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Arena Pharmaceuticals, Inc. (NASDAQ:ARNA)

Cowen and Company 33rd Annual Health Care Conference

March 6, 2013 10:22 ET

Executives

Robert Hoffman – VP Finance and Chief Financial Officer

Analysts

Simos Simeonidis - Cowen and Company

Simos Simeonidis - Cowen and Company

Hi, everyone. Thank you for making it to this timeslot on our schedule on the last day of the conference. My name is Simos Simeonidis. I am one of the biotech analysts at Cowen and it’s my pleasure to welcome the next company in our schedule, Arena Pharmaceuticals. Arena is developing a number of compounds from using their expertise in GPCR discovery. The lead program is lorcaserin BELVIQ has been approved by the FDA, and it’s close to being launched in the U.S. for the treatment of obesity. Here to talk about Arena and its programs is the company’s Chief Financial Officer, Robert Hoffman. Robert?

Robert Hoffman - Chief Financial Officer

Thank you. It’s a pleasure to be here. I just hope that I don’t get stuck here with the upcoming storm in Boston. Before I begin, I’d like to point out that I’ll be making forward-looking statements during this presentation. The actual results may differ. Please refer to the Risk Factors on file with the SEC.

We are looking out over 2013 and what a significant year we expect it to be, but let’s just review 2012 for a minute. So, we received FDA approval back in June of 2012 for BELVIQ. Prior to that, we actually expanded our Eisai agreement to include both North and South America back in May of 2012. And then further to that, actually November, we expanded – had additional collaboration, whereby we partnered BELVIQ in South Korea. And then actually beyond that, we partnered one of our pipeline programs temanogrel with Ildong. So, again, very, very exciting year we had in 2012.

Look at 2013 for a minute, we are looking at getting final DEA scheduling hopefully soon. We have additional regulatory milestones. We have BELVIQ. We have it on file with the EU. We expect to hear in the first half of this year, a final decision as well as Switzerland, which is a few months behind that, but also in the first half of 2013, where we are expecting updates on BELVIQ for Mexico, Canada, and Brazil, which is partnered with Eisai and South Korea with Ildong.

Again, clinical milestones updated on BELVIQ for potential combination studies, APD811, APD334, and temanogrel, and we think we are going to keep our business development people really busy with the different things that we have going on. So, again, a very exciting year ahead of us.

Looking back that we really have taken a long-term strategic outlook on how we put the company together. So, looking at our GPCR focus, we focus exclusively on GPCRs. That has benefited us immensely. That’s where BELVIQ lorcaserin came out of and we have things behind it that we’ll talk about all internally discovered, a very powerful engine behind that. In addition to that back in 2007, I’ll talk about a little bit later, we announced an acquisition of a Swiss facility to manufacture our lorcaserin BELVIQ which we finalized in 2008. So, we’ll talk about that a little bit, but again, a very long-term strategic outlook, if you had told me back in 2007 to 2008 whether or not to acquire this facility. I was on the fence, I was supportive of it, but it’s been one of the best acquisitions we have ever done.

So, let’s talk a little bit about BELVIQ and where we are at? So, we are looking to address the significant market of obesity, not only in the United States, but worldwide. It’s a new chemical entity. I will talk about the prescribing information as well and the upcoming U.S. launch. So, again, it’s a significant problem, not only in the U.S., but worldwide. Approximately, 150 million adults in the U.S. are classified as overweight or obese. The medical burden to the U.S. is 10% or approximately 147 billion annually. It’s not just the U.S. problem anymore. I think we have exported it, but I think other countries are doing a good job and unfortunately in the prevalence of obesity. So, worldwide there is 500 million adults that are classified as obese today.

So, in comes BELVIQ lorcaserin, it’s a single agent discovered and developed exclusively at Arena, as I mentioned, it’s a novel agent. It selectively targets the serotonin 2C receptor in the brain, and we believe the mechanism of action is to decrease food consumption and promote satiety. We did a very large Phase III clinical studies, a program where we tested nearly 8000 patients. So, again, we are pretty well validated. It’s been 13 years since a new chemical entity was approved by the FDA. The indication is for chronic weight management for long-term use with a BMI of 30 or greater or a co-morbidity and overweight at 27 BMI. And you see the limitations we use there as well.

So, where are we on the DEA scheduling? Back in June, we got approval by the FDA and they passed on the recommendation for a Phase IV scheduling, and the DEA posted their recommendation of a Phase IV back on December 19, 2012. There was a 30-day common period, which ended at midnight January 18 to go to post those comments publicly disclosed, and now they are in the final stages of addressing those comments, and we expect to see the published final designation anytime now. There is a 30-day period in which there is an effective to lag period. Eisai has requested that to be waived. So, we will see on what happens there.

