Arena Pharmaceuticals' (ARNA) CEO Amit Munshi on Q2 2016 Results - Earnings Call Transcript

| About: Arena Pharmaceuticals, (ARNA)

Arena Pharmaceuticals, Inc. (NASDAQ:ARNA)

Q2 2016 Earnings Conference Call

August 8, 2016 04:30 PM ET

Executives

Kevin Lind - Chief Financial Officer

Amit Munshi - President and Chief Executive Officer

Analysts

Alan Carr - Needham & Company

Jason Butler - JMP Securities

Nico Dil - JPMorgan

Jim Birchenough - Wells Fargo

Ted Tenthoff - Piper Jaffray

Operator

Good day, everyone, and welcome to Arena Pharmaceuticals Second Quarter 2016 Financial Results and Corporate Update Conference Call. This call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions]

I will now turn the call over to Kevin Lind, Chief Financial Officer of Arena. Please go ahead.

Kevin Lind

Good afternoon, everyone, and thank you for joining us today. We hope you had a chance to review the news release we issued earlier this afternoon announcing our financial results for the second quarter of 2016. Joining me on today's call is Amit Munshi, our President and Chief Executive Officer.

Before we begin, I'd like to remind you that we will make forward-looking statements involving risks and uncertainties, including about our focus, plans, goals, strategy, expectations, programs, R&D, regulatory activities, commercialization, financials, future activities and achievements, and other statements that are not historical facts. These statements are made in the context of the risks and uncertainties that are discussed in our filings with the U.S. Securities & Exchange Commission, which can be found on the SEC website at www.sec.gov, and our second quarter 10-Q filing. Our actual results may differ materially from our forward-looking statements.

Now I'd like to turn the call over to Amit.

Amit Munshi

Thanks, Kevin, appreciate that. Good afternoon, everyone, and thanks for joining the call. For today's agenda, I'd like to highlight our reprioritized direction, spend a little bit of time on our clinical pipeline and collaborations, and then conclude with the near term milestones and priorities. Kevin will then provide a financial review of second quarter 2016 and update our 2016 guidance, and then we'll move to Q&A.

Starting with corporate strategy, it's been a very exciting first 90 days for me at Arena. Since I joined the company, we've undertaken a very systematic and robust process to execute the turnaround and transition of Arena from a historically research-oriented organization to a high-performing clinical development organization focused on maximizing the value of our assets.

First, we identified a range of options for our clinical assets as well as our commercial stage assets. Second, we developed a prioritization mechanism to assess technical success, competitive landscape and, importantly, the long-term opportunity for our pipeline. Third, we identified clear value inflection points going forward with a clear understanding of what we need to deliver and when And, finally, we developed a corporate reorganization plan to support the strategic shifting of our priorities.

We implemented a substantial workforce reduction, primarily in discovery research, manufacturing and administrative functions in order to focus the organization on its proprietary clinical pipeline. The streamlining of our organization provides substantial cost savings, which will extend our cash runway and enable us to add key resources in clinical operations to support what we believe are the mission-critical activities of our development programs. As you know, today's changes in cost reductions will have substantial impact in the next 12 to 18 months going forward. We are now prepared to scale up the organization to support our clinical pipeline.

All of these actions over the last 90 days begin to position our company to focus on our three key priorities going forward. First, to primarily execute and advance our proprietary clinical pipeline; two, to maintain a streamlined organizational infrastructure and manage our financial resources to develop our pipeline in a timely and cost-efficient manner; and, three, to support our multiple partner collaborations and unlock the value of our portfolio, which spans a marketed product, a Phase 2 program, a Phase 1 program, and a preclinical program.

As we move forward, we are well positioned to become a therapeutically-focused company including, as I will discuss, an initial focus in gastroenterology, hepatology and respiratory, with the ability to develop and deliver first or best-in-class compounds across a broad range of indications. We believe that the potential related to our portfolio of assets adds up to a very compelling future opportunity for the company. So, with that, I'd like to give you a little bit more detail on the clinical programs, as well as our near-term priorities.

As we transform our business, we are becoming highly focused on our clinical execution. We have brought in new clinical leadership for our clinical organization. We have expanded our clinical operations organization and are in the process of improving our interface with clinical research organizations, or CROs. We are also beginning an expansion and actively engaging with the clinical investigator community and key opinion leaders in therapeutic areas in which we are evaluating our compounds.

