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Executives

Robert Hoffman - Chief Financial Officer

Craig Audet - Operations and Head of Global Regulatory Affairs

Cindy McGee - Investor Relations

Analysts

Joshua Schimmer - Lazard Capital Markets

Arena Pharmaceuticals, Inc. (ARNA) Lazard Capital Markets Healthcare Conference Call November 13, 2012 11:30 AM ET

Joshua Schimmer - Lazard Capital Markets

Okay. I think we’re going to get started everyone. I am Joshua Schimmer from Lazard Capital Markets Biotech team. It’s a pleasure to introduce Arena Pharmaceuticals. So BELVIQ became one of the two obesity drugs approved earlier this year. From Arena we have Robert Hoffman, Chief Financial Officer, Craig Audet, Operations and Head of Global Regulatory Affairs and Cindy McGee from Investor Relations.

So, Robert maybe you want to start with a few prepared remarks then we’ll go and take Q&A.

Robert Hoffman - Chief Financial Officer

Sure. Thanks, Josh and thanks for having us here. We are so pleased to get our drug approved BELVIQ on June 27th of 2012. The first drug approved for a weight-loss indication in 13 year. And so we’re just waiting on DEA scheduling right now. BELVIQ is a product of our GPCR platform technology and we have multiple shorts and go behind it. I think we’ll touch on that the pipeline a little bit later but we have a PAH APD811 for PAH which is in a Phase I Multiple Ascending Dose clinical trial right now.

We plan on initiating the Phase I for APD334 which is for autoimmune indication. And then beyond that we have a pain indication as well. So we are thrilled with that. I don’t think that to tell anyone in the audience here that obesity is a large market. One-third of all U.S adults are classified as obese, two-thirds are classified as overweight or obese.

Significant market opportunity, worldwide it’s a 0.5 billion individuals are classified as obese. So it’s a significant market opportunity for us. We actually are very much ready for the launch. We’ve delivered we announced in our last 10-Q launch supply to Eisai. So we delivered a $11.6 million worth. It’s a portion of the launch supply. So we’ll be ready to launch as soon as we get DEA scheduling.

Eisai has been an excellent marketing partner. They had been able to market successfully two block busters in Aricept as well as Aciphex both of that come in our patent. So they’re really focused on the launch of BELVIQ going forward. The economics are significant to us we get we sell them product and from for the very first dollar we get 31.5% of their net sales not a profit share but net sale, very significant.

So in terms of looking at further down the economics at $250 million in net sale. We’ll get 31.5% of that which is about $80 million plus that threshold we achieved some purchase price adjustments as well as some milestones which another $55 million take on top of that when we get DEA scheduling is another $65 million. So if I do my math right that’s an excess of $200 million on their first $250 million of sale.

So it makes significant opportunity for us. In terms of other opportunities we just announced last week a nice collaboration with the South Korean company Ildong but we received a $5 million upfront payment great economic service as well first dollar on net sales is at 35% and that will ramps up to 45% on net sale.

In terms of other areas that we are moving forward with the European strategy. We did file in the EU in March of this year. I can’t believe it’s for this year but and so we founded the 120 day questions and we are hopeful to get a decision on that in first half of 2013 probably behind that is actually Switzerland as well which is where our manufacturing facility is.

So we filed in Switzerland and we expect a decision on that in the first half of 2013 as well. In terms of financials we adjusted our guidance to and 2012 the $165 million in cash that is not include the DEA scheduling milestone of $65 million and it does include the purchase price excuse me the purchase payment as well as the $5 million from Ildong.

Again we are very well financed and we’ve reiterated that we don’t haven’t need to finance at this time. In terms of upcoming milestones I did mention the DEA scheduling. Again we are very much looking forward to launching this drug with our experience partner Eisai

We will announce the results from the APD811 in 2013 and we expect to go into the clinic for APD334 for autoimmune diseases. Again the EU and the first half of 2013 and we look to partner the drug in another opportunities in addition to North and South America with Eisai as well as Ildong with Korea.

With that I am sure Josh you have plenty questions for us and we’re ready to get started.

Question-and-Answer Session

Joshua Schimmer - Lazard Capital Markets

Yeah maybe we can start on the DEA scheduling and give us a sense and what the potential outcomes on that are and how each outcome determines what you can and cannot do on the marketing front?

