KLLJ Investments

Long only, deep value, special situations, growth
KLLJ Investments
Long only, deep value, special situations, growth
Contributor since: 2010
How is it monetized? The same way AHP was looking to monetize Redux during the fen-phen era. Only 2.3M patients take phentermine a year. It isn't widely used because people almost always gain the weight back after they stop. Bel-Phen looks to be at least as effective as fen-phen but with a much better safety profile. Is it possible to get to the 16-18M a year in scripts that fen-phen did? Even if that happens but with 1 Belviq per day as the standard, it is a $1B a year market. Given the pilot studies are for Belviq BID, then there will be enough who take it twice a day to make net sales between $1-2B. You don't need a single pill to monetize it. You also have a subset who will take Belviq for maintenance. There was no maintenance with fen-phen. Most would also gain the weight back when you stopped it.
Yes, it is way too early to know what happens here but the point is that even if it is Belviq once a day takes hold in combination with phen for women looking to lose 12% weight in 3mo, then earnings for ARNA are close to $2. More than double today's share price. It is also important to mention that with BelPhen becoming common, there is little reason why anyone would want the other combination therapies presented in Qsymia or Contrave.
The BelPhen data isn't going to increase sales by 20%, 30%, 40% etc. just by having the data out there. It will require mass consumer awareness of the combination & the efficacy and those consumers then drive the market to multiples of what it is today. Nobody knows if this happens in 6mo or in 3 years. I discussed this in greater detail in my blog yesterday: http://bit.ly/1snWlHr
Great Poster at the ASBP symposium going on today in Austin for a small BelPhen study done by a weight loss specialist. He saw about 12% mean weight loss in 12 short weeks. Don't know if he did Belviq / Phen 15mg BID or QD. Regardless, stellar results and I would bet half of the patients saw 15%+ weight loss over those 12 weeks. Consistent of what I have heard from others and foretelling of the upcoming Eisai/Arena-sponsored BelPhen Pilot Study results coming in the next couple of months.
Thanks Steinbeck for the excellent feedback. I'll write the "and Arena investors lived happily ever after" article in 2017-2018. Give it some time. :-)
Adam, I know you are extraordinarily well-respected in the industry and I'm shocked you have the time to read and comment on a fairly unimportant article on a biotech not even worth $1B. Yes, thanks for pointing out my optimism for a quick launch was wrong. Perhaps my assessment of Belviq's clinical chances of having successful results for smoking cessation will be wrong? Or perhaps Belviq + phentermine won't be more effective than Qsymia high-dose, which almost no patient gets to because of the side effects. Or perhaps I'm wrong on the pipeline potential. Who knows. We'll have to wait and see what happens over the next 3-5 years. I'm sure you will still be in the exact same job, writing articles for a dying company in those 3-5 years while I occasionally post my over-zealous predictions on Seeking Alpha.
I wish I could explain why it doesn't add up. What also doesn't add up is the stock down over 50% while the short interest has gone down over 40%. It is counter-intuitive. I see the smoke but no fire yet.
ARNA at $4, $8 or $12, the facts remain the same. Sometimes, a stock price is difficult to justify both at the lows and at the highs. With Arena, there is a severe disconnect between the probabilities of future sales and the current stock price. There are plenty of biotechs that trade at way inflated values when compared to Belviq with a fraction of the potential.
I failed to mention in my article that over the last year, Short Interest has dropped from 66M down to 38M as of the last reporting date today: http://bit.ly/NfdRzq
Despite the pressure on the share price, the shorts interest has dropped dramatically. If the market truly thought there was no future for Belviq or for Arena, the short interest would be sky rocketing and not dropping to multi-year lows.
If approved, Contrave will face the exact same generic equivalent competitive pressures that Qsymia has battled.
Yes, I was horribly wrong about early sales. However, it doesn't mean they won't come and doesn't change my long thesis. My call to buy at $1.25 wasn't bad though. It is easy to hold with a low cost basis and long term investment horizon. Not as easy for the folks who bought in much higher.