Our lead program, etrasimod, formerly known as APD334, is an oral, next-generation S1P receptor modulator with optimized targeting of disease-critical S1P receptors. As the next-generation S1P receptor modulator, we believe etrasimod combines improved pharmacokinetics and tissue distribution with optimized receptor targeting. We are evaluating etrasimod in an ongoing Phase 2 clinical trial for ulcerative colitis and expect Phase 2 data in the fourth quarter of 2017. Finally, as we plan forward, our teams have actively begun exploring additional indications for etrasimod.

Our second program, ralinepag, formerly known APD811, is an agonist of the prostacyclin receptor. APD811 is currently being evaluated in a Phase 2 clinical trial for pulmonary arterial hypertension, or PAH, and we expect Phase 2 data midyear 2017.

Our third program is APD371, our third clinical stage program, I should say, is a potent, highly selective full agonist with a cannabinoid 2, or CB2 receptor. As disclosed previously, APD371 completed a Phase 1 multiple dose clinical trial – ascending dose clinical trial with favorable results. These data will be presented at an upcoming medical meeting. The Phase 1 results demonstrated the overall safety of the molecule, a pharmacokinetic profile in line with expectations, and no observed effect on the central nervous system.

After a thorough evaluation of the receptor biology in various pain settings and consistent with our increased focus in the GI space, we intend to take APD371 into pain associated with inflammatory bowel disease, specifically Crohn's disease. IBD involves chronic inflammation of all or part of the digestive tract and primarily includes ulcerative colitis and Crohn's disease. We believe that pain associated with Crohn's represents a significant market opportunity and a major unmet patient need.

In major global markets there were approximately 2.3 million IBD, again, inflammatory bowel disease patients, diagnosed in 2015, and total treatment costs for IBD are approximately $10 billion, with 60% of the cost attributable to Crohn's disease. Of these patients, estimates suggest that up to one-third of individuals with ulcerative colitis and more than half of the individuals with Crohn's disease continue to experience persistent symptoms including chronic pain, even though clinical and endoscopic findings demonstrate that the disease is in remission. About 1 in 6 patients are chronically treated with opioids.

In IBD, the cannabinoid system is highly dysregulated. Specific enzymes that regulate the endocannabinoid system and the GI tract are disrupted, and further, these CB2 receptors are located in the target region of the GI tract, and these receptors increase an expression at the ulcerative margin in Crohn's disease. Multiple animal studies in the literature supplemented by expression studies at Arena have provided evidence that CB2 activation can alleviate abdominal pain. Publicly those data suggest that earlier programs in this category have resulted in compounds that have not been highly selective to CB2 and/or have been partial agonists and/or have had low potency. We believe APD371 is the first CB2 agonist currently in clinical development that combines high potency, high selectivity and full agonism to CB2 and may therefore offer significant benefit to Crohn's patients who experience abdominal pain. We anticipate initiating this study early in 2017.

In addition to our focus on clinical execution for our proprietary programs, our reprioritized strategy emphasizes continuing to work to support our multiple collaboration partners. First, Eisai, Inc. and Eisai Company, Ltd., along with other regional partners, including Ildong, Teva and CY Biotech, we continue to support them with their efforts on the approved product Belviq, which has recently achieved two regulatory milestones. Axovant Sciences Ltd. is evaluating nelotanserin, an inverse agonist of the serotonin 2A receptor in a Phase 2 clinical trial for central nervous system disorders. Ildong Pharmaceuticals is evaluating temanogrel, an inverse agonist of the serotonin 2A receptor in a Phase 1 clinical trial for thrombotic diseases. Boehringer Ingelheim International is evaluating our preclinical drug candidates targeting central nervous system receptors for psychiatric diseases.

So, to summarize, our priorities are headlined by our focus on our clinical programs, streamlining our operations and continuing to support our collaboration. What you can expect from us in the near term are continued updates as we continue to transition to a clinical and commercial focused organization, updates on the progress of etrasimod and ralinepag Phase 2 trials, and additional details about the APD371 Crohn's disease program. We believe our clinical stage pipeline has the potential to deliver first or best-in-class compounds for a broad range of indications, and we are focused on making that happen.

Now I'd like to turn the call over to Kevin for a review of our financials.

