Thursday, July 1, 2010

Arena Pharm - Probably The Best They Could Have Hoped For

It's interesting to see how Big Pharma's attitude about obesity drugs has changed. There was a time when that was one of the most appealing areas. Now, though, they seem to be rather cagey about the space.

To wit, Arena Pharmaceuticals (Nasdaq: ARNA) announced a deal today with Eisai to market its lorcaserin anti-obesity drug, assuming it gets final FDA approval later this year (or early next). Arena gets $50M upfront and another $90M if/when the deal goes through. On top of that, Arena will get a royalty of 31.5% of sales on amounts under $750M and 36.5% on amounts above that.

It's an interesting deal. On one hand, 30%+ of revenue is a very healthy royalty rate (amounts in the 20%'s are arguably more common). Given that Big Pharma net margins are typically in the 20%'s, that's not a bad deal for Arena. Then again, that upfront payment is on the low side for a drug with $1B+ potential.

So what should be read into this? Well, it's a pretty clear sign that Eisai is not convinced that the drug gets approved - Eisai is apparently willing to trade a sizable chunk of future profits in exchange for minimal upfront risk. For the other obesity companies, Vivus (Nasdaq: VVUS) probably gets a bigger upfront payment (higher likelihood of approval and commercial acceptance), but lower royalties. Orexigen (Nasdaq: OREX) likely won't get such a good deal - they may have to accept a smaller upfront payment, and I'd be surprised if they pull as large of a royalty.

All in all, not a bad deal for Arena. And even with today's big jump, I think the stock is still cheap. That all depends on getting FDA approval for lorcaserin, though, and that seems probable, but certainly not definite.

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