Craig Audet

Sure, Joshua. I’ll take that. The, as you probably know there are five different schedules DEA there are schedule one to schedule five. Schedule one is the most restrictive it actually includes all the illegal agents like LSD and heroin where there is no medical application. And that runs all the way down to schedule five. It’s created in terms of abuse potential.

So the any central reacting compound has to assess abuse potential provide that assessment to the FDA. During their review they will agree or not agree with that assessment and then they will provide their recommendation to the DEA. So FDA has recommended schedule four for us. DEA process is a little bit more obscure but what happens basically is they do Eisai to pick assessment of the FDAs review. They publish their designation in the Federal Register for 30 day comment period. They’re going to address some comments and then publish a final scheduling designation. So we are in the process, we’re at DEAs in that scientific review.

So that’s a little bit of background more to your question Josh which is what can and can’t you do with schedule for schedule four. Schedule four is on the less restrictive side of the schedule nearly schedule four, five the requirements are very, very similar and what it means is that there is additional record keeping requirements on the part of the manufacture, the distributors and the physicians. So that if DEA wanted to look to see if there was diversion they have the ability to do so. That’s really the only requirement. There are very few restrictions.

Joshua Schimmer - Lazard Capital Markets

What about things like sampling and promotion?

Craig Audet

So it doesn’t, it does not affect promotion at all. How you can promote the drug. There is a little symbol for a schedule four that you have to put on the logo of the drug and that have to always be present but it doesn’t affect how you can promote and what you can promote. No, this is a effect sampling. You can still, they can still ride a 90 day supply. So it’s a 30 day plus two refills the patient then have to go back to their physician in order to reap that.

Robert Hoffman

Just to get through context Lunesta and Ambien are schedule four drugs. They are very well selling drugs.

Joshua Schimmer - Lazard Capital Markets

Right. So why is there so much focus on this schedule then I guess it seems like it’s a non-issue or not?

Craig Audet

It’s a non-issue other than the timing I think that’s the focus right. So we can’t put the drug on the market or Eisai can’t market the drug until the scheduling process is complete.

Joshua Schimmer - Lazard Capital Markets

Got it. You might have seen VIVUS has gotten off to a somewhat slow start and we used to start slow and then what investors were looking for. How do you and Eisai avoid this way. What’s the right way to do this, what’s the wrong way to do this and how do you avoid those mistakes?

Craig Audet

Just in the middle so we can slide it back and put this we need to. So I think it’s difficult to compare one drug launch to another drug launch. I think some of the challenges that VIVUS have had is that they had to sort of build the marketing organization very quickly they had to get a contract field force up and running and trained and out there establishing relationships with physicians.

They also have the issue of their REMS program. So they’ve got the pregnancy testing they’ve got the mail-order pharmacies. And the so they’ve had to establish themselves it might be a little bit too soon to start rating them on their launch and they might be a little bit more time to really get their feet under them.

In terms of the difference here. I think we have a relationship with Eisai. Eisai has an establishing market organization as Robert mentioned they detailed Aciphex right now for gerd. One of the things you’ll see is that, the gerd patients about 70% of gerd patients are obese or overweight. So there is already an overlap and there is already a relationship that the sales force is going to if you go to market BELVIQ has with those physicians. So they can hit the ground running right there. And then there is no REMS program. So there is less of that hassle factor associated with that. Do you want to add anything?

Cindy McGee

The other thing is we look forward to BELVIQ being available on the shelving pharmacies there male order distribution is not required for BELVIQ.

Joshua Schimmer - Lazard Capital Markets

I guess really heard the idea of having to build this therapeutic category which took me by surprise given how many millions of patients are have obesity and I would have thought that they would be intended to lose weight in all different ways. Given how much they spend on so many other ways to lose weight. But why is a therapeutic category that needs to be built and then how come, do you think you will see more and pull a factor and if so why?

Craig Audet

I think that I’ve heard that term that this category had to be built. I don’t think it has to be built. I think it’s there. I think it have to be solidified. So there are very few prescription product out there right now for weight lose. And so people have diet and exercise they can go to their drug store and buy off the shelf, these off the shelf preparations that work or don’t work arguably one way the other. The physicians don’t have the tools in their own material. So what happens is the patient comes into the physician he doesn’t say anything to the patients about them being away or if they do they tell him they need to diet and exercise more. So I think what you need here is necessarily building the marketplace but it’s solidifying the marketplace around treatments that physicians can hang a hat on and that actually work for patients.

