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Arena Pharmaceuticals, Inc. (NASDAQ:ARNA)

Piper Jaffray 2013 Healthcare Conference Call

December 4, 2013 11:30 AM ET

Executives

Robert Hoffman – SVP, Finance and CFO

Cindy McGee – VP, IR

Analysts

Edward Tenthoff – Piper Jaffray

Edward Tenthoff – Piper Jaffray

Good morning everyone. Our next presenting company is Arena Pharmaceuticals. My name is Ted Tenthoff. I am a senior biotech analyst here at Piper Jaffray. And before I begin, I am required to point out certain disclosures regarding the relationship between Piper and Arena, which are posted at the back of the room and also at the registration desk. Despite what many might call a disappointing launch of Belviq Eisai is really going to gain traction over the last couple of weeks. The partners have expanded their alliance to pretty much cover the globe and beyond Belviq Arena is steadily progressing on proprietary pipeline.

Here with us today are Robert Hoffman, CFO and also Cindy McGee who is the VP of Investor Relations and also who manages the Eisai partnership. So, thanks very much both of you for joining us.

Robert Hoffman

Thanks.

Cindy McGee

Thanks for having us, Ed.

Edward Tenthoff – Piper Jaffray

I am going to start off the questions but if anyone has any questions just raise your hand, happy to make this more of an informal and interactive discussion. So turning to the [inaudible] script grew 6.7% sequential I know people are on this every Friday and Monday morning looking at the script growth. They exceeded 5,000 for the week before Thanksgiving, what are some of the new initiatives that Eisai put in place to really help drive this growth in the States?

Robert Hoffman

So I think it rounded to 6.8%.

Edward Tenthoff – Piper Jaffray

Okay.

Robert Hoffman

So before I begin I would like to point out that Cindy and I will be making forward-looking statements during this presentation. Actual results may differ, please refer to the risk factors that’s filed with the SEC. So Eisai is doing a number of things; I think you probably saw in conjunction with the expansion but also prior to that they mentioned that they are going to increase their sales force, double it in fact from 200 at launch to up 400 at the end of December.

Also in conjunction with that they’ve mentioned that reimbursement is going on nicely in fact ahead of schedule. They had initially at launch had about 30% of insured lives had some form of coverage. They had initially said that they thought they could get that to 40% at the end of their fiscal year, which is March 31, 2014. They updated on their call in early November to say that 40% of prescriptions that have been written have some level of coverage and they expect to get to 50% by March 31, 2014. So we view that as a significant advancement of reimbursement which we think is one of the three pillars. The other thing that they’ve started and you’ve probably seen it now is the direct to consumer activity, so Cooking Light, People Magazine, Sports Illustrated, Oprah magazine, they have had some really nice ads in there that includes the voucher the 15 day free trial voucher.

So I think the combination of that as well as the physician education that they are working on, they have a lot of symposia that they put on put on, some web activities. They believe they've touched greater than - greater than 1,000 physicians are engaged in those types of activities and just so much they increased the 200 to 400 now that they think they can touch 65,000 physicians in United States.

Edward Tenthoff – Piper Jaffray

That's great.

Robert Hoffman

So a lot of a combination of three of those has really driven and I think will continue to drive prescription. And so one last thing, in terms of reimbursement I think we're going to see a lot of wins in terms of a lot of the insurance coverage is calendar year based. And so come January 1, I think we will see some more announcements or more coverage in that regard. They picked up Express Scripts and they have a lot of the Blue Cross Blue Shield. In fact, we had meeting with individual today and he mentioned that he went to his doctor and he was surprised, he went and he got prescribed Belviq in his copay with $15. So I am not saying that’s representative but he was really surprised…

Edward Tenthoff – Piper Jaffray

There seems to be progress on the reimbursement…

Robert Hoffman

Exactly.

