Tuesday, September 16, 2014

Arena Pharmaceuticals - Belviq + Phentermine Combination A Game-Changer

It has been a long-time since I posted on this blog so I thought I'd take this opportunity to provide an update on the progess of the Belviq + Phentermine opportunity.  In the Seeking Alpha article I published last week for Arena Pharmaceuticals (ARNA,) I listed the key catalysts for their lead drug Belviq to become a blockbuster.  A key component of the overall thesis is the potential for Belviq to be used in combination with phentermine to create a new “Bel-Phen” therapy that is as effective as the fen-phen phenomenon of the mid 1990’s but without the associated heart valve problems.  On September 12th at the American Society of Bariatric Physician’s Symposium in Austin, TX, a medical weight loss specialist in Missiouri, Dr. Robert Huster, delivered a Poster Session on his results using this combination in his practice.  In this article, I’ll discuss why Dr. Huster’s results should foreshadow what investors should expect from the release of the clinical trial to test these two drugs together.

Arena Pharmaceuticals was founded in 1997, the same year that fenflurimine was pulled from the market, the “fen” in the potent “fen-phen” weight loss therapy.  At the peak of the fen-phen craze, between 16-18M scripts a year of the combination was being filled at its peak.  Arena’s specialty is creating highly-selective GPRC drugs and their lead compound lorcaserin (Belviq,) is the first highly selective 5-HT2c agonist available.     A “safe” replacement for fenflurimine that was selective to the 5-HT2c receptor in the brain, associated with satiety and a reduction of cravings, could create a combination therapy that is as efficacious as fen-phen but without impacting the 5-HT2b receptors in heart valves and resulting in valvulopathy or pulmonary arterial hypertension (PPH.)  This market possibility was the key component of my original investment thesis for Arena.  Although this isn’t the only reason while I remain an ARNA-bull, it is the catalyst by which a parabolic growth of prescriptions could occur.

Obesity specialists have long recognized that combination therapy is the most effective solution for treating this complex disease.  In the investor world, the market has long compared the efficacy of Vivus’ Qsymia (fixed-dose topirimate and phentermine combination) compared to the novel, single-agent Belviq.  With Qsymia, patients could expect a 52-week weight loss of 6.7% at the recommended mid-dose or 8.9% for the high-dose, which almost no patients progress to due to the tolerability of this dosage.  Belviq on the other hand, results in a mean 5.8% 52-week weight loss.  As these are pooled results, it is important to note that there are clearly responders and non-responders to each drug and why the FDA recommends that a physician track a patient’s progress and in the case of Belviq, discontinue the drug after 12-weeks if they haven’t achieved 5% weight loss.

Given the average efficacy for Belivq is described as modest, many physicians are reluctant to prescribe weight loss medication.  The weight loss also isn’t eye-popping enough to result in mass consumer demand.  The holy grail of average weight loss that physicians want to see is 10%.  That is obviously not a moderate amount of weight loss.  Even though the literature is clear that a 5-10% reduction in weight is clinically meaningful, many physicians are still reluctant.  This is why the results of the Belviq + phentermine combination therapy is so important to ignite the weight loss drug market.  If Bel-Phen can provide similar efficacy as Fen-Phen, then there is your vanity market and there is no longer a conversation of modest efficacy.  In a segment on the Today show discussing combination weight loss therapy, a patient was interviewed who took Fen-Phen, had great success, and then describes her experience with the topirimate-phentermine combination which is now marketed by Vivus (VVUS) as Qsymia.  Dr. Louis Aronne of Weill-Cornell Medical College and a though-leader in the medical management of obesity is interviewed in this segment states that it is “very clear you have to use the right medications together,” for treating obesity.

As the author of the linked article states:  “The phen side of fen-phen is still available, but to be a real diet aid, it needs a dance partner. For one thing, the use of phentermine, a chemical cousin of amphetamine and a controlled substance, is approved only for a few weeks. It does make hunger fade, but over time, weight loss tends to peter out. What fen did was keep phen going in an exciting quickstep—a Fred Astaire sweeping his Ginger Rogers to magical heights. Ever since fenfluramine was taken off the market, physicians have been looking for a replacement.

