I think sometimes investor conferences can be boring, but in other instances they can lead to significant information, especially where the profit potential can be complicated by a business model dependent upon a biotechnology partnership. In one of many investor conferences Arena (ARNA) is scheduled to present in the coming days, at the November 13, 2012, Lazard Capital investor conference we were given critical details about Arena's business model going forward.
Investors and institutional analysts alike for the very first time have been handed the real basis and rational behind investor enthusiasm over the profit potential of Arena's obesity drug Belviq.
Arena's presentation at the Lazard Capital conference detailed the mechanics of the business model. Arena has a 10 year Swiss tax heaven benefit on profits, which makes the share it pays to Eisai under the partnership terms look like a tax trade-off.
At the Lazard conference Robert Huffman, Arena's Chief Financial officer stated on pages 1-2 of the transcript:
"Significant market opportunity, worldwide it's a 0.5 billion individuals are classified as obese. So it's a significant market opportunity for us. We actually are very much ready for the launch. We've delivered we announced in our last 10-Q launch supply to Eisai. So we delivered uh $11.6 million worth. It's a portion of the launch supply. So we'll be ready to launch as soon as we get DEA scheduling.
Hoffman stated Eisai is Arena's partner and "So they're really focused on the launch of BELVIQ going forward. The economics are significant to us we get we sell them product and from for the very first dollar we get 31.5% of their net sales not a profit share but net sale, very significant.
So in terms of looking at further down the economics at $250 million in net sale. We'll get 31.5% of that which is about $80 million plus that threshold we achieved some purchase price adjustments as well as some milestones which another $55 million take on top of that when we get DEA scheduling is another $65 million. So if I do my math right that's an excess of $200 million on their first $250 million of sale.
So it makes significant opportunity for us. In terms of other opportunities we just announced last week a nice collaboration with the South Korean company Ildong but we received a $5 million upfront payment great economic service as well first dollar on net sales is at 35% and that will ramps up to 45% on net sale.
In terms of other areas that we are moving forward with the European strategy. We did file in the EU in March of this year. I can't believe it's for this year but and so we founded the 120 day questions and we are hopeful to get a decision on that in first half of 2013 probably behind that is actually Switzerland as well which is where our manufacturing facility is."
Now, before you buy a particular stock, you may want to find out whether existing large shareholders are buying more or selling off their shares. This can help you evaluate the stock in the context of what they think of the stock's price and prospects. This information may sound like it would be hard to get and, possibly illegal if you could find it. Fortunately, neither is the case.
The reality for most well known stocks is institutions (mutual funds, brokers, large accounts such as retirement funds and endowments, and so on) usually hold the majority of outstanding shares. Generally, we want to consider this information when evaluating a particular stock.
These large companies and institutions employ teams of analysts to invest billions of dollars. It makes sense that they are going to spot good places to put their money, right? The answer is a definite yes. Of course, they are looking for a good return on their investments just like the rest of us. They look for good companies with good growth prospects, most of the time.
