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Arena Pharmaceuticals, Inc.

Q3 2008 Earnings Call Transcript

October 30, 2008 05.00 pm ET

Executives

Robert Hoffman - VP of Finance and CFO

Jack Lief - Chairman, President and CEO

Bill Shanahan - VP and Chief Medical Officer

Analysts

Alan Carr - Needham and Company

Thomas Wei - Piper Jaffray

Bret Holley - Oppenheimer

Phil Nadeau - Cowen & Company

Jon LeCroy - Natixis

Patrick Moriarty - Fortis

Patrick Moriarty - Fortis Securities

Jim Birchenough - Barclays Capital

Tom Roberts - Noonday Asset Management

Operator

Good morning. Welcome to today's Arena Pharmaceuticals third quarter earnings conference call. Today's call is being recorded. At this time, I would now like to turn the conference over to Mr. Robert Hoffman. Please go ahead, sir.

Robert Hoffman

Thanks, Gwen. Good afternoon, and welcome to Arena Pharmaceuticals third quarter 2008 earnings conference call. I'm Robert Hoffman, Arena's Vice President, Finance and Chief Financial Officer. Joining me on the call is Jack Lief, our President and CEO; and with me who'll be available to help address any questions at the end of the call is Dominic Behan, our Senior Vice President, Chief Scientific Officer and Bill Shanahan, our Vice President and Chief Medical Officer.

After we Jack gives the brief introduction to the call, I will review our financial results for the third quarter and nine months ended September 30, 2008. I'll then again turn the call over to Jack for additional comments followed by a question-and-answer period.

Before we begin, I'd like to point out that we'll be making numerous forward-looking statements during this conference call. Such forward-looking statements include statements about our clinical trials and results, internal and partnered programs, drug candidate pipeline, technologies, financial guidance, assumptions, strategy and other statements that are not historical facts.

Such statements include the words plan, will, believe, expect, promise, potential, intend, or similar words. You're cautioned not to place undue reliance on these forward-looking statements which are only predictions and reflect the Company's beliefs, expectations, and assumptions currently based on currently available operating, financial and competitive information and speak only of the time they are made.

Risks and uncertainties that could cause actual results to differ materially from those described in our forward-looking statements include the timing and outcome of clinical trials, pre-clinical studies and research activities, the regulatory process, the timing and outcome of our partnership efforts, our ability to obtain additional financing from collaborators and investors, whether our assumptions prove to be correct, and other risks identified in our SEC reports.

For a discussion of these and other factors, please refer to the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2007, as well as other subsequent filings with the SEC. For forward-looking statements, we claim the protection of the Private Securities Litigation Reform Act of 1995.

Now, I'd like to turn the call over to our President and Chief Executive Officer, Jack Lief.

Jack Lief

Thanks, Robert. Good afternoon, everyone, and thank you for joining our 2008 third quarter conference call.

On the last quarter we were continued to focus on executing the lorcaserin development program. Our main priority as we move through the currently difficult global economic environment and maintaining high degree of confidence in lorcaserin program, and I'm looking forward to announcing what I believe will be a very positive Phase 3 obesity data from our pivotal BLOOM trial around the end of March.

During the past quarter, the lorcaserin pivotal program has continued to make progress as planned. In BLOOM, some patients have already completed their two-year dosing, and all of the remaining patients in our study are within about three months of completing the trial. While blinded data by its nature is inconclusive and may not accurately or be completely indicative of unblinded results, we are very encouraged by our ongoing monitoring and review of the blinded data in all three Phase 3 trials, BLOOM, BLOSSOM, and BLOOM-DM.

Our review, which is necessarily limited in its nature and primarily intended to monitor the trials to assure patient safety and conduct according to their respective protocols, reveals to us no apparent pattern that we believe negatively impacts the development, approvability or commercialization of lorcaserin. We are excited about the opportunity to review and analyze unblinded BLOOM data in the first quarter of next year.

During the past quarter, our APD125 insomnia program has also continued to progress. Enrollment in the APD125 Phase 2b trial was completed in the third quarter with 744 patients. And yesterday the last patients completed their dosing. We expect to announce top line results in about six weeks.

In December we will also have an R&D day, where we will give you some insight into some very promising earlier stage programs, some of which are generating interest from potential partners. We will also provide an overview of the lorcaserin and APD125 program.

I'll now turn the call over to Robert, to go through the financials before I provide some additional insight into our finances and the current environment, and then provide some additional comments on our programs. Robert?

