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Arena Pharmaceuticals, Inc. (NASDAQ:ARNA)

Q4 2008 Earnings Call

March 12, 2009 5:00 pm ET

Executives

Robert Hoffman – Vice President of Finance and Chief Financial Officer

Jack Lief – Chairman, President and Chief Executive Officer

Bill Shanahan – Vice President and Chief Medical Officer

Dominic Behan – Senior Vice President and Chief Scientific Officer

Analysts

Alan Carr - Needham and Company

Bret Holley - Oppenheimer

Philip Nadeau – Cowen and Company

Carol Werther – Summer Street Research Partners

Matthew Osborne – Lazard Capital Markets

Jim Birchenough – Barclays Capital

Joshua [Seditus] – PHD Capital

Operator

Welcome to the Arena Pharmaceuticals’ fourth quarter and full year 2008 financial results conference call. This call is being recorded. At this time, for opening remarks and introductions, I would now like to turn the conference over to Arena’s Vice President of Finance and Chief Financial Officer, Mr. Robert Hoffman.

Robert Hoffman

Good afternoon, and welcome to Arena Pharmaceuticals fourth quarter 2008 earnings conference call. I'm Robert Hoffman, Arena's Vice President of Finance and Chief Financial Officer. Joining me on the call is Jack Lief, our President and CEO. Also in the room and available to help address any questions after our prepared remarks are Dominic Behan, our Senior Vice President and Chief Scientific Officer, and Bill Shanahan, our Vice President and Chief Medical Officer.

After Jack gives the brief introduction to the call, I will review our financial results for the fourth quarter and full year ended December 31, 2008. I'll then again turn the call over to Jack for additional comments, with time at the end of questions and answers.

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, plans, and other statements that are not historical facts.

Such statements may include the words may, plan, will, believe, expect, 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 as 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, success, and cost clinical trials, pre-clinical studies and research activities, the regulatory process, the timing and outcome of our partnership efforts, our ability to obtain additional funds 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 our risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2007, as well as our 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

Good afternoon, everyone, and thank you for joining our 2008 fourth quarter conference call. As most of you, we expect to have results from BLOOM, a 2-year trial in 3181 patients evaluating lorcaserin for weight loss around the end of this month. Although the BLOOM data was blinded until shortly before the release date, as we have previously stated, we have been encouraged by the overall emerging profile of lorcaserin.

BLOOM results will be a significant milestone for arena, and we expect it to be followed by two more significant lorcaserin milestones this year. The first is the results of our second pivotal trial, BLOSSOM, in September. The BLOSSOM study is a 4000-patient one year trial. The next event is the submission of our NDA at the end of the year. Important recent lorcaserin developments include the completion of dosing of all patients in the BLOOM trial and the enrolment completion in the BLOSSOM trial last June.

With respect to the non-pivotal BLOOM DM trial, we expect that trial to complete enrolment with about 600 patients in the next few months. Last year, we also published lorcaserin stage 2B clinical trial results in the December 4th issue of Obesity, the official peer-reviewed journal of the Obesity Society.

Other positive recent and 2008 developments include positive data from both our single and multiple ascending dose phase I trial, evaluating the safety, pharmacokinetics, and pharmacodynamics of APD791. You will recall, APD791 is our internally discovered oral drug candidate intended for the treatment of arterial thrombosis and other related conditions. The initiation and completion of a phase I program for a second generation of oral Niacin receptor agonist discovered by Arena and being developed by Merck under our collaboration.

We also announced last month that Merck has initiated a Phase II trial for this program. The initiation of a phase I program for APD597, a novel GPR119 agonist discovered by Arena and being developed by Ortho-McNeil-Janssen, under our collaboration. The advancement of APD597 followed an announcement last year reporting that clinical results of a less potent GPR1109 agonist AP668 suggest that agonists at this receptor improved glucose control in patients with type 2 diabetes, but not every program was successful.

We announced last year that our APD125 phase 2 trial measuring subjective endpoints in patients with primary insomnia did not meet the trial’s primary or secondary endpoints. Although treatment was well tolerated with no adverse safety findings, we are not planning further clinical development of APD125.

Looking now to the remainder of 2009, I expect Arena will have some significant positive developments mostly centered on lorcaserin, which continues to be the focus of our resources in this currently difficult economic environment. As I previously mentioned, lorcaserin events this year include the BLOOM pivotal trial data results around the end of this month, the BLOSSOM pivotal trial data results around the end of September, and the submission of the lorcaserin NDA before the end of this year. We’re also looking forward to exploring partnering opportunities as we evaluate the data from pivotal trials and share it with potential partners as may be appropriate.

