Investors in Arena Pharmaceuticals (NASDAQ:ARNA) are pretty eager to see the launch of anti-obesity drug Belviq this Friday, June 7th. With just two more trading sessions prior to the launch, some investors may be wondering where the excitement is. Arena opened launch week at $8.90 and as of the close on Tuesday was at $8.76. How could it possibly be that a company with an anti-obesity drug is trading down going into launch?
The answer is not that simple. There are many factors at play and one of the major ones is that the performance of competitor Vivus (NASDAQ:VVUS), with its drug Qsymia, has been quite modest going into its 8th month of sales. Whether you believe that Belviq and Qsymia should be compared and contrasted or not is not the issue. The issue that the street looks at is sectors, and it is typically the street that sets the expectation levels. The street's experience with Qsymia sales has thus far not set any records.
The first thing to consider is that while the launch is indeed important for Arena (after all, it garners the company a $65 million milestone payment from Eisai (OTCPK:ESALY)), it is the near term weekly channel checks (sales figures) that will move the equity and the mid term 4th, 5th, and 6th month that will give us an inclination of exactly how many patients respond to treatment with Belviq. That is when we will understand the longer term potential of the drug as a revenue source for Arena. Until that data is cast in stone there will be speculators on either side of the equation.
Even if Arena's initial launch does come in at more modest levels, there is still potential with Arena because of its pipeline. Right now the only deals that Arena has on the table are the Eisai deal for Belviq in North America, and the Ildong deal for Belviq in Korea. That leaves plenty of room for Arena to negotiate more deals with more partners. I recently featured recent IPO Epizyme (NASDAQ:EPZM) as a pharma company with a great potential pipeline that has constructed several major deals to help ensure success. The potential is there for Arena to do the same, thus using royalties to drive the machine of future development.
It is almost a catch 22 situation. Arena is very attractive because it has a pipeline and as yet signed no deals for a lot of it, but the street may be leery due to the fact that Arena is not yet mitigating risk by bringing in partners. There is a lot riding on Belviq for Arena. Not just the viability of the drug, but also the viability of their concept, and the ability to cut the biggest and best deals possible.
I have maintained for quite some time that the launch presents an opportunity for an active trader to see a pop to about $9.50 and that the equity will settle down and await initial channel checks. Some may feel that I am being bearish. For me it is simply a matter of prudence. I am already in and simply waiting to see the initial results of sales so that I can make an informed decision about the investment moving forward. I saw Arena as worth a bet at anything below $8.50 and feel that the launch can present a play for more active traders. As frustrating as my more conservative strategy has been for very passionate longs, it has had a tendency to be pretty much right on target.
I consider the launch on the 7th to be somewhat like noise in this equity. I am looking for the meat and potatoes of channel checks. Savvy traders will be able to trade these sales figures for weeks before we begin to see the impact of non-responders dropping off. While passionate longs may want a massive number of prescriptions written in the first week, a more stable situation would be a build-up of scripts coming off of a solid base. If you are invested in Arena for the longer term, stability should mean more to you than pops and drops. Stability comes with solid week-over-week and then month-over-month progress gains. In an interview on Bloomberg Tuesday, Eisai and Arena management guided that the team was shorting for Belviq sales to hit $150 million this year. In modeling a breakdown, the prescription levels might need to look like the chart below.
There is certainly enough potential in Belviq as well as its pipeline to bet on, but let's remember it is a process to obtain and then maintain gains. A simple look at the chart above shows that this will not be a walk in the park. The street is already modeling sales and will apply channel check data to compare. Investors should do the same. Let the traders trade and let the longs hold strong. If the product does well with consumers, it will write its own course. I will be discussing the launch of Belviq and my expectations this Thursday at 8:00 PM on Playground Radio.
Additional disclosure: I may initiate a position in Epizyme within the next 72 hours. I have no position in Vivus.