Robert Hoffman

Thanks, Jack. In the third quarter of 2008, we recorded revenues of approximately $1.9 million, compared to third quarter 2007 revenues of approximately $5 million. Third quarter 2008 revenues included $1.5 million in manufacturing services revenue under our manufacturing service agreement with Siegfried, and $0.4 million for patent activity from our collaborations with Ortho-McNeil and Merck.

All of our revenues in the third quarter of 2007 were from our collaborations with Ortho-McNeil and Merck, and included $2.6 million in amortization and milestone achievements in technology access development fees, 1.6 million in research funding and 0.8 million for patent activities.

In the first nine months of 2008, we recorded revenues approximately 7.1 million compared to the first nine months of 2007 revenues of 14.8 million. Revenues in the first nine months of 2008 included 5.5 million in manufacturing services revenue, under our manufacturing services agreement with Siegfried and 1.6 million for patent activities from our collaboration with Ortho-McNeil and Merck.

All of the revenues in the first nine months of 2007 was from our collaboration with Ortho-McNeil and Merck and included 7.7 million in amortization and milestone achievements and technology access and development fees, 5.2 million in research funding and 1.9 million for patent activities. In the third quarter and first nine months of 2008, we recorded cost of manufacturing services of 1.7 million and 6.4 million respectively.

Cost of manufacturing services are comprised of direct cost associated with manufacturing drug products for Siegfried under our manufacturing services agreement, including related salaries, other personnel costs, and machinery depreciation costs. We did not incur any cost in contract manufacturing services in 2007 because the agreement with Siegfried was entered into in January 2008.

In the third quarter of 2008, research and development expenses were approximately $47.7 million, compared to approximately $32.2 million in the third quarter of 2007. This $15.5 million increase was primarily attributable to an increase in clinical study fees and expenses of approximately $14.5 million as we continued the Phase 3 program evaluating lorcaserin for the treatment of obesity and continued an ongoing Phase 2b trial of APD125, our drug candidate under investigation for the treatment of insomnia.

Also contributing to the increase in research and development expenses, was an increase in total personnel costs of $1.2 million, due to primarily an increase in the number of U.S. research and development employees from 340 at the end of September 2007, to 357 at the end of September 2008. Nearly all the employees added were in the drug development.

In the first nine months of 2008, research and development expenses were approximately $151.6 million, compared to approximately $108.8 million in the first nine months of 2007. This $42.8 million increase was primarily attributable to an increase in clinical study fees and expenses of approximately $38.1 million as we continue the ongoing Phase 3 lorcaserin program, started the APD125 Phase 2b trial, and completed the APD791 Phase 1b trial. Also contributing to the $42.8 million increase in research and development expenses was an increase in total personnel cost of 3.5 million due primarily to an increase in the number of U.S. research and development employees.

Research and development expenses in the first nine months of 2008 included 98.9 million in external clinical fees and expenses. Such external clinical fees and expense were comprised of $77.5 million or approximately 85% for lorcaserin, 9.9 million for APD125, 1.2 million for APD791 and 2.3 million for earlier stage programs including APD916 and internally discovered oral drug candidate for cognition and alertness.

Research and development expenses in first nine months of 2008 included 3.3 million in non-cash share-based compensation compared to 3.1 million for the first nine months of 2007. General administrative expenses totaled 5.9 million in the third quarter of 2008, compared to the third quarter of 2007 general administrative expenses of $7.9 million.

General administrative expenses totaled 21.9 million in the first nine months of 2008 compared to 19.6 million in the first nine months of 2007. The $2.3 million increase is due to primarily to an increase of 1.8 million in total personal cost as we increased the number of our general administrative employees.

Total personnel cost in the first nine months of 2008 included $2.8 million in non-cash share-based compensation compared to 3.9 million in the first nine months of 2007. We extend our partners reimbursements for patent activities, the reimbursements are classified as revenues. Such reimbursements totaled 1.6 million in the first nine months of 2008 and 1.9 million in the first nine months of 2007. At September 30, 2008, we had 76 general administrative U.S. employees compared to 68 at September 30, 2007.

Total non-cash share-based compensation expense was 6.1 million in the first nine months of 2008 compared to 7 million in the first nine months of 2007. Net loss allocable to common stockholders was 56.2 million in the third quarter of 2008, compared to 32.8 million in the third quarter of 2007 and was 177.0 million in the first nine months of 2008, compared to 104.4 million in the first nine months of 2007.

The increase in net loss allocable to common stockholders was primarily due to an increase in research and development expenses, including clinical expenses for lorcaserin, general administrative expenses and a decrease in recognized revenue and interest income.

