Arena Pharma Is Still A Good Short

A better measure of Eisai's prowess here is Halaven, a treatment for late-stage breast cancer that the company markets independently. Despite Eisai's oncology focus and management's projections of "blockbuster" sales, Halaven generates less than $300 million in annualized revenue two years post launch. That's hardly the hallmark of a U.S. drug -marketing powerhouse.

4. Arena only receives roughly one-third of Belviq's profits.

Although valuation metrics are often ignored in the early stages of a drug launch, the likelihood that Belviq stumbles out of the gate may make investors more valuation sensitive with respect to Arena. Based on script data thus far, I estimate Vivus' Qsymia will generate below-consensus sales of only $200 million in 2013. It might not even do that well. I would be surprised if peak U.S. sales for Qsymia exceeded $650 million. (Although the stock has declined meaningfully as investors have lowered expectations for Qsymia, Vivus is still probably a decent short at current prices.)

Arena and Eisai's 190 sales representatives that will launch Belviq is too small a group to adequately cover the general practitioner market. But let's give them the benefit of the doubt and assume these sales reps do a surprisingly (if not unbelievably) effective job scrounging up $750 million in Belviq sales in 2015. For Arena, that would generate $250 million in revenue. Applying a five times multiple to these near-peak revenues suggests the present value of Belviq by the end of next year is only $996 million.

The math is clear: Even though Arena shares have tumbled over the past few months, plenty of downside remains. Arena is still a good short.

Sadeghi has no positions in stocks mentioned in this column.

Nathan Sadeghi-Nejad has 15 years experience as a professional health-care investor, most recently as a sector head for Highside Capital. He has worked on the sell side (with independent research boutiques Sturza's Medical Research and Avalon Research) and the buyside (at Kilkenny Capital prior to Highside). Sadeghi-Nejad is a graduate of Columbia University and lives in New York. You can follow him on Twitter @natesadeghi.

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