There Goes Half of Arena's Market

In quick succession yesterday, trading in Arena Pharmaceuticals (NAS: ARNA) was halted, the Food and Drug Administration announced the approval of its obesity drug Belviq, the company followed suit with a press release of its own, and shares resumed trading.

Those were the most important events for the company -- as witnessed by the 30% jump in the share price -- but they didn't provide the most useful information for valuing the stock. That was in the conference call that followed.

The label says that patients shouldn't stay on Belviq for longer than 12 weeks if it's clear the drug isn't working for them. According to management, 42% of patients in the pivotal clinical trials reached the 5% weight loss threshold suggested by the FDA after 12 weeks. In patients who had diabetes, the fraction responding that quickly was even lower. Just 32% of patients reached that goal.

More than half of the patients who take the drug aren't going to be on it for all that long if doctors follow the label, which is typical for a drug, at least initially. The real-world number of patients who continue after 12 weeks might actually be even lower. At least some of that weight loss is due to lifestyle changes independent of taking Belviq; we know this because patients taking placebo also lose weight. If patients in the clinical trials were more motivated to lose weight than the general population, the weight loss might be lower once the drug hits the market.

That won't be for a while. Arena and its marketing partner Eisai must wait for the Drug Enforcement Administration to rule on the schedule of the drug, which typically takes four to six months to complete. The FDA recommended that Belviq be given a Schedule IV, meaning it has some potential for abuse but that it's relatively low. If the DEA follows suit, it'll mean extra paperwork, but there won't be any restrictions around giving free samples, advertising, or setting up automatic refills of the drug. Besides the initial delay, getting reviewed by the DEA isn't that big of a deal. Teva Pharmaceuticals' (NYS: TEVA) Provigil, Sanofi's (NYS: SNY) Ambien, and Pfizer's (NYS: PFE) Sonata are all Schedule IV dugs.

Arena will manufacture Belviq and sell the pills to Eisai for 31.5% of the net sale price, which increases to as high as 36.5% of the price for annual sales above $750 million. The initial income will have a relatively low tax rate because it's made in Switzerland, and the company negotiated a 10-year tax holiday for the plant. Arena will have to cover 10% of the cost for a post-marketing cardiovascular study and 50% of the pediatric development program.

The company wasn't willing to give the price that Eisai will sell the drug for; I guess there's no reason to tip off VIVUS (NAS: VVUS) , which has an obesity drug that will likely be approved next month, and could launch earlier since it doesn't require DEA scheduling. But later on CNBC, CEO Jack Lief said the cost would be close to that of a Starbucks' venti latte, so figure a few dollars a day.

Ironically, cutting out a daily venti latte would cut around 275 calories and save the patient some cash to boot.

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