EnteroMedics: Arena 2.0?

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Arena Week 11 Sales Up Big

established.

· While I talk about gross sales frequently, the driver for Arena is its percentage of net sales. It is gross sales that determine things like blockbuster status, while net sales get to the meat and potatoes of what Arena garners from the sale of the drug.

· The orange line depicts my 30% adjusted IMS sales. It is currently pacing below the blue hockey stick model and above the yellow analysts' model.

· The green line depicts my 20% adjusted Symphony sales. It is currently pacing below the blue hockey stick line and above the analyst line.

· I have not stated that the company will track to any particular line.

This week the IMS scripts came in at over 4,000, a great accomplishment. This represents a week-over-week growth of an impressive 18%. As stated, I adjust the weekly number up by 30%. My adjusted IMS script number is 5,309. The chart below is a 12-week blow-up of the larger 30-week chart. As you can see, the current adjusted script pace is just above the yellow analyst line that would, in theory, generate a $12 price target. Scripts are also pacing just below the blue hockey stick model that would pace Arena to $150 million in gross sales by the end of this year. The overall trajectory of my adjusted scripts is above and ahead of the trajectory on the analysts line and leaning more toward the hockey stick that graphs a more exponential path.

(click to enlarge)

The 30-week chart below outlines the overall pace and projected paths through the end of 2013. The current pace for script sales is pointing toward $60 to $70 million in gross sales. It would now take roughly $68 million in gross sales to garner Arena the $10+ million in revenue analysts are looking for in $12 per share valuation targets. Investors need to bear in mind that Arena is paid off of net, not gross, so the $68 million would need all of the allowable discounts and costs applied to arrive at a net number, of which Arena gets 31.5%.

(click to enlarge)

Last week we witnessed IMS script numbers move up after a flat week, while Symphony was more flat. The two services nearly converged last week. We are now approaching the weeks where refills begin to take on more importance. In theory a patient that has not lost 5% by week 12 should discontinue the drug. Some patients will stop earlier for any number of reasons, and some patients may stay on longer.

As I have stated, there is an active traders dynamic to the weekly script numbers. If they are low, the stock will suffer. If they are as expected the stock will maintain. If they are high, the stock can appreciate. The trend has been a more pronounced reaction to the downside than the upside. In order to see marked upside appreciation the script numbers would need to, in my opinion, demonstrate a week over week gain of about 20% or more at this point. In contrast, a week over week gain of less than 8% would be perceived as a negative.

Summary

· Weekly IMS numbers show 18% improvement week over week

· The current adjusted pace is below the $150 hockey stick model

· The current pace is tracking well with, yet above the analyst model

· Current unadjusted IMS sales are at 29,457

· Current 30% adjusted IMS numbers are at 38,294. This is pacing just ahead of my stated goal of 40,000 in 12 weeks

· Estimated YTD gross sales (to consumers) is $7,639,673*

· Estimated YTD net sales (to consumers) is $3,829,400*

· Estimated YTD Arena share (from sales to consumers) $1,205,201*

The snafu with the SEC filings seems to have faded off with very positive script news. Stay tuned.

*Arena is not using sales to consumers to book revenue. It is using sales to the wholesaler to account for revenue. Eisai books sales to wholesalers as well. Weekly scripts are tied to actual consumer sales, thus the translation in revenue modeling.

Disclosure: I am long ARNA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

Additional disclosure: I have no position in Eisai

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Is Arena A Buy Near 52-Week Lows?

Arena Pharmaceuticals (ARNA) is not currently sitting where most investors a year ago imagined it would be. In the summer of 2012 the company was riding high with a recent FDA approval of the anti-obesity drug Belviq, and only needed finalized DEA scheduling to bring its drug to market. The DEA process dragged on for months, and it was not until June of 2013 when Belviq became available.

Arena Pharmaceuticals is not where investors thought it would be almost 3 months after launch either. While I was chastised for "low-balling" when I said that 40,000 scripts in 3 months would be a good start, it turns out that the 40,000 script level is exactly what we are on pace for.

Arena Pharmaceuticals is not even where I, a person that tends to look at things with a more conservative eye, thought it would be. I anticipated a nice base of about $8.50 at launch and for the sales of prescriptions to allow upward momentum from there. As it turns out, even my more conservative outlook was not conservative enough.

