More Reasons Arena Shorts May Have It Dead Wrong
Jun 13 2013, 18:00 | by John Reisman | about: ARNA
Jacob Smith's article: 'Why The Newest Short Thesis On Arena Is Dead Wrong And Should Be Ignored' was a good article that inspired me to look deeper into the 'new' short story.
Arena Pharmaceuticals (ARNA) has been through a series of normal and not so normal influences between the bulls and the bears. The fact that an officer's name (Wesley Day) from competitor Vivus (VVUS) showed up in documentation sent to the DEA, which may have contributed to the long delay of label approval, seemed not so normal.
Jacob Smith reported in his article that the shorts have a new story.
"While initial script and sales numbers might be good or even great, ARNA shares will come crashing down once refill rates plummet due to lack of efficacy."
And that story is worrying longs. Yes, it is a red herring, but it is also a straw-man styled appeal to emotion argument designed for the 'house of horrors' of investing.
Let's look at the short argument:
"initial script and sales numbers might be good or even great"
"ARNA shares will come crashing down"
"refill rates plummet due to lack of efficacy"
But what is this rumor based on? It turns out not very much.
The data collected during Phase I, II, and III trials gave indication of how much the churn might be. Those numbers were calculated based on phase trial results and analysis to evaluate potential for Belviq sales.
The key questions for Arena investors are:
Question: Why would the churn rate be significantly different than predicted based on the analysis of the evidence in the trials?
Answer: There is no evidence to support 'extreme' lack of efficacy beyond what the trials and analysis indicate and those numbers are calculated into the sales and growth plan. Nevertheless Eisai and Arena will be watching the data carefully to learn more as Belviq is tested in the real market.
Question: Why did a Seeking Alpha writer say on May 10, 2013 that Arena is a short down 22% ($6.24), then it's a strong buy "after the first quarter sales hit the street"?
Answer: Possibly because the writer is short the stock (as was indicated on his article: Belviq's Sales Will Disappoint: Demographics Matter). But apparently the writer was not short the company. Otherwise why would he say it's a buy at $6.24?
Question: Eisai (ESALF.PK), using the data from the Belviq trials, Eisai/Arena have projected sales and churn and estimates $150 million in sales by December, 2013. Why?
Answer: Because that's what the data indicates is reasonable for the sales of Belviq based on their analysis and the ability/experience of Eisai to deliver Belviq to the market.
Now, if the data is correct, and the churn is as expected, or even reasonably close to expectations based on the actual data that would indicate that this new 'short story' is simply wrong.
If this short story is wrong, then this is a great opportunity to buy shares from those that may be shaken out by 'scary stories.' Simply put, Arena, with Belviq, is indicated to be a very strong story, with a great pipeline, with an entirely new drug type.
I try not to watch the message boards myself because there is often too much hype going on with longs claiming it will be through the roof soon, and shorts saying it will hit the ground soon.
Question: What is the 'real' story with Arena?
Answer: It has a unique technology that has a very attractive pipeline that looks to manifest in multiple new treatment areas that are needed by doctors around the world to solve unmet medical needs.
Question: What should/might Belviq sales look like?
Answer: Look at the numbers Eisai/Arena has calculated/guided for expected sales.
June 2013: $2,000,000
July 2013: $6,000,000
August 2013: $12,000,000
September 2013: $19,100,000
October 2013: $27,300,000
November 2013: $36,600,000
December 2013: $47,000,000
That's $150,000,000 in estimated sales in only six months.
These numbers may be somewhat liberal, or conservative. Since these numbers are based on analysis of data rather than whims or guesses, I am assuming they are pretty much a reasonable estimate. Eisai is certainly an expert in such estimation and overshooting estimates only sets a company up for disappointment. There is no reason to overestimate.
If you were to freeze the growth in sales in Dec. 2013 (10%) one year of sales would be:
$517 million might be too liberal? Here's what the one year sales would look like if sales advance on 1.25% after December 2013:
Well, $444 million isn't too shabby either.
If you estimate the sales with the pacing in the first 6 months for a whole year of sales it looks like:
So why are the shorts pushing a disaster scenario? If I were to guess, maybe it's because they are short the stock and now realize they need a way to chase away the longs? It's an old story, and anyone that's been trading for a few years or more has seen this before. As investors, the best we can do is investigate, study, learn, and weigh our risk/reward ratios based on the value we see in the best data available.
Back in that little place called reality, no one knows the future. Will Arena be a blockbuster? We invest based on the research we do. What is any stock really worth depends on many factors. We each make choices based on the information we find and hopefully we do a good job. For me, I go with what the data tells me based on the profile of potential, not scary stories that are based on someone's guess. But if you have a long-term view and Arena is a strong buy "after the first quarter sales hit the street," then why isn't it worth buying now?