Does Wall Street Still Hate Arena Pharmaceuticals?

It's no secret that Wall Street has been betting heavily against Arena Pharmaceuticals (NASDAQ: ARNA  ) both before and after the Food and Drug Administration approved the company's fat-fighting pill, Belviq. The investing thesis is simple and to the point: Belviq sales won't live up to their blockbuster hype. 

Roughly nine months into Belviq's launch, skeptics seem to be correct in their assessment of the drug's commercial potential. Specifically, Arena and marketing partner Eisai (NASDAQOTH: ESALY  ) reported that Belviq only garnered $8.4 million in first-quarter sales, falling well off the blockbuster path.

Despite these unimpressive sales numbers, short interest in Arena has actually been steadily falling, although shorts still hold a whopping 21% of the float. With that in mind, let's look at three reasons why Wall Street is backing off of its bearish bet against this mid-cap biotech. 

ARNA Chart

ARNA data by YCharts.

Reason No. 1
Despite the drug's lackluster sales numbers, Eisai is stepping up its promotional efforts for Belviq and there are signs that it's making progress. Per the first-quarter earnings release, Eisai has made significant headway in expanding insurance coverage for Belviq, which may go a long way toward increasing sales. Many patients had to pay out of pocket when the drug first hit the market, so more insurance coverage should be a boon for them and for sales.

Additionally, Eisai has launched national television ads that should increase awareness of the drug in its intended target market. With many physicians hesitant to prescribe obesity medications due to their history of problematic side effects, I think it's critical for the two companies to focus on a bottom-up approach when it comes to marketing. 

Finally, Eisai is adding 200 more sales reps to support educational efforts targeting doctors and obesity specialists. In sum, Belviq's sales could pick up in subsequent quarters due to these promotional efforts, which might be cause for concern among short-sellers. Time will tell.

Reason No. 2
Unlike many of the other most-shorted biotechs, Arena Pharmaceuticals has an active research pipeline centering around its G-protein coupled-receptor platform that was validated by Belviq's approval. Moreover, Arena and Eisai are making a concerted effort to expand Belviq's label, with a midstage trial for smoking cessation now under way. In other words, Arena isn't a one-trick pony.  

Keeping with this idea, investors should pay special attention to the development of a lorcaserin (Belviq) phentermine combo pill. Such a combo could dramatically improve weight loss and hence demand for the product. To date, Eisai has completed a 12-week pilot study focusing on the combo's safety profile. 

Reason No. 3
Perhaps one main reason shorts are backing off of Arena is that it is financially stable, with $256.5 million in cash at the end of the first quarter. Although the vast majority of this cash came in the form of milestone payments from Eisai, and not from Belviq sales, the company's shares are presently trading at roughly five times its cash position. And with many of Belviq's clinical activities funded mostly by Eisai, Arena shouldn't need to raise additional cash anytime soon. 

Foolish wrap-up
A near-21% short interest is nothing to take lightly as an investor long the stock. That said, Arena's short interest has come down dramatically from where it was at the start of the year. Arena's institutional ownership has also risen substantially following Belviq's approval. Prior to FDA approval, Arena sported an institutional ownership in the low 30% range. It has edged up close to 50% in recent months. 

Looking ahead, I don't see any clear-cut drivers for top-line growth for Arena, unless Belviq sales pick up in a big way. Even so, I also don't see any major downside catalysts for the company, which could be the biggest reason of all why shorts are apparently losing interest in this stock. 

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Read/Post Comments (9) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 09, 2014, at 6:13 PM, marp11 wrote:

    lets see

    MF BASHES KERX...IDIX NOW ARNA

    we are rich

  • Report this Comment On June 09, 2014, at 6:14 PM, marp11 wrote:

    IDIX

    KERX

    now ARNA

    please keep hating

    we are rich

  • Report this Comment On June 09, 2014, at 6:21 PM, billcatedit wrote:

    No mention here of Canadian, Mexico, and Brazilian approval submissions. Eisai will be submitting approval for China and Japan this fiscal year as well. Oh yes, Arena Pharmaceuticals and CY Biotech entered into a Marketing and Supply Agreement for BELVIQ® (lorcaserin HCl) in Taiwan in July 2013. And..Arena Pharmaceuticals established BELVIQ® (lorcaserin HCl) Marketing and Supply Agreement with Ildong Pharmaceutical for South Korea in latter 2012.

