Arena Pharmaceuticals, Inc.
Q4 2015 Earnings Call Transcript

Published: 1 Mar 2016

[Operator:]

Good day, everyone, and welcome to Arena Pharmaceuticals' Fourth Quarter and Full Year 2015 Update Conference Call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Arena's Senior Vice President of Operations and Head of Global Regulatory Affairs, Dr. Craig Audet. Dr. Audet, please go ahead.

[Craig M. Audet:]

Thank you, Vicki. Good afternoon and thank you for joining us today. We hope you've had a chance to review the Form 10-K and the news release that we issued earlier this afternoon announcing our financial results for the fourth quarter and full year of 2015. Joining me on today's call with prepared remarks are Harry Hixson, our Interim Chief Executive Officer, and Jennifer Bielasz, our Vice President of Finance and Accounting. 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 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, financial results, conditions 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 timing, results and cost of R&D; manufacturing, 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 results news release and Form 10-K as well as our other SEC filings. I would now like to turn the call over to Harry.

[Harry F. Hixson:]

Good afternoon and welcome everyone. I am Harry Hixson, Arena's Interim Chief Executive Officer. On today's call, Jennifer will review our financials and Craig will provide a summary of the activities we intend to track for 2016. Before handing the call over to Jennifer, I would like to provide a short recap of certain of our significant fourth quarter accomplishments. In October, we announced the initiation of Phase 1b trial of APD371, our selective and potent agonist of the cannabinoid 2 receptor, an internally discovered investigational drug candidate that Arena is exploring for potential development in several indications including pain. This study is designed to evaluate the safety, tolerability and pharmacokinetics of multiple ascending doses of APD371. Also in October, we announced the receipt of an additional patent for BELVIQ that provides support for exclusivity in the U.S. until 2032. The patent is based on the discovery that achieving 5% weight loss with BELVIQ by week 12 is a strong predictor of responses in the weight loss at week 52 of treatment. In November, we announced that the FDA had accepted for filing the new drug application for an extended release formulation of lorcaserin, planned to be marketed under the brand name BELVIQ XR. The FDA has assigned a Prescription Drug User Fee Act or PDUFA action date in the third quarter of 2016. The extended release formulation is designed to offer patients a chronic weight management treatment with once daily dosing. In December, we announced the completion of enrolment in the 12,000 patient CAMELLIA cardiovascular outcome study, which is designed to evaluate the impact of long-term treatment with BELVIQ on the incidence of major adverse cardiovascular events and conversion to type 2 diabetes mellitus in overweight and obese patients with cardiovascular disease and/or multiple cardiovascular risk factors. This is a significant milestone for the BELVIQ program. We believe that incorporating CVOT results into the product label may provide a significant uplift in BELVIQ sales. This is especially true with the MACE plus endpoint. Proof of reduced risk of hospitalizations due to cardiovascular events would allow BELVIQ to be differentiated from competing products. We believe this may drive increased utilization from both current and non-prescribed use of BELVIQ and may even expand the branded prescription market. In addition, discussions with payers suggest that demonstrating a decreased risk of hospitalization in major cardiovascular events would enhance BELVIQ insurance coverage. We ended the quarter by hosting an Analyst and Investor Day in New York City, where we provided an in-depth scientific profile of each of our internal clinical stage compounds and outlined their development path to proof of concept. We did this to focus shareholders on the intrinsic value of our deep internally discovered pipeline. More recently, we announced the joint research collaboration with Boehringer Ingelheim that grants them exclusive worldwide rights to Arena's internally discovered novel compounds related to an orphan central nervous system receptor. This collaboration is a good example of our ability to partner novel earlier stage programs and build value by leveraging our partner's expertise and resources. We will continue to assess strategic collaborations for both our clinical and preclinical programs. I would like to end with an update on our search for a new CEO. The Board of Directors is overseeing this process and has retained a major executive search firm to assist in the ongoing identification [indiscernible] process. We have identified a number of qualified candidates that we are in the process of interviewing. We will provide an update when the selection process is complete. In summary, fourth quarter accomplishments reflect our stated desire to create an organization focused on key priorities designed to add value to the organization. We expect to carry this momentum through 2016. I would now hand the call over to Jennifer to review our fourth quarter and year-end financial results. Jennifer?

