Arena (ARNA) announced it's Q2, 2013 numbers yesterday, and as I anticipated it was essentially a call that centered on the big picture and did not offer up much detail on the current sales trajectory of Belviq nor guidance. I had spoken to the fact that the call would lack the detail the street wanted to see prior to the event.
As anticipated, we saw a pre-call run on exuberance followed by a take-down on lack of detail. In fairness, the call was easy to see if you are able to separate yourself from the emotion of the investment. Simply stated, it was too early for the company to give a lot of flavor on sales, especially considering the method by which the launch is progressing (i.e. the use of free trials). Any time free trials are used it takes more time to gauge actual consumer demand. Before passionate investors get upset, I am not saying that the free trials is a bad idea. I believe the opposite. With the lack of insurance coverage, the free trials is the best way to go.
Typically, with this series of articles, I find myself having to offer up a whole list of "qualifications". The reason for these qualifications was to inform readers of what I am tracking and how, as well as to ward off the comments that focus on minutia rather than the core issues at hand. The vast majority of readers like this series.
In the Q2 conference call Arena quoted and used the IMS Health data set to state that between launch and July 19th, that about 12,500 scripts had been sold. Arena also stated that they feel IMS Health data as about 25% of the overall market. Since the beginning of this series I have utilized IMS Health data. I have also, since the beginning, adjusted that data up by 30% (simple adjustment up by a specified percentage). Now to the qualifications:
- The data used is from IMS Healthcare. This company reports numbers each Friday. Arena themselves quoted IMS data in the Q2 conference call.
- I adjust the IMS data up 30% to account for any under-estimates that can arise for a number of reasons. Arena has spoken to a 25% upward adjustment. I will continue to use 30% in my reporting until something more concrete dictates that I should adjust my 30% downward. If you prefer the 25% then the trend lines will simply adjust downward slightly.
- Another company, Symphony Health, also tracks sales data. It typically comes out later in the day, and after the sales data from IMS has carried its impact on the markets. I track Symphony data (though it is not included in these charts), and I adjust it up by 20%.
- The tracking blue and gray paths are my models on how Eisai (ESALY.PK) can arrive at $150 million in gross sales by the end of the year. The $150 million was the subject of continued debate. In May of this year, the Eisai CEO outlined a $200 million target by Eisai's year end of March 31, 2014. On June 7th Lonnel Coates, CEO of Eisai America outlined $150 million by the "end of the year." Coates was at, and spoke during the Eisai shareholder referencing $200 million by March 31st of 2014. Some investors (mostly retail) have argued (after the sales numbers began to roll in) that the $150 million was actually for March 31st of 2014. Essentially, to believe that the $150 million was meant for March you must believe that Eisai told its investors $200 million in mid May and then trimmed the target by 25% three weeks later on launch day. On August 1, 2013 Eisai spoke to the $150 million issue. In response, Eisai stated that the $150 - $200 million is "hopeful aspirations now". There are many ways that such a statement can be taken, but the most certain is that the $150 million sales figure is not likely to happen, but instead something that the company hopes to see happen. More realistically, in my opinion, sales are pacing toward between $60 million and $70 million (gross) by the end of 2013. The most recent Eisai comments on sales expectations should, for the first time, inject a dose of reality into investor expectations. Analysts like Leerink Swan and Jefferies are likely in the right neighborhood on their respective gross sales expectations. The wild card is what the average script price is and how much revenue Arena can generate per script. The only way the $150 million is attainable at this point is via a hockey stick growth pattern. It is important to understand that gross sales is the sales number prior to discounts and adjustments. The gray and blue lines track Eisai's goals, not Arena's goals.
- I have added an "analysts' expectations" line to the graph (depicted in Yellow). This line tracks to $55 million in gross sales by the end of the year. If we assume that the average prescription is $125, it would take $55 million in gross sales to bring in the $10 million in Belviq "royalties" to Arena that these analysts are modeling in arriving at $12 price targets for Arena. The yellow line is tracking analysts' goals for Arena. At this time Arena is tracking in the neighborhood of what it would take to arrive at a $12 price target.
- I have not modeled the Credit Suisse sales expectations. They are below that of Leerink Swan and Jefferies. Credit Suisse carries a $5 price target on Arena.
- The orange line depicts my 30% adjusted IMS sales. It is currently pacing just above the blue hockey stick model and the yellow analysts' model.
- I have not stated that the company will track to any particular line. Currently the gray straight-line model to $150 million seems unattainable (though it is still early).
We are now in week 7 of the sales data. I have added a 12 week close-up chart to better visualize the current pace. The 12 week close-up is the same data set as the overall chart that depicts the data to the end of 2013.
As you can see on the 12 week chart, the 30% adjusted sales pace is below the straight line model (gray line) to $150 million, and above both the hockey stick model (blue line) to $150 million as well as the yellow line represented by the analysts expectations to justify a $12 price target. Investors should bear in mind that because the Q2 call just transpired, the analysts projections could change. Investors should also note that the analyst line depicts gross sales needed for Arena to garner $10 million in "royalty" revenue. At the moment I have assumed that it would take $55 million in gross sales to get to that point. Eisai has indicated $10 million in gross sales already, which netted Arena $1.3 million. The current pace would imply that it would take about $80 million in gross sales in order for Arena to collect $10 million. I am not adjusting my model, because the free samples will be making up less of the overall prescription pool as time passes. The chart through the end of the year is depicted below:
While some may not be thrilled with the sales numbers, there is a silver lining here. The expectations will now get down to more realistic territory. While neither Eisai or Arena offered up anything in the way of formal guidance, we can now understand that the $200 million by March 31st of 2014 and the $150 million by the end of this year are hopeful aspirations. Even without formal guidance, the expectation levels are now more tempered than they were previously. This will help ease volatility, irrational exuberance, and irrational negativity. The company will still move on weekly data, but the range of the moves will, in my opinion, be less pronounced now. As is usually the case, expectations set the bar.
By The Numbers
- The unadjusted IMS number for week 7 was 3,074.
- The unadjusted cumulative total is 15,609.
- My 30% upward adjustment is 3,908 - approaching the 4,000 level for the first time.
- The cumulative running total for my adjusted number is 20,279
- I have gross retail sales at $794,698 for the week.
- I have cumulative gross retail sales at $4,045,600 - We want to see a minimum of $55,000,000 in gross retail sales by year end.
The current sales pace is not bad and continues to demonstrate positive traction. The sales did flatten slightly this week, part of which is attributable to free trials coming off and non-renewals. Stay Tuned.