Arena Pharmaceuticals Has Over A 300% Upside Potential In 2012

| About: Arena Pharmaceuticals, (ARNA)

Arena Pharmaceuticals (NASDAQ:ARNA) is a biotech development company with expected upside of over 300% in the next several months. Lorcaserin, intended for weight management, is its most advanced investigational drug candidate. After completing a pivotal Phase 3 clinical trial program for Lorcaserin, ARNA submitted a New Drug Application, or NDA, to the FDA, for regulatory approval in December 2009. The FDA issued a Complete Response Letter (CRL) in October 2010, and ARNA has successfully responded to the FDA with solid data. I expect that there will be favorable news in the coming weeks on the stock and ultimately the FDA will issue a favorable decision on Lorcaserin by the end of 2Q2012.

Analyst/Expert Opinions and Options

The analysts and experts expect extreme upside for ARNA:

1) Zacks recently upgraded ARNA from Hold to Strong Buy.

2) On January 10, 2012, Piper Jaffray published a research report on Arena Pharmaceuticals after the FDA accepted Arena's complete response for weight loss drug Lorcaserin as a Class II acceptance. In the report, Piper Jaffray writes,

The FDA accepted Arena's complete response for weight loss drug lorcaserin as a Class II acceptance, setting the new PDUFA date for June 27. Contrary to Arena's current valuation of $234 million and Street expectations, we believe the additional data in the complete response will be sufficient to address the FDA's concerns. We see the directive from the Senate Appropriations Committee to the FDA to report on steps to support obesity drug development along with FDA acceptance of the QNEXA NDA as evidence that the regulatory environment is improving. While regulatory risk remains, we continue to find the risk: reward favorable for ARNA shares and reiterate our Overweight rating and $3 price target.

3) One of our biotech consultants, Dr. Williams, has purchased a 1 million share stake in ARNA. He believes ARNA has upside potential of $5 to $8 this year. We value his opinion immensely and his track record is impeccable. Most notably, he invested in Dendreon (NASDAQ:DNDN) at under $4 a share in 2006 when it was out of favor with the Street and sold it at $50 in 2010.

4) The options trades on ARNA are extremely bullish with trading in the $3 and $6 strikes for July, 2012.

Competition for Lorcaserin

I believe that Loracaserin is clinically superior to present competitors such as Roche Group (RHHBY.PK), which markets Xenical or GlaxoSmithKline Consumer Healthcare (GSK) which markets an over-the-counter low-dose version of Orlistat (same active ingredient as Xenical) in the United States under the brand name Alli. Xenical/Orlistat have the horrific side effect of gas with oily spotting. The remaining significant competitor is Phentermine, which is a generic drug sold by a number of companies and has well-published extreme cardiological side effects. In addition to currently marketed obesity drugs, there are competing obesity drug candidates that are in similar stages of development as Lorcaserin. These competing companies are Vivus (VVUS) and Orexin Therapeutics (OREX). Of the development companies, I believe ARNA truly stands out as the gem.

Lorcaserin's Lucrativity

ARNA received a $50M upfront payment from Esai under a U.S. licensing agreement. Both ARNA and Esai equally share the cost of required pre-approval development which minimizes the cash burn on ARNA. ARNA will receive up to a $60M milestone payment upon regulatory approval and delivery of product supply for launch. Furthermore, ARNA is eligible to receive ~$1.2B in purchase price adjustment payments. Payments are expected to exceed ARNA's current market cap by 140%, totaling $330M with Eisai's annual net sales between $250M & $1B. As added icing on the cake, ARNA is eligible to receive up to an additional $70M in regulatory and development milestone payments .

Beyond the U.S., obesity is a global problem. E.U. Markets continue to increase demand for obesity treatments. ARNA is preparing to file an MAA in first half of 2012, news of which should propel the stock much higher. Also, it is notable that ARNA has been granted eligibility for centralized procedure by the EMA. I expect that ARNA will shortly announce a lucrative EU partnership agreement that is as lucrative as that with Esai in the U.S.

Conclusion

ARNA shares appear to have reached a bottom from a technical perspective and considerable news over the next few months should propel the stock to much higher levels. 20% of the float is short and any news of developments in the EU market could cause a major short squeeze in the stock. I would not be surprised if ARNA hits the $4-$5 level well ahead of the PDUFA date in June.

Disclosure: I am long ARNA, DNDN.