Arena Turns Page On Belviq - Restructures Deal With Eisai

| About: Arena Pharmaceuticals, (ARNA)

Summary

Eisai will now control global rights to Belviq.

Eisai responsible for all costs.

Arena gets lower royalty rate, but carries no burdens.

Arena Pharmaceuticals (NASDAQ:ARNA) seems to be turning a page on its anti-obesity drug Belviq (lorcaserin). The company has renegotiated its deal with Eisai (OTCPK:ESALY) with regard to the drug and is essentially turning over global rights to lorcaserin. The terms of the deal are not fully disclosed, but some aspects were given in a press release.

As stated above, Eisai is acquiring global commercialization rights to BELVIQ. This includes the territories retained by Arena under the initial agreement signed years ago. Eisai will control all global development and commercialization decisions, and is also responsible for all lorcaserin development expenses going forward.

Under the revised agreement, Arena will:

  • Transfer to Eisai certain intellectual property, assets and records related to lorcaserin
  • Assign its rights under the agreements with Ildong Pharmaceutical Co. LTD., Abic Marketing Limited and CY Biotech Company Limited to Eisai
  • Continue to manufacture lorcaserin at its facility in Switzerland and sell finished product to Eisai for marketing and distribution
  • Provide for technology transfer to Eisai for the option to manufacture lorcaserin
  • Arena is eligible to receive approximately $23 million over a two-year period for inventory and ongoing support for its manufacturing obligations, plus payments comparable to a contract manufacturer for continuing to supply lorcaserin
  • Arena will no longer incur lorcaserin clinical development expenses, which could have exceeded $80 million over the next several years
  • Arena is eligible to receive royalty payments of 9.5% on annual global net sales of lorcaserin less than or equal to $175 million, 13.5% on annual global net sales greater than $175 million but less than or equal to $500 million and 18.5% on annual global net sales greater than $500 million
  • Arena is eligible to receive $26 million in potential sales and regulatory milestones including $25 million upon global net sales reaching $250 million in any 12 month period and $1 million for approval in Brazil.

This news may be shocking to some investors that saw lorcaserin as a winning lottery ticket when it was first approved by the FDA. Three new weight loss pills entered the market over the past few years and none have been able to gain substantial traction.

The poor sales of Belviq and the terms of the initial deal with Eisai put the whole project in jeopardy. Eisai pulled the plug on aggressively marketing the drug but seemed to do just enough to demonstrate that it was meeting its obligations. This situation has had Belviq in a pharma purgatory for well over a year. In the end, Eisai is the bigger player, and could outlast Arena.

I credit Arena's new management for seeing the stalemate and trying to move the company forward with the development of new drugs. I also credit management with having the vision to let Belviq go. Getting a more modest royalty may not seem like the winning strategy, but in the end it allows the company to move forward with a more clear and concise strategy.

The after market reaction to the news was muted, but there is a lot to digest here. Arena has finally arrived at a place where I had long suspected it would. Well over a year ago I wrote about the deal with Eisai being a stumbling block and that a re-negotiation needed to transpire. Cutting this deal at the beginning of 2017 allows a full and fresh start. Arena has 3 pipeline candidates that could bring about fresh deals with other big pharma companies.

I am critical of Arena for not cutting itself a bit of a better deal in terms of cash. The company has also announced what amounts to $50 million in dilution. In a perfect world, Arena should have gotten a bit more up front value out of this deal. I think even if they trimmed the lowered royalties a bit deeper they may have been able to accomplish just that.

I am critical of Arena for trying to "oversell" this news with talk of potentially saving $80 million. That piece of news is more fluff than reality in my opinion. Potential savings are worth about as much as the potential milestones. Arena saw very little of the potential milestones from the original deal. Will Arena save money by not having to pay for added clinical trials? Yes. Are all of these trials going to happen? Perhaps they will. Will the design of the trials change? That is very likely. Thus, the savings may in reality be a number substantially lower than what was advertised. That being said, management had to put as big a bow on this deal as it could.

All in all, I think that making a deal with Eisai to offload responsibility for Belviq outweighs seeing the sales trudge along in slow torture because Eisai was not supporting the effort aggressively. I also think that the company is trying to start off the year in a way allows some of the overhang of cash, expense, and timing to evaporate. The events of the past 24 hours should give investors tepid optimism. There is now a lot riding on the results of ongoing clinical trials. Good results could mean big pluses in this equity, but any misstep means that there is very little to fall back on in the near term. An options strategy may be a wise play here for those that want to speculate. Stay Tuned!

Disclosure: I am/we are 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.

Additional disclosure: I have no position in Eisai

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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