How's That Long-Term Biotech Investment Looking?

If you invested in Arena Pharmaceuticals (NASDAQ: ARNA  ) a year ago, you're sitting on some pretty solid gains; shares are up about 150% since last March. The Nasdaq over that timeframe is up only about 4%, while the Dow is doing a little better, up 10%, but still nowhere near the returns the biotech has seen.

ARNA Chart

ARNA data by YCharts.

The gains, of course, are thanks to getting its first product approved. If you bought a year ago and sold just after the approval of its obesity drug Belviq, you could have pocketed nearly a five-bagger.

Zoom out the chart a little more, though -- let's say five years -- and the investment doesn't look so good. Buying a Nasdaq index fund would have produced double a return over holding shares for that long.

ARNA Chart

ARNA data by YCharts.

Delays are costly
That spike up and down in 2010 was when the company produced positive data showing that its drug helped patients lose weight, and then the FDA advisory committee voted 9-5 recommending against approval. The agency subsequently followed suit, rejecting Belviq and asking for more safety data.

Before that, Arena was your typical biotech with multiple shots on goal. There was APD125 to treat insomnia, APD791 for arterial thrombosis, and a collaboration with Johnson & Johnson (NYSE: JNJ  ) to develop a diabetes drug codenamed APD597, which the pharma handed back to Arena in 2010. None of them turned out to be as potentially lucrative as Belviq.

Despite not much gain in the share price over the past five years, Arena's valuation has grown substantially.

ARNA Market Cap Chart

ARNA Market Cap data by YCharts.

The share price hasn't risen by nearly as much because Arena has had to sell additional shares to raise capital. Drug development isn't cheap. Over the past five years, share count has more than tripled. The pie is bigger, but each share constitutes a much smaller slice.

But what about the next five years?
No point in dwelling -- too much -- in the past; it's the future that counts.

Clearly, most of Arena's current valuation is locked up in Belviq. The drug should launch shortly, as soon as the Drug Enforcement Agency makes a final decision about the its potential level of abuse. Belviq will be marketed by Arena's partner Eisai.

Based on how VIVUS' (NASDAQ: VVUS  ) competing drug Qsymia has done, I wouldn't expect a fast launch for Belviq. Arena and Eisai still have a lot of work to do convincing payers that it's worth covering the drug; otherwise it's too expensive for many patients to bother with.

The companies also have to alleviate doctors' worries about the safety. Wyeth's fen-phen and Abbott Labs' (NYSE: ABT  ) Meridia, which were both pulled from the market for safety reasons, have doctors questioning the risk-benefit ratio for new drugs. It'll take some time for doctors to get comfortable with Qsymia and Belviq and prescribe them for a large fraction of their obese patients.

Can it be done? Absolutely. I believe both drugs could be blockbusters some day. Same goes for Orexigen's (NASDAQ: OREX  ) Contrave, which is further behind in development. The potential market for obesity drugs is huge.

How long it takes to get over the hurdles will determine whether Arena has to raise capital again. At the end of last year, Arena had $156 million, got about $5 million for licensing rights to sell Belviq in South Korea to Ildong Pharmaceutical, and will receive another $65 million from Eisai following final DEA scheduling.

Arena plans to burn through up to $100 million this year, consisting of up to $28 million in general and administrative expenses and up to $71 million on research and development. Even if it gets only minimal revenue from its share of Belviq sales, Arena shouldn't have to raise capital this year.

It could run into issues in 2014, especially if its pipeline progresses well. All the development-stage drugs are currently in phase 1, which is relatively cheap to run. Research and development costs will increase as it launches larger trials.

Of course, if Arena does have to raise additional capital before becoming cash flow-positive, hopefully it'll be at a higher valuation, which will reduce the dilution.

Are there any reasons left to own Arena?
With Belviq's FDA approval now a distant memory, investors are scrambling to decide whether to buy or sell Arena. In the Fool's premium research report, senior biotech analyst Brian Orelli takes you through a comprehensive look at this contentious stock, including its massive opportunity, potential pitfalls, and key reasons to both buy and sell. To find out more about Arena, click here to access your report today.


Read/Post Comments (6) | Recommend This Article (2)

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 March 27, 2013, at 6:31 PM, bonhead wrote:

    you guys need to shut up .This is not news worthy .You are bunch of .motley fool not credible

  • Report this Comment On March 27, 2013, at 6:32 PM, bonhead wrote:

    motley fool bunch of liers .

  • Report this Comment On March 27, 2013, at 7:10 PM, RSRdriver wrote:

    3 Solid reasons why ARNA Belviq will fail!

    1, Efficacy- No matter how many times some spin the numbers, the efficacy still is dismal and MD's are not stupid or brainwashed!

    2, Efficacy- The EU CHMP will reject Belviq for the dismal efficacy and it's cost benefit ratio.

    3, Efficacy- Few insurance carriers will cover a drug that barely works, has a ridiculously high price and with a better drug available (Vivus Qsymia).

    IMO, the DEA is about to put the knockout on Belviq by requiring stifling label restrictions due to the potential for hallucinations. IE: almost any every day activity from driving to working with machinery to who knows will be restricted. As most know, MD's in this country are more apt to avoid a lawsuit than risk one on a drug that barely works.

    A Sch.3 is also not out of the question.

  • Report this Comment On March 27, 2013, at 8:41 PM, gazoo99 wrote:

    RSRdriver.......

    I don't care what you bought VVUS at.....

    Again I say go long on VVUS.... Short ARNA....

    Take your own advise...... no one else is.

    VVUS has sold their soul to the devil.... given all their IP on Qysmia out as colateral on a $110 mil loan.....

