Arena Pharmaceuticals' Slow 2013

A review of Arena Pharmaceuticals' (ARNA) 2013 might as well skip the first half of the year because basically nothing happened until midyear.

The biotech's obesity drug, Belviq, was approved by the Food and Drug Administration back in June 2012, but Arena's marketing partner Eisai couldn't launch the drug until the Drug Enforcement Agency made a final ruling on the schedule for the drug.

Controlled substance schedules range from Schedule I to Schedule V. Schedule I are illegal drugs, with the most abusive prescription drugs starting at Schedule II. Belviq is way down at Schedule IV with drugs like anxiety medications that have almost no restrictions and, besides a little extra paperwork, don't affect sales and marketing. I have no idea why it took a year for the DEA to make up its mind about the schedule for the drug, but there was nothing Eisai could do until the agency made its final ruling.

Not that it mattered much
Arena and Eiasi's closest competitor, VIVUS' (VVUS) Qsymia, was launched shortly after being approved in 2012 because it didn't have to wait for the DEA. Typically, the first drug on the market gets the spoils but not in the obesity market. Doctors have been slow to prescribe the new obesity medication.

Source: Company press releases.

While headed in the right direction, both drugs are a long way away from being blockbusters. Heck, they're a ways away from covering the companies' expenses.

VIVUS and Eisai have two fundamental challenges to getting decent sales for their obesity drugs. They've got to convince doctors that the benefits outweigh the risks. It's been hard to get past memories of fen-phen and Meridia, which were both pulled from the market. Prescribing diet and exercise, while not particularly efficacious given the lack of follow-through, doesn't have any unknown side effects.

The companies have also struggled with gaining reimbursement for the drug. In the meantime, they've given deep discounts on the drugs, which hamper the net sales numbers above. Not only will the number of lives covered by insurance be essential to growing sales, but the tier that their drugs are assigned to will be equally important. It's a lot easier to get patients to stick with tier 2 drug with a $10 to $20 copay than a tier 3 drug that typically come with copays in the $50 range.

More competition
Looking forward, Arena Pharmaceuticals is likely to get more competition next year from Orexigen's (NASDAQ: OREX) Contrave, but I don't see that as a major problem and could actually be a benefit in the short term. At this point, growing the entire obesity market is more important than a company getting the most sales. A third voice -- Orexigen's marketing partner Takeda -- talking about obesity drugs with doctors should help expand the market.

Put another way, which would you rather have? An entire $47 million market (based on the third-quarter run rate) or a third of a market that's in the billions?