Arena Pharmaceuticals, Inc.
Q1 2015 Earnings Call Transcript

Published: 12 May 2015

[Operator:]

Good day, everyone and welcome to Arena Pharmaceuticals First Quarter 2015 Financial Results 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 Senior Vice President and Chief Financial Officer, Mr. Robert Hoffman. Mr. Hoffman, please go ahead.

[Robert Hoffman:]

Good afternoon and thank you for joining us. I am Robert Hoffman, Arena's Chief Financial Officer. We hope that you've had a chance to review our financial results news release we distributed earlier today for our first quarter of 2015. Joining me on today’s call with prepared remarks are Jack Lief, our President and Chief Executive Officer and Craig Audet, our Senior Vice President of Operations and Head of Global Regulatory Affairs. Also participating on today's call is Dominic Behan, our Chief Scientific Officer and Bill Shanahan, our Chief Medical Officer. During this call, we will make forward-looking statements about our goals, plans, expectations, future activities and events, including statements about BELVIQ and our drug candidates, including efficacy, safety, R&D, regulatory applications, and collaborations; commercialization of BELVIQ, including marketing, reimbursement and prescriptions, financial results, condition and guidance, and other statements that are not historical facts. Such statements may include the words plan, expect, believe, may, will, can or similar words. You are cautioned not to place undue reliance on these forward looking statements, which represent our judgment and beliefs 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 our forward-looking statements include those related to, the timing, results and cost of R&D, manufacturing and commercialization; the regulatory process and decisions; data and other information related to drugs and drug candidates may not be as expected, favorable, or sufficient for further development, regulatory approval or commercialization; collaborations; and other risks identified in today’s financial results press release, as well as our SEC filings. I will now turn the call over to Jack.

[Jack Lief:]

Good afternoon and welcome. On today's call, I'd like to begin by discussing the agreement we just announced with Roivant Sciences for nelotanserin. Previously known as APD125, nelotanserin is a novel inverse agonist of the 5-HT2A receptor discovered at Arena that has been studied to date in multiple clinical trials, involving over 900 patients. The prior clinical trials support nelotanserin's tolerability, activity in the brain, and potential to treat a variety of neuropsychiatric conditions. This collaboration grants Roivant exclusive worldwide rights for nelotanserin. They intend to initiate Phase 2 clinical trials for the treatment of behavioral and neuropsychiatric disturbances, including psychoses in patients with dementia and other neurological diseases. Roivant may subsequently pursue the development of nelotanserin for other neuropsychiatric disorders to further realize the commercial potential of the drug candidate. Based on its potency and specificity for its 5-HT2A receptor, Roivant believes that nelotanserin has the potential to be a best-in-class drug against this target. Roivant is led by some of the industry's top talent and is uniquely positioned to maximize the therapeutic and commercial value of nelotanserin. The founder of Roivant Sciences Inc is among the most widely respected healthcare investors with a strong track record of biotechnology investments. It’s Senior Vice President of Research and Development led the development of Aricept, the top selling drug for Alzheimer's disease and its Senior Vice President of Clinical Research was previously with Gilead and Pharmasset and led the development of Sovaldi for the treatment of hepatitis C. Millions of people suffer from at least one form of dementia, and Roivant believes that the 5-HT2A receptor is one of the most promising targets for the treatment of behavioral disturbances and neuropsychiatric symptoms in patients with dementia and other neurological diseases. Based on this agreement, we will receive a $4 million upfront payment and we are eligible to receive $41.5 million in regulatory and development milestone payments, 15% of net sales in exchange for the manufacture and supply of finished commercial drug product, and up to $60 million in one-time purchase price adjustment payments, tied to commercial, certain commercial sales milestones. Roivant is responsible for all development expenses through approval. Nelotanserin is another example of a compound resulting from our GPCR platform, and internal expertise and we look forward to a productive collaboration with Roivant. Now, turning to BELVIQ, since launch we've seen steady and consistent increases in quarter-over-quarter physician and patient uptake of BELVIQ. Important new initiatives for 2015 that Eisai has communicated to us include strategies to further drive demand for BELVIQ with a focus on increasing prescription refill rates including through its pay no more than $75 savings card, continuing to ensure access by improving insurance coverage for BELVIQ and appropriately differentiating BELVIQ from other weight loss agents by communicating its unique properties. Eisai's ultimate goal is to make BELVIQ the weight loss agent of choice of physicians and overweight and obese patients. Likewise, our South Korean collaborator, Ildong Pharmaceuticals has a similar goal in that country. As you may recall, BELVIQ was approved earlier this year for marketing in South Korea, and Ildong launched 60-count blister packs and 100 count bottles of BELVIQ on February 24. Ildong estimates that a total of 766,350 tablets were prescribed through the end of March, which equates to approximately 12,770 one-month prescriptions in just over five weeks. According to Ildong, this launch has exceeded their expectations. Based on IMS data in the US and Ildong's estimates, total prescriptions for the first quarter in the US and South Korea total approximately 182,000. We are pleased with Ildong's launch of BELVIQ in South Korea and look forward to updating you on prescription growth as their launch continues. I will now turn the call over to Craig who will provide some highlights followed by Robert who will review our financial results for the first quarter before opening the call to your questions. Craig?

