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Executives

Cindy McGee

Jack Lief - Chairman, Chief Executive Officer, President, Co-Founder, Chief Executive Officer of Aressa, President of Aressa, Chief Executive Officer of Brl, President of Brl, Director of Aressa and Director of Brl

Craig Michael Audet - Senior Vice President of Operations and Head of Global Regulatory Affairs

Robert E. Hoffman - Chief Financial Officer, Principal Accounting Officer and Vice President of Finance

Analysts

Matthew Lowe - JP Morgan Chase & Co, Research Division

Alan Carr - Needham & Company, LLC, Research Division

Thomas Wei - Jefferies & Company, Inc., Research Division

Tazeen Ahmad

Jason N. Butler - JMP Securities LLC, Research Division

Arena Pharmaceuticals (ARNA) Q2 2012 Earnings Call August 9, 2012 5:00 PM ET

Operator

Good day, everyone, and welcome to Arena Pharmaceuticals' Second Quarter 2012 Conference Call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Arena's Vice President, Investor Relations and Alliance Management, Ms. Cindy McGee. Cindy McGee, please go ahead.

Cindy McGee

Welcome, and thank you for joining us. On today's call, we will review our second quarter financial results and provide a business update. Prepared remarks will be provided by Jack Lief, our President and Chief Executive Officer; Craig Audet, our Senior Vice President of Operations and Head of Global Regulatory Affairs; and Robert Hoffman, our Chief Financial Officer. Dominic Behan, our Chief Medical Officer, will also be available to address your questions.

During this conference call, we will make forward-looking and other statements about our views, including statements about BELVIQ or Lorcaserin and our drug candidates, including, with regard to efficacy, safety, potential plans and future activities and events, research, development and commercialization, the regulatory process and other statements that are not historical facts. Such statements may include the words plan, will, expect, believe, may, could, would or similar words. You are cautioned to 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 information and speak only as of the time they are made. For such statements, we claim the protection of the Private Securities Litigation Reform Act of 1995. Risks and uncertainties that could cause actual results to differ materially from those described in our forward-looking statements include: drug development, the regulatory process and commercialization are uncertain; data and other information related to drug and drug candidates may not be as expected, favorable or sufficient for further development or commercialization; the timing, results and costs of research and development; the regulatory process and commercialization and other risks identified in our SEC reports. For a discussion of these and other factors, please refer to the risk factors in our SEC filings.

I will now turn the call over to Jack.

Jack Lief

Thanks, Cindy. With the FDA approval of BELVIQ in June, we and Eisai are focused on preparing for the launch following the completion of DEA scheduling. Our colleagues at Eisai are currently planning for BELVIQ to be available to physicians and patients in early 2013. On today's call, I will first highlight 3 reasons we believe we are well-positioned for success with BELVIQ. Craig will then review the ongoing activities related to our U.S. launch and our regulatory submissions outside of the United States. Robert will provide a financial update and outline our guidance scenarios for the year. Lastly, I will review our pipeline plans before opening the call to your questions.

Based on the potential BELVIQ demonstrated in development, we established a solid foundation for the post-approval setting. We believe that the following 3 points illustrate why we are well-positioned for BELVIQ -- for BELVIQ's long-term success. First, BELVIQ will play an important role in the medical management of obesity in the U.S. BELVIQ is the first new chemical entity approved for weight loss by the FDA in 13 years. It is indicated as an adjunct to diet and exercise for chronic weight management in adult patients with a BMI of 30 or greater or 27 or greater in the presence of at least one weight-related comorbid condition. With over 100 million adults in America today who meet this criteria, we are pleased that patients will have an additional treatment option to complement their diet and exercise efforts.

