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Arena Pharmaceuticals (ARNA) received FDA approval in June 2012 for Belviq as a supplement to a reduced-calorie diet and physical exercise, for the treatment of obesity and weight management. Arena's marketing partner in the U.S., Eisai (OTC:ESALF), markets the drug. Ever since the drug launched, it hasn't reached its full potential for multiple reasons. What is the company's strategy to grow its revenue further, and what should investors do?

The Drug, Belviq

When used along with diet and exercise, Belviq can help obese adults to lose weight and keep it under control. Belviq works by activating certain receptors in the brain that help a patient eat less and feel full, after eating smaller meals. The drug comes under the Schedule IV of Controlled Substances Act, or CSA. Drugs classified under Schedule IV of CSA may have safety issues, abuse potential, or extreme medical implications. The FDA approved Belviq in June 2012, but the drug entered the market in June this year because of the CSA.

New Marketing efforts

As Arena's U.S. partner, Eisai markets and distributes Belviq. Since Belviq's launch, Eisai has initiated a 15 day free trial voucher and a savings card, which accounted for more than 60% of the drug's prescriptions. With the savings card, people without insurance coverage receive $75 off on Belviq. Also, Eisai's focused on establishing a strong network for Belviq, with primary care physicians, cardiologists, and endocrinologists.

However, the drug sales didn't pick up. Recently, Eisai launched a print ad campaign to promote Belviq directly to end consumers. It will place the ad in all major US lifestyle magazines, including O, The Opera Magazine. The campaign is designed to educate consumers about Belviq as an option for weight management and control. In addition to the print ad, the company has also launched its "BELIEVE EVERYDAY SUPPORTSM" Program, which is a free weight management support and savings program to promote Belviq. This program will provide patients with useful, informative, and educational tips that will help patients take the right steps towards losing weight and keeping it under control.

Results so far and expectations

According to the U.S. Centers for Disease Control and Prevention, or CDC, there has been a dramatic increase in obesity in the U.S. Out of the 313 million U.S. citizens, about 37.5% of the adult population and approximately 17% of children and adolescents between the age 2 - 19 years are suffering from obesity.

By doing simple math on the CDC's estimates, we arrive at an astonishing number of 66.5 million adults and 16 million children and adolescent currently suffering from obesity in the U.S. Looking at the huge market, Belviq's prescription growth in the past quarter looks moderate.

According to the latest data released by IMS Health, the total prescriptions for Belviq in the week ended on September 13, was 3,822 compared to 3,341 in the week ended on September 6, an increase of 15.3%. However, the September 6 week included Labor Day, so if we compare latest data with the August 30 week, the prescriptions declined from 3,849 to 3,822.

Week Ending

Weekly Prescription

Growth

6/14/2013

1087

6/21/2013

1829

68.26%

6/28/2013

2222

21.49%

7/5/2013

2064

-7.11%

7/12/2013

2493

20.78%

7/19/2013

2840

13.92%

7/26/2013

3074

8.24%

8/2/2013

3168

3.06%

8/9/2013

3135

-1.04%

8/16/2013

3461

10.40%

8/23/2013

3840

10.95%

8/30/2013

3849

0.23%

9/6/2013

3314

-13.90%

9/13/2013

3822

15.33%

Source: IMS

Currently, there is no significant impact of Eisai's marketing program on Belviq's sales. We expect the latest print ad campaign to increase the product visibility among the targeted audience, effecting the prescriptions positively.

AMA says obesity is a disease, insurers please reimburse

Apart from visibility, the other factor that affects drug sales in the U.S. market is reimbursement by insurance companies. Currently, very few insurers cover obesity drug reimbursement, which limits drug sales. A positive development in this front came from the American Medical Association, or AMA, which officially recognized obesity as a disease. We expect the recognition will help the company persuade insurers to cover the drug under reimbursement, which would improve drugs sales. Currently, about 30% of people with private health insurance are covered for Belviq.

Competition

Vivus Pharmaceutical (VVUS) is the other company that has received FDA approval for obesity drug, Qsymia. The drug hasn't done well in the market because the FDA imposed distribution restrictions due to concerns surrounding birth defects. Qsymia is only available from certified pharmacies under a Risk Evaluation and Mitigation Strategy. Belviq doesn't have such restrictions, giving it an advantage over Qsymia. Another competitive force acting against obesity drugs is human psychology. Doctors and Obese patients think that the excess weight is a lifestyle issue that can be addressed through healthy living habits, rather than medical treatment.

Revenue Recognition

Arena doesn't sell Belviq directly, hence there's a catch in how Arena recognizes revenue. According to the agreement between Arena and Eisai, Arena will receive 31.5% of Eisai's net product sales of Belviq. Also, the sales price will increase on a tiered basis to as high as 36.5% on the portion of annual net Belviq sales exceeding $750 million. Arena's recognized revenue will be 31.5% of Eisai's net Belviq sales. For instance, Arena reported revenue of $1.3 million for Belviq in the June 2013 quarter, whereas the actual sales were approximately $4.12 million net of discount and one-time costs reported by Eisai. It is very important for Belviq to pick up in the market according to Arena's point of view.

Valuation

Company

Enterprise Value/Revenue

Price/Book

Arena Pharmaceuticals

15.91

10.12

Vivus

75.63

5.25

Arena and Vivus are direct competitors in the obesity drug market; both companies are facing trouble generating revenue, but it is far more visible in Vivus EV/revenue multiple, which is high compared to Arena's EV/revenue ratio of 15.91.

Conclusion

Given the size of the obesity drug market, the IMS Health prescription data doesn't give an encouraging indication for Belviq. However, we believe Eisai's current marketing plan to promote Belviq directly to end consumers can drive drug sales. We advise a wait and watch approach for Arena.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Satya Prakash, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.