First off, I would like to thank those who have found value from my articles I’ve previously published on my blog and Seeking Alpha. I’m no longer going to use Seeking Alpha as a medium for a few different reasons. Since Seeking Alpha has made the business decision to not pay to have their content distributed via Yahoo Finance, the page hits have been cut by about 75% in my experience making it not worth the effort. Secondly, I have so much more freedom to write more creatively and openly than you can on an edited website like Seeking Alpha. So with that said, if you are offended by curse words and political incorrectness, read no further.
I recently read a new publication that re-enforced my bullishness on Arena Pharmaceuticals' Belviq to take over as a 1st line treatment option for Smoking Cessation. As I covered in my last blog post, there are several events upcoming that can lead to Belviq becoming a blockbuster drug. One of those of course is the data on Belviq as a smoking cessation option and the other is the Belviq + phentermine (BelPhen) pilot study data. I think there are several shots on goal for Belviq to reach a blockbuster within 3 years or so given what we know today about this market and this drug. I have no idea how Arena’s marketcap is under $1B given these opportunities. It is a bit ridiculous in my opinion but the market is always right so what do I know. So as an investor, you can use the weakness to add to a position, sell out for a loss or just sit back and wait for the story to play out.
One of the reasons ARNA is valued as it is, is due to the fact that Wall Street has attached the three obesity drug related biotechs together. Many paired trades are out there for these companies with professionals being long or short each equity in various combinations. It limits the spread between valuations and with the very slow uptick for obesity drugs, all of these companies have felt the pressure. It is a bit unfair but that is a big part of why ARNA has floundered around 52-week lows. There is very little premium put in Arena as being an R&D company with novel drugs vs. Vivus and Orexigen which have glued together a couple of generics. Generics that have a host of side effects and whose combination use has never really taken off in the market place.
These branded combination generics, Qsymia and Contrave, are really a scam to the American public and physician community in my personal opinion. I mean seriously. Weight loss specialists have been combining phentermine with topirimate for decades so why in the world would they switch to a fixed dose, branded drug that costs multiples more? Contrave has inherited the block box warning of bupropion and it will have the same generic pressures as Qsymia. Vivus and Orexigen will be spending hundreds of millions of dollars in post-marketing trials in the HOPES that physicians will be duped to prescribe their branded drugs rather than just writing two scripts for combination therapy.
That is not a business model that I found compelling to invest in. It sounds like a great way to lose your money if you ask me. Vivus is lucky they have an ED drug with an improved label and that should be their focus as a company. Who knows what is going to happen with Orexigen. Maybe Takeda can convince primary care physicians that Contrave is a good idea but I seriously can’t see it being more than a 3rd line option. Maybe if they were able to get interim cardiovascular data in the label, it could have offset the black box but they are a bit fucked now in my opinion. But again, I’ve been wrong for years so I could be wrong again.
I know I have digressed but the reason was to discuss why Arena is valued at $900M being tied at the hip, at least by Wall Street, to two “peers” who sell weight loss drugs. Rather, it should be valued based on future expectations of its NOVEL drug that is a SINGLE COMPOUND with multiple market opportunities. It will be combined regularly with phentermine as I discussed in my last article. That efficacy is twice as good as the competition and 10%+ weight loss in 12-weeks is going to cause a great demand from consumers, once they become aware of it. So outside of chronic weight management and BelPhen, how does Belviq become differentiated in the market? Wall Street needs to recognize its unique position as a novel drug with multiple uses. This is where the upcoming Phase 2 smoking cessation is key in my opinion.
In my BelPhen article, I included data from pre-clinical studies that demonstrate the synergy between Belviq with phentermine. In previous articles, I included links to other pre-clinical studies that showed great promise for Belviq’s ability to be used for smoking cessation. This opportunity is understood by many scientists, researchers and even the National Institute of Drug Addiction (NIDA.) I spoke with NIDA representatives 2 ½ years ago and they were particularly excited about the potential for Belviq as an anti-addiction drug, not just weight loss.
As I alluded to in the introduction, we now have yet another pre-clinical study that was recently published that underscores the opportunity here. This study was published in the Behavioral Pharmacology Journal and is entitled: Examination of the effects of varenicline, bupropion, lorcaserin, or naltrexone on responding for conditioned reinforcement in nicotine-exposed rats. You can purchase the article here, assuming you don’t have that publication on your coffee table. What is cool about this study is it was a head-to-head comparison between varenicline (Chantix,) lorcaserin (Belviq,) naltrexone and bupropion (Wellbutrin/Zyban and a key ingredient for Contrave) so it is a great way to gauge their effectiveness in a controlled trial with the same parameters. Animal models for drug addictions are very representative of what you ultimately see in human testing because it is the same primitive pathways that tend to be involved.
Obviously I can’t share too much content from this publication, I would encourage readers to purchase it,) but I’m sure the authors won’t mind if I shares this quote as it pertains to their findings for lorcaserin’s potential to be used as a smoking cessation treatment:
"Presently, lorcaserin is only marketed as an aid for weight loss, and to
date, has not been examined formally as a treatment for smoking cessation. Given that both food and drug reward-directed motivation can be influenced by similar neuronal circuitry (Berridge, 1996; Berthoud and Morrison, 2008), it is possible that this drug decreases the motivation for both food and drug intake through a common mechanism of blunting the motivating properties of reward-associated cues (Higgins et al., 2013b). It is also notable that one of the unwanted side-effects of smoking cessation is weight gain (Williamson et al., 1991). Thus, the use of this drug as an appetite suppressant in
abstaining smokers may serve the added benefit of attenuating reactivity to smoking-associated cues (Higgins et al., 2013b). These two beneficial effects could encourage the individual as he or she works toward attaining a healthier lifestyle."
