Seeking Alpha
Long/short equity, insider ownership
Profile| Send Message|
( followers)  

Arena Pharmaceuticals (NASDAQ:ARNA) is a clinical-stage biopharmaceutical company focused on discovering, developing and commercializing oral drugs that target G protein-coupled receptors, or GPCRs-- an important class of validated drug targets-- in four major therapeutic areas: cardiovascular, central nervous system, inflammatory and metabolic diseases. Arena's most advanced drug candidate is lorcaserin hydrochloride, or lorcaserin, which is intended for weight management.

Arena first submitted a New Drug Application for lorcaserin to the FDA in December 2009, and the FDA issued a Complete Response Letter (CRL) in October 2010. In the CRL, the FDA outlined non-clinical and clinical reasons for its decision and provided recommendations relating to addressing such issues. On January 10th 2012 Arena Pharmaceuticals announced that the U.S. Food and Drug Administration (FDA) has accepted Arena's resubmission of the New Drug Application (NDA) for lorcaserin for filing and review. The FDA considers the resubmission a complete, class 2 response, and assigned a new Prescription Drug User Fee Act (PDUFA) target date of June 27, 2012.

About Lorcaserin

Lorcaserin is intended for weight management, including weight loss and maintenance of weight loss, in patients who are obese (Body Mass Index, or BMI, > 30) or patients who are overweight (BMI > 27) and have at least one weight-related co-morbid condition.

New England Journal of Medicine published the results of a two-year BLOOM (Behavioral modification and Lorcaserin for Overweight and Obesity Management) trial on July 15th 2010.

The data presented in the article showed that lorcaserin used in conjunction with behavioral modification caused significantly greater weight loss and improved maintenance of weight loss compared to placebo. Lorcaserin also improved values for biomarkers that may be predictive of future cardiovascular events, including lipid levels, insulin resistance, levels of inflammatory markers and blood pressure.

Eisai Collaboration

In July 2010 Arena entered into a marketing and supply agreement with Eisai (OTC:ESALF). Under this agreement Arena granted Eisai exclusive rights to commercialize lorcaserin in the United States and its territories and possessions subject to FDA approval of the lorcaserin NDA. As part of the agreement, Arena is obligated to manufacture lorcaserin at its facility in Switzerland, and Eisai is obligated to purchase all of its requirements of lorcaserin from Arena.

Arena received a non-refundable, upfront payment of $50.0 million from Eisai, and following regulatory approval of lorcaserin and upon the delivery of product supply for launch, may receive up to an additional $60.0 million depending on the label. Arena is obligated to sell lorcaserin to Eisai for a purchase price starting at 31.5% of Eisai’s annual net product sales, and the purchase price will increase on a tiered basis to 36.5% on the portion of annual net product sales exceeding $750.0 million, subject to reduction in the event of generic competition and certain other circumstances.

Arena is also eligible to receive up to an aggregate of $1.19 billion in purchase price adjustment payments based on Eisai’s annual net sales of lorcaserin, with the first and last amounts payable with annual net sales of $250.0 million and $2.5 billion, respectively. Of these purchase price adjustment payments, Eisai is obligated to pay us a total of $330.0 million for annual net sales of up to $1.0 billion. Arena is also eligible to receive up to an additional $70.0 million in regulatory and development milestone payments.

Eisai and Arena will equally share the development expenses for the additional development work required by the FDA prior to approval of our NDA for lorcaserin. If the FDA requires development work following approval of lorcaserin, Eisai will bear 90% and Arena will bear 10% of such expenses, except that Eisai and Arena will share equally the costs of certain pediatric or adolescent studies.

Market Size of Lorcaserin

According to the Centers for Disease Control and Prevention, approximately one-third of U.S. adults were obese in 2007-2008. Studies have shown that a weight loss of 5% to 10% of body weight from baseline can result in meaningful improvements in cardiovascular risk factors (e.g., lipids, blood pressure and blood glucose) and a significant reduction in the incidence of type 2 diabetes.

Competition for Lorcaserin

Present competitors with respect to lorcaserin include Hoffmann-La Roche Inc., the US prescription drug unit of the Roche Group (OTCQX:RHHBY), which markets orlistat under the brand name Xenical, and GlaxoSmithKlineConsumer Healthcare (NYSE:GSK) which markets an over-the-counter low-dose version of orlistat in the United States under the brand name alli. Another competitor is phentermine, which is a generic drug sold by a number of companies.

In addition to currently marketed obesity drugs, there are competing obesity drug candidates that are in development in similar stages of development as lorcaserin. These competing companies are Vivus (NASDAQ:VVUS) and Orexin Therapeutics (NASDAQ:OREX).

Conclusion

I recommend buying Arena's stock under $2.5. I might sell part of my position before the June 27th PDUFA date to reduce risk of non-approval. I would give a greater than 50% chance for lorcaserin approval at the June 27th meeting based on solid safety data.

Source: Arena Pharmaceuticals Faces FDA Decision For Second Time