Each retail prescription is for 60 pills and each bottle sold to the pharmacy is 100 pills so the calculation is off by approx 40%.
"That to me is worth a speculative play on a $1.25 stock. At this level, Arena is trading like a never-expiring zero strike call option."
And 13 of the 45 comments on that article came from you arguing why Belviq wouldn't get approved. You probably should have bought the stock.
People have been disagreeing with my thesis since I recommended ARNA at $1.25. I recall you also saying you would write an article in response to a similar comment a year go, still no article. Just prolific comments from someone who has done little research. Here is a point by point response to your comments.
1). The AMA endorses new drugs for medical weight management. The only novel drug is Belviq. There is room for half a dozen blockbusters in this drug category.
2). You miss the complete point here. Drug intervention is now listed to aid when diet and excercise isn't enough and prior to other diabetes drugs. It is my opinion that Dr.'s will write for Belviq most frequently because it has the best tolerability and side effect profile of any of these drugs. It also reduces HbA1c by .8 for non-responders and 1.2 for responders. Read the link to the most recent study before.
3). Commercial coverage for 30% at launch + several states will cover at launch but this will grow to most everyone in 2015. There will be a lot of responders who take chronically but we will just have to see.
4). Eisai guided to $150-200M in thier FY2013, excellent numbers and putting it on path to a blockbuster in 2015.
5). Yes it would but shows that Accenture and Eisai under forecasted demand.
6). Eisai forecasted government coverage by 2017 and it should happen much earlier. This bill will have a lot of support and the AMA behind it.
7). Shorts original thesis was it wouldn't be approved. They were wrong.
8). Shorts have grown because now the thesis is Belviq = Qsymia and they are again wrong.
9). Neither Meridia or Orlistat had the profile of a 1st line drug. To make the comparison shows how uneducated you are in the matter.
I of course could be wrong and you don't know until you look in hindsight. I have no problem with points being challenged but the arguments aren't very good.
Lipitor generated $865M its first full year on the market and $2B in Year 2. I don't know if Belviq will do $2B in Year 2. It is unlikely but in Years 3 and 4, it could catch up and do $4B a year. Cart before the horse. Right now Wall Street doesn't expect much success with Belviq and that is the point.
After over 1K comments on Seeking Alpha, one would think you could take your vast knowledge and wisdom to write an article we can all learn from.
"I have personally stated that I would like to see the company get to 40,000 scripts in the first three months of sales (i.e. June, July, August). In my opinion, if the company can do that number they have a shot at seeing 12 month sales at $250 million. Hitting $250 would trigger purchase price adjustments and the lowest tier of bonus payments."
Incorrect. You need $250M in Net Sales by the end of March 2014, 9mo, in order to trigger the first set of Purchase Price Adjustments. The PPA's are calculated based on Eisai's fiscal year, not a calendar year, which runs until the end of March. I personally think you could see 40K scripts a week before the end of 2013.
Although an analysis of the MOA of each drug is interesting, an equal focus on the safety and tolerability profile is just, if not more, important. As an example, GLP-1's are injected and have a host of serious side effects such as pancreatitis. Qnexa causes tingling in the extremities, cognitive issues and a risk of birth defects. You need a holistic review of each one to include efficacy with MOA, safety and tolerability.
The key of a widely used monotherapy is for it to be mild, safe and tolerable. For Belviq, it has a defined set of responders and this is caught in the label. Take it for 12 weeks and you will either be a responder or not. About 42% (as a mono-therapy) are classified as responders and go on to lose an average of 11-12%. Diabetics reduce HbA1c by a full point, better than many blockbuster diabetes drugs such as Januvia, regardless of weight loss. Bariatricians will combine with cycles of phentermine which will dramatically increase the efficacy and the two work in synergy to off-set side-effects. Cardiologists, Endocrinologists, Gastroenterologists, and PCP's will primarily use it as a mono-therapy. It is the most-important molecule for this indication approved to-date. We will see how it will do in the market soon.
I hope you don't take offense but it seems like you are grasping for content to justify publishing endless SA articles on Arena for the sake of earning .01 a page click. Your knowledge of this space seems cursory at best.