Even though phentermine isn’t as in-vogue as it was in the mid 90’s, it still is written about 150,000 times per week, less than half the volume it did as part of the fen-phen combination.  Most of these prescriptions come out of weight loss clinics.  If Bel-Phen is shown to have the clinical efficacy of fen-phen without any new severe adverse events, it could re-invigorate the weight loss clinic market.  This is a consumer-driven market and not one created by company sales & marketing teams.

Foreshadowing the Clinical Outcomes
Eisai Pharmaceuticals, Arena’s marketing partner, has completed a Phase II “pilot” study to test the safety of using Belviq combined with phentermine.  Arena has guided that results will be out towards the end of 2014.  It is important to call-out that the FDA did not require any echocardiograms during this trial.  In the pivotal trials for Belviq, over 20,000 echocardiograms were conducted to rule out valvulopathy as much as statistically possible for Belviq.  The ongoing cardiovascular outcomes trial will provide the data required to completely rule out an increase in cardiovascular risk and hopefully, show a reduction in risk instead.  

This initial Bel-Phen study is intended to test safety of the combination with efficacy as a secondary measure.  It consists of three 75-patient arms of Belviq + placebo, Belviq + 15mg phentermine BID and Belviq + 15mg phentermine QD.   Arena had guided to releasing the results of this study prior to the end of this calendar year.  Based on the outcomes, then Eisai and Arena will consult with the FDA on if this will be enough to request a label change or if a second study will be required.

So what should investors expect with this study?  Will there be a synergetic effect with using Belviq and phentermine in combination or will investors be sorely disappointed?  As mentioned in my introduction, there was a small independent study presented at last week’s American Society of Bariatric Physicians Symposium that detailed early results of using this combination in practice.  Dr. Robert Huster and Dr. Louis Aronne’s study only consisted of a total of 22 patients who completed but demonstrated an amazing 11.8% average 12-week weight loss.  In addition to the impressive weight loss, no significant side effects were observed.  I should note that Dr. Arrone's university is also listed as a site for the formal Eisai study.

Dr. Huster and Aronne’s treatment of 1 Belviq 10mg per day and 2 15mg tablets of phentermine per day is not consistent with the trial arms of Eisai’s study, but could foreshadow the efficacy that should be seen in that study.  We should see the trial arm in Eisai’s study consisting of 2 Belviq 10mg with 2 15mg phentermine per day show at least 12% 12-week weight loss.  That is over twice as effective as Belviq’s 52-week mean weight loss and almost twice as good as Qsymia mid-dose 52-week loss, in just 12-weeks for Bel-Phen.  If the Eisai trial is consistent with the results from this small study and demonstrates and expected AE profile, then this could be the beginning of Bel-Phen becoming a reality.  

The synergistic effect of this combination was seen in pre-clinical animal tests conducted by Arena as noted in the Arena patent covering this combination therapy.  Given that animals and humans have the same pathways in play for food cravings and satiety, the Bel-Phen results seen by Dr. Huster and Dr. Aronne are to be expected and consistent or better than results seen with the fen-phen combination.  An image of the results of the pre-clinical Belviq + phentermine studies is show below and the Compound B listed is the same chemical formulation as lorcaserin:  

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Interestingly enough, Arena has additional patents covering other variations of lorcaserin as seen in this patent application from 2005.  This updated compound appears to even more selective at the 5-HT2c receptor than Belviq is and the results of combining it with phentermine are even more compelling in this graphic.  Will Arena move this compound forward in the years ahead as Belviq gets closer to its 2026 patent expiration?

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In summary, I don’t think it is unreasonable to hypothesize that tens of millions of people would want to try Bel-Phen if they found that it is safe and can result in 12% or more in weight loss over 12-weeks.  What you can’t anticipate is when will the public become aware there is a safe alternative to fen-phen?  What is the mass-media event that brings that awareness?  It could be a segment on national TV, article in a prominent magazine or just via social media.  What I can say with confidence is that word spreads much faster in today’s social-driven world vs. 1996.  It is the consumer that will create the demand for this combination therapy and when that demand comes, nobody knows.  The current valuation of Arena in no way builds in much chance of a Bel-Phen craze.  Similar peak scripts to fen-phen would generate $1.8B-$2B in net annual sales for Belviq and earnings over $2 a share for Arena.  It makes today’s $4 share price for Arena a high risk / high reward value proposition if you believe that the public will want to try a drug to shed 12% of their weight in just 12 weeks.

