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Arena Pharmaceuticals (NASDAQ:ARNA)

Q4 2013 Results Earnings Conference Call

February 27, 2014, 5:00 p.m. ET

Executives

Jack Lief - Co-Founder, Chairman, President and CEO

Craig Audet - SVP, Operations and Head of Global Regulatory Affairs

Robert Hoffman - SVP, Finance and CFO

Dominic Behan - Chief Scientific Officer

Cindy McGee - VP of Investor Relations and Alliance Management

Analysts

Cory Kasimov - JPMorgan

Steve Byrne - Bank of America

Ted Tenthoff - Piper Jaffray

Lee Kalowski - Crédit Suisse

Marko Kozul - Leerink Swann

Thomas Wei - Jefferies

Scott Marx - Samlyn Capital

Operator

Good day everyone, and welcome to Arena Pharmaceuticals’ fourth quarter and full year 2013 update call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Arena’s Vice President of Investor Relations and Alliance Management, Ms. Cindy McGee. Ms. McGee, please go ahead.

Cindy McGee

Thank you for joining us. We hope that you have had a chance to review the news release that crossed the wire this afternoon. On today’s call, prepared remarks will be provided by Jack Lief, our President and Chief Executive Officer; Craig Audet, our Senior Vice President of Operations and Head of Global Regulatory Affairs; and Robert Hoffman, Chief Financial Officer. Dominic Behan, our Chief Scientific Officer, is also available to address your questions. Bill Shanahan, our Chief Medical Officer, is traveling today.

During this broadcast, we will make forward-looking and other statements about our goals, plans, expectations, and future activities and events, including statements about BELVIQ and our drug candidates, including with regards to efficacy, safety, R&D, advancement potential, regulatory applications and collaborations; commercialization of BELVIQ, including with regard to physician and patient awareness, marketplace adoption, and reimbursement; financial results, conditions, and guidance; and other statements that are not historical facts.

Such statements may include the words, plan, expect, believe, may, will, can, and similar words. You are cautioned to not place undue reliance on these forward-looking statements, which represent our judgment and beliefs only as of the time they are made. For such statements, we claim the protection of the Private Securities Litigation Reform Act of 1995.

Risks and uncertainties that could cause actual results to differ materially from those described in our forward-looking statements include the regulatory process and decisions; the timing, results and cost of R&D, manufacturing, and commercialization; data and other information related to drugs and drug candidates may not be as expected, favorable, or sufficient for further development or commercialization; activities and results related to our collaborations and our entry into additional collaborations; and other risks identified in our SEC filings.

I will now turn the call over to Jack.

Jack Lief

Good afternoon, and thanks for joining us today. I’d like to start by outlining some major developments that occurred in 2013, which now have positioned Arena for what I believe will be an outstanding year.

First, BELVIQ became available last June to patients in the United States for chronic weight management. Eisai has continued to build a strong foundation for the market success of BELVIQ through physician education, patient awareness, and significant reimbursement progress. Eisai has made tremendous progress since BELVIQ’s launch, and I expect to see meaningful increases in physician and patient adoption this year.

Second, we took an important step forward to making BELVIQ available to patients in additional countries by expanding our commercialization agreement with Eisai. In addition to our continuing efforts, we now have three pharmaceutical companies actively working on BELVIQ’s regulatory approval. BELVIQ is currently under review for marketing approval in five countries, with more filings planned for later this year.

Third, we have outlined our life cycle management priorities for lorcaserin. I’m very excited about BELVIQ, as an indication for weight management. I am also excited that we and our collaborators will combination our expertise to investigate new indications, formulations, and combination, and importantly, do so in a shared expense arrangement.

Fourth, we’ve advanced our pipeline of internally discovered compounds. While investors are understandably focused on BELVIQ’s success and life cycle opportunities, our validated research and development platform is often overlooked. If successful in our clinical development, we could have four new chemical entities ready for, or in Phase II clinical trial. As we deliver proof of concept, I expect investors will further appreciate our non-BELVIQ program this year.

