Arena Sales - Pacing Along Modestly

| About: Arena Pharmaceuticals, (ARNA)

We are now 15 weeks into the launch of the anti-obesity drug Belviq from Arena Pharmaceuticals (NASDAQ:ARNA). The sales of Belviq according to IMS Health have come in shy of the 4,000. This means that, on an unadjusted basis, we have now spent 9 consecutive weeks in the 3,000's. Essentially the pace is exhibiting a modest growth. Script sales this week were 4% above last.

If, in theory, we spend 8 weeks getting through the 4,000 block, and 6 weeks getting through the 5,000 block we are looking at an adjusted script total of somewhere between 155,000 and 175,000. That would generate gross revenue of between $31 million and $36 million. What we want to see is growth compounding faster. With direct advertising to consumers starting, there is a chance that we can reach 200,000 to 250,000 scripts by year end which would get revenue to between $40 million and $45 million.

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.

The simple fact of the matter is that $60 million in gross consumer sales by the end of 2013 is a long shot. Reaching $50 million has a chance, and getting somewhere in the neighborhood of $35 to $40 million is what we should be considering as the likely year end result. Unfortunately all of these numbers are below the initial expectations laid out by Eisai on launch day, and below the expectations of the more bullish analysts.

We are now 15 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 below the 60,000 bottle mark. The average is about 3,800 bottles a week on an adjusted basis.

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 just under 4,000. This represents modest 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 5,179. On a non-adjusted basis Belviq has spent 9 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 2 to 3 weeks.

Belviq Sales Tracking - 16 Week Chart
(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 about $40 in gross sales to consumers by the end of this year. It would 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. As you can see, we are pacing below that territory. I am anticipating that analysts may adjust their downward, extending the timeframe out in which sales targets will allow for valuations that get to $12. Simply stated, I think that it is likely that we see price target adjustments downward by analysts unless the quarterly call gives reason to support the current targets.

Belviq Sales Tracking - 30 Week
(Click to enlarge)

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 4% 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. However, that being said, I do not see it very likely that the current advertising will deliver the traction needed to get back on track with the analysts growth line.

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.

We are still early in the sales process, and refills are going to become another important factor to consider. I have another article discussing the refill dynamic ready for publication, so stay tuned. In the near term there is not a lot to be bullish about. Potential still exists, but the reality that it will take time to come to fruition is something that traders and long term investors need to understand, assess, and consider.


· Weekly IMS numbers are up 4% 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 44,184

· Current 30% adjusted IMS numbers are at 57,439.

· Estimated YTD gross sales (to consumers) is $11,459,120*

· Estimated YTD net sales (to consumers) is $5,743,900*

· Estimated YTD Arena share (from sales to consumers) $1,809,329*

*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