Second, we've built a strong foundation to commercialize BELVIQ, including by establishing our manufacturing facility, marketing collaboration and global patent coverage. In 2008, we acquired our manufacturing facility in Switzerland in order to better control BELVIQ's supply chain. As part of this acquisition, we also received a 10-year holiday from certain taxes. In 2010, we executed our commercial agreement with Eisai in the U.S., and we expanded the agreement this May to include most of North and South America. The strong financial terms of this agreement enable us to capture a significant portion of net sales and also limit our responsibility for expenses, including those related to post-marketing requirements. Lastly, we have composition of matter patents issued in major jurisdictions globally, that in most cases, are capable of continuing into 2023. We have also filed petitions for an extension in the U.S., which should extend the patent term into 2026.

Third, we will continue to build our foundation by pursuing a global registration strategy establishing additional marketing collaborations, as well as exploring BELVIQ's range of therapeutic potential. We believe that we're well-positioned to commercialize BELVIQ in the United States.

As Craig is about to outline, we are working to obtain regulatory approvals in additional territories. We also continue to own the rights to BELVIQ outside of North and South America, and we are currently exploring collaboration opportunities throughout the world. BELVIQ is a new chemical entity and a novel single agent, offers new numerous opportunities to evaluate its therapeutic potential for other indications and combination treatments. We view BELVIQ for chronic weight management as an important starting point and we are in the process of prioritizing our further development plans.

I will now turn the call over to Craig.

Craig Michael Audet

As Jack mentioned, we're working with Eisai to prepare for launch in the United States following the completion of DEA scheduling. The FDA has recommended BELVIQ for Schedule IV. The DEA is in its review process and will publish its recommendation in the Federal Register for a 30-day comment period. After the comment period, the DEA will finalize BELVIQ's schedule and designation, and following that, Eisai will make BELVIQ available to patients and physicians.

Eisai is focused on providing BELVIQ to the right patients: Those who want to lose weight as a way of improving their health, while setting appropriate expectations and supplementing BELVIQ treatment with diet and exercise support. Eisai also plans to apply its expertise developed from successfully building the previously underserved Alzheimer's market with Aricept, which recorded approximately $2 billion in peak U.S. sales. Moving forward, the successful launch of BELVIQ will be the primary focus of Eisai's field force.

Beyond our activities in the United States, we're proceeding with our marketing applications in the European Union and Switzerland. Our centralized submission in the EU was accepted for review in March. The EMA process is a little bit different from that of the FDA. In the first half of the process, the EMA's Committee for Medicinal Products for Human Use or CHMP, completes the review of the MAA and provides their feedback in the form of a 120-day assessment report and list of questions. The questions will need to be addressed before Lorcaserin can be recommended for approval. We have now received this report and are in the process of preparing our response. The report provides CHMP's quality, clinical and nonclinical questions and comments, which include a similar range of issues previously raised by the FDA. Three were identified as major observations: The tumor findings in rats; the dropout rate in clinical studies and how this affects the analysis of efficacy; and the incidence of valvulopathy. We plan to respond to the CHMP next quarter and based on this timeline, we expect a decision on our EU application at some point in the first half of next year.

We've also submitted an MAA in Switzerland on July 11, our third application for regulatory approval. This submission was accepted for review by Swissmedic at the end of July. In addition, we've completed our transfer of the U.S. new drug application to Eisai. The NDA transfer establishes Eisai as the Marketing Authorization Holder responsible for marketing efforts and for regulatory compliance in the United States. We will continue with our manufacturing responsibilities, as well as to lead the global development of BELVIQ.

Eisai also plans to use our Lorcaserin dossier and our product expertise as the basis for its marketing applications in the additional territories in which it holds commercial rights, focusing first on Canada, Mexico and Brazil.

We look forward to keeping you updated on our ongoing commercialization and regulatory activities as we progress through the DEA process, work to obtain additional regulatory approvals in other parts of the world and further explore the therapeutic potential of BELVIQ.

Robert will now provide you with a financial update. Robert?

Robert E. Hoffman

Thanks, Craig. I'll focus my comments on highlights of financial performance for the 6 months ended June 30, 2012, compared to the 6 months ended June 30, 2011. I'll also refer you to today's financial results news release and form 10-Q.

