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Spencer Osborne
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Spencer Osborne is founder of Satellite Standard Group [SSG], and a partner of Sirius Buzz (http://siriusbuzz.com/). Sirius Buzz covers the satellite radio industry as well as companies that do business in this sector. Sirius Buzz provides information and opinion to readers with an interest in... More
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  • Credit Suisse Update On Arena 6 comments
    Jul 22, 2013 8:32 AM | about stocks: ARNA

    Credit Suisse offered an update on Friday that outlined its expectations regarding Arena (NASDAQ:ARNA) and Belviq sales. The firm notes that IMS sales represent a n increase of just over 12% from the pre-4th of July week and puts the average weekly growth rate at about 6% if we use the last two weeks data.

    The free trials, according to IMS are making up the bulk of sales thus far. IMS estimates the free trials to be at about 70%

    An important item to note from the report is the manner in which Arena is going to book sales. Arena will use the "sell-in revenue recognition method. The Sell-In method does not recognize consumer demand, but rather the sales of Belviq to wholesalers. Essentially the sell in is reflective of Inventory that is not yet sold to consumers. The reason this is important is that with a launch the sales in the sell-in model will be high. The downside to this is that If the inventory is not being depleted and re-orders are slow, the numbers will then appear low. For the time being the sell-in method will have a positive impact on the financials. Credit Suisse estimates that Q2 sales will show $15 million for Arena, which equates to mostly stocking of inventory.

    At this point Credit Suisse is estimating that Q3 sales could fall short. The firm believes that around 190,000 total scripts would be needed for Q3. That is an average of 15,000 per week.

    Credit Suisse is assuming an Average Selling Price (NYSE:ASP) of $80. This is lower than the $125 I use in my model. The firm notes that the impact of the free scripts could lower the ASP to $40. Personally I believe that $40 is on the low end. The difficulty here is the assumed level of freebies.

    Where all of this comes into play, is that if the $80 is used and Q3 sales pace to Credit Suisse expectations, sales to consumers would be about $5 million in Q3. That number is lower than many investors are anticipating.

    Credit Suisse has an "underperform" rating on Arena with a $5 price target.

    Disclosure: I am long ARNA.

    Stocks: ARNA
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Comments (6)
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  • Day Trader001
    , contributor
    Comments (762) | Send Message
     
    Thanks Spencer,

     

    Kind’a ugly news, but enough to kick around some long-term Puts for downside security!
    22 Jul 2013, 12:50 PM Reply Like
  • jakes101
    , contributor
    Comments (917) | Send Message
     
    Something to think about....thanks for the update.
    22 Jul 2013, 01:36 PM Reply Like
  • Spencer Osborne
    , contributor
    Comments (8233) | Send Message
     
    Author’s reply » The big factor here is what impact the discounting is having. I modeled to $125. CS is at $80
    22 Jul 2013, 02:11 PM Reply Like
  • WIS JOE
    , contributor
    Comments (58) | Send Message
     
    After listening to the conference call I was under the impression Eisai was doing the discounting to market Belviq and will not change the income guaranteed to Arna per script. The discounting is Eisai expense as is sales and marketing, advertisement etc. etc. Am I incorrect on this that the price per script to Arena does not change.
    2 Aug 2013, 07:00 PM Reply Like
  • Spencer Osborne
    , contributor
    Comments (8233) | Send Message
     
    Author’s reply » Wis.....

     

    This issue has had many confused. It mostly ties to how retail investors interpreted a comment made by the CFO in a call. Retail investors convinced themselves (wrongly) that Arena gets money for the free freebies. I have the entire deal between Arena and Eisai published here in my instablog section. You can refer to it, but I will summarize.

     

    Arena gets the GREATER of either a flat cost per bottle or 31.5% of the net sales.

     

    Those that argue that Arena gets BOTH are FL:AT OUT WRONG. They will sully my name all over every message board that exists, but the truth is exactly what I have been saying. Arena gets 31.5% of the NET.

     

    Thus:

     

    Arena pays to manufacture the product.

     

    Eisai buys it at an estimated amount based on projections

     

    Adjustments are made based on actual sales

     

    Eisai cuts Arena a check, or Arena cuts Eisai a check, depending on actual NET sales.

     

    Thgus, the freebie comes out of the gross as a component of what is arrived at for NET, These retail investors that want to think that Arena gets a check for cost of goods sold are actually arguing that Arena will get less money. That is how foolish some of these people are. Example:

     

    100 bottles of belviq. Let's assume a cost of $10 per bottle to manufacture.

     

    100 bottles cost arena $1000

     

    Arena sells 100 bottles to Eisai. They are guaranteed $1,000 from Eisai, but can earn more. Eisai estimates that the bottles will sell for full price of $200 each. They estimate that discounts, shipping, warehousing, etc. will bring a NET of $125 per bottle. Eisai cuts Arena a check for $125*100= $12,500

     

    Eisai sells the 100 bottles to a wholesaler at $200 each, collecting $20,000.

     

    60 of the bottles are used to develop 120 free 15 day scripts. That is a $100 value each.

     

    Pharmacies fill the free scripts and send rebate into Eisai.

     

    Eisai takes $12,000 from the $20,000 and pays the rebates. Eisai is left with $8,000.

     

    The other 40 bottles have a $75 rebate making the price $125 to the consumer. The pharmacy sends Eisai rebate forms on 40 bottles for a value of $3,000

     

    Eisai pays the $3,000, leaving the balance at $5,000.

     

    Shipping, etc, cost $250

     

    This leaves the balance at $4,750

     

    $4,750 is the net sales figure.

     

    Arena gets the greater of $1,000 or 31.5% of the NET.

     

    In this example, 31.5% of the NET is $1,496.25.

     

    Arena gets $1,496.25

     

    If you want to calculate Arena's profit, it is $1496.25 - $1,000 or $496.25.

     

    3 Aug 2013, 02:28 PM Reply Like
  • jakes101
    , contributor
    Comments (917) | Send Message
     
    Spencer,

     

    Yeah good point. Do you ever use goodrx.com for stats, is it accurate?

     

    The site currently shows cheapest major pharmacies for Belviq:
    30 tablets: $110.36 w coupon @ Walmart
    60 tablets: $215.71 w coupon @ Walmart

     

    This for some reason sounds a bit high. Perhaps there are better coupons on belviq.com.
    23 Jul 2013, 02:49 PM Reply Like
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