    I smell desperation..... to the enth degree here.

    VVUS sold the farm for operating money.

    Cash burn makes them broke at the end of the year.

    Then who gets the IP? and the shareholders get squat!

  • Report this Comment On March 27, 2013, at 10:35 PM, gazoo99 wrote:

    VVUS is in the home stretch..... down and out.... with no gas in the tank, throwing out a life line...... to acquire operating funds.... second quarter sales in the toilet...... sold the farm to continue operating by granting "intellectual property rights" for Qsymia as security on the note. They had nothing else of any "value" so to speak to offer.

  • Report this Comment On March 30, 2013, at 12:19 PM, gazoo99 wrote:

    Qysmia's side effects:

    Some side effects of Qsymia may not be reported. Always consult your doctor or healthcare specialist for medical advice. You may also report side effects to the FDA.

    For the Consumer

    Applies to phentermine / topiramate: oral capsule extended release

    Get emergency medical help if you have any of these signs of an allergic reaction while taking phentermine / topiramate: hives; difficulty breathing; swelling of your face, lips, tongue, or throat.

    Stop taking this medication and call your doctor at once if you have a serious side effect such as:

    • pounding heartbeats or fluttering in your chest;

    • depressed mood, thoughts of suicide or hurting yourself;

    • trouble concentrating, problems with thinking or speech, feeling like you might pass out;

    • blurred vision, eye pain, or seeing halos around lights;

    • low blood sugar (headache, hunger, weakness, sweating, confusion, irritability, dizziness, fast heart rate, or feeling jittery);

    • severe pain in your lower back, red or pink urine;

    • feeling very thirsty or hot, being unable to urinate, heavy sweating, or hot and dry skin;

    • low potassium (confusion, uneven heart rate, extreme thirst, increased urination, leg discomfort, muscle weakness or limp feeling); or

    • dangerously high blood pressure (severe headache, blurred vision, buzzing in your ears, anxiety, confusion, chest pain, shortness of breath, seizure).

    Less serious side effects of phentermine / topiramate may include:

    • mild dizziness, anxiety, feeling tired or irritable;

    • constipation;

    • memory problems, sleep problems (insomnia);

    • numbness of tingly feeling; or

    • altered sense of taste, dry mouth, or an unpleasant taste in your mouth.

    This is not a complete list of side effects and others may occur. Call your doctor for medical advice about side effects.

    For Healthcare Professionals

    Applies to phentermine / topiramate: oral capsule extended release

    Cardiovascular

    Cardiovascular side effects have included palpitations (up to 2.4%) and chest discomfort (up to 2.1%).

    Dermatologic

    Dermatologic side effects have included rash (up to 2.6%) and alopecia (up to 3.7%).

    Gastrointestinal

    Gastrointestinal side effects have included constipation (up to 16.1%), dry mouth (up to 19.1%), nausea (up to 7.2%), dyspepsia (up to 2.8%), gastroesophageal reflux disease (up to 2.6%), gastroenteritis (up to 2.5%), decreased appetite (up to 2.1%), paresthesia oral (up to 2.2%), and thirst (up to 2%).

    Genitourinary

    Genitourinary side effects have included urinary tract infection (up to 5.2%) and dysmenorrhea (up to 2.1%).

    Hepatic

    Hepatic side effects have included nephrolithiasis (up to 1.2%).

    Immunologic

    Immunologic side effects have included influenza (up to 6.7%).

    Metabolic

    Metabolic side effects have included hypokalemia (up to 2.5%), decreased serum bicarbonate (up to 8.8%), decreased serum potassium (up to 4.9%) and decreased serum creatinine (up to 2.5%).

    Musculoskeletal

    Musculoskeletal side effects have included and back pain (up to 6.6%), pain in extremity (up to 3%), muscle spasms (up to 2.9%), musculoskeletal pain (up to 3%), and neck pain (up to 2.2%).

    Nervous system

    Nervous system side effects have included paresthesia (up to 19.9%), headache (up to 10.6%), dizziness (up to 8.6%), dysgeusia (up to 9.4%), fatigue (up to 5.9%), irritability (up to 3.7%), hypoesthesia (up to 3.7%), and disturbance in attention (up to 3.5%).

    Ocular

    Ocular side effects have included blurred vision (up to 6.3%), eye pain (up to 2.2%), and dry eye (up to 2.5%).

    Other

    Other side effects of phentermine reported postmarketing have included allergic reactions, urticaria, cardiovascular adverse reactions, elevation of blood pressure, ischemic events, central nervous system adverse reactions, euphoria, psychosis, tremor, reproductive adverse reactions, changes in libido, and impotence. Other side effects of topiramate reported postmarketing have included dermatologic disorders, bullous skin reactions (including erythema multiforme, Stevens-Johnson syndrome, toxic epidermal necrolysis), pemphigus, gastrointestinal disorders, pancreatitis, hepatic disorders, hepatic failure (including fatalities), hepatitis , metabolic disorders, hyperammonemia, hypothermia, ophthalmic disorders, and maculopathy.

    Psychiatric

    Psychiatric side effects have included insomnia (up to 9.4%), depression (up to 4.3%), and anxiety (up to 4.1%).

    Respiratory

    Respiratory side effects have included upper respiratory tract infection (up to 15.8%), nasopharyngitis (up to 12.5%), sinusitis (up to 7.8%), bronchitis (up to 6.7%), cough (up to 4.8%), sinus congestion (up to 2.6%), pharyngolaryngeal pain (up to 2.5%), and nasal congestion (up to 2%).

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