For the following financial results, 2012 will refer to the first 6 months of 2012 and 2011 will refer to the first 6 months of 2011. We recorded revenues of approximately $24.2 million for 2012, compared to revenues of approximately $7.2 million for 2011. 2012 revenues included a $20 million milestone payment from Eisai for the inclusion in the FDA approved prescribing information of the efficacy and safety data from the BLOOM-DM trial in patients with Type II diabetes. Research and development expenses for 2012 decreased to $28.5 million from $30.6 million for 2011. Research and development expenses for 2012 included $0.7 million in noncash, share-based compensation expense, compared to $1 million for 2011. General and administrative expenses for 2012 decreased to $11.6 million from $13 million for 2011. General and administrative expenses for 2012 included $1.7 million in noncash share-based compensation expense, compared to $1 million for 2011. Interest expense totaled $5.5 million for 2012, compared to $7.9 million for 2011. This $2.4 million decrease is primarily attributable to reducing the principal on our note payable to Deerfield. In May 2012, we repaid the remaining balance on this note.

We recorded a noncash loss on extinguishment of debt in the amount of $6.3 million in 2012 related to principal payments on our note payable to Deerfield. We also recorded a noncash loss of $19.1 million in 2012, primarily related to the revaluation of common stock warrants that are classified as derivatives. This loss is primarily due to the increase in our stock price over the first 6 months of 2012. Our net loss eligible to common stockholders decreased to $51.5 million for 2012, compared to $65.1 million for 2011.

Cash and cash equivalents totaled $143.8 million at June 30, 2012, compared to $57.6 million at December 31, 2011. Cash at June 30 did not include the previously mentioned $20 million milestone payment from Eisai, which we received in July 2012, and $23.4 million in proceeds from the exercise of warrants and stock options received after June 30. At June 30, 2012, we had approximately 205.1 million common shares outstanding and warrants to purchase 14.8 million shares of common stock. Subsequent to June 30, 11.4 million of our outstanding warrants were exercised, and today, we have approximately 216.8 million common shares outstanding and warrants to purchase 3.4 million common shares, with an average exercise price at $6.23 per share.

Although the timing remains uncertain, for purposes of updating our full year 2012 financial guidance, we are assuming that we receive DEA scheduling and deliver BELVIQ launch supply in 2012. We are increasing our full year 2012 revenue guidance from a range of $66 million to $72 million, to a range of $91 million to $97 million. Our revised revenue guidance includes the $20 million milestone payment from Eisai we achieved last quarter and $65 million from Eisai following DEA scheduling deliver of launch supply. If we do not receive DEA scheduling in 2012, we would expect the revenues for 2012 to be $65 million lower. Our revised revenue guidance does not include any other revenue under our marketing agreement with Eisai, such as product sales of BELVIQ or from any other new collaboration we enter into in 2012.

Full year 2012 research and development expenses guidance is unchanged at approximately $57 million to $67 million, including noncash expenses, which total approximately $6 million. Full year 2012 general administrative expenses guidance is unchanged at approximately $20 million to $24 million, including noncash expenses of approximately $2 million. We continue to expect to spend approximately $2 million for capital expenditures for all of 2012, primarily for our manufacturing facility in Switzerland. We are increasing our year-end 2012 cash, cash equivalents and short-term investments guidance from $84 million to $89 million to approximately $215 million. If we do not receive DEA scheduling in 2012, we expect our cash at the end of 2012 to be $65 million less.

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

Jack Lief

Thanks, Robert. The FDA's approval of BELVIQ in the second quarter was a significant development for obese and overweight Americans who need help losing weight. BELVIQ is the first product resulting from our vision to bring patients novel medicines that selectively target G protein-coupled receptors. We have additional drug candidates in early development that are promising, and we continue to explore their potential. Of these, we have prioritized certain research and development programs, including APD811 and APD334.