I also expect other pharmaceutical companies will increasingly be interested in our pipeline, and note our strong track record in securing agreements with collaborators such as Eli Lilly, Merck, Ortho-McNeil, and of course more recently, Eisai, [Ildong], and CY Biotech.

Lastly, we ended 2013 in a strong financial position that will support our efforts to improve health by bringing innovative medicines to patients. This year, we look forward to increasing BELVIQ adoption in the U.S. and making BELVIQ available to patients in additional countries, pursuing new lorcaserin indications, formulations, and combinations, advancing our pipeline of internally discovered drug candidates, and developing additional compounds.

On today’s call, Craig will provide an update on Eisai’s U.S. commercial activities, discuss the ongoing efforts to commercialize BELVIQ around the world, and outline our development program. Robert will review our financial results for 2013 and provide guidance for 2014. Lastly, I will review our upcoming milestones before opening the call to your questions.

I will now turn the call over to Craig.

Craig Audet

Thank you, Jack. We have a lot to tell you about today, but let’s first begin with a commercial update on BELVIQ. As Jack mentioned, since launch, Eisai has focused its BELVIQ sales and marketing initiatives on activities in three areas: educating healthcare professionals on the efficacy and safety profile of BELVIQ, developing patient support programs and awareness, and expanding reimbursement coverage.

Eisai has reported significant progress to date. With regard to physician awareness, the expansion of the BELVIQ sales force to 400 representatives was completed in early January. This doubling in size increases Eisai’s physician coverage to approximately 65,000 physicians, and I’m happy to report that as of mid-February, approximately 22,000 physicians have prescribed BELVIQ.

In addition to physician education, it’s important that potential patients are aware that there’s a new treatment option in BELVIQ available to them. Towards that end, Eisai continues to invest in its patient awareness campaign.

The company’s investment in print advertising doubled in January compared to last October. The ads continue to run in major U.S. magazines such as People, Sports Illustrated, Oprah, Cooking Light, and they include a 15-day free trial voucher for BELVIQ. Eisai plans to broaden this direct-to-consumer reach by initiating a television advertising campaign in the second quarter.

Lastly, Eisai has made significant progress on the reimbursement front, surpassing its initial goal of 40% coverage by the end of March 2014. Coverage for BELVIQ is now estimated by Eisai to be greater than 50% of people who are commercially insured.

Recent increases in coverage include CVS Caremark, Blue Cross Blue Shield of Massachusetts, Johnson & Johnson, and the Ford Motor Company. In addition, in conjunction with Aetna, Eisai developed a pilot program that offers BELVIQ as a preferred brand to eligible patients.

Based on this success, Eisai is now targeting 70% coverage for people who are commercially insured by the end of March 2015. The additional resources Eisai has committed to physician education and patient awareness complement the improved managed care access they have effected, and should add to the anticipated seasonal uplift in the prescription weight management market. We look forward to continued prescription growth and positive feedback from physicians and patients.

Beyond the U.S. market, BELVIQ is currently under regulatory review for marketing approval in Switzerland, Mexico, Canada, Brazil, and South Korea. With the expansion of our collaboration, Eisai now has rights to BELVIQ in most of the world, and together we are establishing a regulatory filing strategy to seek approval of BELVIQ across their territories.

Now I’d like to talk a bit about our development programs for lorcaserin. Our collaboration with Eisai creates further opportunities for us to explore additional indications, formulations, and combinations. Together, we are focused on evaluating lorcaserin as a potential aid for smoking cessation, developing a once-daily formulation, exploring the efficacy and safety of co-administration of lorcaserin with phentermine, as well as investigating the drug’s impact on diabetes and cardiovascular outcomes.

With regard to smoking cessation, there has been a great deal of interest in new treatment options as updated public health figures show the devastating health effects of smoking. For example, in the United States, over 40 million adults smoke, resulting in approximately 480,000 premature deaths and $193 billion in direct healthcare expenditures and productivity losses per year. However, smoking is a global issue. In China alone, approximately 350 million people smoke, and worldwide, smoking results in over 5 million deaths per year.

Further to modulating appetite and satiety, presumptively through the melanocortin system, there is preclinical data suggesting that the serotonin 2c receptor may modulate the mesolimbic dopaminergic reward system, which is believed to play a role in addiction to nicotine.

