Arena Pharmaceuticals (NASDAQ:ARNA) received a price target upgrade today from Pipe Jaffray analyst Edward Tenthoff from $9 to $12.50 representing a price target increase of almost 40% and a potential move of about 50% from current trading levels. This is a bullish sign that investors have been waiting to see for quite some time.
In his report Tenthoff indicated that the move is based on pre-launch knowledge of the product as well as a survey of doctors and the likelihood that they will prescribe the anti-obesity drug Belviq. Tenthoff also commented that Arena's marketing partner Eisai has indicated that it is forecasting sales at $150 million in 9 months. Piper Jaffray is currently estimating 2013 sales of Belviq to be at $68 million.
The Eisai (ESLAY.PK) forecasts have created a great deal of confusion amongst investors and perhaps analysts. In mid May Eisai management indicated during a presentation that it expected Belviq sales to be about $200 by its fiscal year end. Eisai carries a year end of March 31st. With Belviq launching June 7th, there was instantly debate about whether that sales figure should be applied to 9 months or 10. Simple math would dictate that 10 months is the appropriate way to project.
On launch day, June 7th, Eisai indicated that Belviq sales should be $150 million by the end of the year. If one reviews the Bloomberg interview it appears that what was meant by that statement was calendar year of 2013.
Setting aside all of that confusing information for a moment, we have a distinct positive here to work with. Piper Jaffray is setting a bar of $12.50 per share based on $68 million in Belviq sales between launch and December 31st. Essentially, no matter how you slice the pie of Eisai statements, all are ahead of what Piper Jaffray is forecasting. If Arena and Eisai are able to meet their own projections, the Piper Jaffray number will be blown away. Thus, in theory, the price target of $12.50 may need adjustment sooner than many may think.
With all of that said, there are a few cautions. As yet neither Arena nor Eisai have offered up an "official guidance" The projections we are hearing are essentially what the companies would like to do. That is important to consider. Another caution is that it is sales that matter and not the number of prescriptions written. That is where channel checks come into play, as they measure sales.
What we have happening here is the establishment of price targets that will be 50% higher than current levels. As sales numbers begin to roll in we may well see other analysts follow suit. Piper Jaffray is leading the way and making a more gutsy call right now. If sales are good, other analysts may well set even higher targets. It will be important to stay tuned because when the average analyst price is substantially higher than the current price, investors that are less familiar with the company or sector may begin to take notice.
In my opinion Arena at current levels is a buy. I see the risk side as a 25% drop and the reward side as a 50% + gain. That makes it a decent play for active traders as well as longer term investors. Stay Tuned!
Disclosure: I am long ARNA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.