Arena Pharmaceuticals (ARNA) released its Q4 and full-year results Thursday. As investors already know, the equity took a hit on the results. While most of the market is digesting that news, I thought that I would take some time to assess a less talked about, yet important, aspect of the call. Arena offered up guidance in the call.
One aspect of the guidance seems to have confused many investors. That was the revenue guidance offered:
Arena expects the majority of its 2014 revenues will be payments from collaborators based on net product sales of Belviq and regulatory milestones. In addition, Arena expects 2014 revenues of approximately $9.0 million from amortization of upfront payments from existing collaborations, approximately $7.0 million in development and patent reimbursements from Eisai, and approximately $1.0 million from manufacturing services for Siegfried.
Essentially, Arena stated that most of its 2014 revenue will come from its share of Belviq sales and regulatory milestone payments and that in addition to that the company is expecting about $17 million in other revenue. Simply stated, the minimum revenue number for 2014 would be $35 million. That would be comprised of the 417 million from other items, and $18 million from sales of Belviq (setting aside milestone payments). What does that mean?
We know that Arena receives 31.5% of net sales. Thus, in order to get at $18 million, net sales would have to be $57 million. Now, if we assume that net sales is about half of gross sales, then the overall sales figure for Belviq should be at about $114 million at a minimum. Bear in mind that this number is arrived at using conservative metrics.
If we are going to be aggressive, and double the number, gross sales would be at $228 million, net sales at $114 million, and Arena's share of that about $36 million. Let's call this aggressive model the top of the scale. If we split the conservative and aggressive approach, the numbers come out to gross sales of about $170 million, net sales of about $85 million, and Arena's share at about $27 million.
Is it reasonable to expect $150 million in sales in 2014 given that the minimum expectation of the company appears to be at about $114 million? Right now, Q1 sales are on pace for about $25 million. If Q2 delivered $35 million, Q3 at $45 million, and Q4 at $55 million, the 2014 number would come in at $160 million with growth of just $10 million in each quarter. Would $150 million in gross sales impress the street? I think the answer would be yes. There is a lot riding on 2014 with Belviq. While watching weekly sales may get tedious, it does allow an investor to assess the path of sales in an analytical manner. Please keep in mind that this is oversimplified, and a big chunk of revenue could be in milestone payments for regulatory hurdles cleared. This is why I did not split the difference between the low end and the high end and went with a round number of $150 million in gross sales.
The other component of Arena's guidance was the expense side of the equation:
Arena expects full year 2014 research and development expenses of approximately $90.0 million to $98.0 million, including non-cash expenses of approximately $9.0 million, and approximately $6.0 million in development expenses reimbursed by Eisai and included in revenue. Arena also expects full year 2014 general and administrative expenses of approximately $30.0 million to $36.0 million, including non-cash expenses of approximately $6.0 million and approximately $1.0 million in patent expenses reimbursed by Eisai and included in revenue. In addition, Arena expects to spend approximately $9.0 million to $10.0 million in capital expenditures, primarily related to its manufacturing facility in Switzerland. Arena will continue to manage expenses, taking into account its revenues and shared costs with collaborators.
The cost side of the business is oft related to as cash burn. On the low side, Arena expects to spend $129 million. On the high side, the company expects to spend $144 million. In essence, investors should be prepared for losses in 2014. The company has essentially laid that on the table already. The faster you as an investor understand the dynamics, the better you can be at assessing a trade in an equity.
Arena does have a pipeline, but this guidance should tell you as an investor why getting Belviq sales ramped up is so important. Arena does have cash and cash equivalents on hand of over $220 million, but in pharma that number is not as big as many think. Stay Tuned!