Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Arena Pharmaceuticals, Inc (NASDAQ:ARNA)

Q3 2007 Earnings Call

October 17, 2007 5:00 PM ET

Executives

Robert Hoffman - Vice President of Finance and Chief Financial Officer

Jack Lief - Chairman, President and Chief Executive Officer

Bill Shanahan - Vice President and Chief Medical Officer

Dominic Behan - Senior Vice President and Chief Scientific Officer

Analysts

Alan Carr - Needham and Company

Leland Gershell - Cowen and Company

Graig Suvannavejh - UBS

Bret Holley - CIBC World Markets

Matthew Osborne - Lazard Capital Markets

Elizabeth Naldi - Piper Jaffray & Company

Eugene Trogan - Morgan Joseph & Company

Bill Tanner - Leerink Swann and Company

Carol Werther - Summer Street Research Partners

Ding Ding - Maxim Group

Jim Birchenough - Lehman Brothers

Patrick Moriarty - Fortis Bank

Operator

Good day, ladies and gentlemen, and welcome to the third quarter 2007  Arena Pharmaceuticals earnings conference call

I would now like to turn your presentation over to your host for today's call, Mr. Robert Hoffman, Vice President of Finance and Chief Financial Officer.  Please proceed, sir.

Robert Hoffman

Thanks, Eric.  Good afternoon and welcome to Arena Pharmaceuticals third quarter 2007 earnings conference call.  I am Robert Hoffman, Arena's Vice President of Finance and Chief Financial Officer.  I will briefly review our financial results for the third quarter and nine months ending September 30, 2007 and then turn the call over to Jack Lief, our CEO, for a corporate update.

Before I begin, I would like to point out that we will be making numerous forward-looking statements during this conference call.  Such forward-looking statements include statements about our clinical trials and results, internal and partner programs, drug candidate pipeline, financial guidance, strategy, technologies and other statements that are not historical facts.  Such statements may include the words "plan," "will," "believe," "expect," "promise," "potential," "intend," and similar words.  You are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and reflect the company's beliefs, expectations and assumptions based on currently available operating, financial and competitive information and speak only as of the time they are made.  Risks and uncertainties that could cause actual results to differ materially from those described in our forward-looking statements include the timing and outcome of our licensing efforts, our and our partners' research and clinical studies, the regulatory process and our ability to obtain additional financing from collaborators and investors, and other risks identified in our SEC reports.  For a discussion of these and other factors, please refer to our risk factors described in the company's annual report on Form 10-K for the year ended December 31, 2006, the company's quarterly report on Form 10-Q for the quarter ended June 30, 2007, as well as other subsequent filings with the SEC.  For forward-looking statements, we claim the protection of the Private Securities Litigation Reform Act of 1995.

In the third quarter of 2007, we recorded revenues of approximately $5 million compared to third quarter of 2006 revenues of approximately $4.4 million.  All of our revenues in both periods were from our collaborations with Ortho-McNeil, a Johnson & Johnson company, and Merck.

In the first nine months of 2007, we recorded revenues of approximately $14.8 million compared to the first nine months of 2006 revenues of approximately $25.9 million.  All of our revenues in both periods were from our collaborations with Ortho-McNeil and Merck.

The first nine months of 2006 revenues included a $4 million clinical milestone under our Merck collaboration related to the initiation of the Phase 2 clinical trial as well as a $5 million clinical milestone from Ortho-McNeil related to the initiation of the Phase 1 clinical trial of APD668 for the treatment of type 2 diabetes.

At September 30, 2007, deferred revenues totaled approximately $6.1 million.

Research and development expenses increased to approximately $32.2 million in the third quarter of 2007 compared to approximately $22.7 million in the third quarter of 2006.  This $9.5 million increase was primarily attributable to an increase in pre-clinical and clinical study fees and expenses of approximately $6 million, as we continued the first and longest of our planned Phase 3 clinical trials for lorcaserin, known as BLOOM, as well as completing a Phase 2 trial of APD125 for the treatment of insomnia.

This $9.5 million increase in research and development expenses also included personnel costs and related research supplies increasing by an aggregate of $2.8 million, as we increased the number of research and development employees from 291 at the end of September 2006 to 340 at the end of September 2007.  Nearly all of the increase in research and development employees was development staff needed to support our internal programs.

Research and development expenses increased to approximately $108.8 million in the first nine months of 2007 compared to approximately $65.3 million in the first nine months of 2006.  This $43.5 million increase was primarily attributable to an increase in pre-clinical and clinical study fees and expenses of approximately $33.1 million, as we completed enrollment and continued our lorcaserin Phase 3 BLOOM trial as well as completed the Phase 2 trial of APD125.

This $43.5 million increase in research and development expenses also included personnel costs and related research supplies increasing by an aggregate of $7.6 million due to the increased number of research and development employees.  This $7.6 million increase in personnel costs and related research supplies included an increase of $0.9 million in non-cash share-based compensation expense to $3.1 million in the first nine months of 2007.

Included in the research and development expenses in the first nine months of 2007 was $52.8 million in external pre-clinical and clinical study fees and expenses, including $34.6 million in expenses for lorcaserin, $12.9 million for APD125, and $2.9 million for APD791.

Early in the third quarter, we announced the start of a Phase 1 trial for APD791, which is our oral internal-discovered drug candidate intended for the treatment of arterial thromboembolic diseases.  The balance of $2.4 million in external pre-clinical and clinical study fees and expenses was spent on our earlier-stage programs.

