Arena Pharmaceuticals, Inc.
Q3 2007 Earnings Call Transcript

Published: 18 Oct 2007

[Operator:]

Good day, ladies and gentlemen, and welcometo the third quarter 2007  ArenaPharmaceuticals earnings conference call I would now like to turn your presentationover to your host for today's call, Mr. Robert Hoffman, Vice President ofFinance and Chief Financial Officer.  Pleaseproceed, sir.

[Robert Hoffman:]

Thanks, Eric.  Good afternoon and welcome to ArenaPharmaceuticals third quarter 2007 earnings conference call.  I am Robert Hoffman, Arena's Vice President ofFinance and Chief Financial Officer.  Iwill briefly review our financial results for the third quarter and nine monthsending September 30, 2007 and then turn the call over toJack Lief, our CEO, for a corporate update. Before I begin, I would like to point outthat we will be making numerous forward-looking statements during thisconference call.  Such forward-lookingstatements include statements about our clinical trials and results, internaland partner programs, drug candidate pipeline, financial guidance, strategy,technologies and other statements that are not historical facts.  Such statements may include the words"plan," "will," "believe," "expect,""promise," "potential," "intend," and similarwords.  You are cautioned not to placeundue reliance on these forward-looking statements, which are only predictionsand reflect the company's beliefs, expectations and assumptions based oncurrently available operating, financial and competitive information and speakonly as of the time they are made.  Risksand uncertainties that could cause actual results to differ materially fromthose described in our forward-looking statements include the timing andoutcome of our licensing efforts, our and our partners' research and clinicalstudies, the regulatory process and our ability to obtain additional financingfrom collaborators and investors, and other risks identified in our SECreports.  For a discussion of these andother factors, please refer to our risk factors described in the company'sannual report on Form 10-K for the year ended December 31, 2006, the company'squarterly report on Form 10-Q for the quarter ended June 30, 2007, as well asother subsequent filings with the SEC.  Forforward-looking statements, we claim the protection of the Private SecuritiesLitigation Reform Act of 1995. In the third quarter of 2007, we recordedrevenues of approximately $5 million compared to third quarter of 2006 revenuesof approximately $4.4 million.  All ofour revenues in both periods were from our collaborations with Ortho-McNeil, aJohnson & Johnson company, and Merck. In the first nine months of 2007, werecorded revenues of approximately $14.8 million compared to the first ninemonths of 2006 revenues of approximately $25.9 million.  All of our revenues in both periods were fromour collaborations with Ortho-McNeil and Merck. The first nine months of 2006 revenuesincluded a $4 million clinical milestone under our Merck collaboration relatedto the initiation of the Phase 2 clinical trial as well as a $5 millionclinical milestone from Ortho-McNeil related to the initiation of the Phase 1clinical trial of APD668 for the treatment of type 2 diabetes. At September 30, 2007, deferred revenues totaled approximately $6.1 million. Research and development expenses increasedto approximately $32.2 million in the third quarter of 2007 compared toapproximately $22.7 million in the third quarter of 2006.  This $9.5 million increase was primarilyattributable to an increase in pre-clinical and clinical study fees andexpenses of approximately $6 million, as we continued the first and longest ofour planned Phase 3 clinical trials for lorcaserin, known as BLOOM, as well ascompleting a Phase 2 trial of APD125 for the treatment of insomnia. This $9.5 million increase in research anddevelopment expenses also included personnel costs and related researchsupplies increasing by an aggregate of $2.8 million, as we increased the numberof research and development employees from 291 at the end of September 2006 to340 at the end of September 2007.  Nearlyall of the increase in research and development employees was development staffneeded to support our internal programs. Research and development expenses increasedto approximately $108.8 million in the first nine months of 2007 compared toapproximately $65.3 million in the first nine months of 2006.  This $43.5 million increase was primarilyattributable to an increase in pre-clinical and clinical study fees andexpenses of approximately $33.1 million, as we completed enrollment andcontinued our lorcaserin Phase 3 BLOOM trial as well as completed the Phase 2trial of APD125. This $43.5 million increase in research anddevelopment expenses also included personnel costs and related researchsupplies increasing by an aggregate of $7.6 million due to the increased numberof research and development employees.  This$7.6 million increase in personnel costs and related research supplies includedan increase of $0.9 million in non-cash share-based compensation expense to$3.1 million in the first nine months of 2007. Included in the research and developmentexpenses in the first nine months of 2007 was $52.8 million in externalpre-clinical and clinical study fees and expenses, including $34.6 million inexpenses for lorcaserin, $12.9 million for APD125, and $2.9 million for APD791. Early in the third quarter, we announcedthe start of a Phase 1 trial for APD791, which is our oral internal-discovereddrug candidate intended for the treatment of arterial thromboembolic diseases.  The balance of $2.4 million in externalpre-clinical and clinical study fees and expenses was spent on ourearlier-stage programs. General and administrative expenses totaled$7.9 million in the third quarter of 2007 compared to $3.9 million in the thirdquarter of 2006.  This $4 millionincrease is due primarily to personnel costs increasing by $1.7 million.  Personnel costs in the third quarter of 2007included $1.9 million in non-cash share-based compensation compared to $0.6million in the third quarter of 2006.  Theincrease in general and administrative expenses was also the result ofincreased patent processing costs, totaling $1.9 million in the third quarterof 2007 as compared to $0.5 million in the third quarter of 2006.  We expect our patent fee expenses for all of2007 to be similar to our patent fee expenses for all of 2006.  At September 30, 2007, we had 68 general and administrative employees compared to 58 at September 30, 2006.  General and administrativeexpenses totaled $19.6 million in the first nine months of 2007 compared to$13.2 million in the first nine months of 2006.  The increase is primarily the result ofpersonnel costs increasing by $3.4 million. Personnel costs in the first nine months of2007 included $3.9 million in non-cash share-based compensation compared to$1.6 million in the first nine months of 2006.  Total non-cash share-based compensationexpense was $7 million in the first nine months of 2007. Net loss applicable to common stockholderswas $32.8 million in the third quarter of 2007 compared to $20.1 million in thethird quarter of 2006.  Net lossallocable to common stockholders was $104.4 million in the first nine months of2007 compared to $51.9 million in the first nine months of 2006. The increase in net loss allocable tocommon stockholders was primarily attributable to an increase in research anddevelopment expenses, along with the decrease in recognized revenues.  The increase in net loss allocable to commonstockholders in the first nine months of 2007 was partially offset byadditional $5.1 million in interest income as compared to the first nine monthsof 2006.  Interest income in the firstnine months of 2007 totaled $14.3 million. Cash, cash equivalents and short-terminvestments totaled $339.1 million at September 30, 2007.  We started 2007 with $388.8million in cash, cash equivalents and short-term investments. At September 30, 2007, we had approximately 61.2 million shares outstanding of commonstock.  Assuming the conversion of all ofour preferred shares into common stock, we would have approximately 68.4million shares of common stock outstanding at September 30, 2007. Based on our expected spending levels andrevenues for 2007, our yearend cash, cash equivalents, and short-terminvestments balance is expected to be on the high end of our previous guidancerange of approximately $259 million to $271 million and, perhaps, somewhatabove that range. Now, I would like to turn the call over toJack Lief for a corporate update.