I’ll now turn the call over to Robert to go through the financials before I provide some additional information on what you can expect from the BLOOM data announcement along with some additional comments on our other programs.

Robert Hoffman

In the fourth quarter of 2008, we recorded revenues of approximately $2.7 million, compared to fourth quarter 2007 revenues of approximately $4.6 million. Fourth quarter 2008 revenues included $2.0 million in manufacturing services revenue under our manufacturing service agreement with Siegfried, and $0.4 million for patent activity from our collaborations with Merck and Ortho-McNeil-Janssen, a Johnson & Johnson Company.

All of our revenues in the fourth quarter of 2007 were from our collaborations with Merck and Ortho-McNeil and included $1.9 million in amortization and milestone achievements and technology access and development fees, $0.7 million in research funding, and $2 million for patent activities.

In the full year of 2008, we recorded revenues approximately $9.8 million compared to full year 2007 revenues of $19.3 million. Revenues in the full year 2008 included $7.4 million in manufacturing services revenue from Siegfried and $2.4 million for patent activities from our collaborations with Merck and Ortho-McNeil.

All of our revenues in the full year of 2007 were from our collaboration with Merck and Ortho-McNeil and included $9.5 million in amortization and milestone achievements and technology access and development fees, $5.9 million in research funding, and $3.9 million for patent activities. In the fourth quarter and full year 2008, we recorded cost of manufacturing services revenue of $2.2 million and $8.5 million respectively.

Cost of manufacturing services is comprised of direct costs associated with our manufacturing drug products for Siegfried included related salaries, other personnel costs, and machinery depreciation costs. Prior to entering into the manufacturing agreement with Siegfried, we had no cost of manufacturing services, and therefore had no costs in 2007.

In the fourth quarter of 2008, research and development expenses were approximately $53.3 million, compared to approximately $40.7 million in the fourth quarter of 2007. This $12.6 million increase was primarily attributable to an increase in clinical study fees and expenses of approximately $12 million as we continue the Phase 3 program for lorcaserin and completed a Phase 2b trial of APD125.

In the full year 2008, R&D expenses were approximately $204.4 million, compared to approximately $149.5 million in the full year of 2007. This $54.9 million increase was primarily attributable to an increase in clinical study fees and expenses of approximately $50 million, as we continued our ongoing Phase 3 lorcaserin program, completed the APD125 Phase 2b trial, and completed the APD791 Phase 1b trial.

Also contributing to the $54.9 million increase in research and development expenses was an increase in personnel costs excluding non-cash share-based compensation expense of $3.2 million, due to primarily an increase in the number of US-based research and development employees from 349 at the end of 2007 to 358 at the end of 2008. Nearly all the employees added were related to our development of lorcaserin.

Research and development expenses in the full year 2008 included $123.5 million in external clinical fees and expenses. Such external fees and expenses were comprised of $106 million, or approximately 86% for lorcaserin, $13.5 million for APD125, $1.1 million for APD791, and $2.9 for our earlier stage program including APD916, our internally discovered oral drug candidate for cognition for alertness. Research and development expenses in the full year 2008 included $5 million in Non-cash share-based compensation expense, compared to $4.2 million for the full year of 2007.

General and administrative expenses totaled $8.6 million in the fourth quarter of 2008 compared to fourth quarter 2007 expenses of $6.9 million. General and administrative expenses totaled $30.5 million in the full year of 2008 compared to $26.6 million in the full year of 2007. This $3.9 million increase is primarily due to an increase of $2.1 million in personnel costs excluding non-cash share-based compensation expense as we increased the number of our general and administrative employees from 68 at the end of 2007 to 77 at the end of 2008.

To the extent our partners reimburse us for patent activities, the reimbursements are classified as revenues. Such reimbursements totaled $2.6 million in the full year of 2008 and $3.9 million in the full year 2007.

Total non-cash share-based compensation expenses were $8.5 million in the full year of 2008 compared to $8.8 million in the full year of 2007. Net loss allocable to common stockholders was $62.5 million in the fourth quarter of 2008, compared to $40.9 million in the fourth quarter of 2007 and was $239.5 million in the full year of 2008, compared to $145.3 million in the full year 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 and administrative expenses, and a decrease in recognized revenue and interest income.

