Now that we have the "pre-holiday week" and the holiday week behind us one would expect to have seen some decent week over week growth in the prescription sales numbers of Arena's (ARNA) anti-obesity drug Belviq. That is exactly what we got with prescription sales for the week ending September 13th coming in at just above 3,800 as reported by IMS.
The prescription sales data seems to bring about a lot of noise and varied opinions. My personal opinion is that I never want to see a holiday week offered up as an excuse for a dip in the sales number. What I want to see is the numbers grow despite the fact that a holiday existed. Yes, holidays will impact sales. It is my opinion that a compelling product that is being sought by consumers can still show growth despite a holiday. Why do I not like to see a holiday used as an excuse? Because there are many of them. In October we will see Columbus Day. November has Veterans Day and Thanksgiving. In December we have Christmas and New Year's Eve. Simply stated, a product that has great consumer traction can navigate the holiday hurdle.
As I have stated many times, the weekly script numbers are geared more toward active traders. Longer term investors use the weekly data to project longer term trends, but immediate stock price fluctuation happens on the heels of whether or not the perception of the sales data is good. What is perceived as good or bad is based on company projections, street expectations, and penetration into the potential market.
One of the biggest factors that drove the stock price of Arena up was an expectation that an anti-obesity drug with a good safety profile would be a hit with doctors and consumers alike. With a potential market of over 100 million in the U.S. alone, people were predicting early success and using the term blockbuster. When the company outlined goals for early sales figures to be somewhere between $150 million and $200 million, it gave investors a target to shoot for. One of the major drivers for the equity dipping to 52 week lows has been that the current sales pace is not pointing to the numbers outlined as sales goals prior to launch. The fact of the matter is that the Arena marketing partner, Eisai, has now called those figures "hopeful aspirations."
We are now 14 weeks into the launch of Belviq. If we adjust the prescription numbers of IMS and Symphony Health upward (to account for non-reporting, etc.), the company has just now gone through the initial script order of 50,000 bottles. That initial order generated $10 million in gross sales, $4.3 million in net sales, and about $1.3 million in sales revenue to Arena. If we assume that pharmacy "warehouses" practice the "order-as-needed" policy that most industries now practice, then another 50,000 bottles shipped in the last week or so (assumes that Eisai does 50,000 bottle orders). If we assume that script growth is still happening, then we would be looking at a third 50,000 bottles somewhere around October 18th. Breaking that down, the pace would be 13 weeks for the first 50,000 and 6 weeks for the second. That is decent growth, but not blockbuster. The pace we want to see is the 4th installment of 50,000 bottles ordered somewhere around November 15th, and a 5th order on December 6th, and a sixth order at the end of December.
If you are not keeping score, here is what we have:
Q2 - 50,000 bottles generating $10 million in gross sales
Q3 - 50,000 bottles generating $10 million in sales
Q4 - 200,000 bottles generating $40 million in sales
There is a distinct possibility, depending on sales pace, how warehouses order from Eisai, and how Eisai orders from Arena, that Q3 can generate 100,000 bottles instead of 50,000. That could take the Q4 totals down to 150,000 bottles. Why do I bring this up now? To outline what I feel are reasonable expectations and inform investors of a dynamic that could impact the perception of sales.
If Q3 has 100,000 bottles ordered and placed, it will demonstrate quarter over quarter sales growth in an "easy-to-read" fashion. That same dynamic could impact Q4. Essentially we would see stepped growth from 50,000 to 100,000 to 150,000. If Q3 has a 50,000 bottle order placed, it will imply flatter growth with a surprise to the upside in Q4. These are the types of things that savvy traders understand. These are also the dynamics that can be played out in the press in either a positive or negative light. Understanding this now gives you an advantage. What could foil all of this "interpretation" would be Eisai and Arena outlining realistic expectations on sales levels to the street. As yet this has not happened.
While the explanation above may seem long winded, it should serve well for both active traders and longer term investors. Another item to note is that Eisai has started its Direct-To-Consumer (DTC) advertising. This is a modest campaign that simply gets the very basic information out to the public. The ads that have been placed in several magazines are the type that can be referred to later in radio and television ads. If you have ever seen a pharmaceutical ad on television you are familiar with the legal jargon at the end that will close with something like, "individual results may vary, see our ad in O Magazine." The current ads will not drive the script numbers in an immediate fashion. They are not really designed to do that. They will be accretive over time, especially as more robust advertising starts in the weeks and months ahead.
The charts below track IMS Health and Symphony Health sales data on an adjusted basis with comparisons to $150 million in gross sales by the end of 2013 and $70 million in gross sales by the end of the year. It has been suggested by some readers that I recalculate the $150 million line to show exponential growth further out. I prefer to leave the line "pure" so as to measure where goals were just prior to launch vs. where sales are actually tracking. I do give running totals, so if you see exponential growth happening later on, you are welcome to model that yourself. Before getting into the data here are the qualifiers:
· The data used are 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 their 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 may 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 $40 million and $60 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, though currently the sales pace is trending below that line as well. 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. In the most recent quarter the average prescription was $82. I'm adjusting upward (to $100 per bottle) 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 as well as the yellow analysts' model.
· The green line depicts my 20% adjusted Symphony sales. It is currently pacing below the blue hockey stick line as well as 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. This represents anticipated positive week-over-week growth, but falls short of delivering a "wow factor." As stated in the qualifiers, I adjust the weekly number up by 30%. My adjusted IMS script number is just over 4,969. On a non-adjusted basis Belviq has spent 8 weeks in the 3,000's.
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 below 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. It should be noted that my adjusted total scripts to date is above the analyst line and just below the hockey stick line. The reason for this is that the initial 8 weeks of sales were above both the hockey stick and analysts lines, and the initial 12 weeks were above the analyst line. With current pacing, the running total on scripts will fall below the analyst line in the next 3 to 4 weeks.
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 $40 to $60 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. It is important to note that the current pace is tracking below this. Thus, in theory, these analysts may well adjust their models at any given point in time.
Investors need to bear in mind that Arena is paid based on net sales, not gross sales. My analysis is that based on a $199.50 per bottle gross sales figure it would take about $68 million in gross sales. I then apply a $100 per bottle net figure to the number of scripts sold to calculate a running total on theoretical revenue to Arena. Investors should note that Arena and Eisai recognize revenue when the wholesaler buys the drug, not the consumer. The data in this chart is reflective of consumer purchases of Belviq.
This week scripts were up 15% 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 gross sales in 2013 gross are diminishing as each week passes. On the positive side, with advertising starting, the potential for a more exponential type growth curve does exist.
I want to reiterate that investors 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 show that adjusted sales have fallen below the analyst line. There is longer term potential that still exists, but it is reliant on getting insurance coverage and direct to consumer advertising ramping up. With DTC ads now beginning, the insurance issue is a big one.
Essentially we are looking at the early indication that sales for 2013 are likely to fall short of analysts and street expectations. This does not mean that the longer term is a failure. It is, at this point, a game of patience vs. perseverance vs. insurance vs. physician education and acceptance vs. consumer traction.
· Weekly IMS numbers are up 15% week over week
· The current adjusted pace is well below the $150 million hockey stick model
· The current pace is tracking below the analyst line
· Current unadjusted IMS sales are at 40,200
· Current 30% adjusted IMS numbers are at 52,260.
· Estimated YTD gross sales (to consumers) is $10,425,870*
· Estimated YTD net sales (to consumers) is $5,226,000*
· Estimated YTD Arena share (from sales to consumers) $1,646,190*
*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