[Jack Lief:]

Thanks, Robert.  Good afternoon, everyone, and thank you forjoining our quarterly conference call today.  This past quarter, we achieved significantcompany milestones in our lorcaserin, obesity and APD125 insomnia programs. For lorcaserin, we announced positive monthsix safety review by the independent Echocardiographic Safety Monitoring Board,or ESMB, in the Phase 3 BLOOM trial and for the APD125 insomnia program, weannounced positive Phase 2 results. We expect to continue to deliver on thesecorporate milestones for these programs and the other milestones that we havecommunicated to you over the past few years.  We intend to continue to improve our abilityto develop and discover novel therapeutics.  We believe that our fundamentals continue toget stronger, and by persisting along the strategic course we have set, wecreate significant long-term value. With that in mind, I would like to continueby first reviewing recent developments of our two most advanced programs andthen review our other programs.  BLOOM'spositive month-six ESMB review in September established that differences, ifany, in the incidence rates of FDA-defined valvulopathy in patients treatedwith lorcaserin and the control group did not meet the independent board's predeterminedstopping criteria.  We believe this was asignificant milestone, helping further support lorcaserin's cardiac safetyprofile and its potential as a safe and effective weight-management treatment.  The board's review is also consistent withearlier clinical trials that indicated no apparent effect on heart valves aswell as pre-clinical studies conducted for up to 12 months at more than 50times the equivalent human doses. The ESMB also confirmed that the rate ofvalvulopathy in the placebo group is consistent with the company's statisticalpowering assumptions used in the design of the pivotal trial program to monitorpatients with an increased risk of developing valvulopathy. Based on these findings from the ESMBreview, we are continuing to move ahead with the BLOOM study and we remain ontrack to initiate two additional Phase 3 pivotal trials later this year. In addition to the month-six ESMB findings,there has been a recent independent study, which helps establish a rat modelfor valvulopathy.  We believe this studyis also supportive of lorcaserin's emerging cardiac safety profile. In a paper by Steven Droogmans published inthe European Heart Journal a few months ago, it was shown that over afive-month study period pergolide caused valvulopathy in rats in as little as10 weeks.  Pergolide is a potent 5-HT2B agonistthat has been shown to cause valvulopathy in humans. This is the first timeknown to us that a drug causing valvulopathy in humans has been shown to causevalvulopathy in a pre-clinical model. This contrasts with Arena's lorcaserinpre-clinical studies where we dosed for six months in rats and 12 months inmonkeys, and there was no observed heart valve effect with lorcaserin.  The lorcaserin studies were dosed up to 54times the expected human therapeutic dose. I will now briefly review the BLOOM designand update you on its status and what to expect going forward in our lorcaserinpivotal program.  BLOOM is the first ofthree planned pivotal trials.  It is adouble-blind, randomized, placebo-controlled trial evaluating a 20-milligramdaily dose of lorcaserin

