Here's Why Arena Pharmaceuticals, Inc. Surged Again on Wednesday

What happened

Shares of Arena Pharmaceuticals, Inc. (NASDAQ: ARNA) are on the move again. The biotech stock rocketed higher yesterday after posting clinical trial results for a new drug candidate with blockbuster potential. The stock has risen another 10.4% as of 3:10 p.m. EDT on Wednesday.

So what

As is usually the case when a smaller biotech scores a mid-stage clinical trial victory, Arena announced a secondary offering to fund the final and most expensive stages of development for etrasimod. The company intends to offer up to 7.625 million shares, which could raise the share count about 19% higher than it was at the end of 2017.

Patients with ulcerative colitis (UC) taking 2 mg per day of the oral anti-inflammatory candidate showed significant improvements over the placebo group. While pricey, injectable biologic drugs are often used to treat ulcerative colitis, options are limited.

If etrasimod succeeds in phase 3, there's a good chance this drug will go on to achieve more than $1 billion in annual sales. It was well tolerated and none of the patients in the 2 mg group suffered a serious adverse event, versus 11% in the placebo group.

Now what

A fairly large cross section of the world's UC patients can't tolerate existing treatments, but it's going to be a while before we know if etrasimod will be another option at their disposal. A pivotal trial with ulcerative colitis patients is still in the planning stages. We don't know the size of the upcoming pivotal trial for etrasimod yet, but it will get expensive.

Arena Pharmaceuticals finished 2017 with $271.3 million in cash after burning through $91.4 million last year. While that's a respectable war chest, the company also intends to begin three phase 3 trials with its pulmonary arterial hypertension candidate, ralinepag, in the second half of the year.

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Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.