Again, looking at the foundation the Swiss manufacturing facility, I will talk about. We have been very proactive in putting market collaborations in place. And one of the other things that I think is super-important is the global patent coverage that we have, that we’ll talk about a little bit. So, again talking about this manufacturing facility, we were very forward-thinking, and I can’t take all the credit, because I was on the fence as I mentioned to acquire this facility back in -- we announced it in 2007. We kept the facility going from 2008 until approval by manufacturing generics. So, we have a very skilled workforce over there, that is cohesive, they know what they are doing. They have been through the FDA process, where the facility has been inspected. They are right ready to go. In fact, they have actually delivered the initial product supply to Eisai back in October of 2012, a less than $12 million worth. In addition to that, we actually negotiated at the time of the acquisition, a 10-year tax holiday in Switzerland from the day we first start selling the drug. So, that’s going to be extremely valuable assuming we are successful in selling BELVIQ. That is a very important asset that we have.

In terms of cost control and supplying capacity, there is a large capacity there, and we have the ability to expand it beyond that. So, we are very well set in the manufacturing area, which I think where a lot of companies trip up. So, again, very forward-thinking in thinking about how we put that in place very early on. We have put together I think a very important collaboration with Eisai in terms of the marketing and distribution, not only in the U.S., but again we expanded it in 2012 to include North and South America. And then we looked at a very discrete market in terms of the South Korea and put together a collaboration place with Ildong.

So, how is Eisai preparing for the launch? They have different tools that they are looking at, but certainly the distribution channel that they have in place, it will be available on pharmacies from day 1. Once we get approval and DEA final designation, they have priced it, they think that they believe – we believe too that its unique value to patients, the VAT cost was $199.50.

So, again, picking the right partner, commercialization partner was really important to us and so they have a very experienced sales force that has prior experience with GERD with their Aciphex drug, that’s actually coming up patent this year. So, we have 200 dedicated sales reps working on BELVIQ. We think that’s going to be a huge benefit. I don’t know if you know this, but 70% of our GERD patients are classified as obese, overweight or obese. So, there is a lot of overlap in terms of what the doctors are calling on. In addition, they have strategically set their sales force such that they are going to be in areas where there is high subscribers in patients that will – are classified as overweight or obese. So, we are very much looking forward to this launch.

How are they doing it? They have a three pronged approach. They are targeting the employers to talk about the concerns of the rising healthcare that we have in the United States. They are addressing the commercial payers and as well as the government payers. So, it’s really important. They have a very high functioning reimbursement group of 50 dedicated specialists and actually three health economists as well. And they are out there talking to the different groups already. So, we think that there is going to be a lot of up-tick. We have actually publicly said that they think about 30% reimbursement will happen in the first year and that will ramp up their goal is after three years to have it at 70% of reimbursement. So, again that’s very encouraging to us.

So, looking at the economics of the deal, we announced the deal back in 2010 and expanded in 2012. It was between the two $50 million and $55 million in upfront payments that we received. I think equally important we were able to get the prescribing information from the BLOOM-DM trial that was a trial – a Phase III trial that we did in diabetics to get that prescribing information on the label, so that all the docs and the patient will see that both the safety and efficacy data that triggered at $20 million milestone that we received last year. As I mentioned, we have already delivered the launch supply, at least part of the launch supply and so we received the $12 million payment last year as well. And we will receive a $65 million payment upon the final DEA scheduling.

Looking at the other components of the agreement, from $1 we have received 31.5% of Eisai’s net sales that goes up to 36.5% of net sales of any annual dollars about $750 million. There are some one-time purchase price adjustments that totaled $1.2 billion beyond that and there are some additional regulatory milestones as well. I think equally important is the cost related to CVOT trial. So, these can be very expensive, I know one of our competitors out there in this space talked about their study being approximately $250 million and it gets moved around a little bit. Assuming that ours with the same in $250 million, we would be responsible for 10% of that and Eisai will be responsible for 90% of that. That spans over three or four years. So, again you can see that the economics not only from the sales side, but from the expense side is extremely important. And we’ve put a great collaboration in place. In addition to that, we showed the 50% of the pediatric study expenses, which are less expensive.

So, looking at those things in totality at least on the revenues side, you can see there is a nice example here. If we sell $250 million in annual net sales based upon the purchase price we get 31.5% of that or just under $80 million. There is additional payments, the purchase price payment as well as a milestone payment, which totaled $55 million. And then I always like throw this in if it all happened in the same year that we had DEA scheduling, we would receive approximately $200 million of the first $250 million that they sell. So, again it’s a great collaboration that we have in place. We believe we share an appropriate amount of the economics. And I think this insanitizes Eisai to sell a lot of this, because as you can see in early dollars we are really sharing lot of it, they are insanitized to sell a lot of BELVIQ.

