If you are invested in Arena Pharmaceuticals (ARNA), you are likely aware that Arena is partnered with Eisai (OTCPK:ESALY) for marketing and distribution of the anti-obesity drug Belviq in North America. You are also likely aware that on the day Belviq launched that the two companies spoke of $150 million in sales from Belviq in 2013.
Before moving on there are, a few things to establish. Sales is different than NET Sales. The deal between Arena and Eisai is based on NET sales. NET sales deduct items like shipping of the drug to warehouses and pharmacies, rebates, returned product, etc. NET sales will always be lower than sales. The statement made by management on launch day was relating to overall sales.
Whether we as investors like it or not, there is a $150 million expectation on the drug Belviq right now. Whether Eisai can deliver is the question everyone wants to know. Rather than look at the $150 million as a distant target, we should begin to break it down into smaller parts so that we can track the progress. By doing this, you can make more informed investment decisions along the way. Here are some parameters to break this down into bite size pieces:
- From Launch until January 3rd we have 30 weeks.
- Sales need to average $5 million per week.
- The sales price of Belviq is $200 per bottle. I keep this price intact because Eisai still sells the bottle to the pharmacy at $200 each. Rebate programs are then applied at a later date. In other words, the sales number will still look good and be at the $200 per bottle. The rebates and free 15-day program will bring down the NET Sales.
- It takes 750,000 bottles of Belviq to be sold in order to hit the $150 million target.
- The average weekly sales need to be 25,000 bottles.
- The IMS Health data on sales could be lower by 20% to 40%. With Vivus, the IMS sales data through 6 months was under-reported by 35% to 40%.
In the chart below, I have depicted a sales pace that would need to be achieved in order to get to 750,000 bottles sold and $150 million in revenue. Investors should note that this chart is pretty much a straight line progression rather than a ramp-up with a hockey stick.
If you look at the chart you will notice that, if the sales progress in this straight line manner, then we will need to see the 30th week delivering a sales number of almost 51,000 bottles. Breaking down the straight line method further we see:
- By week 4 we want to see the weekly number at 5,878 and the cumulative total at 14,639
- By week 8 we want to see the weekly number at 12,168 and the cumulative total at 53,552
- By week 12 we want to see the weekly number at 18,624 and the cumulative total at 118,492
- By week 16 we want to see the weekly number at 24,872 and the cumulative number at 208,045
- By week 20 we want to see the weekly number at 32,296 and the cumulative total at 326,289
- By week 24 we want to see the weekly number at 40,003 and the cumulative total at 475,278
- By week 28 we want to see the weekly number at 46,798 and the cumulative total at 651,945
If you look at the hockey stick method, you will notice that the ramp-up is slower, but then the sales take off and the numbers get quite big. With the hockey stick method, we would need the 30th week to deliver sales of nearly 105,000 bottles of Belviq. Both lines in this chart represent a path to $150 million in sales (750,000 bottles of Belviq) by the end of the year.
As weekly numbers come in, this chart will reflect that adjusted data. My intent for the time being is to use an assumption that the channel checks are under-reporting by 30%. What we want to look for is for the channel checks to be above at least one of these lines. As long as that is the case, the $150 million revenue target is achievable in a reasonable fashion.
The last item to discuss here is the NET revenue. As we are aware, the wholesale price of Belviq is $200 per bottle. Arena gets paid based on NET revenue. While the Eisai deal has many confidential sections that investors are not privy to, there are past deals that we can look at to try to get an idea of what determines NET. In most cases NET is arrived at by subtracting shipping, rebates, price adjustments, and defective products.
Belviq has a "15 days free" program as well as a $75 per month voucher. These programs will, in theory, bring down the sales number. If every one of those 750,000 bottles maximized the $75 voucher benefit (the exposure we have), we would need to deduct $56 million from the total sales. If 200,000 patients take advantage of the 15 days free, we would need to deduct another $20 million. From there we need to consider shipping costs, etc. As you can see, there is potential exposure to deducting more than $75 million from the $150 million in sales. Investors simply need to be aware of this and consider it in your valuation models. We will be able to see more when Arena does its Q2 report (although it will only include 3 weeks of sales).
I would suggest that investors build models of their own to track the progress. I will update my model each week and publish it here, but by building your own model you can assign different assumptions if you so desire. If a reader wants my model, they can send me a message and I will forward it off to you. Stay Tuned.