If the institutional investors are buying a stock, that is an endorsement of sorts that the stock has good prospects. Let's look at Arena's case, Pre-Adcom institutional ownership was 26%. However, a recent measure of institutional ownership showed the institutions have been steadily growing their ownership interest to 44.4%. The top 5 existing institutions in the top 15 -- Vanguard Group (VUG); Barclays Global Investor (BCS); Northern Trust Corp (NTRS); Morgan Stanley (MS); Bank of New York (BK-PC); Goldman Sachs Group (GSF); American International Group (AIG); Citigroup Inc (C); Bank of America Corp (BAC); UBS (UBS); Schwab Charles Investment Management (SCHW); Barclays; JP Morgan Chase & Co (JPM); Cupps Capital Management; and TIAA Cref Investment -- added significantly more in the third quarter and a brand new top 5 institutional investor has emerged:
- Wellington Management Co LLP 17,962,741
- Vanguard Group Inc 11,487,746
- Deerfield Management Co/NY 7,873,917
- Blackrock (BLK) 6,419,643
- State Street Corp (STT) 6,043,845
Out of a total 168 institutional holders reporting, there are 38 new institutional positions in the stock. Institutions and funds alike are buying according to Morningstar. There are 234 fund owners. The top 10 Funds own 10.96 % of the outstanding shares:
- Fidelity Select Biotechnology 3,861,344
- Vanguard Small Cap Index 3,148,184
- Vanguard Small Cap Index Inv 3,161,896
- Oppenheimer Global Opportunities A 3,000,000
- SPDR S&P Biotech 2,59,700
- Vanguard Small Cap 2,245,317
- Vanguard Extended Market Idx Inv 1,764,105
- iShares Nasdaq Biotechnology 1,429,757
- iShares Russell 2000 Growth Index 1,301,355
- CREF Stock 996,609
There is a 57.2 % increase in institutional ownership from the previous quarter. There is an 87.5% increase from the previous quarter in new owners. Among the largest new institutional holders we see Deerfield Management Co., which added an impressive 7,873,917 shares; Capital World Investors added 5,000,000 shares; QVT Financial added 2,700,000; Jefferies Group (JEF) added 312,692; Group One Trading 235,800; SG Americas Securities 225,539 and Wellington Management Co added 8,555,930 shares in the 3rd quarter. As of the last report institutions held 96,471,441 total shares. By and large the most recent data shows Institutions and Funds are quietly adding to their positions. A basic principle of smart investing is to follow the institutional money flow. I expect that institutional ownership will increase to 60% by the end of Q1 2013 when U.S. marketing should ramp up. Arena may trade as high $20 per share by the end of the year.
Finally, don't ignore the company's fundamentals. They still tell the best story about a company's long-term chances for success in building value. Here is why Arena is a red-hot buy. We like using Investor's Business Daily's proprietary stock performance technology:
Price and Volume:
- Price $8.15
- Relative Strength Rating (RS) 99 (It's flashing 99 out of a possible 99)
- Group RS Rating A
- % of 52 Week High -36.7%
- Price vs. 50-day Moving Average -6.82%
- 50-day Average Volume 16,758,000
Supply and Demand:
- Market Capitalization 1.84 B
- Accumulation/Distribution Rating B-
- Up/Down Volume 0.9
- % Change In Funds Owning Stock 9%
- Qtrs of Increasing Fund Ownership 3
Pre-Adcom there were approximately 40,000,000 shares short. Arena's long and short interest in the stock is temporarily playing tug of war with the persistent wave of short interest attacks sitting at all time highs at 50,945,833 as of October 31, 2012. The short interest growth is disturbing in light of the FDA's approval in June, 2012. Special care should be made by short interests since ARNA made it to the naked short list (Reg SHO) as of November 14, 2012, which means short sellers are having a hard time finding more shares to short and some shares short are required to cover within 5 days. The SEC has received many complaints about the short interest rules not being followed by traders and brokers alike in ARNA stock as demonstrated by this Bloomberg Special Report. Generally speaking the best way to limit short selling is to keep your shares in a cash account with your broker, and if shares are in a margin account to make sure you do not have a margin debit balance (no money borrowed from the broker). You should talk to your broker immediately.
The DEA is expected to give Belviq a schedule IV classification, which will allow liberal prescription by doctors every 90 days. Belviq should be a blockbuster drug because of its excellent safety profile, it can be easily prescribed and obtained by patients with no REMS attached, its efficacy in responders averages 11%, and its excellent pre-T2DM and T2DM benefits!
Arena's stock continues to trade at an extremely low price of $8.15/share. The 52-week high is $13.50/share. Looks like the Institution Investors are accumulating Arena as a long-term growth stock before the floodgates open. Sophisticated investors know the company's fundamentals will get stronger with DEA drug scheduling, Eisai Pricing, and Belviq marketing.