APD811 is intended for the treatment of pulmonary arterial hypertension. Prostacyclin receptor agonists are the standard of treatment for advanced disease, but there are no currently marketed oral treatments targeting the prostacyclin receptor. We believe the results of our early-stage studies suggest that APD811 has the potential for once daily dosing or oral dosing. We are continuing with our plans to achieve [ph] a multiple dose Phase Ib clinical trial in the fourth quarter.

We're also excited about the potential of APD334, our S1P1 agonist intended as an oral treatment for conditions related to autoimmune diseases. We plan to advance APD334 into clinical development this year. We look forward to advancing APD811 and APD334 and select other programs in our earlier stage pipeline, as we build on the long-term success of BELVIQ. Our productive collaboration with Eisai will continue as we progress through the DEA scheduling process and towards launch. We expect BELVIQ to play a key role in physicians' newly expanded toolkits for patients whose diet and exercise efforts alone are not sufficient for the medical management of their excess weight.

We'll now open the call to questions.

Question-and-Answer Session

Operator

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

Matthew Lowe - JP Morgan Chase & Co, Research Division

It's actually Matt Lowe in for Cory today. Just wondering if you could update us at all on Eisai's plans, potentially, for DTC marketing, product sampling or potentially, how many reps they may launch with, if there's anything you could say about that?

Jack Lief

Well, as we said, initially, Eisai plans to have a field force of approximately 190 representatives focused on the specialty market. Eisai continues to assess the market and we'll provide additional details of Eisai's launch plans in the future as appropriate. We're working closely with Eisai, and we've reviewed their confidential plans, so they're very confident in their ability to successfully deliver BELVIQ to the right patients and build this market, but specifically to your other questions, those remain confidential.

Matthew Lowe - JP Morgan Chase & Co, Research Division

And then any updated thoughts on running combination trials and if so, when these might begin?

Jack Lief

So as I said, we're evaluating a variety of different options and we'll report as we can, as appropriate, later on.

Operator

Our question is from the line of Alan Carr of Needham & Company.

Alan Carr - Needham & Company, LLC, Research Division

One, can you comment on where things stand -- any updates on post-approval trial requirements and protocol discussions with the FDA around that? And then also, I guess, I'll stick with the previous question about pipeline work and additional work with BELVIQ in terms of expanding the label and combinations, that sort of thing. What proportion, I guess, of your efforts are going to be towards building the earlier stage pipeline versus focus on BELVIQ and expanding there with combination market?

Jack Lief

I'll let Craig address the first part of your question.

Craig Michael Audet

Can you actually restate that?

Alan Carr - Needham & Company, LLC, Research Division

The first one was about the post-approval trial requirements, where that stands, in terms of discussions with the FDA and protocols and that kind of thing.

Craig Michael Audet

Sure. As you know, as you've probably seen in our approval letter, we do have timelines where we have to have finalized protocols with the agency, so we're working to meet those timelines now, which requires that we have drafts into the FDA. But they like to see them 3 to 6 months before the finalization, or they'll go through a couple of rounds of review. So we're actively working with Eisai to finalize protocols, to get them to the FDA.

Jack Lief

And the second part of your question regards the combination product?

Alan Carr - Needham & Company, LLC, Research Division

I'm wondering, you mentioned that you're going to be focusing on 811 and 334, I'm just wondering how much of the R&D efforts of this company -- at Arena are going to be devoted towards the long-term pipeline here versus working on BELVIQ in combination market.

Jack Lief

Well, from a research perspective, most of our research effort will be devoted towards the long-term pipeline for Arena, but clearly, we believe we're going to be very successful with BELVIQ and we and Eisai are reviewing and prioritizing the next steps going forward, the lifecycle management for BELVIQ. So we're going to be highly focused on both areas.

Operator

Our next question comes from Thomas Wei of Jefferies.

