Belviq, a novel weight loss drug by Arena Pharmaceutical, is the latest obesity drug approved by the FDA in 13 years. By being the first obesity drug to be approved in this huge obesity market, retail investors were expecting a big payday. They took a huge risk going into the approval knowing that a CRL will drop the price down to 1.50 or lower. Their risk, however, were poorly rewarded. The price opened for trading at 13.50, a 50% increase. Investors were expecting a 17.50 or a 100% increase as this is a potential blockbuster drug in a huge obesity market. The price then began to decline and closed at 11.39, a mere 28% increase. The price continued to decline yesterday under heavy pressure and went as low as 9.81 before rebounding to close at 10.23 as retail investors dumped their shares fearing it might go even lower. So the crooks in Wall Street first robbed the retail investors of their reward and then raped them of their shares.
A lot of investors are angry and are trying to figure out why this happened. How can a potential blockbuster drug do so poorly after approval? Well let me help you understand what had just happened. Arena is 70% retail owned and 30% institution owned unlike Vivus pharmaceutical which is 68% institution owned and 32% retail. Wall Street has been favoring Qnexa from Vivus over Belviq from Arena from the start. Adam F. from the Street wrote articles bashing Lorcaserin, generic for Belviq, before the Advisory Committee approval and before the FDA approval. These crooks were wrong about Arena's drug betting that it would not get approved. There are over 45 million shares of ARNA shorted prior to FDA approval. Upon approval, these same crooks realized that retail investors had beat them. They know that the revenue potential for Belviq is enormous so they decided to steal it from the retailers. While trade was halted for the announcement, these hedge funds and institutions would use scare tactics by having their analysts on CNBC down play the effectiveness of Belviq and how the shares are already priced in. They open trade with only 50% premium and let the price drop knowing there will be a lot of sell pressure from retail investors selling the shares they have been holding for 3 or more years. The reason for them to let the price drop is for the shorts to cover at a discounted price and for institutions to load these precious shares up. Once all that buying is done, they will flood the news with positive articles and analysts upgrade to drive the price back up to where it should really be; between $17-$20 per shares.
So where will ARNA shares go from here? The only direction for the shares to go is up. And it will be huge within a year time. Let me explain to you why the shares of ARNA will shoot up within the next year.
Buyout
Most analysts are saying that Arena will be bought out within a year. I do agree with them that it will be bought out but I think it will happen before the year end. The reason is two fold. Firstly, the EMA will approve Belviq for marketing in Europe at the end of this year since safety is more important to them. That means that Arena will need a distributing partner soon for Europe to get the ground work ready. If a big pharmaceutical company wants to buy out Arena, they would want to do this before Arena get a partner so they don't have to deal with the headache of splitting profit with this partner. Secondly, they would want to do the buyout before Belviq starts selling in 4-6 months. The buyout price will be much higher once they see the revenue pouring in. A bidding war by that time will drive the price even higher. I'm sure some of Qnexa bulls are thinking why big pharmaceuticals would buy out Belviq when they can buy out Qnexa, a more effective drug. Let me tell you why.
Qnexa vs. Belviq
Qnexa is a combination of two generic drugs. Topiramate acts as an appetite suppressor and is known to cause birth defect. Phentermine is the metabolic enhancer to help burn the fat. When you combine these two together, they work very well in helping a patient lose weight. However, this drug can only be taken for 3 months and then the patient has to get off of it to detox. Patients tend to gain the weight back when they are off the drug. Belviq is a novel drug which acts as an appetite suppressor. Alone, it can help an obese person lose weight to meet the FDA guideline. Topiramate cannot do this by itself. That is why it needs phentermine to be effective. Belviq can be taken on a long term basis.
Most articles written about Lorcaserin always knock down its effectiveness comparing it to a placebo as compare to Qnexa. They never talk about how effective it is for participants who completed the trials. In the Blossom study, 63% lost at least 5% of their body weight and 35% lost at least 10% of their body weight. The top 25% lost an average of 16% or 35 lbs. Some of these analysts made fun of the potential 10 lbs of weight loss for a 200 lbs person. 10 lbs lost can reduce a person's chance of getting diabetes by 60%. If 10 lbs is nothing to them then they should wear a 10 lbs backpack everyday for a year and see how they like it.
Lor-phen
In the real world, doctors will prescribe phentermine in conjunction with Belviq if they see that the patient needs a little boost before prescribing Qnexa. No doctors would want to have a lawsuit for birth defect on their hand. This combination is similar to the popular weight loss drug Fen-Phen but without the heart valve issue. Lorcaserin, at clinical dose, is highly selective to the 5HT2C receptors and not the 5HT2B which causes heart valve issues like Fen-Phen. In a NY Times article published yesterday, Dr. Ed Hendricks, an obesity specialist, said that he and other doctors might try prescribing Belviq in combination with phentermine, to essentially reconstitute the once popular fen-pen combination. "Once the word gets out that it works the same way, you are going to have a huge demand," said Dr. Hendricks, who was on the advisory committee that voted in favor of approving Belviq. Once the patient loses the weight, they will stay on Belviq long term to keep the weight off.
Share price
By being the first go-to drug by physicians, Belviq will gain blockbuster status. It is effective and safe so more patient will be willing to try it. The cost of the drug is around $3-$4 per pill twice a day according to the CEO's comparison to a Starbuck's latte. Let's average it to $7 a day or $2555 a year. There are 78 million obese people in the US. Let's say Belviq can penetrate 1% or 780,000 of the obese population. The annual sales will be 1.99 billion or $8.29 a share. Divide that by 3 do to the Eisai partnership and you get $2.76 a share before expenses for Arena. Give it a 10X multiple and you have a $27.60 stock. I would expect a $40-$50 buyout before Belviq start selling and $60-$70 with revenue coming in. ARNA shares are at a discount right now. There is always room for a competitor in this market but I don't think Qnexa will be the one.
There is a chance Qnexa might get a CRL due to the risk of the drug. FDA already satisfied Congress's request for an obesity drug and will not take a chance on a risky one. Even if it is approve, Qnexa can only be prescribed by obesity specialist and purchased online at specialty pharmacy. It cannot be prescribed to women of child bearing age which will limit their revenue. Also, doctors will be prescribing phentermine with Belviq which will probably have better results than Qnexa with less risks. If it is so good of a drug, then why are the CEO and CFO dumping their shares before approval? How come they don't have a distributing partner yet since they are up for approval in less than 3 weeks. It looks great on paper but not in the real world. Institutions are loaded up on Vivus and will run up the price if it gets an approval. They will let the ill-inform investors hold the bag at those high prices when the stocks drop dramatically do to poor revenue. Look at DNDN and see for yourself.
Disclosure: I am long ARNA.