For Arena, Belviq Refills Are Becoming Key

| About: Arena Pharmaceuticals, (ARNA)
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The Arena Pharmaceuticals (NASDAQ:ARNA) anti-obesity drug Belviq has been on the market for 15 weeks now. We are fast approaching the point in time where we can begin to assess the situation as it relates to refills of Belviq prescriptions. Readers have been asking for this data for a few weeks, and at the time I stated that the data would not begin to offer real relevance until this week. Well, the time is now here to begin the process of assessing the Belviq refill data.

There are several factors to understand when beginning to look at the refill rate:

  • The guidelines on Belviq are that if a person does not lose 5% of their body weight by week 12 they should cease using the medication. Thus, in oversimplified theory, the first "dropouts" would have come off of the rolls beginning in week 13.
  • Eisai (OTCPK:ESALY) uses a 15 day free trial to entice patients to try Belviq. Thus, in theory, the first prescription is a 15 day trial followed by 3 refills. If half of new patients elect to use the 15 day trial, the average script generates $100 each.
  • A Refill that is not covered by insurance is eligible for a $75 discount. Thus, in theory refills are worth about $125 each.
  • Refills give an indication of how "sticky" Belviq is with consumers. Stickiness gives us some insight into efficacy. If a product is not effective people will not use it again. If it is effective they are more likely to use it again.
  • Factors that could impact stickiness are not all related to effectiveness. By example, some people stop because of cost.
  • In theory the pattern goes 15 days, 30 day refill, 30 day refill, 30 day refill, assess for 5% weight loss (I am aware that this pattern takes it to 14 weeks, but it is probably a very common pattern)
  • Week 13 would deliver the first drop-offs due to lack of weight loss. Each week thereafter, another class of patients will reach that point. We are just getting to the point where these drop-offs will be impacting the weekly numbers.
  • New prescriptions equate to the front end of growth. Refills equate to the residual growth.

Now, digging deeper we want to first understand that not all script sales are created equally. I divide the patients into 3 categories. I consider the free trial scripts as potential patients. I consider those in the first 3 months to be trial patients, and I consider those after 3 months to be patients.

In simple terms, a potential patient offers no revenue. A trial patient offers good revenue, but the length of time that revenue can be counted on is unknown. A patient is a responder, that will be back month after month. In essence, the most valuable category is the patient, and the least valuable is the potential patient.

Breaking it Down

The early weeks of Belviq sales were comprised of between 60% and 70% free trials. For the purpose of ease, we will go with the assumption that half of the new scripts in any month as we move forward are free. Thus, half of the group are potential patients for 15 days and trial patients for the second 15 days. Half of the group are simply trial patients for the full month. The first group pays $63 for the first month. The second group pays $125. The average is $94.

In contrast, a trial patient pays $125 per month (considering $75 discount). The same figure applies to a patient. Essentially a trial patient and a patient are more valuable than a potential patient in terms of dollars. In fact, the premium in revenue between these categories is 33%. That is not something to sneeze at.

This is where the responder rate becomes critical. However, it is not yet that simple. As stated above, there are a number of reasons a person might stop taking the drug. There very well could be instances where a patient is seeing the desired results, but simply cannot afford the cost of the drug. Essentially this leaves a bit of a quandary in to measuring the effectiveness of the drug. What I am saying is that the perceived effectiveness is actually a minimum number. How much higher actual effectiveness is depends on how many people drop off for other reasons. With that out of the way, what investors care about is overall effectiveness considering how well the drug works at the prices it sells for. From an investor standpoint, a person that leaves because of cost is essentially a non-responder. This is where the insurance issue that I have been harping on comes into play. As insurance coverage rises, the company gets another shot at getting those drop-off's back.

When looking at script sales as we move forward, we want to see a few things. We want to see growth of new scripts, we want to see growth in refills, and we want to begin to understand the effectiveness from an investor's standpoint. Remember, we need to bear in mind that the effectiveness is a minimum number. We also want to keep a tab on the clinical effectiveness. The reason for this is simple. More effective means more success. More success means more trust by doctors. More doctor trust means they will prescribe Belviq more often.

It is tempting to begin to look at simple week over week refill growth, see progress, and say that it is good. However, that is far too oversimplified. Early in a launch we can expect week over week growth on total scripts, so logic dictates that as larger and larger pools of potential patients graduate to trial patients, we will see growth in the refill rate as well.

Taking things a step further, we can look at what percentage of new growth is made up of refills. We can also look at the refills as a percentage of the possible pool. The possible pool is the new scripts from 2 weeks prior + the total scripts every 4 weeks prior to that. For example, this week's number would look like:

This week's refills/(week 13 new scripts + week 9 total scripts + week 5 total scripts + week 1 total scripts)

The cart below gives several data points. These data points include Raw week over week growth, refills as a percentage of overall sales, and refills as a percentage of possible patients.

Refill Data Analysis

Looking at the refills vs. the total potential pool gives us an idea of the effectiveness from an investment standpoint (remember, this is a minimum number). As you can see, we are just now entering the segment of the chart that includes 4 potential refill periods. This is important because of the 12 week "test of 5% weight loss" that tells a doctor whether or not a patient is a responder. It is important to bear in mind that these percentages do not represent the clinical responder rate. Bear in mind that free trials are designed to bring in a large pool of potential patients. The concept is that by bringing in more people you are more apt to identify and hopefully keep those that respond in a clinical manner.

Investors need to bear in mind that we are just now getting to the point in time where this data becomes relevant. Had we tried to gauge the investment effectiveness in week 6, we would have been looking at the percentage of possible patients, seen 15% and then been disappointed from that point forward.

As investors what we want to see is raw growth in refills week over week be as good or better than the overall growth from the 4 weeks prior. Thus far, that is what we have.

With the refills as a percentage of overall sales, a low number (for the time being) indicates good front end growth (lots of potential patients coming on board). At this point I consider a number under 10 to be good, 10 through 14 as neutral, and a number 15 and above as unfavorable. While the refills may be progressing well, a red indicator means a stall in front end growth. This will impact refills 4 weeks from now. Thus, it is a leading indicator on refills, and a current indicator of front end growth. Please bear that in mind.

With refills on the possible pool, higher numbers are better. I consider under 10% to be negative, 10% to 14% to be neutral, and numbers 15% and above to be good. My reasoning is that I am looking for more impressive and more compounding growth than we are currently seeing. In essence, from an investment standpoint the current growth, while okay, is not yet compelling. That is not an indictment of failure, rather it is simply an indication that this process will take time. Direct to consumer advertising has just begun, so more compelling growth will begin slowly over the next few months.

This analysis may seem unconventional to some, but thinking outside of the box is how savvy traders and investors make money. As you see the data points progressing to a new level, you can begin to anticipate what will transpire in the weeks ahead, or at least be prepared for it. Notice that we have spent 8 weeks trying to navigate through the 3,000 script range according to IMS. While we have seen growth, the speed of that growth is slower than we want to see.

Bear in mind, that this chart is very new, and may require adjustments for expectations. I encourage investors to develop their own charts with their own parameters for expectations. You can use the price action in the stock to measure whether your expectations of negative, neutral, and positive align with the street. Stay Tuned!

Disclosure: I am long ARNA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have no position in Eisai