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Biotech investors tend to be an emotional bunch, and the stocks they invest in are no different. Biotechs are among the few investment vehicles out there that can literally quadruple based on pure hype, achieving multi-billion dollar market caps in the process. Consequently, biotechs can also rapidly implode when the inevitable happens, i.e., fundamentals catch up to their sky high valuations.

In a series of articles, I made this very point with Arena Pharmaceuticals (ARNA) post-approval for its anti-obesity drug, Belviq. Since my last article, where I specifically stated that the stock looked like it could correct from $7 to the $4s, ARNA shares have done just that.

Given the fair amount of flack internet trolls gave me for stating that ARNA was overvalued and the myriad rebuttal articles calling for $12 price targets, it would be all-too-easy to pen a piece trumpeting this call. But frankly, that's a waste of time, and serves no purpose whatsoever. Rather, I'd like to discuss the future prospects of Arena Pharmaceuticals as a long-term investment vehicle.

ARNA is a Strong Buy and Here's Why

With the preamble out of the way, I am now going to explain why I think ARNA is a strong buy at current levels. While the bulk of the retail investment community has been focused on Belviq's value proposition, I have been checking out the remainder of Arena's pipeline, which is intriguing from a valuation perspective. In order to better understand my position, I believe it's best to first give a basic primer on how developmental biopharma's go about their business.

Within the capital intensive world of biopharma, most developmental stage companies either license out or partner with a Big Pharma for their leading clinical candidate. Once the developmental stage company gets its first green light from the FDA, such as Arena did with Belviq, they generally use the cash earned from the deal to develop the remainder of their pipeline, which is where mid-cap biopharmas can really create tremendous value for shareholders.

By signing away the bulk of Belviq's North and South American revenues to Eisai (OTCPK:ESALY), and choosing to receive substantial upfront milestone payments instead, Arena is following this tried and true path. Now that the company is on better financial footing ($178 M in cash), Arena can brush the dust off of their other G-Protein Coupled Receptor (G-PCR) clinical candidates, and begin to create deep value for shareholders. And this is where I find the most intriguing investment potential in Arena going forward.

A Look at Arena's GPCR Pipeline

First up is APD811, an orally available agonist of the prostacyclin (IP) receptor indicated for the treatment of Pulmonary Arterial Hypertension (PAH). Presently, prostacyclin receptor agonists are administered via injections or inhaled routes. Arena is developing APD811 to be the first orally administered prostacyclin agonist, which to my mind is significantly more patient friendly. Who wants to get an injection when they can take a pill, right?

Thus far, APD811 has completed Phase I clinical trials, showing no serious adverse effects. The company is therefore currently planning to launch a Phase II trial in the first Quarter of 2014. The good news is that a Phase II study for APD811 should yield results relatively quickly, within perhaps a year. In terms of APD811's potential value proposition, the PAH market is expected to top $4B globally by 2018. And unlike Belviq, Arena has decided to retain worldwide rights to APD811. Even so, APD811 is well behind Actelion's selexipag in the race to become the first orally-administered IP for PAH - which is in a pivotal Phase III trial now. Given that the global PAH market is so large, however, I believe there is ample room for multiple drugs in this multi-billion dollar market.

Next in line is APD334, indicated for wide range of autoimmune disorders. Last April, Arena initiated a Phase I trial to evaluate the safety, tolerability and pharmacokinetics of single-ascending doses of APD334 in up to 64 healthy adult volunteers. As these types of studies progress quickly, there is a good chance investors could hear results within the first quarter of 2014. The value proposition of an orally-administered GPCR therapy for a host of autoimmune disorders cannot be understated. There are entire biopharmas, such as Immunomedics (IMMU), whose pipelines are dedicated solely to this multi-billion dollar market. And again, Arena has smartly retained worldwide rights to APD334.

Finally, Arena has partnered with IIdong Pharmaceuticals to co-develop temanogrel for a host of thrombotic diseases. Under the agreement, IIdong gets to pay for an additional Phase I trial and a Phase II(a) trial in exchange for exclusive commercial rights to the drug in South Korea. Arena has retained all rights outside of South Korea. I saved this candidate for last because the value proposition of temanogrel potentially dwarfs the remainder of Arena's pipeline. Specifically, the market for anti-thrombotic medications is expected come close to $13 B by 2018.

Conclusions

Arena investors and enthusiasts alike have suffered, in my opinion, from Belviq tunnel vision. While the drug is marketed towards a multi-billion dollar market, the company rightly partnered with a Big Pharma in order to push its flagship drug through costly clinical trials, giving away a good deal of the drug's future revenues in the process. Even so, this move was the correct one. Arena can now focus on advancing its exciting pipeline of GPCR drug candidates - several of which are targeting absurdly large markets. The best part for investors is that Arena hasn't had to sign any more deals giving away significant chunks of future revenues for promising clinical candidates, and it should be able to progress the pipeline without resorting to massive dilution that erodes long-term shareholder value.

On a final note, while none of these drug candidates can be guaranteed to reach the commercialization phase, I am hopeful that at least one more will ultimately reach the promised land. My belief stems from Arena's outstanding scientific and management team. It was no small feat to get Belviq FDA-approved. Anyone that read the FDA's briefing documents ahead of the advisory committee could plainly see that the FDA was looking for any excuse to sink the approval. Belviq was approved only because Arena's team put the drug through its paces and carefully addressed the agency's concerns in exquisite detail. I expect more of the same from the company, thus creating significant long-term value for patient shareholders.

Source: Deep Value In Arena's Pipeline

Additional disclosure: I have now closed my short position and sold my $5 PUT Options for ARNA.