In September 2014, the Food and Drug Administration approved Orexigen Therapeutics(NASDAQ: OREX) obesity drug, Contrave, setting up a battle with Arena Pharmaceuticals' (NASDAQ:ARNA) obesity drug, Belviq.

Since then, the two companies' valuations have followed entirely different paths. Earlier this month, Orexigen declared bankruptcy. Likewise, Arena's valuation was cut in half when the obesity drug market didn't work out like investors were hoping, but Arena has regained all its market cap and then some.

ARNA Market Cap Chart

ARNA Market Cap data by YCharts.

Arena's recovery had nothing to do with obesity

The underlying difference in the trajectory of Orexigen and Arena comes from their pipelines. Arena has been focused on the interaction of drugs and receptors, so while part of the company was getting Belviq approved, Arena's drug discovery unit was busy trying to find different drugs targeting other receptors.

Last week, Arena reported positive data from the phase 2 Oasis trial testing etrasimod, a drug that modulates the S1P receptor, in patients with ulcerative colitis. The higher of the two doses tested produced a placebo-adjusted 0.99 point improvement in the three-component Mayo Clinic Score, which looks at stool frequency, rectal bleeding, and findings on endoscopy. Measuring the score in terms of clinical remission, 33% of patients taking the higher dose of etrasimod had a clinical remission, compared to just 8.1% for the placebo. And looking at just the endoscopy results, 41.8% of patients taking the higher dose of etrasimod improved, compared to 17.8% of patients who received the placebo.

The efficacy data looks comparable to Celgene's (NASDAQ:CELG) competing S1P drug, ozanimod, which is currently being tested in a phase 3 trial in patients with ulcerative colitis. There's some hope that etrasimod might have better cardiovascular safety than ozanimod, negating Celgene's lead, but that's theoretical at this point.

Person holding their stomach

Image source: Getty Images.

At what cost?

Arena's market cap is up about 85% since the approval of Contrave, but its share price hasn't done nearly as well.

ARNA Chart

ARNA data by YCharts.

While investors think Arena is substantially more valuable, its share price hasn't followed suit because Arena had to sell shares at deflated prices, resulting in each share representing a smaller piece of the larger pie.

With shares up on the phase 2 etrasimod data, Arena took the opportunity to raise more capital last week, selling 8.5 million additional shares. Investors were unfazed by the announcement, sending shares up as high as $45.85, which turned out to be a little overzealous because Arena actually ended up pricing the secondary offering at $41.50.

Nevertheless, the move to raise capital at the newly inflated price was a smart move and certainly a lot less costly than raising capital when shares were depressed. This round, Arena was able to gross more than $350 million from the secondary offering, something that would have been impossible a year ago when its market cap was under $400 million.

That cash will come in handy as Arena seeks to test etrasimod in a phase 3 trial for ulcerative colitis and probably other auto-immune diseases in a bid to try and catch up to Celgene.

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.