Tuesday, January 8, 2013

Arena Breaking Out Ahead Of European Approval

Arena Pharmaceutical (ARNA) investors have been anxiously awaiting the launch of their lead drug BELVIQ which appears only to be weeks away after the DEA recommended a Schedule IV drug classification on December 18th.  On January 9th, Arenas CEO, Jack Lief, will give a presentation at the J.P. Morgan Healthcare Conference where investors are hopeful for an update on BELVIQs launch and any updates regarding their application for marketing authorization in Europe.  Given Arenas jump of almost 10% on January 8th, the market may be starting to anticipate that EMA approval is becoming more likely.

Arena closed above $10 on January 8th for the first time since July, shortly after receiving approval for BELVIQ -- the first new novel weight loss drug approved by the FDA in the last 13 years.  More importantly, it is the first drug ever approved for this indication that is free of unpleasant or dangerous side effects.  It could be the first option ever for endocrinologists, cardiologists, obesity specialists and primary care physicians to prescribe that gives a patient a very good chance to lose an average of 11% (if they are a drug responder,) lower HbA1c by -.9 (better than most Type II diabetes drugs,) while both lowering blood pressure and heart rate.  This is the type of drug profile and approved label that leads to a chronic therapy becoming a major blockbuster.

With two-thirds of America overweight or obese, there are plenty of potential patients in the US to make BELVIQ a blockbuster.  European approval would almost double that target market and with Vivus’ (VVUS) Qsymia rejected for European use, BELVIQ would be the only viable options for the medical management of obesity.  Under centralized drug reviews in Europe, the Committee for Medicinal Products for Human Use (CHMP) will provide Arena with an assessment of their review of BELVIQ at day 180 of the review process.   Since Arena responded to the CHMPs 120-day list of questions before the end of October then by regulation, the CHMP would have provided Arena with their 180-day assessment in December.  Since Arena has not announced that an Oral hearing is required at next weeks meeting of the CHMP, then it is reasonable to assume that the CHMP may in fact not have any outstanding questions and there is no oral hearing required.  If that is in fact true, then it would indicate BELVIQ EMA approval is becoming more likelyand far sooner than many believe.  It is likely the CHMP will recommend approval for BELVIQ at next weeks meeting if there are no outstanding concerns, and the meeting minutes could confirm that on Friday, January 18thwhich just happens to be right before options expiration.

Arenas breakout on January 8th was confirmed with volume and sets up ARNA for a run to the next major resistance area to $12 and ARNA could soon fill the gap to $11 left from July 18th, 2012.  Positive comments from Arena as it pertains to the CHMP review for BELVIQ at the J.P. Morgan conference could be enough fuel to lead that charge to fill the gap to $11 and set-up a very interesting scenario for January 2013 options expiration if the CHMP follows with a recommendation for EMA approval next week.
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With the thumbs-up from the CHMP, Arena is likely to begin finalizing who their marketing partner will be for Europe.  As Arena did with Ildong for South Korea and Eisai for most of the Americas, they will want a partner who will market BELVIQ as a chronic therapy for improving overall cardio-metabolic health and not just for cosmetic purposes.  This was affirmed by Craig Audet, Arenas SVP of Commercial Operations, in a recent Bloomberg article: “Another thing were really looking for is someone who looks at BELVIQ for medical management of obesity, and not just as a weight-loss drug,” Audet said in an interview. “We dont want someone marketing this as a cosmetic drug.”  Jack Lief also provided another clue of the next major market to be partneredChina.  “Lief said the biggest market outside the U.S. for the drug is China, and the company is looking for partners there as well.”

