What To Expect From Arena In Q2

Jul.31.13 | About: Arena Pharmaceuticals, (ARNA)

The second quarter conference call from Arena Pharmaceuticals (NASDAQ:ARNA) is scheduled for tomorrow at 8:30 AM EST. Conference calls can be precarious times for investors. Some active traders simply sidestep them altogether and wait for more concrete developments that result from the call. One thing that is concrete is that the company will turn a profit for the quarter. More on that below.

Arena and marketing Partner Eisai launched the anti-obesity drug Belviq during the second quarter. The launch was June 7th, so effectively there is very little from a sales perspective during the quarter that will impact the call. However, the launch of Belviq brought with it a very substantial, one time, $65 million dollar milestone payment from Eisai. That is what will deliver a profit.

Yes, the headlines will speak to the profit and an impressive EPS. That goes without saying. In fact, the fact that Arena will be profitable this quarter is not in doubt by anyone. As an investor, focusing on that payment to derive the applicable valuation to Arena is likely not the best way to go. That payment does not guarantee sales success of Belviq. On the positive side, that payment will be cash in the coffers that allow the company to operate and develop its pipeline without fear of dilution. Thus, the money is very real, and very useful, but only tells part of the story.

Right now, the bulk of the valuation and potential in Arena is tied to Belviq. As stated, we are very early in the process. I do not look for the company to provide a lot of color on the market. We are only about 7 to 8 weeks into this process, and the launch strategy is just beginning to take shape.

Eisai is incorporating a launch strategy that includes free samples, and subsequent discounts. One of the drivers of this is the fact that insurance coverage on Belviq is still in the 30% to 35% of covered lives neighborhood. Free samples is not a bad marketing plan, and often is a great way to educate patients and doctors about your product. The goal is to get exposure by offering something free in hopes that a long-term paying customer will develop. That takes time.

It is too early for the company to provide any meaningful data traction data on refills, because the process has only just begun. Instead I expect the company to express confidence in the launch with the caveat that it is essentially too early to offer up specific numbers and trajectory. On this front, investors will be happy about the big picture but still uncertain of the path and the timeframe to achieve it. Uncertainty translates to risk. The Belviq story, from an investment perspective, still carries uncertainty.

What investors will want to focus on, to see through the uncertainty, is any information relating to insurance coverage, and doctors "touched" (doctors that have been met by an Eisai rep or attended a seminar on the product). The doctors "touched" is an important foundation that needs to be developed to drive the success of the drug. The insurance issue is of paramount importance to the revenue line. The more that is covered by insurers, the more a patient is likely to stay on the drug, and the less the company will need to offer discounts and rebates.

The importance of the free program cannot be understated. This program gives Eisai the contact information of the patient. If a patient does not have insurance now, they may not stay with the drug due to cost. As more insurance companies come on board to covering obesity treatment, the company will have the ability to reach out to the consumer again. They may well be able to win back the patient.

As an investor I suspect that the pps of Arena will run up on exuberance going into the call, and then sell off on the reality that there is simply not enough information to definitively assess the potential or speed of sales success with Belviq. I am not anticipating a buyout, nor a merger. This is simply a quarter where we will get the financial status of the company and where the company is at with pipeline development.

The call will have plenty of big picture positives, but lack the detail that many investors want to gather a better understanding of. There is potential that the company will discuss the status of the application in Switzerland, as well as the status of when it anticipates resubmitting an application in Europe.


The volatility around the call will be something active traders might enjoy, but will not offer much to give clarity on the sales traction of Belviq. It is my belief that we will see this equity's performance tied to the weekly channel checks of sales until at least the next quarterly report.

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.