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Executives

Jack Lief - CEO

Robert Hoffman - CFO

Bill Shanahan - VP and Chief Medical Officer

Analysts

Thomas Wei - Piper Jaffray

Bret Holley - Oppenheimer & Co

Leland Gershell - Cowen and Company

Matthew Osborne - Lazard

Alan Carr - Needham

Adam Cutler - Canaccord

Soham Pandya - Think Equity

Arena Pharmaceuticals Inc. (ARNA) Q2 2008 Earnings Call August 5, 2008 5:00 PM ET

Operator

Good afternoon, everyone. Welcome to the Arena Pharmaceuticals second quarter 2008 financial results conference call. (Operator Instructions)

With us today is Jack Lief, Arena's Chief Executive Officer and Robert Hoffman, Arena's Vice President of Finance and Chief Financial Officer. At this time I would like to turn the call over to Robert Hoffman. Please go ahead sir.

Robert Hoffman

Thank you. Good afternoon and welcome to Arena Pharmaceuticals second quarter 2008 Earnings Call. I am Robert Hoffman, Arena's Vice President of Finance and Chief Financial Officer.

After Jack Lief, our President and CEO gives a brief introduction of the call. I will review our financial results for the second quarter and six months from the June 30, 2008. I will again turn over the call to Jack for corporate update and at the end there will be time for questions.

Before we began, I will 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, technologies, financial guidance, assumptions, strategy, 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 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 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 clinical trials, preclinical studies and research activities, the regulatory process, the timing and outcome of our partnership efforts, our ability to obtain additional financing from collaborators and investors, whether our assumptions prove to be correct and other risks identified in our SEC reports.

For a discussion of these and other factors, please refer to the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 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.

Now, I would like to turn the call over to Jack Lief.

Jack Lief

Thanks, Robert. Good afternoon, everyone. Thank you for joining our 2008 second quarter conference call. We are now more than halfway through 2008 and on the cusp of a series of important events for Arena. We are weeks away from the first patients completing their two years in BLOOM, and have already begun the process of assembling key portions of our Lorcaserin NDA for submission later next year.

I will start by briefly reviewing important Arena milestones achieved earlier this year. Today, I am pleased to announce that we completed BLOSSOM enrollment in late June 4008 patients. BLOSSOM, along with BLOOM, comprise our pivotal trial program evaluating Lorcaserin's safety and efficacy for the treatment of obesity.

The independent Echocardiographic Safety Monitoring Board provided a favorable month 12 safety review in the pivotal BLOOM trial for our obesity drug candidate Lorcaserin.

We initiated a Phase 2b clinical trial of APD125, our internally discovered oral drug candidate intended to reduce insomnia symptoms and improve sleep maintenance and quality.

Dr. Thomas Roth of Henry Ford Hospital presented the positive results from Arena's Phase 2a clinical trial of APD125 in an oral presentation at the Sleep 2008, 22nd Annual Meeting of the Associated Professional Sleep Societies.

We reported positive Phase 1a and Phase 1b clinical trial results for APD791, our internally discovered drug candidate intended for the treatment of arterial thrombosis and other related conditions.

Merck initiated a Phase 1 clinical trial of a second generation oral niacin receptor agonist, intended for the prevention of atherosclerosis and its progression.

Taisho Pharmaceuticals initiated a Phase 1 clinical trial of a drug candidate under a GPCR-focused partnership to develop compounds to treat psychiatric disorders, and completed their initial clinical trial which provided the first clinical evidence that GDIR agonist may act as effective modulators of glucose homeostasis in patients with Type 2 diabetes, as a result Ortho-McNeil announced another, advanced and potentially more potent Arena-discovered GDIR compound into development.

We are well positioned to build on these accomplishments and others to achieve key milestones over the next several quarters. My confidence in Lorcaserin as our lead program is particularly strong; I think it holds tremendous clinical and commercial potential for Arena and our future partners.

I will now turn the call over to Robert to go through the financials. Robert?

Robert Hoffman

Thank you, Jack. In the second quarter of 2008, we recorded revenues of approximately $2.6 million, compared to second quarter 2007 revenues of approximately $4.8 million. Second quarter 2008 revenues included $2 million from contract manufacturing revenue under our contract manufacturing agreement with Siegfried, and $0.6 million for patent activities from our collaborations with Ortho-McNeil and Merck.

All of our revenues in the second quarter of 2007 were from our collaborations with Ortho-McNeil and Merck, and included $2.6 million in amortization and milestone achievements in technology and access development fees; $1.6 million in research funding; and $0.6 for patent activities.

In the first six months of 2008, we recorded revenues of approximately $5.3 million, compared to first six months of 2007 revenues of $9.7 million. Revenues in the first six months of 2008 included $4 million in contract manufacturing revenue under our contract manufacturing agreement with Siegfried, and $1.3million for patent activities from our collaboration with Ortho-McNeil and Merck.

