Intrinsic value of Arena Pharmaceuticals - ARNA

Previous Close

$44.01

  Intrinsic Value

$3.32

stock screener

  Rating & Target

str. sell

-92%

Previous close

$44.01

 
Intrinsic value

$3.32

 
Up/down potential

-92%

 
Rating

str. sell

We calculate the intrinsic value of ARNA stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2017), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 1.5

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046
   2047

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  21
  22
  22
  23
  24
  25
  25
  26
  27
  28
  29
  31
  32
  33
  35
  36
  38
  40
  41
  43
  45
  47
  50
  52
  54
  57
  60
  63
  66
  69
Variable operating expenses, $m
  23
  24
  24
  25
  26
  26
  27
  28
  29
  31
  32
  33
  34
  36
  37
  39
  41
  43
  45
  47
  49
  51
  53
  56
  59
  61
  64
  68
  71
  74
Fixed operating expenses, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  23
  24
  24
  25
  26
  26
  27
  28
  29
  31
  32
  33
  34
  36
  37
  39
  41
  43
  45
  47
  49
  51
  53
  56
  59
  61
  64
  68
  71
  74
Operating income, $m
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -3
  -3
  -3
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -5
EBITDA, $m
  2
  2
  2
  2
  2
  2
  2
  2
  2
  2
  2
  2
  2
  2
  3
  3
  3
  3
  3
  3
  3
  4
  4
  4
  4
  4
  4
  5
  5
  5
Interest expense (income), $m
  6
  6
  6
  6
  6
  7
  7
  7
  8
  8
  9
  10
  10
  11
  12
  12
  13
  14
  15
  16
  17
  18
  19
  20
  22
  23
  25
  26
  28
  29
  31
Earnings before tax, $m
  -7
  -7
  -8
  -8
  -8
  -9
  -9
  -10
  -10
  -11
  -12
  -13
  -13
  -14
  -15
  -16
  -17
  -18
  -19
  -20
  -22
  -23
  -24
  -26
  -27
  -29
  -31
  -33
  -34
  -36
Tax expense, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Net income, $m
  -7
  -7
  -8
  -8
  -8
  -9
  -9
  -10
  -10
  -11
  -12
  -13
  -13
  -14
  -15
  -16
  -17
  -18
  -19
  -20
  -22
  -23
  -24
  -26
  -27
  -29
  -31
  -33
  -34
  -36

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  165
  169
  173
  178
  183
  189
  195
  202
  210
  218
  227
  236
  246
  256
  267
  279
  291
  304
  318
  333
  348
  364
  382
  400
  419
  439
  460
  482
  505
  530
Adjusted assets (=assets-cash), $m
  165
  169
  173
  178
  183
  189
  195
  202
  210
  218
  227
  236
  246
  256
  267
  279
  291
  304
  318
  333
  348
  364
  382
  400
  419
  439
  460
  482
  505
  530
Revenue / Adjusted assets
  0.127
  0.130
  0.127
  0.129
  0.131
  0.132
  0.128
  0.129
  0.129
  0.128
  0.128
  0.131
  0.130
  0.129
  0.131
  0.129
  0.131
  0.132
  0.129
  0.129
  0.129
  0.129
  0.131
  0.130
  0.129
  0.130
  0.130
  0.131
  0.131
  0.130
Average production assets, $m
  33
  34
  34
  35
  36
  38
  39
  40
  42
  43
  45
  47
  49
  51
  53
  55
  58
  60
  63
  66
  69
  72
  76
  79
  83
  87
  91
  96
  100
  105
Working capital, $m
  -8
  -8
  -8
  -9
  -9
  -9
  -9
  -10
  -10
  -11
  -11
  -11
  -12
  -12
  -13
  -13
  -14
  -15
  -15
  -16
  -17
  -18
  -18
  -19
  -20
  -21
  -22
  -23
  -24
  -26
Total debt, $m
  58
  61
  64
  68
  72
  77
  82
  87
  93
  99
  106
  113
  121
  129
  138
  147
  156
  167
  177
  189
  201
  213
  227
  241
  256
  271
  288
  305
  323
  342
Total liabilities, $m
  128
  131
  135
  138
  143
  147
  152
  158
  164
  170
  177
  184
  191
  199
  208
  217
  227
  237
  248
  259
  271
  284
  297
  311
  326
  342
  358
  375
  394
  413
Total equity, $m
  36
  37
  38
  39
  40
  42
  43
  45
  46
  48
  50
  52
  54
  57
  59
  62
  64
  67
  70
  74
  77
  81
  84
  88
  93
  97
  102
  107
  112
  117
Total liabilities and equity, $m
  164
  168
  173
  177
  183
  189
  195
  203
  210
  218
  227
  236
  245
  256
  267
  279
  291
  304
  318
  333
  348
  365
  381
  399
  419
  439
  460
  482
  506
  530
Debt-to-equity ratio
  1.590
  1.630
  1.680
  1.730
  1.780
  1.840
  1.890
  1.950
  2.010
  2.060
  2.120
  2.170
  2.230
  2.280
  2.330
  2.380
  2.430
  2.480
  2.520
  2.570
  2.610
  2.650
  2.690
  2.730
  2.760
  2.800
  2.830
  2.860
  2.890
  2.920
Adjusted equity ratio
  0.221
  0.221
  0.221
  0.221
  0.221
  0.221
  0.221
  0.221
  0.221
  0.221
  0.221
  0.221
  0.221
  0.221
  0.221
  0.221
  0.221
  0.221
  0.221
  0.221
  0.221
  0.221
  0.221
  0.221
  0.221
  0.221
  0.221
  0.221
  0.221
  0.221

