Arena Pharmaceuticals - Out To Launch Or Out To Lunch?

May.22.13 | About: Arena Pharmaceuticals, (ARNA)

Some equities have a pretty passionate following. Arena Pharmaceuticals (NASDAQ:ARNA) happens to be a company that carries a very passionate fan base. On its face this could seem like a great thing, but as with anything in life, there are two sides to any story. The same is true with the upcoming launch of Arena's anti-obesity drug Belviq. Is Arena out to launch, or is it out to lunch?

The answer to that question is not an easy one. It depends on whether you are looking for and measuring company success or the success of the equity. Personally, I look at the equity because that is where I have some money invested.

Circling back to the passionate fan base Arena has, we should now look at a few items:

Positives Of A Passionate Fan Base

  • These fans are unofficial ambassadors of the equity. They love the equity, have invested in it, and those that got in early enough have seen great success. They preach that success and firmly believe that even more success is to come.
  • These fans are unofficial ambassadors of the company. Because these fans saw investment success by being into the equity at the right time, they have become virtual spokespeople for the company. Essentially, many of the more passionate and vocal fans of the company can find positives in anything.
  • They exude a positive message. I will not go so far as to say the word "spin" in its classic sense, but will use the word in a more innocent sense. These passionate fans will spin any news to be positive. By example, when Arena had its Belviq application ongoing in Europe the passionate fan base was always carrying the mantra that Arena would be huge in Europe because competitor Vivus (NASDAQ:VVUS) had been rejected. Belviq in Europe would be a virtual gold mine, and that, due to a perceived safety advantage, European approval was a virtual guarantee. When Arena suddenly pulled its application in Europe these fans, though likely very disappointed, did not show any negative emotion. Instead, they heralded the move as the right thing to do in order to line up an eventual approval the "right way".
  • Passionate fans get the word out. These are the ones beating the bushes, pounding the pavement, leading the cheers, posting on message boards, commenting on articles, and making sure that Arena is a name that everyone will know.

Negatives Of A Passionate Fan Base

  • These fans are unofficial ambassadors of the equity. You see, the passionate fan being an unofficial ambassador is good and bad. On the bad side, these fans can create very lofty expectations. While many got in early (at a couple of bucks), and now have a four-bagger on their hands, their excitement brings in people at the highest levels. It is almost impossible for the new-comer to reach the same fevered pitch that the early adopters have. Ever see a comment about Arena when it is at a high? Ever see those people touting all of the positives when the equity was at $10, $11, $12, or even $13? Those were indeed great times for the early investors, but I assure you that a person that bought Arena at even $10 on the excitement and positive spin of passionate fans is not very happy at this point. In fact, they may feel that they got sold an empty bill of goods. This often leads to more reserved fans that want all of those positives to line up perfectly and the equity to rise above the levels they bought at. Essentially, these passionate fans create an expectation level that is difficult to reach or maintain.
  • These fans are unofficial ambassadors of the company. Again, it is good and bad. Many passionate fans take stances that are simply overly positive. They speak as though they are a part of the company, and sometimes try to speak on behalf of the company. Sometimes they start campaigns that actually make the company's job even harder than it already is.
  • They exude a positive message. The power of a positive message can not be denied. It is a wonderful thing. With a drug like Belviq, it can be dangerous. By example, responders to Belviq in controlled trials numbered about 22%. That is a great number. It also means that Belviq will not necessarily work for 78% of those that try it. If you were to listen to the passionate fans you might assume that Belviq will work for almost anyone, and that there is no room in the market for any other. Realistically speaking this is not the case.
  • Passionate fans get the word out. The bad side of this is that passionate fans often carry a message that simply is not correct, and often something that the company can not say, support, or do. For example, we can look at type II diabetes. Belviq has shown potential here. In fact, some studies are already under way with good initial results. Belviq is not labeled for Type II diabetes. It is labeled for weight loss of someone that has a BMI of 27 or more as well as a co-morbid condition, of which Type II diabetes is a qualifying condition. A doctor scripting Belviq for treatment of Type II diabetes would be doing so off-label even if the patient has a BMI over 27. The doctor can treat the weight on-label and see a positive benefit in the Type II diabetes condition as a "side effect". While splitting hairs, the distinction is important. Personally, a BMI of 25 means I weigh 160 pounds. At 172 pounds I would have a BMI of 27. If I had Type II diabetes, then I would qualify for Belviq. Once I lose my 12 pounds, I no longer need the drug for weight. The doctor could continue me on treatment for my theoretical Type II diabetes, but at that point would be doing so off label.

