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Why Arena Pharmaceuticals Will Outperform In 2013

|Includes: Arena Pharmaceuticals, Inc. (ARNA)

Some have stated that based on the current market cap of $1.96B (call it $2B) and a P/E ratio of 20, Arena Pharmaceuticals (NASDAQ:ARNA) needed $300M/year in revenue. That doesn't quite match, because $2B divided by 20 is $100M. However, lets look at the $300M number for a moment because once we factor in the marketing partner and other expenses, $300M is as good as any other number. We can baseline Belviq at $150/month per patient based on what Qsymia costs (a little more actually, but we will round down to stay conservative). So $300M divided by $150/month per patient and they need 166,666 patients to achieve is goal. Now given that some patients will be short term, take the drug, achieve their goal, and then go off, they will need to re-supply that patient queue. The steady state number is still 166,666 which is a very realistic goal.

CDC Obesity Statistics

According to the CDC one-third of all Americans are obese. The NHCS brief of January 2012 stated that there are 78M obese adults in the USA & 12.5M obese children. Lets just focus on the adults though. To achieve the revenue numbers that some project ($300M) they only need to capture 2/10 of one percent of that 78M. That isn't an unreasonable market share to capture.

The CDC website estimates it costs $147B in health care costs to treat obesity patients. That is a huge number. Dividing that $147B by 78M obese people gives us an annual cost of $1,884.61 per patient. Therefore, it is a no-brainer to approve the medication that gets them off the obesity list, if it costs less than $1,884.61/year, especially since many people will then be off the obesity list long after they stopped taking the medication.

Building up the numbers

Building up the numbers paints a different view altogether. If they capture 10% of the available market, then that is 7.8M patients. 7.8*$150=$1.170B, (for ONE month) which is a huge number to be sure. That comes out to $5.39/share based on 217.29M shares outstanding. A P/E ratio of 20 puts the share price at $107.80/share, which is what creates all the excitement with current shares trading at $9.02. Even if they only capture 30% of this target of $1.170B, they will hit $351M. Remember the $1.170B is for one month only, and typically the patients will be on an average of 6-months (certainly some will be one-month only, and some will be on a year or more, so they offset).

Nirvana numbers.

If they capture 10% of the obesity market, and patients are on the drug for 6-months, that projects total revenues at $7.02B/year. At an average dosing cycle of 6-months and a 10% market share of the obesity population, this puts revenue around $32.34/share. with a P/E ratio of 20 that puts shares around $646.80/share (unrealistic to be sure, but this is the math workup). Now the marketing partner will get some of that money, but they are also paying up front ($65M milestone payment). Europe, South Korea, and other markets sweeten the deal even further. This is why investors are looking to get fat off this obesity drug.


If Arena continues on its present course, they should easily out perform the rest of the market (considerably). Whether I am looking at a 1-year horizon or longer, the returns on ARNA far outweigh the risks.

Disclosure: I am long ARNA, VVUS.