"Why mention the benefits of Belviq for diabetes in this article? The company can not even market the drug for diabetes as it is not labeled for that. The fact of the matter is that losing weight (via any method) has positive impacts on diabetes."
BLOOM-DM results are right there in the label and it can absolutely be marketed as a diabetes drug. Do you believe that Belviq's MOA for reducing HbA1c and Fasting Glucose in diabetics is weight loss? It sounds like you do. You should compare the DM results for Qsymia and Belviq. Weight loss is a part but there is a sub-receptor at 2c that has an impact on glucose control. You should research this.
"The novo drug victoza is an interesting look." Novo has already said this drug is for the severely obese only. It is 5X the cost of Belviq, injected and comes with severe potential AE's. No payor would cover victoza for weight loss before trying less expensive, milder agents first. These drugs are not competitive.
"The ONLY benefit of being novel is in the patent protection." No, this is a benefit but not the main benefit. A novel molecule as a single agent provides a new tool for physicians to try. As a novel agent, it can be combined with other drugs. It has the ability to be indicated for other diseases over time. There are numerous benefits to being a novel drug.
As often happens with early growth biotechs, the PE ratio will be forward looking based on growth. ALXN is a good example. If Belviq is growing at 50% a year, the early PE will be 50-100x earnings. As growth slows, so will the effective PE.
Arena management has commented in the past that they have been in discussions with a lot of different BP's. Any BP who is interested in a partnership will sign a non-disclosure and a stand-still agreement to acquire the company. This is a common practice in biotech and it is likely that most of the big guys have one in place with Arena.
If Arena gets bought out, it will be for much more than a $4-5B price tag if Belviq has a strong launch. The key is launch, growing acceptance and earnings. Also don't discount something different than a buyout like a JV agreement between Eisai and another BP in conjunction with taking a 49% interest in Arena so they can keep the NOL's. There are all sorts of scenarios that can play off based on Belviq success.
If you truly want to understand why your short thesis is wrong, then you can read my article on this: http://seekingalpha.co...
Your assumptions are off-base. Eisai believes they can hit pretty much the entire target of prescribers within 30 days. Arena already has deferred revenue of $11.6M from Q4 they will likely recognize this quarter for launch supply. Eisai's guidance of $200M in 3 quarters is far above any current analyst and I think you could see them exceed this number based on the growing payor coverage.
I hope you don't have a large short position but you never know, you could be a genius and be spot-on with your assessment.
Great article Chris. One comment though regarding an ARNA acquisition, Arena likely has stand-still agreements in place with most of the major big pharmas. It is unlikely either gets acquired within the next year.
As of December 31, 2012, Arena had $623M in Federal NOL.
Yes. I have never written about the weight loss clinic aspect, interviews with the lead distribution network for phentermine to those clinics and leading bariatricians.
Arena has a 10 year tax holiday from Switzerland and their effective tax rate will be about 10%.
Your denial of the failure of Qsymia is mind-boggling? I recommended selling at $30 and again when it dropped under $20 saying it would go to $10. It did. I have also said many times why Qsymia would not be accepted in the market place.
I hope to get a new article up soon that will explain why Qsymia was dead in arrival and why the launch of Belviq will be different.
Will you hold this investment until it becomes a penny stock? Don't say it can't happen because it will if something doesn't miraculous happen soon and history shows that only 20% of new drug launches will increase their script rate after 6mo on the market. This new financing takes profit out of net sales and adds future pressure to their balance sheet but they probably had little choice.
Good luck to you.
Qsymia sales have now flatlined at 3,000 scripts a week for the last few weeks. If that trend continues then they will sell $20M worth in 2013, far less than the $300M some analysts forecasted 6mo ago, with operating costs exploding to over $200M this year. VVUS is a terrible investment and shareholders should have sold when insiders dumped their shares in 2012 before it hit the market.
