One Biotech Turnaround to Watch

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A few years ago, Arena Pharmaceuticals' (NASDAQ: ARNA) stock got crushed after its obesity drug Belviq flopped in a major way. But today, the company gained a whopping 29% in market cap after releasing positive phase 2 results for a new drug with huge potential.

In this episode of Industry Focus: Healthcare, Motley Fool analyst Kristine Harjes takes a closer look at Arena Pharmaceuticals and what its new drug, etrasimod, could mean for the company and its patients. Tune in to find out more about why etrasimod could be a game-changing drug, the biggest risks that Arena is still facing, what other exciting drugs Arena has in its pipeline, and more.

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A full transcript follows the video.

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This video was recorded on March 21, 2018.

Kristine Harjes: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It's March 21st, 2018. I'm your Wednesday Healthcare show host, Kristine Harjes, and I'm recording this from my home in downtown Washington D.C., because Fool HQ is closed today due to a snowstorm. Regular listeners to Industry Focus know that when the market is closed for a holiday, we don't record a show. But what you might not realize is, holidays, for whatever reason, seem to fall on every day but Wednesday. So, for the several years I've been doing this show, there have been 52 Healthcare episodes every single year. So, when producer Anne Henry advised me yesterday to pre-record a little clip announcing that there would be no new show the following day due to the snow just in case the weather lived up to the forecast warnings, I said, "You know what? I'm going to take a recorder home, and if the office is closed tomorrow, I'll record something from there." So, here we are, folks. I can't break the streak.

In January, while I was at the JPMorgan Healthcare conference, I recorded a set of interviews with various biotech executives. You can find them in the January 10th edition of this show. One of the conversations that are recorded while I was there was with Amit Munshi from Arena Pharmaceuticals. Arena was, at one time, focused on obesity, and they had a drug called Belviq that wound up more or less being a failure, and the company's market cap was absolutely devastated. Many shareholders gave up on the company and it wasn't until fairly recently that the company started to really right its ship. Back in January, Amit talked to me about being part of a new management team for the company, and all of their hopes to turn Arena's fortunes around, starting with handing the rights to Belviq, that obesity drug, back over to their partner, Eisai, and committing to be a clinical development focused company.

Flash-forward to earlier this week. Arena's market cap gained 29% after announcing positive Phase II results from its ulcerative colitis drug, Etrasimod, which brought their market cap to around $1.2 billion, which is a long way from their mid-2016 lows of $400 million market cap. The drug met its primary and all of its secondary endpoints for a 2mg dosing for 12 weeks. There's also a 1mg dosing that was being tested which did not have a statistically significant response, which is fine by me. I would rather see a stronger version of the drug wind up having better efficacy, that just makes sense, especially when you see positive safety data, which is something I will get to in a little bit.

There were 156 patients in the trial, so this isn't a tiny little Phase II trial, it was fairly substantial. The drug is a once-daily oral S1P modulator. That works by sequestering lymphocytes so that they don't respond to inflammation. Arena thinks it could have potential applications in over 80 different conditions, including things like inflammatory bowel disease and Crohn's disease, but the ulcerative colitis market, which is what it was being studied in in this Phase II trial, is already worth billions of dollars.

Turning back to Arena now. Aside from Etrasimod's positive efficacy data, it's important to note that the drug's safety results were fantastic. There were actually fewer serious adverse events in the treatment group than IN the placebo group. Similar drugs in the S1P modulator class have run into safety issues. For example, multiple sclerosis drug Gilenya has had some safety concerns regarding liver function, macular edema and lowered heart rate. But not all S1P modulators are alike. The body actually has five different S1P receptors, and Etrasimod avoids the two that are thought to lead to safety risks, unlike Gilenya, which interacts with both of them. If the hypothesis that Etrasimod's selectivity makes it safer holds up in late-stage trials, then the drug could wind up being best in class.

Celgene is actually developing its own S1P modulator, and this will be important to watch. It's called Ozanimod. If you've been listening to our coverage of Celgene, you have definitely heard us talk about this drug. It has a bit of a head start on Etrasimod as it's already in Phase III. Ozanimod, though, is less selective than Etrasimod, and it hits one of those two riskier S1P receptors. So, Phase III safety data will be absolutely key to determining which drug has the upper hand.

The jump in Arena's market cap based on Etrasimod's Phase II data is indicative of the potential here. But that drug isn't even all that the company has going for it. To do a quick rundown of the highlights from the rest of its pipeline, Ralinepag is entering Phase III in pulmonary arterial hypertension, or PAH. They also have a drug called APD371, which is in Phase II for pain associated with Crohn's disease. PAH, which is what Ralinepag targets, is a rare disease of the lungs' blood vessels, and it eventually leads to patients dying of heart failure. IV is currently the therapy of choice, because oral drugs usually aren't potent enough to make them a better choice, but Arena is hoping that their drug can change that. Meanwhile, APD371 is a CB2 receptor agonist, meaning that it acts on a natural receptor in the body, which is an inflammatory pain regulator. As an interesting side note, cannabis also acts on the CB2 receptor, but Arena's drug is entirely synthetic, with just about no meaningful relationship to weed, something that Amit Munshi was stressing quite a bit in our interview. We've talked on the show before about the desperate need for new pain medications to reduce reliance on dangerous opioids, so this one will really be a must-watch drug.

All of this is to say that Arena is truly my favorite turnaround story stock, and I will be following this one very closely.

That's pretty much all I've got for you today on this shorter snow day edition of Industry Focus. If you're stuck in the snow like I am, stay warm out there and shoot me a note at industryfocus@fool.com, let me know how you're spending your snow day. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Thanks for listening, everyone, and Fool on!

Kristine Harjes has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Celgene. The Motley Fool has a disclosure policy.