First Diet Pill in Decade Turns Arena Into Deal Bait: Real M&A

The first medication in more than a decade to help 78 million obese Americans slim down is turning into takeover bait.

Arena Pharmaceuticals Inc. (ARNA) won Food and Drug Administration approval last month for Belviq, a treatment affecting an area of the brain that helps a person feel full after consuming less food. With the first weight-loss drug to be cleared for sale in the U.S. in 13 years, Arena is projected by analysts to increase revenue 18-fold in the next four years, the fastest growth in the world among specialty pharmaceutical companies greater than $1 billion, according to data compiled by Bloomberg.

While Arena’s 494 percent stock gain this year makes it the most expensive U.S. specialty drugmaker relative to revenue, the San Diego-based company offers potential buyers a medication that Piper Jaffray Cos. estimates will reach $2 billion in annual sales. Arena, with a $2.3 billion market value, may draw takeover interest from GlaxoSmithKline Plc (GSK), which is divesting its diet pill Alli, said WBB Securities LLC. Tokyo-based Eisai Co. (4523), which has licensed the rights to sell Belviq in the U.S., could also be an acquirer, said Lazard Capital Markets LLC.

“The large pharmaceutical companies are all on the edge of their seats looking at Arena,” Stephen Brozak, president of WBB Securities in Clark, New Jersey, said in a telephone interview. Obesity “is a global pandemic. There are people that absolutely are in need of these types of products. Large pharma are wonderful at marketing drugs and this is a product that lends itself to marketing.”

Appetite Suppression

Today, shares of Arena rose 3.1 percent to $11.46.

“Arena is focused on bringing Belviq to the market in the U.S. with Eisai and in obtaining approval of the drug in markets outside of the U.S.,” David Schull, a spokesman for Arena, said in an e-mailed statement when asked whether the company has been approached by potential acquirers about a deal.

The FDA approved Belviq, previously called lorcaserin, on June 27. The pill works in a similar way to fenfluramine, part of the fen-phen appetite-suppression drug combination pulled from pharmacies 15 years ago when it was linked to heart valve abnormalities.

Arena and Eisai agreed to conduct six post-market studies to assess the safety and efficacy of the drug, including determining the potential for major cardiac risks such as heart attack and stroke, the FDA said.

Belviq will be available after the Drug Enforcement Administration completes a review to classify the drug based on its potential for abuse, which Arena has said may take four to six months.

Obesity Rate

“It’s the single most important thing that’s happened to Arena in its entire history,” WBB Securities’ Brozak said. “This is the first approval they’ve ever gotten.”

Analysts project that by 2015 Arena’s sales will have risen faster than every other specialty drugmaker in the world with a market capitalization greater than $1 billion, data compiled by Bloomberg show. The company’s revenue may total $232 million that year, versus $13 million in 2011, according to analysts’ estimates compiled by Bloomberg.

About 42 percent of the U.S. population may be obese by 2030, up from about a third currently, according to a report presented at the Centers for Disease Control and Prevention’s obesity conference in May. Globally, about 500 million people are obese, according to a World Health Organization report. Obesity is defined as having a body mass index of more than 30.

Glaxo, the U.K.’s largest drugmaker, may be interested in purchasing Arena to bolster its presence in the market for weight-loss remedies after sales declined for Alli, its over- the-counter diet pill, according to WBB Securities’ Brozak.

‘Dress Rehearsal’

London-based Glaxo has said it plans to divest Alli, which contains orlistat, a chemical that blocks the intestines from absorbing fat when taken as many as three times a day with meals. Orlistat has been linked to reports of liver injury, prompting consumer advocacy groups to demand its removal from the market. The FDA announced new warnings on the pill’s label in mid-2010, and Glaxo has said that Alli is safe and effective when used as directed.

Glaxo has “done the dress rehearsal,” so it would now know how to best market Arena’s weight-loss drug, Brozak said.

Kevin Colgan, a spokesman for Glaxo, said the company doesn’t comment on speculation, when asked whether it wants to acquire Arena.

Other companies are also seeking approval for weight-loss drugs. Qnexa from Vivus Inc. (VVUS) is slated for an FDA decision by July 17. Orexigen Therapeutics Inc. (OREX), which is developing the pill Contrave with Takeda Pharmaceutical Co., agreed in September to conduct a two-year study of the drug’s heart risks.

Drug Partnership

Belviq is the first prescription obesity medicine to be approved for sale in the U.S. since Roche Holding AG (ROG)’s Xenical in 1999. Glaxo’s Alli is a half-dose version of Xenical’s active ingredient and received FDA clearance in 2007 as the first diet drug available without a prescription.

Once available, lorcaserin will be marketed in the U.S. by Eisai under the name Belviq and the company will pay Arena a portion of the drug’s revenue. The partnership may deter potential acquirers that don’t want to share Belviq’s sales, said Alan Carr, a New York-based analyst for Needham & Co.

“Arena is much more attractive from an M&A perspective if you’re getting worldwide rights,” he said in a phone interview.

Eisai’s Interest

Eisai may decide to buy Arena so that it collects all of the revenue from Belviq, said Bill Tanner, an analyst for Lazard in New York. The two companies have a so-called standstill agreement that prevents the Japanese drugmaker from purchasing Arena unless someone else tries to first. It’s intended to protect Arena from a hostile takeover and wouldn’t prevent the companies from negotiating a deal, Tanner said.

“If this is a big drug, it could be a fairly sizeable payment that they have to make to Arena,” he said in a phone interview. “It probably makes sense that they’d want to take a look at acquiring it.”

Marcia Diljak, a spokeswoman for Eisai, declined to comment on whether the company would be interested in buying Arena.

Eisai will probably want to first gauge Belviq’s commercial success so that it doesn’t risk overpaying for Arena in case sales are weaker than analysts expect, Tanner said.

Arena, which has posted an almost six-fold stock price increase this year, was valued as of last week at 52 times analysts’ estimates for fiscal 2012 sales. That’s higher than all 14 other specialty pharmaceutical companies in the U.S. that have a market capitalization greater than $1 billion, data compiled by Bloomberg show. Even based on revenue estimates for fiscal 2015, Arena trades at the second-richest multiple in the group.

‘Blockbuster Drug’

“If you knew for a fact that there wasn’t a buyer for the company, I don’t think this stock would be where it is,” Lazard’s Tanner said. “It’s not overly expensive if you think it’s going to be a decent drug.”

Edward Tenthoff, a New York-based analyst for Piper Jaffray, estimates Belviq will reach annual sales of $2 billion just in the U.S. by 2020.

“The approval of a drug with the market potential of Belviq certainly makes Arena” an acquisition candidate, Tenthoff said in a phone interview. “This could be a true blockbuster drug in an age when there are fewer and fewer blockbusters.”

To contact the reporter on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net.

To contact the editor responsible for this story: Sarah Rabil at srabil@bloomberg.net.

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