Edward Tenthoff – Piper Jaffray

Absolutely. So in a third quarter Eisai reported net Belviq sale of about $5.4 million and this is in spite of pretty healthy inventory build in the second quarter. This resulted in revenue of $2 million to Arena in the quarter which actually exceeded our expectations. So walk us through kind of how the equation goes around the price assumptions that go into that profit show at - that revenue component that you receive.

Robert Hoffman

Sure, so the $5.4 million is what Belviq net sale was to Eisai, we get 31.5% of that which equates to about $1.7 million. In addition to that the vouchers that the patients used it’s free to the patients. However, Arena gets paid upon that and we get paid our cost of goods which was another $300,000. In terms of the price I think it's too early to garner what that's going to be. I was thinking about this last night and this morning in terms of adding other 200 sales reps I don't know what that’s going to do to voucher utilization and what not, I mean is it they are going to go and see doctors, who are going to have new patients coming in. So I just don't know, I think it’s steady state, we’ll start to be able to garner information from that. But it's just too early. But we hope that they give out lots of vouchers that would get new patients in because that's for funnel to get prescriptions.

Edward Tenthoff – Piper Jaffray

Do you have any intel yet on what kind of voucher conversion you are getting or what kind of -- how many patients are starting out on a free prescription and then ultimately turning that into a longer term prescription?

Robert Hoffman

We don't have that yet, and we're anxiously awaiting that data.

Edward Tenthoff – Piper Jaffray

And we’ll be excited to see some of the durability data too, I think that's going to be really important?

Cindy McGee

[Inaudible] the conversion from the 15 day voucher to a 30 day script and then [per system] [ph].

Edward Tenthoff – Piper Jaffray

Yeah, exactly. You guys recently expanded a relationship with Eisai which I think personally made a lot of sense to keep this all in the same house. They cover basically the entire globe except for South Korea, Taiwan, Australia, Israel and New Zealand.

Cindy McGee

That's right.

Robert Hoffman

Good.

Edward Tenthoff – Piper Jaffray

Yeah I wrote it down. You also received an additional $60 million for the expansion of the agreement expanded clinical regulatory milestones and also higher purchase price adjustments. So kind of walk us through at least from you guy's standpoint and Eisai’s standpoint the rationale for those, and any of the relevant deal economics for you guys.

Robert Hoffman

I mention deal economics and Cindy wants to address this question. As you mentioned that $60 million upfront I totaled it we received the $60 million. So it was due at the signing and we’ve since received that. We have received over $200 million from Eisai in milestones and upfront that's the data. I mentioned that the $60 million milestone is deferred and amortized over the estimated collaboration period and so whatever that ends up being we will have that in first quarter. But the milestone in total is over $200 million. You mentioned the purchase price adjustments, that’s now $1.56 billion. So, sales from sales of $250 million to $1 billion, we get $330 million in purchase price adjustment and other milestones payment. So very rich economics in terms of that. Cindy, anything in terms of…

Cindy McGee

I think you got it

Edward Tenthoff – Piper Jaffray

And there are some varying purchase price adjustment.

Cindy McGee

Yes.

Edward Tenthoff – Piper Jaffray

So I think you may have the highest still in the U.S.

Robert Hoffman

In the U.S., correct.

Edward Tenthoff – Piper Jaffray

…and a little bit different for Europe and some of the other territories.

Robert Hoffman

But there also we get at the top end of the 35% at the minimum.

Edward Tenthoff – Piper Jaffray

Cindy, tell us about, I know you’ve really taken over the management of that relationship, so tell us from a higher level, what's going on with Eisai?

Cindy McGee

So what we really see with the agreement I think are two key reasons, right. So the global, most of the world now -- the two key reasons are, first, it establishes a foundation for seeking approval of Belviq for weight management globally, right. So we’re currently under review, Eisai filed in Mexico, they filed in Canada, they are planning to file in Brazil around the end of this year. We are also under review in Switzerland; our partners in Asia Ildong and CYB are planning to also file around the end of the year. So it creates that foundation for seeking approval for weight management around the world.

