Please ensure Javascript is enabled for purposes of website accessibility

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

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

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Arena Pharmaceuticals, Inc. Stock Quote
Arena Pharmaceuticals, Inc.
ARNA

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
400%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/15/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.