Cash, cash equivalents and short-term investments totaled 212.1 million at September 30, 2008 compared to 398.2 million at the start of 2008. We earned 6.5 million in interest income in the first nine months of 2008, compared to 43.3 million in the first nine months of 2007.

We continue to follow a conservative investment policy that is focused on principal preservation. And as a result, we do not invest our cash in collateralized debt obligations, auction rate securities or equity securities. At September 30, 2008, we had 74.0 million shares of common stock outstanding.

On October 28, 2008 we receive redemption notices from two holders of the Series B preferred, pursuant to the rights under the certificate of designations applicable to the Series B Preferred. Such holders elected to have all their outstanding shares of Series B Preferred redeemed by Arena on November 13th, 2008.

I will attribute cash reflects our belief that our stock represents a good investment at this time and our confidence in our pipeline in particular the lorcaserin programs. By redeeming the preferred stock for cash we'll also avoid a very dilutive event for our stock holders. As such we are updating our financial guidance for year end 2008 cash. Cash equivalents and short-term investments to total approximately $115 million as represents a decrease from our previous guidance of year end cash of approximately $160 million.

Increases, excuse me the decreases due to the expected redemption in November of all the Series B Preferred in cash in the amount of $55.8 million, which is partially offset by a decrease in planned expenses in external clinical and preclinical study season expenses in 2008 to a range of 120 to 128 million, compared to prior guidance of 130 to 138 million.

Ending 2008 cash does not include 15 million in capital expenditure reimbursements for certain improvement to one of our facilities, which we expect will be a reimbursed us in early 2009. We will continue to manage expenditures on other programs and activities to meet our goal of following the NDA lorcaserin at the end of 2009.

Now, I would like to turn the call back to Jack.

Jack Lief

Thanks Robert. As I noted earlier we are currently in a difficult global economic environment. Overall income with challenges, I believe Arena can successfully navigate this environment by managing our spending, so that we can reach a major milestone of filing the lorcaserin NDA at the end of next year. We have to leave out additional capital, if that's what's necessary. We recently elected to satisfy the redemption of four of our outstanding Series B-1, Series B-2 Preferred stock entirely in cash.

This eliminates a potential very dilutive event and reduces our fully diluted count to about 74 million shares. I would like to satisfy the preferred holders entirely in cash reflects my confidence in our pipeline. And in particular, in the lorcaserin program.

My confidence is based not only on Arena's long term prospects, but also on my expectation that we will have dramatically improved financing partnering opportunities based on short term clinical and regulatory achievements, which include data we see from our two lorcaserin pivotal trails and the filing of the lorcaserin NDA next year.

Although, my confidence in our ability to create long term and short term value is high. I am also cognizant of the current market environment and have implemented certain cross saving measures and will continue to evaluate our spending as the situation dictates.

Continuing with the lorcaserin program, as I noted the lorcaserin pivotal trails BLOOM and BLOSSOM are progressing as expected. Data from BLOOM is anticipated around the end of March and BLOSSOM data, about six months later. We continue to expect the filing of our lorcaserin NDA by the end of next year and we have already started assembling key portions of our lorcaserin NDA. Data from the BLOOM-DM is likely around mid 2010 and is expected to be filed as a supplement to the NDA after lorcaserin is approved.

Lorcaserin's intellectual property position continues to improve. Recently we are issued a composition of amount of patents in Japan bringing to 56, the member of jurisdictions in which we own, issued composition amount of patents for lorcaserin and the early compounds and for methods of treatment utilizing lorcaserin. These jurisdictions accounted for more than 90% of global pharmaceutical sales in 2006, according to IMS data.

Returns of these patents continue at least in to 2023 in most jurisdictions, even without taking it to account any of the available patents term extensions. [Partly] lorcaserin as well as our other programs remains an integral part of our focus. And I believe we are likely to have attractive partnership opportunities. I am confident that the lorcaserin pivotal data we are expecting next year will support additional interest from potential partners and I strong believe and we are capturing in our ability to do the right deal for Arena and its investors. To the best of my knowledge we have the only viable late stage model obesity drug in development.

APD125 our next most advanced program after lorcaserin is and all drug candidate discovered by Arena and being studied through the majority of patients with chronic insomnia. Those who have difficulty maintaining sleep after initial sleep onset. APD125 is completely completing a Phase II b trial. APD125 acts through a different mechanism then currently marketed insomnia drugs. By selectively targeting the 5-HT2a receptor, we believe it blocks one of several CNS activating pathways rather than initiating a general CNS suppressive effect. Because of the different mechanism of action of APD125, we have not observed the side effect generally associated with current approved GABAergic drugs. Through this nozzle mechanism, APD125 has potential to reduce insomnia symptoms and improving sleep maintenance quality.

