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Executive summary:

  • The pilot program by Aetna is likely to pave the way for broader insurance coverage.
  • According to market research, the weight loss market is expected to reach $650 billion by 2015, clearly showing the potential for growth in the market.
  • The stock is trading at an attractive price as the premium attached to the stock due to the initial hype has been removed, and upside potential is present.
  • The increase in the scope of the drug will open new opportunities to grow revenue.

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Arena Pharmaceuticals (NASDAQ:ARNA) brought a lot of excitement to the market when it received approval for its anti-obesity drug, Belviq. Investors were expecting blockbuster sales figures due to the problem of obesity and high spending on healthcare. As a result, the stock price went through the roof even before the drug hit the market. However, as the company launched its drug, it faced considerable problems in the market and sales were well below expectations. The company became the victim of the hype created around the potential of the anti-obesity market.

The market clearly ignored the factors that contributed to low sales of the drug. As a result, the stock price went down and the stock lost more than 35% during the last year. However, the worst is over for Arena in my opinion and the company is entering an exciting period. The stock has gained more than 13% since the start of the year and I expect the stock to gain momentum over the next six months.

Belviq Sales: Major Hurdles are Falling

If we look at the growth in prescription rates in isolation, we will be surprised to see the trend in the stock price as the prescriptions grew at an exceptional rate over the last few months. Within two months after its availability in the market, Belviq prescriptions increased by 197%, which is extraordinary for a starter drug. However, the problem was not the rate of growth in prescriptions; it was the volume of prescriptions and sales. The market expected the company to report millions in sales during the first quarter, which was clearly not happening.

The biggest reason was the lack of coverage from insurers as most of the insurers considered it a lifestyle drug rather than a life-saving drug. However, this major hurdle is falling now as the insurance coverage for these drugs is increasing. Aetna (NYSE:AET) is offering Belviq as the preferred brand for its eligible patients through its pilot program designed to gauge the benefit of these drugs. The pilot program will ensure that the drug is available to a larger number of patients. The other drug being tested in the pilot program is Qsymia, developed by Vivus (NASDAQ:VVUS). Qsymia is thought to have an inferior safety profile compared to Belviq. Furthermore, Arena has scored another win recently by striking a partnership with CVS Caremark (NYSE:CVS). This partnership will further enhance the sales as it will increase the availability of the drug and the ability of the patients to afford the drug.

The Need for Treatment and Future Prospects

The demand for anti-obesity treatment is expected to be high due to the obesity rate in the U.S. According to CDC (Center for Disease Control and Prevention) more than one-thirds of the U.S. adults (35.7%) are obese with an estimated annual medical cost of obesity related diseases of $147 billion. Arena has also outpaced its competitors by a large margin in the industry. During the last year, Belviq has outpaced Qsymia by approximately 10% in getting the prescriptions from the concerned physicians.

Eisai and Arena are working extremely hard to increase the reach of the drug - Eisai has doubled the size of the sales force to 400 people in the US alone. According to Transparency Market Research, the weight loss market will reach $651 billion by 2015. However, the figures are not only for the drugs used to fight obesity; these figures are for the whole weight management segment, which also includes services, equipment, diet and devices. However, it is clear from the research that the market for the anti-obesity drugs is huge as the spending on managing the weight is increasing. Furthermore, the company has filed for marketing authorization in Brazil, if successful, it should open another geographic region for the company.

Working on Increasing the Scope of the Drug

Arena has also planned to begin trials of Belviq for smoking cessation by the mid 2014 with duration of 12 weeks and 600 candidates. Belviq has the ability to fight many addictions such as smoking, alcohol and drug usage etc. It could also be used for Schizophrenia patients and people with sleep disorders. Eisai and Arena Pharmaceuticals planned to globalize the multipurpose drug, Belviq. The companies had reviewed the drug usage in Canada, Switzerland and Mexico in 2013 and have plans to expand its trials in Middle Eastern and Asian countries along with Russia.

Conclusion

For any product to be successful the basic factor is the need for that product - for the discussion above, it is clear that the need for Belviq is present in the market. As I mentioned above, the main hurdles for the drug were insurance coverage and out of pocket costs - these issues are being resolved, which should enhance sales. I believe Arena Pharmaceuticals is attractively priced at current price levels and it should prove to be a solid investment in the long term.

Source: Arena Pharmaceuticals: Is The Stock Attractively Priced?