Short interest in Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) is 28.81% of its float. Shorts have 16.8 days to square their positions, and some of them are already covering, as shown by the 2.91% decrease in short interest. There is a short interest of 62.30 million shares, down from 64.17 million. The short interest ratio is 16.8 days, meaning that based on the average daily trading volume, it will take more than 16 days for short sellers to cover their positions.
The mystery objectors
A report was published in The Financial Times on April 21, 2013. The report talked of how DEA scheduling of Belviq is being held up due to a large number of anonymous people posting their objections with the DEA.
Belviq, and rival product Qsymia of VIVUS, Inc. (NASDAQ:VVUS), became the first obesity drugs to get FDA approval in more than a decade. There were concerns regarding both drugs, but as obesity has become a major issue, the regulator approved them. Qsymia got through with restrictive REMS, the FDA’s Risk Evaluation and Mitigation Strategy. Belviq, however, had to wait for the DEA’s ruling on the drug’s potential for abuse, for which the government agency gives a time window for filing comments. The process is usually completed within four to six months, but in Belviq’s case an unusually high number of comments were filed, which the DEA had to sift through, delaying the final ruling by 10 months.
The intriguing part is that out the 69 comments, 47 were positive and most of them were identified. However, 19 out of 22 negative comments were anonymous -the “mystery objectors.” This stirred up the belief that it is the handiwork of people with vested interests, such as short sellers.
Why short sellers will now have trouble
Another 30 days and the wait is over
The effective date will also bring in $65 million in milestone payments from Eisai, the Japanese company to which Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) has granted exclusive rights for marketing and distributing Belviq in most of North and South America, including the United States, Canada, Mexico and Brazil. This is in addition to the milestone payment of $500,000 received from Eisai on submission of application for marketing approval from the Mexican regulators.
Q1 2013 Earnings
The news of withdrawal of the application for approval from Europe’s regulator was included in the Q1 2013 earnings report. While there was not much of a difference between Q1 2013 revenue ($2.4 million) as compared to the same quarter last year ($2.2 million), it was up 26% from Q4 2012 revenue. There was a substantial increase of 14% in general and administrative expenses on account of increases in salaries, audit and patent fees, but the net result was a reduction in net losses, which was down from $29.4 million, or $0.18 per share in Q1 2012, to $18.9 million, or $0.09 per share.
Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) will sell Belviq to Eisai at a tiered purchase price–31.5% of Eisai’s net annual product sales and 36.5% on the portion above $750 million. It will also be eligible for $1.6 billion in purchase price adjustment payments on the basis of net sales of Belviq.
As of March 31, 2013, the company had $136.3 million in cash and cash equivalents, with another $65 million expected from Eisai. Once revenue from Belviq sales start coming in, it will further ensure the smooth progress of evaluation of Arena Pharmaceuticals, Inc. (NASDAQ:ARNA)’s pipeline candidates for pulmonary arterial hypertension and autoimmune diseases.
Developments on competitor Vivus’ front
A post-hoc analysis – looking at data for patterns that were not specified in the earlier studies of Qsymia – conducted by VIVUS, Inc. (NASDAQ:VVUS)’s M.D., Charles Bowden, shows that patients who lost 15% or more weight after 2 years on Qsymia had the greatest improvement in cardiovascular parameters such as systolic blood pressure and cholesterol (HDL) levels.
Vivus’ Qsymia has been on the shelves in U.S. pharmacies for roughly six months now. Earlier there had been reluctance on the part of physicians to prescribe Qsymia due to cardiovascular risk associated with long term use of phentermine. Cardiovascular risk of Qsymia (a combination of phentermine and topiramate) had not been closely assessed during trials. Improvement in blood pressure and/or cholesterol along with weight loss reduces cardiovascular risk. Data from the analysis bodes well for future sales of Qsymia, as they would allay the fears of physicians to a great extent.
VIVUS, Inc. (NASDAQ:VVUS) is primarily a single drug company and totally dependent upon Qysmia, inasmuch as all of its Q1 2013 product revenue of $4.11 million was comprised of sales of Qsymia.
My take on Belviq
The projected market size for a safe and effective drug like this is roughly $3.7 billion. Despite a good head start, Qsymia sales have been anything but sluggish. Belviq, however, stands a better chance to capture the obesity market as it comes without the restrictive REMS.
The DEA scheduling is a big booster as it paves the way to the launch of Belviq. Belviq is expected to hit the market a month from now. While I do not expect it to be a roaring success soon after it is launched, Belviq has a strong marketing partner in Eisai, which is a big positive for building up Belviq sales.
All these positive indicators are likely to make short sellers run for cover as they would be expecting an increase in investor interest in Arena Pharmaceuticals, Inc. (NASDAQ:ARNA). The evidence is already there – a reduction in short interest and the stock gaining 10% on news of DEA scheduling designation. Arena shares are likely to see further upward movement as more short sellers start covering their positions.
Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) looks good for the short term as well as long haul. I would not wait if I wanted to invest in the obesity drug sector.
The article Shorting Arena Is Not a Good Idea Now originally appeared on Fool.com and is written by Shas Dey.
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