Could Arena Pharmaceuticals Inc. Be Running Out of Money?

Source: Flickr user Purple Slog

When it comes to the biotech sector there is perhaps no figure more important to investors or the business itself than the cash burn rate. Because most clinical-stage and early commercial stage biotech companies are losing money, it's important to understand how long their current cash on hand will be expected to last.

One biotech in particular that investors should be watching the cash burn rate of very closely is Arena Pharmaceuticals (ARNA). With Wall Street not expecting the company to be profitable on annual basis until 2017, it's worth digging beyond the surface to discover whether or not Arena Pharmaceuticals could be running out of money. Today we'll do just that, as well as look at ways Arena can stem the tide of its cash burn and/or raise cash along the way.

Understanding Arena's business model
Before we can reasonably understand whether or not Arena Pharmaceuticals is running out of money we should first understand the primary focus of its pipeline.

Source: Arena Pharmaceuticals

Although Arena has a number of products currently in early stage development, including APD811 for pulmonary arterial hypertension, and APD334 for autoimmune diseases, its existence truly revolves around the success of Belviq, one of three newly approved chronic weight management drugs. In addition to being approved by the Food and Drug Administration as a weight-loss therapy, Belviq is also being studied as a treatment tool for smoking cessation.

Based on estimates from IMS Health as of the latest quarter, Arena and its licensing partner Eisai (ESALY -1.95%) delivered approximately 110,000 prescriptions of Belviq, up 43% from the first quarter. Net product sales of Belviq were $9.9 million, of which Arena recorded $3.1 million per its collaborative agreement with Eisai. 

Investors also need to understand this is a highly competitive space, with VIVUS' (VVUS) Qsymia gaining approval around the same time as Belviq and beating it to pharmacy shelves by nearly a year as Belviq awaited Drug Enforcement Agency scheduling. Also, Oreixgen Therapeutics' (NASDAQ: OREX) Contrave recently gained approval from the Food and Drug Administration for its weight-management drug Contrave. Qsymia led to better weight loss in clinical trials, but Contrave has a potentially more favorable long-term safety profile having nearly completed its cardiovascular outcomes study. Long story short, this is a competitive space which is evolving by the day.

Arena's cash position
As of the end of the second quarter, Arena had $219.1 million in cash, cash equivalents, and short-term investments on its balance sheet with $71.8 million in debt, for a net cash position of $147.3 million. To put this figure into context, Arena had $221.9 million in cash, cash equivalents, and short-term investments as of Dec. 31, 2013.

Though it would appear that Arena's cash position is little changed, the company did announce a $33.3 million benefit during Q2 related to the sale of its investment in TaiGen. In other words, without this securities sale Arena would have burned through about $35 million in cash through the first-half of the year. 

If Arena weren't to earn another milestone payment from partner Eisai and didn't attempt to raise additional funds, I'd estimate that three years from now it would have just $50 million to $60 million in cash and cash equivalents.

How Arena can boost its cash on hand
The good news for Arena's shareholders is that there are ways for it to boost its cash position. Some of these methods are actually quite positive, while one in particular could spell further downside for investors.

Source: Arena Pharmaceuticals

Clearly, Belviq and Eisai are the two pathways Arena needs to lean on in order to bolster its cash position. Under the terms of its current agreement with Eisai, Arena nets a 31.5% stake on net product sales (which can ramp up to as high as 36.5% on annual sales over $750 million). These rising product sales can be used to help offset Arena's administrative and research and development costs.

Additionally, Eisai is on the hook for a number of regulatory and milestone payments should Belviq achieve certain sales goals. Specifically, on top of $270 million in upfront and regulatory milestone payments, Eisai could owe Arena up to $1.16 billion in one-time purchase price adjustment payments based on Belviq's annual sales totals. In sum, if Belviq's sales keep improving, Arena's cash concerns could dissipate thanks to collaborative revenue from Eisai.

Another option for Arena to boost its cash on hand would be to consider licensing out some of its early stage clinical programs. APD334 for autoimmune diseases could be a potentially intriguing clinical drug that could attract larger pharmaceutical companies, but this also isn't likely to occur until Arena can lay out some very convincing mid-stage efficacy and safety data on the drug.

Lastly, Arena can always turn to the open market and sell shares of its common stock in order to raise cash. This is, of course, the least desirable outcome for shareholders since it can dilute their existing shares and potentially send their stock lower -- a terrifying thought considering that Arena has lost about a third of its value year to date. In December 2012 Arena did just this, offering 11 million shares at $5.50 to prepare for the commercialization of Belviq. While it's unlikely an offering will be done anytime soon with Arena's stock price in the doldrums and ample cash on hand for the moment, it's not out of the question.

Is Arena running out of money?
Now it's time to return to, and answer, our original question: Could Arena Pharmaceuticals be running out of money?

Source: Flickr user Dan Moyle

Despite its hefty losses in the interim, Belviq's steady sales growth compounded with Eisai's collaborative revenue should provide ample cash to sustain Arena's operations moving forward. Of course, whether or not Belviq turns into the superstar that Wall Street expected it to be two years ago is a completely different story.

Orexigen's Contrave, for instance, appears to be a safe weight-loss adjuvant therapy to proper diet and exercise based on the findings of the 8,900-person Light Study. Arena's Belviq, on the other hand, won't have data from its long-term cardiovascular outcomes study for a while, which could lead to Orexigen gaining the upper hand.

Also, Zafgen's (ZFGN) beloranib, a mid-stage experimental drug which focuses on how the body processes fat rather than altering the feeling of being hungry, could prove to be a big winner in weight control management. Arena's solace is that the developing drug is likely four or more years away from findings its way to pharmacy shelves.

So to sum up, Arena's cash on hand will almost certainly shrink from where it is now, but it's not a huge concern. Instead, continuing to grow Belviq in the wake of growing competition is what investors should really be worried about.