The Phase II b trial is a randomized, double-blind, placebo-controlled subjective study evaluating the efficacy and tolerability of APD125 in patients with primary insomnia characterized by difficulty maintaining sleep. The trial now fully enrolled with 744 patients is evaluating two doses, 20 milligrams and 40 milligrams and placebo over 14 consecutive nights of treatment. The trials evaluating standard subjective measurement of sleep including change from baseline in number of awakening for sleep onset with primary endpoints.

The Phase II b study is also investigating and validating several sleep quality instruments including a measure sleep quality initially developed with the National Institutes of Health. Although the FDA has a sleep quality endpoint, I am not aware of any drug to-date that has had the data to support such labeling. If, based on the phase IIb results, we've validate one and more these tools that may provide us the opportunities for such a claim in our label and provide an additional factor differentiating APD125 from other insomnia agents.

I would now like to briefly discuss APD791. Arena's internally discovered oral drug candidate intended for the treatment of arterial thrombosis and other vascular conditions. We have completed Phase Ia and Phase Ib clinical trials and have positive data on the safety and tolerability from those trials. As previously announced, despite the favorable Phase 1 data, for now we've delayed any further development as part of our efforts to conserve financial resources and focused on lorcaserin.

Similarly, from our earlier stage pipeline, we have APD916 and H3 antagonist from our alertness and cognitive impairment program. Although, APD916 is on the ready, we believe and we believe holds excellent potential. We’re delaying to file with the IND to around the middle of next year. This is a change from our guidance last quarter, where we stated we would file before year end and initiate a trial second half of next year. The change of course is due to our own going efforts to priorities programs in order to conserve resources.

In addition to APD916, we also have novel compounds being investigated for pulmonary hypertension and autoimmune disorders, as well as other indications. The targets we are investigating for these and other programs include both known and orphan GPCRs. Getting these programs, IND ready but delaying the start of the clinical trials represents part of our lower cost strategy for conserving our resources while continuing to build shareholder value.

Before opening the call to your questions, I’d like to review our expected corporate events over the next few quarters.

We’re expecting to host and R&D day in New York in December. Results from our APD125 Phase II b insomnia trial in December and results from our pivotal BLOOM obesity trial around the end of the first quarter of next year. Results from our BLOSSOM obesity trial around the third quarter of 2009 and filing of a lorcaserin NDA before the end of next year. We’ll also report on the advancement of our partner programs and update you on licensing opportunities regarding programs through out our pipeline.

By focusing on a lorcaserin, strategically managing our pipeline in spending, and by delivering on the milestones we’ve communicated to you. I believe we have the foundation and navigate current tough environment. Although, there would be challenges and difficult decisions, I believe that by taking the course we’ve outlined, we can realize the value particularly over the long term which I believe is contained in our pipeline.

Our corporate values, innovation, integrity, teamwork and excellence remain at the core of all that we do. We will continue to systemically built Arena with a strategic plan that includes, but certainly looks beyond, our next corporate milestone, and focuses long-term on benefiting patients and optimizing stockholder value. Thank you.

The call is now open to questions. Gwen?

Question-and-Answer Session

Operator

[Operator Instructions]. And we’ll go first to Alan Carr with Needham.

Alan Carr - Needham and Company

Hi, good afternoon everyone. You mentioned that I believe I heard you say that you didn’t see any apparent negative patterns in the blinded data from the cancer trial just wonder if you willing to share any patterns that you do see?

Jack Lief

You are asking a good question. You know, obviously what I meant to say was that we see what we expected to see and we don’t see anything that would give us concern regarding the approvability of the study that Bill Shanahan is here Chief Medical Officer, Bill how would respond to that?

Bill Shanahan

I would respond that what we are observing is consistent with, what we know about the drug and the patient population in study. We’re seeing adverse even profiles that are consistent those two parameters nothing to see out of sort there.

Alan Carr - Needham and Company

Okay. Thanks. You know with regard to your cash. You had mentioned I think before hand, that before electing to deal with the preferred stock with cash that you would have sufficient cash through an NDA submission next year, and now you are still giving the same guidance but without 55 million here.

So are you able to save, did you just give yourself enough cushion before hand or are you actually going to be able to somehow knock of that much from here operating cost next year?

