Obesity Drug Is Supersized Opportunity

This column was originally published on RealMoney on Feb. 24 at 10:00 a.m. EST. It's being republished as a bonus for TheStreet.com readers.

After spending years developing its drug-discovery technology, Arena Pharmaceuticals' (ARNA) efforts are bearing multiple fruit. Consequently, unlike some biotech one-trick ponies, Arena could reward shareholders in a number of different ways.

Arena has drugs in development for obesity and insomnia that could each have multibillion-dollar potential, and it has research and development partnerships with Merck (MRK) and Johnson & Johnson (JNJ) on very attractive financial terms.

Its phase III obesity drug looks particularly promising -- Arena could forge a partnership on it with a major pharmaceutical company later this year. The company has a fat bankroll of nearly $300 million in cash, which should give it the strength to hold out for a good partnering deal.

While the obesity drug is clearly the company's crown jewel, it's expected that phase II data for the insomnia program, which will be in later this year, will allow it to move into phase III development. If its anti-insomnia drug works as designed, it will have no hangover side effects. Both drugs could be launched in 2010.

The Fat of the Land

Arena has mastered the ability to clone and express G protein-coupled receptors (GPCRs) in order to screen drug candidates against GPCR target assays. While many other companies use the same approach to identify drug candidates, many assays prove to be unstable or inaccurate. Arena's assays mimic natural disease targets very effectively. As a result, the drugs it designs are not only very specifically targeted in the petri dish, but in humans as well, enabling highly predictive preclinical drug design.

There aren't many markets bigger than obesity, and Arena Pharmaceuticals has it in its crosshairs. Americans spend billions each year on fad diet programs and workouts, over-the-counter weight-loss aids and nutraceuticals. Unfortunately, most Americans aren't as successful in their diets as Subway's poster boy, Jared Fogle -- about 30% of adults are obese, according to the U.S. Centers for Disease Control, and another 35% are overweight. Obesity doesn't just make it hard to get a date, it's a major contributor to cardiovascular disease, diabetes, cancer and other health problems that cost the U.S. health care system billions each year.