This strategy for signing marketing partners who understand the overall health improvements brought about by BELVIQ is important for building long-term value.  There is a major difference for drugs that are prescribed by endocrinologists and cardiologists and those marketed for cosmetic purposes.  FenPhen (fenflurimine + phentermine) was for the cosmetic market, it wasn't written by your cardiologistFenPhen was written 18M times in its peak year.  Redux had the fastest drug launch everwritten 53K a week just 3-mo post-launch for the cosmetic market.  This market has probably doubled over the last 15 years since fenflurimine was pulled.  BELVIQ does not equal fenflurimine for many reasons.  Of course the primary way it is different is because it is selective in the receptor it targets and is more effective than fenflurimine was as a single agent.  The hypothesis of course is that BELVIQ will be as good, if not better, than fenflurimine was when combined with phentermine (without the risk of valvulopathy)  -  BelPhen, amagic pillto lose 15% weight.  This was my original ARNA investment thesis to begin with. However, BELVIQ is a great drug by itself and should be marketed that way.  It has basically no risk associated with trying it and for almost have the people who do try it to see if you respond to the drug; if you do, you will lose an average of 11% even without combining with phentermine.  As a single mono-therapy that can help a patient lose weight, reduce HbA1c by -.9 and improve blood pressure, reduce heart rate, lipids and waist circumferenceBELVIQ becomes a drug that can confidently and liberally prescribed by most everyone.

This is why it is important to have a marketing partner that recognizes the holistic benefit of BELVIQ for chronic weight management and not just cosmetic benefits.  It is a drug for cardio-metabolic health first and foremost.  This is a market more important and much larger than the statin market.  A market with really no competition and certainly no first line therapy that exists today.  It is the largest unmet medical need in the world and there has never been a safe, tolerable and effective choice for prescribers. It should not be promoted as a cosmetic drug (at least not by the marketing partners.)  Cosmetic use will come organically.  It does not need to be promoted that way, just like FenPhen was only promoted through the media and weight loss clinics.

Qsymias Abysmal Failure

Earlier this week, VVUS jumped after reports stating that prescriptions rose 68% for the four weeks ending December 21st after the launch of their marketing program giving the first two-weeks of the drug away for free (titration period) – a total of almost 13,000 prescriptions compared to less than 8,000 for the four weeks ending November 23rdThis means prescriptions grew from an average of 2,000 a week to just 3,250 a week a full 3 months after launch!  At an average script value of $150 that is less than $500K in sales per week and indicates that Vivus sold less than $5M of the drug since its launch in Septemberbut a small fraction of the estimates for 2012 Qsymia sales and certainly not close to the rate it needs to be at to justify a $1.5B valuation.  With Vivusquarterly operating costs likely approaching $50M a quarter, Vivus is burning through their cash at an unprecedented rate.  For those who have read my perspective on Qsymia in the past, this should come as no surprise.  Frankly, sales have been worse than I even imagined.  Because this drug raises heart rate (thanks to phentermine,) and has other unpleasant side effects such as tingling extremities and cognitive impact - it doesn't have the profile for a first line therapy.  When you add in the risk of birth defects for the most prominent portion of the target market (requiring pregnancy tests and double birth control,) the pain of titrating doses, the limited distribution and the training prescribers have to complete before they can even prescribe it -- you have the makings of a complete disaster.  I maintain that Qsymia will be shown to not be a viable drug long term given the costs of the required post-marketing studies over the next 5 years and pending competition from both BELVIQ and BelPhen.

The biggest risk with investing in ARNA (for me,) was would the FDA approve this drug given the history of this class of medicine and particularly because of the concern over valvulopathyI'm not concerned at all that BELVIQ is going to sell well given its unique mix of safety, tolerability and efficacy -- plus the potential for BelPhen.  It may take longer than I'd like but I think it sells and therefore I continue to hold my overweight position (no pun intended.)  I look forward to a potential recommendation by the CHMP next week for BELVIQ approval in the EU and the US-marketing to begin in February.

Wednesday, December 19, 2012

The Upcoming Arena Battle and Short-term Catalysts

Today Arena Pharmaceuticals (ARNA) finally received the long-anticipated Schedule IV designation recommendation from the DEA.  This is the 1st major step to be completed prior to the marketing and distribution of BELVIQ in the US.  There will now be a 30-day comment period for the public to provide their input followed by DEA formal scheduling, which generally takes 15-45 days to complete.  There will then likely be a 30-day delay in “effective date” to comply with section 553 of the Administrative Practice Act.  So with DEA scheduling now complete, what can investors expect over the next 90 days as BELVIQ finally approaches launch?