Jack Lief

Yeah. We have saved a significant amount of money for both this year and next year, and I think we feel comfortable with that guidance Robert, what would you have?

Robert Hoffman

Yeah. I would agree that in this year along just referring some of the programs there was savings up to $50 million and looking at next year, the thoughts for the lorcaserin program goes down significantly due to the completion of the BLOOM and BLOSSOM data. This is early in the first quarter in mid-year next year so. Thanks.

Alan Carr - Needham and Company

So you're timing for NDA submission was next year, was when?

Robert Hoffman

At the end of next year.

Alan Carr - Needham and Company

End of next year. And you’re confident that you have cash, I am just trying to may be.

Robert Hoffman

We've have had more than 12 months of cash since we are still in our trouble we have more than 12 months of cash based on our current plan to get us to that NDA point and as I said we will manage our cash even beyond that if necessary and this is even without financing new financings.

Alan Carr - Needham and Company

Okay. Thanks very much.

Robert Hoffman

Yeah sure.

Operator

We go next to Thomas Wei with Piper Jaffray.

Thomas Wei - Piper Jaffray

Hi, thanks. A question on, just a reminder when you're ESMB gave you in site into the in term analysis did they tell you directly that the rate of background valvulopathy was in line with your original powering assumption, is that how they worded it?

Jack Lief

Yes. Basically, yeah they are telling us that our powering assumptions were correct and that we have the powering for the two combined trails, will give us the appropriate power to address the endpoints.

Thomas Wei - Piper Jaffray

So when you talk about this blinded look at the data, that falls in line with your expectations should we assume you kind of plotted out all the valvulopathy events on a blinded basis overtime and basically that occurs a, looks linear and b, is basically exactly in line with your original powering assumption?

Jack Lief

I think, that goes beyond what we publicly release, from what I can tell you is that, there is normal fluctuation in echo reads and were not saying anything that inconsistent with, what we could expect to be background, and we have very robust program that is well powered to address the FDA concerns.

Thomas Wei - Piper Jaffray

And then just lastly, for APD125 if this Phase IIb trial is positive does your current plan call for just holding clinical development of that in seeking a partner?

Jack Lief

Yeah. So, we do not plan based on the cash that we have at hand to begin a new Phase III moving to Phase III clinical trials even if ADP125 Phase IIb study is positive. The plan is to electrify this, we do have some preliminary discussions from partners who are who have indicated that they are interested in looking at the Phase 2b study in the data, obviously we let the data speak for itself. And you know and make all decisions at that particular time, but we do not plan on starting Phase 3 studies next year ourselves, based on our financial resources that we expect.

Thomas Wei - Piper Jaffray

And no additional Phase 2 trial necessary?

Jack Lief

That's right. We don't plan on additional Phase 2 trials either.

Thomas Wei - Piper Jaffray

Thanks.

Jack Lief

Pleasure.

Operator

We'll go next to Bret Holley with Oppenheimer.

Bret Holley - Oppenheimer

Yeah, hi thanks for taking the question. I just have a question about your thoughts about your certainly your negotiating position on deals for both 125 and lorcaserin given the cash position. I mean once you actually have the more cash [fluency] and [pre] data in March assuming those positive your going have [brunt] to a fairly significant additional sum of cash, is this a disadvantage do you feel?

Jack Lief

Well, fairly the more cash we have the stronger the position your are in with partners. I think we're going to be in strong position for a variety of reasons. One is that we will not be completely out of cash at that point in time. The second is that I think we have lots of competition among partners, who are interested in obesity compound that’s both effective as well as say more tolerated.

The third element is that of course we've already had some (inaudible) in some part of big Pharma at Arena and have expressed some significant interest in our compound,. So you are right while we will be running low, we are not on empty and I think we'll have opportunities to gain the value that we've created from our pipeline. Did I answer your question Bret?

Bret Holley - Oppenheimer

Yeah. The question I have is what gives you confidence that there will actually be a competitive situation, its -- I mean the cost have all been fairly preliminary I would [cash] on that. I'm just wondering what gives you that confidence?

Jack Lief

Well a number of companies have sent teams of people exceeding 10 up to 15 people to Arena to do pre-diligence on lorcaserin, if they weren't interested they certainly wouldn't some of those -- those individuals as must they had nothing better a deal to come over and discussed this with us. I think the outcome we have typically a briefing session at the end of the several days of dosings and in most briefing sessions where they -- a very frank discussion that’s going on and it’s generally positive.