[Operator:]

Your first question comes from the line ofAlan Carr with Needham.  Please proceed.

[Alan Carr:]

Hi, good afternoon.  Thanks for taking my question, andcongratulations on a good quarter.

[Jack Lief:]

Thank you.

[Alan Carr:]

A question on partnering.  What sort of impact has the six-month safetydata had on your discussion?  Are thereany changes in level of interest and do you have different partners involvednow, or potential partners involved in discussions now?

[Jack Lief:]

Well, we see our partners relativelyregularly, potential partners I should say, relatively regularly at variousconferences throughout the year.  Obviously,they are aware of what is going on.  Atlast month’s Investor Conferences I noted that there were a number of largepharma representatives there at my presentation.  So we have not begun serious discussions thusfar regarding lorcaserin with a partner.  However, I do not think that there is any rushand I think that we have time.  I thinkthe value will increase as we move closer to NDA.

[Alan Carr:]

Do you think having 12-month data availableis going to have a major impact on where these discussions head?

[Jack Lief:]

Well, I think 12 months is obviously betterthan six months and we think that six months was indicative of the long-termsafety of our compound.  But 12 monthscertainly is going to be better.  Safetyis always a work in progress so more information is always better, and I thinkwe will have better opportunities for partnering as the study continues.

[Alan Carr:]

Okay. I have a question on 125.  When can we expect to see full data from that? The second part of that is what sort offactors are you considering in terms of whether or not to conduct this second-- possibly a second Phase 2 trial?

[Jack Lief:]

Well, we hope to publish.  Bill Shanahan, my Chief Medical Officer, issitting hear next to me.  Bill, anyvisibility on publication and possible publication dates or anything like that?

[Bill Shanahan:]

Sure.  Firstly, we would of course look to anappropriate scientific forum in which to present the data such as - the SleepSociety meetings that come up would be one possibility, and we would hope topublish sometime perhaps next year or thereafter.

[Jack Lief:]

Sure, and the second part of your questionwas, what will make us -- allow us to decide whether to move into anothersubjective study.  As I said on the call,we are leaning towards a subjective study right now, but we have not made thatfinal determination.  Is that still thecase, Bill?

[Bill Shanahan:]

Yes, I think we are still considering it,but leaning towards doing an additional study.

[Jack Lief:]

Did we answer your question, Alan?

[Alan Carr:]

Yes, thanks.

[Operator:]

Next question comes from the line of LelandGershell with Cowen and Company.  Pleaseproceed.

[Leland Gershell:]

Good afternoon.  Thanks for taking my question.  Question on 125, placebo effects aside Inoticed a lack of a clear dose response between the 10 and 40-milligram groupson the WTDS and WASO endpoints.  I waswondering how you interpret those findings and what it might mean for futurestudies?

[Jack Lief:]

Well, keep in mind that a crossover designis a very artificial way of measuring what the drug will actually do inpatients in a parallel group design.  However,it is a very objective way of measuring whether the drug is performing asintended.  What I think we have shown isthat the drug did indeed perform in a very robust fashion.  Even though the placebo response wassignificant, the drug response was even more significant.  Generally, the 40 milligrams looked a littlebit better than the 10 milligrams in most of the end points that we saw.  Bill, what do you think?

