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Buy, Sell, or Hold: Arena Pharmaceuticals

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When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether it's possible upside outweighs its risks. Let's take a look at Arena Pharmaceuticals (NASDAQ: ARNA  ) today, and see why you might want to buy, sell, or hold it.

Founded in 1997 and based in California, Arena is a biotech company most known these days for its weight control management drug, Belviq. Its market capitalization is about $2 billion, and its stock has soared more than 350%over the past year, leading some to wonder if it's still a good idea to buy in, or if it's best avoided now.

The first reason to consider Arena is the business it's in: health care. With our planet's population growing, getting older, and living longer, demand should only grow for medical products and services. Getting a little more specific, Arena's tackling of obesity is also extremely promising, as it affects so many people and is a (ready?) growing problem.

Management is another plus. Arena CEO Jack Leif has been so effective that he was in the running to be our CEO of the year for 2012, and he ended up coming in second overall, which isn't too shabby.

Want growth? Arena's revenue growth has been bumpy, but is picking up. Net losses have been shrinking, as have free-cash-flow outflows. Long-term debt has been dropping, and is more than outweighed by cash.

Another plus is that Arena has partnered with Japan's Eisai (NASDAQOTH: ESALY), to help it bring Belviq to market. That means sharing its gains, but it also likely means more gains to share. (And fewer expenses, as Eisai is paying for additional clinical trials.) Some have speculated that Eisai might even consider acquiring Arena. Meanwhile, as Arena starts targeting more international sales, it recently announced another partnership, with South Korean drugmaker Ildong, to sell Belviq in Korea.

Finally, insurer Aetna (NYSE: AET  ) has agreed to cover Belviq (and Alli), which will help in sales and acceptance of the drug. 

While there's much hope surrounding Belviq, the best situation for a biotech company is to have even more promising drugs coming out of its pipeline. Arena does have a handful of additional formulations in progress, but none are anywhere near the end of the pipeline.

Some companies are more free from competition than others. Arena does have some rivals, such as VIVUS (NASDAQ: VVUS  ) , with its Qsymia weight-loss drug. Approved by the FDA last year, Qsymia got off to a slow start, but sales have been growing. Arena's Belviq, though, is more likely to win approval in Europe first, though, which would give it a strong edge. Competition from Alli (also known as Xenical), co-marketed by Roche (NASDAQOTH: RHHBY) and GlaxoSmithKline (NYSE: GSK  ) , isn't a big worry, as it has had some safety concerns. Orexigen Therapeutics  (NASDAQ: OREX  ) , meanwhile, also has an obesity drug in the works, but it's still in trials, hasn't yet been approved, and won't be a threat for at least one or more years. My colleague Brian Orelli has pointed out that Belviq and Qsymia can even coexist, successfully.

Arena's valuation isn't a huge draw right now, as its price-to-sales ratio is around 58, roughly twice its five-year average, close to 10 times the industry average, and more than 40 times that of the S&P 500 (which, admittedly, has much lower growth expectations than Arena). The company's P/E ratio is... well, nonexistent, since there are no earnings to divide price by. While Arena's rising revenue is great, net income is still in the red, though it has been shrinking some. It's reasonable to conclude that much of Arena's great near-term potential is already reflected in its current price.

Rising share count is also a worry, with shares outstanding having nearly tripled over the past five years.

And then there are safety issues, as well as plenty of uncertainty about exactly how well Belviq will sell. Rival product Alli, for example, is sold over the counter, and hasn't broken $1 billion in sales, so it's reasonable to wonder whether a prescription drug will -- especially if each dose costs a few dollars.

Hold (off)
Given the reasons to buy or sell Arena Pharmaceuticals, it's not unreasonable to decide to just hold off on it. You might want to wait for its net losses to turn into net gains and for its stock dilution to stop or taper off. You might want to wait for a more compelling valuation, too, perhaps by keeping the company on a watchlist, hoping for a stock-price pullback.

You might also check out some other interesting biotech companies, to see if they seem like better bargains than Arena Pharmaceuticals. Perhaps take a look at Antares Pharma (NASDAQ: ATRS  ) , which is developing innovative drug-delivery systems such as gels and needle-less injections. It, too, has had some dilution and is still posting net losses, despite robust revenue growth.

The verdict
I'm holding off on Arena Pharmaceuticals for now, largely due to valuation concerns. Everyone's investment calculations are different, though. Do your own digging and see what you think. The company may perform spectacularly in the coming years, but remember that there are plenty of compelling stocks out there.

The potential market for obesity drugs is massive, but so are the risks. If you're looking for more information on the top two obesity drug players, grab copies of our premium research reports on Arena Pharmaceuticals and VIVUS today. In the reports, our senior biotech analyst, Brian Orelli, Ph.D., breaks down each company's strengths and weaknesses, and explains the critical issues you need to know about. News in this space moves fast, so both reports come with a full year of updates. Click now for exclusive information on Arena and VIVUS.

Read/Post Comments (4) | Recommend This Article (5)

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 January 05, 2013, at 10:58 AM, RSRdriver wrote:

    HAH, a CEO that once conveniently forgot to tell the first ADCOM that Belviq causes cancer in rats!

    A useless drug.

    A bunch of dillweed writers searching for followers.

    A trained army of fools who will break any SEC law pertaining to ORGANIZED stock manipulation and vote for anything on command!

    No reputable upgrades EVER!

    ARNA is a $4 stock at best.

  • Report this Comment On January 06, 2013, at 11:59 AM, earthunit wrote:

    Typical MF article.

    BASH a great potential investment and then push your own piece of garbage.

    Long live Wall Street. It'll never change.

  • Report this Comment On January 06, 2013, at 7:47 PM, Foreeverlong wrote:

    Your article is misleading. Arena has no competition. VIVUS's Qsymia is hampered by a very restrictive REMS that prohibits it from being aggressively marketed in the U.S. primarily due to one of its two generic components, Topiramate that is a danger to women of childbearing age. For the same reason, it cannot be bought in your local pharmacy. Finally, it was not approved for sale in Europe.

    In contrast, Belviq (about to come to market in March of this year) is now a DEA Class IV drug with no severe restrictions, will be available from your local pharmacy, for responders/completors of the clinical trials provided an 8% to 11% reduction in weight on average, and has tremendous potential for patients suffering from Type II diabetes. Physicians can already combine Belviq with Phentermine for patients who don't respond to Belviq alone.

    Belviq has a Top 20 big pharma in Eisai, whereas VIVUS does not, and probably never will. But in the end, it really is not about Belviq versus VIVUS. It is about the fact that world and physicians are anxiously waiting for the availability of Belviq, that will be the first safe and effective drug for weight reduction.

    If you review the posts on Yahoo Finance and Investor Village you will quickly find out that many sophisticated investors, including physicians, have invested in Arena for very good reasons. If you are sitting on the sidelines in the next short while when Belviq is approved in Europe, and is released for sale in the U.S. in March you will not buy this stock at $9 PPS. You will be buying it at a much higher price. Arena's big pharma partner, Eisai is confident of Belviq's success and has risked billions of dollars in the process. Major insurance companies across the U.S. have alreasdy added Belviq to their fomulary.

    Good luck.

  • Report this Comment On January 06, 2013, at 10:13 PM, RSRdriver wrote:

    Investor Village and YES, Yahoo Finance!

    That says it all doesn't it.

    Desperation is really starting to get pathetic.

    Guess that's what happens when these places are the only ones to find positive pumps for Belviq and Arena.

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