Robert Hoffman

I would add to that to see overall health of patients if they continue to get better but that’s something that you’ll see benefit for. In addition to that I would look to reimbursement and so that’s I think it’s helpful to have VIVUS out there and VIVUS have and I am sure I don’t want to hold this large group working on reimbursement. We know that Eisai has this much a 50 people work on family reimbursement. So it’s very synergistic that I think reagents is working in that area as well.

Joshua Schimmer - Lazard Capital Markets

Given kind of the how you’ve been looking at a relative positing of each drug and relative launch strategies. Were you surprised that how is the speed of uptake of Qsymia and if so does that kind of make you go back and readdress or rethink your own expectations?

Craig Audet

I known that Eisai is watching that launch and they are definitely learning some lessons from it but as I sort of outlined a little while ago a little bit difficult to compare the two. With an organization that sort of just getting their feet under them and I think needs a little bit more time to excel in an organization like Eisai who is up and running and ready to go and actually with this DEA scheduling they’ve had additional time to put measures in place. So it will I think we’ll see them hit the ground running first quarter.

Joshua Schimmer - Lazard Capital Markets

And in terms of the obligations Eisai have I guess Eisai they’ve got four responsibility for U.S promotion what are other R&D obligations on the post approval commitment?

Robert Hoffman

Sure. So, in terms of the cardiovascular outcome study they pay 90% we pay 10%. Then for certain of a pediatric study that’s 50-50.

Joshua Schimmer - Lazard Capital Markets

And how much of the cost of cardiovascular outcome versus on an annual basis what are you thinking the cost for this and others?

Robert Hoffman

We haven’t come up with the final protocol. I’ve heard numbers used between a 100 million and 200 million. So I could expenses from mid 2013 till maybe the study end of 2017 this is fairly minimal.

Joshua Schimmer - Lazard Capital Markets

How do you think about Eisai kind of break even mark given that they have steep royalty f obligations to use? Is there such a thing that’s having two steep royalty obligations then ultimately just makes such a amended for them to hit that they don’t put the resources that they would have or?

Robert Hoffman

Yeah listen I think that clearly with Aciphex coming off patent as well as Aricept coming up patent last year or a year before for a year now. They are clearly motivated to partner to sell BELVIQ and so I think that just motivated them to sell more of it. I mean that’s really what booked down to.

Cindy McGee

Lonnel Coats the CEO of the U.S. subsidiary of Eisai approved them on their Q2 fiscal call. Their Q2 financial call last week and he gave a 10 minute presentation specifically on BELVIQ and said they expect this compound to be one of the most important in the history of their organization like Robert said with Aricept and Aciphex those were they develop those markets into lots list of products. And so they’re really looking forward to BELVIQ really moving in and playing a key role in their organization.

Joshua Schimmer - Lazard Capital Markets

So I guess you’re also talking to the FDA about ways to evaluate the combination of BELVIQ and Phentermine. And it sounds like we should have an update soon. First of all when do you think we’ll have an update and how should we be thinking about this combination versus other combination products that we’ve seen and what is it that you’re trying to get the FDA comfortable with?

Craig Audet

So I think broader picture is that we’re not just looking at a combination with Phentermine. We’re looking at life cycle management in general for BELVIQ and where we can advance the products therapeutic potential. So there are some new indications where we have some initial data that says that the products might be efficacious.

We also are looking at a combination with Phentermine and also a combination with metformin. So, specifically to the phentermine to address your question, we want to make sure that because this is such a difficult space to get regulatory approval that we’ve worked with - likely did by the way like the company did for the complete response letter make sure that we had a plan in place with the FDA upfront that all agreed to and then executed on that plan and then provided the results to the FDA in order to get this approval. We want to follow that path for any sort of a combination or any additional work we do for the obesity indication. So, with phentermine we have a general plan in place, we want to go to the FDA with that strategy, get their input, solidify that plan, finalize it and then we’ll be willing to sort of talk a little bit about and what we don’t want to do is tell you something that we then have to retract a few months later. In terms of timing with the FDA where we see this as a priority and so it is one of the priority for the organization, we can’t give you specific timing but suffice to say we are pursuing it.

Cindy McGee

And on…

Craig Audet

We do.

