Binary Event #3: Arena Pharmaceuticals

Hi everyone-

I look for HIGHLY favorable biotech situations. I look for a deck that is stacked in favor of a company. Also, I look for a company that is almost completely dependent on that event. I call this a BINARY EVENT- an event where the company and its stock price is almost totally dependent on this event. This is my third installment of the binary event. To show the benefits of this approach for a little bit of your hard-earned capital:

Installment #1: KITE Pharmaceuticals – 4 recommendations :o(
Saul’s Investment Discussion Recommendation Date: 1/13/17
Price: $49.44
Sales Price: $179.99 (Purchased by Gilead 10/3/17)…

9-Month Stock Return: 364%
1-year LEAP Return: 1,525%

KITE develops CAR-T therapy for blood cancers. It was competing head-to-head with Juno Pharmaceuticals, and Juno just failed Phase 3 testing due to safety issues. KITE’s therapy looked considerably safer, and was in Phase 3 with essentially no competition. I believed this company was RIPE for a takeover, but would do well on its own with a Phase 3 approval. During commercialization, I considered this a significantly riskier play due to manufacturing concerns.

KITE passed Phase 3 testing, was approved for marketing by the FDA, and was acquired by Gilead Pharmaceuticals. Usually, small biotechs are picked up by larger companies at about 8X peak sales. This has not been a great investment for Gilead. While it holds promise, it has been difficult to get high quality blood from the patient to process, so there are probably two paths to improve this therapy: earlier treatment and universal cells (a company is working on this).

I first heard a TED talk on this during the fall, and then heard Todd Campbell discuss KITE a few times on the Industry Focus podcast. His discussions are definitely worth a listen.

Installment #2:
Foundation Medicine FMI– 41 recommendations :o)
Saul’s Investment Discussion Recommendation Date: 11/11/17
Price: $40.63
Sales Price: $136.95 (Purchased by Roche 6/18/18)…

7-Month Stock Return: 237%
1-year LEAP Return: 640%

Thesis: Genetic testing is key to future cancer treatments, and it looked likely that FMI was about be approved by Medicare and Medicaid. The approval is important for 3 reasons. First, Medicare and Medicaid would likely pay for a bunch of testing. Second, insurance companies tend to follow Medicare and Medicaid’s direction. And third, the growth of testing would feed FMI’s massive database of genetic information. The size of genetic information is absolutely key to success in FMI’s business, and no one was close to the data FMI had. Finally, Roche owned 59% of FMI. Roche’s MO would be to purchase the remaining FMI shares after Medicare/Medicaid approval. I considered that purchase highly likely.

FMI gained Medicare/Medicaid approval and was purchased by Roche on 6/18/18.

Again, I heard a TED talk on this and then Todd Campbell called this out as his top 2017 stock pick for biotechs on industry focus, so I started digging.

-----------------------------------------------Installment #3: Arena Pharmaceuticals----------------------------

Arena introduced Belviq, a weight loss drug that it invested far more into than it could hope to recoup. It was a floundering company. It replaced its management and refocused its autoimmune diseases. It has 3 drugs under development: a best in class safety pulmonary arterial hypertension drug (OK potential, but significant competition from J&J), a cannaboid pain management drug of ulcerative colitis (potentially OK, but I don’t think this is anything to write home about), and Estrasimod (S1P Modulating Drug) for Ulcerative Colitis. This could be a BLOCKBUSTER.

Estrasimod Results:
33% of patients in a Phase 2 trial went into remission and 41.8% patients improved. This is comparable to Celgene’s competing S1P drug, Ozanimod. S1P drugs have already been validated by Novartis who has been using a drug called Gilenya since 2008, so this is a HIGH PROBABILITY BINARY EVENT for Arena. It looks like this drug could be used for MS one day, but I am not sure why it has not been tested for that disease. A Phase 3 test is currently under preparation.

Why Now:
I think investing in most companies with Phase 2 results is a fool’s errand. However, with S1P drugs already proven, this looks very likely to succeed. Additionally, and this is key, it does not contain receptors that Celgene’s Ozanimod or Novaritis’ Gilenya contain, so it is very likely that this have best in class safety, avoiding serious side effects that Gilenya and Ozanimod have and own the market.…

I learned about Arena when I owned Celgene. I decided that Arena was a signficant threat and better bet so I sold out of Celgene and switched to Arena. After that, Todd Cambpell also talked about this on Industry Focus. It’s nice to get confirmation from a good source.

If you buy in ARENA now, you will not see day-to-day pops like we do with the SaaS stocks, BUT in 3 years, I think that you will likely have as good or better return. I bought this in July, this year, and I am down about 5%. I have no idea when this is going to pop, but it is very likely it will. My allocation is 3.2%.

I love the returns from our SaaS companies, I love concentrated portfolios, and I still love a little sector diversification. It helps me sleep better at night.




PS Ulcerative Colitis Adressible Market is ~ $4.8B

Arena Market Cap = $2 B


Thanks bulwnkl, looks interesting. Interesting in the form of ‘attempting to read the first sentence after clicking on the link made me doubt I speak English’


I’m looking forward to getting a bit more experience in biotech, but was just wondering about the binary nature of Arena. Can you clarify what event will kick them into orbit? Is it the success of a phase 3 trial?

thanks for this, really interested


That’s a hilarious observation. I didn’t even think of that when I wrote it.



Referring to: “The S1PR receptor modulator FTY720 (Fingolimod), a prodrug that is phosphorylated in vivo, possesses potent immunomodulatory activities and has been approved for the treatment of multiple sclerosis”

I didn’t know there was such a word as ‘prodrug’ or ‘phosphorylated’, or even ‘immunomodulatory’.

Definitely going to try and get those into a conversation!

Lot to learn