Kevin Lind

Thank you, Amit. Our detailed financial results are discussed in the press release. I will provide a brief review of our second quarter 2016 financial results and then update our financial guidance. Revenues in the quarter totaled $9.5 million, including $4.3 million in net product sales of Belviq. Research and development expenses totaled $18.5 million.

General and administrative expenses totaled $8.5 million. Restructuring charges totaled $6.1 million, including noncash charges of $1.0 million. Net loss was $27.2 million, or $0.11 per share. As of June 30, 2016, cash and cash equivalents totaled $122 million, and approximately 243 million shares of Arena common stock were outstanding.

In late 2016, we reduced our U.S. workforce by approximately 100 employees, or 73%, primarily in the areas of research, manufacturing and G&A, which we estimate will reduce annualized cash expenditures for personnel by approximately $17 million and related other operating expenses by $6 million to $8 million. As a result of the U.S. workforce reduction, we incurred a $6.1 million restructuring charge in the second quarter of 2016 in connection with one-time employee termination costs, including severance and other benefits. In July, the company also reduced the workforce in Arena GmbH, primarily in the areas of manufacturing and G&A. The company estimates this will result in an additional reduced annual cash expenditure of approximately $2.1 million.

As we weigh out our reprioritized strategy, our goal is to give you credible and consistent guidance that you can rely on. For 2016, we expect R&D expenses between $78 million and $84 million, including noncash expenses of approximately $9 million, G&A expenses between $27 million and $33 million, including noncash expenses of approximately $7 million. The company believes the cost reductions and strategic shift in priorities will allow it to manage its cash through completion of Phase 2 clinical trials for its three internal clinical stage programs.

With that, I'll turn it back over to Amit.

Amit Munshi

Thanks, Kevin. In summary, we are focused on execution, rearranging our priorities, building the requisite clinical capabilities, and establishing key linkages in the physician community. With our three proprietary clinical programs, we're committed to developing our pipeline in a time and cost conscious manner to deliver first or best-in-class compounds. Our strong quarter end cash position of $122 million, in addition to the workforce reduction, will support our advancement of the clinical stage programs, and we look forward to making continued progress on our clinical and on our strategic priorities and providing updates as the year progresses.

I will now turn the call over to the operator to begin the Q&A session. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question comes from Alan Carr from Needham & Company. Your line is open.

Alan Carr

Hi. Thanks for taking my questions. I wonder if you can comment a bit on trial enrollment for your two lead programs. It looks like one of them might have shifted out a bit. And then, also, you mentioned that you might be looking at a few more indications for 334. I wondered what other ones you're looking at and what sort of timing there might be to get those started? How many of these, also, can you run in parallel? I think before you commented there might have been some cash constraints that kept you from running too many. So, it would help if you clarified that. Thanks.

Amit Munshi

Thanks, Alan. Let me first comment on the clinical trial enrollment. As I mentioned, we have – historically, the company has been a research-oriented company, discovery research-oriented company, and with the changes we've made in staffing, the changes we've made on our clinical leadership, our focus is to – is really on clinical trial execution. As we go forward, that becomes our primary, secondary and tertiary focus as a company. So, I can't really comment beyond my 90 days here historically, but I can definitely comment on how we anticipate working on clinical trial execution going forward. So, we're committed to continually improving our ability to execute these clinical trials, and this again is a transition process from a historically discovery/research-oriented company.

The second question on 334, we are evaluating a range of potential options. We hope to have some ideas about where we'd like to go before the end of the year. We expect these trials to start sometime in the first part of 2017. Just to be clear, I think one of the things that we are actively doing now is looking at smaller scale exploratory trials, and we think some of these molecules have such fantastic clinical utility that we're best served running smaller exploratory trials before we commit to large scale, full-blown Phase 2. So, that should address the cost question as well.

Alan Carr

And then you also, your collaborators got approval for lorcaserin in Mexico. I wonder if you can give us a sense on timing for launch there and maybe scale of opportunity in relation to Korea? Thanks.

Amit Munshi

I'm sorry, Korea or Mexico?

Alan Carr

Well, you already have approval in Korea. I'm just wondering if it's on the same scale as that one or if it's a bigger opportunity than you have in Korea?

