Arena Pharmaceuticals, Inc.
Q3 2015 Earnings Call Transcript

Published: 11 Nov 2015

[Operator:]

Good day, everyone and welcome to the Arena Pharmaceuticals’ Third Quarter 2015 Financial Results and Corporate Update 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 of Operations and Head of Global Regulatory Affairs, Dr. Craig Audet. Dr. Audet, please go.

[Craig Audet:]

Good afternoon and thank you for joining us today. We hope you've had a chance to review the Form 10-Q we filed yesterday as well as our financial results news release we distributed earlier today for the third quarter of 2015. Joining me on today’s call with prepared remarks are Harry Hixson, our Chief Executive Officer and Jennifer Bielasz, our Vice President of Accounting and Controller. Also participating in 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 and future activities and events, including statements about BELVIQ and our drug candidates, including efficacy, safety, R&D, regulatory applications, and collaborations; clinical plans and progress, 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 judgments 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 implementation of our cost savings efforts and new strategic focus, timing, results and cost of R&D, manufacturing and commercialization and the regulatory process and related 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 news release, as well as our SEC filings. I will now turn the call over to Harry.

[Harry Hixson:]

Good afternoon. And welcome everyone. I am Harry Hixson. As we previously announced Jack Lief, Arena's former President and Chief Executive Officer retired from the company on October 5 of this year. While Board of Directors conducts the search for Jack's permanent replacement, they've appointed me to serve as Interim Chief Executive Officer and Principal Financial Officer. As I've been on the Board since 2004, I am familiar with the Arena's R&D processes, its research and clinical pipeline and its executive management. I look forward to assisting Arena as it moves to the next stage in its evolution. I'll begin today's call by elaborating on our recently announced strategic plan to improve efficiencies and reduce costs. After this, Craig will provide an update on our pipeline candidates including BELVIQ and Jennifer will review our financials. Let's begin with the October 27 announcement of our plan to create a streamline and more efficient organization, focused on key priorities design to add both near and long-term value to the organization. It's clear that the growth of the obesity market in the United States has not met expectations. And all of the new branded drugs including BELVIQ are struggling to increase sales and market share. Eisai has recently acknowledged the difficulties in this market on their October 30 quarterly conferece call. They discussed their plans to use cost efficient strategies to market BELVIQ such as targeting opportunities in certain parts of the United States where obesity rates are high and where there is insurance coverage. Eisai expects slow growth for the obesity market in general and for BELVIQ to continue to grow slowly until the results of the cardiovascular outcome study or CVOT are known and if positive incorporated into the product label. Market research indicates that incorporating CVOT results into the product label may provide a significant uplift in BELVIQ sales. This is especially true of the MACE plus end point. Proof of reduced risk of hospitalization during cardiovascular event would allow BELVIQ to be differentiated from competing products. We believe that this may drive increased utilization from both current and non prescribed as a BELVIQ and may even expand the branded RX market. In addition, market research with payer suggests that demonstrating a decrease risk of hospitalization in major cardiovascular event would enhance BELVIQ insurance coverage. Since the result of the CVOT study is not expected until 2018, Arena intends to focus on advancing our clinical stage pipeline and utilizing our productive research capabilities to develop the potential of our early stage drug candidate. For example, our market research shows that APD334 has the potential to create significant value in the autoimmune space. And we are advancing our ongoing Phase 2 clinical trial for ulcerative colitis. We also considering exploring additional APD334 indication in pilot studies that could support and even broader value proposition beyond inflammatory bowel disease. At the same time, we are advancing our Ralinepag APD-11 program as we continue the ongoing Phase 2 clinical trial for pulmonary arterial hypertension or PAH. With Ralinepag's combination of long half life and robust pharmacology in arterial move muscle cells and platelets, we believe that Ralinepag has best in class potential in the oral IP agonist space. We believe that this strategic approach will increase the attractiveness and value of our clinical stage compound to potential partners. We plan to use our research engine to create similar value propositions to attract potential collaboration partners for certain of our earlier stage program. Cost savings are integral part of this initiative and as such we recently announced the reduction of our U.S. workforce by approximately 80 employees or by 35%.This reduction are expected to decrease annualized wage and benefit expenditures by approximately $11 million. We are in the process of implementing additional cost measure to further reduce our expenditures including targeted reductions and cost savings at our Swiss manufacturing facility that will still allows to meet our manufacturing obligations. I hope these few examples have given you a sense of the direction which we are heading as we chart the new course for Arena with our refocusing effort. We intend to take full advantage of our key strength in strategic, efficient and cost effective manner. I will now turn the call over to Craig.

