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Arena Pharmaceuticals Inc. (NASDAQ:ARNA)

Q4 2007 Earnings Call

February 27, 2008 5:00 pm ET

Executives

Robert Hoffman - VP of Finance and CFO

Jack Lief - President and CEO

Dominic Behan - SVP and Chief Scientific Officer

William Shanahan - VP and Chief Medical Officer

Analysts

Cory Kasimov - JPMorgan

Alan Carr - Needham

Jason Zhang - BMO Capital Markets

Bret Holley - Oppenheimer and Company

Graig Suvannavejh - UBS

Elizabeth Naldi - Piper Jaffray

Carol Werther - Summer Street Research

Leland Gershell - Cowen and Company

Matt Osborne - Lazard

Jim Birchenough - Lehman Brothers

Tom McGahren - Merrill Lynch

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2007 Arena Pharmaceuticals Earnings Call. (Operator Instructions).

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’ fourth quarter and year-end 2007 earnings conference call. I’m Robert Hoffman, Arena’s Vice President of Finance and Chief Financial Officer. I will briefly review our financial results for the fourth quarter and full year ended December 31, 2007 and provide our guidance for 2008, our financial guidance.

Before I begin, I’d 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 partnered programs, drug candidate pipeline, financial guidance, assumptions, strategy, technologies and other statements that are not historical facts. Such statements may include the words plan, will, believe, expect, promise, potential, intend, or similar words. You are cautioned should not 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 outcome of our licensing efforts, our and our partner’s research in clinical studies, the regulatory process, our ability to obtain additional financing from collaborators and investors, whether our assumptions prove to be correct and other risk factors identified in our SEC reports.

For a discussion of these and other factors, please refer to the risk factors described in the company’s Annual Report on Form 10-K for the year ended December 31, 2006 and the company’s quarterly report on Form 10-Q for the quarter ended September 30, 2007, as well as other subsequent filings with the Securities and Exchange Commission. For forward-looking statements, we claim the protection of the Private Securities Litigation Reform Act of 1995.

In the fourth quarter of 2007, we recorded revenues of approximately 4.6 million compared to the fourth quarter of 2006 revenues of approximately 4.7 million. In the year ended December 31, 2007, we recorded revenues of approximately 19.3 million compared to full year 2006 revenues of approximately 30.6 million. Full year 2006 revenues included a $4 million clinical milestone on our Merck collaboration related to the initiation of Phase 2 clinical trial. It was a $5 million clinical milestone from Ortho-McNeil related to the initiation of a Phase 1 clinical trial. All of our revenues in 2007 and 2006 are from our collaboration with Ortho-McNeil and Merck.

In the fourth quarter of 2007, research and development expenses were approximately $40.7 million compared to approximately $38.1 million in the fourth quarter of 2006. In the year ended December 31, 2007, research and development expenses were approximately 149.5 million compared to approximately 103.4 million in the full year 2006. This $46.1 million increase was primarily attributable to an increase in preclinical and clinical study fees and expenses of which approximately 33.1 million were related to the ongoing Phase 3 program evaluating lorcaserin for the treatment of obesity and a Phase 2 trial of APD125, an Arena-discovered drug candidate under investigation for the treatment of insomnia.

Also contributing to the $46.1 million increase in research and development expenses was an increase in personnel cost of $9.4 million due primarily to an increase in the number of research and development employees from 306 at the end of 2006 to 349 at the end of 2007. This $9.4 million increase in personnel cost included in an increase of $1.3 million in non-cash share-based compensation expense to $4.2 million.

Included in research and development expenses in the full year 2007 was $73.5 million in external preclinical and clinical study fees and expenses and included $51.3 million in expenses for lorcaserin, $15.7 million for APD125 and $3.1 million for APD791, which is our internally discovered drug candidate intended for the treatment of arterial thromboembolic disease. The balance of $3.4 million in external preclinical and clinical study fees and expenses was spent on our earlier stage programs.

We had anticipated spending more in 2007 in external preclinical and clinical study fees and expenses primarily on lorcaserin based on plan to start BLOSSOM and BLOOM-DM trial before December 2007. However, we started trials later which allowed us time to successfully obtain permission from the FDA to remove the echocardiographic screening criteria from the BLOSSOM and BLOOM-DM Phase 3 trials, and therefore – thereby, deferred some of the planned 2007 related trial expenses into 2008. This later start is not expected to change our NDA submission timeline. Of the 48 research and development employees we added in 2007, 75% were development staff hired to move lorcaserin and other programs forward.

General administrative expenses totaled $6.9 million in the fourth quarter of 2007 compared to $5.2 million in the fourth quarter of 2006, in total, 26.6 million in the full year 2007 compared to 18.5 million in the full year 2006. This increase of $8.1 million in the full year 2007 is primarily the result of personnel cost increasing by $4.3 million. Personnel costs in the full year 2007 included $4.6 million in non-cash share-based compensation compared to $2.1 million in the full year 2006.

The $8.1 million increase in general administrative expenses was also attributable to an increase of $1.9 million in patent cost primarily related to our partnered programs. To the extent our partners’ reimbursed us for patent costs, reimbursements are classified as revenue. Such reimbursements totaled $3.9 million in 2007 and $2.1 million in 2006. At December 31, 2007, we had 68 general and administrative employees compared to 54 at December 31, 2006. Total non-cash share-based compensation expense was $8.8 million in the full year 2007 compared to $5 million in the full year 2006.

Net loss allocable to common stockholders was $40.9 million in the fourth quarter of 2007 compared to $36.4 million in the fourth quarter of 2006. Net loss allocable to common stockholders was $145.3 million in the full year 2007 compared to 88.3 million in the full year 2006. The increase in net loss allocable to common stockholders was primarily due 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 full year 2007 was partially offset by additional $6.2 million in interest income as compared to full year 2006.