So why is it that Arena investors are now knocking on the proverbial door of a 52 week low? More importantly, is the current pricing level a good entry point?

My opinion is that sales of prescription anti-obesity drugs are coming in at a much slower pace than many anticipated. Competitor Vivus (VVUS) has had its drug, Qsymia, on the market for almost a year and just recently was able to bring in a weekly sales figure of 10,000 prescriptions sold according to IMS. Arena has had more volume in its launch, but as yet, 10 weeks in, has not cracked the 4,000 level. Sales have been steady but slow.

The more problematic issue with Vivus and Arena is not slower than anticipated sales, but rather lower than modeled revenue. Arena and Vivus have both been forced into discounting their respective products to gain traction, and even at that, it is not like consumers are lining up outside the doctor's office to get a prescription. Consumer acceptance is going to be slow going, and until insurers in larger numbers open up these drugs for coverage it is going to remain a slow growth prospect.

Betting on the anti-obesity space will remain a roller coaster until doctors have more comfort with the drug, patients realize that it is available, and the organic word of mouth success stories begin to unfold. There is still uncertainty in the space, but make no mistake, there is potential as well. After all, there are some 100 million obese people in the U.S. alone.

In my opinion Arena is currently a buy for investors willing to have some patience and absorb the risk. While the concept of treating obesity seems like a no-brainer, getting people that need treatment to understand the benefits seems to be a task that is not quickly being adopted. This is where direct to consumer advertising can make a substantial difference. If advertising is combined with getting insurance coverage from the current 35% of covered lives to 50% of covered lives, the impact can be swift and fast moving for those invested. The issue was getting expectations to realistic levels and then building from there.

Not long before Belviq launched, Arena partner Eisai made statements about sales being $200 million by March 31st of 2014. Subsequent to that Eisai U.S. made statements about $150 million in sales. Whether that was referring to the end of 2013 or by March 31st of 2014 is the subject of debate, but either way, the numbers have now been called "hopeful aspirations" by Eisai. As disheartening as the "hopeful aspirations statement may have been for Arena investors, it was likely the most healthy thing that could have happened. It finally got the street and investors to think in terms that were more realistic.

Before moving on, I want to visit the $150 million figure again. We have determined that gross sales are arrived at by Eisai selling Belviq to wholesalers at a price point of $199.50 per bottle. What that translates to is nearly 752,000 bottles sold. The launch supply was 50,000 bottles that gave a gross revenue figure of $10 million. That would mean that another 700,000 bottles would still need to be sold to wholesalers. Currently that would mean 100,000 bottles a month would need to be sold if you are targeting March 31st of next year, and 175,000 a month if you are targeting the end of the year. In my estimation the initial 50,000 bottles will be exhausted at about week 14 after launch. As you can see, the likelihood of these types of numbers being ordered is not very high. That is fine, because we want to get away from hope and more toward reality.

Realistically speaking we are looking at gross sales of between $60 and $70 million by the end of the year. Arena gets paid 31.5% of net sales. Early numbers indicate that the net sales figure for 1 bottle of Belviq is about $82. This would imply that Arena would get about $26 per bottle sold to the end user. If we assume that as time passes the net average appreciates, we can arrive at a more bullish $100 per bottle. This would imply Arena revenue of about $32 per bottle.

If Arena can get to $10 million in the split for 2013, the first hurdle toward brighter days can be cleared. In Q2 the company received $1.3 million in revenue from Belviq. In my opinion this is a key element in establishing a base price from which equity price appreciation can build.

Is Arena a buy at current levels? My answer is a yes, depending on your timeline and risk tolerance. As each week passes we are beginning to establish with a greater degree of certainty that there can indeed be enough gross sales in 2013 to get Arena in the neighborhood of $10 million in Belviq revenue. That is the starting point.

What adds value to Arena? The pipeline. Arena announced today that the company has completed phase 1b clinical trials for its APD811 hypertension drug. Advances in pipeline bring about more and more potential for a company like Arena. While this progress adds value, the Arena story is currently hitched to Belviq success in the market. The street is focused on Belviq. Pipeline potential is not yet built into the price. Savvy investors with patience can potentially see a nice reward from what Arena offers in the pipeline. Stay Tuned!

Disclosure: I am long ARNA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

Additional disclosure: I have no position in Vivus

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