All of our revenues in the first six months of 2007 were from our collaborations with Ortho-McNeil and Merck, and included $5.1 million in the amortization and milestone achievements in technology, access and development fees, $3.5 million in research funding, and $1.1 million for patent activities. The research funding portion of our collaborations with both Ortho-McNeil and Merck was completed in the fourth quarter of 2007, and therefore no revenues from amortization of previously achieved milestones technology access and development fees or research funding will be recognized in 2008 and thereafter from these collaborations.

We are still eligible to receive future milestones and royalties on sales under both collaborations. In the second quarter of first six months of 2008, we recorded cost of contract manufacturing of $2.3 million and $4.6 million respectively. Cost of contract manufacturing is comprised of direct cost associated with drug, manufacturing drug product through Siegfried under our contract manufacturing agreement including related salaries, other personnel cost and machinery depreciation cost.

We did not incur any cost of contract manufacturing in 2007 because the agreement with Siegfried was entered into in January 2008. In the second quarter of 2008, research and development expenses were approximately $56.4 million, compared to approximately $40.9 million in the second quarter of 2007. This $15.5 million increase was primarily attributable to an increase in clinical study fees and expense of approximately $13.9 million, as we continued to Phase 3 program evaluating the Lorcaserin for the treatment of obesity; continued an ongoing Phase 2b trial of APD125, our drug candidate under investigation for the treatment of insomnia; and completed a Phase 1b trial of APD791, a drug candidate intended for the treatment of arterial thrombosis and other related conditions.

Also contributing to the increase in research and development expenses was an increase in total personnel cost of $0.9 million due to primarily to an increase in a number of US research and development employees, from 331 at the end of June 2007 to 358 at the end of June 2008.

Nearly all the employees added were in drug development. In the first six months of 2008, research and development expenses were approximately $104 million compared to approximately $76.6 million in the first six months of 2007. This $7.4 million increase was primarily attributable to an increase in clinical study fees, an expansion of approximately $23.5 million as we continue the ongoing Phase 3 Lorcaserin program, started the APD125 Phase 2b trial, and completed APD791 Phase 1b trial.

Also contributing to the increase in research and development expenses was an increase in total personnel cost of $2.5 million, due primarily to an increase in a number of US research and development employees. Research and development expenses in the first half of 2008 included $63 million in external clinical fees and expenses. Such external fees and expenses were comprised were $54.3 million or approximately 85% for Lorcaserin, $5.7 million for APD125, $1.1 million for APD791, and $1.9 million for our earlier stage programs, including APD916, our internally discovered oral drug candidate for enhancing awareness.

Research and development expenses in the first half of 2008 included $2.2 million in non-cash share-based compensation expense, compared to $2.1 million for first half of 2007. General and administrative expenses totaled $7.2 million in the second quarter of 2008, a $400,000 increase over the second quarter of 2007 general and administrative expenses of $6.8 million.

General and administrative expenses totaled $16 million in the first half of 2008, compared to $11.8 million in the first half of 2007. This $4.2 million increase is due primarily to an increase of $1.1 million in the patent cost related to our partner program, and our internal programs in technologies as well as total personnel cost increasing by $1.4 million. Total personnel cost in the first half of 2008 included $2.1 million in non-cash share-based compensation compared to $2 million in the first half of 2007.

To the extent our partners reimburse us for patent activities, the reimbursements are classified as revenues. Such reimbursements totaled $1.2 million in the first half of 2008 and $1.1 million in the first half of 2007.

At June 30, 2008 we had 76 general administrative US employees compared to 64 at June 30, 2007.

Total non-cash share-based compensation expense was $4.3 million in the first half of 2008, compared to $4.1 million in the first half of 2007.

Net loss allocable to common stockholders was $65.8 million in the second quarter of 2008, compared to $39.1 million in the second quarter of 2007, and was $120.8 million in the first half of 2008, compared to $71.5 million in the first half of 2007. Increase in net loss allocable to common stockholders was primarily due to an increase in research and development expenses, including clinical expenses for Lorcaserin, general administrative expenses and a decrease in recognized revenues and interest income.

Cash, cash equivalents, and short-term investments totaled $272.2 million at June 30, 2008, compared to $398.2 million at the start of 2008. We earned $5.2 million in interest income in the first half of 2008, compared to $9.6 million in the first half of 2007.

We continue to follow an investment policy that is focused on principle preservation, and as a result have not exposure to any collaterized debt, obligations, or auction rate securities.

At June 30, 2008 we had we had 73.9 million shares of common stock outstanding.

As we discussed last quarter, the BLOOM and BLOSSOM trials comprise of pivotal programs for Lorcaserin NDA submission in late 2009.

BLOSSOM enrollment was completed in late June with 4008 patients. The BLOOM-DM trial is being planned as an amendment to the NDA. Including enrollment of nearly 3200 patients in BLOOM, we have enrolled nearly 7200 patients in the pivotal trial programs, which is consistent with our prior guidance that our pivotal program will enroll about 7000 patients. This robust plan provides a number of patients we will need, as agreed with the FDA, to adequately assess potential safety risks, such as FDA defined valvulopathy.