Cash, cash equivalents, and short-term investments totaled $110.1 million at December 31, 2008, compared to $398.2 million at the start of 2008. Our ending 2008 cash, cash equivalents, and short-term investments reflect payment of $55.8 million for our redemption of all of the outstanding shares of our Series B preferred in November 2008. In February 2009, we received $15 million in reimbursements for certain improvement to one of our facilities. We earned $7.4 million in interest income in the full year 2008, compared to $18.8 million in the full year 2007. The decrease is due to a decline in interest rates as well as the decrease in average cash balances during 2008.

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 or CDOs, auction rate securities, or equity securities. At December 31, 2008, we had 74.1 million shares of common stock outstanding.

We expect our external clinical and preclinical expenses for 2009 to be approximately $50 to $60 million, over 90% of which is related to lorcaserin. As you know, we expect to learn the results from our BLOOM Phase 3 trial around the end of this month. Because of the importance of these results to our strategic plan and budget, we think it is prudent to wait to provide additional financial guidance until our first quarter 2009 conference call in about a month, at which time we expect to be able to provide you with more complete financial outlook.

Our primary focus this year is lorcaserin, including meeting our goal of filing an NDA at the end of this year. We’ll our spending to not exceed our available resources to meet this goal, as well as our ultimate goal of commercializing lorcaserin with a partner or on our own.

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

Jack Lief

Before updating you on lorcaserin and the rest of the pipeline, I want to briefly add to Robert’s comments on our finances and guidance. Given my expectation for positive data and based on our other R&D programs and other assets such as real estate, I anticipate that Arena will have the financial resources to meet our most important near term objectives as well as continue to further our long term goals. My objective will be to balance retaining the value that’s created from developing lorcaserin and our other program with the need to continue advancing lorcaserin and to the extent resources allow other programs while managing our financial risk in an uncertain economic climate.

Moving now to some of the significant events we expect this year, the first of which is the data announcement from our BLOOM pivotal trial around the end of this month. With respect to the BLOOM announcement, I’d like to review what you can expect from our press release in a few weeks. The announcement will provide you with a preliminary analysis of topline data that is likely to include mean and categorical weight loss, a summary of adverse events, dropout rates, the rates of FDA valvulopathy, and a summary of changes in a limited number of secondary endpoints.

Keep in mind that at the time announcement although we’ll have analyzed the topline data that we are sharing with you, we will not have finished analyzing the data for other endpoints. We’ll not share data from secondary endpoints and exploratory endpoints for which the analysis is not finished. Also, although we consider the data and statistical analysis related to FDA valvulopathy and the BLOOM trial a meaningful assessment of risk, our formal statistical assessment of the valvulopathy risks for FDA filing will include data from both the BLOOM and BLOSSOM trials.

Additionally, later in the year, we intend to present the data at a top tier medical meeting and to publish the data in a highly respected peer-reviewed journal. I also would like to remind you that this is a large randomized and controlled trial, enrolling 3181 patients over two years which incorporates a moderate diet and exercise program. Other moderate diet and exercise programs in other studies have shown a relatively small amount of weight loss in the placebo group, around 1.5% to 2.5%. Partnering lorcaserin as well as other programs is an integral part of our focus. I believe we have what is potentially the first in a new class of weight management drugs. If the lorcaserin data continues to support that potential with a favorable profile meeting or exceeding the FDA guidance, I think we will have plenty interest and expect that new and possibly more valuable commercialization options will become available to us.

I now like to briefly discuss APD791, Arena’s internally discovered oral drug candidate intended for the treatment of arterial thrombosis and other vascular conditions. Last year, we completed Phase 1a and 1b clinical trial. In both trials, APD791 was generally well tolerated and dose dependent inhibition of serotonin mediated amplification of platelet aggregation was demonstrated. APD791 was rapidly absorbed and exposures were related to dose. As previously announced, despite the favorable Phase 1 data, we are currently delaying any further development as part of our efforts to conserve financial resources and focus on lorcaserin.

In December, we had an R&D day where we provided insight into some very promising earlier stage programs, some of which are in partnering discussions. The programs we reviewed included APD916, an H3 antagonist from our alertness and cognitive improvement program, which we intent to initially investigate for the treatment of narcolepsy and cataplexy. In preclinical studies, APD916 showed improvements in cataplexy, wakefulness, and cognition, although APD916 is IND ready, and we believe holds excellent potential, we have delayed the filing of the IND as part of our ongoing prioritization efforts to conserve financial resources.

