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With Arena Pharmaceuticals (ARNA), overall sales of the anti-obesity drug Belviq are of paramount importance. After all, sales generate revenue, and revenue can lead to profits. If enough Belviq is sold, investors can be rewarded. If sales are not strong, the equity can suffer.

Recently, we just passed the four-month mark in sales. Belviq launched in June of this year. In theory, a patient that tries Belviq will be categorized as a "responder" to the medicine or a "non-responder". The guideline for that determination is set up by assessing whether or not the patient has lost 5% of their body weight by the 12th week on the drug. Of course, that is a guideline; some show response prior and some show response later. The bottom line here is that with the given guidance, we should be able to now get a decent idea of how Belviq is progressing in the marketplace by looking at the refill data.

From an investment perspective, we want to attempt to use the data at hand to determine the action on the stock price. There are short-term, mid-term, and long-term strategies at play. Depending on your trading style, assessing this data will carry varying value.

While it is tempting to simply look at whether or not the refill rate is growing, that is perhaps too simplistic. For example, last week refills of Belviq declined, while overall sales increased. What we want to determine is whether we are seeing patient traction in refills, and whether that segment is growing.

While there are many ways this can be looked at, I use a simple concept of tracking back refills to the pool from which they were new prescriptions. In essence, that pool consists of the new scripts from 2 weeks ago (there is a two week free trial), and then every 4-week period prior to that. In theory a person will try the drug for 2 weeks, then fill a standard script every month thereafter.

In the chart below, I utilize color coding to assess how the equity may react to the data. This dynamic can shift at any time. Expectations for Belviq were extremely high when the launch happened. These expectations have been tempered over time, but as yet, neither Eisai (OTCPK:ESALY) nor Arena has offered up formalized guidance. Meanwhile, we can see that analysts have recently brought down their expectations (which were already less than the numbers floated out by Eisai leading into the launch of Belviq).

(click to enlarge)Refill Tracking

To be clear, the assessment is based on what it will take to see a stock price appreciation given current market sentiment on Arena. While there is indeed overall growth, the level of growth is not at a pace that makes the street bullish. If expectations on pace get reset to a slower growth, then the data that will be perceived as bullish will shift.

Last week we saw overall script growth remain pretty flat, but modestly up. Refills were also flat, but were slightly down. There are some factors that come into play when looking at this data. This chart is not depicting the responder rate, nor the true refill rate. The reason for that is some refills are actually booked as new prescriptions (depending on how a script is written). What this chart does is assess the numbers and the possibilities and then compare them to previous weeks and the pulse of the current market.

The raw week-over-week data simply presents in the simplest terms what is happening. The refill percentage of overall sales depicts the percentage of overall sales that refills comprise. The refill as a percentage of the possible pool takes into account regular interval refills of 15 days (the initial free trial), then each 30 days thereafter.

As you can see, the current sentiment (vs. street what it would take to see the equity respond in a given direction) is negative. Raw refill growth was negative for the week. Thus the sentiment on that type of data would be negative.

Refills as a percentage of sales track two dynamics. A low number here could indicate poor refill tracking (a lack of consumer acceptance or lack of responders) or could indicate great front-end growth (big week-over-week total scripts). In general, we want to see great positive front-end growth in prescriptions. This would, in theory, develop into better refill growth in the weeks ahead. I call great front-end growth bullish when this number is between 1% and 9%. I call it neutral when it is between 10% and 14%, and bearish when it is above 16%.

The refills of the possible pool is also negative at the moment. We want to see the trend here working toward higher numbers if front-end growth is neutral or negative. What we had this week was flat front-end growth and declining refills. This dynamic is negative.

Investors should bear in mind that this data is geared toward more active trading, but can also be used in the mid term and long term by looking at trending. There are many dynamics that can shift the equity and the sentiment:

  • In my opinion, the most important factor for investors is a reasonable expectation level. Arena and/or Eisai could set the stage for more realistic stock action by guiding the street as to anticipated sales and the timeline to reach key milestone sales figures. When do these companies expect to get to $50 million in sales? $100 million? $150 million? $200 million?
  • Direct to consumer advertising will begin to carry an impact in the months ahead. This can help create a pull by consumers being added to a push by sales reps and doctors.
  • The addition of additional sales reps can mean more "touches" with doctors. This can translate into more scripts being written.
  • New territories can gain approval. This would expand the pool of potential patients.

The Belviq story is fairly new still. Expectations were set very high by analysts as well as these companies. Prior to launch, I was highly criticized for setting the expectation bar at 40,000 prescriptions in the first 3 months. The sales pace for 2013 is looking to be between $30 million and $40 million. In my opinion, if the company embraced these numbers, it would serve to set expectations to a level that can be met, and even beaten. Perhaps, we will see some form of guidance in the Q3 conference call.

There is still long-term potential with Belviq and thus Arena. However, the dust has not fully settled yet, so if you are on the sidelines, you may want to have a wait and see stance at the moment. There is very little in the short term that will make this equity jump and run away from you. Stay tuned.

Source: Arena - Tracking Belviq Refills

Additional disclosure: I have no position in Eisai