The enrollment rate of BLOOM-DM has improved in recent months, and we believe we can complete the enrolment around year end. We expect this trial to enroll approximately 600 patients, increasing the total projected number of patients in Phase 3 to about 7800. As a result of the increase in the total number of patients enrolled in the Phase 3 Lorcaserin program, our external Lorcaserin clinical expenses will be higher in 2008 than previously planned.

We have reprioritized our other pipeline programs and activities deprived savings that partial offset the increased cost of our Lorcaserin trials. For example, although we are still on track to file an IND for APD916, our compound for enhancing alertness, we do not plan on initiating the trial until the second half of next year.

In the preclinical and clinical expense line for other than Lorcaserin, we are forecasting reduction in estimated spent for the balance of 2008 of over $8 million. We have looked to other areas for same as well, including differing certain planned capital expenditures and planned new hires in 2008.

For all of 2008 our updated financial guidance is as follows, $10 million to $12 million in revenues versus the prior guidance of $8 million to $12 million, which includes revenue from 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 collaboration in 2008.

$207 million to $221 million in total research and development expenses versus prior guidance of $193 million to $209 million. This includes, $77 million to $83 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, $130 million to $138 million in external clinical and preclinical study fees and expenses. This guidance assumes expenditures for the continuation of Phase 3 program for Lorcaserin, the completion of our Phase 2b clinical trial for APD125 and the filing of an IND for APD916.

Approximately 85% of our external clinical and preclinical study fees and expenses guidance for 2008 relates to our continued development of Lorcaserin.

General administrative expenses guidance for 2008 overall remains the same at $27 million to $31 million, which includes $3 million in non-cash share-based compensation charges, and also includes patent costs related to our partnered and internal programs totaling $7.5 million, $2.6 million of which, we expect to be reimbursed by our collaborators. We have therefore included $2.6 million in patent fee revenue in our revenue guidance.

Cash usage for operating activities of $196 million to $206 million versus prior guidance of $190 million to $210 million. This cash usage for operating activities takes into account the increases in expenses primarily in clinical expenses for Lorcaserin. These increases will be offset by decreases in expenses in other areas, as well as by changes in the balance sheet items, including an increase in accounts payable and accrued clinical expenses at the end of 2008 as compared to the beginning of 2008.

Capital expenditures totaling $38 million to $42 million versus prior guidance of $38 million to $44 million.

Capital expenditures include cash paid in January 2008 for the acquisition from Siegfried of our drug product manufacturing facility related assets. Total cash used for operating activities, capital expenditures therefore are projected to be in the range of $235 million to $249 million versus prior guidance of $228 million to $254 million.

We still expect to end 2008 with approximately $160 million in cash, cash equivalents and short term investments. This projection assumed [new], new collaborations or milestone achievement revenues and their common stock will be issued in connection with the conversion or redemption of outstanding shares of our Series B redeemable and convertible preferred stock, including any of that may be converted or redeemed on or before Series B-1's December 2008 mandatory redemption date.

Ending 2008 cash does not include $15 million in capital expenditures or reimbursements for certain improvements to our one of our facilities which we expect, we will be reimbursed to us in late 2008 or early 2009. We will continue to manage expenditures on other programs and activities to ensure the cash needed to file the Lorcaserin NDA at the end of 2009.

Now I will turn the call back over to Jack Lief.

Jack Lief

Thanks Robert. As I stated earlier, we are well positioned to build on our accomplishments especially with respect to our Lorcaserin. I hold a particularly high degree of confidence in Lorcaserin, and I think it holds tremendous clinical and commercial potential for Arena and our future partners. Developing innovative medical advances like Lorcaserin and achieving key milestones in the creation of those advances is capital intensive.

For that reason, we regularly review budgeting decisions for previous programs, and expenditures to allocate resources appropriately. Now that we are fully enrolled in our Lorcaserin weight management pivotal trails, we are better able to estimate cost and completion dates. As Robert communicated, our Lorcaserin costs have increased somewhat but we have mitigated this increase by savings and deferrals in other areas and our year-end cash guidance remains unchanged.

I will now review the Lorcaserin program and provide some additional contexts around the cost of the Lorcaserin Phase 3 trails and our cost saving measures. As you would recall, we have three ongoing Lorcaserin Phase 3 trails. A two year trails, BLOOM started September 2006, and two one-year trails BLOSSOM and BLOOM-DM that have started last December.

BLOOM-DM is our trail in obese and overweight patients who are being treated for type II diabetes. Our most advanced patients in BLOOM have now been enrolled in that trail for almost two years, and will conclude treatment next month. While blinded data by its nature is inconclusive and may not accurately be indicative of unblinded results, we are very encouraged by our ongoing monitoring and review of the blinded adverse events and weight loss data of BLOOM, BLOSSOM and BLOOM-DM.

