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The Stupid and Financially Reckless Argument for Eisai Buying Arena Pharma

By: Adam Feuerstein | 05/20/14 - 10:26 AM EDT

Stocks in this article: ARNAVVUSOREX

Japanese companies have a history of paying grossly inflated prices for U.S. assets, but the drug maker Eisai would have to be monumentally stupid -- and financially reckless -- to buy out its obesity drug partner Arena Pharmaceuticals (ARNA).

But yet this rumor persists. Today, FT Alphaville editor Paul Murphy muses that intermittent takeover talks between Eisai and Arena are "back on in a serious way." 

"There's already a marketing deal between the two firms," Murphy adds. "Eisai has to pay lots of royalties and seems to have reached a point where it makes more sense to buy Arena outright. Dunno what Eisai might be willing to pay but it is likely to be rather higher than $6.51."

With all due respect to my journalism colleague, Murphy is bonkers.

Eisai already owns two-thirds of Arena's primary asset, the weight-loss drug Belviq. Arena's current enterprise value is $1.2 billion. For argument's sake, let's say Arena demands a takeover premium of 30%. Eisai is going to pay almost $1.6 billion for the remaining third of Belviq? Not likely.

As it stands, Eisai is hardly paying Arena anything because the commercial launch of Belviq has been awful. Since the weight-loss drug hit the U.S. market almost one year ago, Belviq sales have totaled only $25 million. Of this amount, Eisai has paid Arena a little over $8 million in Belviq royalties. 

Why would Eisai pay $1.6 billion or so to recoup $8 million in royalty payments? The answer, of course, is Eisai won't, unless the company is monumentally stupid or financially reckless. 

Arena bulls will inevitably counter that Belviq is a blockbuster weight-loss drug waiting to happen, so Eisai should strike now. Possible, but improbable. The velocity of a drug launch typically correlates quite well with peak sales potential. Belviq was a dud out of the start gate and it's unlikely to accelerate in a meaningful way, particularly relative to Arena's current $1.2 billion enterprise value. The company, today, is valued at 48 times trailing 12-month revenue (the Belviq royalty.) That's absurd. 

Eisai is losing a lot of money right now on Belviq. The company has been forced to triple the number of sales reps marketing the drug to 600. Expensive TV ads have been purchased. Present competition in the weight-loss pill market from Vivus  (VVUS) isn't much, but a new entrant from Orexigen Therapeutics (OREX) and Takeda is coming soon. And Eisai is going to spend even more cash to buy Arena now? C'mon, don't be foolish. The more likely scenario, in a year or so, will see Eisai give up on Arena and Belviq.

Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.

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