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Last week I wrote a pretty quick and simple Instablog titled, Looking At Numbers For Arena. The piece was a simple exercise in developing what the primary patient group for Arena's (NASDAQ:ARNA) Belviq might look like. A couple of days later, I saw an article written by Bradley Fickes of UT San Diego titled, Belviq's "Responders" Lose More Weight. I would like to encourage readers to read the Fikes piece before continuing on with this article. It is a good read, and begins to get to an important point that investors need to think about.

When I went about writing my instablog, it was a very simple exercise in trying to identify the key market that is likely to develop the best results from Arena's Belviq, and by extension be the best for the bottom line. The concept is simple. Belviq is not a solution for everyone, but can be a great solution for some.

As an investor it is prudent to try to understand the size of the potential market and see if the investment potential makes it a good bet. If you think about it, a company could develop a drug that cures a very rare disease that only impacts about 10 people. The drug could work great, but it may not be a good investment. Personally I see potential in Belviq as well as Arena Pharmaceuticals the investment. The reason I see that potential is because the market is substantial enough to deliver good financial results.

With that being said, my numbers below are geared toward looking at several factors that narrow down the target potential pool to those that are most likely to have success with the drug. Essentially, this is an exercise in identifying what is termed the primary market.

The primary market is the pool derived from the potential market that will deliver the biggest potential return. In this case the biggest potential return comes from those who respond to Belviq. In my opinion, the primary market starts out with people who are obese. This can then be refined into which portion of the obese population delivers the best results. The secondary market is those who are overweight with a qualifying comorbid condition. I will go into greater detail on that below.

The Numbers

  • Population of the United States - 315,000,000
  • Percentage of Population over the age of 18 - 75%
  • Potential number of patients that qualify by age - 236,250,000
  • Percentage of U.S. Population that is obese - About 33%
  • Potential number of patients that qualify by age and obesity - 77,962,500
  • Percentage of Population on SSRI's (antidepressants) - 11%
  • Potential number of patients that qualify based on age, obesity and are not taking SSRI's - 69,386,625 (I remove SSRI's because FDA labeling shows a conflict between Belviq and SSRI's and urges caution)

I see this group of 69.4 million people as the primary market for which Belviq may be a good solution. I have not included the secondary category of overweight people with a comorbid condition for a few reasons. First, this group is likely between 5 and 20 pounds overweight. In most cases the simple use of being on a better diet and increasing the exercise level is probably the best solution. I would consider it quite odd if a doctor scripted any weigh loss pill for someone that needed to drop 10 pounds and is perfectly capable of hitting the gym for a few hours a week and cutting out the Big Macs. There is indeed a secondary (millions) that is worth understanding, but what I am trying to focus on here is the primary market.

Now that we have established (in a very simple model) that the potential strong market for Belviq is about 69.4 million patients, let's look a bit deeper. We want to get into the responders. Responders are those that the drug works for and thus will likely be on the pill for a length of time. The first thing we need to understand is that the ONLY way someone can be a responder is if they try the drug. There will be many that will not try it. For the purpose of this exercise, I will make an assumption that the entire pool will try the drug, thus getting closer to the primary market segment.

Depending on how you look at the data, the level of responders will be somewhere between 30% and 50%. In my instablog I split the difference and used 40%. In this piece I will look at all three numbers and allow the reader to interpret and use the data they feel appropriate.

30% Responders

The potential responders using 30% of the entire potential strong market is 20,815,988

40% Responders

The potential responders using 40% of the entire potential strong market is 27,754,650

50% Responders

The potential responders using 50% of the entire potential strong market is 34,693,313

Looking At The Financial Aspect

Let's face it. If something is perceived as expensive, people are less likely to buy it. One extremely important issue surrounding Belviq is how much it costs. This is why monitoring what transpires with insurance companies is of vital importance. When insurance coverage expands, more people are likely to try Belviq or other prescription weight loss products. A MedCorp study conducted using obese people came to the conclusion that 3.3% of those surveyed would pay for a drug if the cost was $50 or more. The number improved to 11.9% (including the 3.3%) if the payment was between $40 and $50.

(click to enlarge)MedCorp Study - January 2013

If we add the financial situation into the equation we can begin to refine data even further. We can do this by taking the 69,386,625 number and doing some simple math. If 3.3% of that pool will buy the drug, the pool is 2,289,759. Now we need to apply the 30%, 40% and 50% responder data to that number.

30% Responders Inclusive of 3.3% Financial Numbers - 686,928

40% Responders Inclusive of 3.3% Financial Numbers - 915,904

50% Responders Inclusive of 3.3% Financial Numbers - 1,144,880

Those numbers increase nicely if we get to a $40 price point for Belviq. The potential pool of the 69.4 million would become 8,257,008. Going through the same steps, the numbers would look like this.

30% Responders Inclusive of 11.9% Financial Numbers - 2,477,102

40% Responders Inclusive of 11.9% Financial Numbers - 3,302,803

50% Responders Inclusive of 11.9% Financial Numbers - 4,128,504

The biggest key with Belviq is insurance, and identifying responders. We need to bear in mind that not everyone will try the drug. This is countered by increasing insurance that will allow more people to try it. We need to consider that there are other treatment options on the market and trying to make their way to the market. We also need to remember that perceived success of the drug is often in people demonstrating actual success. The UT San Diego article points out that Belviq works best in patients that have an obesity issue due to eating but does not seem to work well for obesity due to other conditions. It is why the term responders is used often.

Remember, I excluded the entire pool of people that are simply overweight with a co-morbid condition. That is a secondary market that carries its own potential. For investors the important information here is that we are now getting to specifics of the target market. A good goal is to see if the primary market is enough to make the drug and company profitable. My opinion is that the primary market alone is big enough. That makes the appeal of the secondary market even better. Prior to launch the popular mantra was that Belviq was a weight loss pill that will help tackle an estimated 66% of the population that is overweight or obese. Now that the drug is on the market it is time to refine models and garner more accuracy so that we can apply that knowledge to our investment.

NOTE: Before a large debate about SSRI's begins, let me reiterate that the intent here was to get down to what is the best potential market. I certainly am aware that people on SSRI's and their doctors can find solutions that may mitigate the issue. Let's stay out of the minutia.

Source: Arena's Belviq: Finding The Target Patients