Therefore, we believe that lorcaserin could be efficacious as an aid to smoking cessation. This belief is further supported by preclinical studies conducted independently by two academic centers showing reductions in nicotine self-administration in rats.

In the next few months, we plan to initiate a 12-week, Phase II proof of concept study that will enroll approximately 600 patients. We and Eisai will equally share the development expenses for this trial.

Once-daily dosing could help us improve patient convenience, and we are making progress toward that end. We completed an initial study to evaluate the safety, tolerability, and pharmacokinetic properties of several different formulations of lorcaserin 20 mg extended release tablets, and have selected a formulation for further development.

Eisai has initiated dosing in a pilot study to evaluate lorcaserin and phentermine administered in combination. Their ongoing 12-week pilot study is enrolling approximately 225 overweight and obese adults, and is designed to preliminarily assess the safety of lorcaserin and phentermine when co-administered.

Eisai is responsible for conducting and funding this study. Please note that our FDA approved prescribing information states that the safety and efficacy of co-administration of BELVIQ with other products for weight loss have not been established.

Eisai also initiated a cardiovascular outcomes trial called CAMELIA, which will enroll approximately 12,000 overweight and obese adults with cardiovascular disease or multiple cardiovascular risk factors, and is expected to run for approximately five years.

As is being required by the FDA for all weight management products, CAMELIA is designed to evaluate lorcaserin’s effect on the incidence of major adverse cardiovascular events, or MACE, compared to placebo. We are responsible for 10% of these development expenses. Additionally, CAMELIA will evaluate whether lorcaserin reduces the incidence of conversion to type 2 diabetes and MACE [clots], both as compared to placebo.

Now let’s change gear and talk about our pipeline of novel drug candidates. Beyond our global BELVIQ efforts and lorcaserin development, we remain committed to our mission to bring new and better medicines to patients. We look forward to strategically advancing our pipeline, which includes APD811, Temanogrel, APD334, and APD371.

APD811, a non-prostanoid prostacyclin agonist intended for the treatment of pulmonary arterial hypertension, has completed Phase I. The compound’s oral bioavailability and half-life seen in Phase I may allow for once-daily dosing with lower peak to trough ratios that could provide advantages over other IP agonists, the majority of which are administered frequently or continuously through intravenous, subcutaneous, or inhaled routes. We plan to initiate a Phase II trial in the next few months.

Temanogrel, an inverse agonist of the serotonin 2A receptor, is intended for the treatment of thrombotic diseases. Temanogrel is believed to have a dual mechanism of action that inhibits serotonin-mediated platelet aggregation as well as vasoconstriction. This quarter, Ildong plans to initiate a Phase I multiple dose clinical trial to evaluate the safety of co-administration of Temanogrel with aspirin and clopidogrel. Ildong is responsible for conducting and funding this trial.

APD334, an S1P1 receptor agonist, is intended for the treatment of autoimmune diseases. In the preliminary Phase I trial, this compound demonstrated favorable pharmacokinetic and pharmacodynamic effects, a 35-hour half-life, and a dose-responsive reduction in blood lymphocyte panels. We are planning to initiate a Phase I multiple ascending dose trial this year.

Lastly, APD371, an agonist of the cannabinoid 2 receptor, is intended for the treatment of pain. By selectively targeting the CB2 receptor, this compound has the potential to provide pain relief without the side effects associated with opiates and NSAIDs and without the development of tolerance. We are currently evaluating single ascending doses in an ongoing Phase I trial.

In summary, Eisai continues to deliver on its long term strategy to increase awareness and access for BELVIQ in the United States and. We are also working a Eisai, Ildong, CYB, and potentially other collaborators to expand the availability of BELVIQ around the world. In addition, our team is focusing on advancing the novel drug candidates in our pipeline and discovering additional compounds.

I’ll now hand the call over to Robert, who will review our financials.

Robert Hoffman

Thanks, Craig. I’ll focus my comments on highlights of financial performance for the full year ended December 31, 2013, compared to the full year ended December 31, 2012. Please note that our fourth quarter 2013 results are included in our news release issued earlier today. I’m happy to take questions during the Q&A portion of this call on either the quarterly or annual results.

