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The Surprising Catalyst That Sent Arena Pharmaceuticals, Inc. Soaring 27% in June

By Sean Williams - Jul 6, 2017 at 10:33AM

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Normally an announcement like this sends a stock's share price lower.

What happened

Shares of Arena Pharmaceuticals (ARNA), a biotech company focused on the development of small-molecule drugs for the treatment of autoimmune diseases and pain, soared 27% during June, according to data from S&P Global Market Intelligence. The reason for the move higher in Arena's stock is nothing short of shocking.

So what

In June, Arena released a number of press releases that may have resulted in some minimal upside, including its announcement on June 15 that it was to present at the JMP Securities Life Sciences Conference. Late in the month, Arena also revealed the completion of its phase 1 bioavailability study comparing a once-daily, extended-release formulation of ralinepag, with a twice-daily immediate release formulation of the drug. The end of this early-stage trial means top-line data should be right around the corner.

An accountant examining a balance sheet.

Image source: Getty Images.

However, the primary catalyst appears to be the approval of a reverse stock split by shareholders and the company's board of directors in mid-June. Normally, reverse stock splits, where more shares of stock are exchanged for fewer shares in order to increase the share price of a company (splits do not change a stock's market cap), are viewed as negative news and a sign of weakness. But Arena's 1-for-10 reverse stock split was taken somewhat positively as it lifted the company's share price well above the dangerous $1-per-share level where it could receive a delisting notice from the Nasdaq. With its share price now around $17 post-split, it also psychologically makes Arena more attractive to hedge funds and investment firms that might not otherwise invest in stocks with a low share price (say $5 and under).

In short, Arena Pharmaceuticals' shareholders no longer have fears about delisting, and their immediate cash concerns were dissipated in April when the company raised $75.5 million in net proceeds from the sale of 70 million shares (now equal to 7 million shares) of common stock. 

Now what

In many ways, Arena's shareholders have a number of things to look forward to. For instance, the upcoming data release for ralinepag is expected by Arena's chief medical officer to support a trial for a single oral dose as a treatment for pulmonary arterial hypertension. 

A biotech lab researcher conducting a study.

Image source: Getty Images.

Furthermore, Wall Street and investors should get a good look at phase 2 data for etrasimod, an oral S1P receptor modulator, by the end of the year for ulcerative colitis. Arena is also currently enrolling patients for its phase 2 study of APD371, a drug that targets the cannabinoid-2 receptor as a treatment for Crohn's disease-associated pain.

However, for every positive, Arena offers plenty of negatives. The company's only approved drug, Belviq, was jettisoned to its licensing partner Eisai earlier this year, and the company's only means of raising cash has essentially been to sell off assets and undertake secondary stock offerings, which are dilutive to investors. A number of the company's studies have also been nothing more than safety and dose-finding in nature, meaning we have very little to go on in the way of efficacy as of yet, though we should know more by year's end.

With Arena still years away from a shot at recurring revenue and reeling from its failure with Belviq, I believe the best course of action for investors would be to stick to the sidelines.

Sean Williams has no position in any stocks mentioned. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.

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