[Craig Audet:]

Thanks, Jack. Good afternoon, everyone. I'd like to provide a brief update on some of our programs as well as some upcoming milestones. We recently announced the completion of two registration of clinical trials of our once-daily extended release formulation of lorcaserin, which is planned to be marketed under the brand name, BELVIQ XR in the US after approval. We are working with Eisai to complete a new drug application for BELVIQ XR and plan to submit it to the FDA later this year. Based on market research and other potential factors such as improved convenience and compliance, we believe this could result in an increase in market share of BELVIQ XR over the current immediate release formulation. We also recently announced favorable results from our Phase 1 single-ascending dose study of APD371, a highly selective and potent agonist of the cannabinoid 2 receptor currently in development for the treatment of pain and potentially for fibrotic diseases. Doses of up to 400 milligram were achieved and were well tolerated as evidenced by the lack of adverse events that limited dose escalation. 100 million people in the U.S. are burdened with persistent pain each year with the global pain management market in 2012 reaching approximately $35 billion. So the opportunity for a safe, well tolerated, and more efficacious pain reliever is substantially. We plan to advance this program into a multiple ascending dose study later this year. Earlier this year, we reported positive results from our Phase 1b multiple-ascending dose study of APD334, showing dose-dependent lymphocyte lowering of up to 69% with safety findings that support moving to the next stage of development. We have recently filed with the FDA in order to begin a Phase 2 study in ulcerative colitis and are actively preparing for a study start planned later this year. We believe APD334 may also provide a clinical benefit in Crohn’s in other autoimmune diseases and are looking into additional Phase 2 studies. The timing for the start of the study such as Crohn's are under assessment and may not occur this year based on logistical considerations and financial prioritization. We will provide additional guidance on timing when appropriate. Over 1.6 million people suffer with IBD in the U.S, with UC accounting for almost 1 million of that figure. The global UC market in 2014 totaled approximately $3.4 billion, so the opportunity for oral agents that are efficacious for induction and maintenance with fewer side effects is significant. On the BELVIQ registration front, Eisai is continuing to work with the health authorities in Brazil and Mexico in order to gain marketing approval in these countries. In addition, we and Eisai would be reengaging with the repertoire and co-repertoire in the European Union with an eye towards resubmitting around the end of Eisai's 2015 fiscal which, as a reminder, would be the end of March 2016. In Taiwan, our collaborator CY Biotech is enrolling patients in their six month bridging study which will enable them to file for marketing approval once completed. Finally, the health authorities’ review of Teva's marketing application in Israel remains ongoing. In summary, we continue to advance our clinical pipeline of novel oral agents towards proof of concept and beyond in areas of unmet medical need that we believe can add significant value. We also continue to work to bring BELVIQ to additional patients in new countries and to work with Eisai on life cycle management activities for BELVIQ. I'd now like to turn the call over to Robert, who will review our financials.