For 2013, we recorded revenues of $81.4 million compared to $27.6 million for 2012. 2013 revenues included $65 million of milestone payments from Eisai we earned in connection with the final scheduling designation of BELVIQ, $5.7 million from net product sales of BELVIQ, $2.4 million in reimbursements from Eisai for development and patent expenses, and two milestone payments totaling $1 million earned in connection with Eisai’s applications for regulatory approval of BELVIQ in Mexico and Canada.

Of the $5.7 million from net product sales of BELVIQ, $5.3 million represented 31.5% of Eisai’s net product sales and $0.4 million related to redemptions of the 15-day free trial vouchers. Arena and Eisai currently recognize net product sales revenue when Eisai ships products to its wholesalers. From launch in June 2013 until the end of 2013, Eisai shipped over 157,000 bottles of BELVIQ.

Recall that the [unintelligible] million up-front payment we received from Eisai in the fourth quarter related to the expansion of our agreement will be deferred and amortized as revenue over the estimated life of the agreement. Due to the utilization of Eisai’s voucher and savings program, and some one-time launch expenses, our gross to net deduction of 47% from June through December 2013 was higher than we expect it to be moving forward as voucher prescriptions convert into regular prescriptions, and as reimbursement continues to increase.

Cost of product sales of BELVIQ totaled $1.8 million for 2013. We did not record any cost of product sales of BELVIQ in 2012. As I’ve mentioned in the past, we expect the cost of goods and gross margin for BELVIQ to vary significantly until we reach expected normal capacity of our manufacturing facility in Switzerland.

Also contributing to the variability is our recognizing the cost of goods related to vouchers and related revenue at the time of sale. At expected normal capacity, and assuming a typical gross to net deduction, I would expect our gross margin to reflect that of other small molecule drugs.

Research and development expenses for 2013 increased to $66.5 million from $54.1 million for 2012. The increase is primarily attributable to external clinical and preclinical study fees and expenses including manufacturing costs, personnel costs, and lab supplies. R&D expenses 2013 included $4.3 million in noncash [unintelligible] compensation expense compared to $1.8 million for 2012.

General and administrative expenses totaled $31.7 million for 2013 compared to $26.2 million for 2012. The increase is primarily related to personnel costs. G&A expenses for 2013 included $4.7 million in noncash share-based compensation expense compared to $3.2 million for 2012.

We recorded a noncash gain of $10.2 million in 2013, primarily related to the revaluation of a common stock warrant that is classified as derivative liability. Net loss allocable to common stockholders was $19.4 million for 2013 or $0.09 per share on a fully diluted basis compared to a net loss of $88.3 million for 2012 or $0.45 per share fully diluted.

Cash, cash equivalents, and short term investments increased to $221.9 million at December 31, 2013. As we’ve previously reported, we have an equity investment in TaiGen that we received as part of a collaboration with TaiGen.

At December 31, 2013, such investment was recorded as no value. In January, TaiGen completed an initial public offering and as such, we will begin to record its value on our financial statements. At December 31, 2013, we had approximately $218.6 million in common shares outstanding.

With regard to our 2014 financial guidance, we expect the majority of our 2014 revenues will be payments from collaborators based on net product sales of BELVIQ and regulatory milestones. In addition, we expect 2014 revenues of approximately $9 million from amortization of up-front payments from existing collaborations, approximately $7 million in development and [unintelligible] reimbursements from Eisai, and approximately $1 million from collaboration services from [unintelligible].

We expect full year 2014 research and development expenses of approximately $90 million to $98 million, including noncash expenses of approximately $9 million and approximately $6 million in development expenses reimbursed by Eisai, including revenue. This R&D expense guidance includes approximately $23 million in external preclinical and clinical spend related to the lorcaserin activities Craig just mentioned.

