Arena Pharmaceuticals' (ARNA) Chief Scientific Officer and Co-Founder Dominic Behan was a featured speaker at the Deutsche Bank Health Care Conference on May 30, 2013. The session had an element of excitement as the launch of the anti-obesity drug Belviq is set for next week. Over a decade after the company formed, its first product is mere days away from becoming available in the U.S. market. I encourage investors to read the transcript, as it keeps the session in full context.
I tend to focus on the near and midterm dynamics of this equity. One main reason is that there is a lot riding on the success of Belviq. As I anticipated, the subject of Belviq, marketing partner Eisai, and any metrics surrounding Belviq sales were very measured. The reasoning behind this is quite simple. I outlined some of that recently in an article about marketing (do not look for TV and media advertising out of the gate). Arena is excited and anticipating success. That is a good thing, because this launch carries more importance than many may realize.
The long-term Arena strategy has never been about putting all of the eggs in one basket. The company has had an approach that dealt in a concept (or theory if you will). Belviq is the first drug out of that broader base that has gained approval and is now going to market. To a certain extent, the theories of this platform were validated with company trials and FDA approval. From a medical perspective, that is much further than many theories actually get. That makes Arena a decent bet. From a financial perspective, the prospects look good as well. The financial side gained big points when Eisai stepped up to the plate to partner with Arena. The next test for Belviq, and by extension the pipeline, is sales success. The big question is whether sales of Belviq will make it viable. Good sales will be all it takes to get investors more excited and looking deeper into the potential of the pipeline.
Dominick Behan stated, "Arena was never settled to be just about one horse. The company went after GPCRs as a broad platform approach, and the idea was to access these receptors to find novel chemical entities for the treatment of human disease. Just all happens that BELVIQ is the first novel chemical entity that has been approved from our broader pipeline."
The Arena pipeline is in various stages, will require clinical trials, and will need to garner approval for the market. Arena is not rushing anything at this point and that is a responsible path. While the launch of Belviq looks promising, it is the revenue from that launch (combined with $200 million in cash on hand) that will finance the next phases of growth. While some may consider the Eisai deal expensive (Eisai gets about 66% of net sales), one key element of brilliance in the deal was the fact that Eisai will absorb large amounts of the costs associated with future Belviq studies. This will allow Arena to use cash to bring elements of the pipeline to fruition with cash on hand instead of debt and stock dilution. For investors that is an important consideration. If sales revenue of Belviq can hit $250 million in 1 year it would trigger bonuses from Eisai and put another $134 million into the cash coffers. If sales are less, the payment will remain at about 33%. The potential of the pipeline ties directly to the success levels of Belviq.
Before moving onto the pipeline, I want to state that the perceived value of that pipeline is sensitive to the sales results of Belviq. There is potential there that is worth betting on, but the level of excitement for the pipeline and the company is currently hinged on Belviq. This is why I have been so focused on what the early sales will be and have been so sensitive to the less than stellar sales results of competitor Vivus (VVUS) and its drug Qsymia. Perhaps more than anything else, I get questions of why I want to compare Belviq and Qsymia. It is not that I want to compare them at all. I want to understand the market that Arena is entering, what revenue can be generated, and if the market makes the company I have invested in appreciate. From an investor's standpoint, I do not care if one is new and the other is old. I do not care if one works with one pill a day and the other with two. What I care about is whether or not my chosen investment in this sector has success and what that path is. My comparison has not been that Belviq sales are limited to what Qsymia has done. In fact, it is just the opposite. I expect Belviq sales to be higher. Looking at what Qsymia has done gives me a reference to work from on the consumer acceptance of a prescription anti-obesity solution as well as a decent idea of how pricing impacts the sector. Think about that. At $200 per script, Belviq needs 104,167 patients on the drug for 12 months. If the price comes down to $150, the patient number needs to be 138,889.
In the pipeline, Arena has APD811. This drug is targeting pulmonary hypertension. It is in phase 1 trials with those results pending in the second half of 2013. There would need to be phase II, and Phase III trials prior to possible application for approval.
Termanogrel is another concept in the pipeline. It will be used to treat Thrombosis. This drug is in phase 1 trials. Arena has partnered with IlDong of Korea to take the drug to proof of concept.
A third pipeline is APD334. This drug will be used to treat autoimmune diseases. This drug is also in Phase 1 trials.
The three pipeline drugs listed above are the furthest along in the testing process. These trials take time and money. In theory, the money will come from sales of Belviq. As an investor, I see potential in the pipeline, but also see that getting to the next step is important. I would much rather see a successful Belviq that will allow the company I am invested in to finance its own operations than to rely on debt, dilution, or deals that are less favorable than might have otherwise been.
Arena management has done a good job of setting the stage for success. It is now time for the ultimate proof of concept. If all of the cards fall into the right place, then early investors will truly have something to celebrate. Remember, Wall Street is watching all of this closely. There will be some frustrating times ahead, but the key is whether or not Belviq can pace to $250 million sales in the first year or so. Many investors took their gamble early on. I took mine at $7.32 and now have an average cost basis of $4.14. In my mind, anything under $8.50 is a good buy. Launch should see this equity above $9.00 and then channel checks of prescription numbers will write the next chapter. One note of caution. Belviq is "marketed" as a drug that a patient will try for 12 weeks. If after 12 weeks, the patient has not achieved 5% weight loss it is recommended that they discontinue. Thus, months 4, 5, and 6 will be quite telling as the responder levels are determined and we understand the churn. Simply stated, the first 3 months will not have very much churn. Keep that in the back of your mind. Stay tuned.
Additional disclosure: I have no position in Vivus