2012's Top Russell 2000 Gainer Poised for a Repeat Performance in 2013
Reza is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The first weight management medication approved by the FDA in over a decade will soon hit the USA market. Belviq, by Arena Pharmaceuticals (NASDAQ: ARNA), is a single-molecule novel agent developed in California using an advanced GPCR technology based on a Nobel Prize winning scientific discovery.
Arena’s stock had a stellar 382% Gain in 2012, placing it as the top gainer in the Russell 2000 index. For the reasons outlined below, many investors believe Arena’s stock is poised to do even better in 2013.
SAFE MECHANISM OF ACTION
Years of extensive clinical trials on over 8000 patients have confirmed Belviq’s safety and efficacy. Unlike other weight-loss medications, which have had severe risks, Belviq’s most common side effect is a mild headache for a couple of days. It does not stimulate metabolism nor does it raise heart rate. Instead, Belviq promotes satiety—the experience of not being hungry. Consistent with Belviq's excellent safety profile, the FDA did not require a REMS (risk management) program.
Clinical trials revealed that responders lost an average of about 12% of body weight in a year. Scientists have determined that even a modest 5% loss in body weight has significant health benefits.
Being overweight often leads to an array of other illnesses. Belviq has significant benefits for treatment of pre-diabetic symptoms, Type 2 diabetes, as well as other comorbidities associated with being overweight, such as heart disease and cancer. Data indicates Belviq improves values for biomarkers that may be predictive of future cardiovascular events, including lipid levels, insulin resistance, levels of inflammatory markers and high blood pressure, and significant positive impact on type 2 diabetes patients (0.9% reduction in hemoglobin a1C levels, and 27% reduction in fasting blood sugar levels).
WIDE INSURANCE COVERAGE
Two major insurance companies (Aetna and Blue Cross) have indicated they would cover obesity drugs, and others are expected to follow suit. Arena's marketing partner Eisai has a large team focused on insurance coverage.
Employers and insurance companies alike have an incentive to encourage weight loss because it leads to better overall health and significantly decreased healthcare costs. It is anticipated that Belviq will be covered by most insurance plans, and eventually by government programs such as Medicare and Medicaid.
HUGE TARGET MARKET
Belviq’s potential market is huge. In the USA alone, where obesity is a growing epidemic, one-third of adults are clinically obese and two-thirds are overweight. The treatment of obesity and type 2 diabetes costs the USA healthcare system an estimated $1 billion per day.
Obesity continues to expand throughout the world. The WHO estimated that “in 2008, more than 1.4 billion adults, 20 and older, were overweight. Of these, over 200 million men and nearly 300 million women were obese.” Many investors predict that Belviq will be a global blockbuster. Capturing even a fraction of the potential market means huge earnings for Arena.
DOCTORS EXPECT SUCCESSFUL LAUNCH
One of the many doctors who are predicting a successful launch for Belviq is Dr. Steven Vig, M.D., a specialist in internal medicine in Arizona who has thousands of patients including many obese, overweight, and diabetic patients. Dr. Vig correctly predicted Belviq’s FDA approval in 2012. He is now predicting Belviq’s launch will be a colossal success:
“Patients are calling my office every day asking when the new weight loss pill (Belviq) will be available. Based on current information, we are telling them that it will likely be available in pharmacies in the United States in March of 2013. Eisai will be targeting primary care doctors as well as specialists like endocrinology in their initial marketing efforts.”
Dr. Vig, M.D., anticipates European approval in the first half of 2013. Dr. Vig, M.D., opines Belviq will be a blockbuster drug, and will be used by overweight and obese patients all over the planet, some of which have type 2 diabetes. Later studies will focus on Belviq plus metformin for faster weight loss, Belviq plus phentermine for more weight loss, Belviq alone (the latter for smoking cessation), and pediatric obesity studies. Doctors will be saying to their patients, "GET SLEEK WITH BELVIQ!"
BELVIQ WILL BE APPROVED IN THE EUROPEAN UNION
The European Union is expected to grant marketing authorization for Belviq in the first half of 2013. Belviq meets the EU’s efficacy requirement, and has an excellent safety profile. Arena will then be well positioned to capture the majority of EU’s obesity market. Vivus (NASDAQ: VVUS)'s Qsymia was recently rejected in Europe due to safety concerns. Vivus will appeal the ruling, however I dont believe it will get approved given what we know about the history of Europeans' safety concerns with Phentermine, a key ingredient of Qsymia, due to concerns over lung and heart problems. This rejection was a blow to Vivus investors as Europe provides a major market for obesity drugs.