For clarity, when Arena is conducting a clinical trial under our collaboration with Eisai, we record 100% of the expenses under research and development expense and any amount reimbursed by Eisai is recorded as revenue. Conversely, if Eisai is conducting a clinical trial, we would record only our expense related to the trial. For example, Eisai is conducting the cardiovascular outcomes trial. As such, we are recording our 10% of the overall required study cost to research and development expenses.

Full year 2014 general and administrative expenses are expected to be approximately $30 million to $36 million, including noncash expense of approximately $6 million and approximately $1 million of patent expenses reimbursed by Eisai and included in revenues. We expect to spend approximately $9 million to $10 million in capital expenditures primarily related to our manufacturing facility in Switzerland.

Importantly, we will continue to carefully manage expenses, taking into account our revenues and share costs with collaborators. In summary, we continue to believe we are well financed and look forward to the success of BELVIQ, progression of lifecycle management opportunities, and advancement of our R&D pipeline in 2014.

I’ll now turn the call back over to Jack.

Jack Lief

Thanks, Robert. As we have outlined on today’s call, it’s a time of great opportunity for Arena. BELVIQ’s market uptake continues to grow, we continue to pursue BELVIQ regulatory approvals in new markets, and we are approaching proof of concept data for numerous programs in our pipeline. We have eight active development stage programs and many of these program expenses are shared with our collaborators.

We look forward to the following key milestones this year: further reimbursement coverage of BELVIQ; expanded direct-to-consumer awareness campaigns including TV commercials highlighting the availability, safety, and efficacy of BELVIQ; BELVIQ approvals outside of the United States; completing the lorcaserin Phase II smoking cessation trial and the lorcaserin and phentermine pilot studies; initiation of Phase II trials for APD811 and Temanogrel; and completing Phase I development of APD334 and APD371.

We believe that achieving these milestones will result in an outstanding year for Arena. Our mission is to embrace the challenge of improving health by bringing innovative medicine targeting GPCRs to patients.

We will now open the call to your questions. Operator?

Question-and-Answer Session

Operator

[Operator instructions.] Our first question comes from Cory Kasimov of JPMorgan.

Cory Kasimov - JPMorgan

Just wondering if you could give us any information on any impact you’ve maybe seen so far from the doubling of the Eisai’s sales force. And I think you said on the last call that there was 60% of scripts that involved a savings card or a voucher program. I apologize if I missed that, could you give us an update on that number and maybe what the conversion rate of those scripts to the regular 30-day scripts has been?

Jack Lief

As Craig said, the 400 sales reps were in place in January. And what we’ve seen is prescriptions increasing by roughly double the rate of market increase. So prescriptions we’ve seen increase quite significantly, and we expect that that trend will continue moving into this year. The second part of your question was?

Cory Kasimov - JPMorgan

Just on conversion rates and the voucher program?

Jack Lief

It’s very early in the process. Eisai has just received some data through August of that, and unfortunately they don’t have a lot of information on that. We believe it’s roughly half of the patients that start on BELVIQ refill. So we’ll report more data as we get that information.

Cory Kasimov - JPMorgan

And then maybe just a quick follow up on the smoking cessation program. I apologize if I missed this. Is there anything you can tell us about the Phase II design there, and maybe what endpoint you’ll be looking at in that study?

Dominic Behan

We’re probably in a fairly standard proof of concept study, similar to what’s been done previously with other drugs such as Chantix, 12 week study. And the last four weeks of our study will look at continued abstinence rates. So it’s a fairly standard design based on what’s been done previously.

Operator

Our next question comes from Steve Byrne of Bank of America.

Steve Byrne - Bank of America

Robert, I want to try to drill into these numbers a bit. Does it look like, as of October 1, that gross to net was reset by Eisai, that corresponds into a lower average selling price for the fourth quarter than it was in the third? Is that right?

Robert Hoffman

Well, what I focused on on the last call was the gross to net percentage just kind of was 49%. And so if you look at it overall, it’s hard to tell from the launch, it’s difficult to get to gross to net, but if you look at through September 30, it was 49%. What you see now is that that gross net discount has gone down to 47%. So it’s all working in the right direction in my opinion.

Steve Byrne - Bank of America

Based on that 157,000 bottles shipped, you had 91,000 shipped in the prior two quarters, is that correct?