[Bill Shanahan:]

Yes, I agree.  On some of the measures there is not a cleardose response, but on quite a few there tends to be a pretty good doseresponse.  One place where we have seen avery clear dose response, both in Phase 1 and Phase 2, is increases in deep orslow wave sleep and in things like number of awakenings and arousals.  Certainly what we need to be -- what is goingto be really important of course is subjective findings as well and that is whywe are strongly considering another study before going into Phase 3.

[Leland Gershell:]

Okay, one more question on 791.  I should take from your comments that we willnot hear data from the first Phase 1 but we will hear data from those that willbe pushed into the first part of 2008?

[Jack Lief:]

Yes, so far so good, and what we are goingto try and do is to give you the overall global result of that, I think.  Bill? Is that still the plan?

[Bill Shanahan:]

Sure. Yes, still.

[Jack Lief:]

So we would rather have both the single andmultiple dose package available for announcement.

[Leland Gershell:]

Okay. Fair enough.  Thanks very much for taking the questions.

[Operator:]

Your next question comes from the line ofGraig Suvannavejh with UBS.  Pleaseproceed.

[Graig Suvannavejh:]

I have got several questions if I may.  Two are on pipeline and one is actually on theP&L. First of all, on APD125 you talk about potentially leaning towardsdoing this extra Phase 2 trial.  I amtrying to get a sense of it.  Is thatsimply to flesh out a little bit better, just to understand the compound - whatyou saw in the first Phase 2 - or do you think it is important that you do thestudy to increase the potential of partnership on this compound?

[Jack Lief:]

Well, I think both of those are importantbut I think a third reason for doing this study is the subjective study wouldbe a parallel design study which would be different obviously from thecross-over design study.  So we thinkthat there may have been some interaction of the crossover design to boost orofficially boost placebo, whereas typically studies are done, subjectivestudies such as these are done parallel and they are unencumbered by thatdesign.  Is that our current thinking,Bill?

[Bill Shanahan:]

It is.  Obviously when you get into a sleep laboratory,you have got two placebo effects, the drug and changing the sleep environmentto a sleep laboratory. Certainly it looked like, for many of the variables aspeople went through their dosing week, the placebo patients improved, but thedrug-treated patients maintained their same very good effects.

[Jack Lief:]

That is something we would expect to fallout of a subjective sleep study.  Inaddition, we had very stringent requirements for getting into this trial.  We required 60 minutes or more ofwake-after-sleep onset.  So we weretaking in some of the most severe people in terms of sleep maintenance issues. Wethink these things probably contributed to the larger placebo effect.

[Graig Suvannavejh:]

Does this at all impact your priorstatements on timing of advancement of the program to Phase 3?

[Bill Shanahan:]

We still think that the drug will be morethan ready for Phase 3 next year.  Indeedit could be ready currently but as I said earlier we are leaning towards thesecond Phase 2B study, if you will, prior to Phase 3.  The plan is once that is done, we willobviously have other discussions with partners, and hopefully we will have somesuccess in that area prior to Phase 3 later on next year.

[Graig Suvannavejh:]

Okay. Great.  Just a second question, if I could, withregards to the two additional Phase 3 trials for lorcaserin.  So the timing of when those trials wouldstart is here in the fourth quarter, and in your discussions with the FDA isthere anything that you can comment on that has you thinking that what they arethinking is consistent with what you are thinking and that pretty much thedesign of the trials will be as expected?

[Jack Lief:]

Well, we certainly believe that they arethinking maybe similar to our thinking but we cannot comment on that.  And you know, our guidance is still the same.  I do not want to suggest that we knoweverything that the FDA is thinking there, but all of our communications thusfar have been supportive of this idea that we would be able to begin relativelysoon the other two studies and we are making plans to do that.

[Graig Suvannavejh:]

And then my last question has to do with,so your R&D spend was lower relative to my expectations.  It probably just had to do with timing of whenI thought you might start the Phase 3s for lorcaserin.  So just on overall 2007 financial guidance,aside from the change in what you said on the cash balance expected by yearend,is -- are all other elements of the P&L in terms of guidance assumptionsstill consistent.

[Jack Lief:]

Yes.  Robert?

[Robert Hoffman:]

So some are a little bit higher, some are alittle bit lower, so that is why I guided towards the cash which we think willbe on the higher end of the range.  Youmay recall that for R&D expenses that the two additional Phase 3 will start-- we expect them to start in the fourth quarter and those are certainlyfront-end loaded with the screening process and getting people enrolled in thestudy.