So I think there is a lot of interest in obesity why shouldn’t there be. And that now we guarantee that we have announced the date of next daily sign, no that’s not the -- that's certainly not my intention to imply that. But my intention is to tell you that, I think there is lot of interest and I think, depending upon how robust the efficacy data is we are going to be able to do a very high quality deal.

Bret Holley - Oppenheimer

And the last question I have. Have you can -- considered doing maybe [agent] only deals for only deals for many of these compounds; its (inaudible) that wouldn’t be a exclusionary to your most partners interest in your worldwide rights that usually its that Asia and then I am just wondering if you consider that kind of approach?

Jack Lief

We are talking to several companies actually -- Asian country, [all] country Asian deals today. And -- so I think there is a lot of interest there, you are right.

Bret Holley - Oppenheimer

Okay. Thank you very much, Jack.

Jack Lief

Okay.

Operator

We will go next to Phil Nadeau with Cowen & Company.

Phil Nadeau - Cowen & Company

Yes many thanks for taking my question. My first question is also on your cash balance. So you just have answered to some of the answers question there; R&D expenses is going to fall off significantly in Q1 and then again in Q3. Could you give us some idea the magnitude that R&D expenses will decrease at those times?

Jack Lief

Yeah. So I'm going to let Robert answer it, but before I do, let me just point out that we typically give guidance on our first quarter conference call in exact in better granularity. We just point out that, this year we’ll be spending about a $105 million on lorcaserin studies and program and next year that’s scheduled to decline to half or less but Robert, do you have some.

Robert Hoffman

Yeah. We have just stated about 105 the range is 120 to 128. So that the balances other programs for this year. Jack mentioned that, 125 we won't be spending any money in order to do Phase 3. So, looking at $105 million for lorcaserin in this year, next year will be less than half what it is this year, with little or no spend at all on the other programs we have in development or earlier stage for external clinical fees and expenses. Does that answer your question?

Phil Nadeau - Cowen & Company

Yes, I think so. So, is it safe to assume that the other $120 million to $130 million in expense you're incurring this year will mostly go away next year?

Robert Hoffman

The external expense line, if you use a midpoint of $124 million. Yes. I mean again if it's less than half for lorcaserin which is $105 million this year and little or no spend on the other programs. That's a safe assumption.

Phil Nadeau - Cowen and Company

Okay. And your comments on the blinded data from the BLOOM trial. In that blinded data were you able to see weight loss figures or were you just looking at adverse event reports?

Jack Lief

You know, we do see aggregate weight loss figures. So we see what the entire cohort, the entire population loses in an aggregate fashion. And as I said we believe we are going to have a very effective, very potent and well tolerated compound.

Phil Nadeau - Cowen and Company

Great. Thank you.

Operator

We'll go next to Jon LeCroy from Natixis.

Jon LeCroy - Natixis

Hey, thanks for taking my call. Hey, can you quickly run through your income statement guidance again for the year, and then I have a follow up.

Robert Hoffman

Sure. So our guidance right now is $10 million to $12 million on revenue, $77 million to $83 million in R&D internal expenses, $120 million to $128 million on external clinical study fees and expenses. G&A is $28 million to $30 million, CapEx is $38 million to $42 million. And then any cash of $115 million.

Jon LeCroy - Natixis

Okay, thanks. And then my other question is, so what was your R&D employee number again for this quarter?

Jack Lief

I believe it was 357 US.

Jon LeCroy - Natixis

And so if those employees now, I guess once lorcaserin finishes up apparently won't have much to do next year. How easy is it to cut back on those people?

Jack Lief

So as I said. The research people are going to be working on some very exciting targets that we have some pretty good understanding from potential partners of interest in pulmonary hypertension and inflammation among other areas. So those people are not twiddling their thumbs. They're fully engaged in that program.

We've avoided hiring lots of people. We have under staffing meetings all the time to, I field complaints about why we need more people and explain why we're not going to hire them right now. So, as our development, as our clinical trials wind down, those people who are on lorcaserin clinical trials will be focusing entirely on the filing of that IND.

The only other clinical trial that is ongoing right now is APD125, and some of those people will also be flexed onto the lorcaserin program. So, I'm not sure whether I answered your question or not.

Jon LeCroy - Natixis

No, I think that's fine. I don't know what it cost to employ those people, $100,000, $150,000 apiece. It's maybe $40 million, a kind of run rate that can't go away. Am I looking at that wrong?

