Arena's Hard Work Begins
Location: Drendo4u's CAPS Blog Comments
I have been a fan of Arena for years, but the hard work for the company now begins. I’d urge people to use fact-based analysis in investment decisions and avoid the type of hyperbole or fact-free speculation that is the basis for the article above.
It starts with the first two sentences. The statement that Belviq is the first approved weight management therapy in thirteen years is accurate; the next statement, that it is the first obesity drug approved, is not. The fact that Arena “took a huge risk” in re-filing its NDA isn’t relevant. All emerging companies know that a CRL could negatively impact the stock price. Risk is what biotech companies embrace. If Arena didn’t re-file, the company would likely not exist today; risk as it was, resubmission o the NDA was the lowest risk option for Arena. After the last CRL, it raised more cash on the basis that it would re-file, without those funds, Arena would probably have folded.
I don’t know how the author can speak for all investors when he talks about expectations for a 100% increase. Some were most probably expecting more; others less. The conjecture that “Wall Street” somehow managed to “rob” shares is garbage; the author didn’t think through the statements he made in the paragraph that followed. I’ll discuss those thoughts next.
The author states that over 45 Arena million shares were shorted prior to FDA approval; the statement is accurate, but not informative. The bulk of those shares were shorted well before the PDUFA date; the short interest on March 15 was 28 million when shares traded under $2. It was 44 million at the end of April when Arena closed at $2.44. The bulk of shares were shorted when the company traded under $2 to $3. The author appears to contend that institutions, which own around 30% of the float, have two contradictory urges: they believe that the stock price is undervalued and will double; they also believe that they need to bid the stock price down to rescue the shorts. So the share price depreciation after approval was an attempt to rescue shorts, who, for the most part, are stuck at a price well under $4 per share. Even if they got to $4, the 40+ million shorted shares would cover and the heroes that drove the price down would also buy so that they could enjoy the ride back up to $17; after all, benefiting from a doubling of the share price is their apparent goal. Even if these institutions had a goal of triggering stop orders, they still have to sell a significant portion of the assets, assets that, if held, they apparently expect to double.
What’s more interesting is that apparently, these great conspirators started spreading misinformation when trading was halted. To do that, of course, they had to know that an approval announcement was imminent. I’ll run through it again. The author contends that “the reason for them to let the price drop is for the shorts to cover at a discounted price and for institutions to load these precious shares up.” We all know that the way to get the price to drop is to sell shares; so we’re expected to believe that institutions started selling shares so that shorts could cover: shorts who were trapped at under $4,a place where the share price hasn’t ventured in weeks. If the shorts were covering -- buying -- the share price would climb. So, the only way for this conspiracy to work is for institutions, who in fact invested in Arena with the expectation that the share price to double, to sell shares to rescue shorts that can’t really be rescued. It gets better, they’ve presumably now managed to buy back all the shares they sold during the fictive rescue effort and, in some miraculous fashion, have done so in a way that avoided a rise in price. I don't know what's more stunning: the fact the someone would make this claim or the fact that others are expected to believe it.
The beauty about conspiratorial clap trap is that the complete and abject lack of evidence to underpinning the nonsense is, in and of itself, support of the extent of the conspiracy.
There’s more: the author claims that “most analysts are saying that Arena will be bought out within a year.” I’ve yet to find some analysts; in fact, I’ve yet to find one analyst that has made this statement. Someone will undoubtedly make this suggestion, that most have made this claim is nonsense.
The good news is that these “analysts” are likely not part of “Wall Street.” It seems that there were other “analysts” from hedge funds and institutions who were busy talking to CNBC in an attempt at scoring a Pyrrhic victory to rescue shorts. The analysts who are apparently talking about a take-over mustn’t be part of that short-seller-rescue group. You see if these analysts are busy saying that Arena will be acquired by a large pharmaceutical company, well that’s going to drive the stock price up. So we can at least conclude that in this world of conspiracy, financial professionals aren’t a monolith.