[Jack Lief:]

Sure.  So, the short answer to that question was,yes.  I think our cash spend will catchup next year.

[Graig Suvannavejh:]

Okay, great.  Thank you.

[Operator:]

Your next question comes from the line ofBret Holley with CIBC World Markets.  Pleaseproceed.

[Bret Holley:]

Hi. Thanks for taking my question.  Jack, I am a little bit curious about somethingyou said in your prepared remarks.  Yousaid that in the BLOOM trial, that you had not noted any differences in safetyor efficacy, relative to your expectations.  I guess what I am wondering is how could youreally know efficacy at this point?

[Jack Lief:]

We are cognizant of blinded data and webelieve that our drug will be quite effective.   And so obviously when a study is blinded, wealso are looking at any AEs that we are seeing, adverse events, or those sortsof things.  Those are also blinded, butwe have not seen any patterns, we have not seen any numbers that would give usany concern materially regarding the overall safety or efficacy of our drug.  I would love to be able to un-blind the studyand give you exact numbers as we are approaching the one-year time point formany of these patients, but we cannot do that. So we will just have to do the best we canthus far.  I think most people believethat we have a very potent weight loss compound.  The key in getting our drug approved is goingto be the safety.  So we are reallyfocusing on the safety, we have been focusing on safety all thus far.  We want to make sure that we are picking upall of the safety signals and concerns that there might be in any of ourstudies, so that at the end of the day, we are well prepared -- should our drugget to NDA.

[Bret Holley:]

So, I guess this is a follow-up question,then.  Have you actually, in the blindeddata, seen an actual separation between two groups that you are referring to, togive you confidence in the statement on efficacy?

[Jack Lief:]

Yes, we have not looked at those sorts ofstatistics thus far.

[Bret Holley:]

Okay.  And then I guess the last question is, myunderstanding of the ESMB reviews is that, it was just focused on theechocardiogram data.  Is that the case ordid they actually investigate potential other AEs and SAEs in the data?

[Jack Lief:]

Bill?

[Bill Shanahan:]

They looked at the echocardiographic data,they were also aware of SAEs that had occurred, and the idea there was becauseif there were any cardiovascular SAEs they wanted to be aware of them.  But their focus is on the cardiovascularsafety and, specifically, the echocardiographic safety of the compound. Certainly, if it were not for our need toget some sort of blinded read at the data in terms of our powering assumptions,then we would not have even needed ESMB.

[Bret Holley:]

Okay.  Thank you very much for answering myquestions.

[Operator:]

Your next question comes from the line ofMatthew Osborne with Lazard Capital Markets.  Please proceed.  Mr. Osborne, your line is open.

[Matthew Osborne:]

Hi.  Thankyou for taking the questions.  A couple ofquestions, just can you remind us the half life of APD125 and how, with such ahalf life, how that mechanistically would not impact next day residual effects?

[Jack Lief:]

Dominic?

[Dominic Behan:]

The mean residence time is around sixhours. So, we believe that the majority of the drug is really gone from bloodafter six hours.  Mechanisticallyspeaking, this mechanism is very different to the GABA mechanism, whichstimulates an inhibitory neurotransmitter system. This works by blocking a stimulant -- astimulation response by serotonin. So, mechanistically it is very different inthat regard. We think that even if we have spill-over of the compound to the nextmorning or next day, we are not going to have that same liability of thesuppressing GABA active compounds. In fact, published data with retanserin, whichis also an older class of atypical anti-psychotic that has a two-way inhibitoryactivity has shown even with a half life of 40 hours, that they can see strongeffects on sleep consolidation.  Butthere is no significant next day effect. So mechanistically two-way blockade isvery different to the GABA stimulation approach.

[Jack Lief:]

So keep in mind this is a non-sedatingcompound that improves sleep maintenance and sleep architecture.  I think that is really important. Bill?

[Bill Shanahan:]

We also have some specific data with thisdrug from both Phase 1 and II that addresses this issue.  In Phase 1 trials, as you recall, we did dofairly extensive psycho motor testing at Cmax on the order of one to two hoursafter taking dosing in the morning there during those Phase 1 trials, and didnot see any important impairments even at Cmax.  In this Phase 2 trial, we did next morningcognitive function testing and saw no impairment. So what we think reallydistinguishes this drug from GABA drugs is that you can function quite wellwhen the drug is on board.

[Matthew Osborne:]

Actually as a follow-up then, can you putinto context perhaps the effect on latency to sleep onset?  So if it is less with APD125 and this class asa whole relative to the sedating agent, effectively how would you compete on ahead-to-head basis relative to latency to sleep onset, relative to the otherparameters that you improved that you mentioned?