[Robert Hoffman:]

Thanks Craig, I'll focus my comments on financial performance highlights for the quarter ended March 31, 2015 compared to the quarter ended March 31, 2014. I also refer you to today's financial results news release. For the following financial results 2015, we’ll refer to the three months ended March 31, 2015 and 2014; we’ll refer to the three months ended March 31, 2014. For 2015, we recorded revenues of $12.3 million compared to $6.8 million for 2014. 2015 revenues included $6.6 million in net product sales of BELVIQ, a $3 million milestone payment from Ildong earned in February 2015 for the approval of BELVIQ in South Korea and $2 million from amortization of upfront payments. Of the $6.6 million from net product sales of BELVIQ, $4 million represented 31.5% of Eisai's U.S. net product sales, $2.2 million was from net product sales from Ildong in South Korea and $0.4 million related to redemptions and vouchers in the U.S. Consistent with how we recognize net product sales in the U.S., we recognized net product sales in South Korea when Ildong ships products to its wholesalers. Eisai's net sales were $12.8 million and Ildong's as calculated under our agreement were $4.8 million for a total $17.6 million in 2015. During the first quarter of 2015, Eisai shipped approximately 153,000 60-count bottles of BELVIQ and Ildong shipped the equivalent of approximately 58,000 60-count bottles of BELVIQ to wholesalers. A large portion of Ildong shipments to South Korean distributors and therefore our revenues were primarily related to initial stocking. For the US, the gross to net discount was 58% [ph] which reflects the new pay no more than $75 savings card program implemented by Eisai in January 2015. Cost of product sales of BELVIQ totaled $3.2 million for 2015 and $0.8 million for 2014. Due to the smaller graft sizes for Ildong as well as capacity of our manufacturing facility, we expect continued volatility and cost of product sales expenses until production volumes stabilize. Research and development expenses for 2015 increased slightly to $22 million from $21 million for 2014. R&D expenses for 2015 included $2.1 million in non-cash service compensation expense compared to $1.8 million for 2014. General and administrative expenses increased slightly to $8.4 million for 2015 compared to $8 million for 2014. G&A expenses for 2015 included $1.8 million in non-cash share-based compensation expense compared to $1.4 million for 2014. Net loss was $24.3 million for 2015 or $0.10 per share on a fully diluted basis compared to net loss of $25.3 million for 2014 or $0.12 per share of fully diluted. At March 31, 2015, cash and cash equivalents totaled $241 million. Also at March 31, 2015, our payable to Eisai totaled approximately $22.5 million. At the end of Eisai’s fiscal year March 31, the estimated price paid to us for products that Eisai sold it to their distributors as compared to the Eisai product purchase price, and the difference in this case is refunded back to Eisai for overpayments. We expect to pay approximately $10 million to $11 million of the $22.5 million to Eisai in May 2015 and pay the balance in May 2016. We will now open the call to questions. Kristal?

[Operator:]

[Operator Instructions] And our first question comes from Simos Simeonidis from RBC Capital Markets, your line is now open.

[Simos Simeonidis:]

Hi, guys. Thank you for taking the questions. I was wondering if you can talk a little bit about the smoking cessation plan, what are your - sorry, the smoking cessation program, what are your plans there, especially as it pertains to using the BELVIQ XR tablet.

[Jack Lief:]

I’ll let Craig address that question.

[Craig Audet:]

Hi, Simos, how are you?

[Simos Simeonidis:]

Hi, how are you?

[Craig Audet:]

Good, good. We are working with Eisai on that right now. We still need to go to the FDA and have discussion with them on study design, and then go from there. We would plan to use the once-daily formulation as we said in the past in that study.

[Simos Simeonidis:]

Okay. And do you have a rough idea of when these studies may start, would it be this year?

[Craig Audet:]

Well, it’s tough. The timing of the study is really going to depend on the ongoing discussions that we’re having with Eisai in terms of study design and the feedback from the FDA that we get.

[Simos Simeonidis:]

And then the other program I was going to ask is the combination with phentermine, where are you in your discussions with the agency and could you also potentially use the once-daily drug there?

