Arena Pharmaceuticals, Inc. (ARNA)

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The Looming EU Approval Makes Arena Pharmaceuticals Significantly Undervalued
By Joseph Dedvukaj - December 13, 2012 | Tickers: ARNA, VVUS | 6 Comments

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

Arena's weight management drug Belviq has been approved by the FDA for marketing in the United States. A few weeks ago, I wrote an article detailing Arena's path to profitability. I remain optimistic about Arena's prospects for global success in the obesity market. One big reason is, as of the writing of this article, we have learned Arena (NASDAQ: ARNA) is getting closer to approval for its pending marketing application with the European Medicine Agency. People are growing fatter around the world, wreaking havoc on the health care system. According to the Medical News Agency obesity rates in Europe have been rising and are now a serious public health concern.

If Belviq is approved in the EU, it means a few simple but important things for Arena investors:

1. Belviq can be sold/prescribed in all of the EU countries.

2. It means Arena will add a significant pharma partner to market the drug in the EU countries and obtain significant milestone payments.

There is a high probability the European approval process will result in approval. Investors should be mindful of these important events for their investment thesis. The EMA approval process entails:

Generally, the EMA approval process takes 210 calendar days, but the clock can stop along the way as the drug is evaluated.

a. With regard to the general 210 day process, Day 1 starts right after the EMA accepts the MAA filing, which in the case of Arena was on Mar. 26.

1. Upon initial consideration of the marketing application, the EMA sends out 120-day questions to Arena. We already had one stoppage at Day 120 for these written questions.

a. Day 120 was approximately July 25, which caused the clock to stop for Arena (sponsor) to respond to the 120 day questions/issues or ask for a 90 day extension.

2. Arena responded to the 120 day questions in a timely manner around Oct. 25. Arena along with a CRO (Contract Research Organization) worked on the written response together for the different questions/issues raised by the Co-Rapporteur's and other EU countries. At Day 110, the Rapporteur's do either a joint report or separate reports on the submitted MAA that goes out to the EU countries for comment and questions.

3. On Day 150, the Rapporteur's do an assessment report of Arena's 120 day written response. Once again, either jointly or separately. This assessment report is provided to Arena and the other EU countries. Remember, the conclusions are preliminary and subject to change. The other EU countries then respond back to the Rapporteur's via the CHMP with any additional questions or issues by Day 170, which is approximately Dec. 14

4. At Day 180 (12/24/12) Arena receives the completed report with any additional questions/issues that still may need to be addressed. The CHMP may ask Arena to prepare an oral explanation to any unanswered questions. Again, around Dec. 24 Arena has 30 days to prepare and present in person to the CHMP if requested. If requested, the CHMP meeting would take place around Jan. 23, 2013. Here is where it gets tricky. The CHMP could state in their report to Arena that Belviq is likely not going to get approval. If that is the case, Arena then can request an oral explanation (this is what happened in the case of Vivus (NASDAQ: VVUS)). Arena would get the same 30 day clock stoppage to prepare for its oral presentation. The date of the presentation then starts the clock at Day 181.

The other more likely scenario is that at Day 180, Dec. 24, the report Arena receives from CHMP does not have anymore questions/issues for Arena to address. There may be some minor questions that can be taken care of without any oral explanation. In this case, the report is probably positive, indicating that Belviq will be approved. If this is the outcome, then sometime between Day 180 (12/24/12) and Day 210 (1/23/13), an official approval decision will be handed down and also posted on the EMA website.

After the approval decision, there is a 36-day period where labeling and packaging information, etc., is exchanged between Arena and the CHMP and the member countries of the EU. At the end of this period, Arena or its marketing partner can start selling Belviq to patients in the EU. Therefore, if there is no work stoppage at Day 180, the official approval date could come between Day 180 and Day 210. Assuming the approval comes on Day 210 that would be February 27, 2013. The marketing launch would then commence around March 4, 2013.

If Arena does have to do an oral explanation then it would be done around Jan. 27, 2013. Assuming everything is positive, Day 210 would be February 27, 2013. After approval on April 3, 2013, or April 4, 2013, Arena could launch EU marketing.

Arena's profitability prospects can only get better with the passage of time, in my opinion. If you own Arena shares, do not sell your shares. Don't set stop losses.

Most investors don't realize that Arena has several strong short-term and long-term catalysts coming:

1. DEA schedule IV announcement any day now

2. $65,000,000 milestone payment

3. December, 2012, EMA preliminary assessment of Belviq's EU application

4. First quarter, 2013, Belviq U.S. sales and marketing

5. EU Belviq approval first half 2013

6. Continued institution and fund ownership growth

7. EU Partnership

8. Additional Rest of World Partnerships

9. Quarterly sales results

10. EU Launch

11. Potential Approval in Switzerland, Canada, Mexico, Brazil and Korea

12. Belviq-Phentermine combination drug

13. Belviq for treating addiction (such as smoking cessation support)

14. Belviq-Metformin combination drug (Diabetes is a huge market by itself)

15. Advancing APD811 towards phase IIb (PAH treatment)

16. Starting clinical trials with at-least one more promising NCE

17. Potential Buy-out by Big Pharmaceutical before Belviq becomes a success

18. Potential short squeeze coming.

In conclusion, this is exactly why Arena should be a part of your portfolio. Arena has reached an "inflection point." The company is on the possible verge of growing its obesity drug Belviq into a mega blockbuster. New marketing approvals and partnerships will increase profitability sharply. And once management secures new partnerships in brand new markets - as it will soon - the stock should turn into a real barn burner. I reiterate my buy rating on Arena stock. Now is an excellent time to add to your stock positions before the momentum of the company's fundamentals gain acceptance by Wall Street investment analysts.

http://beta.fool.com/mrjosephd/2012/12/13/arena-pharmaceuticals-inc-is-significantly-underva/18692/?ticker=ARNA&source=eogyholnk0000001

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