As anticipated, the prescription sales for Arena Pharmaceuticals (NASDAQ:ARNA) anti-obesity drug Belviq were not good this week. What was not anticipated was that the sales would take a substantial dip of about 14% from the flat performance of last week. One main driver for the sagging script number this week was the fact that there was a holiday in the mix, and it is difficult to have any sales on a holiday. That being said, as an investor we are looking for a compelling product in Belviq that lets it rise above such hurdles and perform well despite the holidays that will happen from time to time. Essentially it is far better to perform well and overcome the hurdles than it is to use the hurdle as an excuse.
Investors need to bear in mind that weekly prescription sales figures are geared more toward active traders than long term holders. The weekly numbers will move this equity on a short term basis. That being said, those that are looking at a longer term play do use the weekly tracking to assess where they feel the sales will be in specific periods of time. We now have 13 weeks worth of data to consider. 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, and at the moment the trend leans to the low side of that number.
On a positive note, without a holiday, the numbers next week should be up substantially from this week. That being said, we need to see some impressive growth if we are to have any realistic chance of hitting above $50 million in gross sales in 2013.
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. Arena'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.
· 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 3,300. This represents negative week-over-week growth. I adjust the weekly number up by 30%. My adjusted IMS script number is just over 4,300.
The chart below illustrates what I have been cautioning readers about with regard to flatter sales. As you can see, the current adjusted script pace is now the yellow analyst line that would, in theory, generate a $12 price target (according to analysts). Scripts are also pacing well below the blue hockey stick model (illustrating an exponential type growth) that would pace Arena to $150 million in gross sales by the end of this year. There is no beating around the bush on this. The sales chart is looking ugly this week. It would take an IMS number of 5,000 in the next reporting period to get back above the analysts line.
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.
This week scripts were down 14% from last week. The pace of sales is demonstrating that it will be a difficult challenge to get 2013 sales figures to the levels that the more bullish analysts have outlined. This does not mean that it cannot be accomplished, but the odds of accomplishing $70 million in 2013 gross sales are diminishing as each week passes.
As I have stated many times, investors also need to remember that there is an active traders dynamic to Arena and weekly scripts as well as sales pace play a major role here. When script numbers are low, the equity will suffer. At this point, to correct the trajectory we need to see a huge improvement over last week. The data now shows that adjusted sales have fallen below the analyst's line. There is longer term potential that still exists, but it is reliant on getting insurance coverage and direct to consumer advertising going. Both of these are longer term prospects.
Essentially we are looking at the early indication that sales for 2013 are likely to fall short of the analysts expectation unless we begin to see substantial and immediate growth. Arena's Belviq has now spent 7 weeks in the 3,000 range on IMS numbers. The analysts model shows no more than 2 week on any block of 1,000. Clarity on the slower pace should now be at hand for anyone that was still holding out hope for a more robust launch.
· Weekly IMS numbers are down 14% week over week
· The current adjusted pace is well below the $150 hockey stick model
· The current pace is tracking below the analyst's line
· Current unadjusted IMS sales are at 36,378
· Current 30% adjusted IMS numbers are at 47,291.
· Estimated YTD gross sales (to consumers) is $9,434,634*
· Estimated YTD net sales (to consumers) is $4,729,100*
· Estimated YTD Arena share (from sales to consumers) $1,489,667*
*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