I have corrected my previous article and put it up on Seeking Alpha for wider distribution:  http://seekingalpha.com/article/1073271-the-approaching-arena-battle

Good investing.

Sunday, December 9, 2012

Why Arena will be a $20B Company

The most difficult thing to do as a biotech value investor is to find a company with an approved drug that will actually sell better than the market believes it will. Dendreon (DNDN) investors know this well after watching it reach a valuation over $6B before Provenge was even available and those who held expecting great things have seen that value spiral down to $600M after sales and margins failed to meet expectations. Valuations based on erroneous assumptions are often the basis for misaligned expectations. The current markecap for Arena Pharmaceuticals (ARNA) is $2B so is that overvalued or undervalued? We will only know for sure when we look back in a few years. In this article, I'll address my thesis as to why I believe Arena is posed to be worth $20B or more in the next 3 years.

I have followed the obesity drug space with great interest since 2008. The largest unmet medical need is a drug that can serve as a 1st line therapy for weight loss. A drug that can fill this unmet need has the potential to be the top prescribed drug in the world given the pandemic the globe faces in fighting obesity. I have written about the attributes in common with first line therapies in the past which include having a safety profile free of major side effects (especially severe adverse events,) good tolerability and efficacy. It must be a drug that a prescriber can feel confident with to give to their patient. It must be a drug that will do more good than harm.

The FDA, media and many physicians historically associated weight loss drugs as vanity drugs. In fact, the most successful drug of all time was the fenflurimine / phentermine (FenPhen) combination, which took off in the mid-90's. Many of these scripts came from high traffic weight loss clinics prescribing to just anybody who wanted it - resulting in many vanity patients. During FenPhen's peak year, it was written an estimated 18M times before being pulled from the market after fenflurimine was found to result in an increased occurrence of valvulopathy. Phentermine is still the most widely prescribed weight loss drug with an estimated 6M scripts in 2011. Obesity specialists are the main generator of these scripts and readily prescribe it with other drugs such as topiramate or more commonly, 5-HTC compounds. Interestingly enough, these specialists tend to prescribe phentermine at a dosage equal to twice the recommended dose and over half will prescribe it for long-term use, which is against the label. Very rarely is phentermine prescribed by Endocrinologists or Cardiologists for weight loss because it also increase a patient's heart rate -- something diabetics or those with a history of heart disease absolutely don't need.  The key for success is not the vanity market but rather a very safe 1st line option that can be prescribed with confidence for a majority of patients to try to improve overall cardio-metabolic health.

These are many of the underlying reasons that have hampered acceptance of Vivus' recently approved Qsymia (fixed dose phentermine / topiramate combo pill.) These are the same reasons that led me to not invest in Vivus. I have never understood why the Street has been so vocally bullish on Vivus which led to a post-approval marketcap of $3B and institutional ownership over 70%. However, since Qsymia's launch, they have had almost a 70% haircut as Qsymia sales have been at a rate far below expectations. I believe Vivus insiders have always understood the challenges in front of them given their CEO and their President have sold over $20M in stock in 2012 alone. It is an uphill battle to sell a fixed dose of two well-known generic drugs that requires titration, costs 3X the generics, raises HR and contains phentermine at a dosage less than what Obesity specialists already readily prescribe. Endocrinologists and Cardiologists are highly unlikely to start prescribing Qsymia given they already shy away from prescribing phentermine. This has become readily apparent in the last 3months since Qsymia's launch. They have almost 200 reps calling on 25,000 prescribers yet have only managed to sell less than $2M worth of the drug so far -- a very small fraction of what analysts called for. Some of these same analysts and the company are blaming the poor launch on having to educate prescribers on the benefits of weight loss and some of these same analysts are still saying Qsymia will do $300M in 2013. I not only find that irresponsible analysis but almost criminal for investors to rely on such valuation calculations. My prediction is Qsymia to not sell more than $25M in 2013 and if that is the case, then Vivus may in fact pull it off the market altogether. Vivus's operating costs will grow to close to $50M in Q4 and will continue to increase as they fund all of their post-approval trials themselves, which will cost at least $250M. If Qsymia can't do $100M in 2013, it makes no financial sense to keep it on the market. If lackluster Qsymia sales continue, I believe you will see VVUS' share price be cut in half from these levels.