Amit Munshi

Okay. So, on Mexico we don't have an updated timeline from Eisai launch. There are some procedural issues in Mexico, including pricing and reimbursement on the ground, so I think those processes are ongoing now. So, we don't have an updated timing and it's a bit out of our hands. In terms of the size of opportunity, it's uncharted territory for Eisai to take an obesity product into Mexico and so we're going to have to just wait and see what the opportunity looks like. In terms of obesity as an epidemic in Mexico, it definitely outpaces the size of the market in Korea quite substantially. How that translates into actual product sales and utilization, we'll have to wait and see.

Alan Carr

All right. Thanks for taking my question.

Amit Munshi

Thanks, Alan.

Operator

Thank you. Our next question comes from Jason Butler for JMP Securities. Your line is open.

Jason Butler

Hi, thanks for taking the question. Just had a follow-up on the enrollment timelines for the Phase 2 trial in ulcerative colitis. Just given your experience in the last 90 days, can you speak to any changes that you've made to either the trial protocol or any of the enrollment criteria, or any of the procedural aspects of the trial that you think give you confidence in the timeline that you've given us today?

Amit Munshi

Sure. Thanks, Jason. You know, we did a full diagnostic. We've had people out to the clinical sites just to understand, again, just walking in new here, a fresh pair of eyes and there is really no major or substantive changes in the protocol plan. Most of the issues are around clinical trial execution. So, as I stated before, we brought in – we had a change in management, brought in a new clinical operations group and are continuing to interface heavily with the CROs as well as with the clinical sites to make sure we can get the study enrolled. There don't seem to be any showstoppers on the actual study design. Most of the issues that we're dealing with are just simple execution issues, and we've had to make personnel changes to make sure we address that.

Jason Butler

Great. And then just a question on the commercial potential, IBD for the CB2. Can you talk about the current treatment landscape and why something like a CB2, a drug targeting CB2 might have some differentiated potential versus current therapies and how do we think about the use of opioids in that setting as well?

Amit Munshi

Sure. So, as I mentioned earlier, opioids are used in about 1 out of 6 patients in this setting. So with the continuing pressure in our environment to move away from opioids as a class of drugs, there is definitely a need for new therapeutic options. It's interesting in this Crohn's disease setting or IBD in general. There is a tremendous amount of recalcitrant pain that is the presence of anti-inflammatory therapies like the anti-TNF therapy. So, these patients are experiencing a lot of abdominal pain and a baseline consistent pain, and we're hoping to be able to alleviate that discomfort with the CB2 program with APD371.

There is a tremendous amount of literature in the biology of the endocannabinoid system in the GI tract. There are very specific enzymes that are dysregulated in the endocannabinoid system in the GI tract, and we know that the receptor biology in the presence of the receptors across the GI tract and increase in expression at the ulcerative margin of Crohn's disease gives us good confidence that we're going after a target that is both a large unmet need but has strong biologic rationale.

Jason Butler

Okay, great. That's helpful. Thanks for taking the questions and thank you for providing all of the helpful details in the call.

Amit Munshi

Thanks, Jason.

Operator

Thank you. Our next question comes from Jessica Fye from JPMorgan. Your line is open.

Nico Dil

Hi. This is Nico on the call for Jessica. Thank you for taking our questions. Would you give us your thoughts on the healthy selexipag launch and where you expect ralinepag to differentiate?

Amit Munshi

I'm sorry, could you repeat that question? It was a little difficult to hear.

Nico Dil

Would you give us your thoughts on the healthy selexipag launch and where you expect to differentiate?

Amit Munshi

Yes. So, we're watching it carefully. The ralinepag program is in development and early, so we're waiting to see the output of the Phase 2 data before we'll make any judgments or comments about, if we think the molecule is better or anything of that sort. It's just we believe that the quality of the molecule, the quality of chemistry here at Arena has put into our hands a fantastic molecule. So, we really hope to be able to share more insight on the differentiation the closer we get to the Phase 2 data.

Nico Dil

Great. Thank you.

Operator

Thank you. Our next question comes from Jim Birchenough from Wells Fargo. Your line is open.

Jim Birchenough

Hi guys, thanks for the update. Just a few questions. On etrasimod, I'm just trying to understand what your threshold for success will be here. I'm interested in how you're approaching each of your development candidates. Should you see evidence that is not as good as, say, something like ozanimod, either in terms of heart rate effects or clinical efficacy, what do you do in that situation and where do you set the bar so we know when we see the data what to look for?

