What happened

Arena Pharmaceuticals (NASDAQ:ARNA) reported that its experimental pulmonary arterial hypertension (PAH) drug, ralinepag, hit the mark in a mid-stage trial yesterday, causing its shares to gain a whopping 45% in pre-market trading this morning. Turning to the details, the company said that ralinepag significantly improved pulmonary vascular resistance compared to patients receiving placebo, and demonstrated a numerical improvement in six-minute walk distance as well.

Rocket flying from someone's hand

Image source: Getty Images.

So what

Arena is developing ralinepag with the hopes of grabbing a best-in-class designation, which would go a long way toward helping it compete against rival therapies from the likes of United Therapeutics and Johnson & Johnson that presently dominate the PAH market. While a pivotal trial is still required to achieve this lofty goal, this positive mid-stage readout is at least a step in the right direction.  

Now what

Arena plans on advancing ralinepag into a pivotal-stage trial soon, according to the press release. To do so, however, the biotech is probably going to need to take advantage of this surge in its share price to raise a significant amount of capital via a secondary offering. Late-stage trials, after all, can cost hundreds of millions of dollars to complete.

Alternatively, Arena may decide to seek out a partner to help fund ralinepag's late-stage development. The good news is that a licensing deal would probably mitigate the need for heavy rounds of dilutive funding. At the same time, the company would also likely have to give up a fair chunk of ralinepag's sizable commercial opportunity in PAH to go this route.

Either way, investors who haven't bought shares yet may want to wait until Arena's financial house is in order before doing so. Secondary offerings, after all, are essentially standard practice when a small-cap biotech reports positive top-line results, especially one that produces a noteworthy spike in share price like this one.

George Budwell has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Johnson & Johnson. The Motley Fool has a disclosure policy.