Many analysts and the journalists have pointed to Qsymia's failure in the market as a sign that Arena's Belviq will also fail. After all, Qsymia resulted in a lot more weight loss so if it can't succeed, how will Belviq? In order to address these questions, I'll discuss the evolution of my investment thesis with Arena and why the analysts continue to miss the point on why Belviq will ultimately be a major seller.


My original investment thesis for going long ARNA was twofold. First, Belviq's profile was indicative of a 1st line therapy for this space. While the mainstream media and analysts pointed to Belviq's, mean placebo-adjusted weight loss of only 3%, I recognized that it was completer and responder analysis that is a more important metric when analyzing real-world efficacy. The FDA's efficacy criteria based on intent to treat with the last observation carried forward is not representative of an obesity drugs efficacy. This opinion has also been expressed by members of the FDA Advisory Committee who reviewed Belviq. Obesity drugs are somewhat self-regulating in that only patients who are committed and respond to Belviq will likely continue to take the drug. If you don't respond to the drug within a couple of months, you stop taking it. With Belviq, completers lose over 8% and responders will lose an average of 11%. This is very important and clinically meaningful weight loss. Belviq also meets the safety and tolerability requirements of a first line therapy with no adverse event really more than a mild and transient headache. After 20,000 echocardiograms, there was no sign of valvulopathy. This is the first novel weight loss drug that has this unique mix of efficacy, safety and tolerability.

The second part of my original investment thesis was that lorcaserin (Belviq,) has the potential to re-create the FenPhen phenomena by providing a safe alternative to fenfluramine. So not only could Belviq be highly successful just for weight management as a single agent but it could be combined with phentermine to provide rapid weight loss with increased efficacy and appeal to a broader set of patients. If BelPhen becomes an accepted combo by obesity specialists, you could potentially see even more scripts than you did with FenPhen given the rise in obesity and social media to spread the word. This is yet another reason why Qsymia is going to have a hard time selling enough to justify its existence. BelPhen will likely be more effective, have less side effects, with no risk of birth defects and no REMS. Given a Belviq and phentermine safety study is a top priority for Eisai and Arena, we could see results in 2013 giving prescribers more confidence to write the combination. I believe we will see early results of this combination by the 2013 Obesity Specialist conferences.

While I still firmly believe in my original investment thesis, it has evolved with the results of Arena's BLOOM-DM trial in 2010. In that trial, not only did Belviq meet the criteria for weight loss, it showed significant improvements in both HbA1c reduction and Fasting Glucose. In fact, Belviq demonstrated improvements in measures for patients regardless if they were a major responder for weight loss and at a rate as good or better than many major diabetes-specific medications. This impressive glucose improvement is not just from weight loss but from a separate method of action that can improve insulin sensitivity (http://www.ncbi.nlm.nih.gov/pubmed/16204433.) Belviq lowered HbA1c by -.9 (-.5 placebo adjusted) and fasting glucose by -27 (-15 placebo adjusted.) With the results of this study included in the label, Belviq should be an attractive 1st or 2nd line therapy for millions of diabetics, especially once Eisai and Arena complete studies to show the efficacy when combined with metformin vs. metformin alone.

Belviq should not be pigeonholed as an obesity drug. That is the mistake that shorts have made in their investment thesis. It is a drug for cardio-metabolic health. It is a drug that could be classified as a diabesity drug. This is an important distinction and one the investment community does not yet understand. Belviq is a drug that can help about 40% of the people who take it lose approximately 11% of their body weight on average. Obesity specialists will combine it with phentermine to improve the efficacy for some patients or to help patients get over weight loss plateaus. It has important improvements for both diabetics and pre-diabetics for glucose control, better than many diabetic-specific drugs. It does this while also lowering blood pressure, heart rate, lipids, waist circumference and improving quality of life. It is a drug that will be taken as a chronic treatment for cardio-metabolic health improvement by tens of millions of patients worldwide because of its efficacy, tolerability and lack of adverse events. This is a bigger market than the statin market that lead to Lipitor and Crestor to be 2 of the best selling drugs of all time.