General and administrative expenses totaled $7.9 million in the third quarter of 2007 compared to $3.9 million in the third quarter of 2006.  This $4 million increase is due primarily to personnel costs increasing by $1.7 million.  Personnel costs in the third quarter of 2007 included $1.9 million in non-cash share-based compensation compared to $0.6 million in the third quarter of 2006.  The increase in general and administrative expenses was also the result of increased patent processing costs, totaling $1.9 million in the third quarter of 2007 as compared to $0.5 million in the third quarter of 2006.  We expect our patent fee expenses for all of 2007 to be similar to our patent fee expenses for all of 2006.  At September 30, 2007, we had 68 general and administrative employees compared to 58 at September 30, 2006.  General and administrative expenses totaled $19.6 million in the first nine months of 2007 compared to $13.2 million in the first nine months of 2006.  The increase is primarily the result of personnel costs increasing by $3.4 million.

Personnel costs in the first nine months of 2007 included $3.9 million in non-cash share-based compensation compared to $1.6 million in the first nine months of 2006.  Total non-cash share-based compensation expense was $7 million in the first nine months of 2007.

Net loss applicable to common stockholders was $32.8 million in the third quarter of 2007 compared to $20.1 million in the third quarter of 2006.  Net loss allocable to common stockholders was $104.4 million in the first nine months of 2007 compared to $51.9 million in the first nine months of 2006.

The increase in net loss allocable to common stockholders was primarily attributable to an increase in research and development expenses, along with the decrease in recognized revenues.  The increase in net loss allocable to common stockholders in the first nine months of 2007 was partially offset by additional $5.1 million in interest income as compared to the first nine months of 2006.  Interest income in the first nine months of 2007 totaled $14.3 million.

Cash, cash equivalents and short-term investments totaled $339.1 million at September 30, 2007.  We started 2007 with $388.8 million in cash, cash equivalents and short-term investments.

At September 30, 2007, we had approximately 61.2 million shares outstanding of common stock.  Assuming the conversion of all of our preferred shares into common stock, we would have approximately 68.4 million shares of common stock outstanding at September 30, 2007.

Based on our expected spending levels and revenues for 2007, our yearend cash, cash equivalents, and short-term investments balance is expected to be on the high end of our previous guidance range of approximately $259 million to $271 million and, perhaps, somewhat above that range.

Now, I would like to turn the call over to Jack Lief for a corporate update.

Jack Lief

Thanks, Robert.  Good afternoon, everyone, and thank you for joining our quarterly conference call today.  This past quarter, we achieved significant company milestones in our lorcaserin, obesity and APD125 insomnia programs.

For lorcaserin, we announced positive month six safety review by the independent Echocardiographic Safety Monitoring Board, or ESMB, in the Phase 3 BLOOM trial and for the APD125 insomnia program, we announced positive Phase 2 results.

We expect to continue to deliver on these corporate milestones for these programs and the other milestones that we have communicated to you over the past few years.  We intend to continue to improve our ability to develop and discover novel therapeutics.  We believe that our fundamentals continue to get stronger, and by persisting along the strategic course we have set, we create significant long-term value.

With that in mind, I would like to continue by first reviewing recent developments of our two most advanced programs and then review our other programs.  BLOOM's positive month-six ESMB review in September established that differences, if any, in the incidence rates of FDA-defined valvulopathy in patients treated with lorcaserin and the control group did not meet the independent board's predetermined stopping criteria.  We believe this was a significant milestone, helping further support lorcaserin's cardiac safety profile and its potential as a safe and effective weight-management treatment.  The board's review is also consistent with earlier clinical trials that indicated no apparent effect on heart valves as well as pre-clinical studies conducted for up to 12 months at more than 50 times the equivalent human doses.

The ESMB also confirmed that the rate of valvulopathy in the placebo group is consistent with the company's statistical powering assumptions used in the design of the pivotal trial program to monitor patients with an increased risk of developing valvulopathy.

Based on these findings from the ESMB review, we are continuing to move ahead with the BLOOM study and we remain on track to initiate two additional Phase 3 pivotal trials later this year.

In addition to the month-six ESMB findings, there has been a recent independent study, which helps establish a rat model for valvulopathy.  We believe this study is also supportive of lorcaserin's emerging cardiac safety profile.

In a paper by Steven Droogmans published in the European Heart Journal a few months ago, it was shown that over a five-month study period pergolide caused valvulopathy in rats in as little as 10 weeks.  Pergolide is a potent 5-HT2B agonist that has been shown to cause valvulopathy in humans. This is the first time known to us that a drug causing valvulopathy in humans has been shown to cause valvulopathy in a pre-clinical model.

This contrasts with Arena's lorcaserin pre-clinical studies where we dosed for six months in rats and 12 months in monkeys, and there was no observed heart valve effect with lorcaserin.  The lorcaserin studies were dosed up to 54 times the expected human therapeutic dose.

I will now briefly review the BLOOM design and update you on its status and what to expect going forward in our lorcaserin pivotal program.  BLOOM is the first of three planned pivotal trials.  It is a double-blind, randomized, placebo-controlled trial evaluating a 20-milligram daily dose of lorcaserin: 10 milligrams before breakfast and 10 milligrams before dinner, versus placebo over a two-year treatment period in obese patients with or without co-morbid conditions and overweight patients with at least one co-morbid condition.

All patients receive baseline echocardiograms at screening and follow-up echocardiograms six months after starting the trial, and they will receive echos again at months 12, 18 and 24 to assess heart valve function over time.  These month-six echos were reviewed by the ESMB, and month-12 echos will be reviewed in the next quarter.  The ESMB is an independent board of experts that primarily monitors echocardiographic data in the BLOOM study.

