Arena Pharmaceuticals (NASDAQ:ARNA) plans to roll out phase 2 results for etrasimod this quarter, and Celgene (NASDAQ:CELG) investors ought to be paying attention. That's because etrasimod works similarly to ozanimod, a multiple sclerosis drug that's one of the most anticipated drugs in Celgene's pipeline. Will Arena Pharmaceuticals outmaneuver Celgene's efforts to expand ozanimod's market opportunity?

What's the story?

After it delivered arguably best-in-class mid-stage trial results in multiple sclerosis, Celgene paid $7.2 billion in 2015 to get its hands on the selective S1P receptor modulating drug, ozanimod. 

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In its phase 2 trials, ozanimod not only helped reduce MS relapses, but it also did so without the safety worries commonly associated with Gilenya, the first and only S1P modulator to win FDA approval.

Because Gilenya generates over $3.2 billion in annualized revenue and ozanimod is arguably better, industry watchers have attached multibillion-dollar peak sales estimates to ozanimod.

Last year, those blockbuster predictions were reinforced when ozanimod's phase 3 trial results backed up its mid-stage findings. Celgene has since filed for FDA approval of ozanimod in MS, and a decision from regulators is on tap for later this year.

Ozanimod's commercial success, however, depends somewhat on its status as the best-in-class treatment option and according to Arena Pharmaceuticals, that may not be the case. When it comes to targeting S1P, Arena Pharmaceuticals' etrasimod may be even more selective than ozanimod, and that could mean it causes fewer unwanted safety risks because of off-target interactions. 

The body has five S1P receptors, and in January, Arena Pharmaceuticals presented data to investors showing that unwanted cardiac and pulmonary safety events for this class of drugs could be the result of their interacting with S1PR2 and S1PR3. Gilenya, the first S1P modulator, is non-selective and thus interacts across both S1PR2 and S1PR3. Ozanimod is more selective than Gilenya, but it still interacts with S1PR2.

Ozanimod's interaction with S1PR2 could be why there was a drop in patient heart drop following patients' receiving their first dose in phase 1 studies. As a refresher, Gilenya's label calls for monitoring patients following their first dose because of the risk of a drop in heart rate. Ozanimod's phase 2 and phase 3 trials didn't produce a similar safety concern, but that's probably because the phase 1 data led to ozanimod's being titrated in those trials.

Unlike Gilenya and ozanimod, etrasimod doesn't interact with S1PR2 or S1PR3, and dosing didn't have to be titrated in its phase 2 study based on phase 1 results.

What's next

Etrasimod's phase 2 trial data this quarter is in ulcerative colitis patients, so the threat is to ozanimod's label expansion opportunities, not to its use in MS.

If Ozanimod wins FDA approval, its safety advantage should allow it to win away much of Gilenya's market share. It could also chip away at the market share held by other oral MS drugs, including the $4 billion-per-year Tecfidera. If so, then ozanimod has blockbuster potential regardless of etrasimod's phase 2 results.

That being said, an ozanimod phase 3 ulcerative colitis study is already ongoing, and it should be fully enrolled later this year. If etrasimod ulcerative colitis study is a success, then it could cast doubt on ozanimod's potential to generate long-lasting sales in this and other billion-dollar indications. If that doubt causes investors to rethink their ozanimod peak sales projections, it could take a toll on Celgene's shares.

Given the uncertainty, investors who are considering buying Celgene because of ozanimod might want to hold off until etrasimod's data is out. At that point, they should be able to get a better feel of how stiff of a competitor Arena Pharmaceuticals could be.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.