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Arena's (ARNA) obesity drug, Belviq, was approved on June 27, 2012 and should receive final scheduling by the DEA soon. The DEA recommended Schedule 4 and is collecting comments through January 18, 2013, then a final decision should be forthwith. European approval may also be imminent (see Seeking Alpha), which could be a game changer. Vivus' (VVUS) drug Qsymia did not get European approval, which will give Belviq exclusivity in the European obesity market. The European sales potential for Belviq and a relatively weak start for Qsymia sales has lead to a change in my previous opinion, published by Seeking Alpha, for Arena's growth potential.

Belviq may enjoy exclusivity for a while. The only other drugs, Phentermine and Orlistat (Xenical) by Roche (OTCQX:RHHBY), do not sell well. Orexigen's (OREX) obesity drug, Contrave, is currently undergoing cardiovascular outcome trials (CVOTs) and awaits approval. Both Belviq and Qsymia are under going post-market FDA ordered CVOTs, which is something for share holders to monitor near the end of 2013 and throughout 2014. The obesity drug Meridia, by Abbott (ABT), was withdrawn from the market because of cardiovascular risk. Because of Glaxo's (GSK) diabetes drug Avandia's association with Myocardial Infarctions (MIs), new diabetes drugs are required to have large CVOTs prior to FDA approval, a situation similar to Orexigen's Contrave. Comparing the prescribing information for Qsymia to Belviq is also a useful analysis for gaining an opinion on sales potential.

A model taking in into account that Arena receives 31.5% (and up to 36.5% for sales over $750 million) of Belviq's revenue and assuming a high margin (70%), because Arena is not actually marketing Belviq, a model was developed assuming varying total Belviq revenues and Arena PE ratios.

(click to enlarge)

Arena Share Price Model

Revenue (mil $)

Earning/ sh ($)

PE

Share price ($)

300

0.33

15

5

  

20

6.60

600

0.66

15

10

  

20

13.33

900

1

15

15

  

20

20

The model predicts that if total sales of Belviq approach $600 million, target Arena prices would be substantially higher than $10 per share for the next year. Although Arena has appreciated somewhat since another Seeking Alpha article suggested acquiring Arena below $10 was reasonable. Arena closed at $10.20 Monday, January 14, 2013. There's time, but the train is leaving the station.

Source: Arena: A Share Price Model