[Jack Lief:]

Yeah, so we actually are planning right now working with Eisai to finish the FDA meeting request and get that into them. So we expect to have that meeting in the next 60 to 75 days with the FDA once the submission goes in, of course. And as we said in the past, we’re looking at possibly either augmenting the current label by removing the limitation of use with phentermine or perhaps if it’s not too onerous actually doing a fixed dose combination somewhere in between, so we will have to see. And we could - I believe we could use the XR formulation in there as well.

[Simos Simeonidis:]

Great. Thank you very much for taking the questions. I’ll jump back in the queue.

[Jack Lief:]

Sure.

[Operator:]

Thank you. And our next question comes from Alan Carr from Needham & Company. Your line is now open.

[Alan Carr:]

Hi, thanks for taking my questions. Probably for Dominic, a couple sort of mechanistic ones, I am wondering if you could talk a bit about how - forgot the - APD125’s differentiation from pimavanserin in terms of affinity for dopamine receptors and other 5-HT receptors. And then also with respect to 371, if you could talk about a bit more about what you saw in that Phase 1 trial and mechanism there, distribution that sort of thing, and timing and plans for bringing that into Phase 2. Thanks.

[Jack Lief:]

Dominic.

[Dominic Behan:]

Sure. So just as a reminder, nelotanserin is a highly selective inverse agonist of the serotonin 2A receptor. It has very good preferential selectivity for 2A over 2B and 2C, and it is very important on that receptor. And we've probably shown in various trials that we had good exposure for that compound and also pharmacology emulation to slow wave sleep activity. So we've previously shown good evidence for access to the CNS, and some proof of pharmacological action at the receptor target. We think mechanistically this target could be good for various neuropsychiatric diseases, and that's why we were interested in collaborating with Roivant that brings to the table multiple levels of expertise in this area, so we are very excited about being in that compound forward into development. On 371, just to remind you, 371 is a selective CB2 agonist, so there is two main CB2 receptor, I should say, cannabinoid receptors 1 and 2. The idea here is to selectively modulate the CB2 for pain indications avoiding the CB1 receptor mainly in the CNS because that could be associated with various unwanted CNS affects. So we think that by isolating and targeting the CB2 receptor, we can potentially have efficacy in pain and we've shown that preclinically in various models of pain whilst avoiding some of the side effects that we think could occur with CB1 modulation. So that's the idea on 371.

[Alan Carr:]

Back to 125, sorry I forgot the new name, but how does it differ from pimavanserin?

[Jack Lief:]

Nelotanserin

[Alan Carr:]

What sort of differences are there from pimavanserin as far as you know. Have you been able to look at both of them?

[Dominic Behan:]

As you come to selectivity, we think we are highly competitive because of the potency selectivity. We also previously showed that we had good exposure, but there was an exposure limit that we think could be interesting in terms of potential side effects as well. So it's really the attractiveness is the selectivity and the potency by good evidence for pharmacology in humans in terms of access to the serotonin 2A target that we previously demonstrated in various trials.

[Alan Carr:]

Okay, thanks very much.

[Robert Hoffman:]

I said and I would add, very good tolerability in multiple subjects.

[Alan Carr:]

Okay, great. Thanks very much.

[Operator:]

Thank you. Our next question comes from Ted Tenthoff from Piper Jaffray. Your line is now open.

[Ted Tenthoff:]

Great. I appreciate that. Just kind of an update on sort of where things stand with the marketing effort with Eisai. We've seen some changes. How do you guys kind of view this in terms of sort of the path forward for BELVIQ and what do you see as sort of the primary drivers? Scripts seem to be doing nicely, I think the whole space is growing. So what do you guys see as really the most recent update on where that sector is?

[Jack Lief:]

Well, remember, Ted, that the recent restructuring wasn't due to BELVIQ, it was due to the retired US business and it was across the entire US business. So we see them still putting in investment towards BELVIQ. They are very committed to the product. As we said in the prepared remarks, they want to see it the treatment choice for physicians and for patients for weight loss. The $75 program seem to have really help them gain some more traction in the marketplace. Since they’ve launched that program, we’ve seen a pretty uptick and new-to-brand prescriptions to BELVIQ, which says that basically new patients are trying it, it’s not just refills. So, we think that’s important. I’m not sure - by the way they have - they’re carrying it in the neurology field force as well as the contract field force. It’s the only Eisai product that’s carried across both field forces. So, we think that’s important as well.