Robert Hoffman

I forget what the number was. What’s your question?

Steve Byrne - Bank of America

Just based on the sales that were recognized in the quarter, the roughly $7.5 million, it looks like a lower average selling price than the prior quarter. What I’m getting at is if that was adjusted, do you true up with Eisai at the end of the quarter that we’re in?

Robert Hoffman

We true up every month, actually. So we continue to refine that, and adjust as appropriate. So the $7.5 million sales, that was reported by Eisai?

Steve Byrne - Bank of America

Yes.

Robert Hoffman

Was that part of your question?

Steve Byrne - Bank of America

Yes, the average selling price on that looks lower than it was in the third quarter.

Robert Hoffman

Again, if you’ll recall, I tried to focus the September 30 gross to net percentage at 49%, and it’s improving to 47% overall.

Steve Byrne - Bank of America

Let me just switch over to a question I have on CAMELIA. Do you have buy-in from the European regulators on this trial design to the extent that you could use interim results to refile?

Craig Audet

Remember that the issues that we have with the E.U. are very similar to what we saw with the FDA, and that did not include any cardiovascular risk. So although through the course of our review, the CHMP did look at that study design, they were more concerned with it as a post-marketing commitment than as a way to get past the hurdles that we’ve seen so far.

Steve Byrne - Bank of America

Will you have interim readout in that study?

Craig Audet

No, we’re not planning on it.

Operator

Our next question comes from Ted Tenthoff of Piper Jaffray.

Ted Tenthoff - Piper Jaffray

I wanted to focus in on cost of goods sold, and appreciating your comment that it’s going to bounce around a little bit, but in the third quarter COGS came in a little bit, and I want to understand your comment, Robert, that you thought that this would be similar to typical small molecules. Is that with respect to where Eisai’s revenues are? Or with respect to where your royalties are? I’m assuming you’re talking about kind of where Eisai’s sales come in. Is that a correct assumption?

Robert Hoffman

With regard to your first question, we use a first-in, first-out method, for the inventory that we produce. So when I say that it’s going to be lumpy, when we work through one batch, the next batch, it just depends on how expensive that batch was, and what the utilization of the facility was at the time.

In terms of the cost, it is extremely inexpensive to make, and so if you look at Eisai’s overall net sales, we would probably be a little bit lower than what a traditional small molecule compound would be to make. And if you look at ours, then it would be probably in line with what one is. So again, extremely inexpensive to make, and I think that’s the benefit of having our own manufacturing facility in Switzerland.

Operator

Our next question comes from Lee Kalowski of Crédit Suisse.

Lee Kalowski - Crédit Suisse

I was wondering if you could give us some sense for the inventory on hand, breaking out the growth over last quarter by demand and inventory fluctuations.

Robert Hoffman

We haven’t given that, but what I could say, characteristically, is that on a basis of what the demand is going forward, it has shrunk.

Lee Kalowski - Crédit Suisse

So in other words you’re saying that relative to ending inventory last quarter, it has come down somewhat?

Robert Hoffman

It has come down, yes. A little bit. And again, I view it as like what demand is going forward and with prescriptions going up, that means that the amount of time at the inventory is there. It’s hopefully less.

Lee Kalowski - Crédit Suisse

So it’s a function of the denominator somewhat, of whatever you’re assuming the going forward rate or current rate of prescriptions are.

Robert Hoffman

Yeah.

Lee Kalowski - Crédit Suisse

And one of the things you mentioned as a catalyst for the year is the pilot study. So as far as the phentermine combination study, there’s no phentermine plus BELVIQ placebo arm. So I’m wondering, given that it’s powered primarily for safety and the absence of that fourth arm, how should we be thinking about or interpreting the results as far as the secondary endpoints and going forward, if there’s additional trials. Should we expect that it would be a four-arm trial?

Craig Audet

We’re still getting to the pilot study. We really haven’t talked, at least publicly, about the next study design. Suffice it to say that the primary endpoint for this study is, in fact, safety. There’s a secondary endpoint to look at efficacy. It will give us a good barometer reading of what we think a combination could look like, and whether we move it forward. What we’ve always said is, this pilot study will help inform future development.

