Arena Pharmaceuticals, Inc.
Q3 2014 Earnings Call Transcript

Published: 3 Nov 2014

[Operator:]

Good day everyone, and welcome to Arena Pharmaceuticals Third Quarter 2014 Financial Results Call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Arena’s Chief Financial Officer, Mr. Robert Hoffman. Mr. Hoffman, please go ahead.

[Robert Hoffman:]

Good morning and thank you for joining us. I am Robert Hoffman, Arena’s Chief Financial Officer. Earlier this morning, we issued two news releases one reporting topline results from Phase 2, proof-of-concept study with Lorcaserin for smoking cessation, and the recording in our third quarter 2014 financial results. On Tuesday afternoon of last week Eisai and Arena released topline results from the pilot study Lorcaserin and combination of Phentermine. On Thursday morning Arena’s shared additional data from an abstract previously embargoed on a late breaking poster on the study that will be presented this week at the Obesity Society’s Annual Scientific Meeting. We hope that you’ve had a chance to review these updates. Joining me on today’s call with prepared remarks will be Jack Lief, our President and Chief Executive Officer; and Craig Audet, our Senior Vice President of Operations and Head of Global Regulatory Affairs; Dominic Behan, our Chief Scientific Officer; and Bill Shanahan, our Chief Medical Officer, are also available to address your question. 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, advancement potential, regulatory applications and collaborations; commercialization of BELVIQ, including product supply, marketing, the sales force, physician and patient awareness, marketplace adoption and reimbursement; financial results, conditions, and guidance, and other statements that are not historical facts. Such statements include the words, plan, expect, believe, may, will, can or similar words. You are cautioned not to place undue reliance on these forward looking statements, which represent our judgment and beliefs only as of the time they are made. For such statements, we claim the protection of the Private Securities Litigation Reform Act of 1995. Risks and uncertainties that could cause actual results to differ materially from those described in our forward looking statements include the timing, results and cost of commercialization, R&D and manufacturing; the regulatory process and decisions; data and other information related to drugs and drug candidates may not be as expected, favorable, or sufficient for further development or commercialization; collaborations; and other risks identified in today’s financial results press release as well as our SEC filings. I will now turn the call over to Jack.

[Jack Lief:]

Good morning, and thanks for joining us today. As Robert reported, we have a lot of news to cover this morning including financial results for our third quarter during which we continue to see growth in sales of BELVIQ as well as clinical trials results from two of our Lorcaserin Lifecycle Management programs. I will begin this morning’s call with a progress report on BELVIQ. During the third quarter, the number of prescriptions filled for BELVIQ totaled approximately 143,000. Now keep in mind that the overall market was flat in the third quarter, nevertheless, we saw a 30% increase in prescriptions compared to the previous quarter and approximately 230% over the third quarter of last year. Also during the quarter, prescriptions per week exceeded 12,000 for the first time. Since launch, the total number of prescriptions filled has reached nearly 0.5 million and the number of healthcare providers who have actually prescribed BELVIQ climbed to about 60,000. In addition as Robert will discuss shortly; on October 15, Eisai launched a pilot sampling program for BELVIQ as part of their commercial plan. This program combined with Eisai’s ongoing marketing efforts including the recently initiated one minute direct response television advertisement and the outreach by Eisai sales force provides us with continuing confidence in Eisai’s strategy to drive prescription growth and make the BELVIQ available to an increasing number of patients. We believe the introduction of new market entries will expand the adoption of prescription rate management agents and increase insurance coverage which should positively affect BELVIQ sales. We expect BELVIQ to compete successfully on its own merit against existing and newly introduced prescription weight management products given his unique benefit risk profile. I will now turn the call over to Craig, who will update your on recent developments in our Lorcaserin life-cycle management program, Robert will then review our financial results for the third quarter before opening the call to your questions. Craig?

