There are times in life when one has to take a step back, take a deep breath, make an objective assessment of a situation, then stick to that objective position despite the actions of others and their personal slant on things. This is one of those times as it relates to Arena Pharmaceuticals and their flagship drug, Belviq.
Rather than wax on for dozens of pages of brain-addled nonsense (most of you will know what I refer to) I will encapsulate the reasons why I believe that Belviq is in a unique situation that will eventually lead to blockbuster status.
Let's start with the market for weight loss drugs...
In the mid 1990's Fen-Phen was all the rage. At its peak, right at the time when the FDA pulled fenfluramine and dexfenfluramine from the market (more on this later), doctors were writing 1.5 million prescriptions per month or 18 million per year. At the time, it is estimated that the obesity rate among U.S. adults was about 27%. That was also almost two decades ago and the U.S. population was smaller. The adult obese population was probably around 40 million back then. Baby boomers were just barely starting to fight the battle of their bulge too.
Now, in 2014, we have an obesity rate of over 35% in an adult population that has grown significantly over the last 20 years. That 40 million obese figure is now more like 65 million as a result. Additionally, there are many who are simply overweight but carry a secondary medical condition that adds them to the population that obesity medications are meant to reach. I think this figure, conservatively, would be about 80 million adults who are either overweight with a secondary condition or obese.
Also, in the 1990's, obesity was considered a personal problem. Insurance did not cover ANY obesity meds. The AMA had not adopted the consensus that obesity was a metabolic disease.
Now, in mid-2014, about 60% of U.S. insured lives are covered for obesity meds compared to 0% in the 1990's. That is huge.
Now, let's move to some things that make Belviq unique...
Belviq (lorcaserin) is a brand new drug. It is not a re-branding or re-packaging of already available generics. It is truly novel. As such, it is set apart from the current competition (Qsymia, from Vivus, VVUS) and the very likely future competition (Contrave, from Orexigen, OREX). Let's enumerate some of these important distinctions.
1. Belviq is a SINGLE agent. It is one chemical that achieves its results by acting alone. Qsymia and Contrave are both DUAL agents. They achieve their results by bringing TWO drugs together. This means that Qsymia and Contrave have a higher chance of negative side effects since patients who might be sensitive to just one of the two drugs in the combo will end up with a bad side effects outcome. This is born out in the Phase III trials. Belviq had about 8% (same as placebo) drop out due to side effects. Qsymia's side effect dropout rate was in the mid teens (twice that of their placebo) and Contrave was in the mid TWENTY percent range (again, twice as many as the placebo).
2. Because Belviq is truly unique and is protected by U.S. patents until 2023 (with a likely extension available), the strength of Arena's intellectual property rights is solid. Qsymia, after having been on the market for less than 2 years, is already facing potential competition from generic manufacturers. Belviq will not face any such issues until the patent runs out.
3. Related to point 1, because Belviq IS a SINGLE agent, the possibility exists that it could be paired with another drug to even greater effect. Belviq responders (said to be about 50% of those who try it) end up losing about 11% of their weight in 12 months. Contrave patients lost about the same amount, though about one out of four dropped out due to side effects. Qsymia patients on the standard dose lose about 10.5% of their weight. So, you can see that the SINGLE agent Belviq already competes well with the DUAL agent alternatives in efficacy for those that respond.
4. Belviq is a mild drug. There will always be some patients who do not tolerate a drug well. But, Belviq is especially WELL tolerated. The most common side effect is a headache that seems to pass after a few days after starting dosing. The competitors both contain drugs that carry significant unpleasant side effects. The Phentermine in Qsymia is a CNS stimulant and causes insomnia for many. Some users of Qsymia have reported that food tasted metallic. Phentermine can also raise blood pressure and heart rate. The bupropion component in Contrave is well known as a bad actor too. Insomnia is a VERY common side effect. Increase in blood pressure and heart rate are also very common. Belviq patients have NOT reported insomnia as a side effect. In fact, going by anecdotal evidence at drug review websites, many say that they slept BETTER after starting Belviq.
But... what about SALES?
Admittedly, many investors in ARNA have been disappointed in sales. Belviq has been on the market for one year and the average scripts from the last 4 weeks is averaging just over 10,500 weekly scripts (Symphony, unadjusted). The GOOD news is that the rate of growth has been remarkably steady. Other than the end of year holiday periods (Thanksgiving, Christmas, New Year's) the growth rate plots nearly straight line on a LOG chart. That means it would look more 'exponential' on an arithmetic scale. I prefer to use a log chart because it is a more telling view of real growth.
