Celgene Buys Receptos. Is Arena Pharmaceuticals Next?

Arena Pharmaceuticals (NASDAQ: ARNA) jumped more than 6% last Wednesday. But it had nothing to do with the biotech's only approved drug, obesity treatment Belviq.

It wasn't even anything Arena Pharmaceuticals did.

Instead, it appears the bump was caused by Celgene's (NASDAQ: CELG) purchase of Receptos (NASDAQ: RCPT) for $7.2 billion. Arena has a drug in its pipeline, APD334, which has the same target, the sphingosine 1-phosphate 1 receptor, as Receptos' Ozanimod.

Score one for guilt by association.

S1P1 receptor and autoimmune diseasesHere's a little biology lesson to understand why Celgene and Arena are excited about the target. I promise it won't hurt.

Sphingosine 1-phosphate 1, or S1P1, receptor is expressed on white blood cells, also called lymphocytes, and signaling of the receptor by S1P promotes the movement of lymphocytes out of the lymph nodes into the blood.

Drugs that block the S1P1 receptor can therefore decrease the number of lymphocytes in the blood. That's not something you'd normally want to do, but it can help people with autoimmune diseases where the immune system is mistakenly attacking the body instead and causing inflammation.

There's already an S1P1 drug, Novartis'Gilenya, on the market. While the drug clearly helps multiple sclerosis patients, Gilenya has warnings on its label about the potential for heart problems, infections, and liver damage. Patients taking Gilenya have to be watched for six hours after receiving their first dose and are supposed to get an electrocardiogram at the end of the observation to confirm that there aren't any heart problems.

The added requirement is clearly burdensome, but Novartis was still able to sell nearly $2.5 billion worth of Gilenya in 2014. Imagine what it would have been without the side-effect fear.

Building a better S1P1 receptor agonistIt appears the reason for the heart problems has to do with how quickly patients get to peak drug concentrations. With continuing doses of Gilenya, minor heart problems, such as decreased heart rate, appear to go away.

Receptos has presented phase 2 data showing that Ozanimod can help patients with relapsing multiple sclerosis and ulcerative colitis, an autoimmune disease that affects the bowels, without much affect on the heart or liver. Receptos has already completed enrollment in one of its phase 3 trials, testing Ozanimod against Biogen Idec'sAvonex in patients with relapsing multiple sclerosis.

Arena's ADP334 is further behind, having recently presented phase 1 data that showed the drug could reduce the number of lymphocytes in the blood without causing heart or liver issues, albeit in a small number of healthy volunteers.

Arena also trails Actelion, which has an S1P1 modulator, ponesimod, in a phase 2 development for systemic lupus erythematosus.

Takeout imminent?At this point, I doubt a biotech is going to buy Arena specifically for APD334. Investors seem to have come to their senses, as all of the pop from Wednesday has completely disappeared.

Arena is preparing for a phase 2 trial testing APD334 in ulcerative colitis, but it hasn't started enrolling patients yet. Most suitors will want to see that level of proof of concept before buying.

And despite the bump in price last week, investors really shouldn't want management selling out before proof of concept data is available. If phase 2 data shows that APD334 has better efficacy or safety than Ozanimod, Arena's value will rise substantially; Arena's market cap is around $1 billion, substantially lower than the $7.2 billion Celgene is paying for Receptos, but about the same as Receptos had a year ago.

In biotech, it's always better for a company's stock to rise because of data it produces than news of its competitor.

The article Celgene Buys Receptos. Is Arena Pharmaceuticals Next? originally appeared on Fool.com.

Brian Orelli has no position in any stocks mentioned. The Motley Fool recommends Celgene. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.