I think the influx of new biotech investors learned some interesting lessons about the launch and subsequent commercialization of drugs this year. In effect, it's far from smooth sailing, and expectations for initial launch numbers should be kept in check. Delusion is typically not a good investing thesis.
The truth is that a drug's long-term potential as a revenue generator is generally better assessed 6-12 months after its initial launch. So with that in mind, here's my take on two of the most lauded drug launches this year and their prospects in 2014.
Will Amarin Sink in 2014?
With a rejection likely coming for Amarin's (NASDAQ:AMRN) label expansion for its fish-oil pill Vascepa on Dec. 20th, the company is going through a rough patch to put it mildly. Amarin's share price has crashed over 70% since the FDA's Advisory Committee voted against expanding the pill's current label, management is now indicating it's going to sue the FDA if they won't at least include some of the Anchor info in the present label, and the future of Vascepa's pivotal Reduce-It study looks bleak.
Although none of this is good news for Amarin shareholders the anemic sales of Vascepa for its Marine Indication, or people with severely high triglycerides, is the biggest problem facing the company. Specifically, Vascepa sales are on track to generate a smudge over $40 M in revenue for its first year on the market. Drugs that go on to become blockbusters are usually able to at least break the $100 M mark in their first full year on the market. So it's safe to say that Amarin has some work to do if they want to compete against GlaxoSmithKline's (NYSE:GSK) blockbuster fish-oil pill Lovaza, which is on track to break $1 B in sales this year.
With about $210 M remaining in cash and cash equivalents and a burn rate topping $4 M a month, Amarin is going to have to make some tough decisions soon. If it can't find a partner for Vascepa that's willing to hand over a hefty upfront milestone payment, Amarin may have little choice but to shutter the critical Reduce-It study.
Bottom line: My take is that management needs to concentrate the remaining resources on increasing Vascepa sales if they are going to pull this one out of the fire. Pursuing a favorable partnership and possibly suing the FDA are unnecessary, and basically fruitless, distractions at this point. If a partnership was likely, it would have happened by now. And suing the FDA is a waste of time and energy.
Vascepa, if marketed correctly, could be a profitable drug, and that's my point. Lovaza is proof-positive of this statement. Unfortunately, you won't find much hope in Amarin's latest 10-Q (hyperlinked above) about management focusing on Vascepa's marketing efforts and increasing sales in its current form. So I wouldn't hold my breath that Amarin is going to be a comeback kid in 2014.
How will Belviq fare in the New Year?
Arena Pharmaceuticals (NASDAQ:ARNA) is facing a pivotal year for its flagship obesity medication Belviq. So far sales haven't set any records, and this was an issue I warned Arena investors about well before the fact. As a refresher, I recommended Arena investors temper their initial expectations because the obesity market needs to be developed because of the poor track of Belviq's antecedents. Once the stock dived into the low $5s, however, I closed my short position and went long. While my long-term investing thesis primarily centers around Arena's other clinical candidates, I do have some really good news for investors focused on Belviq as the main value driver.
Now that Belviq is close to being on the market for about half a year we finally have sufficient data to do some "quantitative speculating," as I like to call it. Whenever possible I try to employ mathematical models and simulation techniques in my investing activities, and Belviq's sales numbers are a prime example. To get a handle on what to expect in terms of first full year Belviq sales, I used three different simulation techniques that incorporated current sales numbers and weekly sales growth. And frankly, I was a bit shocked at the result.
Belviq sales are gaining a fair amount of momentum, albeit slowly, and this appears to be turning into a snowball effect. Specifically, my three models converged on an estimate for first year gross sales of between $140-$210M. Of particular interest, the models all agreed that sales really pick up in Q2 next year, and the models were robust against a variety of varying assumptions. For the statistically challenged, that last little bit simply means I played around with different parameter estimates to see if any adjustments altered the sales estimates in the broad sense.
That said, I caution investors about reading too much into these estimates. These techniques are highly similar to those used to predict where a hurricane is going to make landfall. As most readers will understand, as a storm gets closer to land, the better able the models become at predicting where landfall will actually occur. So the more data we get on Belviq sales, the more reliable this model will become.
What's most interesting to note is that my estimates don't take into account the increased promotional effort that Eisai is currently putting forth. I am keen to see if this increased promotional effort accelerates weekly sales, or at least keeps them growing slowly. Even a minimal increase in weekly sales growth will have a large impact on the final result, which is probably why Eisai is increasing its effort now. I bet dollars to donuts the smart folks at Eisai performed a similar analysis and came to the same conclusion.
So while this is all interesting speculation, I do have a bigger point to make with this modeling approach. In effect, you shouldn't put too much stock in the naysayer's comments that Belviq is going to end up as a commercial failure. It's progressing nicely, and math is finally on the side of Arena longs. Of course, bad things could happen that would derail the current sales trajectory. But if that's the short investing thesis at this point, it's not a very good one.
On a final note, we will have a much better handle on this issue come next April-May. But if my models have any basis in reality, then Arena shareholders should be in for a good year.
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.