As we have seen over the recent weeks, Arena Pharmaceuticals' (NASDAQ:ARNA) stock price moves according to the weekly prescription data. While it is too early to establish whether Belviq sales are tracking to success or not, we do get a clearer picture as each week passes. Investors can draw comparisons to competitor Vivus (NASDAQ:VVUS), to the stated sales goal of $150 million by December 31st, or to analyst estimates that are at this point all over the proverbial map. Personally, I am tracking sales against the $150 million target as it is, at the moment, the only type of company issued guidance we have.
Looking at the big picture gives us a look at the overall script numbers. IMS Health and Symphony Health track these sales. Neither company gets a full sales report and extrapolations are required to arrive at an estimate. Another dynamic is that a 90 day prescription is counted as 1 script just as a 30 day prescription is. In contrast, a 15 day free trial script is also counted as 1 script. As you can see, this leaves room for error and/or interpretation.
What I want to focus on prior to this week's script numbers being released is the 15 day free trial offered by Arena and Eisai (OTCPK:ESALY). There are some very distinct positives and very distinct negatives to such a campaign. On one hand they offer exposure, on the other they hurt the bottom line in the short term. Typically, the thought process is that the freebie will generate enough paying customers to lead to profits in a longer term. Free trials is a sound and seasoned business practice that has been tried and true for decades. I want to go a bit deeper than that concept though.
IMS health estimates that 70% of the scripts reported thus far are free trials. Symphony Health places the number at about 60%. To save a long and drawn out debate I am going to use 65%.
While I realize that the comparison is not popular among many retail longs, I am going to draw a comparison to Vivus and its drug Qsymia. Vivus offered NO DISCOUNTS until week 11 after its launch. In contrast, and smartly so, Belviq was discounted out of the gate. Upon offering the discount Vivus saw an almost 50% jump in prescriptions from about 1,400 to 2,050. Discounts out of the gate point to Arena and Eisai learning from what Vivus did and improving on it.
Now for the negative side. If you take out 65% of the script totals for Belviq because they were free (going for an apples to apples comparison), then the two drugs were not that far apart thus far in tracking. What that may tell us is that traction in this space is going to be difficult. After all, Qsymia has certainly not set any records with sales. In fairness though, we need to acknowledge the path Belviq has taken, which did put its product in front of more consumers coming out of the gate.
In the communications I receive regularly - because I write about this space - I have seen many people concerned that this week's script numbers will suffer because of the July 4th holiday. Realistically speaking I agree with that assessment. It only makes sense. However, with or without holidays Arena has 30 weeks from the launch date on June 7th to deliver $150 million in sales if it wants to meet the statements made by management to Bloomberg and at the annual meeting. Where there is a negative there is also a positive. Enter the 15 day script. Every 15 day script filled from June 14th through June 21st (already counted as 1 script) will come up for refill during this week's reporting period. Had these 15 day scripts not have existed, this week's numbers would have been even more challenging. The 15 day scripts actually help in this case in two ways. The company got a counted sale for what normally only happens on a 30 day sale. This dynamic will continue on for as long as the company runs the promotion plus 15 days.
The big question is what the "take rate" is. The take rate is the number of patients that continue to take the treatment offered by the pill. Taken at face value, free promotions typically bring down the take rate in preference for higher volume, and in the longer term more customers. This early in the game, showing high volume (prescription numbers) is important. That is because there are many doubters about the type of success that the prescription anti-obesity space has. One way to turn doubters into believers is to have high prescription numbers. As with anything though, where there is a positive there is a negative. Showing high script numbers as a metric is very helpful in the short term, but hurts the revenue line in the longer term because money is being spent to bring in higher numbers. This is not a big deal if expectations are proper. It can be a windfall or fiasco if expectations are too low or, respectively, too high.
I have stated in the past that if Belviq can come even close to the $150 million target it will be a big positive for the company. Usually a miss is a miss and is a negative, but in this case, a miss is still likely ahead of the street's current expectations. In contrast, I have stated that a big miss will simply be a negative. The importance here is that Belviq show potential that it can be a profitable drug for Arena. To do that it needs to show the capability of hitting the lowest bonus bar of $250 million in net sales for one year. Preferably we would like to see it track towards the second bonus bar as well. In my opinion, anything short of hitting at least the minimum bonus within the first two years will relegate the drug to decent rather than blockbuster status. Investors are currently faced with an interesting dynamic that has potential in a tug-of-war with history. It has made Vivus and Arena traders dreams, while it has also frustrated both longs and shorts.
In closing, I want to state that the 15 day free trial is a smart move. If Belviq can convince enough people that it works it can start a snowball rolling. Getting information on the "take rate" is important. Another piece of valuable information would be how many of those that drop off do so because of financial considerations (though we may not get this data). Let's remember that generic phentermine is used in anti-obesity and sells about 150,000 scripts per week at very inexpensive prices. This is a main reason why I pound the proverbial table about the importance of gaining traction with insurers as much as I do about getting consumers. Take this week's upcoming script data with a grain of salt, but also remember that the clock is still ticking between now and the end of the year. Stay Tuned.
Disclosure: I am long 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.
Additional disclosure: I have no position in Vivus.