[Jack Lief:]

The GABA-active drugs tend to reduce latencyto sleep onset by 10 minutes.  Somestudies show as much as 15 minutes.  Formost people with chronic insomnia, they do not have a problem falling asleep.  They have a problem staying asleep, and theyhave a problem waking up and not being able to get back to sleep. So if you compare the number of awakeningsthat we have with our drug, compared with Ambien, there is a much more robusteffect of our drug versus these GABA-active drugs.  Patients stay asleep longer and they wake upfewer times throughout the night. I think that is the beauty of our drug inthat at the end of the night they have a better outcome if they sleep better ina deeper type of fashion. Did we answer your question? Matt? Matt? We lost him?

[Operator:]

Your next question will come from the lineof Elizabeth Naldi with Piper Jaffray.

[Elizabeth Naldi:]

Hi, thanks for taking my call.  Is your APD125 is a Phase 3 trial contingentupon a partnership or if a partnership does not happen will you still proceedwith the program?

[Jack Lief:]

You know we are talking about potential Phase3 in the latter part of next year.  Westill have a year of timing to discuss that with partners. I think it ispremature to make any judgments there.  Itis certainly not my intension to halt all development of all programs waitingfor partners to come around at any time, but I certainly will be looking topartnering this program before Phase 3.

[Elizabeth Naldi:]

Great. Thank you.

[Jack Lief:]

My pleasure.

[Operator:]

Your next question comes from the line ofEugene Trogan with Morgan Joseph & Company. Please proceed.

[Eugene Trogan:]

Hi.  Mostof my questions have been answered.  Justone quick corporate development question I guess, if you can call it that.  There is a company that recently became publicby the name of Athersys that is developing an orally selective 5H2C receptoragonist for obesity.  They are currentlyin Phase 1 clinical trials.  I waswondering to the extent that you are aware what differences there are betweentheir compound versus lorcaserin, and is there anything in the intellectualproperty that you may have for lorcaserin that may protect you in this regard?

[Jack Lief:]

Well, intellectual property-wise, I am notsure that we have anything to prevent anybody else from developing an obesitydrug that works at the 5HT2C mechanism other than something that is verysimilar to our compound lorcaserin.  Fromthe perspective of how their trial is doing, they do not call us up and fill usin on those trials, so I am really not sure where that study lies. I think the important thing to keep in mindis that we have shown people that we have very robust weight loss and we can dothis in a very well tolerated fashion.  Iexpect that we are going to be able to show that also in the Phase 3 program aswell.  I have not seen any clinical datafrom Athersys of any sort yet.

[Eugene Trogan:]

Right.  But in terms of selectivity towards 2c versus2b, I was wondering if you were aware of anything with that compound versuslorcaserin?

[Jack Lief:]

It is not just selectivity, it isbioavailability and compartmentalization.  Remember, in addition to the 100-foldselectivity that we have told people about, there is also a thirteenfoldpreferential partitioning to brain versus plasma. That is where you want the drug to go in. Thereis basically, functionally we believe a thousandfold, greater than a thousandfold1 difference between central 2c and peripheral 2b activity.  So I cannot comment on the Athersys program.

[Eugene Trogan:]

Okay.  Thank you.

[Operator:]

Your next question comes from the line ofBill Tanner with Leerink Swann.  Pleaseproceed.

[Bill Tanner:]

Thanks.  Jack, just a question on the partnership.  Just thinking about if you can help usunderstand a little bit how you are thinking about the point in the timelinewhere you have the most leverage or where you maximize the NPV in terms ofdoing something?  Because just tryingthink about it, you have got obviously some increased trial expenses that aregoing to begin to be incurred at the end of this year, declining in cashresources. I guess it would seem that a partner mightwant some say in the Phase 3 design unless you guys are going to do a designthat most of the companies would be comfortable with.  Then you made a comment that it would be like-- it could be possible that you would partner it before NDA approval.  I am thinking why would someone -- if they didnot do it before NDA filing, would they not just want to wait until approval?  So just help us understand that a little bit,the whole spectrum, I guess.