[Jennifer K. Bielasz:]

Thank you, Harry. I will focus my comments on financial performance highlights for the full year ended December 31, 2015 compared to the full year ended December 31, 2014. Please note that our fourth quarter 2015 results are included in our news release issued earlier today. I'm happy to take questions during the question-and-answer portion of this call on either the quarterly or annual results. For 2015, we recorded revenues of $38.3 million, compared to $37 million for 2014. 2015 revenues included $19.7 million from net product sales of BELVIQ, $8.6 million from amortization of upfront payments, a milestone payment received from Ildong totalling $3 million earned for regulatory approval of BELVIQ in South Korea, $2.7 million in reimbursements from our collaborators for development, patent and trademark expenses and research funding, and $4.3 million in toll manufacturing revenue. 2015 revenues were slightly higher than 2014 revenues, primarily due to an increase in our net product sales of BELVIQ of $3.7 million due to the launch of BELVIQ in South Korea in February 2016 partially offset by lower sales in the U.S., an increase in toll manufacturing revenues of $2.8 million and an increase in milestone payments of $2.3 million. These increases were partially offset by a decrease in reimbursements from our collaborators of $7.9 million, primarily related to a decrease in reimbursements from Eisai due to the completion of our Phase 2 smoking cessation trial in 2014. Of the $19.7 million from net product sales of BELVIQ, $14.2 million were from net product sales in the U.S. and $5.5 million were from net product sales in South Korea. During 2015, Eisai shipped approximately 494,000 60-count bottles of BELVIQ to their distributors and Ildong shipped the equivalent of approximately 144,000 60-count blister packs to their distributors. Primarily due to the 'pay no more than $75' savings card program implemented by Eisai in early 2015 and an increase in returns, the 2015 gross-to-net discount increased to 58%, from 47% compared to 2014. Cost of product sales of BELVIQ totalled $8.6 million for 2015 and $6.4 million for 2014. The increase is primarily due to an increase in products sold in 2015 as well as higher cost of production for products shipped to South Korea. Research and development expenses for 2015 decreased to $88.4 million from $100.3 million for 2014. The decrease is primarily attributable to external clinical and preclinical study fees and expenses, including manufacturing costs, primarily related to completing the Phase 2 trial evaluating lorcaserin for smoking cessation in 2014 and lower internal non-commercial manufacturing costs related to our once-daily formulation of lorcaserin, BELVIQ XR. The decreases were partially offset by increases in our Phase 2 programs for APD334 and Ralinepag. R&D expenses for 2015 included $7.5 million in non-cash share-based compensation expense compared to $7.1 million for 2014. General and administrative expenses totalled $36 million for 2015 compared to $34.1 million for 2014. The increase was primarily related to an increase in personnel costs as a result of accrued severance costs following the retirement of our Chief Executive Officer in October 2015. G&A expenses for 2015 [ph] included $6.7 million in non-cash share-based compensation expense compared to $6.4 million for 2014. Interest and other income/expense was an expense of $4.8 million in 2015, primarily consisting of interest expense related to our lease financing obligations and net foreign currency transaction gains. Interest and other income/expense was income of $44.8 million in 2014, which included a gain of $49.6 million related to shares we held in TaiGen. Net loss allocable to common stockholders was $108 million for 2015 or $0.45 per share on a fully diluted basis compared to a net loss of $60.5 million for 2014 or a loss of $0.28 per share fully diluted. At December 31, 2015, cash and cash equivalents totalled $156.2 million, which does not include the $7.5 million upfront payment from Boehringer Ingelheim agreement. At December 31, 2015, we had approximately 242.9 million common shares outstanding. With regard to 2016 financial guidance, absent any new collaborations, we expect our 2016 revenues will primarily consist of net product sales of BELVIQ, milestone achievements under existing collaborations, amortization of upfront payments from existing collaborations, toll manufacturing, and research funding and patent expense reimbursements from existing collaborations. We do not believe we can accurately predict the amount of future net product sales of BELVIQ or the timing of milestone achievements, if any, and accordingly are not providing guidance for our overall 2016 revenues at this time. The amount of BELVIQ net product sales is expected to depend on Eisai's marketing efforts including relating to BELVIQ XR if approved later this year, the extent of reimbursement coverage for BELVIQ in the United States, and receiving regulatory approval in countries outside the United States. Potential milestone payments for 2016 of up to an aggregate of approximately $16 million include milestones for obtaining regulatory approval for BELVIQ XR in the United States, regulatory approval for BELVIQ in Mexico, Brazil, and Israel, and acceptance by Boehringer Ingelheim of the first development compound. Amortization of upfront payments from existing collaborations is expected to be approximately $12 million, toll manufacturing revenue is expected to be approximately $4 million, and research funding and patent expense reimbursements from existing collaborations are expected to be approximately $3 million. In regard to the 2016 expense guidance I am about to give, please keep in mind that we may adjust our expenses based on cash we receive during the rear including from BELVIQ net product sales or any milestones or new collaborations. We expect full year 2016 research and development expenses of approximately $89 million to $98 million, including non-cash expenses of approximately $11 million. The research and development expenses include external clinical and preclinical study fees of approximately $45 million to $49 million, most of which relates to our continuing Phase 2 clinical trials for APD334 and Ralinepag, and our share of costs for BELVIQ cardiovascular outcome trial. We also expect full year 2016 general and administrative expenses of approximately $27 million to $33 million, including non-cash expenses of approximately $7 million. In addition, we expect to spend approximately $1 million to $2 million for capital expenditures and approximately $9 million for payments related to our lease financing obligations. I will now turn the call back over to Craig.