Cash, cash equivalents and short-term investments totaled $398.2 million at the end of 2007 compared to 388.8 million at the start of 2007. Cash, cash equivalents and short-term investments at the end of 2007 included net proceeds to us of 103.2 million from the sale of 11 million shares of our common stock which we completed in November 2007. We earned $18.9 million in interest income in 2007. At the end of 2007, we had 72.3 million shares of common stock outstanding. Assuming the conversion of all our preferred shares into common stock, we would have 79.6 million shares of common stock outstanding at the end of 2007.

For 2008, our financial guidance is as follows. 8 to $12 million in revenues, which includes revenue for our manufacturing facility in Switzerland and excludes any potential milestones from existing collaborations that may be achieved in 2008. This revenue guidance assumes that we do not enter into any new collaborations in 2008. 193 to 209 million in total research and development expenses. This includes 79 to 85 million in internal research and development expenses of which $4 million is for non-cash share-based compensation charges. Total research and development expenses for 2008 also includes 114 to 124 million in external preclinical and clinical study fees and expenses primarily relating to the clinical trials for lorcaserin, APD125, and APD791.

This guidance assumes the expenditures for the continuation of Phase 3 program for lorcaserin, the initiation and completion of a Phase 2b clinical trial for APD125, and the completion of a Phase 1b clinical trial for APD791.

Over 75 of our, 75% of our external preclinical and clinical study fees and expenses guidance for 2008 relates to our continued development of lorcaserin. General and administrative expenses for 2008 of 27 to 31 million, which includes $4 million of non-cash share-based compensation charges and also includes patent costs related to our partnered programs and internal programs totaling $6.7 million of which we expect $2.6 million would be reimbursed by collaborators and therefore included the $2.6 million in patency revenue in our revenue guidance.

Cash usage for operating activities of 190 million to 210 million and capital expenditures totaling 38 to 44 million and included the cash paid at the closing for the acquisition of Siegfried Ltd. of a finishing manufacturing facility and related assets which closed in January of 2008. Capital expenditures also includes certain leasehold improvements to one of our facilities, 15 million of which we expect to be reimbursed in early 2009. Total cash used for operating activities and capital expenditures are therefore projected to be in the range of 228 million to 254 million.

We expect to end 2008 with approximately $160 million in cash, cash equivalents, and short-term investments assuming no new collaborations or milestone achievement revenues and that common stock will be issued in connection with the conversion or redemption of outstanding shares of our Series B redeemable convertible deferred stock including any that may be redeemed on the Series B1 December 2008 mandatory redemption date.

With the expected year-end 2008 cash, cash equivalents short-term investments of 160 million and the approximately 15 million in reimbursements we expect to receive in early 2009 for leasehold improvements, we believe we have sufficient funding to complete our Phase 3 lorcaserin program and following NDA in 2009. This projection assumes cash expenditures of 105 for internal research and development, general administrative expenses and capital expenditures. And $70 million in external preclinical and clinical study fees and expenses related to the development of lorcaserin. This assumes we’ll continue any trials initiated in 2008, but we will not initiate any new trials in 2009 for any other drug candidate. This also assumes that we maintain the same number of employees in 2009, as we expect to have at the end of 2008.

Now, I would like to turn the call over to our President and CEO, Jack Lief.

Jack Lief

Thanks, Robert. Good afternoon, everyone and thank you for joining our year-end conference call today. In the next few weeks, we’ll receive and share the results from the 12-month review by the independent Echocardiographic Data – Safety Monitoring Board or ESMB in the lorcaserin BLOOM trial. The ESMB review is not only a very important interim safety data point for lorcaserin, it also highlights the one-year mark and half way point for all patients. This is important because the primary echo safety and body weight efficacy endpoints for the BLOOM trial are all based on the12-months data.

Before reviewing lorcaserin program in more detail, I’d like to note that 2007 Arena’s 10th year anniversary was a successful year in which we achieved significant positive developments with respect to our clinical programs. In addition to making progress in our lead internal programs and in our two partnered programs, which I’ll review momentarily, we completed an approximately $103 million public offering and realized nearly $50 million from a sale leaseback real estate transaction.

We also added important knowledge and experience to our Board, with the addition of two new independent Directors, Phil Schneider and Randy Woods. With our ongoing lorcaserin Phase 3 program scheduled to complete in 2009, our primary focus in 2008 will remain on the lorcaserin clinical trial program and the timely filing of our NDA next year. Specifically in the very near term, our focus will be on the BLOOM trials month-12 ESMB reviews scheduled for next month.

If favorable, the month-12 review will establish that differences if any in the rates of FDA defined valvulopathy in patients treated with lorcaserin and the control group did not meet the ESMB’s predetermined staffing criteria. The month-12 review is significant for multiple reasons. First, it will yield information gathered over twice the exposure period of the previous review. We believe that this exposure duration, even under a conservative interpretation of the literature, would be sufficient to exert a detectable fenfluramine-like effect on heart valves, if present. Second, this review marks the completion of all ESMB monitoring agreed to with the FDA.

Third, the primary echo safety endpoint for the BLOOM trial is based on the month-12 data. And fourth, the review can confirm that the rate of FDA defined valvulopathy in the placebo group remains consistent with our statistical powering assumptions used in the design of the Phase 3 trial program to monitor patients for any increased risk of developing valvulopathy.

Safety of course is always a work in progress and we will continue to monitor safety in all our trials. Clearly though, a favorable month-12 review is very meaningful to the continued development of lorcaserin, especially considering that we’ve now evaluated many more patients for the 12 months than were ever evaluated in controlled prospective trials of people taking fenfluramines for any period of time. If the month-12 review is favorable as expected, we will continue the Phase 3 program with the goal of submitting an NDA before the end of next year.