The EU's regulatory process is complex but a close examination of the EU's EMA/CHMP timeline indicates that at the latest by February 21, 2013 we should expect CHMP's recommendation for approval to the EU unless the regulatory clock stops if EMA has further questions.
BELVIQ’S OTHER USES
Arena has indicated that it plans to conduct trials for the use of Belviq in a variety of other health problems such as smoking cessation and trials in combination with other agents to address additional addictive behaviors.
BELVIQ HAS DISTRIBUTION PARTNERS
Belviq will be distributed in the USA by Eisai, which has marketing rights to Belviq in North and South America. Arena is in discussions with several international partners for making Belviq available in the rest of the world (ROW) including China which has a huge obesity and diabetic problem. The second of such agreements was inked with a large South Korean pharmaceutical, Ildong, which includes royalties, lucrative milestone payments, and research cooperation. Many more deals are expected if Arena is not acquired soon.
ARENA POSITIONED FOR BIG PHARMA ACQUISITION
Most large pharmaceuticals are faced with ever narrowing pipelines due to expiring patents and generic competition. Arena is a ripe takeover target by a Big Pharma acquirer, which could happen in 2013 following initial USA sales figures, but at a hefty premium — not less than $6B or $26 per share (vs. the current share price of $9). The share price could be further boosted prior to final sale by a combination of short squeeze and competitive bidding.
The buyout could also result from negotiations for a EU partner with a global player such as Johnson & Johnson, Pfizer; Roche, GlaxoSmithKline, Novartis, Sanofi, Abbott Laboratories, Merck, Eli Lilly, and Bristol Myers Squibb.
SHORT INTEREST IS STARING AT A BILLION DOLLAR LOSS
Short interest has risen since FDA approval to an astronomical level of 55 million shares. The only rational explanation for this is an attempt to raise their sales basis, believed to be under $5/share. Given the daily volume, behavior of the stock and several strong catalysts on the horizon, we estimate covering the short position could cost the short interest a billion dollar loss.
Any catalyst—like EU approval—could worsen the loss for short sellers. Even if half of their position is hedged by options, the potential loss is still staggering and at a level which has caused some hedge funds to close their doors. Options activity in the next few months should be very interesting as shorts should use their options leverage.
Adding to shorts’ woes is a stream of demand by institutions that sat on the sidelines prior to approval. Strong demand for shares together with limited supply means higher prices. Arena has indicated it has no plans to dilute the shares, given a strong cash position, expected revenues from Belviq and further milestone-payment receivable from existing marketing partner.
Institutional ownership of Arena has increased significantly post-approval to the current level of about 45% of the float. Analysts expect this will increase to 80%. The transfer has to occur from retail investors to institutions. Many retail investors bought Arena under $3 while Arena was under heavy attack by short sellers and like-minded journalists and analysts who were all proven to be embarrassingly wrong when Belviq was approved by the FDA. (The bashers are still at it, repeatedly attacking Arena with the same mantras that led short interest into hot water in the first place, which is where they still find themselves stuck today.)
Retail investors’ prediction of Belviq’s approval was due to solid scientific evidence and the guidance of several medical doctors who were excited about Belviq and firmly believed it would be approved, given the scale and consequences of the obesity epidemic. The FDA sided with the science, not the fiction promoted by short-sellers.
ADDITIONAL REASONS WHY WE LIKE INVESTING IN ARENA
- Arena has a strong pipeline of other potential novel agents based on its proven, leading edge, and GPCR technology.
- Arena’s founder and CEO has not sold a single share since founding the company.
- A strong balance sheet and attractive profit margins.
- A strong intellectual property position.
- Valuation models paint a very positive picture for Arena’s share price (model 1, model 2).
- 10-year tax holiday in Switzerland where Belviq is manufactured adds a delicious “icing on the cake.”
Finally, in 2013, we expect Arena’s shares to beat their stellar 2012 performance, and reward the patient investors handsomely.
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