Arena Pharmaceuticals (ARNA) has now received its long anticipated scheduling for Belviq from the DEA, and its fate in Europe, at least in the short-term, is a known for investors. The stage is thus set for Belviq's commercial launch in North America, which is expected to occur next month. With the PPS sitting around $8ish and showing fairly decent support at these levels for months (except the quick dip upon Arena pulling Belviq's application in Europe), investors and traders alike now must decide how to play the launch. Spencer Osborne cogently argued that anything below $8 in PPS represents a strong buying opportunity going forward, with his argument couched in terms of projected number of scripts being written during the initial launch. Looking at these numbers and the bullish sentiment on message boards, I am of the opinion that most investors are about to be sorely disappointed.
Over the last few months, I have never seen even a single quantitative argument for why Belviq's launch will be strong, or why it's destined to be a blockbuster. Stating that a certain number of scripts could be written without any basis for the estimate isn't exactly quantitative in my book. That's tantamount to wishful thinking, or just plain speculation. And when naysayers point out that obesity drugs haven't garnered much demand from either doctors or patients alike since the dramatic implosion of fen-phen, bulls resort to all sorts of short seller conspiracy theories to support their position. A clear example is the comically poor demand for Vivus's (VVUS) Qsymia, which is on the path to selling less than $20 M worth of pills over the next year.
I understand there are significant differences in the logistics of the launches between these two drugs, but even the restrictive REMS of Qsymia cannot explain such strikingly poor sales. ARNA bulls that ignore this example do so at their own peril. Overall, the only reason bulls appear to believe that Belviq's launch will be strong is the pandemic nature of obesity in general, which gets worse every year according to the CDC. Nevertheless, I believe that argument is a strawman, and will show why in this article.
Demographics Matter to Belviq's Launch
If all that mattered was the sheer size of the obesity epidemic, I would be buying ARNA shares hand over fist -- regardless of its already high market cap of nearly $2 B. But nothing could be further from the truth. There are two logistical problems that Arena and Eisai cannot overcome in their fight to make Belviq a blockbuster. Namely, obesity meds have not gained much traction in getting covered by insurance companies, and secondly, the hefty price tag for a month supply of Belviq. The wholesale price for a one month supply of Belviq is $199.50, leaving the retail price somewhere about $220-250 a bottle. Given that Obamacare is not likely to cover anti-obesity meds anytime soon but only conditions arising from being obese (i.e., diabetes, heart disease, etc.), this leaves most patients having to foot the bill for Belviq. These two logistical issues will come face to face with the demography of obesity in a way that is wholly unfavorable to ARNA investors.
According to the CDC, there are major differences in the demographic trends between adult male and females in terms of obesity. Specifically, obesity rates increase with decreasing income in women, whereas socioeconomic status matters little to males (i.e., males tend to be fat irrespective of their incomes in the U.S.). If we combine this gender trend with the sufficient income necessary to either afford Belviq or an insurance plan that covers it, that leaves us with about 30 M potential customers in the U.S. (both sexes combined).
Now let's consider Belviq's efficacy and administration. According to the package insert, Belviq is to be discontinued by week 12 if 5% weight loss isn't achieved. Yet, a meta-analysis of lorcaserin's clinical data shows that only 47.5% of patients lost at least 5% after an entire year on the drug. This same meta-analysis shows that 22.6% of patients lost 10% or more in a year's time on lorcaserin, making them the true "responders." Putting this together, this means that probably only 23% of patients that start Belviq are likely to continue past the third month, i.e., only strong responders will meet the 5% weight loss criteria in three months.
Taking the demographic and clinical trial data together, this means there are about 6.9 M potential customers or long-term users of Belviq in the U.S. If we look at normal penetration rates for well marketed drugs, this would give Belviq a potential launch of about 80k scripts over the first year. If we take into account competition from Qsymia and script to purchase conversion rates, this puts us into a 40-60k script ballpark. While this is no doubt a rough estimate, it is certainly more quantitative than just pulling a number out of thin air, as many authors have done before. Even so, I believe it is far more realistic than what has been espoused thus far.
I am therefore expecting the initial sales of Belviq to come in around the 10k mark, or about $2.5 M in revenue. It's important to remember that the initial few weeks of sales will be slow, but tend to pick up thereafter. Under this scenario, Arena would generate about $800k in revenue from the initial launch due to their revenue sharing agreement with Eisai. If we apply a sector average multiple of 17, I thus believe ARNA shares are due for a 22% correction to the downside from current levels, once the first sales numbers hit the street. And that is based on fundamentals alone. I wouldn't be surprised at all to see a much larger drop based on sheer overreaction. That said, I do believe ARNA would then become a strong buy after the first quarter sales hit the street, and the subsequent correction to the downside. This is likely to be the case because Belviq sales will pick up for subsequent quarters, which is normal for any newly launched drug. Overall, ARNA is a great short play at current levels in my opinion, and this opinion is based on the demographics of Belviq's target market combined with the competitive landscape in the obesity market.