[Craig Audet:]

Thanks Jack and good morning. Early today we issued a press release that contain top-line results from our Phase 2 trial investigating Lorcaserin as an aid to smoking cessation. This proof-of-concept trial provides what we believe is the first clinical evidence that a selective serotonin 2C agonist. They have a treatment effect for smoking cessation, presumptively through the modulation of the dopamine reward system. These data are supportive of pre-clinical experiments demonstrating that the serotonin 2C receptor plays an active role in at least two distinct neutral circuits; one influencing appetite and one influencing reward. The trial was 12 weeks study that enrolls 603 active smokers who were randomized receive either Lorcaserin 10 milligram once daily, 10 milligrams twice daily or placebo. Subjects at baseline averaged 18 cigarettes per day and have an average weight of 177 pounds and an average BMI of 28. The primary objective of this study was assessment of the continuous obscenest rate for the last four weeks of the study. Obscenest rates for the study were 15.3% for Lorcaserin twice daily, 8.7% for Lorcaserin once daily and 5.6% for placebo. With the treatment affecting Lorcaserin twice daily group being statistically significantly greater than, that the other two groups. The odds ratio between the Lorcaserin twice daily group to placebo group was 3.02 meaning that patients on Lorcaserin twice daily were three times as likely to start to smoking than those on placebo. Secondary objective of the study included assessment of body weight change and a safety and tolerability. At week 12 for patients who quit smoking Lorcaserin twice daily was associated with the loss of 0.9 pounds compared to a gain of 1.7 pounds for the Lorcaserin once daily group and 1.6 pounds for the placebo group. The most common adverse events for the study were similar to the profile seeing in our Phase 3 program for Lorcaserin and consistent of headache, nausea, constipation, dizziness and dry mouth. In summary, proof-of-concept was established. The study made its primary endpoint and that Lorcaserin had a statistically significant and dose responsive effect over placebo for smoking cessation with the threefold odds ratio in the twice daily group. The study also showed evidence of weight control for quitters in the Lorcaserin twice daily group. Weight gain being a common consequence of and deterrent to quitting smoking. Looking forward an area of focus for any tissue development will be methods to improve our abstinence rates if we were to conduct a second Phase 2 study or move into a Phase 3 program. We and Esai plan to complete our analysis of the full data set and review it in greater doc to determine our next steps. Now let’s move to the 12-week pilot study of the coadministration of Lorcaserin and Phentermine. In this study, 238 overweight and obese adults were randomized to one of the three treatment arms. Lorcaserin 10 milligram twice daily or Lorcaserin twice daily plus 15 milligrams of Phentermine once daily or 15 milligrams of Phentermine twice daily. Patients had an average weight of 232 pounds and average BMI of 38 at baseline. The primary endpoint of the study assessed with the short-term treatment of Lorcaserin plus Phentermine is associated with an exacerbation in the proportion of the patients experiencing at least from one of the nine pre-specified adverse events compared to therapy with Lorcaserin alone. The proportion of the patients were putting at least one of these events were 37.2% for Lorcaserin, 42.3% for Lorcaserin plus Phentermine once daily and 40.5% for Lorcaserin plus Phentermine twice daily showing no exacerbation. Although this study was not powered for secondary endpoints, the proportion of the completers achieving greater than or equal to 5% weight loss at week 12 was 33.3% for the Lorcaserin group, safety 8.2% for the Lorcaserin plus Phentermine once daily group and 84.2% for Lorcaserin plus Phentermine twice daily group. Mean change from baseline weight loss in completers at week 12 was 8.8 pounds or 3.8% for the Lorcaserin group, 16.8 pounds or 7.3% for the Lorcaserin plus Phentermine once daily group and 19.6 pounds or 8.7% for the Lorcaserin plus Phentermine twice daily groups. Decreases from baseline had been weekly systolic and diastolic blood pressure were observed throughout the study in all treatment groups. Mean changes for pulse rate at week 12 in beats per minute or a decrease of 1.9 in the Lorcaserin group, compared to an increase of 1.1 in Lorcaserin plus Phentermine once daily group and of 3.1 in Lorcaserin plus Phentermine twice daily group. After these events, during the trial, we’re consistent with reported experience with these agents with the most common ever adverse events being dry mouth, headache, constipation, fatigue and dizziness. In summary, treatment with Lorcaserin plus Phentermine was not associated with an exacerbation in the proportion of patients experiencing at least one of nine pre-specified adverse events, compared to Lorcaserin alone. In addition, the combination of Lorcaserin and plus Phentermine twice daily was associated with more than the double the weight loss observed with Lorcaserin alone. Arena and Eisai plan to examine these findings more closely as we consider our options relative to further development. As Robert mentioned, data from the trial are being presented later this week in the Late Breaking Poster session at the Obesity Society Annual Scientific Meeting during Obesity Week in Boston. I would now like to hand the call over to Robert who’ll review our financials.