[Craig Audet:]

Thanks, Harry. I would like to provide a brief update on some of our programs, some upcoming milestones in the context of our strategic refocusing -- I will begin with BELVIQ life cycle management program. At this time, we do not intend to advance lorcaserin and phentermine combination for the indication for smoking cessation Lor caserin. Regarding the lorcaserin and phentermine combination as we have previously guided, the extensive development program were required for marketing approval. We may not be willing to proceed due to the length of time to complete the studies and the significant financial investment required. Feedback from the U.S. Food and Drug Administration indicated that a full development program would be required including a factorial design Phase 2 study and two one year Phase 3 studies. We and Eisai have decided not to pursue this program. In addition, after a more detailed assessment of the potential smoking suspicion market and our Phase 2 results, we believe there are market specific challenges such as the declining smoking rate and the platonic quit rate among smokers which may limit the potential return on the investments required to advance the development program for this indication. Again, we and Eisai have decided not to go forward with this development program. As Harry discussed our market research indicated that there are favorable results from the CVOT study incorporated into the product label may provide a significant uplift in BELVIQ sales and we intend to continue to support Eisai's efforts on this program. On the registration front, the NDA for our once daily formulation of BELVIQ known as BELVIQ SR is expected to be filed with FDA this year. In addition, we continue to support Eisai's efforts in their active dialogue with the health authorities in Mexico and Brazil as well as Teva in Israel. Since the review of these applications with these health authorities are not time bound we are unable to provide an update as to when we might receive their final decisions. Regarding Taiwan, CY Biotech recently filed an application for the approval of BELVIQ with their health authority. In Europe, Eisai and Arena have met with EU health authorities regarding the resubmission of BELVIQ MA and we are discussing the results of this meeting to how best to proceed. We no longer expect Eisai to make a resubmission by the end of March 2016 as previously anticipated and do not have a specific date as to when a potential MAA re-filing could occur. Regarding APD371, a highly selected and potent cannabinoid 2 receptor agonist and development for the treatment of pain, we recently announced start of our Phase 1 multiple ascending dose study. Top line results for this study are expected in the first quarter of 2016. Finally, I'd like to provide an update on the collaboration we established earlier this year with Roivant Sciences for nelotanserin. Arena's internally discovered inverse agonist of the serotonin 2A receptor. Late last month Roivant assigned all of its right to develop and commercialize nelotanserin to its subsidiary Axovant Sciences. Axovant is responsible for all development cost and has announced that it intent to initiative two Phase 2 clinical trials with nelotanserin in the first quarter of 2016. The first trial was planned in patients with either dementia with Lewy bodies, or Parkinson's disease dementia in patients who suffer from visual hallucinations. The second trial is planned in patients with dementia with Lewy bodies who are experiencing REM Behavior Disorder. This collaboration is the example of how Arena can advance significant program adding value in a cost effective manner. I will now turn the call over to Jennifer who will review our financials.

[Jennifer Bielasz:]

Thank you, Craig. I will focus my comments on financial performance highlights for the quarter ended September 30, 2015 compared to the quarter ended September 30, 2014. I also refer you to today's financial results news release and our recently filed quarterly report. For the third quarter 2015, we recorded revenues of $9.1 million, compared to $8.2 million for the third quarter 2014. Third quarter 2015 revenues include a $4.9 million from net product sales of BELVIQ, and $2.3 million from amortization of upfront payments. Of the $4.9 million from net product sales of BELVIQ, $2.9 million is from our share of Eisai’s U.S. net product sales, and $1.6 million is from our share of Ildong's net product sales in South Korea. Eisai's net sales were $9.2 million and Ildong's net sales were $3.4 million for a total of $12.6 million in the third quarter 2015. During the third quarter of 2015, Eisai shipped approximately 106,000 -60 count bottles of BELVIQ and Ildong shipped approximately 43,000 -60 count blister pack of BELVIQ to wholesalers. For the U.S. the gross to net discount was 56%, which reflects to pay no more than $75 savings card program implemented by Eisai in January 2015. Cost to product sales of BELVIQ totaled $1.6 million for the third quarter 2015 and $1.8 million for the same quarter of last year. Due to the capacity of our manufacturing facility, we expect continued volatility in cost of product sales expenses until production volume stabilizes. Research and development expenses for the third quarter of 2015 decreased to $22.1 million from $24.5 million for the third quarter of 2014. R&D expenses for last quarter included $2.1 million in non-cash shared based compensation expense compared to $1.8 million for the same quarter of last year. General and administrative expenses increased slightly to $9 million for the third 2015 compared to $8 million for same quarter of last year. G&A expenses for last quarter included $1.8 million in non-cash share-based compensation expense, compared to $1.6 million for the third quarter of 2014. Net loss was $26.4 million for the third quarter of 2015, or $0.11 per share on a fully diluted basis compared to net loss of $10.7 million for the third quarter of 2014 or $0.05 per share fully diluted. The $10.7 million net loss in the third quarter of 2014 included a one time gain of $16.3 million related to our sales of shares we held in TaiGen Biotechnology Company Ltd. At September 30, 2015, cash and cash equivalent totaled $181 million. As a result of our U.S. workforce reductions we expect to incur charges primarily in the fourth quarter of 2015 of approximately $3.3 million in connection with one time employee termination cost. We expect to incur additional termination cost in relation to reductions we plan to make at our Swiss manufacturing facility later this year. In addition, we estimate that the U.S. reduction will decrease annualized personnel related expenditures by approximately $11 million and expect significant additional cost savings in other areas as part of our strategic refocus. We will now open the call to questions. Operator?