BLOOM continues to proceed as expected.  We have not seen any material safety or efficacy differences compared to what we expected to see in this trial.  If we do see any such difference that would impact the continuation of the trial and improvability of lorcaserin, I think it is reasonable to expect that we would make a public announcement.  I look forward to providing additional updates to you on the status of BLOOM regularly on our quarterly calls and at the time of the month-12 ESMB review in next year's first quarter.

We are currently in discussions with the FDA to finalize protocols for the two remaining pivotal trials that are expected to start later this year.  These trials will evaluate lorcaserin over a one-year treatment period, with one of the trials evaluating patients who also have type 2 diabetes.  As we start the remaining two planned pivotal trials and then head into the month-12 ESMB review, I think this program becomes more attractive, a more attractive licensing opportunity for both Arena and various potential partners.  We will continue to explore these opportunities, and I think it is likely that this program will be partnered at some point prior to NDA approval.

While exploring the partnering interest in lorcaserin, we intend to remain flexible, keeping our options open, maintaining a strong negotiating stance to more effectively optimize our opportunities and do what we believe is best for our stockholders and the long-term development of Arena.

In addition to the positive ESMB review last quarter, we also announced positive preliminary results from our Phase 2 clinical trials of APD125 in patients with chronic insomnia.  APD125 is an oral drug candidate discovered by Arena that is being evaluated in insomnia patients who have difficulty maintaining sleep after initial sleep onset.  The Phase 2 trial was a randomized, double-blind, placebo-controlled study evaluating the safety and efficacy of nighttime dosing in 173 patients with chronic insomnia.  The trial evaluated two doses of APD125 using several standard sleep efficacy measurements.  The trial employed a crossover design, meaning that every patient received both active doses of APD125, 10 and 40 milligrams, and placebo in random order for one week, separated by about one week to allow for wash out of the study drug.

In this Phase 2 trial, patients treated with APD125 experienced statistically significant improvements in objective measurements of sleep maintenance, including waking after sleep onset, wake time during sleep, and the number of awakenings and arousals.  With APD125, patients not only very significantly reduced the number of times they awoke after falling asleep, but they reduced time spent awake during the sleep period by more than 50% from baseline.  Patients also experienced an increase in the time spent in deeper sleep with APD125 restoring sleep architecture towards a more normal pattern.

Importantly, these improvements in measurements of sleep maintenance were achieved without any next day cognitive impairment.  There were no major differences in reported adverse events as compared to placebo, and no serious adverse events were reported.

The trial had a larger than expected placebo response and we are continuing to try to better understand what may have contributed to this.  What may be most interesting is that, despite the high placebo rate, we still had a very robust evidence of improved sleep maintenance across all end points.

So it is very clear to us and our consultants that we have solid proof of concept for APD125.  We are very pleased with its emerging profile and we continue to believe APD125 has the potential to address the significant opportunity in the sleep market for improving sleep maintenance without next day hangover effects.  We know that the majority of patients suffering from insomnia have sleep maintenance complaints, which APD125 may be able to address in ways not possible with other drugs.

At this point, as we complete our analysis of the Phase 2 data we have not yet decided if it is appropriate to conduct a second Phase 2 trial focusing on subjective end points, which the recently completed Phase 2 was not appropriately powered to evaluate, but we are leaning in that direction.  While we continue to evaluate the data from this trial and review the development path for APD125 in light of these data, we are taking the opportunity to consider our partnering options.  At this time we are considering a partnership prior to Phase 3 for APD125, and we will actively evaluate such partnership opportunities.

I would now like to discuss our lead anti-thrombotic drug candidate, APD791.  Currently in Phase 1, APD791 is a novel oral inhibitor, known pharmacologically as a selective inverse agonist of the 5HT2A serotonin receptor.  Serotonin activation of the 5HT2A receptor on platelets and smooth muscle is thought to play an important role in the events leading to thrombosis and elevated serotonin levels have been associated with increased cardiovascular risk.

Normally, when a platelet is activated by a blood-clotting factor such as ADP, thrombin or collagen, the platelet releases serotonin, which in pre-clinical studies promotes platelet aggregation, vasoconstriction and intimal hyperplasia or thickening of the vessel wall.  By targeting the 5HT2A receptor found on platelets and in other cardiovascular tissues, APD791 has the potential to work through multiple mechanisms and could prove more effective than existing anti-platelet therapies.  By blocking activation of the 5HT2A receptor on platelets and in other cardiovascular tissues, we believe APD791 may curb platelet aggregation, vasoconstriction and intimal hyperplasia in the clinical setting, thereby reducing the risk of thrombosis.

In addition, APD791 may lack the potential to increase bleeding risk at therapeutic doses because in pre-clinical studies it inhibited only the serotonin mediated amplification of platelet aggregation induced by other agents, such as collagen and ADP, while still allowing primary aggregation to take place.

In July, APD791 started a single ascending dose Phase 1 clinical trial in healthy adult volunteers.  Doses tested range from two milligrams to 320 milligrams.  We are still analyzing data but believe all doses were well tolerated.  We will soon be moving into a multiple ascending dose Phase 1 trial and intend to have the results of the entire Phase 1 program early in 2008.  We are planning to explore partnership opportunities for APD791 as this program continues to progress.

