Arena Pharmaceuticals (ARNA) announced today that the sales force for the anti-obesity drug Belviq will double by December of this year. That news spurred the equity, which shot up 5% on the news. The press release today was confirmation of the speculation I covered two weeks ago, where it was outlined that the sales force would increase to over 400 in a combination of new company reps as well as contract reps.
While many investors are celebrating the confirmation of this news, there are some important dynamics at play that we should take a moment to focus on.
Insurance Coverage
The press release issued today spoke to insurance coverage. This is a point that I have been harping on for quite some time. The reason I see the news today as important is because it indicates that Arena partner Eisai (ESALY.PK) is seeing traction here.
"Eisai is deeply committed to launching innovative therapies with strong support from the payor community. The expansion of our sales force demonstrates the success we have gained in discussing the potential value of BELVIQ in chronic weight management within the payor community, and the subsequent agreements we have reached with many of our payor partners. We are in very active and productive discussions with other major payors and fully expect the reimbursement landscape will further improve as we head into 2014."
It is no secret that Belviq is expensive for consumers. Eisai, knowing that insurance coverage was a challenge, offered up a free trial and discount cards right from the start. That was good business practice. Yes, it hurts the bottom line, but the big prize was getting people to try the drug. Success stories will bring in more patients.
As we move forward, insurance will become more and more of a focal point. If insurance companies cover Belviq, the out-of-pocket cost to consumers becomes less. The key is getting to a point where consumer acceptance of the out-of-pocket costs is at a peak. We have not yet seen this happen, and in simple terms, will not see that for quite some time yet. Therein is the potential.
What we have not seen yet with Belviq is an inflection point in the sales curve. In point of fact, we have not seen it yet with competitor Vivus (VVUS) and its anti-obesity drug Qsymia either. Yes, Vivus saw a spike in July, but that was due to the product becoming available in retail pharmacies for the first time.
Essentially, what we want to see in this sector is consumer pull that is equal to or greater than Eisai push. With a lack of insurance coverage, the Belviq story has been Eisai push. More insurance will translate into better affordability, which will translate into more consumer pull.
Phase 1 of the insurance landscape is getting insurance companies to add anti-obesity to their respective formularies. Phase 2 will be getting anti-obesity medications into better tiers of coverage. Ultimately, the number of patients that will try an anti-obesity medication will increase substantially if the out-of-pocket cost can get to $50 or below.
One caution here is that we, as investors, have no real sense yet as to what type of discounting from the $199.50 wholesale price (if any) Eisai is making for insurance companies. By example, Eisai is offing consumers a $75 discount. It would make business sense, if possible, to offer an insurance company $50 to gain coverage. It will take quite some time to see the cost flow through to the financials, but it is something to keep in the back of your mind, as any discounts bring down the net revenue, and Arena's share of sales is based on net sales and not gross.
Calling The Bottom
In my last few articles I have hinted that it appeared that Arena could be near a bottom. There are still many factors to consider, but the reaction on the press release today would seem to indicate that perhaps a bottom, as suspected, has indeed been formed. That does not mean that there is no risk to the downside. What I am seeing is that the downside risk has been substantially mitigated. As long as we see decent growth in sales and refills, this equity should be able to hold the line and shift to a more positive trend. In my opinion the missing ingredient now is Eisai and Arena setting a reasonable sales bar to frame expectations in the correct light. If this happens it can temper volatility and allow for more consistent price movement along trends.
Lastly, as stated earlier, we have yet to see an inflection point in the anti-obesity space. That means that potential exists. In my opinion the inflection point will happen when the average out-of-pocket script price to consumers approaches $50. It will take several months of diligent work with insurance companies to get to that point, but when/if we see that inflection, it will be a very positive catalyst for the equity for several quarters thereafter. If I had to venture a guess as to the inflection point I would say that it would be a late 2014 event at the earliest, unless there is a "viral" consumer event prior (i.e. a Dr. Oz or Oprah "backing").
Summary
With consumer advertising beginning, a larger sales force, and insurance company traction, there is a lot to be positive about. Do not look for overnight success here. This equity is like the drug. It is a process that takes time. Pay attention to the pending Q3 conference call and whether the company sets the framework of expectations. 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 Eisai or Vivus
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