Jack Lief

Yes obviously, some of our costs won't go away primarily because we believe that we are adding value, our understanding of GPCRs, the cost that we have going on. And I think there's always an opportunity to create more cash via partnering than it's costing us to execute those earlier stage programs. So, again, I think our shareholders would be well served so far.

Jon LeCroy - Natixis

Okay, thanks.

Jack Lief

Pleasure.

Operator

We'll go next to Patrick Moriarty with Fortis.

Patrick Moriarty - Fortis Securities

Hi. Thank you. Most of my questions have been answered. I have a few follow-ups. First off, with respect to lorcaserin, I just want to back up and confirm whether or not you had the actual valvulopathy rate at the 12 month ESMB, and whether you were given any hint as to other safety metrics at that point that you can now compare blinded data to?

Bill Shanahan

What we've got, we did get the background rate, or approximation of it, a very close approximation. So, we needed that for making sure we were appropriately powered. But we don't in terms of the precise rates, we don't know them.

Patrick Moriarty - Fortis Securities

Okay. In terms of other safety metrics, were you given an idea of where they were at, at that time point as well?

Bill Shanahan

What other, I mean what we have.

Patrick Moriarty - Fortis Securities

Anything from psychiatric side effects to any other potential safety things that could come up?

Bill Shanahan

I'll go back to my original statement. What we are seeing is exactly what we'd expect in this population. So, is, as I said, out of sorts. It's exactly what we expect to see.

Jack Lief

But let me add also that I think a couple of earnings calls ago I was asked about seizures and whether we have seen any, and I answered no. Although we don't usually comment on ongoing clinical trials, but in that case I made an exception. So, we just don't see the kinds of events that people are concerned about. And even though the study is blinded, I think that gives us a lot of confidence that we have a well tolerated compound.

Patrick Moriarty - Fortis Securities

Okay. Now, in terms of the cash balance and moving forward with a couple of pretty big clinical trials coming off the books between the Phase 2b as well as BLOOM in the first quarter, could we see a potential discovery type deal as you've done in the past? Is that something that you would look at in terms of raising money?

Jack Lief

Yes. We have some discussions around that, correct. Very perceptive, Patrick.

Patrick Moriarty - Fortis Securities

Okay. Okay. All right. Thank you.

Jack Lief

Pleasure.

Operator

We'll go next to Jim Birchenough with Barclays Capital.

Jim Birchenough - Barclays Capital

Hi, guys. So, you've indulged me on the seizure question in the past, so I'll ask with your overall safety assessment. Other things people worry about are just overall death rates and cardiovascular events. And so, are you saying when you feel comfortable that what you're seeing is that those events aren't occurring at all? Or, they're occurring at a rate that you'd expect in this type of patient population?

Bill Shanahan

They are occurring at a rate we would expect or lower, actually.

Jim Birchenough - Barclays Capital

Okay.

Bill Shanahan

[Splendid] rates is all we can comment on. But the pattern is exactly what we expect.

Jack Lief

Keep in mind, we have over 7,000 patients in these pivotal studies, and we're amazed at how well this is all going.

Jim Birchenough - Barclays Capital

Okay. And I guess the other thing, I'm just trying to understand for the lorcaserin spend that's going to -- that's left for next year, roughly $50 million. How much of that is split between internal and external?

Jack Lief

That's all external.

Jim Birchenough - Barclays Capital

That's all external. So, then of the spend that's internal right now, I guess $77 million to $83 million, what's going to happen with that spend next year? I'm just trying to understand again how you get the comfort from $150 million in cash?

Jack Lief

Well, remember we have $15 additional million coming in, so that's pretty much $130 million. And I think if you do the numbers, you do get there. Robert, do you want to…

Robert Hoffman

Yes, I would say that's true. The spend for internal should… if you think about a constant, that's a good definition.

Jim Birchenough - Barclays Capital

So, the internal spend should still be in that range of $77 million to $83 million next year?

Robert Hoffman

Sure.

Jack Lief

And remember the CapEx goes down, also.

Jim Birchenough - Barclays Capital

Okay, great. Thanks for taking the questions.

Jack Lief

Pleasure, Jim. By the way, congratulations on the transition from Lehman to Barclays.

Jim Birchenough - Barclays Capital

Great. Thanks, Jack, I appreciate that.

Jack Lief

Okay.

Operator

And we'll go next to [Retu Verrall] with Canaccord.

Unidentified Analyst

Hi, guys. I just wanted to ask about the BLOOM-DM trial, and if I understood correctly you're going to submit that package as a supplement after lorcaserin approval? Could you go over the extent of the diabetes safety data that will make it into the original NDA, and especially given FDA concerns about CV risk in this population?

