Arena Is Still A Great Short

| About: Arena Pharmaceuticals, (ARNA)

At the recent Bank of America Merrill Lynch 2013 Health Care Conference, Craig Audet Ph.D. gave an overview of Arena Pharmaceuticals' (NASDAQ:ARNA) launch for Belviq, its FDA approved anti-obesity medication. While many longs felt that this presentation forecast $200 M first year sales for the drug, I took away a vastly different message. Based on the details provided at the conference by Mr. Audet and a general understanding of effective pharmaceutical sales, I will walk investors through my takeaways below.

Key facts of the projected launch for Belviq

o 26,000 targeted specialists (Cardiologists, Endocrinologists, Obesity Specialists, etc.)

o 200 sales reps assigned by Eisai to Belviq in U.S.

o On average, only 43% of physicians will agree to meet a sales rep

Based on these details and industry averages, we can now make a quantitative estimate of Belviq's sales for its first 3 months on the market.

o Based on industry averages, 11,180 specialists will hold a meeting with a sales rep from Eisai.

o If we assume that 90% of this sub-population of specialists agrees to prescribe Belviq, this leaves us with 10,062 doctors initially prescribing Belviq.

o If Belviq is prescribed twice as often as rival Qsymia, one could expect about 4 scripts per physician, giving us a grand total of 40, 248 scripts in the initial launch.

o At a projected retail price of $250 (higher end of estimate), this gives us about $10 M in sales.

o Arena gets 31.5% of net sales for a total of $3.16 M in revenue.

So in terms of reaching the $200 M in sales projected by many longs and perhaps Eisai (OTCPK:ESALY), the targeted physicians would have to write, on average, 20 scripts per physician for Belviq.

Summing it all up

Since Belviq is being launched at the tail end of Q2, I expect Arena to book less than a million in revenue from sales this quarter. According to Craig Audet's comments at the BOA conference, Arena has about $201 M in cash on hand, which includes the $65 M milestone payment from Eisai. So let's say they have about $202 M in cash by the end of Q2. With a market cap of $1.72 B, ARNA shares would thus be trading at 8.5X cash on hand. That's not unheard of and certainly no reason to panic. In terms of revenues, however, ARNA would look to be ridiculously overpriced with a multiple over 1700. And that doesn't even account for the upcoming R&D expenses associated with the company's revived drug pipeline. Whether the market will value ARNA closer to its cash on hand or revenue is anyone's guess. Personally, I think it will be a mixture of the two, with ARNA shares dropping below $4 a share.

I know that sounds dramatic, but the numbers are self-evident. Moreover, I've warned longs about Eisai's plans for a limited launch a number of times, and to their credit, they have chosen to be resolute in their belief that Belviq is destined to be a blockbuster. While that is certainly their right, it's vitally important to always remember to trade without emotion (when possible), and listen to all sides of the argument with an open mind. To date, I have yet to see a convincing argument as to why Belviq will buck the historical trend of anti-obesity drugs, and the Street, based on its massive short position in ARNA, seems to agree with me.

Disclosure: I am short 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.