In addition to the APD916, at the R&D day, we also reviewed novel compounds being investigated for pulmonary artery 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 their clinical trials represents part of the current strategy to conserve our resources while continuing to build shareholder value.

Quickly reviewing our partner programs which are progressing well, last month, we announced the initiation by Merck of a Phase II clinical trial of a second generation oral Niacin receptor agonist discovered by Arena and intended for the treatment of atherosclerosis. We continue to be excited by this program, and we are very pleased with the commitment Merck has made to advancing it through the clinic after positive Phase I findings.

In December, we announced that APD597, an Arena discovered oral GPR119 agonist for the treatment of type 2 diabetes was advanced into a Phase I clinical trial in partnership with Ortho-McNeil-Janssen. Ortho-McNeil-Janssen’s Phase I program will evaluate the safety, tolerability, pharmacokinetics, and pharmacodynamics of APD597 in single and multiple ascending dose studies in healthy volunteers. The planned clinical trails will also include the evaluation of patients with type 2 diabetes. While we are pleased that Ortho-McNeil-Janssen has advanced APD597 into the clinic, and while we value the collaboration and its considerable potential for significant upside, it is important to note that with the exception of a limited number of compounds chosen by Ortho-McNeil-Janssen, Arena is now free to develop drugs targeting GPR119 for its own account and with new partners.

As you may recall, GPR119 is an orphan GPCR discovered by Arena. It is expressed on beta cells and signals through a similar intracellular pathway as GLP-1 receptor with common downstream effects. However, unlike the GLP-1 receptor, GPR119 has proven amenable to small molecule drug discovery. Stimulation of GPR119 is intended to more efficiently promote insulin release by beta cells in response to elevated blood glucose levels.

In addition, GPR119 has expressed themselves other than pancreatic beta cells such as endocrine cells and the gastrointestinal tract, and in preclinical studies, GPR119 stimulates the release of GLP and GIP, two ingredients that play an important role in insulin regulation and glucose homeostasis. GPR119 stimulation has also been found to increase the levels and activity of intracellular factors thought to be involved in the preservation of beta cells, and GPR119 signaling may therefore also serve to maintain beta cell mass in type 2 diabetes.

Before opening the call to your questions, I would like review expected lorcaserin events over the next few quarters. We are expecting results from our pivotal BLOOM obesity trial around March 31st, results from our pivotal BLOSSOM obesity trial around the end of September, and filing of the lorcaserin NDA before the end of this year. We will also report on the advancement our partner programs and update you on licensing opportunities regarding programs throughout our pipeline.

Given the ongoing economic environment, we will continue to focus resources on our goal of filing lorcaserin NDA by year end. By focusing on lorcaserin, strategically managing our pipeline and resources, and delivering on the milestones we’ve communicated to you, I believe we have the foundation to navigate the current tough economic environment.

Although there may be more challenges and difficult decisions ahead of us, 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 build 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.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question will come from Alan Carr with Needham.

Alan Carr – Needham

Could you clarify a bit your financial guidance for ’08? You said that your expenses for this year, you ended with 110, but I was wondering if your guidance for this year includes an assumption for partnerships.

Jack Lief

So the guidance for this year, what Robert said, was that we will wait till our next quarterly conference call which is expected to be next month, and the reason for that, of course, is in a couple of weeks, we are going to be announcing the BLOOM data, and if the BLOOM data is as positive as I think it will be, we will have a different guidance than if the BLOOM data were negative, and I think it’s pretty mature since we are only a few weeks away from that event. Robert, do you have anything to add to that?

Robert Hoffman

Only that the guidance I did give was for 2009, the external expenses including lorcaserin was $50 to $60 million.

Alan Carr – Needham & Company

Can you give us an update on the abuse potential study for lorcaserin as to where that stands and can you tells us a bit how that one is designed?

William Shanahan

We are doing two studies. One in rats and then one in humans, and both of those are ongoing, and basically with the human study, we look at some other drugs and see in in experienced drug users if there is any preference for our drug versus known scheduled drugs, so it’s actually a 7-period crossover study, so we are looking at several doses of our drug and some competitor drugs, potential comparators.

Alan Carr – Needham & Company

Is the outcome here whether or not they like the drugs, some sort of likeability type response from the subjects? How does that work?

