Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) shares fell after the company announced the June 11 U.S. release of its obesity drug BELVIQ — but that’s not necessarily a bad thing. Over the previous week, investors had bid the drugmaker’s shares above $9 in anticipation of the news; when it came, they sold. But with BELVIQ headed to shelves soon, there are a number of reasons why investors still expect good things for the drug company.
Milestone reached
The U.S. launch of BELVIQ triggered a $65 million payment to Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) from its partner, Eisai. Arena may also earn $1.19 billion in purchase price adjustments, depending on yearly sales levels for BELVIQ. Comparing Arena Pharmaceuticals, Inc. (NASDAQ:ARNA)’s $1.89 billion market capitalization to that payment illustrates how inexpensive Arena’s shares are relative to future sales. If the billion dollar sales level is reached, Arena would be worth just 1.5 times sales. Established pharmaceutical companies like Merk and Pfizer have a price-to-sales ratio of 3.
Initially, Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) will earn 31.5% of Eisai’s net product sales for BELVIQ. After those net sales top $750 million, Arena’s cut of subsequent proceeds rises to 36.5%.
Competition
VIVUS, Inc. (NASDAQ:VVUS) beat Arena to market with its own obesity drug, Qsymia. But shares bottomed at around $10 in March as disappointment in weak sales, high promotional costs and operational inefficiencies were revealed.
Investors incorrectly related the troubled launch of Qsymia to Arena’s upcoming launch. If anything, Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) has an edge over VIVUS, Inc. (NASDAQ:VVUS), because Arena will have the support of physicians and pharmacists during the initial launch. Conversely, VIVUS, Inc. (NASDAQ:VVUS) is exploring partnerships with pharmaceutical companies to gain greater support from primary care physicians.
After recovering steadily, management issued $200 million in convertible senior unsecured 7-year notes. Purchasers may also buy $30 million more. The funds will be used for a capped call transaction, which reduces shareholder dilution, and the rest used for drug development and commercialization.
Risks
Arena does not want patients who lose less than 5% in weight within 12 weeks to continue treatment with BELVIQ. This may be viewed as a negative for sales, but the company wants reimbursement to be given only to those who receive a benefit. Initial sales may slow after 12 weeks, but in the long run, motivated patients will remain in treatment.
More drugs in pipeline
If BELVIQ were its only drug, then Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) would not be a good investment. But the company’s also developing several other promising compounds.
Current treatments for PH, or pulmonary arterial hypertension, must be frequently injected or inhaled, but Arena’s working on a once-a-day pill to do the same job. More clinical trial results from the drug are expected later this year. According to GlobalData, thepulmonary arterial hypertensionmarket is forecast to grow at 5% compounded annually over the next six years. It will be a $3.6 billion market by 2015.
Temanogrel, another Arena drug under development, helps to treat and prevent blood clots by blocking one of the ways they form in the body. is a drug is used to treat thrombotic diseases, which includes myocardial infarction or stroke. 1.5 million Americans suffered from myocardial infarction, and the millions that survive it could use this drug.
The company’s also working on a treatment for autoimmune diseases, which is now in a Phase 1 trial. Nearly 50 million Americans suffer from autoimmune diseases.
Financial analysis
A strong cash balance is a plus for drug developers, and Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) is no exception. The company had $136 million in cash, as at March 31, 2013. The balance is $201 million when the Eisai milestone payment is included.
Foolish Bottom Line
Eisai will have BELVIQ at 20,000 pharmacies. 30 days after the launch, Eisai also plans on having 20,000 physicians stocked with the drug. The doctors include endocrinologists and cardiologists. The highly specialized channels will help the drug reach the right patient targets.
The initial launch is not expected by markets to be a success, but the markets are wrong. Eisai is a highly competent partner for Arena, and as markets recognize this, the share price will appreciate considerably.
The article An Obesity Drug Stock to Fatten your Portfolio? originally appeared on Fool.com and is written by Chris Lau.
Chris Lau has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Chris is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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