[Craig M. Audet:]

Thanks, Jennifer. As Harry noted in his opening remarks, we are focused on key priorities including advancing our deep pipeline of internally discovered compounds. We are concentrating on the advancement of several of our internally discovered drug candidates through a Phase 2 proof of concept. Our internal programs include APD334, our S1P1 receptor modulator in Phase 2 for ulcerative colitis; and Ralinepag, our IP receptor agonist in Phase 2 for pulmonary arterial hypertension. As presented at our Analyst Day in December, we believe that both of these compounds have intrinsic pharmacological and/or pharmacokinetic properties that may distinguish them from our competition and we are looking forward to results from these Phase 2 studies. Our current projection on timing for top line data for these studies is the second quarter of 2017. Recruitment for both ulcerative colitis and pulmonary arterial hypertension trials is competitive and we have taken steps to expand access to additional patient pools to accelerate recruitment. Actual availability of top line results could vary depending on the success of these efforts. Regarding our partnered programs such as Nelotanserin, our internally discovered 5-HT2A inverse agonist, Axovant recently announced that it has initiated a Phase 2 pilot study in patients with dementia with Lewy Bodies or Parkinson's disease dementia suffering from visual hallucinations. Axovant expects top line results in the second half of 2016. In addition, later this quarter, Axovant plans to initiate an additional Phase 2 study in patients with dementia with Lewy Bodies suffering from REM behavior disorder. This study is being designed as a potential pivotal trial with primary measures focused on efficacy. Axovant expects results from this study in the first half of 2017. As a reminder, we are eligible to receive $4 million in development, $37.5 million in regulatory, and $60 million in commercialization milestones based on net sales of nelotanserin. We are also eligible to receive 15% of Axovant's net sales of nelotanserin in exchange for supplying Axovant with finished goods. In addition, Ildong continues the development of temanogrel, our internally discovered 5-HT2A inverse agonist intended for the treatment of thrombotic disease. Ildong plans to initiate a Phase 2 proof of concept study in the second half of 2016. Under our agreement, they will fully fund and conduct this study. Regarding the Phase 1 multiple ascending dose trial for APD371, our cannabinoid 2 receptor agonist for pain, we expect to share top line results around the end of March. In regard to BELVIQ, we continue to expect decisions on the pending regulatory applications in Mexico, Brazil, and Israel this year and Taiwan early next year. In summary, we believe that these opportunities offer tremendous promise to patients as well as to Arena and its shareholders. Our Phase 2 studies are designed to generate clinical data having the potential to demonstrate proof of concept and meaningful differentiation from the competition. If this is achieved and further development is successful, we believe each of these drug candidates has significant market opportunity to address unmet medical needs and drive value. We look forward to updating you on their status as 2016 unfolds. I'll now turn the call over to the operator for questions. Vicki?

[Operator:]

[Operator Instructions] Our first question comes from the line of Jessica Fye with JP Morgan. Your line is now open.

[Unidentified Analyst:]

This is [indiscernible] on the call for Jessica. As we look to your pipeline, can you provide us with your updated thoughts on how you look at the assets you would want to keep versus those you would consider potentially partnering?

[Harry F. Hixson:]

First, we are willing for the proper collaborators to partner any of our clinical or preclinical programs at this time. We don't have them prioritized in any way. As you know, we concluded a deal with Boehringer Ingelheim and that was on a very early preclinical compound, so we look forward to discussions with a number of potential collaborators.

[Operator:]

Our next question comes from the line of Ted Tenthoff with Piper Jaffray. Your line is now open.

[Ted Tenthoff:]

Couple of questions, if I may. Firstly, what were Eisai's net sales and what were Ildong's net sales for BELVIQ in the fourth quarter?

[Jennifer K. Bielasz:]

This is Jennifer. You are asking for the quarterly or the full year?

[Ted Tenthoff:]

For the quarter.

[Jennifer K. Bielasz:]

For the fourth quarter?

[Ted Tenthoff:]

Yes please.

