A couple of years ago, biotech investors were searching for who would be the next Dendreon (DNDN.) A stock that went from the $3's to $50's in less than a year. There was so much promise for the company and their recently approved drug Provenge that the valuation reached $6B for the company even before the product could hit the market. Many believers held the stock based on their expectations that Provenge would be a huge seller and they would reap the profits along the way. But that never panned out. Sales were less than expected and the costs of goods sold were much higher than investors expected and therefore Dendreon continued to generate losses instead of profits. Longs who held onto their beliefs have watched their profits disappear as Dendreon's valuation shrank to just $700M. It is rare that a biotech with an approved product can exceed expectations for their drug and make investors who get in before the growth wealthy in return. Over the last 5 years, in a sharp contrast to Dendreon, Alexion Pharmaceuticals (ALXN) has done just that. Does Arena Pharmaceuticals (ARNA) have a chance follow in their footsteps?
Alexion Pharmaceuticals is a name many biotech investors may not be that familiar with. It flew under the radar for a number of years, but they have done what many never thought they could and that is successfully commercialize a novel drug themselves and generate monster profits along the way. Alexion focuses on ultra-rare diseases and their only approved drug is eculizumab, marketed as Solaris. Even though Alexion focuses on ultra-rare diseases, there are a number of parallels to a name more familiar with retail investors, Arena Pharmaceuticals whose lead drug Belviq for the medical management of obesity was recently approved.
Alexion's Solaris was approved in March of 2007 for PNH (paroxysmal nocturnal hemoglobinuria) an ultra-rare blood disorder -- 15 years after the founding of the company and investing $800M to get it to market. Arena's Belviq was approved in June 2012, 15 years after the founding of the company and over $800M to get it to approval. Soliris is priced at almost $400,000 a year for a patient and Belviq is estimated to cost about $1,825 per patient. Solaris's target market is only a couple of hundred thousand patients worldwide and Belviq's target market is over 500M patients worldwide. Alexion is doing their own sales and marketing, Arena is partnering for sales and marketing. OK, not a very compelling similarity I know. So what in the world do these two companies have in common and why should you care?
In March 2007 when Solaris was approved by the FDA, Alexion had a marketcap of only about $500M. At the time, analysts didn't know if Solaris would sell at a price point close to $400K and given the limited size of their market -- they certainly didn't think it would eventually become a blockbuster. However this year, 5 years after being on the market, it will generate over $1B in sales. Alexion's marketcap today is almost $22B, a 44X increase in just 5 years! They did this by successfully growing revenues and earnings by an average of over 40% a year, every year since launch. One can argue, and rightfully so, that Alexion is overpriced with a price to earnings ratio of 111, more than twice their revenue growth rate of 40%. A PE ration of 80 or less would seem more fairly valued but many believe Alexion is a buyout candidate given the impressive earnings potential.
Alexion's Solaris has a key similarity to Arena's Belviq and that is eculizumab has the potential to be used for a number of indications which is also the case for lorcaserin, drugs that are in themselves a franchise. Alexion received approval to expand Solaris as an orphan drug for treating aHUS (atypical hemolytic uremic syndrome) last year and is working on additional trials to expand Solaris for additional rare hematological, kidney and neurological disorders. The rest of Alexion's pipeline is relatively modest with no other unique compounds yet in Phase III trials. Belviq also has the ability to be indicated for the treatment of additional diseases including Type II Diabetes, Metabolic Syndrome and for the treatment of drug addictions including smoking cessation. It is also likely to be combined with other molecules for combo-therapy such as phentermine and metformin. Both Solaris and Belviq will result in a franchise of drugs with one molecule.
Arena's current marketcap is $1.8B, a 40% drop from the post Belviq approval highs. Like Alexion 5 years before, Arena will be going from a R&D, pre-revenue biotech to try to make the elusive transition to profitable biotech with huge margins and earnings potential. The only question is will Belviq sell or not? If it does, then Arena could follow a similar valuation path as Alexion with revenues and a stock price that resemble a hockey stick. In my last article, I created a model for which investors can determine EPS based on some variables including written scripts. I do expect a modest first couple of quarters after launch to be followed with aggressive quarter over quarter script growth as physicians are educated about the metabolic benefits of the treatment along with some results from early adopters of combination therapy with phentermine. As I have stated before, this is uncharted territory in the obesity space for Arena. There has never been a safe, 1st in class weight loss drug approved for long-term use with Belviq's unique mix of efficacy, safety and tolerability. This is underscored by the recent announcement from Vivus Pharmaceuticals (VVUS) that it is likely that Qsymia will not be approved for marketing in the EU because of safety concerns, giving Belviq that entire market for perhaps as much as 5 years while Vivus completes a cardiovascular outcomes study for Qsymia.
Will prescribers embrace a new novel drug for their patients or not? How long will it take? How profitable could Arena become? These are all questions to be answered in 2013 and beyond but buying Alexion in 2007 would have been a smart move and if Belviq does sell, Arena investors will also be richly rewarded. Sometimes the hardest thing to do as a retail investor, is to do nothing at all.
Disclosure: I am long ARNA.