I would now like to review our partnered programs with Ortho-McNeil and Merck.  With respect to our type two diabetes partnership with Ortho-McNeil, the Phase 1 evaluation of APD668 is continuing in a program being conducted by our partner.  APD668 is a novel oral drug candidate that was discovered by Arena and targets the Glucose-Dependent Insulinotropic Receptor, or GDIR.  The GDIR is a novel receptor discovered by Arena with potential to stimulate insulin production in response to increases in blood glucose.  The Phase 1 program which began last year included evaluation of multiple ascending doses in patients with diabetes.  While primarily designed to evaluate safety, the program is also intended to provide information on the pharmacologic activity of APD668.

I realize that we have been stating for some time that we expect to be able to provide you some color on the Phase 1 studies and our partners' plans for moving this program forward.  However, since the development of APD668 is largely controlled by Ortho-McNeil, we do not have control over the timing of such events, and the timetable that has been communicated to us has been extended on a couple of occasions.  With that said, based on our understanding of the current time table communicated to us, we hope to be able to give you some clarity on the Phase 1 results and Ortho McNeils plans for the GDIR program this quarter.  We continue to believe that this is a very promising program and that drugs targeting the GDIR have significant therapeutic potential.

With respect to our niacin receptor program partnered with Merck, development of niacin receptor agonists for the treatment of atherosclerosis and other disorders is continuing.  Both we and Merck continue to believe the niacin receptor has considerable therapeutic potential in raising HDL for the treatment and prevention of atherosclerosis as well as other pre-clinical, potential pre-clinical benefits.  I expect that we can have additional clarity on the progress of this partnership over the next quarter or so, as Merck proceeds with its plans to reenter the clinic with a backup compound.

Looking ahead to corporate events over the next few quarters, we can expect several meaningful milestones, including the initiation of two additional one-year pivotal Phase 3 lorcaserin studies later this year and the month 12 ESMB review of the ongoing BLOOM trial.  I also expect to provide updates on our APD125 program, as we establish our plans for its continuing development.  Early next year, we also expect to announce Phase 1 trial results from our program evaluating APD791.  Over the next couple of quarters we plan to announce our next IND candidate with Phase 1 initiation expected in 2008, and provide greater visibility on our partner programs and other corporate milestones.

We will continue to consider active, attractive partnership opportunities in order to privatize our internal efforts to create value, and manage our development expenses.  We will continue to apply our focused, long-term outlook and purposeful use of capital, and we intend to maintain a strong balance sheet.  A strong financial position provides flexibility and will allow us to appropriately leverage our assets to create a company committed to serving patients and creating value for our stockholders.  Our corporate values, innovation, integrity, teamwork and excellence will remain at the core of all that we do.  We will continue to systematically build Arena with a strategic plan that includes, but certainly looks beyond, our next corporate milestone and focuses long-term on benefiting patients and optimizing stockholder value.

Thank you.  The call is now open to questions.  Eric?

Question-and-Answer Session

Operator

Your first question comes from the line of Alan Carr with Needham.  Please proceed.

Alan Carr - Needham & Company

Hi, good afternoon.  Thanks for taking my question, and congratulations on a good quarter.

Jack Lief

Thank you.

Alan Carr - Needham & Company

A question on partnering.  What sort of impact has the six-month safety data had on your discussion?  Are there any changes in level of interest and do you have different partners involved now, or potential partners involved in discussions now?

Jack Lief

Well, we see our partners relatively regularly, potential partners I should say, relatively regularly at various conferences throughout the year.  Obviously, they are aware of what is going on.  At last month’s Investor Conferences I noted that there were a number of large pharma representatives there at my presentation.  So we have not begun serious discussions thus far regarding lorcaserin with a partner.  However, I do not think that there is any rush and I think that we have time.  I think the value will increase as we move closer to NDA.

Alan Carr - Needham & Company

Do you think having 12-month data available is going to have a major impact on where these discussions head?

Jack Lief

Well, I think 12 months is obviously better than six months and we think that six months was indicative of the long-term safety of our compound.  But 12 months certainly is going to be better.  Safety is always a work in progress so more information is always better, and I think we will have better opportunities for partnering as the study continues.

Alan Carr - Needham & Company

Okay. I have a question on 125.  When can we expect to see full data from that?  The second part of that is what sort of factors are you considering in terms of whether or not to conduct this second -- possibly a second Phase 2 trial?

Jack Lief

Well, we hope to publish.  Bill Shanahan, my Chief Medical Officer, is sitting hear next to me.  Bill, any visibility on publication and possible publication dates or anything like that?

Bill Shanahan

Sure.  Firstly, we would of course look to an appropriate scientific forum in which to present the data such as - the Sleep Society meetings that come up would be one possibility, and we would hope to publish sometime perhaps next year or thereafter.

Jack Lief

Sure, and the second part of your question was, what will make us -- allow us to decide whether to move into another subjective study.  As I said on the call, we are leaning towards a subjective study right now, but we have not made that final determination.  Is that still the case, Bill?

Bill Shanahan

Yes, I think we are still considering it, but leaning towards doing an additional study.

Jack Lief

Did we answer your question, Alan?

Alan Carr - Needham & Company

Yes, thanks.

Operator

Next question comes from the line of Leland Gershell with Cowen and Company.  Please proceed.

Leland Gershell - Cowen and Company

Good afternoon.  Thanks for taking my question.  Question on 125, placebo effects aside I noticed a lack of a clear dose response between the 10 and 40-milligram groups on the WTDS and WASO endpoints.  I was wondering how you interpret those findings and what it might mean for future studies?