[Jennifer K. Bielasz:]

Eisai's net sales for the fourth quarter were $8 million and Ildong's net sales were $2.5 million.

[Ted Tenthoff:]

Okay. So that looks like it's down slightly for both, and that's reflected in the royalty being down sequentially. What's going into sort of the decline in the U.S., is this competitive pressure, and what's going on sort of more broadly with respect to BELVIQ in Korea? Then I have a quick follow-up, if I may.

[Harry F. Hixson:]

Ted, this is Harry. I think what's going on in the United States is a little easier to understand. Fundamentally, phentermine as latest numbers show about market share of about 75% to 76%, and the branded Rx drugs are all fighting for the residual. We know that last spring Eisai announced that they would be reducing their sales effort and marketing effort. We believe that they are waiting for the results of the CVOT trial, which I think will provide an impetus to the U.S. sales. If you noticed, earlier we said that the CAMELLIA study of 12,000 patients has fully enrolled. As best we know, we are quite a bit ahead of any of our competitors in the CVOT type trial. So we are optimistic that that will have a significant impact on BELVIQ sales. I don't think…

[Ted Tenthoff:]

I'm sorry, Harry, the CVOT data you expect when?

[Harry F. Hixson:]

2018 is the current forecast. With respect to Ildong, I don't think we have a very good idea of sales in Korea.

[Ted Tenthoff:]

Okay, cool, thank you for that color. So when it comes– and I should know this, but with respect to the cost for the lease obligations, is that all recognized in G&A or is it kind of split between G&A and R&D? I should know that but I'm not actually sure that I do know.

[Jennifer K. Bielasz:]

No problem, Ted. Actually for the lease obligations, part of the payments hit our balance sheet because they reduce the financing obligations there. And the other portion is interest which is actually below the line.

[Ted Tenthoff:]

Okay. So it doesn't go through as an operating cost. That's helpful. Okay, cool, I'll hop back in the queue.

[Operator:]

Our next question comes from the line of Alan Carr with Needham. Your line is now open.

[Alan Carr:]

Wondering if you can comment a bit more about the two Phase 2 trials and what you're doing to help with enrolment there, and can you comment on the scale of the opportunities in Mexico and Brazil versus relative to South Korea?

[Harry F. Hixson:]

I think with respect to APD334, I’ll answer your question or Craig will, but first I think we ought to really understand why we are so enthusiastic about 334 and APD11. I think Dominic can comment on why we think those are actually differentiated from the competition.

[Dominic P. Behan:]

Sure. Firstly, just to remind you, Alan 334 has excellent lymphocyte modulation. We’ve demonstrated 60% to 70% reduction in lymphocytes, which we know are clinically relevant for the disease. There's an encouraging cardiovascular profile for this drug, no symptomatic tachycardia, no advanced heart block, and we’ve demonstrated this with a non-titrated dose, and as you know most of our competitors have resorted to titration to avoid the cardiovascular effects. The early clinical data showed a clean [indiscernible] profile, no really significant elevations in liver enzymes which looks good, favorable pulmonary and ocular profile, also no clinically significant ataxia [ph]. Overall, a promising adverse-event profile, and also the selectivity of the compound for the receptors looks very good. It avoids receptors such as S1P2 and S1P3 that we think could be involved in cardiovascular effects, possibly pro-fibrotic concerns. And then you asked about the two Phase 2 studies, so on Ralinepag, again in terms of differentiation, this compound is a full agonist compared to our competitors, especially [indiscernible] and we think that's important because of translation into efficacy potentially in relation to smooth muscle cell proliferation, basal dilation responses and platelet responses. And that intrinsic profile of the compound married to the pharmacokinetic profile we think is very important. So it has a half life of 24 hours, so potentially suitable for one steady dosing with a very low peak to trough ratio, which we think is important to avoid the peaks involved [indiscernible] whilst keeping the exposure up in the range necessary for efficacy by oral dosing, and that's been very difficult to achieve in the past. And we think as we sort of alluded to at the JP Morgan conference, by modeling we go to achieve exposures at the therapeutic doses we believe that will inhibit smooth muscle cell proliferation and that's important we think for the underlying disease progression. So with that sort of background just to remind you, maybe Harry can comment, go ahead.

[Harry F. Hixson:]

I think you asked another question about approvals for BELVIQ in Mexico, Brazil and Israel. I'm going to ask Craig to answer that question.

[Craig M. Audet:]

I think you're looking for the market opportunity there.

[Alan Carr:]

Yes, wondering how the scale of that relative to South Korea.