William Shanahan

Yes. It is. It is basically a likeability to see if there is anything there that would make the drug to have abuse potential.

Jack Lief

This is a standard test that, as far as I know, all centrally acting drugs need to do prior to FDA approval, so we are not doing anything different than you would normally expect other drugs to be involved with.

Alan Carr – Needham & Company

Have disclosed the doses that you are evaluating in the trial?

William Shanahan

We have not, but suffice it to say they will be more than adequate doses to address any regulatory sorts of things that we are involved in.

Operator

Your next question comes from the line of Bret Holley with Oppenheimer.

Bret Holley – Oppenheimer

Jack, I was just curious about your comment about looking at multiple data points from pivotal trials. I’m I reading too much into that in regards to the partnership process? It sounds like if you are going to be looking at multiple data sets, it would certainly suggest that a partnership might be on a timeline behind the BLOSSOM results minimally.

Jack Lief

Well, in partnering you never know for sure. If it was confusing, I apologize, but the multiple data that I was referring to was on the valvulopathy. There are two studies that are needed to fully address based on the way we power the studies addressing the FDA guidance to rule out valvulopathy and obviously there will be a lot more information. We haven’t unblinded the studies yet, so we don’t know the full results, but there will be a lot more information about that in a couple of weeks, so we’ve agreed with the agency that both the BLOOM and BLOSSOM study will be able to pooled for that valvulopathy issue.

Bret Holley – Oppenheimer

Yes. I think you did in an indirect way, so I guess the way you’d answer the question then is that you would have to see statistically proven lack of valvulopathies in your mind for potential partner to be comfortable. Is that what you are saying?

Jack Lief

No. Obviously there are different criteria from different partners, and we have some partners that are highly interested in talking and reviewing the data, but we will see what the data looks like. We don’t know what the BLOOM data looks like. We may be able to fully address any concerns just with the BLOOM data, but that’s only if we are lucky, and we powered the studies, over 7000 patients in the two studies, such that we are well powered to address those issues in both of those studies rather than just one.

Bret Holley – Oppenheimer

Is three to four months really enough time to file the NDA if you are going to get the database from BLOSSOM in September given the huge number of patients you are actually dealing with here?

Jack Lief

It is a lot of patients. On the other hand, we’ve geared up for it. We are not waiting till the very last bit of information comes in. We expect most of the information for the NDA to be available long before September. We will just need to finish that BLOSSOM study, get the data to write the integrated summary that will be included in the package, so we believe it’s very doable, and we have the expertise to do that.

Operator

Your next question comes from the line of Philip Nadeau with Cowen and Company.

Philip Nadeau – Cowen and Company

Jack, my first one is to you. In your prepared remarks, you made the comment that you folks are getting increasingly confident on lorcaserin’s potential based on the blinded data that you are seeing. I was wondering if you could elaborate on that comment. What in particular is giving you confidence in? Maybe even more importantly what have you really learned since the R&D day if anything that has made your confidence increase?

Jack Lief

The confidence is not just based on the blinded data. Of course, the confidence is based on the Phase II data, the Phase I data, the preclinical studies that were done, all of the animal studies that have been completed as well as how the studies are recruiting, have recruited, the retention in those studies, and that sort of thing, so since the December date, we finished the BLOOM study, so that gives us a lot more confidence that we are unlikely to find some surprises that we are not already aware of. Keep in mind the data is still blinded, so I don’t know who is on drug and who is on placebo, so we might be surprised when we unblind the data, but it looks like we are seeing some things that we absolutely would expect to see. Did I answer your question Phil?

Philip Nadeau – Cowen and Company

Yes. I think you did. My second question is on the FDA valvulopathy data that we are going to see in the topline press release. As you suggested in the answer to the last question, just BLOOM itself isn’t really powered for FDA valvulopathy, it is more overall database that is powered to show in difference in FDA valvulopathy, so can you give us some idea of how we should be thinking about how to interpret what you are going to show to us over the next few weeks? I understand that’s a tough question because there is no data on which to speak directly to, but I’m sure you and your management team have in their mind some sort of goalposts for what that data should look like to give you comfort that there is not going to be a problem. If you could share those with us, that would be great.

William Shanahan

I think the important thing to remember is that this is a 2-year trial and 3200 subjects, so it’s going to be very reflective. We would really expect this to represent the BLOSSOM data as well, so what we see there, I think is going to give you a lot of guidance towards what you would expect with the BLOSSOM trial, and so I think you will be able to take a great deal of comfort in knowing what the total database would like based on the BLOOM results.

