This week, we saw an anticipated pop in prescription numbers for the anti-obesity pill Belviq from Arena Pharmaceuticals (NASDAQ:ARNA). A nice week-over-week climb was expected, considering that the last data we saw fell in the week that included the 4th of July holiday. During that week, sales saw a dip of almost 9%, which was actually better than expected. With the month of July came the re-launch of Belviq by marketing partner Eisai (OTCPK:ESALY).
Television ad exposure should help drive consumer demand, and we have seen a correlation between advertising frequency and front-end script growth. Investors can get some great insight into the ad campaign, as well as comparative data from iSpot.tv. This service offers a wealth of information that savvy investors seek out. As my readers already know, television ad exposure in the first week of the re-launch was the most impressive to-date, with 338 ads aired between June 30th and July 6th. The second week of ads (July 7th through 13th) saw a 30% drop off in frequency to 240 ads aired. The current week is not yet complete, but thus far, about 138 ads have aired. On one hand, it may seem concerning that the ads seem to be dropping in frequency. On the other hand, I have noticed a modest shift from tons of middle-of-the-night ads to early morning and daytime. There have also been some prime time ads in the mix. If one were to assume that the Eisai budget for television ads is constant, it is logical to see fewer ads in terms of frequency for better time slots. Things are not yet perfect, but a shift appears to be happening. You can see that the July 1st re-launch represents the biggest ad exposure to-date.
(Chart Source - iSpot.tv)
Over the past few weeks, I have been focusing on beginning to assess what we can anticipate in the Q2 earnings call, in terms of overall revenue and revenue from the sale of Belviq. I have also been looking at the cash side of Arena more closely to assess the time frame that the company may need to bring in more cash. The likely goal of Arena was to have revenue from sales of Belviq as the fuel to finance the development of the pipeline. Slow sales have put a bit of a damper on the prospects of that happening.
While it may seem odd that I am discussing cash burn when the company reported $203 million in cash at the end of Q1 and also reported an investment of about 971,500 shares in Taigen (Taiwan OTC: 4157.TWO) that was valued at $53 million, the reality is the Arena is at a stage where costs to bring pipeline projects along will be happening, and pipelines are expensive to develop. For clarity, the current value of the Taigen investment is about $48.2 million.
What we know is that $19.3 million was payable to Eisai between April 1st and April 15th. That would bring cash down to about $185 million. We also know that in 2014, the company has guided that it will spend about $135 million in research and development, administrative costs, and capital expenditures. The spend side can certainly shift or delay, but we need to understand that shifting that spending would result in slowing the R&D, delaying capex spending, or cutting the administrative costs. At the moment, Belviq sales revenue for this year looks like it will be between $20 million and $25 million. Unless Belviq sales pick up substantially, the reality of a need for cash will present itself sometime in the next 12 months. That cash can come from dilution, debt, or a new partnership deal. Each method for raising cash has its positives and negatives. In my opinion, Arena wants to maintain at least $100 million in cash to conduct the research and development side of its business. Given the guidance, we can anticipate that the remainder of the year will see $105 million spent on the categories listed above, and $19.3 million will be refunded to Eisai. The Taigen investment provides some cushion, but we do not really know the intent of Arena with regard to that stake. The bottom line is that we need to see Belviq sales revenue increase for many business reasons.
This week, with a pop of over 10% in the script numbers, we should have expected to see the street react in a neutral-to-positive manner. This near-term dynamic is fine and something active traders love to see. In the longer term, the sales pace is still tracking in line with $100 million in gross sales this year. As yet, we are not seeing the inflection that takes the sales to the next level ($125 million for 2014). Essentially, we have seen sales over the last 6 weeks as pretty flat overall. Sales on June 6th were just under 10,000, and sales this week were just about at that same level of 6 reporting periods ago. The bottom line is that the scripts recovered from last week, but still are shy of showing the inflection that gets us above a pace for $100 million this year. Personally, I am anticipating that the pace will begin to increase above the $100 million line in the next month or so, as the newness of Belviq with a more aggressive ad campaign offsets the typical seasonality in the sector. Traditionally, prescription weight loss drugs see a second-half decline. What we are looking for is maintaining pace or seeing growth vs. the typical and historical decline in the sector. As you can see in the chart below, the orange script line represented by IMS Health is remaining pretty much exactly on track with the pace (it remains almost imperceptible) that I outlined months ago for $100 million in gross sales for 2014.
(Chart Source - Spencer Osborne)
Looking at the quarter-over-quarter data, we can see that the start to Q3 was below the finish of Q2 because of the holiday week. We can also see that this week's data returned us to where we were 6 weeks ago. Overall, with two weeks of data, Q3 is pacing about 36% above the similar stage of Q2. For perspective, Q2 finished 44% better than Q1. We now have the ability to track year-over-year progress as well. Belviq sales at this stage in Q3 of 2014 vs. this stage in Q3 of 2013 are up 298%.
(Chart Source - Spencer Osborne)
In looking at the most important aspect of all this, I will shift to revenue. As stated, the overall desire is to see revenue from the sales of Belviq get to a point where it can finance ongoing operations. The company is still a long way from that happening. It is my opinion that the company is at least two years away from realizing any further milestones from Eisai related to sales. The three charts below tell the story. The first chart outlines the overall revenue story with gross, net, and Arena's share of revenue. The second chart drills down to the Arena revenue from sales, and the third chart shows a cumulative revenue story for 2014.
(Chart Source - Spencer Osborne)
The current pace shows that Arena will likely have about $18 million in revenue for 2014. As I have said, I am anticipating that the second half of the year can give a pace that will improve on that slightly. If I had to estimate it today, I would say that the sales revenue can get to about $20 million, if we are aggressive. In order to accomplish, that we need to see the second half of the year deliver $75 million in gross sales, a substantial improvement over the $40 million in gross sales that we saw in the first half. For perspective, to get to that $75 million figure, we need to see an average of almost 14,500 weekly scripts on the IMS data (tough to do with holidays and seasonality). If we are conservative, the revenue story will remain at $18 million.
The sales story for Belviq is one that must now have investors looking at cash options in the next 12 months. Substantially increased sales can alleviate that issue, but the jump in sales required is much bigger than any reasonable person would think likely. That leaves us with dilution, debt, selling off the Taigen investment, or early-stage partnerships on pipeline drugs. There are a few countries where Arena could partner Belviq, but the impact would likely not be substantial, and the revenue from the deal would not be as extensive as the deal of $60 million for "rest of the world" that Arena signed with Eisai last fall. The simple reality for the next 12 months is that the street will be assessing the cash situation closely and side-by-side with the sales of Belviq. The more potential that Belviq sales show, the less of a cash worry the street will have and the better deal the company can get on any offerings or partnerships. Stay Tuned!
Disclosure: The author is long ARNA. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I have no position in Eisai