Jack Lief

Well, keep in mind that a crossover design is a very artificial way of measuring what the drug will actually do in patients in a parallel group design.  However, it is a very objective way of measuring whether the drug is performing as intended.  What I think we have shown is that the drug did indeed perform in a very robust fashion.  Even though the placebo response was significant, the drug response was even more significant.  Generally, the 40 milligrams looked a little bit better than the 10 milligrams in most of the end points that we saw.  Bill, what do you think?

Bill Shanahan

Yes, I agree.  On some of the measures there is not a clear dose response, but on quite a few there tends to be a pretty good dose response.  One place where we have seen a very clear dose response, both in Phase 1 and Phase 2, is increases in deep or slow wave sleep and in things like number of awakenings and arousals.  Certainly what we need to be -- what is going to be really important of course is subjective findings as well and that is why we are strongly considering another study before going into Phase 3.

Leland Gershell - Cowen and Company

Okay, one more question on 791.  I should take from your comments that we will not hear data from the first Phase 1 but we will hear data from those that will be pushed into the first part of 2008?

Jack Lief

Yes, so far so good, and what we are going to try and do is to give you the overall global result of that, I think.  Bill? Is that still the plan?

Bill Shanahan

Sure. Yes, still.

Jack Lief

So we would rather have both the single and multiple dose package available for announcement.

Leland Gershell - Cowen and Company

Okay. Fair enough.  Thanks very much for taking the questions.

Operator

Your next question comes from the line of Graig Suvannavejh with UBS.  Please proceed.

Graig Suvannavejh - UBS

I have got several questions if I may.  Two are on pipeline and one is actually on the P&L. First of all, on APD125 you talk about potentially leaning towards doing this extra Phase 2 trial.  I am trying to get a sense of it.  Is that simply to flesh out a little bit better, just to understand the compound - what you saw in the first Phase 2 - or do you think it is important that you do the study to increase the potential of partnership on this compound?

Jack Lief

Well, I think both of those are important but I think a third reason for doing this study is the subjective study would be a parallel design study which would be different obviously from the cross-over design study.  So we think that there may have been some interaction of the crossover design to boost or officially boost placebo, whereas typically studies are done, subjective studies such as these are done parallel and they are unencumbered by that design.  Is that our current thinking, Bill?

Bill Shanahan

It is.  Obviously when you get into a sleep laboratory, you have got two placebo effects, the drug and changing the sleep environment to a sleep laboratory. Certainly it looked like, for many of the variables as people went through their dosing week, the placebo patients improved, but the drug-treated patients maintained their same very good effects.  

Jack Lief

That is something we would expect to fall out of a subjective sleep study.  In addition, we had very stringent requirements for getting into this trial.  We required 60 minutes or more of wake-after-sleep onset.  So we were taking in some of the most severe people in terms of sleep maintenance issues. We think these things probably contributed to the larger placebo effect.

Graig Suvannavejh - UBS

Does this at all impact your prior statements on timing of advancement of the program to Phase 3?

Bill Shanahan

We still think that the drug will be more than ready for Phase 3 next year.  Indeed it could be ready currently but as I said earlier we are leaning towards the second Phase 2B study, if you will, prior to Phase 3.  The plan is once that is done, we will obviously have other discussions with partners, and hopefully we will have some success in that area prior to Phase 3 later on next year.

Graig Suvannavejh - UBS

Okay. Great.  Just a second question, if I could, with regards to the two additional Phase 3 trials for lorcaserin.  So the timing of when those trials would start is here in the fourth quarter, and in your discussions with the FDA is there anything that you can comment on that has you thinking that what they are thinking is consistent with what you are thinking and that pretty much the design of the trials will be as expected?

Jack Lief

Well, we certainly believe that they are thinking maybe similar to our thinking but we cannot comment on that.  And you know, our guidance is still the same.  I do not want to suggest that we know everything that the FDA is thinking there, but all of our communications thus far have been supportive of this idea that we would be able to begin relatively soon the other two studies and we are making plans to do that.

Graig Suvannavejh - UBS

And then my last question has to do with, so your R&D spend was lower relative to my expectations.  It probably just had to do with timing of when I thought you might start the Phase 3s for lorcaserin.  So just on overall 2007 financial guidance, aside from the change in what you said on the cash balance expected by yearend, is -- are all other elements of the P&L in terms of guidance assumptions still consistent.

Jack Lief

Yes.  Robert?

Robert Hoffman

So some are a little bit higher, some are a little bit lower, so that is why I guided towards the cash which we think will be on the higher end of the range.  You may recall that for R&D expenses that the two additional Phase 3 will start -- we expect them to start in the fourth quarter and those are certainly front-end loaded with the screening process and getting people enrolled in the study.

Jack Lief

Sure.  So, the short answer to that question was, yes.  I think our cash spend will catch up next year.

Graig Suvannavejh - UBS

Okay, great.  Thank you.

Operator

Your next question comes from the line of Bret Holley with CIBC World Markets.  Please proceed.

Bret Holley - CIBC World Markets

Hi. Thanks for taking my question.  Jack, I am a little bit curious about something you said in your prepared remarks.  You said that in the BLOOM trial, that you had not noted any differences in safety or efficacy, relative to your expectations.  I guess what I am wondering is how could you really know efficacy at this point?

Jack Lief

We are cognizant of blinded data and we believe that our drug will be quite effective.   And so obviously when a study is blinded, we also are looking at any AEs that we are seeing, adverse events, or those sorts of things.  Those are also blinded, but we have not seen any patterns, we have not seen any numbers that would give us any concern materially regarding the overall safety or efficacy of our drug.  I would love to be able to un-blind the study and give you exact numbers as we are approaching the one-year time point for many of these patients, but we cannot do that.

