The past two weeks have played havoc on stocks. Between Superstorm Sandy shutting down markets, the presidential election, and what seems to be a re-alignment of priorities, the street seems to be in lull mode. The question is when will a bullish sentiment return and to what level can it drive the market.
Arena Pharmaceuticals (ARNA) is a speculative play on its anti-obesity drug Belviq. The drug has FDA approval and is awaiting DEA scheduling before it can be launched. Arena competitor Vivus (VVUS) also has an anti-obesity drug, Qsymia, that is FDA approved. In the case of Vivus, DEA scheduling was not needed and the company launched Qsymiua on September 17th.
Despite the natural competition between the two companies and those that invest in them, there is a certain shared goal. Getting anti-obesity drugs back on the market after more than a decade, getting insurance companies to buy into the benefit of getting a handle on obesity and diabetes and to cover the drugs, and getting consumers and doctors to buy into the idea that a prescription drug may be a meaningful solution to an obesity problem that some say is epidemic. Whether investors like it or not, the Vivus and Arena wagons are hitched together.
Earlier this week both companies reported Q3 earnings. Vivus went first in the pre-market and Arena waited until the market closed. For all intents and purposes these calls were not really about the financial data, but rather the early sales of Vivus' Qsymia. The Vivus call provided the first initial flavor of how an anti-obesity drug might perform in the market, as well as what the challenges and successes might be.
Being the first FDA approved anti-obesity drug to hit the market in years, it is little surprise that the street and investors placed high expectations on these companies, but in particular Vivus since it already had its product on the market. The data delivered by the company was not to the level the street was looking for and both Arena and Vivus suffered for it.
Over the first 6 weeks Vivus saw 5,560 prescriptions written for Qsymia. On average each prescription equates to $160 in revenue per month. Essentially with that pool the company will be knocking on the door of $900,000 per month in revenue. Not impressive, but it is just the beginning. One hurdle the company faces is that while prescriptions are being written, the lack of insurance coverage to pay the bill is having consumers think twice and not actually filling the script. The company stated that 30% of those that got prescribed Qsymia did not turn out buying it.
WHY ARENA HAS HIT BOTTOM
With the tepid reaction to the Vivus call, it was only natural to assume that Arena will have similar hurdles. Arena stock took a hit as well. One big difference is that Arena was able to narrow its losses, and there is a sentiment that Arena's Belviq may be more widely prescribed as it does not have the mail order REMS component that Vivus' Qsymia has and while it may be conjecture that Belviq is safer.
Investors need to bear in mind that whether Arena will enjoy more success is subjective. The issue at hand is that if a perception is created that Arena will have an easier path to sales and prescription filling and that doctors are waiting for Belviq to hit the market in lieu of prescribing Qsymia, the equity might gain support at current levels.
There is a market for anti-obesity drugs. There is also a huge market for over-the-counter solutions. The benefit that Arena has is that Vivus is cutting the path that Arena can benefit from. If Vivus can get more insurers to cove Qsymia, then it is only natural that Arena's Belviq will benefit.
In my opinion, after the initial sales announcement by Vivus, the analyst community is tempering expectations now. That will mean that the exuberant numbers we saw some considering will now be brought down to reality.
What we all need to remember is that the Vivus results represented just 6 weeks of progress. The numbers are growing, the participating pharmacies are growing, and we can anticipate that insurance acceptance will grow as well. By the time Arena's Belviq hits the market we should have more results on Vivus' Qsymia, more realistic expectations, and a better market to sell to. These are all positives.
The run to $20 per share for Arena that some were anticipating is further away now and perhaps that is a healthy thing. My expectations are that Arena can hit $11 on DEA scheduling news. Arena will launch Belviq within a month of that news.
The key for investors is identifying the bottom for a buying opportunity. At the moment, it looks like the $7.00 to $7.25 is the bottom. Moving up and getting the equity back into gear will take time, and news from the DEA.
Disclosure: I am long ARNA.