Think Arena (ARNA) Has Topped Out? Better Keep Thinking...

June 20, 2012 8:27 AM EDT
Arena Pharmaceuticals (Nasdaq: ARNA) shareholders are suffering from an extreme case of "buy the rumor, sell the news." And other investors better take note.

Shares of the pharma are up 165 percent since getting a positive FDA panel outcome on May 10th for the weight-loss drug lorcaserin. As mentioned before, the drug maker has a PDUFA meeting with the FDA on June 27th.

Outside observers might ask when the madness will stop as shares are on an eight-session win streak. Settle in, because things could get exciting from now through the end of the year pending approval.

One Seeking Alpha article from February noted that every 1 percent of market penetration in the U.S. is equivalent to about 1 million patients. One Seeking Alpha article from last February assumes that margins could approach 90 percent as lorcaserin is a small-molecule drug, meaning its easy to produce. The drug is expected to cost about $6 per day, or $3 per pill, which is in-line with current market offerings. At 365 days per year, that's $2.19 billion in annual sales for just 1 million patients.

Arena's U.S. partner Eisai will net about 60 percent of gross sales, or $1.31 billion. From that, Arena will get about $422 million. At a conservative 85 percent margin rate, that's bottom-line additions of $380 million per year.

Given the head start Arena has on peers and expectations for EU approval by the end of 2012, it's new market cap at $1.8 billion seems conservative. Let's assume a market penetration somewhere between 2 percent and 5 percent to start. For the first year, that's $1.90 billion in profit, or $11.57 per share.

From the close at $3.66 on May 10th, shares should be at $15.23, an additional 50 percent higher.

(Note: these numbers are pure speculation, the stock might move way higher given market expectations.)

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wildly optimistic
Reality Checker on 2012-06-20 10:07:37
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You have wildly optimistic market penetration numbers. Do you know what the current market penetration in the US is for all anti-obesity medications combined? Clearly you do not given your estimates. It is only 0.9%. That is not one drug but all combined. So your "modest" estimate is 2X to 5X the entire current market. Good luck with that.

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