Amit Munshi

Sure. So, one of the things that we're really excited about with these molecules and let me focus on etrasimod first, is as the next generation receptor modulator has some very unique properties, including pharmacokinetics and the way it distributes amongst various tissues in the body, we firmly believe that we're optimized the receptor targeting in a way that is applicable to diseases such as ulcerative colitis. And so we're going to be watching very carefully not only the clinical outcomes, but we continue to do work on the underlying receptor biology, understanding it well relative to the competing products in development. Not all of these molecules will have the same impact across the same range of conditions. They affect the various receptor subtypes from the P1 to the P5 differently. Not all will have the same safety profiles. Again, the affect the receptor pharmacology P1 to P5 very differently, and over time we will disclose more information about how we believe our product is differentiated from the competition. But I will leave it right now to say that in an initial first 90-day review, I'm very confident that we have a product that is highly differentiated with improved pharmacokinetics and what we believe is an optimized receptor-targeting platform. So, we'll have to wait until we get closer to the clinic – I'm sorry, closer to the clinical data to make judgments on the actual clinical data. But to fill in the question and bridge the question that you just asked and Alan asked earlier, the profile of this molecule lends itself very well to a certain set of diseases where some of the other S1P modulators might not work as well.

Jim Birchenough

And maybe just to follow-up on the PK part of it in terms of optimal pharmacokinetics. I know in the past ozanimod has been characterized as having very low special compartment distribution, and there has been some attribution for that being what underlies not only the receptor selectivity but also just the low heart rate effect. And just wondering if you can characterize whether you have a similar dynamic with your product where you have low distribution to that central compartment and how important it is?

Amit Munshi

Yes. So, we’ve completed multiple Phase 1 trials to date and that data will be out at a major medical meeting, so I don't want to jump the gun here. But I will tell you that we're very pleased as to the lack of dose titration required for our program as well as the dosing ranges we're able to use relative to Ozanimod and some of the other S1P modulators. And, again, I think that speaks to the type of the improved pharmacokinetics and receptor selectivity. So, I don't want to jump the gun, but we'll be releasing that data at a medical meeting, but I will tell you that we believe that the molecule has some very inherent advantages.

Jim Birchenough

And then just one final question just more specifically. In terms of enrollment in the Phase 2, I can't remember if you said how far along you are, what proportion of patients have you enrolled? And as we try and get a sense of whether you're going to be able to accelerate the timelines here, just where we're at right now in terms of enrollment?

Amit Munshi

Yes, we haven't disclosed that and we will not be disclosing actual enrollment targets or performance against targets. We did disclose that we'll be reading out on the data in late 2017 and again, walking in with a fresh pair of eyes, spending time with the clinical group and reorienting the clinical platform of this company and refocusing on the clinical development, I'm confident we can hit that timeline.

Jim Birchenough

Okay, great. Thanks for taking the questions.

Operator

Thank you. Our next question comes from Ted Tenthoff from Piper Jaffray. Your line is open.

Ted Tenthoff

Great. Thank you very much. Two housekeeping questions, if I may. First, just with respect to the $11 million in milestones, congrats on receiving those and on the new approvals. Will they be recognized at one point or will they be amortized? And also, I didn't see the Q out yet. What were Eisai's sales of Belviq in the quarter?

Amit Munshi

Yes, so first question, we will recognize those milestones when we receive them. And then, apologies, what was the second question?

Ted Tenthoff

Just what were Eisai's Belviq sales?

Amit Munshi

Yes, sure. So, net product sales from Eisai were $2.8 million in the second quarter of 2016.

Ted Tenthoff

So, they sold $2.8 million or that's what you received?

Amit Munshi

That's what we booked, which is what they sold.

Ted Tenthoff

Okay, thanks.

Operator

Thank you. And I'm showing no further questions from our phone lines. I would now like to turn the conference back over to –

Amit Munshi

Hey, Ted, apologies. That's our royalty, right? So, they would be getting the inverse of 31.5% of that.

Operator

And, pardon me, Mr. Tenthoff [Operator Instructions]. And I'm showing no other questions from our phone line.

Amit Munshi

Okay, thank you. This is Amit. Let me just end with some closing remarks. First of all, thank you for joining us today. We hope this will be the first of many conversations we get to have together, and we'll continue to work diligently to progress the pipeline and execute on our plans. We look forward to updating you on our progress as we continue to build on the opportunity we see in front of us. So, thanks again for your time and look forward to talking to you next question. Take care.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a wonderful day.

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