Our review which is necessarily limited in its nature and primarily intended to marcher the trails to a short patient safety and conduct according to their protocols, reveals to us no apparent pattern that we believe negatively impacts the development approvability or commercialization of Lorcaserin.

We are excited about the opportunity to review and analyze unblinded BLOOM date in the first quarter of next year, and I am now more confident than ever that we will see positive safety and efficacy results.

As we discussed last quarter, based on the FDA guidance for weight management drugs, as well as our confirmatory communications with the FDA on this topic, the BLOOM and BLOSSOM trials which include over 7000 patients comprise our pivotal trial program, and will be the basis for the Lorcaserin NDA submission in late 2009.

So the 600 patients BLOOM DM trial is being planned as an amendment to the NDA. Also in addition to BLOOM and BLOSSOM, there are number of Lorcaserin studies including PK studies and an abuse potential study, which completes the Lorcaserin clinical program. These trials will be part of the initial NDA submission.

We expect to announce topline BLOOM data around the end of March and topline BLOSSO data about six months later. We will continue to prioritize our pipeline of programs to give Lorcaserin the resources it requires. This means that while we are retaining our commitment to R&D, and advancing our pipeline, we are slowing certain research stage programs and getting others to partnering for our Phase 3 BLOOM data. I will address specific action with respect to APD791 and APD916 in a few moments.

Partly Lorcaserin as well as our other programs is an important element of our strategy. I believe that we are likely to have attractive partnership opportunities, but I do not intend to give the impression that a partnership is imminent or should be expected shortly. Partnering on the right terms with the right partner or partners is important.

This is especially the case with Lorcaserin, which I believe provides Arena and its investors with an opportunity to have a first-in-class drug that would address a significant unmet medical need. We are evaluating all options for commercializing Lorcaserin, ranging from one global partner to individual territorial licenses.

Now, let's discuss our next most advanced program after Lorcaserin, APD125 and an oral drug candidate discovered by Arena, and being studied to treat the majority patients with chronic insomnia. Those who have difficulty maintaining sleep after initial sleep onset.

APD125 is currently in a Phase 2b trial. The Phase 2b trial is a double-blind randomized placebo controlled subjective study, evaluating the efficacy and tolerability of APD125 in patients with primary insomnia, characterized by difficulty maintaining sleep.

The trial is expected to enroll a total of approximately 675 male and female patients in about 65 clinical sites in the United States, and studies two doses, 20 milligrams and 40 milligrams, and placebo over 14 consecutive nights of treatment. The trial which is about half way complete, will evaluate standard subjective measurements of sleep, including change from baseline in number of awakenings after sleep onset which is the primary endpoint. Enrollment in the trial is proceeding in line with our guidance to have results around year end.

As mentioned earlier, Dr. Thomas Roth of Henry Ford Hospital presented the positive results from Arena's Phase 2a clinical trail of APD125 in an oral presentation at the Sleep 2008, 22nd Annual Meeting of the Associated Professional Sleep Societies. In that trial, patients treated with APD125 experienced statistically significant improvements in objective measurements of sleep maintenance, including significant reductions in the number of times they woke 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 time spent in deeper sleep, with APD125 restoring sleep maintenance and sleep consolidation towards a more normal pattern. Importantly, these improvements in measurements of sleep maintenance were all achieved without next day hangover or cognitive impairment. There were also no major differences and reported adverse events, as compared to placebo, and no serious adverse events were reported.

I believe we now have solid proof-of-concept for APD125, and we are very pleased with its emerging profile. Based on our understanding of the market and patient needs, we continue to believe APD125 has the potential to address the significant unmet need for improving sleep maintenance, without the liability for hangover or overdose.

Research shows that the majority of patients suffering from insomnia have sleep maintenance complaints and APD125 may be able to address these complaints in ways not available by current drugs.

I would now like to discuss APD791, Arena's internally discovered oral drug candidate intended for the treatment of arterial thrombosis and other related conditions. As I noted earlier, we completed the APD791 Phase 1a and Phase 1b clinical trials. The Phase 1 trials were primarily intended to evaluate the safety intolerability of single and multiple ascending doses of APD791. In addition, we evaluated the pharmacokinetics and pharmacodynamics of APD791.

In the Phase 1 trials, APD791 was generally well tolerated and dose dependent in addition of serotonin-mediated amplification of platelet aggregation was demonstrated. APD791 was rapidly absorbed and exposures were related to dose. Results from the Phase 1 trial further support our understanding of APD791's novel mechanism of action, which we believe represents a new approach to reducing the risk of arterial thrombosis and other related conditions.

In light of the data we now have from Phase 1 and in cooperation with other outside expert consultants, we are evaluating the options for APD791 and the best approach to move forward clinically. We believe this candidate has excellent potential for treating arterial thrombosis and related conditions.

In order to achieve solid clinical proof-of-concept, we are currently evaluating various sub-populations for related peripheral artery disease conditions where the clinical trial size is manageable. This will allow us to optimize the value of this program. We believe most likely to have partnership.