Jack Lief

Keep in mind as Bill said that while we believe that BLOOM will be reflective of the BLOOM and BLOSSOM aggregate data, because it’s the longer of the two studies, I think we’ll have a lot of comfort in the results associated with that, but from a statistical powering perspective, the studies were designed to rely on both of those studies for achieving our statistical power for safety.

Philip Nadeau – Cowen and Company

Have you ever disclosed what the power of either the BLOOM trial is on valvulopathy or the power of the overall sample size on that endpoint?

Jack Lief

We have not, but we will have a lot more visibility on that around the end of the month when we do that. Keep in mind that a lot of studies on valvulopathy picked it up in a relatively short of period of time. Animal studies, for example, you can see valvulopathy after a few months, so given the lengthy study, we think that we will have a lot of visibility on our safety associated with lorcaserin.

Operator

Your next question comes from the line of Carol Werther with Summer Street Research Partners.

Carol Werther – Summer Street Research Partners

I was wondering Jack if you would just go over the efficacy endpoints again, and do you need to hit statistical significance on both endpoints?

Jack Lief

The FDA has this categorical endpoint as well as the average mean endpoint, and the categorical endpoint, they want to see the proportion of patients that lose at least 5% of their body weight to be roughly double or more what’s on drug versus placebo, and the drug group needs to be at least 35%. You’ll recall that in the 2b study, we almost achieved that goal with our 20 mg group after only 12 weeks without diet or exercise, so I think we are confident that we will be able to achieve that goal. The second endpoint is the average placebos attracted or placebo adjusted weight on drug needs to be 5% or more, so we believe that we are also going to achieve that goal, so those are the two for US FDA purposes. Now, we are also looking at a third categorical goal at the 10% level for EMEA for European filing, and we will see how we do in that area.

Operator

Your next question comes from the line of Matthew Osborne with Lazard Capital Markets.

Matthew Osborne – Lazard Capital Markets

Jack, can you remind us if we are going to see weight loss at 1 year and also at 2 years or just at the 2-year conclusion?

Jack Lief

We’ll see weight loss at 1 year and at 2 years, and when publish the data, you’ll see lots more fine points.

Matthew Osborne – Lazard Capital Markets

Just going back to the meeting the endpoints, the first as you mentioned or the second was the average placebo subtracted weight loss, and earlier in the prepared comments, you said in your historical review of data, it looked like placebo could come in around 1.5% to 2.5%, which would imply lorcaserin around 6.5% to 7.5%, which may be high for a single agent, but certainly if you could reach that tremendous weight loss, but on the second part of the analysis, the categorical endpoint, have you looked at or do you have any sense of what a placebo arm may show in terms of those percentage of patients reaching that threshold? I think I’ve seen around 15% to 30% in prior trials, just wondering what your search unveiled.

Bill Shanahan

That’s the range you’d expect with the exercise program we have incorporated. We’ve used an exercise program that’s similar to studies done with topiramate and Rimonabant, and the range observed in those studies was in the order of 1.5% to 2.5%, and the Rimonabant data I believe showed around the order of a 20% placebo, 5% response. I think that’s reasonable expectation the range you gave, but we will have to see our data.

Jack Lief

That’s sort of a minimum, your estimates of 6.5 to 7.5% total weight loss for lorcaserin. That would allow us to minimally achieve that.

Matthew Osborne – Lazard Capital Markets

Just switching gears to APD597, what are your plans or Ortho’s plans for assessing cardiovascular risk before going into or while entering Phase II?

Dominic Behan

They have very extensive program in that regard. I’m not sure how specifically I can comment on exactly on what they are doing, but we are obviously excited about that compound. It is a very potent compound addressing the mechanism that Jack outlined earlier in this comments.

Jack Lief

Keep in mind that these are early days before that compound. It’s a compound that’s currently still in phase I. Having said that, we know a lot about the mechanism and a lot about the chemistry and associated properties of this compound in terms of potency and safety.

Dominic Behan

Perhaps I can help based on the preclinical pharmacology and based on knowledge of where the receptor is expressed. I’m not sure cardiovascular concern would be a main concern of the mechanism per se, but of course we broadly evaluate cardiovascular safety regardless on a compound by compound basis as well Ortho-McNeill.

Operator

Your next question comes from the line of Jim Birchenough with Barclays Capital.

