Why Arena Pharmaceuticals, Inc. Shares Jumped 24% in January

Arena Pharmaceuticals shares shoot to the moon after the company releases positive clinical data for its autoimmune drug hopeful. Find out whether this move was warranted or if it's a reason to ring the register.

Sean Williams
Sean Williams
Feb 6, 2015 at 10:17AM
Health Care

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What: Shares of Arena Pharmaceuticals (NASDAQ:ARNA), a biopharmaceutical company primarily focused on developing therapies for weight management and to treat autoimmune diseases, jumped 24% in January per S&P Capital IQ after reporting positive data for APD334 early in the month.

So what: APD334 is an oral drug hopeful that targets the sphingosine-1 phosphate subtype receptor, or S1P1, which Arena believes is critical to treating certain autoimmune diseases. In the company's phase 1b study, which examined 50 healthy volunteers and 10 placebo patients who received meds for a period of 21 days, APD334 delivered a dose-dependent reduction in lymphocyte count in patients' blood, resulting in a mean drop of 69% from baseline. Best of all, there were no serious adverse events reported, with contact dermatitis being the most common adverse reaction.

As Arena's vice president and chief medical officer William Shanahan pointed out in the press release, "Lymphocyte lowering at the level demonstrated in this trial has been shown to correlate with clinical efficacy in phase 2 and phase 3 trials of other S1P modulators in multiple sclerosis, psoriasis, and ulcerative colitis."

Following APD334's strong results the company announced plans to move its autoimmune drug hopeful into phase 2 studies for Crohn's disease and ulcerative colitis.

Now what: While the results from this early stage study are impressive, investors nonetheless need to keep in mind that it was comprised of a mere 60 people (50 receiving APD334) and they were healthy volunteers. A lot could happen when APD334 is introduced to people that actually are afflicted with an autoimmune disease. Following the release of this news Arena's market value shot higher by roughly $500 million, which is a complete head-scratcher for a company burning through between $50 million and $75 million of cash annually.

Source: Arena Pharmaceuticals.

Rubbing salt in the wounds of investors who purchased Arena at a considerably higher price point over the last few years, Arena also announced just two weeks after its positive APD334 results that it sold 21 million shares of common stock to Jefferies and Piper Jaffray. In other words, shareholders saw their investment diluted by a cash raise.

However, the real disappointment here is the sluggish launch for weight control management drug Belviq. With an annual sales run rate of just $67.2 million after a full year and change on pharmacy shelves Belviq is a far cry from the blockbuster drug it was once touted as by Wall Street analysts. The emergence of Orexigen Therapeutics' Contrave and a new medical device could wind up putting Belviq on the backburner for good.

With this in mind I'd suggest keeping a safe distance from this stock.