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  -7
  -7
  -8
  -8
  -8
  -9
  -9
  -10
  -10
  -11
  -12
  -13
  -13
  -14
  -15
  -16
  -17
  -18
  -19
  -20
  -22
  -23
  -24
  -26
  -27
  -29
  -31
  -33
  -34
  -36
Depreciation, amort., depletion, $m
  3
  3
  3
  4
  4
  4
  4
  4
  4
  4
  5
  5
  5
  5
  5
  6
  6
  6
  6
  7
  7
  7
  8
  8
  8
  9
  9
  10
  10
  11
Funds from operations, $m
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -6
  -6
  -7
  -7
  -8
  -8
  -9
  -10
  -10
  -11
  -12
  -13
  -14
  -15
  -16
  -17
  -18
  -19
  -20
  -22
  -23
  -24
  -26
Change in working capital, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
Cash from operations, $m
  -4
  -4
  -4
  -4
  -4
  -5
  -5
  -6
  -6
  -6
  -7
  -7
  -8
  -9
  -9
  -10
  -11
  -11
  -12
  -13
  -14
  -15
  -16
  -17
  -18
  -19
  -21
  -22
  -23
  -25
Maintenance CAPEX, $m
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -5
  -5
  -6
  -6
  -6
  -6
  -7
  -7
  -7
  -8
  -8
  -8
  -9
  -9
  -10
  -10
New CAPEX, $m
  0
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -3
  -3
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -4
  -4
  -5
  -5
Cash from investing activities, $m
  -3
  -4
  -4
  -4
  -5
  -5
  -5
  -5
  -5
  -6
  -6
  -7
  -7
  -7
  -7
  -7
  -8
  -9
  -9
  -9
  -10
  -10
  -10
  -12
  -12
  -12
  -13
  -13
  -15
  -15
Free cash flow, $m
  -7
  -8
  -8
  -9
  -9
  -10
  -10
  -11
  -11
  -12
  -13
  -14
  -15
  -16
  -17
  -18
  -19
  -20
  -21
  -22
  -24
  -25
  -27
  -28
  -30
  -32
  -33
  -35
  -37
  -40
Issuance/(repayment) of debt, $m
  0
  3
  3
  4
  4
  5
  5
  5
  6
  6
  7
  7
  8
  8
  9
  9
  10
  10
  11
  11
  12
  13
  13
  14
  15
  16
  16
  17
  18
  19
Issuance/(repurchase) of shares, $m
  7
  8
  9
  9
  10
  10
  11
  11
  12
  13
  14
  15
  16
  16
  18
  19
  20
  21
  22
  24
  25
  27
  28
  30
  32
  33
  35
  37
  40
  42
Cash from financing (excl. dividends), $m  
  7
  11
  12
  13
  14
  15
  16
  16
  18
  19
  21
  22
  24
  24
  27
  28
  30
  31
  33
  35
  37
  40
  41
  44
  47
  49
  51
  54
  58
  61
Total cash flow (excl. dividends), $m
  0
  3
  4
  4
  5
  5
  6
  6
  7
  7
  7
  8
  9
  9
  10
  10
  11
  11
  12
  13
  13
  14
  15
  16
  17
  17
  18
  19
  20
  21
Retained Cash Flow (-), $m
  -7
  -8
  -9
  -9
  -10
  -10
  -11
  -11
  -12
  -13
  -14
  -15
  -16
  -16
  -18
  -19
  -20
  -21
  -22
  -24
  -25
  -27
  -28
  -30
  -32
  -33
  -35
  -37
  -40
  -42
Prev. year cash balance distribution, $m
  171
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
  5
  5
  5
  6
  6
  6
  6
  6
  7
  7
  7
  7
  8
  8
  8
  9
  9
  9
  10
  10
  11
  11
  12
  12
  13
  14
  14
  15
  16
  16
Cash available for distribution, $m
  164
  -5
  -5
  -5
  -5
  -5
  -5
  -5
  -6
  -6
  -6
  -7
  -7
  -7
  -8
  -8
  -9
  -10
  -10
  -11
  -12
  -12
  -13
  -14
  -15
  -16
  -17
  -18
  -19
  -20
Discount rate, %
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
  157
  -4
  -4
  -4
  -4
  -4
  -3
  -3
  -3
  -3
  -3
  -3
  -3
  -3
  -2
  -2
  -2
  -2
  -2
  -1
  -1
  -1
  -1
  -1
  -1
  0
  0
  0
  0
  0
Current shareholders' claim on cash, %
  97.2
  94.2
  91.2
  88.2
  85.3
  82.3
  79.4
  76.5
  73.7
  70.9
  68.1
  65.4
  62.7
  60.1
  57.6
  55.1
  52.7
  50.3
  48.1
  45.9
  43.8
  41.7
  39.7
  37.8
  36.0
  34.2
  32.5
  30.9
  29.4
  27.9

