million at peak.
Needless to say, it's a big market, and this size is partly responsible for the action we are seeing in Arena right now.
So, what just happened?
The driver behind the company's recent appreciation is the release of data from a phase II investigation of ralinepag in the PAH population. The numbers were somewhat positive and the response we are seeing is an interpretation of these numbers being sufficient to advance the drug in question through a successful pivotal trial.
Specifically, the trial hit against its primary endpoint of an improvement in what is called pulmonary vascular resistance (PVR), logging a close to 30% improvement in PVR between the active arm of the study and a comparator, placebo arm. For those familiar with this indication and its industry standard measurement scale, median PVR in the ralinepag arm fell by 163.9 dyn.s.cm-5 from its starting point of 705 dyn.s.cm-5. The comparable figure for the placebo arm increased slightly, but the company noted that the placebo patients had a lower median heading into the trial, coming in at PVR of 480 dyn.s.cm-5. This latter fact isn’t overly important, however.
The outcome is statistically significant and – when measured against this endpoint – it looks as though the drug worked well. These numbers also imply comparability to the above-mentioned Selexipag as far as PVR improvement is concerned.
In addition to comparability, the drug has demonstrated a number of improvements over the current standard of care that could serve to set it apart from Selexipag (and in turn, help it attract market share from the latter) if it is able to replicate these results in a pivotal trial. Specifically, Selexipag has been shown to have a shorter half-life and larger peak to trough fluctuations than ralinepag. Both of these factors could justify a preference from a physician's perspective when choosing between the two drugs at the point of administration.
That's the good news.
The bad news is that, as per a secondary endpoint of six-minute walk test (a standard industry severity measurement in these sorts of cardio-associated conditions), the trial didn’t register a stat sig improvement as compared to placebo. In the active arm, patients added 36 meters to their six-minute walk distance. In the control arm, this number was 29.4 meters.
So, while the active arm walked farther, so did the control arm, meaning the data can't be logged as stat sig.
While that's not ideal, it's not a big set back. In the trial that underpinned its approval, Selexipag only registered an improvement of 12 meters. Further, the Arena study was only small and – as a result – wasn’t powered to achieve statistical significance against this endpoint.
So what's next?
Well, it's important to remember that this is a phase II trial and that the company is going to have to carry out a much larger phase III study if it's going to get this drug approved in the PAH indication. The study will have to replicate or beat these results to give ralinepag a great chance of a regulatory green light come PDUFA and – if it doesn’t – we'll probably see Arena take a hit as markets realign to reflect their disappointment.
That said, however, things look about as good as they could at this stage of the development program and that's why this one is running as it is. Chances are we'll see the company continue to appreciate (leaving aside the potential for a near term correction on the latest run as shorter term operators pull profits off the table) ahead of phase III initiation.
Cash on hand at last count was $6.6 million, which won't be enough to fund through to NDA submission. As such, anyone thinking about picking up an early exposure to this one (ahead of phase IIII results) is likely going to have to shoulder a degree of dilution (on the back of an equity raise) between now and the drug hitting shelves.