[Craig M. Audet:]

So we think it's going to be relatively similar. What Eisai did is when we signed the deal with them to take over basically most of North and South America, they went through each of those countries and did an analysis, arid as we know Mexico just passed the U.S. recently for most obese, overweight and obese nation. Brazil is close behind that. So those were the two opportunities that rose to the top, not only from a potential sales perspective but also for a relatively short time to get to market because no bridging size were required in either of those countries.

[Alan Carr:]

Coming back to that first question, I wondered if you could comment a bit about, are you all just for 334 and Ralinepag, are you just opening more sites, what's involved in that, because I think it's a slip in terms of when you might have data, I'm just wondering what's involved there?

[Harry F. Hixson:]

First, it's fairly easy to – we've been monitoring that progress and we've worked with our contract research organization to add more sites in the existing countries and then also we are in the process of adding additional countries and sites within those countries with the idea of expediting the trial.

[Alan Carr:]

And that's the case for both of those?

[Harry F. Hixson:]

Yes, for both of those.

[Alan Carr:]

In which I guess regions are you all, is this U.S. and Europe or where you're looking thinking of expanding to?

[William R. Shanahan:]

This is Bill. We are presently in North America, Europe and Australia and New Zealand, but we're looking at potentially other sites including Latin America, so stay tuned. The other thing we're doing is reminding all of our investigators of the day that we presented at the Analyst Day showing the potential differentiation of both of these compounds and I think that's generating some renewed interest as we push forward.

[Operator:]

[Operator Instructions] Our next question comes from the line of Jason Butler from JMP Securities. Your line is now open.

[Jason Butler:]

First one just a follow up on the 334 and Ralinepag Phase 2 trials, can you give us a sense even broadly what proportion enrolment you achieved in those trials so far?

[Harry F. Hixson:]

We are not providing any guidance on enrolment or the progress of the trial, only the completion date.

[Jason Butler:]

Okay thanks. And then a second question, just going back to the CVOT program, can you talk a little bit about what the next steps could be for that program after this Phase 1b study is finished? For example, are you considering a cocaine test?

[Harry F. Hixson:]

What we're going to do at this point is we're going to wait until we see the results of the multiple ascending dose studies and so we need to have that information. And then we are evaluating or investigating various indications that we might like to pursue, but bear in mind that we are going to be [indiscernible] our resource availability for APD371 clinical trials going forward.

[Operator:]

Our next question comes from Simos Simeonidis from RBC Capital Markets. Your line is now open.

[Simos Simeonidis:]

Can you tell us what is the current size of the Eisai sales force that's detailing BELVIQ?

[Craig M. Audet:]

You're looking for just the number?

[Simos Simeonidis:]

Yes or any other information you can give us in addition to the number?

[Craig M. Audet:]

The sales force is 230, which includes 90 in-house reps and the rest are contract.

[Simos Simeonidis:]

Okay, great. And Craig, what's the latest on the European filing for BELVIQ?

[Craig M. Audet:]

We had met earlier with the previous repertoire and co-repertoire to discuss re-filing in Europe and after those meetings Eisai has decided to hold off until they get the results of the cardiovascular outcome study. So we don't expect a re-filing until that data becomes available.

[Operator:]

Our next question comes from the line of Jim Birchenough with Wells Fargo. Your line is now open.

[Nick:]

This is Nick in for Jim this afternoon. With respect to the CAMELLIA trial, can you remind us of the design assumptions for the event rate, whether there are any interim analyses planned and perhaps what the timing of those could be? And then you indicated that the insurers, the positive outcome of this trial would reflect very well with insurers. Do you have a sense of what the hurdle is they are looking to see in terms of event rate reduction?

[Harry F. Hixson:]

Bill, you want to address the first part?

[William R. Shanahan:]

This is Bill. So it's a 12,000 patient trial, roughly equally divided between people who have established cardiovascular disease and others who are at high risk with diabetes and at least one additional major risk factor such as hypertension or dyslipidemia or renal dysfunction, and this is an event driven trial. The estimates are provided by the rate of accumulation of those events and we expect to have data in the 2018 timeframe, both of the non-inferiority, ruling out the 1.4 margin, 90% confidence in our hopes, and that's where we're going, and then there is [powering] [indiscernible] assumptions for MACE plus as well but we should be able to accomplish those in 6 to 12 months after we hit the non-inferiority timeline, but this is still subject to how rapidly these events accumulate.

[Operator:]

I'm not showing any further questions at this time. I would now like to turn the call back over to Dr. Audet.

[Craig M. Audet:]

Thank you very much for being on the call today. This concludes our fourth quarter and full year 2015 financial results call. We'd like to thank you for joining us today and for your continued interest and support of Arena Pharmaceuticals.

[Operator:]

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