The market potential for a drug to improve cardio-metabolic health is the largest in the world. This is the biggest unmet medical need with very few tools for physicians to consider and none that have ever met the requirements to be a 1st therapy - that is until the availability of Belviq. Two-thirds of Americans are overweight or obese. There are over 20M Type II diabetics in this country. There are 79M pre-diabetics where the recommended therapy is diet an exercise to lose weight and improve glucose control. Belviq will be a key 1st line therapy to treat metabolic syndrome and that is something no other weight loss drug has ever been able to do. This is the key for Belviq to sell as much or even more than Lipitor did. Unlike Lipitor, Belviq has no competition. Belviq will be prescribed by obesity specialists, primary care physicians, nurse practitioners, endocrinologists, gastroenterologists and endocrinologists. Eisai will be marketing Belviq as a drug to both lose weight and more importantly, to improve a patients overall cardio-metabolic health.

The skepticism around Belviq becoming a blockbuster, less alone a top seller, centers around the fact that no obesity drug has ever done so. However, one must recognize there has never been an obesity drug approved that was absent both unpleasant side effects, didn't negatively impact cardiovascular risk factors and one which improved all co-morbidity metrics including providing a major benefit for diabetics and pre-diabetics. Belviq should be analyzed as both a 1st in class treatment for weight loss but also as an important drug for those with metabolic syndrome or pre-diabetes. I believe Merck's Januvia provides a great illustration for the potential for Belviq as it pertains to diabetics.

Januvia (sitagliptin) is a DPP-4 inhibitor usually given as a 2nd line therapy for improving glucose control for diabetics. It also comes pre-combined with metformin in a combination called Janumet. Januvia was first marketed in 2007 and will likely cross the $5B a year in annual sales threshold this year. It sells for a little under $5 a day and its label is only for diabetics. Januvia will lower HbA1c a placebo adjusted -.7-.8, compared to Belviq's placebo adjusted -.5. However, adjusting for the differences in placebo, Belviq is more effective than Januvia at reducing HbA1c. In Belviq's BLOOM-DM trials, the placebo grouped dropped their HbA1c by -.4 and in Januvia's 24-week trial, the placebo group rose .2. So Belviq's HbA1c reduction (non-placebo adjusted) of -.9 should be just as good, if not better than Januvia's. Belviq also has a better safety profile and has the added benefit of significant weight reduction / management, improving BP, HR, waste circumference and lipids. So if you analyze Belviq as a diabetes drug, it compares more favorably than Januvia which does $5B a year! In fact, the consulting firm EvaluatePharma is calling for Januvia to be the top-selling drug in 2018 with an estimated $9B in annual sales. Once endocrinologists and primary care physicians are educated on the glycemic benefits of Belviq, it could both generate billions a year while also negatively impacting Januvia's sales.
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Not only will Belviq provide competition to Januvia and other 2nd line drugs for diabetics, Belviq will be prescribed to pre-diabetics as well. That makes the market size 4X larger than Januvia's market. Now add that potential to the possibility of a BelPhen craze and you have the potential for Belviq to be the top-selling drug in the world. If that isn't enough, you will also see future label expansion for the treatment of drug addictions such as smoking cessation, also a billion dollar indication. So for my thesis, it isn't a question of if Belviq will be a blockbuster but how long it will take to get there and how many billions it can actually do.


Jack Lief has structured Arena so their costs will be low, margins / profitability high and taxes low - a mix that will lead to massive earnings. Arena's partnership with Eisai offloads all of the sales & marketing costs and 90% of the post-approval trial costs ($200M+) to Eisai. Arena sells the finished Belviq pills to Eisai at a price that starts at 31.5% of the net sales amount and increases in tiers up to 36.5%. At sales above $250M a year, Arena will then start to receive purchase price adjustments. The net effect is a percentage of sales at almost 50% of what Eisai is selling the product for until the purchase price adjustments expire. In future deals (Europe, China, India, Japan, Russia, Middle East, Africa,) you will likely see deals similar to the recent partnership completed with Ildong for South Korea whereby Arena receives between 35-45% of the Net Sales amount. Arena's manufacturing subsidiary, Arena GmbH, has a 10 year tax holiday from Switzerland which will result in an effective tax rate of probably less than 10% for the company. With $600M in NOL's to offset profits and Belviq likely to cost $.10 a pill to produce -- Arena is structured to be highly profitable.

