Ironwood's Linzess Sales Are Ramping Up: Buy The Dip?

Now that the initial hoopla over the FDA's approval of Linzess has faded, investors have a chance to evaluate two quarters worth of actual drug sales. Just after FDA approval, Ironwood Pharmaceuticals (IRWD) peaked at around $19 per share on strong sales hopes. By the time July hit, IRWD had lost nearly 50% of its value and reached a low of $10. What caused the massive dip? Reports of side effects, nerves about a competing IBS product from Synergy Pharmaceuticals (SGYP) and more shareholder dilution served to spook investors.

However, the bears may have been getting ahead of themselves. The stock has stabilized at a range between $10.50 and $13, and both prescription refill rates and new prescriptions look promising. Synergy's product is at least two years from market, and Ironwood's sales and marketing efforts are still in their infancy.

Market Size and Positioning

First, let's look at a primer on market size and delve into Irritable Bowel Syndrome (IBS) a bit more. About 10-15% of the population is affected by IBS; however, less than 33% of people who are affected ever see a doctor. Most rely on over the counter treatments, usually to no avail. There does not seem to be any indication that IBS is related to nationality, income level, etc., as symptoms are fairly evenly dispersed around the world. Women are affected more than men, and most patients are younger than 45. The condition is chronic, with nearly all treatments designed to relieve symptoms such as constipation and stomach pain. If you don't take the medication, the symptoms will come back.

The pharmacology of Linzess is a bit different than anything that has come out before. It's the first orally delivered peptide which increases fluid secretion to the gut (to relieve constipation) and decreases pain through secretion of cyclic GNP out into the gut. This type of dual symptom relief is what sets the drug apart from anything else on the market right now and has many gastroenterologists writing new prescriptions for the first time.

The chart below shows that while brand growth is still in its infancy, it is tracking nicely along with other GI drugs Zelnorm and Prilosec. (Note that Zelnorm was pulled from market in 2007 due to increased risks of heart attacks and stroke).

(click to enlarge)

The prescriber mix is also improving, and IRWD now sees a 60/40 split among prescribers between gastroenterologists and primary care physicians (PCPs). There are now over 30,000 prescribers for a drug that was released only nine months ago, and new physicians are being added at a rate of about 1,000 per week. Refill rates are also tracking ahead of Zelnorm at this stage. Because IBS is highly symptomatic and informed patients are motivated to seek treatment, many patients are seeing their PCPs or gastroenterologists and requesting Linzess by name.

The good news is that the marketing of Linzess is still at a very early stage, with only $8.3 million being spent in the second quarter. A robust online campaign and a veritable army of sales reps are soon to be deployed in an effort to get the word out. IRWD has about $300 million of cash in the bank, so it will not be constrained by cash flow in the next 1-2 years.

Global Ambitions

Globally, a partnership with AstraZeneca (AZN) will allow for testing of Linzess to ramp up in China as Phase III clinical trials will be underway soon. IRWD is forecasting the first sales in both China and Japan to be made in 2016. In Europe, Ironwood's partner Almirall has launched Constella (Linzess branded for Europe) in the UK, Germany, and Nordic countries. Royalty payments are still small, and amounted to only $2 million in 2Q. Further, because IBS symptoms are prevalent all over the world, Linzess is a good candidate for a global footprint. However, I would not concern myself too much with the Asian market right now. Approval is far off, and a plethora of things can change. As an investor, I would only focus on America and European sales for the time being.

Insurance

Working with insurance companies is also difficult, and this continues to be IRWD's largest challenge. On the positive side, 50% of patients with national commercial insurance have a copay of less than $30 per month, and 80% of patients with insurance have unrestricted access to Linzess. However, the drug may still be prohibitively expensive for a large chunk of their market share - potentially millions of people. The choice between a $5 bottle of Pepto Bismol or Miralax vs. a new prescription that can cost hundreds of dollars is an easy one for anyone on a constrained budget with fairly mild symptoms. Negotiations with payers are still ongoing, and IRWD hopes to have more plans enrolled soon, but cost remains an issue.

