Based on a few comments on recent articles, it is very clear that many investors are confused about Gross sales and Net Sales. That is okay...we are all here to learn. I will not go into depth about the deal between Arena (NASDAQ:ARNA) and Eisai, as it will get people even more confused.

Definitions (over simplified):

Gross sales is a measure of overall sales that is not adjusted for discounts, returns, etc.

Net sales is gross sales minus discounts, returns, etc.

Eiasi sells Belviq for $199.50 per bottle. Thus, if 100 bottles sell, the gross sales number will be $19,950

Now, if we assume that half of those bottles were rebated $100 each, then the net sales would be as follows:

(100 x 199.50) - $5,000 = $14,950

This is where corporate strategy comes into play. Eisai could simply lower the price to entice sales. In the example above, the 100 bottles actually sold for $14,950 or $149.50 each. However, if they did that, the "sales" figure would not be as high. By using a rebate, the "sales" number remains high because the rebate is not used in calculating gross sales. This strategy is very common. It is also a sound strategy because not all people will use a rebate.

In the case of Belviq, Eisai has the free trial (actually a rebate to the pharmacy), as well as a program for people that do not have insurance. These discounts happen after the gross sale. Thus, the gross sale number stay high. It is gross sales that are typically used in determining market position.

To use another example. If I sell 100 cups of lemonade for $1.00 a cup, but offer a rebate of $0.90 per cup, my gross sales would be $100, but my net sales would be $10. Essentially, I collected $100, booked it, then rebated $90. If I just sold the lemonade at 10 cents per cup, my gross sales would have been just $10.

Arena is paid off of net sales of Belviq. Here is an over simplified example using Belviq:

- Arena makes 100 bottles
- Eisai orders 100 bottles and pays Arena an estimated sum based on 31.5% projected net sales. Let's assume that the estimated net sales are $10,000. Therefore, Arena gets $3,100 in payment.
- Eisai sells the 100 bottles to CVS for $20,000. This is gross sales.
- Eisai then pays out shipping costs, etc., and pays out rebates. These costs add up to $10,500.
- Eisai then takes the $20,000 in gross sales and deducts $10,500 in costs to arrive at net sales of $9,500.
- Eisai had paid Arena $3,100 based on an assumption that net sales would be $10,000. Actual net sales were $9,500. A credit is due to Eisai.
- The actual payment for the 100 bottles should have been $2992.50.
- Arena cuts Eisai a check for $157.50
- If the net sales were $10,500 instead of $10,000, Eisai would cut a check to Arena for $157.50.

Hopefully this very simple explanation clears a few things up for readers.

**Disclosure: **I am long ARNA.

**Additional disclosure:** I have no position in Eisai