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20+ years investing in the stock market across many market sectors. Multiple advanced degrees.
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  • Why Arena Pharmaceuticals Will Outperform In 2013

    Some have stated that based on the current market cap of $1.96B (call it $2B) and a P/E ratio of 20, Arena Pharmaceuticals (NASDAQ:ARNA) needed $300M/year in revenue. That doesn't quite match, because $2B divided by 20 is $100M. However, lets look at the $300M number for a moment because once we factor in the marketing partner and other expenses, $300M is as good as any other number. We can baseline Belviq at $150/month per patient based on what Qsymia costs (a little more actually, but we will round down to stay conservative). So $300M divided by $150/month per patient and they need 166,666 patients to achieve is goal. Now given that some patients will be short term, take the drug, achieve their goal, and then go off, they will need to re-supply that patient queue. The steady state number is still 166,666 which is a very realistic goal.

    CDC Obesity Statistics

    According to the CDC one-third of all Americans are obese. The NHCS brief of January 2012 stated that there are 78M obese adults in the USA & 12.5M obese children. Lets just focus on the adults though. To achieve the revenue numbers that some project ($300M) they only need to capture 2/10 of one percent of that 78M. That isn't an unreasonable market share to capture.

    The CDC website estimates it costs $147B in health care costs to treat obesity patients. That is a huge number. Dividing that $147B by 78M obese people gives us an annual cost of $1,884.61 per patient. Therefore, it is a no-brainer to approve the medication that gets them off the obesity list, if it costs less than $1,884.61/year, especially since many people will then be off the obesity list long after they stopped taking the medication.

    Building up the numbers

    Building up the numbers paints a different view altogether. If they capture 10% of the available market, then that is 7.8M patients. 7.8*$150=$1.170B, (for ONE month) which is a huge number to be sure. That comes out to $5.39/share based on 217.29M shares outstanding. A P/E ratio of 20 puts the share price at $107.80/share, which is what creates all the excitement with current shares trading at $9.02. Even if they only capture 30% of this target of $1.170B, they will hit $351M. Remember the $1.170B is for one month only, and typically the patients will be on an average of 6-months (certainly some will be one-month only, and some will be on a year or more, so they offset).

    Nirvana numbers.

    If they capture 10% of the obesity market, and patients are on the drug for 6-months, that projects total revenues at $7.02B/year. At an average dosing cycle of 6-months and a 10% market share of the obesity population, this puts revenue around $32.34/share. with a P/E ratio of 20 that puts shares around $646.80/share (unrealistic to be sure, but this is the math workup). Now the marketing partner will get some of that money, but they are also paying up front ($65M milestone payment). Europe, South Korea, and other markets sweeten the deal even further. This is why investors are looking to get fat off this obesity drug.


    If Arena continues on its present course, they should easily out perform the rest of the market (considerably). Whether I am looking at a 1-year horizon or longer, the returns on ARNA far outweigh the risks.

    Disclosure: I am long ARNA, VVUS.

    Jan 01 3:17 AM | Link | Comment!
  • FDA kills patients & drives up health care costs
    The FDA kills patients. How many people will die because the FDA won't approve critical drugs for patients in need? How many times will the FDA vote "no" just to protect their own self interests at patients expense? If a drug saves 99 patients from dying, but kills 1, the FDA will not approve the drug because there was a problem and the drug wasn't completely safe.

    Take for instance the most recent FDA panel vote about VVUS's Qnexa drug. The FDA helped design the SPA parameters, and approved the 1-year trials, but the panel then turned right around and declared that a 1-year study wasn't long enough (considering many patients may be on the drug for much longer). So, despite the fact that the 2 components of Qnexa have been on the market for a long time and have been well studied, the FDA panel voted no. One panel member was so inept he accidentally voted yes and then changed his vote to no. I guess they really are that stupid on these FDA panels.

    Additional side effects of Qnexa include reduced blood pressure, reduced need for diabetes medication, and other beneficial residual results. The FDA had already stated that Qnexa would have to have a warning label for pregnant women, but the panel didn't think the FDA's warning would be enough (so the FDA panel didn't agree with the FDA's specified warning).

    So how many obese patients will now be deprived of critical (life saving?) weight loss because the panel is concerned about the possibility (not the actuality, just the possibility) of birth defects. So instead of just recommending that pregnant women go off the drug (as an ultra-safe precaution) the FDA will block access for ALL PATIENTS to the most effective weight-loss drug in more than a decade.

    The laundry list of disapproved drugs is far too long. Just as bad, the FDA sometimes comes out with the dreaded "approvable" letter stating that the company could get their drug approved if they just do more (fill in the blank here; more clinical trials; more safety data; more whatever).

    The FDA drives up health care costs. The FDA forces up medication costs by not approving drugs and forcing the recapture of these costs through fewer and fewer approved drugs. The pharmaceutical companies are forced to amortize their investments over fewer approved drugs, forcing the cost up substantially for each treatment.

    The politicians always point to the insurance companies, hospitals, even sometimes doctors - for the cost of health care - but never the government itself. Just another case of the government blaming everybody else for the problem that they are creating.

    It should be a simple solution to allow another category of medication, below "Proven safe and effective to the FDA" highest standard, to still allow patients to gain access to drugs that are safe for their situation (as seen by their own physician who knows their personal case history better than any FDA panel member - who can't even vote yes/no correctly). Clearly the FDA is broken and despite a new administration, nothing changes. Drugs continue to get denied, health care costs continue to rise, and patients continue to die.

    Disclosure: long VVUS
    Tags: VVUS
    Jul 16 2:30 PM | Link | 2 Comments
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