Once we make a decision regarding indications and end points, we can give better clarity on the path forward. We do not intend to initiate APD791 clinical trials before the second quarter of 2009.

From our earlier stage pipeline, we are preparing to file an IND for APD916, an H3 antagonist from our alertness and cognitive improvement program. We believe this program also holds excellent potential. We plan to file an IND for APD916 to enable to start a Phase 1 in the second half of next year.

In addition to APD916, we also have novel compounds being investigated for pulmonary hypertension and autoimmune disorders, as well as other indications. The targets we are investigating for these and other programs include both known and Orphan GPCRs.

Our research provides us with a strong foundation that supports our promising emerging pipeline that will provide some exciting developments in the future including the potential for attractive partnering opportunities.

Before opening the call to your questions, I would like to review our expected corporate events over the next few quarters. We are expecting results from our APD125 Phase 2b insomnia trial around the end of this year, and results from our pivotal BLOOM obesity trial around the end of the first quarter of next year.

As just noted, we are evaluating options for moving APD791 forward, and we will prepare and file an IND for APD916. We will also report on the advancement of our partnered programs and update you on licensing opportunities regarding programs throughout our pipeline.

By focusing on Lorcaserin, carefully advancing our pipeline, and delivering on the corporate milestones we have communicated to you, I believe our fundamentals get stronger. By persisting along the strategic course we have said we can ultimately create significant long-term value.

Our corporate values, innovation, integrity, team work 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. Carla?

Question-and-Answer Session

Operator

The question-and-answer session will be conducted electronically. (Operator Instructions). Let's hear from Thomas Wei with Piper Jaffray.

Thomas Wei - Piper Jaffray

Hi. Thanks. I had a question on your comments about the look at the blinded data here on both efficacy and safety. So should we interpret that you mean that on a blinded basis the overall valvulopathy have engraved in the trial looks very linear?

Jack Lief

So as far as valvulopathy is concerned, of course we have the benefit of the Echo Safety Monitoring Board which gives us significant amount of confidence, that our assumptions when we started the studies were pretty much right on. So Bill do you have anything to add on it?

Bill Shanahan

I do not think really, you have added much more to that. That we did not meet stopping criteria and certainly our blinded review of the data is very encouraging, all of the safety data is within what we would expect for the population. We obviously are not unblinded, but the blended event rates for things could be a concern within what we would expect. So, we are not seeing any patterns that are concerning to us.

Thomas Wei - Piper Jaffray

So you are able to look at the shape of that curve over time on a blinded basis. Do you know if you have access to the data on valvulopathy event rate for drug like fenfluramine overtime? Can you actually plot that out and see what happened before?

Bill Shanahan

Unfortunately we can not because none of those studies were done prospectively. So as we mentioned on numerous other phone calls that the database just does not lend itself to that kind of analysis. It is all prevalence rate, so people were just pulled in after they had been on Fen-Phen for varying amounts of time, days, weeks, months and then took a snap shot and compared to placebo groups that may have been included or may have been included together from case controls or whatever.

I think the best summary of that was that, it is a meta analysis by which he looked at. Basically he broke it into trials that have three months or less of lean exposure and those that had three months or have greater than three months, and found with the FDA valvulopathy definition roughly of 12% versus 6% rate, so about twice the rate in trials that had a mean exposure of over three months.

There are also some data that show that there appears to be a time and a time relationship, but the precise timing is difficult. The longer people have been on fenfluramine it appeared to have higher event rate.

Jack Lief

Was that your question Thomas?

Thomas Wei - Piper Jaffray

Yes. Thank you.

Operator

Now we will open it up to Cory Kasimov with JPMorgan.

Unidentified Analyst

Hi, I am calling in for Cory. Hi guys, how are you? With Lorcaserin Phase 2 data slightly more than six months away, maybe have you seen an increased interest from potential partners?

Jack Lief

Yes. However, as I said I do not want to guide that we are about to sign something or we are just drafting final contracts or anything like that, I think we have seen a lot of interest from a number of partners, and I think, because I am confident in the results, I think we will get there.

Unidentified Analyst

Okay. Great. Also, with recent GSK and Actelion agreement, can you talk about your current strategic thoughts regarding APD125?

Jack Lief

Sure. I think once we have good subjective data, and there of course, we are going to have that data by the end of the year. We will share that data with investors, assuming the data is good, I think that is also is going to be partnerable. We will just have to see what that data looks like.

Unidentified Analyst

I think that previously you have mentioned that you wanted to partner and then push Phase 2, is that still your current thinking?

Jack Lief

Yes I think it will be. Yes it is.

Unidentified Analyst

Okay. Great. Finally just one housekeeping question, the previous guidance for cash at the end of the year, did that include the mandatory redemption?

Jack Lief

No. We are comparing apples-to-apples here. So, we are assuming that we will redeem that with common stock in all of our guidance. So, that going forward, that is we are assuming.

Unidentified Analyst

Okay. Great. Thanks so much.

Jack Lief

Pleasure.