What Does All Of This Boil Down To

The launch date of Belviq is June 7, 2013. That date is now on the radar screen of anyone that follows the equity closely. Once Belviq launches we will finally be able to see what the real numbers are. We will be able to begin setting aside assumptions and replacing those with data. Initial channel check will be the important thing to watch for.

Have you ever heard someone state with certainty that Belviq will be a blockbuster? Are you aware that the pharma blockbuster is typically known as a drug that does $1 billion of sales in 1 year? Are you aware that Arena marketing partner Eisai is targeting sales of $200 million between June 7th of this year and March 31st of next year?

For months, expectations had been quite high in the prescription anti-obesity segment. The enthusiasm was tempered when the Vivus launch of Qsymia got off to a modest start. Expectations have tempered a bit more in subsequent months as Qsymia seemed to struggle to gain traction. While that is not a positive that the passionate fans would like to see, it is actually a good thing.

Wall Street rewards outperformance and punishes misses. Sometimes setting a bar lower and exceeding can be far more rewarding to an equity than simply meeting a bar that is set higher even if the results of performance are identical.

I have received plenty of emails touting that this equity is poised to run going into launch and inquiring as to why I do not see that. My answer is simple. I see a lot of possibilities, count on a conservative approach, and frame my expectations around not what I want to happen, but what the street is looking for.

Simply stated, Arena could have a good launch that shows great promise and the equity may not move as substantially as many think because the expectations are perhaps higher than they should have been. It is almost ironic that I get the wrath of some passionate longs for being too conservative when in actuality the level of street surprise if expectations were reasonable and soundly beaten would be exponentially better for the equity.

What To Watch For

As the June 7th launch date approaches we want to watch for the news flow, the volume traded on the equity, and whether or not the equity can test more recent highs of $8.50. Long ago I stated that I felt DEA scheduling would allow $8.50 to be a baseline going into seeing sales numbers. I still believe that is possible, and is a reasonable expectation.

We will certainly see some excitement surrounding the June 7th date. This excitement could move the equity. Watch the volume during the launch closely. A strong move happens on high volume and can hold the gain. Usually a big event (positive or negative) causes a bigger move than it should. This will create a trading opportunity for savvy investors. The key will happen in the weeks following the launch. Channel checks regarding sales will set the new bars by which the performance of the equity is measured. Whether we like it or not the launch and performance of Belviq will be the barometer of this company and this equity in the short and mid term.

I see potential with the pipeline, but at this point that is not what the street is looking for in determining a valuation base for the equity. Potential is great, but there is a lot that needs to happen before that potential delivers value. My son has the potential to be President one day. Betting on that while he is 12 years old is a severe stretch though. Simply stated, take one step at a time.

Arena's Belviq is the immediate concern. Is Arena out to launch or out to lunch? In my opinion the company is out to launch, but some people have expectations so high that it may appear to be out to lunch. I like the fact that Eisai has outlined $200 million in sales over the next 10 months. I like the fact that Arena has a couple of presentations prior to the June 7th launch. It is my hope that Arena frames the launch in a way that keeps expectations real. If the company frames this launch correctly, we could see a decent move in the equity.

Disclosure: I am long ARNA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have no position in Vivus.