What do drugs for weight loss, pulmonary hypertension, and irritable bowel syndrome all have in common? Not much -- except they are all offerings in which Arena Pharmaceuticals (ARNA +0.00%) has come close to the finish line over the past two decades, only to come up short.
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Reason No. 1 not to buy: Approval does not guarantee sales
Ten-plus years ago, Arena was touting its appetite-reduction drug, Belviq, for weight loss. After Belviq was approved by the FDA in mid-2012, the stock price went up five times in value within four months, from $18 in March 2012 to $118 in July 2012, which also marked the last time it saw triple digits. Much like other weight loss drugs, including now-bankrupt Orexigen's Contrave, Belviq subsequently underperformed. It was sold to Eisai (ESALY +0.00%) for a mere $23 million in January 2017 and was removed from the market in 2020 due to safety concerns. Yikes.
As the Belviq saga indicates, Arena has a failed track record of being able to capitalize on approvals.
Reason No. 2 not to buy: Be wary of companies that jump on a keyword bandwagon
But that's not the only thing about Arena that makes me wary. Another drug, olorinab, was first described by Arena in March 2017 as having "selectivity for (the cannabinoid receptor 2)" and as being "designed to provide pain relief while minimizing the risk of psychoactive adverse effects." At that point, cannabis was a hot topic -- shares of cannabis producer Canopy Growth (CGC 0.87%), for instance, had grown from 2.50 Canadian dollars in March 2016 to CA$11 in March 2017 and would go on to peak at CA$67 in September 2018. Unsurprisingly, this flame was extinguished when olorinab recently flopped in top-line results, losing 12% of its market share in two days earlier this month in a slide from $80 per share down to $71.50.
The takeaway: Investors should be especially cautious with pharmas that switch their pipelines on a dime to headline-grabbing areas of medicine (or public perception) -- especially those that already seem to lack focus. Which brings me to ...
Reason No. 3 not to buy: A small, cash-strapped biotech should have a focused pipeline
Five years ago, Arena was working on a drug called ralinepag for pulmonary hypertension. In November 2018, management agreed to a licensing deal with pulmonary hypertension leader United Therapeutics (UTHR +1.49%). This deal gave United Therapeutics worldwide licensing rights to ralinepag in exchange for $800 million up front and up to $400 million in milestone payments, as well as royalties in the low double digits. This provided Arena with a much-needed cash infusion to better focus on the development of what management believed were better opportunities within their pipeline.
This would have been the perfect time to refocus its efforts. For a company like Arena, having multiple shots on goal is OK if they are within a certain specialty or drug class, but to be working simultaneously on a pulmonary hypertension drug, an appetite suppressant, and a cannabinoid receptor agonist for gastrointestinal disease demonstrates a lack of focus -- and spreads precious resources thin. Even if a company in this position does hit the jackpot, it's not often in a position to capitalize and is sometimes trapped in agreements that limit upside. So what did Arena do with its cash infusion? In August 2019, it started investigating a congestive heart failure drug.
The 1 reason you might buy it anyway
Currently, Arena is taking aim at another condition, albeit one that's somewhat in its existing wheelhouse: ulcerative colitis (UC). The moderate to severe UC market is currently dominated by several blockbuster injectable drugs, including AbbVie's (ABBV 0.29%) Humira, Johnson & Johnson's (JNJ 0.15%) Stelara, and Takeda's (TAK +0.23%) Entyvio. Clearly this is a lucrative market with room for multiple drugs to be highly successful; the difference is that Arena's lead investigational drug, etrasimod, is one of the few oral medications looking to tackle moderate to severe UC. If etrasimod, which just completed enrollment for phase 3 trials in UC, is a success, this could be a multibillion-dollar opportunity within a few years in the UC market alone.
And with such a large potential addressable market for an oral alternative, there is likely room for multiple players. That's a good thing, given that Arena's anticipated top-line data in the first quarter of 2022 should be coming about a year after Bristol Myers Squibb's (BMY +2.05%) May 2021 FDA meeting for ozanimod, a drug with a similar mechanism of action that's already in the running for FDA approval for UC. Even if Arena does make it to approval on its own this time, it won't be without staunch competition, and it will already be playing from behind against a behemoth.
For context, ozanimod was originally brought through clinical trials by Receptos, which was later bought out by Celgene in July 2015. Celgene, now a part of Bristol Myers Squibb, paid $7.2 billion for Receptos when ozanimod was in phase 3 trials for UC. Arena currently has a $4.7 billion market cap. All this is to say, there is significant upside here if etrasimod offers positive results for UC in early 2022.
Sky-high, or up in smoke?
If Arena can demonstrate positive results for etrasimod in UC, it is easy to see how this company could rapidly rise again. But given its track record, healthcare investors may want to sit on the sidelines to see how this game plays out.
