By Spencer Osborne
Arena Pharmaceuticals Inc. (NASDAQ:ARNA) is an equity in transition. It is also an equity with differing stories. The company is about to launch an anti-obesity drug, Belviq, and will have one of only two prescription anti-obesity treatments approved by the FDA in more than a decade. The other company with an anti-obesity drug is Vivus Inc. (NASDAQ:VVUS) with a drug called Qsymia. Qsymia launched last fall with sales tracking well below expectations.
Last spring, Arena Pharmaceuticals (ARNA) was an equity with a bunch of potential. The company signed a distribution deal with pharmaceutical giant Eisai. Eisai brought in cash as well as muscle. The deal was not cheap for either company though. Esai gets to buy Belviq for about 33% of the net, while Belviq gets payments totaling well over $250 million and gets to rely on Eisai to cover further testing. Adding to the potential of Belviq is the fact that Vivus Inc. (VVUS) and Qsymia failed to get European approval. If Belviq can launch there as the sole prescription solution there could be some pretty sizable advantages. However, the success or failure of Arena’s Belviq is in the United States. Simply stated, it needs to be a success here.
Today, with Belviq getting ready to launch, the company is shifting from one based purely on potential to one that will be valued by the success or failure of Belviq. Ever since competitor Vivus launched Qsymia with lackluster sales performance there has been good reason to perhaps temper some enthusiasm for Belviq. The anti-obesity segment can be huge because obesity is such a staggering issue. The question is whether or not a prescription solution (be it Belviq, Qsymia, or third competitor Orexigen Therapeutics Inc. (NASDAQ:OREX) with Contrave, which is still trying to win FDA appoval).
One thing investors need to understand is that there are distinct strategies that can be at play. These strategies can differ in the short, mid, or long term. As someone that covers the sector I oftet get labeled as a soft basher of Arena. More likely than not this sentiment by some readers ties to the distinct difference between shorter term action vs. longer term potential. Longer term I am bullish this equity. The potential exists for this equity to deliver some handsome rewards. However, the shorter term is tied to more uncertainty as to consumer acceptance, pricing, and what Eisai can do.
With regard to Arena and Belviq I have been one to use caution. Vivus and Qsymia have not had much success and the price of Qsymia, as of now the ONLY prescription solution on the market, has already been lowered twice. The cost of Belviq is already established as a higher level. Can a higher cost Belviq sell more than Qsymia? Yes, Qsymia has some restrictions, but there is a key question that needs to be asked. If people a desperate for a solution to weight issues and Qsymia hits the market, why are sales so lackluster?
We have questions in the marketplace. It takes sales of $1 billion to become a blockbuster. That represents a lot of patients. If you invested in Arena at a couple of bucks you have every reason to remain long and strong, keeping your shares held tight. However, if you are looking to enter this equity you need to be cautious. Arena at about $8 bucks can be a winner if sales are great. It can be a long battle if sales are mediocre. This is the precise reason that caution is a key in the short term.
What we want to see is the launch and the initial sales results. This will set the tone for how the equity trades. The key is not really what an individual thinks the company will do. The key is whether or not the company is meeting the expectations of the street. Personally I see entering at current levels as a risk that could well be worth taking as long as you can stomach a 10% loss if initial sales do not meet street expectations. The reward could be building from $8.50 to $11 and then beyond. What I see is a slower launch than many anticipate. This could create trading opportunities.
It is no secret that there are many hedge funds that see Arena as a fantastic short. There are also funds that see great potential. It is drawing battle lines. This is not collusion or manipulation at work, but rather common conversation on the street. When hedge funds see an equity they want to get behind it becomes common knowledge and many get behind it. The same dynamic happens on the short side. The shorts are not an enemy nor are the longs. It is simply two opposing strategies in the market that a savvy investor can create opportunity from.
The long awaited answer as to which side was right and which was wrong will happen with the initial sales results, and even then it may not be clear. This is what investors need to think about. It will take PHENOMINAL sales to silence the short side and dismal sales to silence the long side. More likely than not sales will be somewhere in the middle, making this battle one that can last a bit longer and adding to the frustration levels of both sides. Be prepared either way.
The mid term is mostly determined by what happens in the short term. If sales of Belviq are great then the mid term looks real nice for investors. What we want to see in the mid term is sales continue to rise at a level that indicates a pathway to sales numbers that keep the financial picture of Arena looking strong. The mid term could also be a battleground. Remember, it takes sales numbers that are very impressive to silence the critics.
This is potentially an equity than can appreciate substantially but that depends on consumer acceptance. That may take time. As an investor you need to think about that. Arena does not go from a $10 stock to a $20 stock overnight. Such a rise in market cap requires actual sales now and not just potential.
If you think that Belviq is the be-all and end-all in anti-obesity you may be fooling yourself. If you think about it, what you want to hope for is that Belviq is NOT the be-all and end-all. What you want is for ARENA to be the be-all and end-all.
Orexigen has a product getting ready for FDA trials. Vivus is not going to stand still. Arena will not stand still either. The company will continue to develop and perhaps even improve upon what it has already built. This is where potential comes into play again. If Arena can be successful enough to build on Belviq it will create yet another new opportunity. Stay Tuned!
Approach the short term with some caution. Arena may well be worth a gamble, but the trip from $8 to $20 is not going to be as easy as the trip from $2 to $13.50. Is Belviq a blockbuster? Time will tell. There is a battle that will happen over the coming months. As an investor you owe it to yourself think deeper, dig deeper and understand the dynamics at play.
Spencer Osborne will be a guest on a special edition of Playground Radio discussing Arena Pharmaceuticals Inc. (NASDAQ:ARNA) tonight (Tuesday, April 2nd) at 8:00 pm ET. Listeners are welcome to call in and participate in the live discussion by dialing (347) 934-0239. If you would like to discuss Arena, call in and join the live discussion. Following the live show, a replay will be made available for streaming or download.
Disclosure: Long ARNA
Spencer Osborne is a partner in SiriusBuzz.com and SiriusBuzz Premium, a website dedicated to discussion about SiriusXM Satellite Radio. He also writes exclusive artcles for Seeking Alpha on a wide range of companies. Osborne brings researched based facets of companies to light that investors may want to consider.