Arena's Belviq Prescriptions Flat Week Over Week

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 |  About: Arena Pharmaceuticals, Inc. (ARNA), Includes: ESALY
by: Spencer Osborne

When looking at weekly sales of most pharmaceutical drugs there will be periods of growth and lulls. For the Arena Pharmaceuticals (NASDAQ:ARNA) this past week was a lull. Weekly scripts were essentially flat week over week according to IMS. One popular theory as to the flat cycle is due to the Labor Day holiday. While the holiday was on the Monday after the reported weekly numbers, it is a very popular vacation week.

While the holiday theory does hold water, and will likely impact the next set of numbers as well, there are some things to consider. First is that holding the line during a holiday period is a good thing. Secondly, and perhaps more important, is that we still need to see script growth. There will always be holiday's, seasonality, and hurdles all along the way. Successful sales traction overcomes these things.

Weekly prescription sales figures are geared more toward active traders. The weekly numbers will move an equity on a short term basis. Longer term investors are looking to establish a trend based on the weekly numbers. 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 12. If you put a trend line to the script numbers you will see that the pace is shaping up to deliver gross sales ($199.50 per bottle) of between $50 million and $70 million. There are several factors to consider. As each week passes more and more doctors and consumers become aware of Belviq. That should provide growth over time. What we need to see is a minimum of 10% growth each week to get to the $70 million gross sales mark.

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. These charts track gross sales (the numbers used in determining things like whether or not a drug is a "blockbuster"). I currently estimate net sales based on $100 per bottle. That number is aggressive.

QUALIFIERS

· 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 (OTCPK:ESALY) 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 a bit over 3,800 with 9 more prescriptions this week as compared to last week. This represents flat week-over-week growth. I adjust the weekly number up by 30%. My adjusted IMS script number is 5,004.

I have changed my 12 week chart to a 16 week chart. The chart uses my adjusted prescription numbers. 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 (according to analysts). Scripts are also pacing 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 flatter than both the analysts and hockey stick curves. This could project out to a weaker year end sales number than that which the analyst line represents.

Belviq Prescription Sales - 16 Week ChartClick to enlarge
(Click to enlarge)

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 $50 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 based on net sales, not gross sales. My analysis is that based on a $100 per bottle net sales figure, it would take about $68 million in gross sales to arrive at a net number that would generate $10 million in 2013 for Arena.

Belviq Prescription Sales - 30 Week ChartClick to enlarge
(Click to enlarge)

This week scripts were essentially flat according to IMS. I would expect that next week will offer similar results. What investors need to bear in mind is that with 12 weeks of sales, the street will start to assess what the following quarters will look like. We could, at any time, begin to see analysts adjusting models based on their own newly updated assumptions. While some readers may not appreciate this, script sales are looking to come in substantially weaker than many had anticipated, and well behind the $150 million in gross sales that was the hot topic of discussion just 3 months ago.

Belviq sales did reach the 40,000 scripts in 12 weeks that I characterized would be "good" start. What we want to see now is a more exponential type of growth take shape. That may happen slower than many had thought. The current drawbacks are a lack of insurance companies participating in covering anti-obesity medication, and no consumer advertising.

Investors also need to remember that there is an active traders dynamic to Arena and the weekly script numbers as well as. 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 that there is 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.

Summary

· Weekly IMS numbers show .003% improvement week over week

· The current adjusted pace is below the $150 hockey stick model

· The current pace is tracking with, yet above the analyst model

· Current unadjusted IMS sales are at 33,064

· Current 30% adjusted IMS numbers are at 42,983.

· Estimated YTD gross sales (to consumers) is $8,575,148*

· Estimated YTD net sales (to consumers) is $4,329,800*

· Estimated YTD Arena share (from sales to consumers) $1,363,887*

*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.

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. I have no position in Eisai