Operator

Now we will hear from Bret Holley with Oppenheimer & Co.

Bret Holley - Oppenheimer & Co

Hi. Thanks for taking my question. I had a question-- a flipping to question on the Lorcaserin data been this near on its head regarding the partnership. What likelihood do you to see at this point in the partnership prior to those data, given how close they are, and it just it seems like risk averse partnering environment? I am just wondering if you give me some ideas on that question.

Jack Lief

Sure. Some companies are risk averse and others recognize that it is going to be a lot more competitive when all the cards are on the table and all the Phase 3 data is out and by the time we file that NDA next year. So really, we are talking about in the next 12 months basically all of the clinical data to come out. So I think sometime in the next 12 months, we will have lots of opportunity for partners. I think some partners are doing serious diligence now by sending teams of people over to Arena. Again, I do not want to give you the impression that there is any guarantee that we will sign something in the next quarter or so. However, there is a lot of interest going on and we will just have to see how this all works out.

Bret Holley - Oppenheimer & Co

Okay. Given an evolving market, it is fair to say for insomnia treatments, what do you see is the most attractive commercial aspect for APD125, commercial opportunity for APD125 going forward?

Jack Lief

We have several really attractive commercial opportunities; the first is that the compound will address the most common sleep problems that people with chronicle insomnia have, which is wakening up in the middle of the night, not been able to get back to sleep. So the number of awakenings, that is our primary end-point. We think that we are going to have a good result there, based on the objective data that we previously reported in our Phase 2a study. So our product addresses the most common problem in sleep.

Further, there is really no difference in side-effects between placebo and active drug that we have been able to see. So the drug is very benign in its activity. There is no hangover the next day, there is no sedation, and there is no diminution of performance. So we think that is going to be a big advantage also. There is a general safety advantage in that, absorption of the drug is limited, such that is its linear up to about 40 milligrams or so and then its tops out, so somebody that accidentally or otherwise overdoses on our drug will not be harmed. We do not expect them to be harmed. So, there are a variety of possible advantages. Obviously, we want to see the results from Phase 2b.

Bret Holley - Oppenheimer & Co

Okay. Thanks very much.

Jack Lief

Pleasure.

Operator

We will go to Leland Gershell with Cowen and Company.

Leland Gershell - Cowen and Company

Good afternoon. Thanks for taking my questions. In the past you had mentioned in addition to a six and 12 months echo safety checks, there have been 18 months that would not be under the DSMB, will you be reporting on the 18 months echo check in the next couple of months?

Jack Lief

No not really, because the study is almost being completed, there was just no need. The echos were just taken for data collection, and not because we were concerned, we or the agency was concerned about safety. Bill do you have anything to add to that?

Bill Shanahan

I think that is right, with 18 months, basically now by the time we could analyze these data about half of the people would probably be through the trail. So we decided there was no point in doing analysis. Of course, it takes a considerable amount of time and effort to do that as well. So to be efficient, we decided to just wait. We thought we would getting enough data, and of course our other trials were one year in duration. So we have covered this.

Leland Gershell - Cowen and Company

Okay. On APD791, you mentioned you would not be taking that into a new trial until the second quarter of next year. How should we think about this in terms of partnerable asset? Could we see a partnership on this between now and that time? Or how are you thinking about that?

Jack Lief

We are talking to companies about partnering, but our resources are limited. We have chosen to focus primarily on Lorcaserin over the near-term, and once the BLOOM data is out and we have a greater visibility around partnering, I think we will make those decisions on 791 and our other programs.

Leland Gershell - Cowen and Company

Okay. Thanks for taking the questions.

Jack Lief

Pleasure.

Operator

Now we will open it up to Matt Osborne with Lazard.

Matthew Osborne - Lazard

Hi, guys. Thanks for taking the question. Can you remind us what you are confidence level is on meeting the threshold as a single agent, either at 5% placebo to check the weight loss or at least 35% to achieve that threshold, because in your Phase 2 trial at 10 milligram BIDs only 2.9% and only 31% patients achieved that threshold. Can you just walk through for us why you think you will hit either one of those endpoints in the upcoming BLOOM trials? Thank you.

Jack Lief

Sure. So remember that the Phase 2 study was only a 12-week study and the endpoints are 12 month endpoints. So the duration of the efficacy primary endpoint is 5 times as long as the 12 week endpoint. So that is the first item. The other point that I would like to point out is that even in 12 weeks, almost a third of patients lost at least 5% of their body weight versus only about 2% on placebo. So, I think, this is an outstanding result that we have reported, much more robust than some of the other historical new drugs that were evaluated. So, overall, I feel very confident that we are going to hit the efficacy endpoints that we need to hit. Bill, do you have anything to add to that?

Bill Shanahan

The only thing I would add to that is the essence of diet and exercise is I think important, because we will see more achieving 5% when you have a background of diet and exercise. However, was achieved with people basically not changing their behavior, in terms of diet or exercise, still we saw up to third of the people in 12 weeks lose 5% or more of their body weight. In addition, obesity trials for most agents show that these agents tend to peak between months six and nine and have fairly linear responses up to that point. So we fully expect the results to be at least twice that based on those historical data. So, in terms of just absolute weight loss, the proportions will change when you add diet and exercise.