Cindy McGee

On our conference call last week our CEO Jack Lief outlined our plans for the life-cycle management of BELVIQ as part of our longer-term vision for the company and that we see BELVIQ being an important treatment option as a single agent for the medical management of obesity. And we plan to deliver this around the world for future collaborations like we have with Eisai like the one we announced with Ildong last week for South Korea and then we expect to fill the gap in our pipeline and really broadened the value of BELVIQ through potential combination treatments and for other indications where we think it makes sense like for example smoking cessation and then of course we plan to follow and use our validated platform and our GPCR focus to deliver additional novel products to patients and we see our – how it’s doing this in a profitable manner over time because we’ve limited our expenses through our collaborations like for example we are only responsible for paying 10% of the CVOT. So we are able to then based on the revenue of BELVIQ balance that with making strategic investments in our pipeline.

Joshua Schimmer - Lazard Capital Markets

So, I guess on the tax side of things with manufacturing domicile in Switzerland, how do we think about kind of the sources and uses of cash for the operations and because of the low tax basis, does that – does that domicile the cash X U.S. for deployment at X U.S. how do we think about that?

Robert Hoffman

A nice problem to have stuck in there that we have so much profits. Certainly we have some NOLs that we need to burn through as well over the years again assuming that we get reach profitability. In terms of the overall tax rate we did acquire facility in Switzerland back in 2008 and in conjunction with that acquisition we negotiated a tax holiday, effective tax holiday whereby we are exempt from taxes and majority of the taxes in Switzerland for 10 years from sale of drug. So, in terms of what we believe the overall effective tax rate could be if you look at what Genentech used to pay back in the day of about 40%, you look what Pfizer pays and it’s about 15%, we are hopeful that we can get a lot closer to Pfizer than we can to Genentech. And so this could be a significant transaction, this tax deployment that we put in place but again it’s hard to capturing the profits over there, there is plenty of NOLs and lot of the cash currently resides in the U.S. anyway. And as Cindy has mentioned we have reduced the spend that we have in the U.S. the programs are a little bit earlier stage so that the spend will be manageable going forward.

Joshua Schimmer - Lazard Capital Markets

Got it. May be I’ll just see if there are any questions in the audience or I kind of continue to go forward. May be updates on how you are thinking additional X U.S. partnerships?

Craig Audet

So, we look at this sort of three different ways in terms of partnerships, in one case we will do like we did we are doing in the U.S. and EU where we take the drug all the way through the registration process and then partner on approval. In other cases like we did with Ildong we’ll look at sort of specialty markets where you need a very specific expertise from a regulatory perspective and from a marketing perspective South Korea being a great example of that and will partner and allow the partner to develop the product in the specific territory or country, register it and then ultimately sell it. And by the way an important point with the Ildong collaboration is that they are responsible for the cost of that all the way through, so that any development studies they have to do the registration and the sales and marketing.

And then the third category are the countries that we look at that where the registration take a little bit longer. So we are - we will start the registration in those countries with an eye towards handing that over to a partner during a registration process. So, we have a partnership with Eisai in the Americas right now, we have that partnership in South Korea that we told you about the rest of the world is ours, we are currently evaluating additional potential partnerships in the EU and other territories around the world. So stay tuned for future announcements on that.

Joshua Schimmer - Lazard Capital Markets

I think we have a question in the back of the room.

Unknown Analyst

Yes, two questions, one is it likely given the recent headline news about VIVUS in EU that require other voluntary or mandatory REMS program in EU and is that would that be a country-by-country one or would that be a pan EU REMS, if they deposit on which one they would require? Second is the specialty pharmacy, have you guys gotten feedback from doctors who surveys whether having the drug on the shelf when you go to Walgreens or CVS is an advantage to getting a drop shift from the specialty pharmacy. And could that lend to an advantage where you guys look like the front-line drug to use and perhaps if there is refractory in this they would reserve VIVUS’s product as a second line sort of nice product?

Robert Hoffman

So, I’ll address the EU first. I think VIVUS had very specific issues in Europe, they had CV issue, the psychotropic or the cognitive issues as well as the (indiscernible) issues. So, those were issues that weren’t able to work out, we don’t have any of those issues, so hopefully ours would be a little bit easier, we did get our 120 day questions and we had three major observations, those three major observations were very similar to what we saw in the U.S. So, we did an extensive amount of back and forth with the FDA and we’ve been able to provide that information to the EU, so we are hoping that will win the day in the end.