Jim Birchenough – Barclays Capital

Jack, just wanted to followup on some of the earlier questions. Do you have access to pool, the weight loss data from the trial or has that been conveyed to management in anyway?

Jack Lief

We see blinded data, yes.

Jim Birchenough – Barclays Capital

Is it a safe assumption if you have a historical placebo rate of 1.5% to 2.5% and you got access to blinded pool data that you’re seeing, that’s above the 6.5% to 7.5% range?

Jack Lief

Keep in mind that the pool will consist of roughly half of the patients on placebo and half of the patients on drug, so the placebo subtracted weight loss using that model one can calculate from that, and that’s why we are confident.

Jim Birchenough – Barclays Capital

Just to be clear, it sounds like you are seeing total weight loss in the blinded analysis that assuming placebo does what it’s supposed would suggest at least a 5% placebo adjusted weight loss. Is that fair?

Jack Lief

That’s what we believe. There could always be room for mistakes later on.

Jim Birchenough – Barclays Capital

So if there was a surprise in the trial, then it sounds like it’s going to be the placebo arm doing something you don’t expect it to do?

Jack Lief

There is a small chance of that, yes.

Jim Birchenough – Barclays Capital

When we get the adverse event profile, are you going to have neuropsychiatric scale data like depression scale data or is that something we’ll just have to wait for with the more detailed analysis?

Jack Lief

Yes. That’s something you will have to wait for, but what we will try to do is provide visibility on all the adverse events that we think are important but a lot of them are detail things like the scales. That’s coming later.

Operator

Your next question comes from the line of Joshua [Seditus] with PHD Capital.

Joshua Seditus

Jack, you had said regarding the BLOOM announcement on March 31st that it would a first in a new class of weight loss drugs, and it would present some new commercial options. Could you actually elaborate on some of those potential new commercial options, and the second part of the question, is there any chance that this announcement could be made earlier than March 31st?

Jack Lief

Just to clarify, I said around March 31st, so that’s specifically what we’ve guided to, and the new commercial options obviously refer to a complete lack of safe and effective drugs that are available today to manage the obesity crisis that the United States and other developed countries have. A third of our population of adults is actually obese and third is overweight, and as we know obesity is not just cosmetic. It’s the leading cause of type 2 diabetes and heart disease. Losing weight is important to manage a lot of different comorbidities. I think Donna Ryan at the Bio CEO conference last month stated that the first 5% of weight loss was really a very important amount of weight to lose because patients benefited enormously from even modest weight loss around that, so I think getting back to the my sense of your question, we do expect that we are going to have lots of new opportunities, commercialization opportunities, with a successful launch of lorcaserin for sale through our partners.

Joshua Seditus

Robert said that assuming that the BLOOM announcement is positive and the results are what you had been looking for, he said that they would be readjusting guidance. Robert, can you give me any type of percentage that you would be adjusting the guidance?

Robert Hoffman

We didn’t give any guidance other than external expenses for lorcaserin. For all our programs, it would be in the $50 to $60 million range, of which 90% is lorcaserin, and after the BLOOM data on our first quarter earnings call, I’ll give all the different components that I normally give for guidance for 2009.

Jack Lief

Remember Joshua, we have been very flexible in terms of moving forward, and I think what Robert is referring to is being flexible for the next couple of weeks as we wait to get the data.

Operator

Our final question comes from the line of Carol Werther with Summer Street Research Partners.

Carol Werther – Summer Street Research Partners

Can you just remind if you started any studies in patients taking SSRIs?

Bill Shanahan

Because of the theoretical potential for interaction, we have not done that. This is something we may consider in Phase IV, so we’ve excluded patients who are taking SSRIs or SNRIs.

Jack Lief

We just don’t have a bandwidth to do everything that we’d like to do in advance of this year, so we discussed with the agency, and we selected those elements that are important for that NDA approval, and obviously there are a lot of other studies that we hope to do in the future including long-term studies of our drug in large population.

Operator

This concludes today’s question-and-answer session. At this time, I’d like to turn the conference back over to our speakers for any additional comments.

Jack Lief

Before finishing, I’d like to reiterate that we remain focused on benefiting patients and building long-term stockholder values through the development and commercialization of Arena drug candidates independently and with our partners. Thanks again everybody for joining us on the call today.

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Source: Arena Pharmaceuticals, Inc. Q4 2008 Earnings Call Transcript
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