So we will just have to do the best we can thus far.  I think most people believe that we have a very potent weight loss compound.  The key in getting our drug approved is going to be the safety.  So we are really focusing on the safety, we have been focusing on safety all thus far.  We want to make sure that we are picking up all of the safety signals and concerns that there might be in any of our studies, so that at the end of the day, we are well prepared -- should our drug get to NDA.

Bret Holley - CIBC World Markets

So, I guess this is a follow-up question, then.  Have you actually, in the blinded data, seen an actual separation between two groups that you are referring to, to give you confidence in the statement on efficacy?

Jack Lief

Yes, we have not looked at those sorts of statistics thus far.

Bret Holley - CIBC World Markets

Okay.  And then I guess the last question is, my understanding of the ESMB reviews is that, it was just focused on the echocardiogram data.  Is that the case or did they actually investigate potential other AEs and SAEs in the data?

Jack Lief

Bill?

Bill Shanahan

They looked at the echocardiographic data, they were also aware of SAEs that had occurred, and the idea there was because if there were any cardiovascular SAEs they wanted to be aware of them.  But their focus is on the cardiovascular safety and, specifically, the echocardiographic safety of the compound.

Certainly, if it were not for our need to get some sort of blinded read at the data in terms of our powering assumptions, then we would not have even needed ESMB.

Bret Holley - CIBC World Markets

Okay.  Thank you very much for answering my questions.

Operator

Your next question comes from the line of Matthew Osborne with Lazard Capital Markets.  Please proceed.  Mr. Osborne, your line is open.

Matthew Osborne - Lazard Capital Markets

Hi.  Thank you for taking the questions.  A couple of questions, just can you remind us the half life of APD125 and how, with such a half life, how that mechanistically would not impact next day residual effects?

Jack Lief

Dominic?

Dominic Behan

The mean residence time is around six hours. So, we believe that the majority of the drug is really gone from blood after six hours.  Mechanistically speaking, this mechanism is very different to the GABA mechanism, which stimulates an inhibitory neurotransmitter system.

This works by blocking a stimulant -- a stimulation response by serotonin. So, mechanistically it is very different in that regard. We think that even if we have spill-over of the compound to the next morning or next day, we are not going to have that same liability of the suppressing GABA active compounds.

In fact, published data with retanserin, which is also an older class of atypical anti-psychotic that has a two-way inhibitory activity has shown even with a half life of 40 hours, that they can see strong effects on sleep consolidation.  But there is no significant next day effect. So mechanistically two-way blockade is very different to the GABA stimulation approach.

Jack Lief

So keep in mind this is a non-sedating compound that improves sleep maintenance

and sleep architecture.  I think that is really important. Bill?

Bill Shanahan

We also have some specific data with this drug from both Phase 1 and II that addresses this issue.  In Phase 1 trials, as you recall, we did do fairly extensive psycho motor testing at Cmax on the order of one to two hours after taking dosing in the morning there during those Phase 1 trials, and did not see any important impairments even at Cmax.  In this Phase 2 trial, we did next morning cognitive function testing and saw no impairment. So what we think really distinguishes this drug from GABA drugs is that you can function quite well when the drug is on board.

Matthew Osborne - Lazard Capital Markets

Actually as a follow-up then, can you put into context perhaps the effect on latency to sleep onset?  So if it is less with APD125 and this class as a whole relative to the sedating agent, effectively how would you compete on a head-to-head basis relative to latency to sleep onset, relative to the other parameters that you improved that you mentioned?

Jack Lief

The GABA-active drugs tend to reduce latency to sleep onset by 10 minutes.  Some studies show as much as 15 minutes.  For most people with chronic insomnia, they do not have a problem falling asleep.  They have a problem staying asleep, and they have a problem waking up and not being able to get back to sleep.

So if you compare the number of awakenings that we have with our drug, compared with Ambien, there is a much more robust effect of our drug versus these GABA-active drugs.  Patients stay asleep longer and they wake up fewer times throughout the night.

I think that is the beauty of our drug in that at the end of the night they have a better outcome if they sleep better in a deeper type of fashion. Did we answer your question? Matt? Matt? We lost him?

Operator

Your next question will come from the line of Elizabeth Naldi with Piper Jaffray.

Elizabeth Naldi - Piper Jaffray & Company

Hi, thanks for taking my call.  Is your APD125 is a Phase 3 trial contingent upon a partnership or if a partnership does not happen will you still proceed with the program?

Jack Lief

You know we are talking about potential Phase 3 in the latter part of next year.  We still have a year of timing to discuss that with partners. I think it is premature to make any judgments there.  It is certainly not my intension to halt all development of all programs waiting for partners to come around at any time, but I certainly will be looking to partnering this program before Phase 3.

Elizabeth Naldi - Piper Jaffray & Company

Great. Thank you.

Jack Lief

My pleasure.

Operator

Your next question comes from the line of Eugene Trogan with Morgan Joseph & Company. Please proceed.

Eugene Trogan - Morgan Joseph & Company

Hi.  Most of my questions have been answered.  Just one quick corporate development question I guess, if you can call it that.  There is a company that recently became public by the name of Athersys that is developing an orally selective 5H2C receptor agonist for obesity.  They are currently in Phase 1 clinical trials.  I was wondering to the extent that you are aware what differences there are between their compound versus lorcaserin, and is there anything in the intellectual property that you may have for lorcaserin that may protect you in this regard?