Secondly our agreement with Eisai provides a strong platform for pursuing further development opportunities for Lorcaserin so within this agreement we have been able to prioritize and outline how we will move forward in that way, so we prioritize the fixed dose combination with phentermine, smoking cessation, a once-daily formulation, as well as further evaluating diabetes and [CB] [ph] outcomes. And the agreement has outlined how we will share expenses with Eisai and how we will pursue that and we continue to keep some control on how aggressively to pursue those opportunities. And so I think big picture what this really means is Belviq is now a key priority for Eisai’s global organization. That's very clear to us. And so we look forward to moving forward with them back into Europe, we’d do that application and getting back into Europe and seeking approval there is a is a key priority for Eisai as well, so we are working on that strategy with them.

Edward Tenthoff – Piper Jaffray

Since you bring it up maybe we can jump to that, what are the plans? I know you took it off of with really the MAA earlier this year. What is sort of the larger plan? What can you share us about the plan to get it back in Europe?

Cindy McGee

Right. We will do that application because we didn't think we had enough time given the EU’s time line to address the outstanding concerns. So we wanted to take a step back to determine the best approach to go back into Europe. And then we got into discussions with Eisai about extending that agreement and so now our key priorities for that is to work on the strategies together to determine how best to go back into Europe.

Edward Tenthoff – Piper Jaffray

Okay. And is there any timing on when we should expect an update from that?

Cindy McGee

We haven't provided a timing on that yet.

Edward Tenthoff – Piper Jaffray

Okay. We look forward to that. So I know that you recently went to South Korea to meet with Ildong, you guys have also signed a partnership with CY Biotech in Taiwan, so maybe tell us about these two different deals, why have you done separate deals in these geographies and maybe tell us a little bit about those markets.

Cindy McGee

Sure. Originally back in 2010 we did the first agreement with Eisai for the U.S. We've then expanded that last year for North and South America and we've pursued parallel strategies. I think there were some territories where our team thought it was important to have local expertise. We think we found that with Ildong in South Korea, with CYB in Taiwan. And so I think now [inaudible] saying that we have primarily a global partner in Eisai for many of the larger territories and then in additional areas we currently have local partners and we may have additional ones in territories such as Australia and New Zealand where we continue discussions there. So I think we're balancing those approaches with Eisai covering many of the territories and then local expertise where we feel that's important.

Edward Tenthoff – Piper Jaffray

Okay. I think it makes a makes a lot of sense.

Robert Hoffman

Just to add to that the CYB for example, the group that started CYB is a same group that marketed sibutramine so they're very experienced group that knows the local market place.

Edward Tenthoff – Piper Jaffray

Now, we just had the Obesity Society Week down in Atlanta last month and you guys had some incremental data coming out of the BLOOM, BLOSSOM and DM studies. So tell us a little bit about some of this new Belviq data and kind of really where the clinical story is emerging.

Cindy McGee

We've presented both at Obesity Week and then also at AHA a week after for a variety of additional analyses from our Phase 3 program looking at data from responders in the BLOOM-DM study. The improvement in – if patients or responders, the weight loss I think it was over 10% reduction, and A1C raised about over 1%. So just additional sub analyses in that way. Some of the other posters looked the difference between the lean and fat mass loss where the patients are primarily losing fat mass as opposed to lean and at AHA the poster was focused on the improvements with CRP levels. So additional analyses to help the physician community further understand we have a lot of data in that Phase 3 program, there are lot of patients for upto two years, further understand that, further understand the improvements in the patients who are overweight and obese who also have type 2 diabetes we’ve always been very excited about the BLOOM-DM data; it’s in the label, any Eisai rep can speak to that when they meet with their physician target so we continue to look at publication opportunities for that data and we are looking forward to the additional development opportunities in scoping combination and new areas such as smoking cessation.