Side Effects & Patient Feedback

A cursory glance at the internet message boards of IBS community groups Inspire.com and ibsgroup.org, raises a red flag - this does not seem like a wonder drug that cures all patients. A large amount of people are complaining about diarrhea and have given up on Linzess. While the Rx itself warns that 20-35% of patients may experience diarrhea, initial feedback may not be as rosy as Ironwood claims. While this is only a small sample of patients, and it is more likely that people experiencing problems will post about their experience as opposed to those that don't experience any side effects, the sheer number of posts about the matter is slightly disconcerting. The bottom line is that investors should temper their expectations, which I believe the fall from $19 to $10 already portended.

Cash Flow

I'm projecting about $125 million worth of Linzess sales for the year, as Q2 sales were $28.8 million. Operating expenses were $55 million and IRWD continues losing money. Note that sales are not cleanly broken out on the income statement - investors must look at the collaboration expense line item in more detail to find both Linzess sales and commercial costs and expenses (see below). Also note that due to the distribution arrangement with Forest Laboratories (FRX), Ironwood does not pocket the gross sales. Cash burn continues to be high, and investors must factor in another capital raise in 2015. By then, Synergy's product may be launching, and while Linzess will have some more competition, its network of doctors and sales reps will be very robust.

(click to enlarge)

But 2015 is a long ways away, and I would not advocate a multi-year buy and hold strategy here. In the meantime, as Ironwood continues to ramp up marketing efforts, Linzess should continue to see sales growth. Any surprise on the upside should bode well for the stock, as it could be poised for a breakout above its 200 day moving average, especially with analyst expectations continually getting revised down. I believe that we've seen the short term floor on IRWD, and if investors can get in between $11-12, selling between $15-16 would be a prudent move for a short term profit as we approach the end of the year. Just don't expect the next Prilosec.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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...)

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Arena's Belviq Sales Week 14: Back On Track?

Now that we have the "pre-holiday week" and the holiday week behind us one would expect to have seen some decent week over week growth in the prescription sales numbers of Arena's (ARNA) anti-obesity drug Belviq. That is exactly what we got with prescription sales for the week ending September 13th coming in at just above 3,800 as reported by IMS.

The prescription sales data seems to bring about a lot of noise and varied opinions. My personal opinion is that I never want to see a holiday week offered up as an excuse for a dip in the sales number. What I want to see is the numbers grow despite the fact that a holiday existed. Yes, holidays will impact sales. It is my opinion that a compelling product that is being sought by consumers can still show growth despite a holiday. Why do I not like to see a holiday used as an excuse? Because there are many of them. In October we will see Columbus Day. November has Veterans Day and Thanksgiving. In December we have Christmas and New Year's Eve. Simply stated, a product that has great consumer traction can navigate the holiday hurdle.

As I have stated many times, the weekly script numbers are geared more toward active traders. Longer term investors use the weekly data to project longer term trends, but immediate stock price fluctuation happens on the heels of whether or not the perception of the sales data is good. What is perceived as good or bad is based on company projections, street expectations, and penetration into the potential market.

One of the biggest factors that drove the stock price of Arena up was an expectation that an anti-obesity drug with a good safety profile would be a hit with doctors and consumers alike. With a potential market of over 100 million in the U.S. alone, people were predicting early success and using the term blockbuster. When the company outlined goals for early sales figures to be somewhere between $150 million and $200 million, it gave investors a target to shoot for. One of the major drivers for the equity dipping to 52 week lows has been that the current sales pace is not pointing to the numbers outlined as sales goals prior to launch. The fact of the matter is that the Arena marketing partner, Eisai, has now called those figures "hopeful aspirations."