Thomas Wei - Jefferies & Company, Inc., Research Division

Sorry to ask another one about combination studies, but as you all know, it's a very important part of how you might be able to unlock the value of that drug and so I guess I just wanted to play devil's advocate and try to understand a little bit better why, why not start combination studies right away? What's so complicated about that plan that requires what sounds like quite a bit of work to coordinate before you come to that decision?

Jack Lief

Craig?

Craig Michael Audet

Thomas, it's Craig. We have a combination -- potential combination products and new indications that we're looking at for BELVIQ. So what we want to do is make sure that we're not jumping into something without looking across that range of options and making sure we're looking at probability of success, as well as need in the marketplace. So hopefully that answers your question, we want to make sure that we're going about this the right way and not just doing a knee jerk because people are asking about it.

Jack Lief

And just because, we have, we said we haven't started a combination study doesn't mean that we don't have a lot of effort and focus around that, around that area, we just can't talk about it right now.

Thomas Wei - Jefferies & Company, Inc., Research Division

And can you give us a sense maybe, I guess I'm confused about the notion of other combination therapies or new indications, just given the dearth of available weight loss agents there are. What are examples of the types of things that you are looking at that you might be able to share with us?

Craig Michael Audet

At this point, we really haven't shared those publicly as we're still in the process of going through the evaluation process I mentioned.

Thomas Wei - Jefferies & Company, Inc., Research Division

And then one question also on Eisai's marketing efforts. You mentioned the 190 reps and I guess I wanted to understand, in the contract, is there a commitment for a certain number of details or is it very open-ended as to what Eisai's commercial support for the drug is allowed to be?

Jack Lief

It's very open-ended regarding exactly what they're going to be doing. We know what they're going to be doing and as I said, I'm very confident in their ability to deliver BELVIQ and to make this a very big long-term product and so I'm not concerned at all about that.

Thomas Wei - Jefferies & Company, Inc., Research Division

But let's say you get to a point where you've gotten some decent initial traction and for whatever reason, it could be some factor not related to BELVIQ at all, but something internally that Eisai is dealing with, what sort of input or what levers do you have to ensure that, if necessary, there's appropriate expansion of that commercial support behind the program?

Jack Lief

Our contract is on file, is largely filed and the details are largely available, but the best -- the best guarantees, if you will, are that our interests are aligned. At Eisai, at one time, had a product called Aricept, which was approximately a $2 billion a year product in terms of sales. Unfortunately, that's generic now, the patents have expired and that's no longer available for them, and Aciphex, their next in line product, as I understand, that the patents are aging and that's going to be history also. So I think the best guarantee is the alignment of interests between Arena and Eisai and that's why I'm so excited and confident about this.

Operator

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

Tazeen Ahmad

It's actually Tazeen Ahmad here for Steve. I just had some questions on the x U.S. opportunity for BELVIQ. Can you talk a little bit about your decision as to which territories you want to focus in on, I think you mentioned Mexico, Canada, Brazil. Has your market research indicated that there would be substantial opportunity in those particular countries versus others? Also, as far as the EU approval goes, do you have any updates for any EMA, I think, the 100 -- the day 120 questions were supposed to be received. Can you give us any indication of the types of questions they're asking?

Jack Lief

Sure. So regarding Canada, Brazil and Mexico, those 3 markets are part of the expanded Eisai territory that we announced earlier this year, so -- and those are the big markets. They've been doing market research. I think they've prioritized those markets. Now regarding EU, I think Craig has described that. Craig, do you want to address that a little bit?

Craig Michael Audet

Sure. As I said in the opening remarks, we did receive our 120-day assessment report and list of questions. The report gives us -- has information questions in the areas of quality, clinical and nonclinical. They're very similar to the range of questions we received from the FDA. The major --- there were 3 major observations and they were, again, similar to the FDA: Tumor findings in rats; the dropout rate in the clinical study, in terms of how it affects the efficacy analysis; and the incidence of valvulopathy.