As a quick review, we have three ongoing Phase 3 trials. BLOOM, a two-year trial started in September 2006, and BLOSSOM and BLOOM-DM, one-year trials that started last December. The pivotal trials taken together are expected to total – to enroll a total of about 7,000 patients. Importantly, with respect to BLOSSOM and BLOOM-DM and consistent with a proposal we made to the FDA supported by the month-six ESMB review report, the FDA has allowed us to remove any echocardiographic screening requirements from both trials. This is an important difference from the design of BLOOM in which echocardiography was used to exclude patients with FDA defined valvulopathy and certain other abnormalities from enrolling in the trial.

In the BLOSSOM and BLOOM-DM, there are no such echocardiographic defined exclusion criteria. Instead, echocardiograms will be obtained once patients are enrolled and again at month six and 12 to extend the lorcaserin safety database. These two trials are not monitored by an independent ESMB. By following patients who have a spectrum of heart-valve insufficiency and other echocardiographic detectable variations in baseline, we are creating a robust database for the FDA’s consideration. We should also understand that if any – we should also understand what if any affect weight loss might have on valvulopathy. I think this will be helpful during the review process at the FDA, as well as in labeling discussions.

Enrollment in BLOSSOM is proceeding faster than expected. With respect to BLOOM-DM, our early enrollment rate is slower than projected due to the nature of the trial population and the existence of numerous competing trials recruiting diabetes patients. However, the BLOOM-DM enrollment rate is not expected to change next year’s NDA submission timeline. BLOOM continues to proceed as expected. Our most advanced patients have now been enrolled in the trial for over 16 months. We have said previously that we have not seen any material 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 approvability of lorcaserin, I think it is reasonable to expect that we would make public announcement.

With respect to BLOOM, we are sometimes asked by investors and analysts to comment on the blinded safety in efficacy profile. Blinded data by its nature is uncertain and any observations or conclusions made by examining the blinded data may not be reliable or indicative of the unblinded results. Also, we note that the FDA requested that we keep the study blinded for the full three years of the trial and we at the company have only seen blinded data. Subject to these constraints, our ongoing review of the blinded safety data continues to review the pattern of adverse events that conforms to expectations based on our clinical and preclinical data and the proposed mechanism in the population being studied.

Keep in mind that therapeutic doses, we expect lorcaserin to be generally well tolerated and not to be associated with clinically-meaningful CNS or psychiatric adverse events, such as those associated with drugs targeting the CB1 receptor. The Rimonabant advisory panel last year appears to have raised investor concerns about CNS and psychiatric related adverse events for centrally acting – for any centrally acting compounds and the panel’s discussion raised awareness of the importance of appropriately monitoring for adverse psychiatric events for drugs that are active in the central nervous system. I should note that Arena has proactively monitored throughout our lorcaserin clinical program for psychiatric events. Because lorcaserin’s profile and mechanism of action do not anticipate any increased risk of these events of therapeutic doses and currently available clinical and preclinical data support this anticipation. Importantly, our lorcaserin pivotal trials incorporate prospective monitoring for adverse CNS events.

We have incorporated the Beck Depression Index and the Columbia suicidality scale for all of our Phase 3 trials. Some investors have been specifically interested in the potential psychiatric liability with respect to possible agonism of the serotonin 2A receptor centrally by lorcaserin. Based on the selectivity of lorcaserin for the serotonin 2C receptor over the 2A receptor as well as other properties of lorcaserin, we do not believe lorcaserin will be associated with psychiatric liability. Also supportive of this belief is the finding that lorcaserin did not demonstrate classical 2A pharmacology in our preclinical models. Data addressing this question are presented in a paper first published online on February 5 in the Journal of Pharmacology and Experimental Therapeutics entitled, “Lorcaserin, A Novel Selective Human 5-HT2C Agonist: In Vitro and In Vivo Pharmacological Characterization.”

I look forward to updating you again at that time of the month-12 ESMB announcement expected in March. After the month-12 review, there are no further ESMB reviews or other reviews of unblinded data in our Phase 3 program. I understand this is perhaps not ideal from the perspective of some investors, but I think this is ultimately to our benefit. Having a first-rate pivotal program intended to robustly evaluate lorcaserin’s profile and deliver clear cut data is preferable to compromising our ability to provide a complete picture of lorcaserin’s profile to the FDA and ultimately to patients and physicians. But we will do what we reasonably can to keep you informed to make lorcaserin information available to you. To that end, we are planning a lorcaserin-focused R&D Day in New York City on April 15, where we intend to review ESMB results and present an overview of the program.

As we continue to progress with our Phase 3 trail program and head into the month-12 ESMB review in an announcement next month. I think it’s key to keep in mind the importance of the month-12 ESMB and its increased significance over the month-6 review last September.

Moving to our next most advanced program. In 2007, we initiated and completed a Phase 2 study of APD125, an oral drug candidate discovered by Arena that it is being evaluated for chronic insomnia patients who have difficulty maintaining sleep, while initial – after initial sleep onset. In the completed Phase 2 trial, patients treated with APD125 experienced statistically significant improvements in objective measurements of sleep maintenance, including significant reductions in the number of times they awoke after falling to sleep and more than a 50% decrease from baseline in time spent awake during the sleep period.

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 and measurements of sleep maintenance were achieved without any next day hangover or cognitive impairments. There were also no major differences in reported adverse events as compared to placebo and no serious adverse events were reported. It remains very clear to us and to 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 unmet need of improving sleep maintenance without the liability of hangover or overdose.

We think that the majority of patients suffering from insomnia have sleep maintenance complaints to APD125 may be able to address in ways other available drugs cannot. We are currently planning to initiate another Phase 2 trial to start around mid year that will evaluate subjective insomnia endpoints. We expect to have results from this trial around year end.