Matthew Osborne - Lazard

Then that last question just in terms of timing of launch, given that we anticipate a filing in the second half or the end of 2009, and the BLOOM-DM trial ought to be submitted as a supplemental NDA, when do you anticipate an approval and launch and is there any concerned or perhaps somewhat of a potential for delay, given that I believe the, the obesity guidelines state that they would like to see patients who are diabetic studied as part of the registration or part of the requirement for approval -- can you walk us through the scenario of when you will file? Then follow-up on BLOOM-DM data and then ultimately get-to-market? Thank you.

Jack Lief

Sure. The DM trial; we expect to include that as an amendment to the NDA. To answer your question directly on the approvability without the diabetes data, which we expect to have. However, regarding with the data without the diabetes patients, we have adequately vetted that with the agency and we see no issues. It is very clear that there are no issues. We can file with both BLOSSOM and BLOOM, those two pivotal studies; those 7200 patients included in those two studies are more than sufficient, very robust studies, and this is well understood. So, since we expect that the DM study will be completed in a relatively timely fashion, we are optimistic that we will file it as an amendment. If it is not possible to file as an amendment, we will file it as a supplement, eventually, publish it and file it as a supplement. We do not think that this has any bearing on the approvability of our drug. Bill, do you have any, any other comments on that?

Bill Shanahan

Yes, we have discussed this with the FDA, so it is acceptable to file our NDA with the two pivotal trials. Obviously we like to get the diabetes trial completed as quickly as possible, and then hopefully include that as an amendment. So that it can be an indication in our initial approval.

Matthew Osborne - Lazard

Okay, but the classification and it would likely cost, the cost side is a major amendment to that initial NDA, correct?

Bill Shanahan

That is a discussion we will have to have with the agency. I think it will also depend on the timing. The PDUFA language allows you to mend up to month 7 with the 10 month action date. So we will have to have that discussion, and obviously the earlier we could complete it the better or the other possibility of course would be to have a supplement.

Jack Lief

Remember, the pivotal studies include 7200 patients; the DM study is only a 600 patients study.

Matthew Osborne - Lazard

Right. Okay, great. Thank you.

Operator

Moving on we will open the floor to Alan Carr with Needham.

Alan Carr - Needham

Good afternoon. I just wanted to follow up on the last question. Did you say that an amendment could be filed up to what point? Was the 10 month NDA?

Bill Shanahan

Month 7.

Alan Carr - Needham

Month 7th, and that would not trigger some major amendment you think?

Bill Shanahan

Well, it depends on - the FDA has agreed that it is not a major amendment. If they consider it to be a major amendment then they can reset the clock on that basis. However, I would emphasis what Jack has said, that we will have a sufficient filing with the two pivotal trials including addressing the Echo Safety issue. So we do believe there is a reasonable chance that certainly the earlier we can do it, that this could be considered an amendment. So we will have to have these specific discussions once we know the timing, and we will outline the content with the agency.

Jack Lief

Yes. We do not plan to have a clock reset obviously, you do not know what is going to happen in the future, but some we expect action on our filing in 2010.

Alan Carr - Needham

Okay. I wanted to take the discussion on diabetes a little bit further. Which was longer-term strategy and looking beyond obesity or diabetes? How important do you think that is for commercial profile?

Jack Lief

Well, I think it is clear that losing weight improves the course of disease for diabetes as well as other conditions. So I think our drug will be an important factor in physicians treating lots and lots of patients both with diabetes and without diabetes. We will see what the reduction in glucose and other secondary end points might be.

We have already reported in our Phase 2 studies that there was a favorable outcome in blood glucose. This is even without patients with type 2 diabetes. These are normal obese patients. So we would expect to have very favorable outcomes, but as I said the study is still going on.

Alan Carr - Needham

Any thought on larger outcome mortality-morbidity study in the future.

Jack Lief

Well certainly I think the guidelines are that if you want to have a drug for specifically diabetes, you might need to have longer studies than even a two-year study. However, we do not know whether the agency is going to continue with that approach or not.

Bill Shanahan

Yes. Right now, they are just talking about it. So it was interesting to have the Advisory Committee recommend with a very strong vote to have alchemy studies for diabetes drugs. However, whether the FDA will adopt that or not remains to be seen. I think pragmatically, it will of course certainly have a major impact on diabetes drug development. So we will see how that comes out, but I would add that the obesity market by itself is obviously very large and the drug will do quite well with a strong indication in obesity.

Alan Carr - Needham

Thanks very much.

Jack Lief

Pleasure.

Operator

We will hear from Adam Cutler with Canaccord.

Adam Cutler - Canaccord

Hi. Thanks for taking the questions. I am wondering: In your communication with the SGA around your changes for the Lorcaserin Phase 3 program, was that a face-to-face meeting or was that by written correspondence?

