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Did I just say that out loud? What blasphemy. Or is it? The parabolic move of Dendreon’s (NASDAQ:DNDN) share price over the last year has left everyone wondering, who is the next DNDN? It is almost cliché now to compare DNDN’s move to the potential of other biotechs. There is no doubt that Provenge is a revolutionary therapy and will be a blockbuster in its own right. For now, it is limited to late stage Prostate cancer but could still garner $2B a year in revenue whether or not insurance companies will cover it. DNDN’s market cap is already a whopping $6B. Is that fair, too low, too high? I really don’t know. What I do know is that their market cap is over $6B, right or wrong, because that is what the market has said they are worth right now. The market says Arena Pharmaceuticals (NASDAQ:ARNA) is only worth $340M.

As I outlined in my last article, Lorcaserin is the clear favorite to be the only First Line Therapy available for the Overweight and Obese, so what is its potential value post approval?
Should an Effective, Safe & Tolerable Obesity drug that becomes the defacto First Line Option for Primary Care Physicians and Internists be worth more than $6B? I think so.

The BIG (no pun intended) unknown is how large a First Line Therapy for Obesity would be. If the drug is Safe, Tolerable and Effective then it would practically be malpractice to NOT prescribe the drug as an option for patients that need to lose at least 5% of their body weight to promote positive change of health factors contributing to increased risk for cardiovascular disease or risk for becoming a Type II diabetic. As I outlined in my last article about Lorcaserin, it meets all of the criteria to become a Safe and Effective First Line Therapy for those mildly overweight to morbidly obese. What we can say for a fact is that Obesity is the largest market in the world for a safe and effective drug. Why wouldn’t a PCP prescribe Lorcaserin to an overweight patient? There is a 75% chance they lose at least 5% of their weight and a 33% chance they lose 10% of their weight. The only risk is a mild transient headache that happens in 15% of patients (9% in placebo) and is treated with aspirin until it goes away. Drop outs due to side effects were the same as placebo. Why wouldn’t a PCP try it? That is why it will become a First Line Therapy.

So what is the market for a First Line Weight Loss Therapy and what is the potential value of Lorcaserin? I can assure you that the potential partners negotiating with Arena will have their own revenue models, backed up by surveys no less, but here is mine. According to the Centers for Disease Control and Prevention, 67% of Adult Americans over 20 are Overweight or Obese. That is more than 145M potential patients that need a Safe First Line Drug for weight loss. Only 4M of those would need to be on Lorcaserin for Arena to do $4.5B+ a year in sales at full capacity (twice Provenge’s current revenue forecasts.) That is less than 3% of the Overweight population in the US.

One of the keys for the ultimate success of Lorcaserin will be for coverage by Payers. Currently only 10 states mandate coverage for Obesity therapies. Once a Safe, First Line therapy is available, I expect most Payers will cover within 12-24months after launch. Once that happens, Lorcaserin could garner a much larger market share. I estimate this should happen around 2013.

So of the 145M potential Lorcaserin patients, what percentage will go to a primary care physician and possibly receive a prescription? Let’s be conservative and say only 25% of the 145M overweight go to a doctor, which would be 36M patients. That number should be very conservative considering there are 17M Type II DM patients in the country alone. If the Arena Diabetes subset study shows positive benefit for Type II’s, then it is highly likely 17M patients would be covered for Lorcaserin by Payers. Only 4% of obesity scripts are currently written by Endocrinologists which indicates that there is an unmet need for a safe first line therapy for diabetics. So let’s use 36M potential patients as a nice conservative number with no growth factor whatsoever. And we all know that the number of overweight and obese is increasing every year.

It is important to recognize the impact of the upcoming Peer review publication for Lorcaserin BLOOM results. This publication will be followed by similar Peer reviews for the BLOSSOM study in Q4 and BLOOM-DM sometime in 2011. The Peer review is expected to highlight the excellent safety profile of Lorcaserin with impressive efficacy, which positively impacts secondary indicators such as lowering blood pressure, lowering cholesterol, improves HbA1c and lowers the risk for Type II DM. Given all of the positive health benefits of being on Lorcaserin coupled with practically no side effects, it will be a script written by PCP’s multiple times a day by the masses.