I’d now like to discuss our lead anti-thrombotic drug candidate, APD791, a novel orally available inverse agonist of the 5-HT2A serotonin receptor discovered by Arena. We recently announced favorable results from a single ascending dose Phase 1a clinical trial of APD791 and the initiation of a multiple dose, Phase 1b clinical trial to further evaluate the compound safety pharmacokinetics and pharmacodynamics.

In Phase 1a trial, doses originally intended for the study ranged from 1 milligram to 160 milligrams. But due to excellent tolerability, we doubled the top dose to 320 milligrams. All doses were well tolerated without dose related adverse events such that a maximally tolerated dose could not be defined despite achieving high concentrations in blood. Dose dependent inhibition of serotonin mediated amplification of platelet aggregation was demonstrated, supporting APD791 preclinical data and establishing initial clinical validation of APD791’s novel mechanism of action.

The ongoing Phase 1b trial is a randomized placebo-controlled double-blind multiple ascending doses trial in up to 50 healthy male and female volunteers between the ages of 19 and 45. In addition to evaluating APD791’s safety and tolerability profile, the trial also evaluate the pharmacokinetics and pharmacodynamics of multiple oral doses of APD791 over a period of one week. We anticipate results from the Phase 1b trial mid-year.

I would now like to review our partnered programs with Ortho-McNeil and Merck. Under our diabetes partnership with Ortho-McNeil to develop drugs targeted the GDIR, a novel receptor discovered by Arena, we recently announced that our partner completed its initial clinical trials of APD668. Results from these trials support further investigation of the GDIR as a potential new mechanism to improve glucose control in patients with type 2 diabetes. Based on these results, Ortho-McNeil is continuing development of GDIR agonists and has advanced a potentially more potent Arena discovered compound into preclinical development while holding advancement of APD668.

The research aspect of this partnership with Ortho-McNeil was completed towards the end of last year, while the development portion continues. We remain entitled to receive milestone payments and royalties. This means that while Ortho-McNeil retains the right to develop a set number of compounds targeting the GDIR discovered during the course of our collaboration, rights to the GDIR receptor which we discovered revert back to Arena. With respect to our partner program with Merck, development of niacin receptor agonist for the treatment of atherosclerosis and other disorders is continuing. Both we and Merck continue to believe that niacin receptor has considerable therapeutic potential for the treatment and prevention of atherosclerosis as well as other potential clinical benefits.

I know that Merck recently initiated a Phase 1 trial of a second-generation oral niacin receptor agonist discovered by Arena. Our earlier stage pipeline also continues to show promise. We have several alertness enhancers in development. We expect that one of these may be an IND candidate and enter Phase 1 later this year.

We also have compounds being investigated for pulmonary hypertension and autoimmune diseases – disorders as well as other indications. Targets we are investigating for these and other programs include a wide variety of GPCRs both known and orphan. Our research provides us with a strong foundation that has and will continue to support a promising emerging pipeline that will provide some exciting developments in the future. With some of our drug candidates we’ve demonstrated that we can enter into first-class partnerships that effectively leverage our research and we’ve also shown that we are fully capable of independent clinical development.

We’ve certainly learned that there are benefits of partnerships such as access to additional expertise and the offset of development expenses. But such advantages also come with costs including the loss of full control of program development, especially with respect to timing and potential conflicts of interest. Given this dynamic, we think a mix of partnered and independent programs helps create a more balanced pipeline by improving risk reward profile and ultimately improving Arena shareholder value.

Some programs may be more suitable for partnering earlier and other programs become more attractive licensing opportunities by conducting more advanced development assuming a favorable risk return profile. In this regard, we believe the addition of manufacturing assets and personnel for finished drug products in Switzerland, the execution of a long-term API manufacturing agreement with Siegfried and a favorable tax ruling will provide us additional leverage and flexibility in negotiating with potential partners for our most advanced programs.

Importantly, by controlling more aspects of the development process, we believe we’ll significantly decrease the risks associated with drug development. At some point, I would also like to see Arena develop its own commercialization capabilities. We acknowledge this approach may not be conventional, but most biotech companies fail to achieve their goals. I think this is largely the case because they do not manage risk appropriately. We believe the approach we are taking manages Arena best for the mid to long term and will provide us more options and more opportunities to benefit patients and optimize stockholder value.

Looking at our financial position and the guidance Robert provided, we have sufficient cash to fund our Phase 3 program and file an NDA in 2009. Having that runway provides flexibility and increases our financing options. But, exercising that flexibility may present some additional risks and may be inconsistent with managing Arena for the longer-term. So, I will always remain opportunistic depending upon changes in the market and make take advantage of opportunities than improve our balance sheet.

To that end, I do acknowledge that our last financing raised questions of timing from some investors. I intend to continue to be sensitive to those questions. To the extent that Arena needs to finance in the future, I will continue to appropriately consider timing and the available options, risks, benefits, and costs, including dilution.

Before opening the call to your questions, I’d like to review expected corporate events over the next few quarters. There are several meaningful milestones including the month-12 ESMB review of the ongoing BLOOM trial in March, the initiation of the APD125 Phase 2 subjective study with results around year end, and the APD791 Phase 1b results around mid year. We continue to expect to file a new IND at the end of 2008 – yes, at the end of 2008 in furtherance of our goal of one IND a year and we will keep you updated on the progress of our current partnerships. We will continue to consider partnership opportunities in order to prioritize our internal efforts to create value and to manage our development expenses.