We are now 14 weeks into the launch of Belviq. If we adjust the prescription numbers of IMS and Symphony Health upward (to account for non-reporting, etc.), the company has just now gone through the initial script order of 50,000 bottles. That initial order generated $10 million in gross sales, $4.3 million in net sales, and about $1.3 million in sales revenue to Arena. If we assume that pharmacy "warehouses" practice the "order-as-needed" policy that most industries now practice, then another 50,000 bottles shipped in the last week or so (assumes that Eisai does 50,000 bottle orders). If we assume that script growth is still happening, then we would be looking at a third 50,000 bottles somewhere around October 18th. Breaking that down, the pace would be 13 weeks for the first 50,000 and 6 weeks for the second. That is decent growth, but not blockbuster. The pace we want to see is the 4th installment of 50,000 bottles ordered somewhere around November 15th, and a 5th order on December 6th, and a sixth order at the end of December.

If you are not keeping score, here is what we have:

Q2 - 50,000 bottles generating $10 million in gross sales

Q3 - 50,000 bottles generating $10 million in sales

Q4 - 200,000 bottles generating $40 million in sales

There is a distinct possibility, depending on sales pace, how warehouses order from Eisai, and how Eisai orders from Arena, that Q3 can generate 100,000 bottles instead of 50,000. That could take the Q4 totals down to 150,000 bottles. Why do I bring this up now? To outline what I feel are reasonable expectations and inform investors of a dynamic that could impact the perception of sales.

If Q3 has 100,000 bottles ordered and placed, it will demonstrate quarter over quarter sales growth in an "easy-to-read" fashion. That same dynamic could impact Q4. Essentially we would see stepped growth from 50,000 to 100,000 to 150,000. If Q3 has a 50,000 bottle order placed, it will imply flatter growth with a surprise to the upside in Q4. These are the types of things that savvy traders understand. These are also the dynamics that can be played out in the press in either a positive or negative light. Understanding this now gives you an advantage. What could foil all of this "interpretation" would be Eisai and Arena outlining realistic expectations on sales levels to the street. As yet this has not happened.

While the explanation above may seem long winded, it should serve well for both active traders and longer term investors. Another item to note is that Eisai has started its Direct-To-Consumer (DTC) advertising. This is a modest campaign that simply gets the very basic information out to the public. The ads that have been placed in several magazines are the type that can be referred to later in radio and television ads. If you have ever seen a pharmaceutical ad on television you are familiar with the legal jargon at the end that will close with something like, "individual results may vary, see our ad in O Magazine." The current ads will not drive the script numbers in an immediate fashion. They are not really designed to do that. They will be accretive over time, especially as more robust advertising starts in the weeks and months ahead.

The charts below track IMS Health and Symphony Health sales data on an adjusted basis with comparisons to $150 million in gross sales by the end of 2013 and $70 million in gross sales by the end of the year. It has been suggested by some readers that I recalculate the $150 million line to show exponential growth further out. I prefer to leave the line "pure" so as to measure where goals were just prior to launch vs. where sales are actually tracking. I do give running totals, so if you see exponential growth happening later on, you are welcome to model that yourself. Before getting into the data here are the qualifiers:

QUALIFIERS

· The data used are from IMS Healthcare (orange). This company reports numbers each Friday.

· I adjust the IMS data up 30% to account for any underestimates that can arise for a number of reasons.

· Another company, Symphony Health, also tracks sales data. It typically comes out later in the day, and after the sales data from IMS have carried their impact on the markets. I track Symphony data, and I adjust it up by 20%. I'm adding a Symphony data line (in green), though it may be one week trailing due to the timing (unless Symphony releases prior to submission of the article).