[Jack Lief:]

Sure.  One could imagine that there is a completerelease of Phase 3 data.  The data willbe published and that sort of thing, which we believe will be supportive of avery exciting product that we think lorcaserin is.  Also in the FDA review process there is anadvisory committee meeting, which will meet before that approval date.  Assuming that committee is positive forapproval, I think it would be assumed that the FDA would follow therecommendations of that advisory committee. Before approval there are usuallynegotiations on labeling and a variety of things like that.  So there is a significant delay in terms ofthe final approval and sort of expectation of approval, if you will.  I think we have a lot of opportunities forpartnering around that time as well.  Keepin mind that the 12-month ESMB is also an important milestone.  That is also before NDA approval, and I thinkthere is always a possibility that we will be partnered following that event aswell. So you are right. We do spend a lot ofmoney in the clinical area. But I think the company is well served to dostudies that are robust and meet the high expectations of the FDA, and thoseare costly studies.

[Bill Tanner:]

Okay, fair enough.  I guess I just have one quick question on the791 program.  Can you remind us -- thiswould be chronic therapy, so can you remind us how that pharmacophore actuallydiffers from 125 as it relates to a receptor?

[Jack Lief:]

Sure.  Dominic, you want to address that?

[Dominic Behan:]

It is a different class regarding thepharmacophore.  But the fundamentaldifference is that unlike 125, this compound is designed to have preference forthe plasma compartment.  It is less ofthe compound within the therapeutic dose range that gets into the CNS.

[Jack Lief:]

In animal pre-clinical studies, the drug isnot really found in the brain of some animals.

[Bill Tanner:]

Okay. So then, just the behavior of themolecules would not lend itself -- differential behavior in molecules wouldlend itself to some pricing issues.  Ultimatelyboth of them are commercialized, I guess.

[Jack Lief:]

Oh, sure. And there are different half-livesand that sort of thing in the molecules. I would not think that this would be agood drug for sleep, the 791.

[Bill Tanner:]

Got you.  Okay, thank you.

[Operator:]

Your next question comes from the line ofCarol Werther with Summer Street.  Pleaseproceed.

[Carol Werther:]

Thanks for taking my question.  If you are going to start a second Phase 2with 125, should I think it is going to start in the first quarter of next yearand could be done by mid-year?

[Jack Lief:]

I would suggest that you think in terms ofthe halves of the year.  So we might notactually start the study.  We willcertainly understand what we want to do before then.  But the study will start in the first half.  These studies typically move quite quickly,maybe 30-day dosing and that sort of thing.  So we will have that data relatively quickly.

[Carol Werther:]

Okay, great.  The other question I had was the mouse modelthat you talked about where you do see valve changes.  Have you tested lorcaserin in that model?

[Jack Lief:]

Yes.  It was a rat study with Droogmans.  The rat species was one of the pre-clinicalspecies that lorcaserin has been tested on under GLP conditions for six months. We very carefully evaluated all theheart valves after that six-month period and saw no signals that were apparenton those valves.  That is completelydifferent from the Droogmans study, which showed significant thickening andregurgitation after only 10 weeks.

[Carol Werther:]

Okay, great.  Lastly, you are planning to do EKGs in thenext two pivotal trials for lorcaserin, correct?

[Jack Lief:]

Echos, yes.

[Carol Werther:]

Echos.  All right.  Okay, great.  Thank you.

[Operator:]

Your next question comes from the line ofDing Ding with Maxim Group.  Pleaseproceed.

[Ding Ding:]

Thank you for taking my call.  One question on APD125.  There are different compounds being developedin this class including compounds from Sanofi, Schering, KDNL, Lilly.  How differentiated do you think 125 is fromthe other 5HT2A agonist based on the data we have so far?  I know that not all studies can be compared,but what is your overall assessment?

[Jack Lief:]

Well, overall we think that the effect onslow wave sleep and sleep architecture was very robust, perhaps more robustwith our drug than any other drug that has been reported that we are aware of.  But then again, of course, all of thepotential drugs have not been reported to us.  There may be some other drugs that we are notaware of. But it is a competitive area in researchand development.  And so the fact thatSanofi, which is the sleep leader, is highly interested in this field gives usoptimism that the mechanism is the appropriate one to go after as anext-generation sleep agent.  We justhave to make sure that we have a very safe drug, which so far, the drug looksreally good.  I think we will be in goodshape there.

[Ding Ding:]

Right.  Given this class of drug has no impact onsleep onset but has very good impact on improving sleep quality and sleepmaintenance, in a real world setting how do you think this class of drug can bepositioned? In that context, what type of partner might be ideal for you interms of taking 125 forward, in your opinion?