Clearly, 2007 was a significant year for Arena in which, we achieved important milestones. Our fundamentals continue to get stronger and we will work continuously to perpetuate a high level of performance and achievement in discovering and developing novel therapeutics. Our corporate values, innovation, integrity, teamwork, and excellence 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

(Operator Instructions). Question comes from the line of Cory Kasimov with JPMorgan. Please proceed.

Unidentified Analyst

Hey, guys. This is actually (inaudible) calling in for Cory. Thanks so much for taking my question. On the calls, you actually mentioned your sensitivity to the financing, and based on the guidance for cash balance of approximately $160 million by the end of 2008, should we expect the financing in 2008?

Robert Hoffman

Not necessarily. As we said, we have sufficient cash to take us through the NDA towards the end of 2009. We may not finance until we have announced results from our BLOOM study or the Phase 3 studies for lorcaserin. But we may decide that it is opportune to finance before then. So, certainly right now we have no plans to finance. But we are flexible and we will see. The good news is that we started this year with sufficient cash. We will expect to end this year with sufficient cash to take us through our mid-term goal of filing the NDA, and we will see what our financing plans turn out to be during that period of time.

Unidentified Analyst

Okay. And regarding that, I think you mentioned earlier in the call that you will not be initiating any other studies in 2009. Did I hear you correctly?

Robert Hoffman

Sure. So, we have a Phase 2 study for 125 that we expect to complete around year end and then we plan on meeting with the agency and having an end of Phase 2 meeting and discussing Phase 3. I think we will have lots of partnering opportunities around that. So, I think it’s premature to speculate on our clinical trial for 125 next year. The ING that we mentioned, we plan on starting that study this year and continuing that into next year and the 791 study, we will see. We are waiting for the Phase 1b data. So, again, I think we need to look at all of that information.

Unidentified Analyst

Okay, great. Thank you. And I have one more quick question. I wanted to know if you guys have an early reaction to the competitive data that was released early today, especially regarding the premise that dosing can be increased relative to other drugs in a clinic due to the better selectivity and bioavailability?

Jack Lief

Yeah. That’s a simple question with a longer more fulsome answer required. The short answer is that’s not necessarily so and from a variety of reasons based on how the assays are set up. Dominic Behan, our Chief Scientific Officer is in the room and I will let Dominic address the – that part of the question. Dominic?

Dominic Behan

Well, the question is related to the separation of 2C to 2A. We think we’ve got excellent selectivity in that regard on inositol phosphate signaling. But we just published a paper in JPET as Jeff mentioned in his prepared comments. And we have shown in that paper that we actually don’t see 2A related pharmacology in vivo. So, classical 2A related agonists can induce very classical behavioral responses such as what’s called, “wet dog shakes.” We actually don’t see that with lorcaserin. So, in vivo – in terms of in vivo pharmacology, we think the selectivity is very good and is not translating into 2A related pharmacology.

Unidentified Analyst

Okay. Thank you very much guys.

Robert Hoffman

Pleasure.

Operator

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

Alan Carr - Needham

Hi. Good afternoon, everyone. I was wondering if you could talk a bit more about partnering with-- where you are and what your current line of thinking for lorcaserin and for APD125. Timelines for that maybe? And also what seems to be important to potential partners?

Jack Lief

Well, clearly, as far as lorcaserin is concerned, safety is key. We have an important safety milestone coming up in the next few weeks. And I think we will be able to address that, we expect to address that. And safety also with the 2A receptor I think is going to be addressed quite adequately as well. So, I think, we will certainly have lots of partnering opportunities between next month and NDA filing an approval. Having said that, we will see how that all goes, and I don’t want to presuppose any particular dates around signing or execution. We are in discussions continuously with lots of companies including many of the big pharma companies out there.

Regarding 125, I think 125 is uniquely positioned to be a very safe compound that the bioavailability is limited on that compound so that beyond certain efficacious dose taking more compounds will not do any harm to patients, it’s very well tolerated. And recently, other companies have discussed the advantages of this two-way mechanism. So, I think we are really well positioned to take advantage of this two-way mechanism for sleep maintenance in developing a very safe compound, obviously, we want to take a look at the subjective Phase 2b data, and we’ll see what our opportunities look like at that point in time.

Alan Carr - Needham

With respect to lorcaserin, I wonder if you could dig in just a little bit more, is the – is potential partners or potential partners concerns with safety, safety, and safety or do they, you know, what percent would you say it efficacy after safety?

Jack Lief

Potential partners are concerned with safety, safety, safety and safety and safety. And I think that’s basically the way it is. I think we recorded very, very effective efficacy in the 2b study without diet and exercise. We expect this drug will be the most effective single-agent for weight loss in our studies, and we’ll have to see whether that holds, but I think the key is going to be safety.

Alan Carr - Needham

Okay. Thanks very much.

Jack Lief

Sure, Alan.

Operator

Next question comes from the line of Jason Zhang with BMO Capital Markets. Please proceed.

Jason Zhang - BMO Capital Markets

Thanks. I have two questions. First is a simple one, for APD125, Jack. We saw the data late last year – I mean, September last year, you said another Phase 2 will be initiated in the middle of this year. I am just wondering why such a delay. Is it a supply issue or protocol issue or what other reasons for such a delay of the new trial?

Jack Lief

Well, when you set-up a trial, you have to decide what doses to use in that study. And if we just wanted to use the same doses as we used in the first trial, then, maybe that would be fine, but that’s not necessarily the case we want to explore an additional dose. So, there’s – it takes a while to manufacture the product, it takes a while to make sure that, that manufactured product is on stability appropriately. And we want to file the appropriate reports with IRBs and that sort of thing and the agency. So, we don’t think that this is being delayed unnecessarily. We reported top-line data in September, we didn’t really get all of the data till significantly after that, and we wanted to make sure that we have a robust plan. Did you want anything to add to that?

