Is Arena Pharmaceuticals Stock a Buy?

Arena Pharmaceuticals, Inc (NASDAQ:ARNA) is an American biopharmaceutical company that’s getting a lot of investor buzz these days. Some of this is due to its Phase 2 trials for Temanogrel, which has FDA Fast Track Designation for the treatment of coronary microvascular obstruction (cMVO). Should it be approved, it would be the first FDA-approved therapy.

So, is Arena Pharmaceuticals stock a Buy?

The company has a broad pipeline of late-stage clinical trials for a range of ailments in gastroenterology, dermatology, and cardiovascular categories. It also has several partnerships in both preclinical and various stages of clinical trials.

This has investors wondering if it’s worth the price, so let’s run the diagnostics to determine if Arena Pharmaceuticals will give investors healthy returns.

What Does Arena Pharmaceuticals Do?

Arena Pharmaceuticals is a San Diego, California-based biopharmaceutical company founded in 1997. It develops micro drugs that act on G protein-coupled receptors (GPCRs) using a proprietary technology platform called Constitutively Activated Receptor Technology (CART).

Its pipeline of drugs includes a broad range of treatments for ailments within the three categories identified above. This includes Elevate and Gladiator for ulcerative colitis, Cultivate for Crohn’s disease, Voyage for eosinophilic esophagitis, Olorinab for irritable bowel syndrome pain, Etrasimod for atopic dermatitis and alopecia areata, and several drugs for heart disease.

However, these are all clinical trials – the company only currently had one FDA-approved drug on the market. Its weight loss drug Belviq was FDA approved in 2012, but it sold the drug to a Japanese company in Eisai Co Ltd. It does retain a royalty from the sale and marketing of the drug which provides it a revenue stream.

Is that enough to make Arena Pharmaceuticals a buy though?

Arena Pharmaceuticals Stock: Buy or Sell?

Most analysts recommend Arena Pharmaceuticals as a Buy, and this is largely because of its research partnerships.

The company only earned $0.3 million in revenues in the entire year of 2020, and the net loss to investors was $404.7 million, or $7.39 per share. A large part of this ($323.7 million) is research and development costs.

These expenses only seem to increase in 2021, where the company spent $102.5 million in R&D. This compares to $78.5 million in the same period of the prior year. These expenses are related to its Phase 3 advancements for etrasimod.

Personnel expenses also increased from the prior year, and this led to a net loss of $118.4 million in the first quarter alone, an increase of the $100.2 million net loss in the first quarter of 2020.

Of course, this could change quickly, and the company has a lot of revenue potential once it receives an FDA approval.

Arena Pharmaceuticals Revenues and Earnings Forecasts

Heart disease is the leading cause of death in the United States, and it’s estimated to be a $146.4 billion market by 2022, according to the National Library of Medicine. This means the industry is trudging forward at a 1.8 percent compound annual growth rate (CAGR).

Arena Pharmaceuticals is treating ailments that currently have no treatments, giving it an inside track to large revenues.

Forecasting the company’s revenue is difficult though, as it will continue losing money until it has a commercialized product on the market. An approved cardiovascular treatment could potentially generate over $1 billion in annual revenue, and it has several solid partnerships in place.

It’s currently in early research with partnerships with Beacon, Longboard, Boehringer Ingelheim, and United Therapeutics. Each would give it a potential revenue-sharing opportunity once approved.

Of course, there are risks inherent to any investment, especially biopharmaceutical companies.

Will Arena Pharmaceuticals Receive FDA Approval?

The biggest risk to investing in Arena Pharmaceuticals is that it won’t get FDA approval. Every drug and medical device company is entirely dependent on FDA approval to commercialize and market its products. And the company hasn’t had much commercial success in the past 24 years of operations.

Should the company fail to receive FDA approval, costs will cause a cash crunch. For now, it has a healthy $1.1 billion in cash that gives it a long runway to continue operating throughout the 2020s. But you could be sitting on the same stale stock price for the entirety of the decade.

Is Arena Pharmaceuticals Valuation Fair?

Arena Pharmaceuticals is valued at around $4 billion yet has no commercialized product. The company holds a huge cash balance and has a robust technology platform. It’s currently in Phase 2/3 trials on a handful of drugs, and if these treatments are successful, there’s significant upside potential.

However, investors should not expect much traction until those approvals are finalized. And the company hasn’t proven it’s capable of supporting a long-term commercialized platform. Until it does, it will remain a risky investment.

If it does prove successful, a huge investment return wouldn’t be out of the question. It’s an all-or-nothing thing with very little in between, and whether the cost is worth the risk and potential payout is your decision to make at the end of the day.

Is Arena Pharmaceuticals Stock A Buy? The Bottom Line

Arena Pharmaceuticals is an American biotechnology company with a broad pipeline of projects in clinical trials. It focuses on three issues, and its cardiovascular disease treatments could be pioneering medical breakthroughs.

Until the company commercializes an FDA-approved treatment, however, it has no revenue. It’s spending money heavily on R&D and staffing, and there’s nothing yet to show for it.

Until the FDA approves, there’s no juice to squeeze, but you’ll need to already be on board by the time it does (if it does) to benefit. It’s up to you whether you take that gamble.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.