Arena Pharmaceuticals, Inc. is a biopharmaceutical company. The Company is focused on developing small molecule drugs across a range of therapeutic areas. The Company has three primary investigational clinical programs: etrasimod (APD334) in Phase II evaluation for ulcerative colitis, APD371 entering Phase II evaluation for the treatment of pain associated with Crohn's disease, and ralinepag (APD811) in Phase II evaluation for pulmonary arterial hypertension (PAH). The Company's drug, Lorcaserin, is approved for marketing in the United States and South Korea for the indication of weight management. The Company's drug candidates in clinical development include APD334 for autoimmune diseases, ralinepag for vascular diseases and APD371 for pain. The Company's programs under collaboration include nelotanserin for dementia-associated psychosis, temanogrel for thrombotic diseases, and an undisclosed orphan GPCR for central nervous system (CNS) indication(s).

FINANCIAL RATIOS  of  Arena Pharmaceuticals (ARNA)

Valuation Ratios
P/E Ratio -46.6
Price to Sales 8.6
Price to Book 26.8
Price to Tangible Book
Price to Cash Flow -17.3
Price to Free Cash Flow -17
Growth Rates
Sales Growth Rate 226.3%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -90.9%
Cap. Spend. - 3 Yr. Gr. Rate -35.6%
Financial Strength
Quick Ratio 23
Current Ratio 0
LT Debt to Equity 152.5%
Total Debt to Equity 162.5%
Interest Coverage -3
Management Effectiveness
Return On Assets -8%
Ret/ On Assets - 3 Yr. Avg. -21.1%
Return On Total Capital -20.3%
Ret/ On T. Cap. - 3 Yr. Avg. -51.1%
Return On Equity -48.9%
Return On Equity - 3 Yr. Avg. -116.9%
Asset Turnover 0.6
Profitability Ratios
Gross Margin 87.9%
Gross Margin - 3 Yr. Avg. 77.4%
EBITDA Margin -6.5%
EBITDA Margin - 3 Yr. Avg. -121.6%
Operating Margin -13.7%
Oper. Margin - 3 Yr. Avg. -190.4%
Pre-Tax Margin -18.5%
Pre-Tax Margin - 3 Yr. Avg. -155.9%
Net Profit Margin -18.5%
Net Profit Margin - 3 Yr. Avg. -155.9%
Effective Tax Rate 0%
Eff/ Tax Rate - 3 Yr. Avg. 0%
Payout Ratio 0%

ARNA stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the ARNA stock intrinsic value calculation we used $21 million for the last fiscal year's total revenue generated by Arena Pharmaceuticals. The default revenue input number comes from 2017 income statement of Arena Pharmaceuticals. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our ARNA stock valuation model: a) initial revenue growth rate of 2% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for ARNA is calculated based on our internal credit rating of Arena Pharmaceuticals, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Arena Pharmaceuticals.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of ARNA stock the variable cost ratio is equal to 107.8%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for ARNA stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 9.6% for Arena Pharmaceuticals.

Corporate tax rate of 27% is the nominal tax rate for Arena Pharmaceuticals. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the ARNA stock is equal to 25%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for ARNA are equal to 152.9%.

Life of production assets of 10 years is the average useful life of capital assets used in Arena Pharmaceuticals operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for ARNA is equal to -37.1%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $207 million for Arena Pharmaceuticals - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 33 million for Arena Pharmaceuticals is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Arena Pharmaceuticals at the current share price and the inputted number of shares is $1.5 billion.

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