Edward Tenthoff – Piper Jaffray

I'd like to be cut off in a minute. I think that’s a good point to kind of bring in sort of the larger competitive landscape right now with some of the new data that you are generating. You guys have been on the market for not quite a year now but starting to get a little bit of a sense. So how do you sort of see the competitive landscape shaping up, obviously Vivus is currently selling Qsymia, Orexigen just had clinical update. So what's latest on that front? Are we seeing differentiation between the compounds in the eyes of treating physician? Is it kind of a relationship driven business still so that if Belviq is brought to the physician maybe they’ll use it or are we starting to see market stratification around the drugs?

Cindy McGee

I think some of the KOLs speak to that; and they talk about which patient populations make the most sense for each drug. And they seem to take a step back, we welcome multiple treatment options in this space as we think it is good for this space, we think additional reps in the space are important for physician education and also additional efforts in increasing reimbursement is very important. When it comes to Belviq a lot of the KOLs speak to which patient population makes the most sense and a lot of times we’ll say patients with type 2 diabetes because of the results we saw in BLOOM-DM, patients with hypertension because we are not seeing - blood pressure and heart rate actually improved in the study and then –women of child bearing age also makes sense, and so I think both those are three important patient populations, we will continue to gather more data from Eisai as we proceed into the launch and really understand which segments of the physicians are prescribing and why perhaps, so I think that information will be interesting.

Edward Tenthoff – Piper Jaffray

Excellent. You've mentioned the opportunity in smoking cessation and this isn't really something that I've picked up or really understood that well yet. So maybe you can tell us a little bit more about the mechanism there, any of the clinical data that you'd be generating and sort of you how you pursue adding that to the label or how does that factor in?

Cindy McGee

Sure. So we think the 2C mechanism will be important for adjusting smoking cessation. There has actually been two pre-clinical studies done independently at major academic centers looking at nicotine addiction in rats and has seen efficacy with Lorcaserin in that space. And so Eisai, we and Eisai have prioritized smoking cessation. We plan to move it into a Phase 2 study in the first half of next year, and we think this isn’t only a important opportunity for the U.S. but in other areas such as Europe and Asia, now that Eisai has the rights to those territories, this is an important opportunity for us. So we'll have to see, we'll have to see how that Phase 2 data look. But we think based on the mechanism it could be interesting.

Edward Tenthoff – Piper Jaffray

You’ve also mentioned the opportunity of combining Belviq with phentermine, I mean obviously this brings up some fen-phen concerns but I think you guys have done an extensive job of evaluating [inaudible] risk with Belviq. What are the plans there and were there any data at in Atlanta about investigators who are starting to use these together or any anecdotal information about the combination results?

Cindy McGee

I don't think there is any data presented. What we've said our plan is primarily to do -- we've done the PK studies. That's complete and that allows Eisai now to initiate the 12 week pilot study where they will evaluate Lorcaserin [inaudible] administered with phentermine so it will be a 225 patient, 12 week study with three arms, so we are looking –at Lorcaserin 10 mg twice a day by itself and then in combination with phentermine 15 milligram once daily and then the third arm will be Lorcaserin 10 mgs twice a day with phentermine 15 mgs twice a day. And so those are the first two –steps of this process and then we’ll go back to the FDA to determine how we potentially move forward.

Edward Tenthoff – Piper Jaffray

I want to note that the safety and efficacy of Belviq in combination with any weight loss drug has not been established.

Cindy McGee

Right, –it’s a currently a limitation, it’s in the label.

Edward Tenthoff – Piper Jaffray

So again a lot of focus is on Belviq, I think a lot of the value today is ascribed to Belviq. I think as the pipeline emerges we're going to see that become a more relevant part of expanding the story, so I want to spend maybe about five minutes or so that we have maybe touching on pipeline, unless anyone has any questions on Belviq.