In terms of REMS actually new product in the EU now has to have a risk management plan associated with it. So that’s a risk management plan that you put in place to minimize any risks and that’s across Europe, so it’s not necessarily a country-by-country requirement with the centralized process. So we do have a risk management plan in our application, there were some questions on the 120-day assessment report and we address those questions and so we think that, that should go a long way to showing the CHMP that the risk benefit ratio is favorable. In terms of specialty pharmacy you want to talk about that or. Okay.

So, in terms of specialty pharmacy again I think I used the term earlier hassle factor, we see the mail order pharmacy issue as a little bit of a hassle factor for patients and for physicians who have to do additional paper work in their offices to get those prescriptions to the mail order pharmacy. In the end will that be enough of a factor to sway patients from using their drug and going on to our drug, I don’t know, it’s hard to say, time will tell. Personally if a physician handed me a prescription and I’m being in the industry I hate to say this but I’m one who very - say them actually fill the prescription, but if they handed me a prescription and I can go to my local pharmacy and pick it up or if I had to go through the mail order process I probably would not pursue the mail order process, that’s my personal opinion, I think everybody in the room probably has their own personal opinion on that.

Unknown Analyst

Just two questions, first you mentioned that I think $1.6 million of launch supply you guys shift to Eisai, is that right?

Robert Hoffman

$11.6 million.

Unknown Analyst

11.6, okay, all right, I thought that seems low. Is that a cost or how does that - how is your accounting for that work?

Robert Hoffman

So, that was based upon their net sales, so there is an estimated net sales price and based on that we get 31.5% of that and all that is deferred revenue at this point until what actually gets sold by Eisai.

Unknown Analyst

Okay. So, that’s about - actually 11.6 million of actual sales dollars.

Robert Hoffman

But its deferred until Eisai sells it. Yes, right.

Unknown Analyst

But it’s not a cost of goods sort of…

Robert Hoffman

No..

Unknown Analyst

Okay, got it. And then the second one since you mentioned it VIVUS had some issues with people filling scripts and not for getting scripts and not filling them and since you mentioned that fill your scripts either, what you are going to do to counter than and sort of how do you deal with that issue within the launch?

Craig Audet

Well they are - I think that this is really been billed as a reimbursement issue this 30% is strictly due to reimbursement and I think there are many factors that play into people not filling those scripts, reimbursement being one of them and Eisai is very, very focused on the reimbursement. Do you want to talk a little bout that

Cindy McGee

Sure.

Robert Hoffman

Okay.

Cindy McGee

This is another component that is outlined on their call last week, so they are really taking a three-pronged approach to this, they have a team I think of about 50 of our colleagues at Eisai who are focused on this. And so first they are targeting their employers and talking about loss of productivity due to obesity and the comorbid condition. So, starting there they are already having ongoing discussions with the employers, they think these proactive decisions have been very productive to-date, the next step and they have initiated these discussions already as well is with the commercial payers and then beyond that is with the government payers.

So, we do think this is s a work in progress, it’s something that Eisai is extremely focused on and one thing we think is really helpful for this is in BELVIQ’s label there is a 5% reassessment criteria at week 12. The patients are supposed to see their physicians after five weeks, after 12 weeks of treatment if they achieve 5% weight loss they stay on the drug, if not they are supposed to come up and so we think this will help with reimbursement for payers now, they are only paying for responders. And we file in our trial those patients who were able to achieve 5% weight loss that goes, that translates into an average 11% weight loss after one year of treatment. So, we think if the patients are able to achieve that 5% weight loss that we trialed is they are likely to be very successful in BELVIQ treatment and we are hoping that translates into reimbursement. The other factor is in BLOOM-DM study we saw large reductions in HbA1c 29% in the BELVIQ treatment group and that’s why patients – that’s while patients were coming off their diabetes medication, so we think that data will also be very helpful for reimbursement.

Joshua Schimmer - Lazard Capital Markets

Okay. I think we’re going to have to call this to an end, may be any questions we can take offline, like to invite everyone into the Grand Ballroom for our keynote speaker address the chief medical scientist for IBM Research is something like going to tell us how you can build the computer to win on jeopardy, you can build the computer to win on healthcare.

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