3 Reasons Why Eisai Should Purchase Arena Pharmaceuticals

I can't remember the last time we witnessed two competing potential blockbusters gain approval in the biotech sector within weeks of one another, but the brewing anti-obesity battle between Arena Pharmaceutical's (Nasdaq: ARNA  ) Belviq and VIVUS' (Nasdaq: VVUS  ) Qsymia should be nothing short of epic.

Over the past couple of months, I've gone back and forth between which drug I felt would be the more successful of the two, only recently deciding that I preferred Belviq's prospects to that of Qsymia. One of the primary factors that made me choose Arena over VIVUS has to do with its marketing and licensing partnership with Eisai (NASDAQOTH: ESALY  ) in Japan. While no buyout chatter of Arena by Eisai has been stirred up recently, I still feel an eventual purchase of Arena by Eisai makes sense from all angles.

Here are three reasons why a buyout simply makes sense.

1. Qsymia's European failure
One of the biggest knocks I had against Belviq shortly after its approval was its labeling by the Food and Drug Administration as a schedule 4 drug. That recommendation, I figured, which allows the Drug Enforcement Agency to review Belviq for up to six months, was more than ample time for Qsymia to get its product on pharmacy shelves and take first-in-class anti-obesity status. In fact, VIVUS announced a distribution deal with Express Scripts (Nasdaq: ESRX  ) just last week.

However, my scenario also factored in that Qsymia would be a cakewalk for approval in Europe since the European Medicines Agency is often far less strict than the FDA with its approvals. Well, cue the buzzer, because that was a losing bet. According to VIVUS, approval for Qsymia in Europe now seems unlikely. Although Europe represents only a small portion of the target audience of the drug, it nonetheless opens the door for Belviq to swoop in as the first international anti-obesity blockbuster. With Orexigen Therapeutics' (Nasdaq: OREX  ) Contrave realistically more than two years from market, Belviq has the best long-term potential of the group.

2. Eisai is already financially tied to Belviq
As Foolish health-care guru Brian Orelli has already pointed out, Eisai's investments in Arena have actually been relatively small up to this point in time -- it purchased the U.S. right for just $50 million in 2010 and owed only $90 million upon approval -- but it does have a vested interest in the overall success of Belviq. Specifically, Eisai is fronting the bill for the remaining six safety profiles that the FDA has requested be run post-approval. With few costs left on Arena's end, this is now Eisai's show to run and, to me, it would make sense to internalize those costs under one company.

3. Eisai has the cash and could use the catalyst
The final point why I believe Eisai should purchase Arena has to do with a lack of genuine catalysts for Eisai. Sales for the Japanese pharmaceutical company peaked in 2010 and have since fallen close to 20%. Purchasing Arena outright to grab ahold of Belviq's entire sales potential is just what Eisai needs to reinvigorate its pipeline and get its share price moving higher again.

More importantly, Eisai has the cash on hand and financing capability to make a deal happen. Eisai has $2.4 billion in cash and short-term investments, a clean $400 million higher than Arena is currently worth, and it shouldn't have any trouble wrangling extra financing or using a cash plus share deal to woo Arena shareholders. Pretty much no other pharmaceutical companies outside of Eisai would be interested in Arena because of the messiness that would be involved given Eisai's preexisting licensing deal with Arena.

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Like I said, this is Eisai's show now, and to me, it only seems like a matter of time before they take Belviq into their own hands and make an offer for Arena. Eisai would probably be wise to ensure that Belviq gets approved in Europe and that it safely makes it to market in the U.S., but these seem like mere formalities to what could be an inevitable buyout.

Agree? Disagree? Sound off in the comments section below.

Just because I've chosen Arena to succeed doesn't mean there aren't two sides to every coin. In our latest premium research report on Arena Pharmaceuticals our top health-care analyst's offers up what opportunities and threats are facing the company in the hope of giving you the tools and analysis necessary to make smart long-term investing decisions. Click here to get your copy.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Express Scripts. Motley Fool newsletter services have recommended buying shares of Express Scripts. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (7) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 15, 2012, at 6:24 PM, letalane wrote:

    if arna is shaping up to be a big blockbuster, why wouldn't big pharma buy eisai in order to get arna???????

  • Report this Comment On October 15, 2012, at 11:22 PM, TMFUltraLong wrote:

    Letalane,

    I'd think Eisai wants to make sure Belviq gets approved by the EMA first before it does anything.

    TMFUltraLong

  • Report this Comment On October 16, 2012, at 1:16 AM, kthor wrote:

    what is Belviq sales potential like?

  • Report this Comment On October 16, 2012, at 1:51 AM, TMFUltraLong wrote:

    Peak sales potential is likely in the $1 billion - $2 billion range according to most Wall Street estimates.

    TMFUltraLong

  • Report this Comment On October 17, 2012, at 5:24 PM, clawmann wrote:

    You wrote:

    "Pretty much no other pharmaceutical companies outside of Eisai would be interested in Arena because of the messiness that would be involved given Eisai's preexisting licensing deal with Arena."

    I strongly disagree with that assertion. There would be no “messiness”. The acquirer would acquire ARNA and its assets, including its royalty stream on Eisai’s sales in the Americas. Why do so many think this would be messy? OK, so an acquirer would not get to market Belviq in the US and a couple of other countries; but they would – with the acquisition – acquire Arena’s right to royalties from Eisai, which promise to be quite healthy. Nothing messy about it.

  • Report this Comment On October 17, 2012, at 5:27 PM, clawmann wrote:

    TMFUltralong:

    Wall Street has routinely been wrong when it comes to valuing both Arena and Belviq.

  • Report this Comment On October 17, 2012, at 5:28 PM, TrackUltraLong wrote:

    Clawmann,

    The market for Belviq is primarily within the U.S., so the asking price wouldn't be nearly as high for Arena considering the revenue stream beyond the U.S. That leads me to believe Arena's management and shareholders wouldn't be apt to accept any offer...outside of Eisai of course.

    TMFUltraLong

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