In their tests, based on a review of the included charts, varenicline (Chantix) reduced self-administration of nicotine by approximately 40%, lorcaserin reduced self-administration by 43%, demonstrating similar efficacy. Clearly you need human, clinical data, to really start having prescribers consider Belviq as an off-label option for smoking cessation. Eisai will need Phase 3 trials in 2015/1016 but you could see a smoking label in 2017, assuming the studies are positive.
The Smoking Cessation Market
The Smoking Cessation drug market is about $2.5B globally based on estimates I’ve read. This is considered a highly unmet medical need given the pretty shitty options out there. Just read Chantix’s label here. When this drug was approved in 2006, Pfizer had high-hopes for it and rightfully so given the poor number of options for treatment. Chantix had sales of $883M in its first full year on the market, on pace to be a blockbuster in Year 2 until OOPS, a black box for psychiatric risk crushed those chances. It has been linked to over 500 suicides yet still is doing over $600M a year. It just shows you how dismal the options are for smoking cessation.
What would the smoking cessation market be if there was a drug that was as effective as Chantix, had no black box, had far better tolerability AND resulted in weight loss or at least weight neutrality? Surely it could manage over $1B a year which Chantix would have done in year 2 without the black box? There are approximately 40M smokers in the United States alone. It is estimated that 70% of them actually want to quit, that is 28M Americans. The numero uno reason that most of those 28M people have for not trying to quit smoking? FEAR OF WEIGHT GAIN.
I think it is a pretty logical hypothesis that if the Phase 2 trials for Belviq as a smoking cessation aid meet end-points, it will repeat that success in Phase 3 and earn a smoking label. There should be growing off-label use if the Phase 2 trials are positive and those results are widely publicized. It will also be a great way to go after a smoking cessation label in other territories as a way to gain approval in markets who are hesitant to approve weight loss drugs. You will then have patients who undoubtedly then take it for weight loss off-label. Having Belviq known to be useful as a smoking cessation drug will perhaps finally help differentiate it as a novel drug with multiple uses and show that it shouldn’t be compared to the generic combination drugs it is grouped in with today.
Valuing a Smoking Cessation Opportunity
If the global smoking market is $2.5B today with pretty shitty options out there, then what is the global market for a drug that has clear differentiation through weight loss/neutrality in the label without a black box and a great tolerability profile? Certainly it would expand that market. It would also likely take a significant amount of market share from the competition. I threw out some estimates for smoking cessation revenue if Belviq can get that label in 2017. This is just for smoking cessation in the US. Of course you have revenue for the current label and hopefully broad use of the potent BelPhen combination. But let’s pretend this was solely a drug for smoking cessation, what would today’s intrinsic value be for that revenue stream?
Now this is just for illustration purposes and there are dozens of variables in play including patent timelines, future dilution, increasing operating costs, etc. but the purpose is to show that the unique and novel compound Belviq is worth far more than is currently reflected in the stock price of ARNA. If Pfizer can make Chantix still sell $600M with that label, they could sell $2B a year of Belviq for smoking cessation. Eisai is no Pfizer of course but the point is that there is huge worldwide demand for better smoking cessation pharmacotherapy options.
So here it is you have ARNA with $900M marketcap and it cost more than that just to get Belviq to market. You have Big Pharma that has paid billions for companies for drugs that never panned out. Now looking ahead, you have a novel compound in Belviq that could be used to treat numerous addictions including nicotine, cocaine, alcohol & meth. A combination opportunity with phentermine that could create a new fen-phen craze with BelPhen and its 12% 12-week weight loss average. A best in-class chronic weight management drug for a market that is really in its infancy for obesity being treated as a disease. A drug that appears to be more effective in treating diabetes than the $4B a year Januvia franchise and which can also be used as an effective pre-diabetes drug. Yet, even with all of this future potential, Wall Street basically says that Belviq will never really be more than a minor drug with limited market potential. There are almost 50 blockbuster drugs and 100 that do over $500M a year but Belviq is valued like it has very little chance of making it on that list. It seems like it has a pretty good shot to me. Given the market opportunity for weight management + diabetes + smoking cessation is by far larger than any drug currently available, it doesn’t seem that it becoming a $1B+ asset in the coming years is that big of a stretch?
If I’m in Merck or Pfizer’s executive boardroom, I’d be doing all I could to acquire Arena even with the partnership with Eisai in place. Perhaps they have tried in the past or not bothered because they don’t see value in lorcaserin’s potential? I personally would prefer for Arena just remain independent and see multiple new novel drugs through Phase 2 and continue to partner them while Belviq becomes a franchise in its own right. But I have a lot of patience and a long-term investment horizon. Others would like a buyout tomorrow. Regardless, the upcoming BelPhen + Smoking data is key for everyone.
Once these data points are out, perhaps ARNA will show it is a differentiated company with a unique set of market opportunities in the coming years. A $4 stock price and less than $900M market cap is pretty fucking crazy risk to reward value play and not representative at all of the opportunity here. Does it suck that ARNA is 70% off post-approval highs? Yep. Does that mean that the market opportunity is any less? No, in fact it is really the opposite. I would argue that with upcoming BelPhen and smoking data, the opportunity is far greater in 3-5 years from now than it was post-approval. Buying ARNA at today's price is far less risky in my opinion than buying this stock pre-approval, and certainly at post-approvals highs. Buying low and selling high is much better than buying high and selling low like many retail investors have done with this stock. I think those who are investing at these lows, are in a great position for a 3-5 year hold with multiples of returns.