Jack Lief

Well, intellectual property-wise, I am not sure that we have anything to prevent anybody else from developing an obesity drug that works at the 5HT2C mechanism other than something that is very similar to our compound lorcaserin.  From the perspective of how their trial is doing, they do not call us up and fill us in on those trials, so I am really not sure where that study lies.

I think the important thing to keep in mind is that we have shown people that we have very robust weight loss and we can do this in a very well tolerated fashion.  I expect that we are going to be able to show that also in the Phase 3 program as well.  I have not seen any clinical data from Athersys of any sort yet.

Eugene Trogan - Morgan Joseph & Company

Right.  But in terms of selectivity towards 2c versus 2b, I was wondering if you were aware of anything with that compound versus lorcaserin?

Jack Lief

It is not just selectivity, it is bioavailability and compartmentalization.  Remember, in addition to the 100-fold selectivity that we have told people about, there is also a thirteenfold preferential partitioning to brain versus plasma.

That is where you want the drug to go in. There is basically, functionally we believe a thousandfold, greater than a thousandfold 1 difference between central 2c and peripheral 2b activity.  So I cannot comment on the Athersys program.

Eugene Trogan - Morgan Joseph & Company

Okay.  Thank you.

Operator

Your next question comes from the line of Bill Tanner with Leerink Swann.  Please proceed.

Bill Tanner - Leerink Swann and Company

Thanks.  Jack, just a question on the partnership.  Just thinking about if you can help us understand a little bit how you are thinking about the point in the timeline where you have the most leverage or where you maximize the NPV in terms of doing something?  Because just trying think about it, you have got obviously some increased trial expenses that are going to begin to be incurred at the end of this year, declining in cash resources.

I guess it would seem that a partner might want some say in the Phase 3 design unless you guys are going to do a design that most of the companies would be comfortable with.  Then you made a comment that it would be like -- it could be possible that you would partner it before NDA approval.  I am thinking why would someone -- if they did not do it before NDA filing, would they not just want to wait until approval?  So just help us understand that a little bit, the whole spectrum, I guess.

Jack Lief

Sure.  One could imagine that there is a complete release of Phase 3 data.  The data will be published and that sort of thing, which we believe will be supportive of a very exciting product that we think lorcaserin is.  Also in the FDA review process there is an advisory committee meeting, which will meet before that approval date.  Assuming that committee is positive for approval, I think it would be assumed that the FDA would follow the recommendations of that advisory committee.

Before approval there are usually negotiations on labeling and a variety of things like that.  So there is a significant delay in terms of the final approval and sort of expectation of approval, if you will.  I think we have a lot of opportunities for partnering around that time as well.  Keep in mind that the 12-month ESMB is also an important milestone.  That is also before NDA approval, and I think there is always a possibility that we will be partnered following that event as well.

So you are right. We do spend a lot of money in the clinical area. But I think the company is well served to do studies that are robust and meet the high expectations of the FDA, and those are costly studies.

Bill Tanner - Leerink Swann and Company

Okay, fair enough.  I guess I just have one quick question on the 791 program.  Can you remind us -- this would be chronic therapy, so can you remind us how that pharmacophore actually differs from 125 as it relates to a receptor?

Jack Lief

Sure.  Dominic, you want to address that?

Dominic Behan

It is a different class regarding the pharmacophore.  But the fundamental difference is that unlike 125, this compound is designed to have preference for the plasma compartment.  It is less of the compound within the therapeutic dose range that gets into the CNS.

Jack Lief

In animal pre-clinical studies, the drug is not really found in the brain of some animals.

Bill Tanner - Leerink Swann and Company

Okay. So then, just the behavior of the molecules would not lend itself -- differential behavior in molecules would lend itself to some pricing issues.  Ultimately both of them are commercialized, I guess.

Jack Lief

Oh, sure. And there are different half-lives and that sort of thing in the molecules. I would not think that this would be a good drug for sleep, the 791.

Bill Tanner - Leerink Swann and Company

Got you.  Okay, thank you.

Operator

Your next question comes from the line of Carol Werther with Summer Street.  Please proceed.

Carol Werther - Summer Street Research Partners

Thanks for taking my question.  If you are going to start a second Phase 2 with 125, should I think it is going to start in the first quarter of next year and could be done by mid-year?

Jack Lief

I would suggest that you think in terms of the halves of the year.  So we might not actually start the study.  We will certainly understand what we want to do before then.  But the study will start in the first half.  These studies typically move quite quickly, maybe 30-day dosing and that sort of thing.  So we will have that data relatively quickly.

Carol Werther - Summer Street Research Partners

Okay, great.  The other question I had was the mouse model that you talked about where you do see valve changes.  Have you tested lorcaserin in that model?

Jack Lief

Yes.  It was a rat study with Droogmans.  The rat species was one of the pre-clinical species that lorcaserin has been tested on under GLP conditions for six months.  We very carefully evaluated all the heart valves after that six-month period and saw no signals that were apparent on those valves.  That is completely different from the Droogmans study, which showed significant thickening and regurgitation after only 10 weeks.

Carol Werther - Summer Street Research Partners

Okay, great.  Lastly, you are planning to do EKGs in the next two pivotal trials for lorcaserin, correct?

Jack Lief

Echos, yes.

Carol Werther - Summer Street Research Partners

Echos.  All right.  Okay, great.  Thank you.

Operator

Your next question comes from the line of Ding Ding with Maxim Group.  Please proceed.

Ding Ding - Maxim Group

Thank you for taking my call.  One question on APD125.  There are different compounds being developed in this class including compounds from Sanofi, Schering, KDNL, Lilly.  How differentiated do you think 125 is from the other 5HT2A agonist based on the data we have so far?  I know that not all studies can be compared, but what is your overall assessment?

