On June 27th, Arena (ARNA) investors were finally rewarded for their conviction on lorcaserin's approval chances with a thumbs-up from the FDA. After a short-lived bump in the stock price, Arena shares have retreated back to pre-approval levels making the benefit for holding over the binary event non-existent. So is now the time to sell or is now the time to add to a position? Arena must now wait for the final DEA scheduling of lorcaserin, to be marketed as Belviq by Eisai (ESALF.PK), before they can launch.
In 2010, I wrote an article called "What the Analysts Won't Tell You about Arena" and I believe most of what I wrote still holds true almost 2 years later. Obviously my timing was bad not knowing the content of 2010's briefing documents and not understanding that the FDA wasn't ready at the time to approve a new weight loss drug. So now with Belviq approval in hand, why are analysts still so wrong about Arena?
Arena shares are held primarily by retail investors according to the latest numbers from NASDAQ. Historically, institutions will come into a biotech stock post-approval to eventually result in a holding percentage equal to at least the 72% that retail currently holds. With that in mind, we should see a shift in ownership over the remaining of 2013 from retail to institutions. The big boys do not want to chase the stock and are far more sophisticated in accumulation strategies than retail investors are.
The only thing retail investors can do is just hold their shares and watch or capitulate because of a flat stock price and sell their shares to the institutions. Market Makers have resorted to issuing weekly option series as a tool to control the run-up in stock price. Unfortunately, the only thing that can bypass this orderly distribution of shares from retail to institutions without running up the stock price is news.
There are a number of stock-moving news events which could take place in the coming months. Vivus' (VVUS) Qnexa is up for approval on July 17th and if they receive a highly restrictive REMS, CVOT or an outright CRL, it would be a big boost to Arena. Arena has estimated that it will take 4-6 months for the DEA to render their final scheduling designation for controlled distribution of Belviq. The DEA review has been underway perhaps for a month or more reading into the FDA's approval letter to Arena. Given that, Arena could see an earlier DEA go-ahead than many expect, perhaps as early as September. This would lead to an early launch in the fall. Finally, there is the 120-day letter from the EMA that is widely expected to be received around July 25th, which will give investors the first insight into how approvable Belviq is for the European market. On the heels of this letter, I expect an EU or perhaps EU and Rest of the World partnership for Belviq - if not an outright acquisition of Arena by Big Pharma.
However, the only event that will truly show what the value of Arena and Belviq is (outside of an acquisition) are actual sales. Every single analyst is completely wrong when it comes to Belviq sales projections, and they have been wrong for years. Those same analysts have been wrong about a lack of REMS as reason for a likely lorcaserin approval delay. The fact is, there is nothing to compare Belviq to in order to base sales projections. You have to look at the size of the market coupled with the profile of the drug to determine market penetration, script growth and overall profitability of the franchise.
I wrote in February 2012, with the stock trading well under $2, why lorcaserin will be a blockbuster drug, and I still hold by this analysis. A drug with excellent safety, great tolerability and modest effectiveness is the perfect trifecta profile that doctors love to prescribe. There is really no reason why doctors won't liberally prescribe Belviq to their patients to at least give it a try. The label encourages 12 weeks of use and to consider discontinuing if the patient hasn't lost at least 5% of their body weight. At least 50% who take Belviq for 12 weeks will meet that threshold. Many of those who don't will also stay on it, because of likely improvements in their HbA1c and fasting glucose measurements along with blood pressure and cholesterol.
Eisai's sales force of 600 will focus on endocrinologists initially and follow via a contract sales force to primary care physicians. This is important because today, only a small percentage of endocrinologists prescribe any weight loss drug. According to the CDC, there are more than 20M Type II diabetics and over 70M pre-diabetics who could greatly benefit from Belviq, and endocrinologists will likely welcome new tools to help their patients lose weight while improving HbA1c by an average of 0.9%. It is also important to understand that Belviq's improvement on glucose control is likely not just because of weight loss. There are a number of studies available that show effecting a sub-receptor of 5-HT2c has a distinct method of action that can improve glucose sensitivity. You can bet this will be studied further in post-marketing trials by Arena and Eisai.
Eisai will not be limited to marketing Belviq to the masses about its benefits. I expect national advertisements stating average weight loss of 5.8% and responder average weight loss of 11% coupled with average HbA1c of 0.9% and the main side effect being a mild headache. There will be millions who will ask their doctors about Belviq once they see these ads. The demand for a safe and effective weight loss drug is where the analysts have it completely wrong with Belviq, just like they were about it ever being approved and requiring a REMS. Even without a sales force initially directly covering the primary care market, there will be thousands who will readily try Belviq for their patients. I think this can be underscored by a recent interview by weight loss specialist Louis Aronne, M.D. with New York Presbyterian on CBS News.
Analysts covering Arena expect very modest sales for Belviq, reaching sales north of $1B a few years after launch. This is part of the reason why the share price hasn't soared post-approval. After all, a market cap of $1.8B for Arena if you don't expect Belviq to sell more than a couple of hundred million in a few years might be right. However, they are very wrong, and this will become clear just a few weeks after launch. Once Belviq is available for distribution, weekly script data will be available from 3rd party services to show the performance of launch and market acceptance with week-over-week script growth. Given the lowball estimates for the drug, analysts forecast there will be no more than a few hundred thousand patients a year on the drug. So what happens to the stock price if there are a few hundred thousand who try Belviq in the first quarter after launch?
I forecast 250K scripts in the first full quarter of launch and for Belviq to generate over $1B in revenue in the first 6 months from launch, $2-3B in 2013 and to reach $10B in annual sales by 2015. Yes, these are audacious numbers unless you are open to looking at the size of the market without consideration of performance of previous weight loss drugs. There is no bigger market in all of pharma, with over 100M prospective patients in the US alone. There has never been a safe option for physicians to try. There is tremendous pent-up demand for options from both prescribers and patients.
In 1996, there were estimated to be 18M scripts written for the FenPhen weight loss combination, even without people marketing it, just by word of mouth. Belviq is a safe replacement option for the "Fen" part of this highly potent combination, and I fully expect there will be a BelPhen craze ushered in by Belviq -- thank you to social media. The difference is Belviq is safe and can be taken for maintenance long-term along with excellent benefits for diabetics and pre-diabetics. For these reasons, I expect several million patients to be on Belviq in year one, and when that happens, there is nothing that the analysts and institutions can do to depress the share price.
Investors who buy now and hold will be richly rewarded, in my opinion - either through stock appreciation based on actual sales or acquisition by a top 3 Big Pharma. That is why I continue to hold Arena as a long-term growth stock, not a speculative biotech.
Disclosure: I am long ARNA.