Lee Kalowski - Crédit Suisse

And another combination you’ve talked about is with metformin. I’m just curious, do you have any market research on the potential for diabetes agents, whether it’s a combination or it has a specific claim, with or without metformin, for a diabetes agent that’s a scheduled narcotic and whether you think a CVOT would be required for approval, given that we’ve seen FDA require that in other classes following the [unintelligible] fallout?

Craig Audet

We’ve done, actually, quite a bit of market research on a metformin combination with BELVIQ. We haven’t really talked too much about it, other than it’s not one of the prioritized development programs right now. We sort of have it on the back burner. Whether or not a CVOT would be required would be, I think, a discussion we’d have to have with the FDA before we could talk about it publicly.

Jack Lief

Keep in mind that about 90% of the patients in the BLOOM-DM Phase III study were on metformin. So we have a pretty good database there.

Lee Kalowski - Crédit Suisse

It looks like with the 200 additional Eisai reps in the field, we’ve seen some stalling in the competition. I guess one interpretation could be some gains in market share since additional reps. Would you expect a similar phenomenon if a third competitor were to launch midyear with a significant sales force? Would you expect an expansion of knowledge of the space? Or do you think that a competitor launching with a big sales force could ultimately result in potential headwinds for market share?

Jack Lief

I think in general we try to look at this as more chatter, more noise, more patients realizing that there are treatment alternatives out there and physicians willing to take a try, and looking at the available options and tailoring it to the appropriate patient. Some people view it as a zero sum game. Right now, of the total number of overweight and obese patients out there, only about 2% are using prescription weight loss products. So the potential of the market to expand is incredible. So we think that more players is a good thing right now.

Operator

Our next question comes from Marko Kozul of Leerink Partners.

Marko Kozul - Leerink Swann

My first question is on the BELVIQ phentermine combination. Given physicians and patients have commercial access to phentermine and BELVIQ, can you share with us any anecdotes that you have from the field on combination therapy, both maybe on the [unintelligible] and any safety details?

Craig Audet

You know, it’s difficult to do that. We wouldn’t want to sound like we’re trying to do any off label promotion. We know that physicians have prescribed the combination now. As we said in the prepared remarks, the label specifically states that the safety and efficacy combinations have not been established. And so I want to highlight that.

What we can say is that we know that physicians are doing it that way. We’ve heard anecdotally that they’ve had some success with that, but I really don’t want to get into numbers.

Marko Kozul - Leerink Swann

The next question is on smoking cessation. Regarding BELVIQ’s potential as a smoking cessation medication and weight loss drug, wouldn’t it make sense to try and capitalize on these dual benefits and decide on future trials that could lead to cessation of smoking [in the acute phase] and present weight [neutrality] in the subsequent maintenance phase?

Dominic Behan

Could you state what you mean by dual benefits?

Marko Kozul - Leerink Swann

Smoking cessation and also weight loss.

Dominic Behan

Well, that’s certainly something of potential interest. And certainly weight neutrality will be a desirable attribute of the compound. So we’ll see. We have to see what the study tells us.

Craig Audet

What we’ve seen in some of the market research we’ve looked into is that one of the reasons why people, and particularly more women than men, don’t try to quit smoking is they’re afraid of that 15 to 20 pounds they might gain. So we think if we could come up with, as Dominic says, something where you get good efficacy, good safety for the smoking cessation part, and you can get some weight neutrality in there, that could translate very well in the marketplace.

Marko Kozul - Leerink Swann

Just the last one, APD334, the S1P1 receptor agonist, when might we have access to additional preclinical data, and also maybe clinical data that can characterize the differentiation between your compound and other S1P1 receptor modulators?

Dominic Behan

Well, stay tuned. We’re hoping to, certainly as the program progresses, release more data. So we think the Phase I data certainly look promising from a PKPD perspective, pharmaceutical half-life of around 35 hours, and lymphocyte [unintelligible]. We did see the classical effect of the [S13] class in terms of slowing the heart rate. But what we’ll say is we’ll move this compound to the next stage, so stay tuned on that one. Hopefully, as the year progresses we can release more data.