[Operator:]

[Operator Instructions] Our first question comes from Alan Carr of Needham & Company.

[Alan Carr:]

My questions. One, can you talk a bit about strategies in terms what are your plans might be with the three Phase 1/ two programs that you have in development? Are those programs that you can keep in house and commercialize on your own or would you plan to -- there or mix there and then if you do plan to out -- what are the plans for -- I am wondering how much of this discovery program you have kept in house and what might be coming out of that. And then last one around CAMELLIA, you mentioned data I think in 2018 but can you give us any more of an update on the intermediate amounts those around, and when you think you might complete enrollment and that sort of thing. Thanks.

[Harry Hixson:]

Okay. This is Harry. I will take first part of that, at least three part questions. First, we can't afford to take all of those programs in the clinic all the way through to Phase 2. So we are going to partner one or more than but probably not all of them. And that would depend obviously upon collaborators interests. So maybe you want to -- Dominic, may you want to speak of our programs.

[Dominic Behan:]

Yes, this is Dominic. I think part of your question was regarding the likelihood of continued success in research in terms of novel target bringing those forward. As we've stipulated, we maintained a core research capability so we think we will be able to continue to identify novel GPCR targets and bring them forward and potentially to collaboration or potentially on alone if we decide to do that in future. And I think you also had another question regarding the CVOT study. Craig, do you want to comment on it?

[Craig Audet:]

Yes. Alan, it is Craig. That study as you may remember is designed to enroll 12,000 patients and according to Eisai they expect full enrollment before the end of this year.

[Alan Carr:]

Okay. And then to come back I guess to the first one there around. You may partner to some clearness, you can't afford to bring all of them through Phase 2 or all of them through Phase 3, might you partner one or more right after Phase 2 or I guess could you clarify that a bit.

[Harry Hixson:]

Well, I think we are willing to partner at least one or perhaps two before we complete Phase 2.

[Operator:]

Thank you. Our next question comes from Jessica Fye, JPMorgan.

[Jessica Fye:]

Hey, guys. Thanks for taking my questions. My questions on first on expenses. I guess with the cost cutting saving you $11 million year-over-year and then similar potential cost savings as well. How should we think about overall operating expenses directionally in 2016? Will they be down relative to 2015 or is this offsetting some other growth and they might be bought her up?

[Harry Hixson:]

No. You should expect -- we expect significant reduction in cost in 2016 over 2015.

[Jessica Fye:]

Okay, got it. And forgive me I have missed, can you talk a little bit more about how enrollment is going and you see in PAH study? And isn't -- how should we think about the time for data readout? And then also I think you mentioned some pilot studies for 334 beyond bowel disease, is that outside of GI entirely and when could we see some initial data there?

[Craig Audet:]

So Jessica in terms of the enrollment, we typically don't update on interim enrollment numbers, but believe we have set for 334 that we expect enrollments to be completed around the end of next year. In terms of the additional indications what we have said, what we are saying is that we are looking in the autoimmune space. We are not talking specifically about the indications for competitive reason. We don't want to tip our head too much on that.

[Jessica Fye:]

Are they new areas for the mechanism or some existing players are going already?

[Craig Audet:]

What we want be able to do is differentiate the compound from others in the space to make it more attractive.

[Operator:]

Thank you. Our next question comes from Jason Butler of JMP Securities.

