Arena Pharmaceuticals (ARNA) Snaps Back on Etrasimod Phase 2 Trial Success
If you own shares of Arena you were very pleased when shares rallied 28% yesterday. Especially since the stock had cratered following the Q4 2017 earnings report, which did more to raise questions about pipeline development than answer them given management didn’t reveal anything materially new (other than some details about ralinepag Phase 3 trial design).
We have a lot to cover today, so let’s get to it.
Bottom line: Arena’s Phase 2 top-line data for etrasimod for ulcerative colitis (UC) was very good. It wasn’t best-case scenario, but it was pretty darn close. On balance, I think it was better than expected, good enough to move on to a Phase 3, and increases the percentage of success (POS) for etrasimod up to 65% to 75% (from roughly 25% to 30%), which is on par with the company’s more advanced asset ralinepag (targeting PAH). Importantly, the Phase 2 results increase the probability that etrasimod can work for other indications, meaning Arena is one step closer to having two best-in-class treatments targeting multiple indications.
How much value do these trial results add to the value of the shares? Probably around $20, give or take. That’s a very rough estimate. Prior to the setback for Celgene’s ozanimod, the market appeared to be thinking the annual UC sales opportunity for Celgene was roughly $3 billion by 2029, and that etrasimod would be second to market and thus, command about 1/3 of ozanimod’s market share, meaning peak sales of roughly $1 billion. However, etrasimod might be moving up its launch date relative to ozanimod (assuming both get approved, eventually) and it looks to have a better safety profile. So that $1 billion peak sales potential could be conservative. Then there are other indications etrasimod could work for too.
Do analysts like these trial results? Broadly speaking, yes. Price target increases are pouring in, with many analysts with buy ratings on the stock going from the $45 to $60 range up to the $60 to $80 range (the stock closed at $39.75 yesterday). Those with hold/underperform ratings are still closer to the $50 mark.
The not-so-great news is a Phase 3 trial for UC is likely to require around 800 patients since the potential patient population is likely to have been heavily pre-treated with other agents (a bigger trial helps guarantee statistically significant results). With Arena saying it plans to go it alone at this point (stated on the Q4 conference call, reiterated on the etrasimod read-out conference call), it will need mucho dinero. Hence, the company’s secondary offering yesterday (7.5 million shares with an option to increase by another 1.25 million) after the closing bell, which results in 16% to 19% dilution. The upside is this offering should more than double its cash position from around $240 million to about $545 million (assuming a fully subscribed offering priced around $35 per share). This cash should be enough to get ralinepag and etrasimod through Phase 3 trials without a partner coming on board, though obviously a sale could come at any time (the cash gives Arena more flexibility, which is good).
On to the trial results:
The orally administered, selective sphingosine 1-phosphate (S1P) receptor modulator etrasimod was shown to have statistically significant efficacy versus placebo in the primary, secondary and clinical remission endpoints at the 2mg dose over a 12-week period. The 1mg dose showed improvement on some measures, but not as much as the 2mg dose.
From the press release:
- Relative to placebo, there was a statistically significant (p = 0.009) 0.99 point improvement in a 3-component (stool frequency, rectal bleeding and findings on endoscopy) Mayo Clinic Score (ranging from 0 to 9) with etrasimod 2 mg at week 12.
- Significantly more patients in the etrasimod 2 mg group achieved endoscopic improvement compared with placebo (41.8% vs. 17.8%, p = 0.003).
- The proportion of patients achieving clinical remission, defined by the 3-component Mayo Clinic Score, was 33.0% in the etrasimod 2 mg group compared to 8.1% for the placebo group (p < 0.001).
- Remission as defined by the 4-component Total Mayo Clinic Score was 24.5% and 6.0% for etrasimod 2 mg and placebo, respectively (p = 0.004).
- Etrasimod was well tolerated and there were fewer patients with serious adverse events (SAEs) compared to placebo (0% in 2 mg, 5.8% in 1 mg and 11.1% in placebo).
- Impact on heart rate and atrioventricular (AV) conduction was low throughout the study with no discontinuations from study related to bradycardia or AV block.
My take on the results: I’m not a doctor, but dissecting questions, tone, and independent commentary I’ve reviewed from the results, I think they were better than expected and show etrasimod as a legit challenger to ozanimod, and other treatments for UC. One differentiator is that management doesn’t think etrasimod needs to be titrated. Given there were only two cases of AV block, that both were on day one and resolved on their own, and weren’t SAEs, it seems likely the FDA would agree (speaking as a non-doctor!). The trial results also suggest etrasimod could be effective in patients with Crohn’s Disease. I think we should add that to the list of likely target indications, in addition to ongoing Phase 2 trials for pyoderma gangrenosum (PG) and primary biliary cholangitis (PBC).
Where do we go from here?
We want to see where the pricing for this secondary offering comes in. Given that many of the investment banks that have just upped their price targets for Arena will also help move the new shares, I think the dilution is priced in. Also, the risk of another offering in the near-term (six months) is basically off the table, which should get us through the Phase 2 readout for APD371 for pain associated with Crohn’s disease (expected in April – June), the beginning of the Phase 3 trial (and important updates on trial design) for ralinepag for PAH (should be enrolling in the second half of 2018), the release of full results from the Phase 2 etrasimod in UC data (to be released in a medical venue), and, potentially (though no date has been set) some more info on the PG and PBC trials (which are currently enrolling).
In other words, there’s a lot of incremental data that can add value to the company if/as confidence in the POS for both ralinepag and etrasimod goes up. The biggest catalyst will likely be the data from the APD371 trial, which thus far has been assigned very limited value.
Do we buy, hold or sell?
I’m keeping Arena at buy, as I have since I first recommended it near $39 in early-February. That’s only 4% below where the stock is today due to the post-earnings report selloff! The story has only gotten better, and the chances of pipeline success has only gone up since I picked up coverage of the stock. Why change now?
That said, as is always the case with biotech, take things one step at a time and average in. This isn’t like our software stocks, which grow in value gradually as revenue, EPS, customer count and product offerings expand month by month. Development stage biotech stocks like Arena have more of a stair-stepping value-adding (or destroying) profile.
Since there are so many unknowns and we don’t have a crystal ball, the best way to avoid buying before a step down – and increase your chances of owning before a step up – is to simply spread out your purchases.
Arena Pharmaceuticals (ARNA) remains a buy. BUY.