William Shanahan

I think we also wanted to carefully consider subjected endpoints and wanted to make sure we’d address this, and we did a lot of betting with experts and a lot of internal discussions as well to come up with some, and we were actually going to look at a spectrum of subjected endpoints in the next study. And I think it was very important to get comfortable that we are designing it appropriately and capturing data appropriately.

Jack Lief

We have a long line of questions, so I’d like to limit our questions to one question and one follow-up if we can.

Jason Zhang - BMO Capital Markets

Yeah. Can I just have a follow-up question? Actually, it’s a new one. You – actually you talk a lot about, you described your philosophy with regard to your licensing or preserved value for the long-term shareholder value. I’m sure a lot of people really wanted to know what is your plan for lorcaserin, if the safety data, came out clean at the 12 months? And can I interpret that with, because you have secure supply, you have budget 2008 without a partner. At least you are not as urgent as you might appear before to sign a partner, how do we read that?

Jack Lief

Well, I think that acquiring some manufacturing assets actually improves our opportunities for partners – for partnering, gives us additional flexibility. At the end of the day our partner also has to manufacture commercial supplies and with our commercial capability of manufacturing that allows us to supply a partner for the long-term with commercial material if we go that route. So, I think it provides us with additional flexibility for any partnering outcomes that may occur. I’d like to go onto another question.

Operator

Your next question comes from the line of Bret Holley with Oppenheimer and Company. Please proceed.

Bret Holley - Oppenheimer and Company

Yeah, hi. Thanks for taking my question. I guess, I just want to follow-up on the last point, Jack. I guess, what you are saying here is that the acquisition of the manufacturing capability increases your flexibility, but at face value, it would suggest that you are just planning on manufacturing the drug yourself. Wouldn’t you agree with that?

Jack Lief

Yeah. If we have a partner that will market the drug, we will supply them with the manufactured drug. Is there anything wrong with that?

Bret Holley - Oppenheimer and Company

No, I am just wondering, at face value you may suggest your planning ongoing on your own, at least for a couple of years into launch.

Jack Lief

Yeah, I fully expect that we are going to partner in many markets, if not all markets, if not globally. And we will just have to see how that all works out. I think this gives us many additional degrees of flexibility in partnering as well as commercialization. And with an important drug like lorcaserin that’s already more than halfway through this Phase 3 clinical program. I think this is a prudent step for us to take.

Bret Holley - Oppenheimer and Company

And then my one follow-up, actually. I guess this is for probably Dominic. The high dose experience in the very early stages of lorcaserin’s development would suggest the side effects that we saw, it would suggest that at least to me that some of those effects could be attributable to the activation of 2A. Is it now your understanding based on the new data that you’ve generated that in fact those effects probably weren’t a 2A agonism that we were seeing?

Dominic Behan

Well, those effects were only seen firstly, mainly in one individual. And as I go back to our pre-clinical evidence, we really don’t see classical 2A pharmacology. So, I think it’s hard to say what the effects, were in that one individual.

Jack Lief

Yeah. It’s only one individual.

Dominic Behan

Yeah, but regarding the – whatever concern there may be regarding 2C, 2A selectivity based on our pre-clinical evidence and based on the emerging clinical data. We think we have a good spread on a safe compound.

Bret Holley - Oppenheimer and Company

Okay.

Jack Lief

Bill, you might want to comment on the QTs study?

William Shanahan

Yeah, I am just going to add that of course that one occurrence was at a single dose of 40 milligrams in our Phase 1 trial, and then subsequently, in our thorough ECG study, we dosed cohorts of about 60 patients; 30 men, 30 women with doses of 40 milligrams and we saw no such events. So, we do really question whether that was – whether --what that event really was I guess.

Bret Holley - Oppenheimer and Company

Okay. That’s fair enough. Thank you for taking the questions.

Jack Lief

Pleasure.

Operator

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

Graig Suvannavejh - UBS

Good afternoon. And thanks for taking my question. Just on APD125 we know that there are other agents that are in development that are targeting the same mechanism of action. So, can you broadly just give us a sense how you expect to differentiate your compound being 125 versus the others that are in development, is there anything that you can give us a sense on that?

Jack Lief

Well, yeah. So, we do have this unique safety profile that the exposure is limited with our drug, which means that you can’t really see toxicity orally in preclinical or our clinical program. So, I think that’s an important distinguishing factor also the half life is good, the selectivity is excellent with our drug. And so, I think while other compounds might also have significant merit, I think our APD125 has an excellent opportunity to address insomnia.

Graig Suvannavejh - UBS

And my follow-up will be, just on the potential partnership for 125, I think you’ve guided to having data from your second Phase 2 trial sometime by the end of 2008. So, should a partnership develop, would it be reasonable to expect that it’s probably not until 2009?

Jack Lief

That’s not an unreasonable assumption. There are some recent Sanofi data that talked about both objective and subjective data. So, you can compare their objective data with our published objective data, to get an idea of how the two compounds compare to one another. But we won’t really know the full picture of our compound until we see the subjective data from this 2b study. Did – do you want to add anything to that?

William Shanahan

I will add that, if you look at the recent Sanofi presentation that’s on the web, they did disclose as Jack was alluding to some of their Phase 3 data subjective and objective and if you compare their objective data, we certainly compare favorably and of course you always have to consider their different study designs and everything else, but I think that’s one important point if anything, I think we look – looked a little better, but, the other point that Jack has made previously is that we do have dose limited absorption. So I think that’s another – above the therapeutic range and I think that could prove to be another advantage of our drug where you won’t be able to overdose it.

Graig Suvannavejh - UBS

Okay. Thank you very much.

Operator

Your next question comes from the line of Elizabeth Naldi with Piper Jaffray. Please proceed.