Jack Lief

Well, overall we think that the effect on slow wave sleep and sleep architecture was very robust, perhaps more robust with our drug than any other drug that has been reported that we are aware of.  But then again, of course, all of the potential drugs have not been reported to us.  There may be some other drugs that we are not aware of.

But it is a competitive area in research and development.  And so the fact that Sanofi, which is the sleep leader, is highly interested in this field gives us optimism that the mechanism is the appropriate one to go after as a next-generation sleep agent.  We just have to make sure that we have a very safe drug, which so far, the drug looks really good.  I think we will be in good shape there.

Ding Ding - Maxim Group

Right.  Given this class of drug has no impact on sleep onset but has very good impact on improving sleep quality and sleep maintenance, in a real world setting how do you think this class of drug can be positioned? In that context, what type of partner might be ideal for you in terms of taking 125 forward, in your opinion?

Jack Lief

Well, it is a primary care market -  the sleep, treating sleep. I think the positioning is that we expect it to be on schedule. We expect side effects to be very benign, if any.

We expect the drug to be extremely well tolerated resulting in a better outcome the following morning.  Obviously, we do not expect to get the entire market.  A partner would need to have a good primary sales force and be interested in this field.

Ding Ding - Maxim Group

Right.  Lastly, if I may, how should we think about the total trial cost for the Phase 3 of lorcaserin, say, for the 6,000-patient study?  Is $125 million still the current expectation?

If that is the case what is the cost allocation for the rest of the year?  We are really talking about a very small front-end loaded cost associated with two additional studies, but how should we think about the cost in 2008, I guess?

Jack Lief

Yeah. The front end is actually a very large portion of the cost allocation of these studies, because there is a lot of work that gets done to enroll the right patients and work those patients up into the study.  We are still waiting to get final protocols from the FDA.  I think it is premature to guess what final costs might be.  Last quarter, we gave guidance at $125 million and you can see that we are spending a little bit less thus far.  But I think that is a timing issue, so I think we are going to catch up on that.

Ding Ding - Maxim Group

Okay.  Maybe just a last question.  I understand the research phase of the Merck collaboration ends later this month and J&J partnership also expires in December of this year.  Do we know if either collaboration will be extended, and how that would affect the development program with Merck and also McNeil?  Is there any effect on your own burn rate going forward?

Jack Lief

Yes. We do not expect the collaborations to be extended.  We think we have done our job really well.  We have given Merck a number of options, a number of opportunities to put into the clinic.  With J&J, it is the same thing.

We think our eligibility for milestones and royalties obviously continue as the compounds that work at our targets are further developed by our partners.  I think in general, we will shift resources from our partnered programs to our own efforts, and I think it will have just a very minimal impact on overall burn for the company.

Ding Ding - Maxim Group

Great.  Thanks very much.

Operator

Your next question comes from the line of Jim Birchenough with Lehman Brothers.  Please proceed.

Jim Birchenough - Lehman Brothers

Good afternoon.  Another follow-up on APD125 - just based on the design of the 173-patient trial and the data that we saw, you mentioned the crossover design and commented on the dose response.  What might we expect a Phase 2 trial with subjective end points to look like?

Jack Lief

Well, this would be a parallel design instead of a crossover design, so one group would get placebo and one or more groups would get the drug in various doses.  They would be dosed for a period of time - let us say 30 days.  They would keep a diary typically of how well they slept and possibly they would come in to be evaluated during that period of time.

It would be completely different. They would stay at home. They would sleep at home and at the end of the day its all done double blinded so it would be a very rigorous study. But at the end of the day, we would have a good understanding of how well patients believed and perceived that the drug was working.

Jim Birchenough - Lehman Brothers

Would you insist on using a 10 and 40 milligrams, again?

Jack Lief

We still have not decided on the doses yet. That is one of the things that we would like to see some of the -- some additional data that we are still collecting.

Jim Birchenough - Lehman Brothers

And with APD668, you mentioned that we could hope for clarity on Phase 1 results this quarter.  When exactly could we expect to get data from J&J and what has been the reason for the delay with receiving that?

Jack Lief

Well, you can feel free to ask J&J, but they have a series of committees that meet and evaluate the data.  We have seen the data ourselves and we cannot comment on that.  They have their own process and we have to be respectful of their process.  It is a very large company.

Jim Birchenough - Lehman Brothers

So it is still decided whether we will get topline data or anything in a press release?

Jack Lief

Well, I am not sure what the exact vehicle is.  I would assume it would be a press release.  What has been communicated to us is that we would be able to do this, this year.

Jim Birchenough - Lehman Brothers

Okay.  Thanks for taking the question.

Jack Lief

My pleasure.  One more?

Operator

Your next question comes from the line of Patrick Moriarty with Fortis.  Please proceed.

Patrick Moriarty - Fortis Bank

Yes.  Thank you, but all my questions have been answered.

Jack Lief

Okay.  That is good.  So I think we should close the questioning.  We are running a little bit late this afternoon. Before finishing, I would like to reiterate our commitment to executing our long-term vision and strategic plan.

We remain focused on benefiting patients and building stockholder value through the development, commercialization of Arena drug candidates independently, and with our partners. Thanks again for joining us on the call today.  Thank you.

Operator

Thank you for your participation in today's conference.  This concludes our presentation.  You may now disconnect.  Have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Arena Pharmaceuticals Q3 2007 Earnings Call Transcript
This Transcript
All Transcripts