Zeev's Turnips Patch-No Politics (ZEEV)

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ARNA Which Big Pharma Will Own The Next Weight Loss Blockbuster?
By Reza Ganjavi - June 30, 2012| Tickers: AMLN, ARNA, BMY, DNDN, LLY, JNJ, PFE
For Motley Fool

Reza is a member of The Motley Fool Blog Network -- entries represent the personal opinions of our bloggers and are not formally edited.

http://stockcharts.com/h-sc/ui?s=arna

Speculations are abundant around who and when Arena Pharmaceuticals (NASDAQ: ARNA) will be bought out. Most investors that I've talked to believe a take over of Arena is inevitable, because

a) Arena has a block-buster-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, top 10 Big Pharma stands to lose up to 40 percent of its revenue due to generics.

c) Arena sells pills which requires simple distribution, unlike therapies like Dendreon's (NASDAQ: DNDN).

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’.

According to Sierra World Equity Review Pfizer (NYSE: PFE) "is already talking to Arena Pharmaceuticals".

The prospects 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 and 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 (NYSE: LLY). 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 which prevents Eisai from purchasing Arena unless someone else tries to first. I don't think there will be a shortage of bidders for Arena. A couple of doctors I spoke to named Eisai and Pfizer as 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, specially, 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.

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.