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Credit Suisse Update On Arena

|Includes: Arena Pharmaceuticals, Inc. (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.