[Jason Butler:]

Hi, thanks for taking the questions. Just the follow up on your plans to partner or potentially partner assets. When you think about the discovery engine you have at Arena and the ability to bring new assets into the clinic, when is the right time to partner things? Are you planning on continuing to generate proof of concept clinical data or could we see any earlier partnerships for preclinical assets?

[Harry Hixson:]

Well, first I think you may see some partnering for preclinical asset because we've seen some recent interest in some of those. The optimum time -- everything all other things being equal would be to partner for company like Arena at this stage after positive Phase 2 results. I am not sure that company can afford to take all of its current clinical trial through to the completion of Phase 2 and positive result. So that's the reason why we might be wanted to partner some assets before such time.

[Jason Butler:]

Okay, helpful. And then just point of clarification, Craig. Sorry I miss this. Did you say for 334 that we should expect data for the Phase 2 trials in 2016 or just completion enrollment?

[Craig Audet:]

We expect to have data around the end of 2016. Yes, just top line obviously

[Operator:]

Thank you. Our next question comes from Ted Tenthoff.

[Ted Tenthoff:]

Great, thank you. And thanks for the update. Can you hear me okay? Okay, great. Just thinking on the commentary in the press release and in the prepared remarks about Eisai's focusing on territories where there is reimbursement. Where does its current headcount stand in terms of reps detailing the drug? Will there be any changes to that as a result of this focus?

[Craig Audet:]

Ted, this is Craig. At this point, Eisai has not announced any plans to change the current number of reps they have. What they are trying to do is focus little bit more on the areas where overweight and obesity is prevalent and the insurance cover is a little more willing to reimburse.

[Ted Tenthoff:]

That's helpful. And then what is sort of the competitive landscape there? Obviously, Contrave has been approved and has been gaining share. What is your general commentary on some other competitive landscape, the overall branded medication in obesity.

[Harry Hixson:]

Well, I think first you have to realize that tetramine is dominating the market and then that's the giant in the market and everybody else is like the midget. And we are all struggling, I think some are do better than others but certainly I think everyone is struggling vis-à-vis with their expectations where and when they thought initiated this drug development program.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from Bob Ai from Wallach Capital.

[Bob Ai:]

Hi, guys. Thank you for taking my questions. So my question is about the cost of -- the product you let to Axovant. I noticed that you got 50% of the sales but I am just wondering how -- is that a product difficult to manage -- to manufacture or -- rather it was easy.

[Dominic Behan:]

Bob, this is Dominic. We think we have a good process to manufacture the compound and we think we struck a win-win collaboration with Roivant has now licensed this to Axovant of course. We have a lot on our plate that Harry has discussed regarding our trials are ongoing Phase 2 trials. And this gives us an opportunity to work with fantastic team you have, the tremendous vision for this compound, these are experts in this area and I think we can really extract some significant value as they grew that compound fluid in Lewy body dementia and run sleep disorders. So we are excited about that team and the possibilities for the compound moving forward. And that's why we entered into this collaboration.

[Bob Ai:]

Well, my question is whether -- in other way to ask is whether can you make it decent profit from supplying drug for them in the future.

[Harry Hixson:]

Yes. We can.

[Bob Ai:]

Okay. And also question about just really thinking back so now -- now you announced that basically you are not again to develop the BELVIQ and phentermine combo and just if you had to go through and how -- can you remind -- sharing plan with Eisai.

[Craig Audet:]

Bob, it is Craig. That development program would be a 50

[Bob Ai:]

Okay. And my last question is about so their plan to focus on certain areas where you have the obesity rate is high and there is insurance, is that like half of it account fair or just like the one of few areas like human --

[Craig Audet:]

It's a significant part of the United States. We don't want to go into too much detail because we don't want to give up too many competitive secrets and our marketing secrets at this point. But suffice it to say there are certain areas like the south east where there are significant obesity problem and the insurance tends to be a little better there than other areas.

[Operator:]

Thank you. I am showing no further questions at this time. I'd now like to turn the conference back to Dr. Craig Audet.

[Craig Audet:]

Thank you, operator. Arena is planning to participate at the Piper Jaffray Healthcare Conference in New York on December 2. And we are also planning to hold an Analyst and Investor Day in New York the following day on December 3. So this concludes our third quarter 2015 financial results call. We'd like to thank you for joining us today. And thank you for your continued interest and support of Arena Pharmaceuticals.

[Operator:]

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. And have a wonderful day. You may all disconnect.