Jack Lief

Both

Adam Cutler - Canaccord

Both okay. I am wondering, can you just remind us what the number was that you were planning for the DN study originally and what the entry criteria is in terms of HbA1c?

Robert Hoffman

Yes. We were originally planning 750, and because we have seen the very slow recruitment, we petitioned the FDA to drop the low dose. So in the end we are going to have 600 patients so that should be ballpark again. So roughly a 100 at the low dose, and then 250 both in the placebo arm and in the 10 mg twice-daily dose.

Adam Cutler - Can Accord

Haemoglobin A1c?

Robert Hoffman

The A-1C I think they are 8 to 10. We got the FDA to lower those a little.

Adam Cutler - Canaccord

Okay. What had it been previously?

Robert Hoffman

The guidance I think I am trying to remember for sure. I think the guidance might have been 9 to 11. It could not have been that high. We got them to come down one point basically. So it helps. We are either moderately or very much out of control, and I think that is one of the problems of recruiting these kinds of trials because you are taking out of control diabetics because most endocrinologists try very hard to keep their patients in much better control.

I believe these trials for obesity should just be showing that drugs can be safely administered in the diabetes population, and on background medications and that they still achieve weight loss. It is not per se to improve their diabetes although it is been well demonstrated that if their weight improves, their diabetic control also will improve

Adam Cutler - Canaccord

Got it. Okay. One other question on 125, I am just wondering if you can give us a little bit of color on how you think 125 is differentiated from some of the other drugs that are in late stage development?

Jack Lief

Well the data that I have seen on the Sanofi drug that they have released, I think our drug has the opportunity to be more robust in terms of the effect, for sleep maintenance. Obviously we will see based on the current study that is going on. Also our drug, as I said is very safe because of the absorption limitation. So I think that will have a safety benefit versus the other drugs that I am aware of. I am not aware of any other drug that has that characteristic.

Adam Cutler - Canaccord

Okay. Thanks for taking the questions.

Operator

Moving on, we will go to Jason Napodano with Zacks. We will now hear from Soham Pandya with Think Equity.

Soham Pandya - Think Equity

Thanks for taking my question. Just on the BLOOM-DM study, just one quick question. Are you specifically looking at hypoglycemia safety analysis in that trial?

Robert Hoffman

Of course.

Soham Pandya - Think Equity

Okay. Are there any changes because of the reduction of the patients number hearing in terms of those parameters?

Robert Hoffman

No, again. We still are going to have the intended numbers of subjects in the placebo and the high dose group. We have only reduced the numbers in the low dose group, and of course we have paradigms for adjusting medications and we monitor very carefully for hyperglycemia.

Soham Pandya - Think Equity

Okay, great, thank you. Just another question on the increase in R&D, the $15 million increase in R&D guidance for the year. Can you just explain to me what percentage of that is related to Lorcaserin, I know you mentioned about an 85% number, is that what we should thinking about?

Robert Hoffman

85% related to the external preclinical and clinical study fees and expenses. So, if you look at the actual and as far as the six months, we incurred for Lorcaserin just over $54 million and total R&D expense was just under $104 million.

Jack Lief

However, to the answer I think what is your question was whether Lorcaserin accounted for all of the extra expenses and it does.

Soham Pandya - Think Equity

Okay. I know you have thrown out a number of about a $160 million for the Phase 3 program. Could you help us understand that with the increase in the R&D expenses that you just mentioned? Is it a timing issue or is it related to anything that you are doing in the clinical trials. Are you collecting more data, can you just help me understand that component?

Jack Lief

Sure, so originally we were planning on having about 7000 patients in all three studies; the BLOOM, BLOSSOM and BLOOM-DM trials. We currently will have about 7800 patients in all three studies. So the number of patients has increased, and that is because of the DM study being pushed out primarily. So w expect that that 160 million number could be closer to 180 million in total, because the cost of these studies are very much proportional to the number of patients that are being evaluated in the studies. So we will see on that. However, the good news is that the cash guidance remains unchanged and we have had some litigation from our other programs.

Soham Pandya - Think Equity

Okay. So that is correct, so it is just basically related to the increase in the number of patients not per se related to anything, any more data collection or anything along those lines.

Jack Lief

No, we are collecting lots of data.

Soham Pandya - Think Equity

Okay, right, okay, thank you.

Jack Lief

Sure.

Operator

There are no additional questions. I would like to turn it back over to Mr. Jack Lief for any closing or additional remark.

Jack Lief

Thank you. So before finishing, I would like to reiterate that we remain focused on benefiting patients and building long-term stockholder value through the development and commercialization of Arena drug candidates independently and with our partners. Thanks again for joining us on the call today. That concludes it.

Operator

AND that does conclude our conference for today. Thank you for your participation. Have a pleasant day. You may now disconnect.

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Source: Arena Pharmaceuticals Inc. Q2 2008 Earnings Call Transcript
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