There is really two primary programs that I'm focused on but maybe a pre-clinical one too if you want to discuss that. But firstly on APD811, which is for - you are developing for pulmonary arterial hypertension; you’ve completed a multi-dose Phase 1B. Tell us a little bit about those findings, about this indication and I think you plan to sort of start a Phase 2 in 2014 as well?

Cindy McGee

Sure that's right. And so with APD811 we're pursuing an oral compound to address PAH assuming it’s completed but the Phase 1A and Phase 1B studies –we plan to move this program into Phase 2 next year, where we continue to monitor our resources potentially a first half start for that program. So we will look forward to that. Some of the other programs we have include Temanogrel which we’ve also out-licensed to Ildong, the company that has rights to Belviq in South Korea. And so I think that's an interesting deal. We put a lot of our pipeline on hold while we focused our resources on getting Belviq approved in the U.S. and navigating that process. Ildong was interested in-licensing Temanogrel so they will move it through a Phase 1C and Phase 2A, so essentially it’s a proof-of-concept and they have rights in South Korea and then we will get it back for the rest of the world. So looking to initiate a multi-dose Phase 1 study of Temanogrel in combination with Aspirin and Clopidogrel and so this is a inverse agonist of 2A receptor [inaudible] so we think that’s an interesting compound.

Edward Tenthoff – Piper Jaffray

And importantly you guys retained the rights – right for the rest of globe.

Robert Hoffman

And also the [Unclear] Ildong’s [inaudible].

Edward Tenthoff – Piper Jaffray

So, and is there anything else that you guys have kind of in the development side or things that kind of consider keeping an eye out for…

Cindy McGee

APD334 S1P1 agonist and we are looking at that for a variety of autoimmune diseases, we’ve completed a initial Phase 1 study there and then we have a compound targeting the CB2 receptors for pain that’s called APD371 and we are looking forward to moving that into the clinic.

Edward Tenthoff – Piper Jaffray

Excellent. I think that's could become a much more important part of the story. So wrapping up, Robert you guys ended 3Q, $181 million adding the $60 million from Eisai takes us up over $240 million. How long should that last the company?

Robert Hoffman

Well, I don't think about it in that terms because if you think about what we are continuing to sell Eisai product as well so as the sales go up we are going to continue to have cash coming in, and so I think we are in a different phase of our existence where we are going to have cash coming in and so –stay tuned on that regard.

Edward Tenthoff – Piper Jaffray

We do, we had the cash coming in but we haven't turned a profit yet so.

Robert Hoffman

We haven't turned a profit yet, certainly our guidance was $70 million $77 million in terms of research and development this year, 28 to 34 in terms of G&A. So if you just extrapolated that, it’s certainly more than two years worth. But again, we’ll have that cash coming in.

Edward Tenthoff – Piper Jaffray

And is it too early yet to be forecasting when you guys may be able to turn a profit?

Robert Hoffman

We have not given any sales guidance in terms of Belviq, so if you don't have that [PC] [ph] equation then it is too early. But we have all the pieces in place in terms of a tax holiday. We have the manufacturing facility in Switzerland. We made that acquisition back in 2008, what is means is, we have I don't -- close to 90 people –there now, what it means is we have a tax holiday effect from most taxes. Globally what it means is an effective tax rate in the mid teens potentially. So that is certainly something once we do become profitable, we will be able to recognize an immediate benefit.

Edward Tenthoff – Piper Jaffray

I look forward to seeing that in the future.

Robert Hoffman

Thanks a lot.

Question-and-Answer Session

Edward Tenthoff – Piper Jaffray

Excellent. With that if there aren't any other questions, we are going to wrap up and I want to thank both Robert and Cindy for being with us today. And wish you guys very happy holidays and it should be a really exciting 2014. Thank you.

Cindy McGee

We look forward to it.

Robert Hoffman

Thanks you.

Edward Tenthoff – Piper Jaffray

Thanks everyone.

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