I have written valuation models in the past but a simple way to understand the potential profitability is to break it down to the earnings potential for each million patients who take Belviq as a chronic therapy. The assumption I will make in this exercise is that Arena will receive at least 35% of the Net Sales amount. If Arena is selling Belviq to at least a million patients a year, their revenue will in fact will be much higher when accounting for the purchase price adjustments.

  • Belviq Retail Monthly Estimate: $150/mo = $1,800/year/patient
  • Eisai's Net Sales Amount (70%): $105/mo = $1,260/year/patient
  • Arena's Average Gross (35%): $36.50/mo = $441/year/patient
  • Arena's COGS: $6/mo = $72/year/patient
  • Arean's Profit per patient:  $369

For every 1M patients, Belviq will sell $1.8B a year and Arena will earn $369M per year.
A 10% tax rate and low operating costs could lead to profitability of 80% of this amount = $295M. I will not count purchase price adjustments, milestone payments, upfronts, rolling tiers or increased operating costs for simplicity sakes, just the value that each Belviq patient brings to Arena.

Using 230M outstanding shares = $1.28 EPS potential for every million patients. This is massive earnings growth if Belviq can sell as well as or perhaps even twice as much as Januvia.

Keep in mind the following when you think about the potential that lies ahead for this company to achieve many millions of patients who take Belviq worldwide:
  1. 20M+ Type II diabetics in the US alone
  2. 79M pre-diabetics in the US
  3. 66% of the US overweight or obese and this is a prevalence replicated throughout the westernized world.
  4. 500M obese worldwide.
  5. 2-3M patients a year take phentermine in the US
  6. 18M annual scripts for FenPhen in 1996 in the US
  7. Millions of patients a year on 2nd line diabetes drugs not as effective as Belviq such as Januvia
  8. No existing 1st line drug for pre-diabetics / metabolic syndrome
  9. Belviq could be the only option in Europe where Phentermine use is limited or illegal.

Very few biotechs exceed expectations to increase in value 10-20X post launch of their inaugural drug. Most often, they are the companies where expectations were too bearish and drug sales far exceeded those expectations. When this happens, the market must reassess the value and you will see the underlying marketcap go up exponentially over a number of years. The most important factor for determining the valuation multiple is revenue and earnings growth. As Belviq takes off over the next 1-3 years, I believe Arena will replicate what many of the following companies have done:

Alexion (ALXN)
(click to enlarge)

Biogen (BIIB)
(click to enlarge)

Celgene (CELG)

Gilead (GILD)
(click to enlarge)

Arena with 2M chronic patients (could happen as soon as 2014): Belviq sales of $3.6B, Arena Revenue of $882M, Arena Profit of $590M, Earnings potential of $2.56 will led to a marketcap of at least $20B. Arena with 5M chronic patients (could happen by 2016): Belviq sales of $9B, Arena Revenue of $2.2B, Arena profit of $1.48B, Earnings of $6.40 would indicate a marketcap of $30-50B (very close to Gilead total revenue, profit and above their earnings.)  I believe that a majority of this appreciation should occur over the next 1-4 years, as it did for the companies listed above.

Future ARNA Chart?

In summary, Belviq has the profile of a 1st line drug to be used for cardio-metabolic health -- not just an "obesity drug." It has the potential to be a go-to drug for millions of pre-diabetics / metabolic syndrome. It will likely be prescribed as 2nd line therapy with metformin to millions of patients. Once this becomes clear to the Street, the share price will rapidly appreciate year over year until it reflects the true value of this franchise, just like many successful biotechs before it. If Belviq can garner just 2M patients a year, ARNA is going to be worth $20B at a minimum; if they can remain an independent company that long. I would bet very few investors who bought any of the companies listed above when they were worth less than $1B, held a majority of their shares while the value reassessment by the market took place. Although I plan on taking some profit along the way, I also plan on holding a majority of my ARNA shares for 3+ years while the market comes to realize that my investment thesis was correct.

Good luck investors and as always, perform your own due diligence.  Only you are responsible for your gains and losses.