The reasoning for an acquisition is weak. Everyone in the pharma industry knows that the bulk of profits are made in the United States. Safety is important to the EMA, but the term “more important” is nonsensical in that it’s not clear what the comparison is about. A large pharma company will act in its own self-interest. Since marketing rights for the Americas have been assigned, licensing the drug in Europe, rather than buying the entire company, makes most sense. If a company were to acquire Arena, it would have to navigate the deal that exists with Eisai; an existing deal in Europe, were one to exist, wouldn’t greatly complicate this effort.
The author needs to review the clinical trials for Qnexa. Some subjects took the drug for two years. Phentermine alone is prescribed for three months. This API is part of Qnexa, but at a lower dose. The drug could be prescribed for the same duration as lorcaserin. Regardless of which drug a subject takes, if lifestyle doesn’t change, the weight comes back. Each of the two drugs is an adjunct for diet and exercise; they’re not replacements.
Articles on both drugs report the results of clinical trials, which are placebo adjusted. In aggregate the placebo-adjusted weight loss for Qnexa was better than lorcaserin. I have certainly read articles that focus in on completers; it's not a group neglected in reports on lorcaserin. From a clinical perspective that information is interesting, but the clinical protocol determines how data are analyzed.
I think that there’s a reasonable argument to be made that an issue lies with the control groups; the Arena control group did better. Each provided the same amount of counseling on things like diet, exercise and nutrition. Arena provided this service over twelve months; in the Qnexa study, subjects received three months of counseling. Arena had a lower dropout rate: counseling often helps motivate people. In clinical trials, per protocol, the last observation is carried forward, LOCF, so that if someone weighs in at 200 pounds and never shows up again, that result at the end of year one is recorded at 200 pounds. If the control group loses about 1 pound a month, after three months, the average subject is down to 197 pounds; after 12 months, its 188. It could be the case that people in the control group of the Arena trial stayed longer, which makes the drug look less effective. It’s all a matter of speculation. The real test of efficacy, now that the drug is approved, will be in the market place. I would be surprised that if in a real world setting, Belviq doesn’t perform at least as well as Qnexa. I suspect that users of Belviq will be more compliant, but we'll have to wait and see.
The idea that the drug can capture 1% of the total potential market is questionable. Only about 2 million obese or overweight individuals receive treatment for the condition. Ten percent of that group is optimistic. The instructions in the label and insert are clear: the treatment should be discontinued if the patient fails to lose at least 5% of body mass within 12 weeks. A more realistic suggestion is that maybe as many as ten percent of people that actively seek a medical intervention for obesity would take this drug and about one third of those people would make it past twelve weeks and take the drug for a year: that produces annual revenues of close to $200 million, which is respectable for a new drug. If insurance can be coaxed into extending coverage for Belviq, Eisai may have a billion dollar drug on its hand. My price expectation of $10 to $12 is predicated on the treatment ultimately getting insurance coverage, which it currently does not have. Finally a 10x multiple on sales isn’t realistic; check out how big pharma (the apparent acquirer) is valued and you’ll see the price is closer to 3x of sales. A 10x multiple would be appropriate for anticipated sales, but there’s no good way to value Arena. One large pharma company with experience in the US market, Eisai, has done so already and it accepted a low-risk deal. The fact that Vivus doesn’t have a partner and Arena has a cash-poor deal suggests an aversion on the part of big pharma to venturing into the world of obesity drugs.
Overall, it’s a poorly written and analyzed article. The drug will likely be successful, but there’s no good evidence to support the expectations of the author about sales. The valuation ascribed to Arena is a pipedream; if Eisai can demonstrate that the treatment is likely to generate about $1 billion a year, then Arena could be valued at closer to $15 to $17.
The time to invest in Arena was in February or March, well before the AdComm meeting. I view Arena as a much riskier prospect today.