· The tracking blue path is a model on how Eisai (ESALY.PK) can arrive at $150 million in gross sales by the end of the year. More realistically, in my opinion, sales are pacing toward between $40 million and $60 million (gross) by the end of 2013 and the $150 million goal will not be met. Analysts like Leerink Swan and Jefferies (yellow line) are likely in the right neighborhood on their respective gross sales expectations, though currently the sales pace is trending below that line as well. It is important to understand that gross sales is the sales number prior to discounts and adjustments. The blue lines track Eisai's "hopeful aspirations" goal, not Arena's goals.

· The charts have an "analysts' expectations" line (depicted in yellow). This line now tracks to $68 million in gross sales by the end of the year. In theory, $68 million in gross sales will pay out about $10 million in "royalties" (percentage of net sales) to Arena. I use an average net script price of $100. In the most recent quarter the average prescription was $82. I'm adjusting upward (to $100 per bottle) because the weight of free trials should improve as the next 6 months pass. The analyst line represents what sales would have to track to get to the $12 price target that it has 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 as well as the yellow analysts' model.

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

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

This week the IMS scripts came in at a bit over 3,800. This represents anticipated positive week-over-week growth, but falls short of delivering a "wow factor." As stated in the qualifiers, I adjust the weekly number up by 30%. My adjusted IMS script number is just over 4,969. On a non-adjusted basis Belviq has spent 8 weeks in the 3,000's.

The chart below illustrates what I have been cautioning readers about with regard to flatter sales. As you can see, the current adjusted script pace is now below the yellow analyst line that would, in theory, generate a $12 price target (according to analysts). Scripts are also pacing well below the blue hockey stick model (illustrating an exponential type growth) that would pace Arena to $150 million in gross sales by the end of this year. It should be noted that my adjusted total scripts to date is above the analyst line and just below the hockey stick line. The reason for this is that the initial 8 weeks of sales were above both the hockey stick and analysts lines, and the initial 12 weeks were above the analyst line. With current pacing, the running total on scripts will fall below the analyst line in the next 3 to 4 weeks.

(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 $40 to $60 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. It is important to note that the current pace is tracking below this. Thus, in theory, these analysts may well adjust their models at any given point in time.

(click to enlarge)

Investors need to bear in mind that Arena is paid based on net sales, not gross sales. My analysis is that based on a $199.50 per bottle gross sales figure it would take about $68 million in gross sales. I then apply a $100 per bottle net figure to the number of scripts sold to calculate a running total on theoretical revenue to Arena. Investors should note that Arena and Eisai recognize revenue when the wholesaler buys the drug, not the consumer. The data in this chart is reflective of consumer purchases of Belviq.

This week scripts were up 15% from last week. The pace of sales is demonstrating that it will be a difficult challenge to get 2013 sales figures to the levels that the more bullish analysts have outlined. This does not mean that it cannot be accomplished, but the odds of accomplishing $70 million in gross sales in 2013 gross are diminishing as each week passes. On the positive side, with advertising starting, the potential for a more exponential type growth curve does exist.

I want to reiterate that investors need to remember that there is an active traders dynamic to Arena and weekly scripts as well as sales pace play a major role here. When script numbers are low, the equity will suffer. At this point, to correct the trajectory we need to see a huge improvement over last week. The data now show that adjusted sales have fallen below the analyst line. There is longer term potential that still exists, but it is reliant on getting insurance coverage and direct to consumer advertising ramping up. With DTC ads now beginning, the insurance issue is a big one.

Essentially we are looking at the early indication that sales for 2013 are likely to fall short of analysts and street expectations. This does not mean that the longer term is a failure. It is, at this point, a game of patience vs. perseverance vs. insurance vs. physician education and acceptance vs. consumer traction.

Summary

· Weekly IMS numbers are up 15% week over week

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

· The current pace is tracking below the analyst line

· Current unadjusted IMS sales are at 40,200

· Current 30% adjusted IMS numbers are at 52,260.