Jack Lief

As Craig said, we plan on addressing that next quarter.

Craig Michael Audet

And we're very confident, we don't see any roadblocks here, any show stoppers. We are very confident that we can address these by the end of next quarter.

Tazeen Ahmad

And so when do you anticipate that you would be able to launch in the EU territories?

Craig Michael Audet

So based on that timeline, if we do address it next quarter, we should be able to have a decision from the CHMP sometime in the first half of next year.

Tazeen Ahmad

And would you want to have just an EU-specific commercial partner or would it be kind of looped in with other territories as well?

Jack Lief

Well, we are talking with lots of -- you can imagine there are lots of companies that are excited about this opportunity, but right now, there's no rush. We're focused on doing the right transactions for Arena and BELVIQ and we'll report on that as appropriate.

Tazeen Ahmad

And then the last question is still in the EU, what kind of sense do you have as to what kind of pricing you'd be able to get?

Jack Lief

So we haven't talked about pricing, either anywhere in the world, and we'll report on that as appropriate also.

Operator

Our next question comes from Vincent Rojas [ph] with Stifel, Nicolaus.

Unknown Analyst

One thing we didn't hear, we were interested in knowing is the earnings per share for the quarter?

Jack Lief

We'll get Robert to...

Robert E. Hoffman

The loss per share in the quarter, and I'm flipping through it here, was $0.12 per share and for the 6 months it was $0.29 per share.

Jack Lief

And keep in mind, there's a lot of noncash items that are associated in that.

Robert E. Hoffman

And that's all in the press release we issued right before the call.

Unknown Analyst

Okay. And the last question, real quick, as far as pricing on the drug, obviously, you guys haven't addressed that yet. Is there a time that we could expect when you will be announcing how much this drug is going to be going for, probably towards the end of the year?

Jack Lief

Shortly after launch.

Craig Michael Audet

Vincent [ph], we have -- as you know, we have the DEA's scheduling to deal with. So once we get that designation and Eisai makes the product available, we'll announce the price.

Operator

Our next question comes from Jason Butler of JMP Securities.

Jason N. Butler - JMP Securities LLC, Research Division

I guess 2 questions for Robert here. The 10-year tax break in Switzerland related to your manufacturing facility, can you tell us when that 10-year period begins, is it drug launch or did it begin previously?

Robert E. Hoffman

So the 10 years begins when we start selling from Switzerland. So likely this year, but we'll see on that, so there you go.

Jason N. Butler - JMP Securities LLC, Research Division

Okay, great. And then, now that BELVIQ is approved, just thinking about your R&D expenses in the second half and then going forward, can you talk about what proportion of second half R&D expenses will be related to BELVIQ and then when BELVIQ expenses will start to shift into SG&A?

Robert E. Hoffman

So, in terms of, I don't know if you're talking about the cardiovascular outcome study and the pediatric studies, for the expense portion, we only capture 10% of the cardiovascular outcome studies, and as Craig mentioned, there's still -- we'll be submitting protocols. So in terms of this year, the expenses, as you can see, remain unchanged for the full year. A good part of that is actually for our earlier stage programs, with about $6 million dedicated to the early stage programs. I'm sorry, the last part of your question?

Jason N. Butler - JMP Securities LLC, Research Division

Okay. I think you answered it. The vast majority will still be related to BELVIQ and not the pipeline?

Robert E. Hoffman

Yes, we still have ongoing efforts related to BELVIQ in 2012 and we haven't given any guidance for 2013 yet.

Operator

I'm showing no further questions in the queue at this time. I'll hand the call back to Cindy for closing remarks.

Cindy McGee

Thanks, Mimi. It's a very exciting time at Arena. We are preparing for a productive fall season of investor conferences and medical meetings and look forward to numerous opportunities to meet with many of you. Thanks for joining us today and for your continued support.

Operator

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect and have a wonderful day.

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