Elizabeth Naldi - Piper Jaffray

Hi. Thanks for taking my call. I’m actually calling in for Thomas Wei. You had mentioned on the call, that enrollment for BLOOM-DM is slower than expected. Are you taking any steps to increase patient enrollment in that trial?

Jack Lief

We are looking at it. It’s still relatively early days. Keep in mind that the diabetes study was not as large as the BLOSSOM study, not designed to be as large as the BLOSSOM study. So, we are not terribly concerned at this time but we are looking at it and looking at possible ways of increasing enrollment. But as we said, we don’t think that this is going to affect our filing. We just wanted to give you a full picture of all three studies and the BLOSSOM study, the big study is enrolling actually faster than we expected.

Elizabeth Naldi - Piper Jaffray

Okay. Thank you.

Jack Lief

Pleasure.

Operator

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

Carol Werther - Summer Street Research

Thank you. I just wondered if you could clarify a little bit about what types of details on the safety analysis you are going to try to disclose on April 15th?

Jack Lief

I don’t think we’ve prepared that presentation yet because we don’t have the ESMB report from this independent panel but we certainly will talk about what we know about lorcaserin both from a pre-clinical and clinical perspective. And perhaps put some of that information in perspective with compared to other compounds that we are aware of that have been published on. And so, I think there will be a lot of – a lot of good insight and information coming out of that meeting.

Carol Werther - Summer Street Research

Okay. And then my second question just sort of follow-up is how important is the 12 month safety data for potential partners versus seeing all the data a year from now?

Jack Lief

Well, safety is always a work-in-progress and two years is always better than one year but based on my own personal discussions with some prospective partners. I think one year is an important milestone for both ourselves and a prospective partner. Having said that, I don’t want to give you the impression that we are going to sign immediately after positive favorable ESMB results, it just doesn’t work that way. But I think one year is very important. It will give us a lot of information with BLOOM.

Carol Werther - Summer Street Research

Okay. Thank you.

Jack Lief

It’s my pleasure.

Operator

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

Leland Gershell - Cowen and Company

Hi, Good afternoon. Thanks for taking my question. First the question on BLOSSOM and BLOOM-DM, I know you are enrolling patients who may have pre-existing Valvulopathy, are you taking echos to follow those patients during the trial, even though you are not required to?

Jack Lief

Yes, in fact, as I said, we are taking echoes at base line in a 6 and 12 months to establish a robust safety database for these patients. But we are taking all comers basically. We are not screening out people, because of the bad valvulopathy in the echo.

Leland Gershell - Cowen and Company

Okay. And then one question on 125. Can you share with us any more detail on what your plans for the next Phase 2 trial might be, in terms of design and dosing so forth?

Jack Lief

Sure. Phil, you want to talk about the design?

Phillip Schneider

Well, I don’t think we’ve released actually the full design yet. But we are in the process of finalizing it. We are pretty close to it. And it’s going to be a parallel group study, it will involve two doses, probably 40 and 20 against placebo. And the main thing we want to do and this is, of course look at the traditional subjective measures. We are also incorporating some novel subjective measures and endpoints that may be helpful in evaluating the drug and its potential benefits. So, we will – we still expect to start this study in the next several months, and it will be a very well-powered study that will give us a lot of good data and allow us to really fully assess the subjective benefits of the drug.

Jack Lief

The idea here is to bring a robust plan to the agency and the Phase 2 meeting. So, we can fully bet what Phase 3 needs to look like and I think that’s important for partnering as well.

Leland Gershell - Cowen and Company

Okay, great. Thanks for taking the questions.

Operator

Your next question comes from the line of Matt Osborne with Lazard. Please proceed.

Matt Osborne - Lazard

Hi, guys. Thanks for taking the question. Can you just first on lorcaserin. Can you remind us the primary endpoint for efficacy, is that one year or two, you are also going to have two years of data? Will that be something that would be considered a combination of the one and two years for primary end point or just strictly looking at the 12 months weight loss?

William Shanahan

At the end of the first year because our primary endpoint is at the end of one year. And every weight loss drug yet investigated plateaus somewhere in that 6 to 12 months time period. So, that would certainly be the anticipation that we will find we plateaued. At the end of one year our patients are re-randomized, so what we will do is we expect to see the placebo patients who get to just stay at their relatively modest amount of weight loss, we expect the patients who will be randomized to continue drug for two years, will maintain their weight loss, has been demonstrated for sibutramine and orlistat. And we of course expect the people who get randomized from drug to placebo to slowly gain weight back to baseline over the ensuing 6 or 12 months.

So, what we will get out of this is more of a maintenance claim, but we will also – if we happen to be the first drug in history, we will have people who will continue the drug for two years. So, if that were to happen and then I want to emphasize that’s an extremely unlikely event, but we could also capture those data.

Matt Osborne - Lazard

Okay great. And then on 125, it looks like looking at the Sanofi data, there was about a 7 minute improvement in PSG and they doubled that when it went to subjective review. Do you anticipate following that similar trajectory of essentially doubling the improvement in wake time after sleep onset? And what are you trying to explore with the – it looks like a new 20 milligram dose, either improving efficacy or reducing some side effects that you may have seen at that 40 milligrams?

Dominic Behan

Sure. Well, we are going to certainly look at way so. We already indicated that wake time during sleep, we thought might even be a better measure. And we got more robust results. We got something in the order of 10 to 15 minutes placebo adjusted improvements there. And that of course allows for a consolidation of sleep. So, if a patient only sleeps seven hours and gets a full nights of rest in that seven, eight – seven hour periods, if they happen to wake up to the last hour in the ways of measurement that whole last hour would get counted against you. And we think this might be a better measurement for this kind of drug.