· Estimated YTD gross sales (to consumers) is $10,425,870*

· Estimated YTD net sales (to consumers) is $5,226,000*

· Estimated YTD Arena share (from sales to consumers) $1,646,190*

*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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Pfizer Looks Good Despite Disappointing Eliquis Sales

Pfizer (PFE) developed Eliquis in collaboration with Bristol-Myers Squibb (BMY) and was approved by the FDA in December 2012. Sales estimates expected the drug to reach $4 billion in 4-5 years but the results were disappointing, with just $12 million in sales during Q2 2013. Nevertheless, I shall discuss why this drug still holds promise and why Pfizer is particularly poised to gain from Eliquis.

What Is Eliquis?

Eliquis, commonly known as Apaxiban, belonging to the family of anticoagulants, prevents the formation of blood clots especially in patients who have had elective hip and knee replacement surgery. It is also used for prevention of clots in patients with atrial fibrillation (heart rhythm disorder) thus, lowering the risk of stroke.

The drug is a major achievement as it can be used in both short and long term treatment of Venous thromboembolism. It will give Pfizer a major boost in its revenues after it saw some decrease in sales initially due to the loss of Lipitor's patent, the company's famous blood cholesterol drug.

The impressive study

Researchers proved Eliquis' worth with the successful completion of its 3rd phase of clinical trial for the treatment of deep vein thrombosis. The study conducted on a sample size of 4,808 nonvalvular atrial fibrillation patients revealed that Eliquis matches the standard utility of age-old anticoagulant warfarin.

It can be successfully used for treatment of venous thrombosis ((VT)) and pulmonary embolism (PE) without constant surveillance and dietary restrictions as in the case of warfarin. It also showed reduction in cases of major bleeding in contrast to usage of warfarin and heparin, another blood thinner typically given to warfarin patients in the early part of treatment.

What is Venous Thromboembolism?

Typically, deep venous thrombosis refers to the blood clot in veins which, if in case breaks away, goes to the heart and ultimately to the lungs causing pulmonary embolism. In the U.S. around 900,000 people suffer from this fatal condition every year, according to the Centers for Disease Control and Prevention in Atlanta.

In October, last year, Pfizer and Bristol-Myers Squibb entered into a joint agreement with Portola Pharmaceuticals to advance the scientific understanding of the role of PRT4445 as a potential antidote for Eliquis. The drug was developed in a joint venture by Pfizer and Bristol-Myers Squibb. It helps to reduce the risk of bleeding that is associated with anticoagulants like Eliquis.

A competitor that dropped out of anticoagulant race

Merck (MRK) gave up its oral anticoagulant betrixaban as the drug did not satisfy questions about its efficacy. Moreover, competition for Pfizer and Bristol-Myers Squibb may have forced Merck to give up on its anticoagulant drug as well. Merck had paid $50 million to Portola way back in 2009 in hopes of developing cardiovascular drugs. Certainly, the loss of betrixaban hit Merck pretty hard. If Merck had met all the milestones, it would have struck a deal worth $420 million with the help of the oral anticoagulant.

Conclusion

With a market cap of $188 billion and an enterprise value of $189 billion, Pfizer is one of the largest companies in the world. However, the company is walking in overvalued territory with a PEG ratio of 4.29. To make up for this, the company has a good revenue figure of $57 billion.

The company's 5-year average dividend yield is 4.40%, which is on the lower side but is good for those who want to save on taxes. With an operating cash flow of $16 billion, Pfizer has enough money to develop newer and more effective drugs that will generate profit and revenue for the company.

Eliquis is not an early entrant in the market as Pradaxa and Xarelto, due to which it saw its sales lagging. Recent studies about the drug's relative safety over its competitors will likely boost its sales. Moreover, Eliquis can also be used for other conditions as I have described above.

All these factors boost investor confidence and brighten long-term sales forecasts for Pfizer. Besides this, there is a major strategy chalked out by the company to lift the sale of its off-patent drug Lipitor with its projected sales pegged at $3 billion. Pfizer stock is definitely going to be one of the more interesting and promising big pharma stocks.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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...)

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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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