So if you believe that Lorcaserin will become a First Line Therapy, which I tried to demonstrate in my last post on the Obesity players. And, if you believe that there is a market of at least 36M Americans who visit a doctor and are overweight, then the following scenarios are realistic models of Lorcaserin value. To come up with a complete value of ARNA, you would need to add on some value for their top ranked patent portfolio, JNJ GPR119 partnership which could generate $295M in milestone payments soon along with the other compounds Arena has in trials. I’ll just focus on Lorcaserin, since that is enough.

YEAR

2011

2012

2013*

2014

2015

US Overweight Population (145M)

My Estimated Total Under Physician Care

36.0

36.0

36.0

36.0

36.0

Scenario 1: Good Lorcaserin Acceptance with 35% overall market share

Potential market penetration rate

5%

10%

25%

30%

35%

Lorcaserin sales in Billions

($1200 per patient / year)

2.16

4.32

10.8

12.96

15.12

Margin

50%

50%

50%

50%

50%

Net Income after tax (35% bracket)

0.70

1.40

3.51

4.21

4.91

Terminal Value (2015 profit/10%):
Assume perpetual 4.91 billion ,
zero growth,
10% discounting.

49

NPV (@20% discounting)

24

Net after a 50% Split with a partner

12

Total Shares Outstanding

(assumes about 20% dilution)

0.120

Intrinsic value/share at end of 2010

$100.00

Scenario 2: Average Lorcaserin Acceptance with 20% overall market share

Potential market penetration rate

2%

6%

10%

15%

20%

Lorcaserin sales in Billions

($1200 per patient / year)

0.864

2.592

4.32

6.48

8.64

Margin

50%

50%

50%

50%

50%

Net Income after tax (35% bracket)

0.2808

0.8424

1.404

2.106

2.808

Terminal Value (2015 profit/10%):
Assume perpetual 2.80 billion ,
zero growth,
10% discounting.

28

NPV (@20% discounting)

13.14

Net after a 50% Split with a partner

6.57

Total Shares Outstanding

(assumes about 20% dilution)

0.12

Intrinsic value/share at end of 2010

$54.76


Scenario 3: Poor Lorcaserin Acceptance with 10% overall market share

Potential market penetration rate

1%

3%

6%

8%

10%

Lorcaserin sales in Billions

($1200 per patient / year)

0.432

1.296

2.592

3.456

4.32

Margin

50%

50%

50%

50%

50%

Net Income after tax (35% bracket)

0.1404

0.4212

0.8424

1.1232

1.404

Terminal Value (2015 profit/10%):
Assume perpetual 1.40 billion ,
zero growth,
10% discounting.

14

NPV (@20% discounting)

6.69

Net after a 50% Split with a partner

3.35

Total Shares Outstanding

(assumes about 20% dilution)

0.12

Intrinsic value/share at end of 2010

$27.88

*A majority of states should cover Lorcaserin prescriptions by 2013.

To come up with the Expected Value of Lorcaserin, we can assign a probability to each of the scenarios. I personally think Scenario 1 is the most likely, in fact, I think it will be more widely accepted as the go to First Line Therapy for the overweight. However, we’ll assign a probability of only 25% to scenario 1, 50% to scenario 2 and 25% to the most unlikely scenario but it will give us a very conservative target.

= ($100 x .25) + ($50.76 x .50) + ($27.88 x .25)

Expected Value of $57.35 at the end of 2010 and a market cap of $6.88B, only for Lorcaserin. Keep in mind; this is only for the US. Approval in APAC and the EU will triple the size of the revenue potential of Lorcaserin.

Will it get there this year? I doubt it. I think the market wants to see approval first and then wait for some success before rewarding ARNA. However, a partnership before approval can quickly change the game. I fully expect that to happen and once it does, we’ll have insight into how Big Pharma values a First Line Obesity Treatment.

Disclosure: Long ARNA

Source: Is Arena’s Lorcaserin More Valuable Than Dendreon’s Provenge?