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) - Get Report

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) - Get Report

and

Johnson & Johnson

(JNJ) - Get Report

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.

A safe, effective anti-obesity drug has remained an elusive target. There have been several failures, most notably fen-phen. After only a year on the market, the drug was pulled by the FDA in 1997 for causing heart-valve problems in some patients. Its failure led to increased safety monitoring for obesity drugs.

A variety of stimulants are currently being used for weight loss, but they have cardiovascular side effects that limit their use.

Abbott Laboratories'

(ABT) - Get Report

Meridia is only moderately effective, and

Roche's

Xenical has undesirable gastrointestinal side effects. Together they bring in less than $1 billion a year worldwide.

Arena designed its obesity drug, APD356, to be highly specific to a serotonin receptor in the brain, the same receptor fen-phen targeted. Arena's drug has demonstrated that it avoids the cardiovascular side effects characteristic of fen-phen, and it takes off the weight.

Patients in the phase II trial were able to lose weight without diet modifications or exercise in a "highly statistically significant and clinically meaningful" way, according to the company. Average weight loss was between 4 and 7.9 pounds, depending on dosage, over 12 weeks, vs. 0.7 pounds for a placebo. The company will release the full details of its phase II study later this year.

From an investors' perspective, the drawback to this exciting opportunity is the lengthy development required. Our first glance at the phase III efficacy and safety data will likely be in early 2008, one year after enrollment in the trial.

Because of the long duration of treatment and the heightened safety concerns at the FDA due to the fen-phen fiasco, phase III trial participants will be followed for two years on the drug before Arena will be able to request marketing approval. This puts the launch of this drug at some point in 2010. Nevertheless, a successful and clinically meaningful result would likely mean ADP356 would become a multibillion-dollar drug.

Other Horses

Arena has more than just one leg to stand on. Its technology has enabled it to investigate other important drug mechanisms with the goal of improving efficacy over existing medications.

Arena's insomnia program will enter phase II shortly; data will come out in late 2006. Current drugs -- Ambien, Lunesta and various benzodiazepines such as Valium -- are expected to exceed $5 billion in sales worldwide in 2006, but they carry the risk of tolerance development and can have hangover effects. Arena's drug targets a slightly different mechanism; the company hopes it will be more effective and have fewer side effects. While Arena's insomnia program is technically behind its obesity drug, if it progresses it could be launched in 2010 as well.

Arena is also earning significant income from research partnerships with pharmaceutical heavyweights. Due to the strength and predictability of Arena's discovery technology, Johnson & Johnson and Merck have collaborated with Arena on very attractive financial terms in order to develop drug candidates.

Johnson & Johnson recently started phase I testing on a diabetes drug candidate resulting from its work with Arena. It targets the pancreas to produce insulin more effectively. Arena is entitled to as much as $295 million in milestone payments and low double-digit percentage royalties on sales for this product. The drug has been described as an oral version of Byetta, an injectable medication from

Amylin Pharmaceutical

(AMLN)

that at its peak is expected to generate more than $1 billion a year in sales.

Merck is in phase I trials of a niacin receptor agonist that could raise HDL cholesterol, the "good" kind. Merck will pay Arena up to $32 million in milestones and high single-digit to low double-digit percentage royalties on sales for this program.

The year 2010 may seem millennia away to investors, but I believe, given Arena's current stock price, the potential value of its obesity and insomnia drugs is worth the wait. If it can sign up a strong partner this year to help develop the obesity drug, Arena could bank enough cash to enable it to significantly expand its operations.

Arena's current $660 million enterprise value offers an attractive risk-reward dynamic considering the multibillion-dollar opportunity in obesity, even if the launch is four years away. I believe as it programs progress over the course of the year, Arena could trade at $25 a share.

P.S. from TheStreet.com Editor-in-Chief, Dave Morrow:

It's always been my opinion that it pays to have more -- not fewer -- expert market views and analyses when you're making investing or trading decisions. That's why I recommend you take advantage of our

free trial offer

to TheStreet.com's

RealMoney

premium Web site, where you'll get in-depth commentary

and

money-making strategies from over 50 Wall Street pros, including Jim Cramer. Take my advice --

try it now.

At the time of publication, Ferayorni was long ARNA, although positions may change at any time.

Justin Ferayorni, CFA, is the founder and principal of Tamarack Capital Management and was an analyst and portfolio manager at Bricoleur Capital. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Ferayorni appreciates your feedback;

click here

to send him an email.