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Here's Why Arena Pharmaceuticals Jumped as Much as 30.6% Today

By Maxx Chatsko – Nov 15, 2018 at 11:05AM

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The company moved to immediately monetize a promising drug candidate. For a cool $800 million up-front payment, investors can't complain.

What happened

Shares of Arena Pharmaceuticals (ARNA) rose more than 30% today after the company announced a global license agreement with United Therapeutics (UTHR -0.88%) for ralinepag. The drug candidate is currently being investigated in multiple phase 3 trials as a potential treatment for pulmonary arterial hypertension (PAH).

Due to the late-stage nature of development, Arena Pharmaceuticals fetched a premium price for the global licensing agreement. United Therapeutics will hand over $800 million up front and up to $400 million in additional milestone payments and dish out low-double-digit royalties on future sales should the drug candidate earn marketing approval. Turns out, it's a great pact for both companies.

As of 10:47 a.m. EST, Arena Pharmaceuticals stock had settled to a 24.4% gain, while shares of United Therapeutics settled at a gain of 6%.

A pair of hands holding up stacks of coins and a rising green arrow.

Image source: Getty Images.

So what

The big takeaway today from the perspective of an Arena Pharmaceuticals shareholder is the massive $800 million up-front payment. After all, just yesterday, the company had a market cap of only $1.6 billion. The payment will be added to a cash pile that totaled $500 million at the end of September and will significantly derisk the development of the company's late-stage pipeline. Considering the business posted an operating loss of $97.3 million in the first nine months of 2018, the advantage of a healthy cash position cannot be understated.

But the immediate takeaway is not the only thing that matters for investors. Perhaps equally important is the fact that United Therapeutics is the global leader in treatments for PAH. Arena Pharmaceuticals couldn't have found a better commercial partner for ralinepag -- in more ways than one.

United Therapeutics has been tripped up by an almost unfair amount of generic competition that has targeted nearly every drug in its portfolio in recent years. The stock has lost 18% in the last three years and is down nearly 20% since the beginning of 2018. Therefore, it's easy to see that the company was feeling the pressure to breathe new life into its pipeline and product portfolio, which certainly helped Arena Pharmaceuticals to wrestle away an $800 million up-front payment.

Now what

Considering analysts are forecasting peak sales of $1 billion per year for ralinepag, the $800 million deal ($1.2 billion if other milestones are maxed out) would be well worth it for United Therapeutics. If the drug does gain marketing approval, no one is doubting the ability of the PAH leader to swiftly and successfully commercialize it through the company's unparalleled experience and robust network. That would be a huge win for both companies, their shareholders, and patients.

Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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