Belviq just recently passed Qsymia in weekly scripts, despite Qsymia having been on the market for about 9 months longer. Some point to the weakness of Qsymia and extrapolate that as an overall weakness in the sector that Belviq will not be able to overcome. However, while Qsymia sales in Q1 2014 were LESS than sales in Q4, 2013, Belviq sales were UP about 30%. It appears that Belviq is taking market share. Even on weeks that are adversely affected by holidays, the head to head race shows Belviq as still outpacing Qsymia.
My personal view on this 'race' might be controversial, but here it is. Qsymia is struggling because the CONCEPT is flawed. Taking two very cheap generics and putting them into one pill, with the ONLY added value being the timed release of one of the two drugs (at a 200+% premium to the generics) is just not a good business idea. That would be somewhat analogous to someone taking a standard 2.00 hot dog and a standard 1.25 cole slaw and trying to sell a 10.00 slaw dog. OK... to make the analogy complete we would have to use a timed release hot dog... but you get the picture.
Belviq has ALSO not sold as well as many would have liked. But, I must ask, where did this expectation come from? Eisai (Arena's partner for U.S. and most of the world) threw out some casual references to expectations that many seem to take as gospel. When those figures failed to come to fruition many were discouraged. But, Eisai, already knowing how U.S. sales were headed, decided to sign up for 'rest of world' rights. Eisai has also embarked upon an increase in sales force (initially 200, then 400 6 months later, to become 600 in July of 2014) and a television marketing campaign. If they felt that failure was imminent then I doubt they would have signed up for MORE of the same and invest in advertising.
I personally think that Belviq is slow out of the gate because of its novel status. The physician's first statement of purpose is "First, do no harm". Many doctors (my brother included) prefer to wait a while to see what happens in the real world with a new drug. Now, at the one year anniversary of the launch of Belviq, the 'wait and see' crowd may start to loosen up a bit.
BTW, while naysayers point to the ramping up of sales staff by Eisai as 'proof of failure', I tend to think that Eisai was planning to scale into this from the very start. We all know that 200 salespeople is not even CLOSE to being adequate to launch and MAINTAIN sales that are impressive. I think Eisai planned to reach likely early adopters first (specialists) then slowly branch into standard family practices. I think this was a smart move.
As far as the chart of ARNA goes, the stock is approaching important support levels in the high 5's yet again. There have been a series of lower highs and HIGHER lows that have defined what appears to be a triangle consolidation pattern. This pattern could break to the upside and, if so, a short term move to the mid 8's would be a very reasonable minimum target based upon the height of this consolidation pattern. If it was to break to the downside (beware a short term head fake shakeout... not an uncommon thing in these patterns) then a return to the mid 4's is possible. Since this pattern formed after a strong rebound from the low 4's of 11/2013, I tend to go with the odds that favor an upside breakout. In fact, ONE interpretation of this chart already has that breakout having taken place and the weakness over the last 4 weeks being a pullback to the broken resistance line for a back test. I have a video that details this technical analysis that I would encourage you to watch.
Belviq continues to grow in sales at a rate that has yet to show any sign of hitting a plateau. Anyone who claims that sales are slowing down is simply not paying attention, or willing to lie to those that they HOPE are not paying attention. Current growth rates point to week over week growth in the mid 3% range and an UPTICK in this rate for 2014 to about 4%. A sustained growth rate of 3.5% for the rest of 2014, coupled with a sustained growth rate of 2.5% (week over week average) would result in 2015 sales in excess of 600 million. Though that sounds easy... it is not. However, that figure is approximately what Thomas Wei at Jefferies & Company has stated for 2015.
Television advertising started in the middle of April. Since then, Google trends metrics shows a strong shift in search traffic for Belviq. This increase is bouncing around anywhere from a 400% increase to a 200% increase.
Though not discussed in this post, there are current studies underway that are exploring the use of Belviq as a smoking cessation drug and a study that uses Belviq in combination with a low dose of phentermine. Positive results from either or both of these should be a catalyst to share price appreciation.
Other catalysts exist. Applications have been made for approval in both Canada and Mexico. While Europe has not been friendly to Belviq, continued success and safety in the United States is likely to start to weigh on the 'wisdom' of the EU authorities. Europe has an obesity problem too and doctors over there are starting to become vocal about a lack of treatments.
Finally, it just looks to me like the upside here far outweighs the downside. Shorts are confident, longs are scared. If we were near a top then we would not be seeing those emotions from those players at this point in time.
I am long ARNA and have no position in any other stock mentioned in this post.
Disclosure: I am long ARNA.