[Jack Lief:]

Well, it is a primary care market -  the sleep, treating sleep. I think thepositioning is that we expect it to be on schedule. We expect side effects tobe very benign, if any. We expect the drug to be extremely welltolerated resulting in a better outcome the following morning.  Obviously, we do not expect to get the entiremarket.  A partner would need to have agood primary sales force and be interested in this field.

[Ding Ding:]

Right.  Lastly, if I may, how should we think aboutthe total trial cost for the Phase 3 of lorcaserin, say, for the 6,000-patientstudy?  Is $125 million still the currentexpectation? If that is the case what is the costallocation for the rest of the year?  Weare really talking about a very small front-end loaded cost associated with twoadditional studies, but how should we think about the cost in 2008, I guess?

[Jack Lief:]

Yeah. The front end is actually a verylarge portion of the cost allocation of these studies, because there is a lotof work that gets done to enroll the right patients and work those patients upinto the study.  We are still waiting to getfinal protocols from the FDA.  I think itis premature to guess what final costs might be.  Last quarter, we gave guidance at $125 millionand you can see that we are spending a little bit less thus far.  But I think that is a timing issue, so Ithink we are going to catch up on that.

[Ding Ding:]

Okay.  Maybe just a last question.  I understand the research phase of the Merckcollaboration ends later this month and J&J partnership also expires inDecember of this year.  Do we know if eithercollaboration will be extended, and how that would affect the developmentprogram with Merck and also McNeil?  Isthere any effect on your own burn rate going forward?

[Jack Lief:]

Yes. We do not expect the collaborations tobe extended.  We think we have done ourjob really well.  We have given Merck anumber of options, a number of opportunities to put into the clinic.  With J&J, it is the same thing. We think our eligibility for milestones androyalties obviously continue as the compounds that work at our targets arefurther developed by our partners.  Ithink in general, we will shift resources from our partnered programs to ourown efforts, and I think it will have just a very minimal impact on overallburn for the company.

[Ding Ding:]

Great.  Thanks very much.

[Operator:]

Your next question comes from the line ofJim Birchenough with Lehman Brothers.  Pleaseproceed.

[Jim Birchenough:]

Good afternoon.  Another follow-up on APD125 - just based onthe design of the 173-patient trial and the data that we saw, you mentioned thecrossover design and commented on the dose response.  What might we expect a Phase 2 trial withsubjective end points to look like?

[Jack Lief:]

Well, this would be a parallel design insteadof a crossover design, so one group would get placebo and one or more groupswould get the drug in various doses.  Theywould be dosed for a period of time - let us say 30 days.  They would keep a diary typically of how wellthey slept and possibly they would come in to be evaluated during that periodof time. It would be completely different. Theywould stay at home. They would sleep at home and at the end of the day its alldone double blinded so it would be a very rigorous study. But at the end of theday, we would have a good understanding of how well patients believed andperceived that the drug was working.

[Jim Birchenough:]

Would you insist on using a 10 and 40milligrams, again?

[Jack Lief:]

We still have not decided on the doses yet.That is one of the things that we would like to see some of the -- someadditional data that we are still collecting.

[Jim Birchenough:]

And with APD668, you mentioned that wecould hope for clarity on Phase 1 results this quarter.  When exactly could we expect to get data fromJ&J and what has been the reason for the delay with receiving that?

[Jack Lief:]

Well, you can feel free to ask J&J, butthey have a series of committees that meet and evaluate the data.  We have seen the data ourselves and we cannotcomment on that.  They have their ownprocess and we have to be respectful of their process.  It is a very large company.

[Jim Birchenough:]

So it is still decided whether we will gettopline data or anything in a press release?

[Jack Lief:]

Well, I am not sure what the exact vehicleis.  I would assume it would be a pressrelease.  What has been communicated tous is that we would be able to do this, this year.

[Jim Birchenough:]

Okay.  Thanks for taking the question.

[Jack Lief:]

My pleasure.  One more?

[Operator:]

Your next question comes from the line ofPatrick Moriarty with Fortis.  Pleaseproceed.

[Patrick Moriarty:]

Yes.  Thank you, but all my questions have beenanswered.

[Jack Lief:]

Okay.  That is good.  So I think we should close the questioning.  We are running a little bit late thisafternoon. Before finishing, I would like to reiterate our commitment toexecuting our long-term vision and strategic plan. We remain focused on benefiting patientsand building stockholder value through the development, commercialization ofArena drug candidates independently, and with our partners. Thanks again forjoining us on the call today.  Thank you.

[Operator:]

Thank you for your participation in today'sconference.  This concludes ourpresentation.  You may now disconnect.  Have a good day.