[Ted Tenthoff:]

Okay. All right, good.

[Operator:]

Thank you. Our next question comes from Steve Byrne from Bank of America. Your line is now open.

[Steve Byrne:]

Just drilling into that same question a little bit more, Craig. What do you view as the impact on primary detail equivalents and how is that sales force restructuring take an effect?

[Craig Audet:]

May 1, right? Yeah, it takes effect May 1. They’re still focusing as they were in the beginning of the year. They’ll be high prescribers. So, again, they think it’s much easier to get some of them prescribed albeit to prescribe it more than it is to convert the non-believer, the physician who doesn’t believe in pharmacological treatment for weight loss. So, both the neurology sales force as well as the contract field force will be calling on obesity specialists and high prescribers of BELVIQ and when they do, it will be the only product they talk about.

[Steve Byrne:]

But have you quantified what that primary detail equivalent is since as part of the change that some of these reps now have multiple drugs in their bag as opposed to previously only had BELVIQ?

[Craig Audet:]

They are still targeting the high prescribers of BELVIQ, I believe it’s 30 - there are 32,000 physicians that they targeted in the past. When they change that strategy, they will continue to target those physicians. I can’t give you details on the frequency.

[Bill Shanahan:]

They don’t have a lot of other products in their bag. So, when they call - as Craig said, when they call on a BELVIQ prescriber or a physician who prescribes pharmacology for weight loss, this will be their primary detail –.

[Craig Audet:]

Their only detail, yeah.

[Bill Shanahan:]

Their only detail.

[Steve Byrne:]

Okay. All right. And then on the CB2 agonist, are there other indications that you’re considering pursuing what that model for other than for pain?

[Jack Lief:]

Bill?

[Bill Shanahan:]

We’re also considering fibrotic diseases of various sorts, but our initial focus will be on pain broadly.

[Steve Byrne:]

Okay. And then just one for you Robert, it seems COGS was higher than what we were expecting. Is there anything unusual about that in this quarter?

[Robert Hoffman:]

Yeah, I think it primarily relates to the initial launch supply for Ildong. At the point in time that we manufactured it, it was the only ongoing job that we had in the facility and therefore it runs all the cost related to the facility there. I expect that to continue to happen where it’s kind of choppy in terms of product sales until we get to a more stable point, but it primarily related to the Ildong kind of a smaller patches as well.

[Steve Byrne:]

Okay. All right, thank you.

[Operator:]

Thank you. Our next question comes from Bob Ai from Wallach Beth Capital. Your line is now open.

[Bob Ai:]

Hi, guys. Thank you for taking my call. Most of my questions are already been answered. I just have last one. The APD334, the Phase 1 trial, the study, the results, is it going to be published or were in the posters?

[Jack Lief:]

The Phase 1 study, Bill.

[Bill Shanahan:]

We will look to that. We haven’t definite plans at this point. We just finished - actually we just signed up the study report just last week. So, we’re still getting all those data, but we will look to some way to get these data out to you and update you.

[Craig Audet:]

Bob, I think - it’s Craig, I think we talked about this last time you and I spoke and what our priority is right now, what Bill is really working hard to is the study start in UC [ph], we want to get that going and we don’t want anything to detract us from it. So, we’ll try to get those results out later in the year.

[Bob Ai:]

Okay, thank you.

[Operator:]

Thank you. And I’m showing no further questions at this time. I would now like to turn the call back over to Craig Audet for any closing remarks.

[Craig Audet:]

Arena is planning to participate at the Bank of America Merrill Lynch’s Healthcare Conference in Los Vegas this week and in June in New York at the Jaffray’s Global Healthcare Conference as well as the J&P Life Sciences Conference. So, this concludes our first quarter 2015 financial results call. We like to thank you for joining us today and for your continued interest and support in Arena. Thank you very much.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program, you may all disconnect. Everyone have a great day.