Bill Shanahan

Yes. Well, we exclude people with diabetes from the BLOOM and BLOSSOM trials. So, our diabetes data will come from what we call the BLOOM-DM trial. And we have vetted this with the Agency and they're okay with it. If you read the guidance, it does not require a diabetes trial. Obviously, we would like to collect the data. We're having the same difficulties. To my knowledge, every other company has had in recruiting out of control diabetics into obesity trials. But that's what the guidance requires for the present.

Unidentified Analyst

Can you submit safety data as you go along, even if it's blinded trials?

Bill Shanahan

We could, but I don't think that would be of any use without breaking the blind.

Jack Lief

To our knowledge, there is nothing inherently unsafe about the use of lorcaserin in type 2 diabetics. We haven't seen that in the study so far that's been going on. So, it's just a matter of getting enough patients in to make it a Phase III, a legitimate Phase III study that's dosed over one year. It takes a bit of time. So, I think that's what Bill was saying, right?

Bill Shanahan

Yes. But again, the blinded pattern on this is what we would expect so far. So, we will get some glucose… we will get some glucose metabolic data from our other trials because we do allow people with glucose intolerance into those trials, and we're looking at measures of insulin resistance and glucose metabolism in those trials as well.

Jack Lief

So we're going to have lots of data on pre-diabetics and what some people like to call, although we don't, metabolic syndrome. But, again, these are obesity trials and all of these co-morbidities are improved by weight loss.

Unidentified Analyst

Okay. Thank you.

Jack Lief

My pleasure.

Operator

And we'll go next to Tom Roberts with Noonday Asset Management.

Tom Roberts - Noonday Asset Management

Hi, guys. Congrats on the progress on lorcaserin. Just wanted to follow-up on the question about the number of employees. You mentioned that there are staffing shortages, or staffing shortages meetings, but yet you have more employees than some companies that are profitable and have 10 times the market cap. Where are the staffing shortages and where do they exist?

Jack Lief

So, one could make a decision to outsource all of the work that's involved in development, so there are companies with perhaps a dozen employees that file an NDA, and they outsource everything in that process. So, as part of that outsourcing, I believe that that's a very high risk. It's not necessarily much cheaper, but it's a very high risk strategy, especially in an extensive program like lorcaserin. So, we manufacture our own product, our own finished product. We will manufacture that.

We quality assure -- we have quality assurance for our product. We have quality assurance internal people who are involved in the quality assurance in the clinical programs. We have biostatisticians here and programmers. We have clinical monitors here. We do a lot of the formulation and scale-ups here. So, it's a question of what is it that you want to do and outsource, and how much risk you want to take in that process. Because in my experience, by outsourcing you do acquire capabilities that you don't have in-house, but you also acquire problems that the CROs may have on and they're also short-staffed, and they try and get as much work as they can because they're profit-making organizations, so that's sort of natural for them.

So, in our experience, we've been disappointed by deadlines being missed by CROs and other sorts of issues like that and so we've tried to control and acquire as much control as possible. Along the way, I hear what you're saying and we are very conscious about headcount. We do have a headcount freeze in place. We don't replace people; have not replaced people except if they were critical to the lorcaserin NDA filing and our plans are to carefully control that in the future.

Tom Roberts - Noonday Asset Management

Got it and appreciate that. And then just a follow-up to that. If you cannot get funding through partnerships for the earlier programs, are you committed to shutting those down? And if so, how many people could go if the industry doesn't have the same view of the promise of those programs as does Arena?

Jack Lief

Well, we're flexible. You have to be realistic, especially in this economic time. When Alan Greenspan says that it's a once in a century tsunami that he doesn't understand how it happened fully, that -- you have to take notice of that. So, we'll do what it takes, we'll do whatever is necessary to get across the goal line with lorcaserin, and to make sure that Arena is successful.

Tom Roberts - Noonday Asset Management

Okay, thanks.

Jack Lief

Pleasure.

Operator

And that concludes our question-and-answer session. I'd like to turn things back to our speakers for any additional or closing remarks.

Jack Lief

Thank you. And before finishing I would reiterate that we remain focused on benefiting patients and building long-term stockholder value through the development and commercialization of Arena drug candidates independently and with our partners. Thanks again for joining us on the call today.

Operator

Thanks everyone. That does conclude today's conference. You may now disconnect.

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Source: Arena Pharmaceuticals, Inc. Q3 2008 Earnings Call Transcript
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