You cannot value ARNA without revenue, growth and profitability factors. Is a $1.8B marketcap too high, just right or too low? Analyst expectations call for $30M of BELVIQ sales in 2013. How many scripts is that? How many responders at 12 weeks is that? You can't determine this until you know what the price for the drug is. Valuation at pre-revenue is based on nothing more than conjecture. Why was HGSI and DNDN both over $6B prior to their lead drug launches? Now DNDN is worth less than $1B and HGSI got bought out at less than half their post-approval valuation. VVUS was worth $3B based on Qsymia expectations prior to launch. They sold less than $5M in 2012 (because of the reasons I've been stating for years,) yet the marketcap is still $1.2B (but will go lower IMO.) Until we have several quarters of sales for BELVIQ, you can't value the issue with any sort of conviction. On terrible sales, ARNA will do down to $1.2B in value or less (terrible sales mean scripts/growth that would indicate less than $30M in 2013.) On the flip-side, script growth showing $100M in 2013 (3X expectations) should increase the value of ARNA. Furthermore, with EU approval and partnership, script growth will indicate the likely revenue potential for 2014 & 2015 with more certainty so you can better determine future value. At $1.3B in global sales, Arena could earn over $2 a share making it as profitable as ALXN, a $19B marketcap company.
In my re-initiation of my ARNA investment in Sept 2011 with the stock at $1.25, I said ARNA was a never-expiring call option at that time. Only once Eisai/Arena releases 2013 guidance in May will we be better to judge the value, which will be confirmed by actual script numbers. Only then can you say if ARNA is a $4, $8 or a $80 stock. Prudent risk management and due diligence is always needed.
Excellent due diligence of how "Pump and Dumps," so typical of Small Caps, work. Regardless of whether or not the links were temporarily down (a poor excuse since this takes about 1min to fix and curious how quickly they returned after this article,) disruptive technology and IP are only good if someone actually buys it. Retail gets suckered into buying the next big thing only to watch the stock tank as the company burns through cash raised from overly-optimistic analysis.
No offense but using industry multiples for a pharma is not what one should expect in a high-growth biotech with a recently approved drug. A fair PE will be at least the overall revenue growth rate. It is not uncommon to see a PE of 80 or more for a biotech that is growing their revenue at 50% or more. It is the forward looking expectations of BELVIQ and the actual growth rates that will determine the multiple.
If ARNA earns .25 in 2013, is on track to earn .50 in 2014 and $1 in 2015 then you will see a share price that is 80X more than those earnings estimates IMO, certainly not 15-20. See VRTX, ALXN for examples.
1/15/13 Update: If Arena didn't file their Day 120 LoQ by Oct 12th, then the Day 121 clock may not have restarted until Nov 18. If that is the case, then Jan 17 would be Day 180 and the official opinion would not come until February and NOT this Friday, Jan 18th. There is just no way to know definitively until we see a PR out of Arena or the Meeting Minutes from the CHMP on their opinion...
Yes and that CVOT study will cost $200-300M to complete. Arena pays 10% of their study costs and Vivus pays 100% of theirs. Now tell me, if Qsymia sold $5M in 4mo, maybe they can do $50M in 2013 if they are lucky yet their Operating costs will be about $200M because of the increasing costs for sales, marketing and these post-approval trials. If Qsymia isn't a $200M+ drug in 2015, it would make no sense to continue with it financially. Just sayin.
And from Qsymia's Briefing Documents, average HbA1c reduction was .4 in their phase III trials (despite patients losing more weight than in Belviq's trials) compared to a reduction of .9 in the BLOOM-DM study. Not many Endo's are going to prescribe a phentermine-based drug to their diabetics regardless. They will be prescribing BELVIQ because it is twice as good at impacting HbA1c, Fasting Glucose and does not raise Heart Rate and does not need to be titrated.
I would suggest doing more research. Obesity specialists regularly prescribe phentermine off-label. Most prescribe phentermine 2X the starting dose and over 50% prescribe phentermine for long-term use. They regularly combine phentermine with other drugs such as topiramate. Obesity specialists are clamoring to try BELVIQ with phentermine off-label. This will not be done by cardiologists and endocrinoligists where raising HR (through phentermine) is more of a concern. We'll see how this plays out in another 12 mo or so...