Operator

Our next question comes from Thomas Wei of Jefferies.

Thomas Wei - Jefferies

I had a couple of questions on the BELVIQ phentermine combination study. So one was just to understand what is the background regimen that people are being given in this trial relative to the pivotal trial for BELVIQ? I was just trying to understand, given the lack of a pure dual placebo arm, what a placebo arm might actually have looked like in that trial, if you did have one.

Craig Audet

There is no background diet and exercise in the study, because of the short nature of the trial. It’s a pilot study. We’re just looking mainly at safety. So we didn’t feel it was necessary to put that background of diet and exercise in.

Thomas Wei - Jefferies

And can you just remind me, for trials that do not have that background diet and exercise, does that mean all the weight loss numbers are significantly lower?

Craig Audet

Yes, typically weight loss is lower without diet or exercise. We show that in Phase II, where BELVIQ had a significant improvement for patients, even though overall weight loss was somewhat lower than in our Phase III study. Keep in mind that this is a pilot study, and it’s not designed for registration.

Thomas Wei - Jefferies

For the original Phase II trial, where you did not do diet and exercise, what was the weight loss with BELVIQ 10 mg twice a day? Can you remind me?

Craig Audet

Sure, in a three-month study, there was 3.3% weight loss in the BELVIQ arm versus basically nothing in the placebo arm.

Thomas Wei - Jefferies

And then when you look at the centers that you’re going after with Eisai for this study, I presume that they’re a subset of the centers that were involved in Bloom, Blossom, Bloom-DM. Have you gone into those pivotal trials to isolate out these centers? And do they look like the overall data from the pivotal trial? Or better, or worse? Do you have a sense of that?

Craig Audet

As we said, Eisai is conducting this study. We provided them with the previous centers we had used, but we didn’t, for lack of a better term, cherry pick centers that had better results than other centers. It was more based on patient enrollment and how quickly they could enroll.

Operator

Our next question comes from Scott Marx of Samlyn Capital.

Scott Marx - Samlyn Capital

I just had two quick questions for you. When I try and figure out what net sales are, shouldn’t I take the ASP and multiply it by the bottles shipped into the channel?

Robert Hoffman

That should be pretty close.

Scott Marx - Samlyn Capital

I’m just asking because it sounds like it was 66,000 bottles into the channel, based on 157,000 minus 91,000 in Q2 and Q3, and then the ASP, is that simply the price, which would be $200, and then take out the gross to net discount from there, so about $106?

Robert Hoffman

Correct.

Scott Marx - Samlyn Capital

Okay, so when I multiply those two, $106 times 66,000, it gets me to a number of around $6 million. So I’m just trying to understand what else gets you to a net sales number.

Robert Hoffman

I think actually the total of 157,000 is the total total. So I think the other ones were roughly 50,000 at launch, it was roughly 44,000 or whatever the number was in the third quarter. So in total, it’s roughly 157,000, so I think you could do it that way. You’ll get real close.

Scott Marx - Samlyn Capital

I’m sorry, I’m just thinking for the fourth quarter. So wouldn’t I just take 157,000 and subtract the 91,000?

Robert Hoffman

Yeah, I think it’s roughly that. So if you move it a little bit, you can see where you get to the number.

Scott Marx - Samlyn Capital

Okay, so there’s nothing else that should be in that net sales number.

Robert Hoffman

No.

Operator

Our next question comes from Bob [unintelligible] of [unintelligible] Capital.

Bob [unintelligible] - [unintelligible] Capital

My question is about the amount of [unintelligible] promotional rollout by Eisai. I don’t know how much you can really talk about it, but I’m just curious, do they plan to roll out slowly, in like one city, maybe try it out, and then gradually expanding the plan to a major TV commercial?

Jack Lief

We’re really not sure what their specific plans are. What they’ve said was they expect to begin in April, which is the second quarter of this year, but we’ll just have to see how that rolls out.

Cindy McGee

Okay, great. Well, thank you for your questions. Thank you for joining us today. If you have any follow up questions, we’ll be available this afternoon. Have a wonderful day.

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