How Will Arena Perform in 2013?

Ishtiaq is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Last year was a landmark year for the anti-obesity market, and we saw two drug companies get anti-obesity drugs approved. Arena Pharmaceuticals (NASDAQ: ARNA) became the first company in more than a decade to get an anti-obesity drug, Belviq, through the FDA drug approval process. However, Arena was not the only company to get its drug through the approval process in the anti-obesity sphere. Vivus (NASDAQ: VVUS) also received approval for its anti-obesity drug, Qsymia. Vivus, however, decided to enter the market sooner than expected in an effort to capture as much market share as possible.

On the other hand, Arena Pharmaceuticals had to go through the DEA scheduling process, which has taken the launch of Belviq into 2013. However, Belviq has now received schedule IV from DEA and the company is on track to launch the drug in the current quarter. Schedule IV puts Belviq into the category of drugs with low potential for abuse. Belviq is a highly anticipated drug, and it is expected to receive a warm welcome. Market is expecting Belviq to do better than Vivus’s drug, which showed some poor results due to high costs and lower sales.

Arena, on the other hand, I believe is well positioned to launch the drug with success. Arena’s partner Eisai is focused on the successful launch of the drug. The company is trying to avoid a launch similar to Qsymia. The company has developed an impressive marketing campaign, and the sales force is already in place. Qsymia has considerable restrictions on the marketing of the drug due to some side-effects associated with the drug. However, Belviq faces no such restrictions and the company will be able to advertise the drug. Currently, the company is focusing on regions where obesity is a major issue. At the initial phase of the launch, Eisai will target 25K-30K physicians and then slowly expand the circle.

Arena has an advantage on the cost front as well. The company has a production facility in Switzerland, which provides it tax-benefits. Coming back to the U.S. launch of Belviq, I believe the arrangements are complete for the launch of the drug, and it will be out of the door soon. Belviq has an exceptionally impressive safety profile, which will make it a preferred choice of patients. Ugly memories of previous anti-obesity drugs are still fresh in the minds of patients. As a result, safety will be quite high on the list of priorities when patients and doctors make a decision to choose a drug. Furthermore, Vivus faced low sales due to low insurance coverage, and high costs. Recently, the insurance companies have shown a willingness to cover the costs of anti-obesity drugs. As a result, I do not think Belviq will face such issues.

Moreover, I expect the company to launch Belviq in Europe by the end of the year. I think the company will first like to see the reception Belviq gets in North America, and then they will prepare to launch the drug in Europe. An interesting piece of news about the European launch is that the company is also looking at the possibility of launching the drug for children. The company is looking to launch flavored syrup, a chewy pill or a tablet that dissolves in the mouth. If Arena is successful in this attempt, it will significantly increase the target market and enhance future revenues and cash flows.

However, the idea of feeding a pill to children to suppress appetite is not going to be popular with parents and different organizations. The company can face substantial resistance, and it may hurt the overall European operations. Another negative for Belviq can be lower efficacy, which may turn some patients to Qsymia, which has higher efficacy, but an inferior safety profile. The third player in the anti-obesity market is Orexigen Therapeutics (NASDAQ: OREX). Orexigen is also trying to get its anti-obesity drug approved, and the company is expected to enter the market in 2014 if the drug is approved.

Conclusion

Anti-obesity is a massive market with extremely lucrative opportunities. Arena has a very attractive product which can be a massive success. The stock has already returned 375% during the past year, and most of the news is already reflected in the price. However, launch of Belviq will be a trigger for Arena and the stock price will show significant upside movement. I do not expect the stock to show the same volatile pattern it showed last year. I believe the rise in stock price will be smoother. Once the revenues from Belviq start rolling in, the stock will start trading on earnings and real earnings growth potential rather than just news.  


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