  • Report this Comment On June 09, 2014, at 9:53 PM, Foreeverlong wrote:

    Increased insurance coverage for Belviq, let alone the potential of combining Belviq with Phentermine makes Arena a no-brainer when it comes to buying the stock. Nothing on the market either now or in the future will compare to the ability of BelPhen to reduce weight.

  • Report this Comment On June 09, 2014, at 10:19 PM, AlanPithy wrote:

    There is not likely going to be a Belviq+Phen combination pill anytime soon. Outside of weight loss clinics where the specialists write Phentermine freely and for long term use, most general doctors don't want to prescribe Phen because it still has some stigma from fenphen, because it as an amphetamine, and because anecdotal data suggests that when you discontinue it, the weight comes back.

    But if the Belviq+Phen combo data shows, say, 10%-15% weight loss in 12 weeks the demand and awareness will grow. Doctors will feel more comfortable prescribing Belviq and Phentermine together for 90 days, and then being able to taper off the Phentermine while keeping a patient on Belviq for weight maintenance, continued gradual weight loss and improved metabolic parameters.

    it is this ability to add Phentermine when needed, as needed, in the dose needed at the time needed that makes the Belviq+Phen combination compelling. If it works well together, the overweight will be able get greater efficacy in shorter time while limiting long term exposure to Phentermine and, ideally, preventing the yo-yo effect common with phentermine driven weight loss.

    Belviq is also shown to significantly reduce blood sugar, risk of conversion to Type 2 Diabetes, and hunger, making it a good long-term maintenance product for the 80 million Americans who are overweight and borderline diabetic. These blood sugar benefits could also make Belviq a go-to drug to reduce glucose levels among overweight diabetics.

    The potential Belviq has to help smokers quit would be an additional plus for ARNA, and might help drive approvals in Europe and Asia in 2016. Just as important though, showing convincing smoking cessation data later this year will help highlight the medical community to the unique safety, tolerability and efficacy profile Belviq offers those with uncontrollable cravings (addictions) to eat, smoke or binge.

  • Report this Comment On June 09, 2014, at 11:05 PM, PhillyDan wrote:

    Way too early to call Belviq a bust. In most patients I know taking Belviq which numbers over 50 people, most have lost significant weight and seen reductions in taking insulin for those that require to do so. This oral presentation at the ADA is another reason why shorts should get out.

    Belviq on it's own provides significant weight loss of between 8-15%+ in the people I know. Phen added as the above poster states will provide that additional tool for Doctors.

    In addition, the traction with physicians is taking hold and ramping up.

    "Lorcaserin Can Improve Weight Loss in Patients with Prediabetes and Reduce Progression to Diabetes in Obese and Overweight Patients

    Abstract Number: 99-OR

    Session: New Developments in Clinical Obesity

    This post-hoc analysis evaluated the progression from prediabetes (defined as either HbA1C 5.7 - 6.4 or fasting plasma glucose 100 - 125 mg/dL) at baseline to diabetes over one year in lorcaserin- and placebo-treated adults on a standardized program of diet and exercise."

  • Report this Comment On June 10, 2014, at 4:30 AM, marp11 wrote:

    15---24% weight loss in 10-12 weeks

    BEL/PHEN

  • Report this Comment On June 10, 2014, at 7:07 AM, adumfraudstain wrote:

    Here's a novel idea for ARNA shorts- how about covering your millions of shares below $2.50? Lol!

  • Report this Comment On June 10, 2014, at 8:02 AM, Shasui wrote:

    Thank your for a balanced article, I believe before FDA approval institutional ownership was only 11%, so it has increased dramatically since that time to over 48%.

    I understand everyone is very interested in Bel/phen and It will definitely lead to significantly more weight loss 12-17% in 12 weeks, mayo clinic. But I don't like the fact that phentermine is a thermogenic. I can see everyone going crazy for it because of how fast they will lose weight.

    I lost 23% of my body weight in 8 months, with just Belviq and very little exercise. Moved from bmi 35 to bmi of 27.

    Everyone has been paying attention to weekly prescriptions but I rather look at the monthly numbers, April was 28k and May totaled 43K, which included Memorial Day Weekend. That is pretty good growth. Lets see if that continues.

    The Approval of Orex's Contrave will be great for the obesity sector. More companies to lobby for insurance coverage and to raise awareness about Diabesity.

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