No matter how you slice it and dice it, Arena Pharmaceuticals (NASDAQ:ARNA) is going to be losing money on a quarterly basis for the foreseeable future. The company reported Q2 losses of $27.2 million and the outlook for its lead product is dwindling sales figures, especially in the second half of the year. Adding insult to injury, the pipeline, which is why many investors remain in the company is seeing more delays. The $122 million in cash cannot likely cover the expenses until the phase 2 readouts happen in Q3 and Q4 of 2017.
Newly minted CEO Amit Munshi spent the beginning of the call outlining his vision for the future of Arena. He took some time to clearly state that Arena is transitioning from a "research company" to a "development company". The idea seems to be maximizing value by developing drugs to a stage where the company can realize the best and most lucrative deals. Investors that have been holding onto hopes that a substantial partnership will happen prior to phase 2 read-outs should think again. In my opinion Munshi is now trying to preserve capital, and utilize a shelf offering in order to get to critical points where the company can expand interest in its drug candidate and increase its leverage at any negotiating table. The downside of that is near term stagnation in terms of the stock price.
Some key points were as follows:
- Revenues totaled $9.5 million, including $4.3 million in net product sales of BELVIQ... There were about 114,000 scripts of Belviq filled in the US during the quarter.
- The company decreased the accounts payable to Eisai by only $2 million. Arena still owes Eisai $11.4 million
- Research and development expenses totaled $18.5 million. The company has streamlined efforts, and developed focus, but the cash burn in this category remains substantial. Seeing results delayed by months means additional cash burn to get to a point of results. In the long term this may be good, but those considering investing will want to see if the timing of dilution may impact decisions.
- General and administrative expenses totaled $8.5 million. This is leaner than we have seen from Arena in quite some time. The cost cutting measures here will buy some time, and the company did need a haircut in this area of its business.
- Restructuring charges totaled $6.1 million, including non-cash charges of $1.0 million. This impacted Q2, and should be minimal going forward. One time charges one time cash awards need to be taken with a grain of salt. They do not reflect the typical operations of a company.
- At June 30, 2016, cash and cash equivalents totaled $122.0 million. In Q2 we saw burn of about $18 million with normal operations. The company may be able to get a bit more lean, but at the same time, Belviq sales are going to drop as well. A few months ago I made the statement that investors should assume a burn rate of $17 million per quarter. I will stick by that assessment. This means that Arena has 7 quarters of total cash, but would have worry of a going concern notice in 3 to 4 quarters. The cost cutting efforts have reduced a need for cash in 2016, but early 2017 will have those concerns surface again.
- R&D expenses for 2016 should land between $78 to $84 million, including non-cash expenses of approximately $9 million. The company has already spent $37 million. This means that between $41 million and $47 million will be spent in the second half of the year.
- G&A expenses between $27 to $33 million in 2016, including non-cash expenses of approximately $7 million. The company has already spent $15.4 million. This means that between $12 million and $18 million will be spent in the second half of the year.
Arena noted that the pipeline will see some delay. This may not be what investors wanted to hear, but new management is clearly on a mission to shift the very identity of this company. The relevant pipeline status is now as follows:
- Etrasimod (APD334) is currently being evaluated in a Phase 2 clinical trial for ulcerative colitis .The Company expects Phase 2 data in the fourth quarter of 2017, a delay from what was once early 2017.
- APD371 has what the company has termed favorable results which were reported in April from a Phase 1b multiple-ascending dose clinical trial. APD371 will next be evaluated in a Phase 2 clinical trial for the treatment of pain associated with Crohn's disease. The Company anticipates initiating the trial in early 2017.
- Ralinepag (APD811) is currently being evaluated in a Phase 2 clinical trial for pulmonary arterial hypertension (NYSE:PAH). The Company expects Phase 2 data mid-year 2017. This seems to be a bit of a delay from what was previously noted
In my opinion an investment in Arena these days is an investment in the pipeline and not related to the anti-obesity drug Belviq. The anti-obesity market has essentially been a failure and now seems to be developing negative growth. Arena's marketing partner Eisai seems uninterested in marketing Belviq until results from a post marketing clinical trial to assess cardiovascular impacts. That data is not expected until 2018. Eisia did get Belviq approved in Mexico, but no real flavor has been given on a possible launch there.
Overall, the company seems to have a mission now. While the equity may tread some water, the value in Arena will be the pipeline drugs that we will see results on in mid to late 2017. That means investors that believe the pipeline carries good potential will have plenty of time to accumulate on dips, or even trade the equity with a bit of regularity. I do not see a cash crunch until early 2017, but it will likely happen at some point. Keeping cash above $100 million allows Arena to bring some leverage to the negotiating table instead of desperation. New management has now outlined a mission, puts its flavor on the company, and now needs to prove itself. The street will not reward continued mediocrity, but could jump back in if Arena sees great data on its lead drug candidates. Stay Tuned!
Disclosure: I am/we are long ARNA.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.