It has been an interesting week for investors in Arena Pharmaceuticals (ARNA). We saw the IMS sales numbers present a bigger week over week percentage move than the Symphony numbers last week, the conclusion of a phase 1b trial on APD811, and a revised SEC filing relating to a serious adverse event on the same drug, APD811. This is not the first time IMS has outpaced symphony in percentage gain, but points to a good reason why keeping reporting consistent is important. Weekly sales figures do not depict the long-term success or failure of Belviq, but do give an indication, especially as more weeks pass, as to the pace of anticipated growth we will see. For a drug that has had the "blockbuster" tag attached to it shortly after FDA approval, one important dynamic is whether such status is earned in the closer term, or is a few years away.
As stated, the weekly prescription sales figures are geared more toward active traders. I have long stated that I see the first real importance in these numbers as developing between weeks 12 and 16. We now stand at week 11, so we are fast approaching the point where we are getting into the meat and potatoes of weekly numbers. One important factor in these reports I generate is that I'm looking at some differing dynamics of sales. There are gross sales that are based upon the $199.50 per bottle wholesale price, and net sales that take into account various costs and discounts deducted from the gross. Area's revenue from Belviq is based on a percentage of net sales (currently 31.5%). What I do try to assess is the gross numbers as well as the net in getting to a point where revenue to Arena can be estimated. I track gross sales. Before moving on to the numbers this week, I have my usual qualifiers in place:
· The data used is from IMS Healthcare (orange). This company reports numbers each Friday.
· I adjust the IMS data up 30% to account for any underestimates that can arise for a number of reasons.
· Another company, Symphony Health, also tracks sales data. It typically comes out later in the day, and after the sales data from IMS have carried its impact on the markets. I track Symphony data, and I adjust it up by 20%. I'm adding a Symphony data line (in green), though it will be one week trailing due to the timing (unless Symphony releases prior to submission of the article).
· The tracking blue path is a model on how Eisai (ESALY.PK) can arrive at $150 million in gross sales by the end of the year. More realistically, in my opinion, sales are pacing toward between $60 million and $70 million (gross) by the end of 2013 and the $150 million goal will not be met. Analysts like Leerink Swan and Jefferies (yellow line) are likely in the right neighborhood on their respective gross sales expectations. It is important to understand that gross sales is the sales number prior to discounts and adjustments. The blue lines track Eisai's "hopeful aspirations" goal, not Arena's goals.
· The charts have an "analysts' expectations" line (depicted in yellow). This line now tracks to $68 million in gross sales by the end of the year. In theory, $68 million in gross sales will pay out about $10 million in "royalties" (percentage of net sales) to Arena. I use an average net script price of $100 (down from $125). In the most recent quarter the average was $82. I'm adjusting upward because the weight of free trials should improve as the next 6 months pass. The analyst line represents what sales would have to track to get to the $12 price target that it has established.
· While I talk about gross sales frequently, the driver for Arena is its percentage of net sales. It is gross sales that determine things like blockbuster status, while net sales get to the meat and potatoes of what Arena garners from the sale of the drug.
· The orange line depicts my 30% adjusted IMS sales. It is currently pacing below the blue hockey stick model and above the yellow analysts' model.
· The green line depicts my 20% adjusted Symphony sales. It is currently pacing below the blue hockey stick line and above the analyst line.
· I have not stated that the company will track to any particular line.
This week the IMS scripts came in at just under 4,000, a great accomplishment. This represents a week-over-week growth of an impressive 11%. As stated, I adjust the weekly number up by 30%. My adjusted IMS script number is just under 5,000.. The chart below is a 12-week blow-up of the larger 30-week chart. As you can see, the current adjusted script pace is just above the yellow analyst line that would, in theory, generate a $12 price target. Scripts are also pacing just below the blue hockey stick model that would pace Arena to $150 million in gross sales by the end of this year. The overall trajectory of my adjusted scripts is above and ahead of the trajectory on the analysts line and leaning more toward the hockey stick that graphs a more exponential path.
The 30-week chart below outlines the overall pace and projected paths through the end of 2013. The current pace for script sales is pointing toward $60 to $70 million in gross sales. It would now take roughly $68 million in gross sales to garner Arena the $10+ million in revenue analysts are looking for in $12 per share valuation targets. Investors need to bear in mind that Arena is paid off of net, not gross, so the $68 million would need all of the allowable discounts and costs applied to arrive at a net number, of which Arena gets 31.5%.
Last week we witnessed IMS script numbers move up after a flat week, while Symphony was more flat. The two services nearly converged last week. We are now approaching the weeks where refills begin to take on more importance. In theory a patient that has not lost 5% by week 12 should discontinue the drug. Some patients will stop earlier for any number of reasons, and some patients may stay on longer.
As I have stated, there is an active traders dynamic to the weekly script numbers. If they are low, the stock will suffer. If they are as expected the stock will maintain. If they are high, the stock can appreciate. The trend has been a more pronounced reaction to the downside than the upside. In order to see marked upside appreciation the script numbers would need to, in my opinion, demonstrate a week over week gain of about 20% or more at this point. In contrast, a week over week gain of less than 8% would be perceived as a negative.
· Weekly IMS numbers show 11% improvement week over week
· The current adjusted pace is below the $150 hockey stick model
· The current pace is tracking well with, yet above the analyst model
· Current unadjusted IMS sales are at 29,215
· Current 30% adjusted IMS numbers are at 38,294. This is pacing just ahead of my stated goal of 40,000 in 12 weeks
· Estimated YTD gross sales (to consumers) is $7,639,673*
· Estimated YTD net sales (to consumers) is $3,829,400*
· Estimated YTD Arena share (from sales to consumers) $1,205,201*
The snafu with the SEC filings seems to have faded off with very positive script news. Stay tuned.
*Arena is not using sales to consumers to book revenue. It is using sales to the wholesaler to account for revenue. Eisai books sales to wholesalers as well. Weekly scripts are tied to actual consumer sales, thus the translation in revenue modeling.
Additional disclosure: I have no position in Eisai