3 Reasons to Buy Arena Pharma

Arena Pharmaceuticals' (NAS: ARNA) obesity drug lorcaserin is currently under review, with a Food and Drug Administration decision expected on or around June 27. Buying in front of such binary events can provide substantial gains, as witnessed by the post-approval jumps following the FDA decisions on Amylin Pharmaceuticals' (NAS: AMLN) Bydureon and Discovery Laboratories' (NAS: DSCO) Surfaxin. Here are three reasons you might want to buy Arena.

FDA advisory committee vote
Last month, a panel of outside experts reviewed the drug and recommended approving it by an 18 to four margin. The advisory panel vote is important, but the FDA doesn't have to follow the panel's advice. Orexigen, for example, received a positive advisory committee vote for its obesity drug, Contrave, but was ultimately rejected by the agency. But Orexigen's smaller margin of victory, at 11 to eight, should give investors confidence that Arena won't follow in its footsteps.

In addition to getting outside expert's options, the advisory committee provides an opportunity for investors to sneak a peek at what the agency is thinking in public briefing documents provided for the panel. Based on those documents, it seems the FDA is no longer worried about issues around cancer risk. As long as the agency buys the advisory committee's view that heart risks can be dealt with post-approval, lorcaserin should be approved.

Potential market
In case you haven't noticed, Americans are getting fatter, and most people are too lazy to do anything about it. If empirical observations aren't good enough, check out the graphs in this article, with cold hard data to prove we're getting fatter. Now, of course, we could shed those pounds with diet and exercise, but we won't. When given the choice, most people will take the easy way out, opting to pop a pill daily rather than suffering to shed the pounds.

It's hard to know what the potential market size for obesity drugs is, because earlier offerings have been hampered by poor risk-to-benefit ratios, which led to Abbott Labs' (NYS: ABT) Meridia and Wyeth's Fen-Phen getting pulled off the market.

The only remaining prescription obesity drug on the market, Roche's Xenical, hasn't been a big seller, because it works by blocking the absorption of fat, which then passes through the body. As you can imagine, adding fat to excrement creates an undesirable side effect.

Even if Arena has immediate competition from VIVUS's (NAS: VVUS) Qnexa, the market still appears large enough to support both drugs. Vivus is scheduled to hear back from the FDA next month. Neither drug is going to be able to help all patients, leaving plenty of market share for Arena to feast on. And even when the drugs help patients lose weight, there's often a plateau. We may see patients yo-yoing back and forth between the two drugs.

Pharma backer
Arena isn't in this alone. Japanese drug maker Eisai Pharmaceuticals is backing it, and will be in charge of marketing the drug in North and South America.

I wouldn't put much emphasis on Eisai licensing the drug as an endorsement of the product. The pharma only paid $50 million for the U.S. rights back in 2010 and is only on the hook for $90 million when the drug is approved. Eisai set up the deal so that Arena gets paid well if the drug sells well. In addition to earning a percentage of net sales, there are $1.2 billion in potential milestone payments that are triggered if the drug is a commercial success.

Getting there will be a lot easier with the marketing muscle that Eisai will provide. Having a partner in place should allow the company to hit the ground running once it launches, something VIVUS might have trouble doing because it doesn't have a big-pharma partner.

The ultimate binary event, the presidential election, is just around the corner. Find out how to profit depending on who's elected in the Fool's free report, "These Stocks Could Skyrocket After the 2012 Presidential Election." Get yours free by clicking here.

At the time thisarticle was published Fool contributorBrian Orelliif off to the gym after filing this story. He holds no position in any company mentioned.Click hereto see his holdings and a short bio. The Motley Fool owns shares of Abbott Laboratories. The Fool'sdisclosure policyis skinny but packs a punch.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.