Replies to post #98238 on Biotech Values

[tony111]

Jack Lief mentioned in the CC that the cost is very cheap and similar to other small molecules. Its only a 3 steps synthesis process, so I would think the cost will be in single digit % of total sales.

[DewDiligence]

ARNA: I assume this is a fairly novel type of arrangement in terms of the economic structure. Most deals tend to be based on royalties or they are some type of profit-sharing arrangement.

It’s not novel; for instance, the JNJ-ALKS collaboration for Risperdal Consta and the BMY-LLY collaboration for Erbitux work essentially the same way—the only distinction is that ALKS and LLY (formerly ImClone) receive separately itemized transfer payments for the manufactured product, which makes their revenue lines a little less predictable due to variability in the timing of orders.

any guess on what production costs for Lorcaserin will be for ARNA? I'm curious as to what kind of estimate we can ultimately make for ARNA's net profit % on Lorcaserin sales.

We can’t be precise about the % of sales attributable to production cost until we know how Lorcaserin will be priced; absent any clues to the contrary, I would model 20%, which leaves ARNA a pseudo-royalty rate in the low to mid teens. (If there is a royalty on sales that ARNA owes to a third party such as a university, this needs to be deducted from the above.)

Clearly, ARNA’s consequential upside in the Eisai deal comes from the possibility that Lorcaserin can be a big-selling drug. If sales become really big, ARNA’s net profit as a % of sales will not only increase from the step-up in the direct payment from Eisai, but also will widen from having the fixed-cost component of manufacturing spread over more volume, lowering the % of sales that goes toward production.