The Skinny on Arena's Partnership With Japan's Eisai

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Includes: ARNA, GSK, OREX, PFE, VVUS
by: Ruthanne Williams Roussel

On July 1 Arena Pharmaceuticals (NASDAQ:ARNA) announced a US marketing partnership for its late-stage obesity drug candidate lorcaserin with the US arm of Japan's Eisai, known for gastrointestinal drugs, among others. A well-attended conference call was held before market open, which will be archived on the company's web site for 30 days.

Reasonable people may disagree whether this is the long hoped-for partnership with Big Pharma by one of the three small-pharma obesity drug developers, ARNA, Vivus Inc. (NASDAQ:VVUS) and Orexigen Therapeutics (NASDAQ:OREX), all of whom have drug candidates up for FDA review and approval within the next 6 months. While I personally would think of the top dozen or so companies by worldwide revenues when people say "Big Pharma" -- Pfizer (NYSE:PFE) , GlaxoSmithKline (NYSE:GSK), Roche et al. -- Eisai is certainly in or close to the top 20, depending on who's counting and over what period, and a muscular partner.

The deal is structured to reflect lorcaserin's risk profile relatively early in the game, that is, pre-approval. Lorcaserin will face an FDA advisory panel only in September and receive an approval decision in October. For the moment, ARNA will receive only $50 million upfront from Eisai, a modest amount for a drug that analysts have been ballyhooing as potentially a $1B or more annual blockbuster. Milestone payments of up to $160 million then follow, mostly contingent upon approval and delivery. All this limits Eisai's risk during the approval and pre-launch manufacturing process.

However, the back end is heavily weighted in ARNA's favor if lorcaserin does get approved and take off: a $1.16B sales-related milestone payment could kick in, which is rich considering that Eisai's most recent US revenues in fiscal year 2009 were $3.9B. Eisai's purchase price to ARNA also steps up from 31.5% of sales to 36.5% of sales as sales volume rises.

All in all, it would appear that ARNA is happy to lock in some first-dealer advantage and very favorable partnership terms in the event that lorcaserin does come to market. I like this strategy and so should other shareholders, since if lorcaserin does not come to market close to schedule, ARNA's prospects are very limited anyway -- why not increase the possible upside?

A side note in closing. First, despite persistent questioning, CEO Jack Lief insists that ARNA's market research shows that doctors will prefer to prescribe lorcaserin as a monotherapy. I'd be interested in seeing that research or at least hearing more details of it. I'm not convinced that there is no interest at all in a potential lorcaserin-phentermine combination (the much-rumored "safe fen-phen").

Disclosure: Long ARNA, OREX, VVUS