Turning over to Ildong, we announced this collaboration last year. We think again it’s a very discrete market if you look at that a lot of multi-nationals actually partnered with local pharmaceutical companies over there and so we chose Ildong specifically for that we received the $5 million up from payment, we’ll get $3 million upon the KFDA approval. They have talked about a late 2014 launch. Again great economics with this as well, 35.5% to 45.5% net sales in South Korea.

This is another one that I actually fought a little bit back in the early days. We spent a lot of money on our patent portfolio relatively speaking we have a in-house group and you can see the fruits that we are now getting paid off for this, it’s incredible. We have issued patents and pending patents over 96% of the global pharmaceutical sales landscaping the world. This is incredibly important when you are talking to potential partners and collaborators as to what your patent portfolio is. So, it’s reaped incredible benefits.

In terms of the U.S., we have patent coverage to 2023, that’s before any patent extensions we have filed for the patent extensions we expect to go to 2026. So, we think we are well positioned for success. We have the new chemical entity, I talked about in BELVIQ. We have the very established manufacturing which is already in place and actually had produced BELVIQ. We have two important collaborations and we look to add more. And we have limited responsibility I mentioned that 10% of the CVOT trials which are extremely expensive and are important portfolio patent coverage.

Let’s talk what the future holds though. We have in addition to the U.S. we have filed in the EU we filed that back in March of 2012. We received 180-day list of outstanding questions. We have actually responded to that earlier this year. And we are still expecting a final decision in the first half of this year. A few months behind that is the Swissmedic application we filed in July. We also expect a final decision on that in the first half of 2013 as well.

Eisai has prioritized in their expanded area Mexico, Canada and Brazil for filings for approval in 2013 that filing triggers a $500,000 milestone per filing for Mexico, Canada and Brazil. It sounds small relative to the other numbers, but being a finance guy, I’ll take any amount I can get. Ildong is preparing to submit an application in South Korea again they expect a launch in 2014. And we are looking at evaluating all of the markets we have lot of rest of the world that is exclusively on to Arena.

So, moving on to the pipeline, let’s look at what we have beyond that. So, again all these are internally discovered, small molecule, early available. The first one is APD811 for PAH. This is a very hideous disorder that causes artery pressure between the heart and the lungs, the arteries that flow between the heart and the lungs. It reduces life expectancy of five years to (indiscernible) rate of 57%. We think that we have a once a day treatment potentially once a day treatment. We initiated a Phase I dose in October 2012 and we should have data from the full Phase I study later this year.

I mentioned we did a deal with Ildong licensing temanogrel. This is around thrombosis, thromboembolic diseases. They are responsible for additional Phase I study as well as the Phase IIA study. And we will be able to use those studies to move the program forward on our own. They have a license to South Korea.

Beyond that, we have APD334 for autoimmune diseases, including MS potentially. We think we have a beneficial safety profile, selectivity profile. And we think we can hopefully see an improved adverse profile, it’s especially bradycardia which has been tripping up other people in this area. Beyond that we have APD334 which is an S1PI agonist. It’s hopefully a once daily dosing as well. And we expect to initiate a Phase I in the next few months.

So, this is my favorite slide there is only one in here though. We entered the year very well financially, entered the year with $156 million that was before we received a $5 million milestone payment from Ildong for the initiation of their program, initiation of that collaboration. And we are expecting the $65 million from Eisai and beyond that we will have product sales at 31.5% I talked about. So, we are very well financed. I mentioned on our earnings call on Monday that we see no need to finance at this point with the potential cash flows that we have coming from those sources that I just mentioned and that’s even before we look at potential collaborations around the rest of the world. So, again looking at the upcoming milestones we have, we have the U.S. launch of BELVIQ, hopefully soon the EU and Swiss regulatory process continues to move forward. We expect to have a decision on that in the first half of 2013.

Again, updates on Mexico, Canada and Brazil, you can see Eisai is focused on the launch, but they are also focused on their other territories and moving those things forward. I mentioned South Korea and Ildong in terms of getting on the market in late 2014 and updates on the other programs that we have including BELVIQ and potential combination studies and the potential for additional collaborations. Again I mentioned that we have all tools in place with our important portfolio coverage as well as exciting indications that we’re looking not only for BELVIQ but for the pipeline behind that.

So, again I think this is another summary of what we have; we’ve successfully developed our pipeline BELVIQ is proof of that. We have a number of things behind it that I mentioned, but there is a lot of exciting things that I want to talk about in terms of research that our founders working on, Dominic Behan continues to be, amazes me. And we have a vision to balance that spend against profitability. We want to really make sure that we balance those things appropriately in order to be a profitable conscious company in the long-term.

So with that, I understand that we have a breakout session next door. And I thank you for your attendance. Thank you.

Question-and-Answer Session

[No Q&A session for this event]

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