That’s one of things we are exploring, and awakenings, we saw a very robust effects and some minimal placebo effects. And that’s another potential endpoint that could be very important, and clinically meaningful if you could see a reduction. We saw placebo adjusted reductions on the order of 2.5 awakenings objectively and that could translate into somebody feeling and functioning a lot better the next day. So, a lot of what we will be doing in this study then is – in this next study is looking at subjective endpoints that could be reflected by this, not only the traditional number of awakenings and wake after sleep onset or wake time during sleep, but some of these other things. We’ve developed some questionnaires, and we are using some of the traditional questionnaires and I think being pretty innovative here.

Jack Lief

The other thing that we hope to achieve is validate the final dose that looks like a Phase 3 commercial dose. And so, we want to do that with the 20 milligram dose. We think we are almost there. We want to validate that 20 milligram dose that might not be the dose, but we’ll see that’s why you do the clinical study.

Matt Osborne - Lazard

Okay. Thank you.

Jack Lief

Yeah.

Operator

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

Jim Birchenough - Lehman Brothers

Yeah, hi guys. Just following up on some of the questions on the valve safety assessments. I am looking at an informed consent form that describes valve assessments at 24/52 and 76 weeks. Can you just confirm that there is a 76 week assessment, and I am just wondering what approach you are taking to that assessment?

Jack Lief

Yeah. So, we do echos every six months. So, at the 18 month timeframe, there is an echo, and then at the 24 month timeframe, there is – when the study is finished, there is another echo. Those timeframes are somewhat different than your timeframes, but – so, we’ll have the full assessment over the two years. But as I said, there are no more ESMB readouts. So, this is based on agreement with the agency, but we expect to just continue.

Jim Birchenough - Lehman Brothers

I guess, I’m wondering, what is the point of doing the echos, if they are not going to be assessed by the DMC?

Jack Lief

Because we want to file with the agency all of the data and that’s the point, I think, Bill?

William Shanahan

Sure. And it’s also to attain some limited data for two years of exposure. So, I think we’ve got very robust assessments of one month – one year, rather. And then obviously, we expect attritions through two years, but we will still get significant numbers of patients who will have then treated for two years, and I think that’s going to be very helpful in addressing this valve issue.

Jim Birchenough - Lehman Brothers

And just a follow up on that. And so, I guess the concern would be when you are looking at smaller numbers of patients in longer-term follow-up in the BLOOM study and presumably as well in BLOOM-DM and BLOSSOM, do you run the risk of seeing numerical differences that are just a function of noise that could create concerns?

William Shanahan

Well, that’s always a theoretical risk. But we will have very robustly powered assessment at one year and I think it’s very unlikely that that’s going to occur, that would be viewed in any way, if there is slight numerical imbalances at that point.

Jim Birchenough - Lehman Brothers

So, and to be clear just, there is no statistical review of the 18 month and 24 month valve assessments?

William Shanahan

No. And the reason you are talking about with the Safety Monitoring Board, and that’s because the Echo Safety Monitoring Board, by the time we could do an 18-month assessment, patients would be completing month 24. So, we felt like that wasn’t going to add any additional safety. And just create another logistical burden. We are obviously going to look very thoroughly at the data though.

Jim Birchenough - Lehman Brothers

Are you using the same screen that you are using in terms of criteria in the earlier assessments?

Jack Lief

No. As in the BLOOM trial, we screened out people who had FDA valvulopathy. In our second and third study, the BLOOM-DM and the BLOSSOM study, we have no screening, echo screening criteria. We only obtain an echo at baseline so that we have a baseline, and then we can follow any changes. But this way, we can look at the full spectrum of variations in the population and rule out any drug effects in people who have, in some cases, perhaps fairly advanced valvular insufficiency.

Jim Birchenough - Lehman Brothers

I understand, and I’m just trying to understand whether at 18 month – 18 months, you are using the same criteria for assessing whether there is access valvulopathy. There is not a key assessment, I understand that’s not fruitful at that point, but are you applying the same criteria to describe any access if its there?

Robert Hoffman

Sure.

Jack Lief

Yes.

Dominic Behan

And we’re looking at FDA valvulopathy.

Jack Lief

Yes. Next question?

Operator

Next question comes from the line of Tom McGahren with Merrill Lynch. Please proceed

Tom McGahren - Merrill Lynch

Hi, thanks. Just a quick question on lorcaserin. Have you thought about potential combination studies down the road or would you leave that to potential partners?

Jack Lief

Yeah. The combo studies are always a possibility. We’ve addressed that with the agency in the past. And I think their preference is to have us evaluate the drug alone. And that’s what our plans are. Bill, you have anything to add?

William Shanahan

Yeah. I think that’s – it’s very important for us to get a very clean read and put all our resources into making sure we get echos on people on the drug alone, and be sure that we really ruled out the problem there before we get into combination studies.

Jack Lief

So that might be a Phase 4 or something?

William Shanahan

Phase 4. Yeah, that would be --

Tom McGahren - Merrill Lynch

Okay. Kind of any advanced thinking on what it might be combined with down the road?

Jack Lief

Anything. Limited possibilities right now, but anything in the future --

Tom McGahren - Merrill Lynch

Usual suspects, yes.

Jack Lief

Yes.

Tom McGahren - Merrill Lynch

Okay. Thanks a lot.

Jack Lief

Welcome.

Operator

We are showing no more questions in queue. I would like to turn the call over to Mr. Jack Lief for closing remarks.

Jack Lief

Okay. Thank you, Eric. Before finishing, I’d like to reiterate our commitment to executing our long-term vision and strategic plan. We remained focused on benefiting patients and building stockholder value through the development of commercialization of Arena drug candidates independently and with our partners. Thanks again for joining us on the call today.

Operator

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

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Source: Arena Pharmaceuticals Q4 2007 Earnings Call Transcript
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