Which Big Pharma Will Own the Next Weight Loss Blockbuster?
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Speculations are abundant around who and when Arena Pharmaceuticals (NASDAQ: ARNA) will be bought out. Most investors I've talked to believe a buyout is inevitable because:
a) Arena has a blockbuster-potential drug just approved by the FDA.
b) Big Pharma is in dire need of a lucrative acquisition to boost its pipeline. According to PricewaterhouseCoopers, by 2015 the top 10 Big Pharma companies stand to lose up to 40 percent of their revenue due to generics.
c) Arena sells pills that require simple distribution, unlike therapies like Dendreon's.
d) Arena is grossly undervalued.
e) Arena owns all its intellectual property rights globally.
Cash-rich and pipeline-starved Big Pharma is looking for good deals and Arena seems to be a delicious target.
Business Week quoted Stephen Brozak, president of WBB Securities:
“In every single board room, you have instructions from the chairmen and chairwomen to the chief scientific officers to ‘Find me something like Arena with freedom to operate and without the licensing agreements.’
The prospect for a bidding war is strong. Besides Pfizer, a number of other pharmaceuticals may join the race to take over Arena, including Arena's own Japanese partner, Eisai, Johnson & Johnson (NYSE: JNJ), Bristol-Myers Squibb (NYSE: BMY), and others.
BMS has just announced a deal to acquire diabetes drug maker Amylin Pharmaceuticals (NASDAQ: AMLN) in a $7 billion deal that includes covering Amylin's net debt and a contractual payment obligation to Eli Lilly. I anticipate a number of Big Pharmas will be talking with Arena in the coming months and I have every confidence that Arena's seasoned CEO, Jack Leif, will negotiate a great deal for the shareholders.
Eisai has a "standstill agreement" with Arena that prevents Eisai from purchasing Arena unless someone else tries to first. I don't think there will be a shortage of bidders. A couple of doctors I spoke to named Eisai and Pfizer as the most likely candidates. Pfizer has a lot of experience in this market segment, and both companies could use a boost to their pipelines, which are increasingly challenged by generics, especially Eisai's. To quote a dear friend and Arena scholar James "Danny" Stevens:
"Pfizer, through aggressive marketing and selling to the medical community, made Lipitor into a huge blockbuster. It is very possible they see that same potential with BelViq."
Prospects for a short squeeze given the astronomical short interest would further boost the price and inflame the bidding war.
Most of the discussion among investors is not around "if" but "when and how much."
The timing is anybody's guess, but some investors I've talked to believe it could happen before year's end as Big Pharma would be interested in sealing a deal before Arena signs up a European partner so they wouldn't have to deal with Arena plus a third party, if Arena signs up with a distribution partner before a takeover deal.
The NDA Approval Letter indicates the DEA scheduling is already in progress. It seems the company is being conservative in predicting a 4-6 month duration and it could complete sooner. Michael Murphy has predicted Belviq will be available to consumers by Labor Day. I don't think that's an unrealistic assumption given the company has stated they have half-a-billion pills ready to deliver to Eisai.
I found it interesting that Arena's management made it clear in recent public communications that they have not yet chosen a partner for Europe, perhaps implying that people should not assume Eisai is the European partner (as some investors have assumed).
As for the takeover price, it's difficult to say but I don't believe the Board of Directors would accept an offer under $40 per share.
I am long ARNA. This article is not an investment advice. Please do your own research. To find out more about my interests visit www.rezamusic.com and to join my mailing list email me on (info at rezamusic dot com). The Motley Fool owns shares of Johnson & Johnson. Motley Fool newsletter services recommend Johnson & Johnson and Pfizer. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.