[Robert Hoffman:]

Thanks, Craig. I’ll focus my comments and highlights of our financial performance for the three months ended September 30, 2014, compared to the three months ended September 30, 2013. I also refer you to today’s financial results news release. For the following financial results 2014 will refer to the three months ended September 30, 2014 and 2013 will refer to the three months ended September 30, 2013. For 2014, we recorded revenues of $8.2 million, compared to $3.6 million for 2013. 2014 revenues included $5.7 million in net product sales of BELVIQ and $2 million from amortization of upfront payments. 2013 revenues included $2 million in net product sales of BELVIQ and $1 million from amortization of upfront payments. Of the $5.7 million in net product sales of BELVIQ for 2014, $5.2 million represented 31.5% of Eisai net product sales which totaled $15.8 million and a $0.5 million related to redemptions of the 15-day free vouchers. We and Eisai currently recognized net product sales revenue, when Eisai shifts product to its wholesalers. During the quarter ended September 30, 2014, Eisai shifted approximately 148,000 bottles of BELVIQ to their wholesalers. The growth in net production totaled 43% for the quarter ended September 30, 2014 comparable with the growth of net production of 44% in the quarter ended June 30, 2014. There was some increase in inventory at the wholesale level at the end of September 2014, as compared to June 2014. 2014 cost of product sales with BELVIQ totaled 1.8 million, which included a 0.5 million for the free voucher redemptions. Cost of product sales consists primarily of direct and indirect cost related to manufacturing BELVIQ including salaries, share-based compensation, another personnel cost, machinery depreciation costs and amortization expense related to our manufacturing production licenses. We recorded a $0.5 million cost of product sales of BELVIQ in 2013. Research and development expenses for 2014, increased to $24.5 million from $14.6 million for 2013, increases primarily attributable to increases in external clinical and preclinical study, fees and expenses, internal manufacturing cost and to a lesser extent personnel cost. R&D expenses for 2014 included $1.8 million in non-cash share-based compensation, compared to $1.2 million for 2013. General and administrative expenses totaled $8 million for 2014 compared to $7.8 million for 2013. G&A expenses for 2014 included $1.7 million in non-cash share-based compensation compared to $1.1 million for 2013. We recorded a gain on sales available for self-securities of $16.3 million 2014, related to our sale of shares we held in TaiGen. Net loss with $10.7 million for 2014 or $0.05 per share compared to a net loss of $17.2 million for 2013 or $0.08 per share. Cash and cash equivalents totaled $188.3 million at September 30, 2014, compared to $221.9 million at December 31, 2013. At September 30, 2014, we had approximately 220.1 million shares of common stock outstanding. In September 2014, Eisai decided to initiate a pilot program sampling program a part of its marketing efforts and they allocated a certain number of bottles of BELVIQ for the initial product sampling, which began in October 2014. Under the Eisai agreement, Eisai will pay us our cost of goods for these product samples. The allocation of BELVIQ bottles for product sampling reduced our deferred revenues and increased our payable to Eisai by $6 million, bringing our payables to Eisai up to $19.1 million at September 30, 2014. I’ll now turn the call back over to Jack.

[Jack Lief:]

Thanks Robert. Before we end, I’d like to provide a brief update on our pipeline progress. This quarter, we expect to begin recruiting for Phase 2 study for Renalapag, our IP agonist for the treatment for the treatment of Pulmonary Arterial Hypertension. APD334 or S1P1 agonist for the treatment of autoimmune disease is completing a Phase 1 multiple ascending dose trail. We expect to have results by the end of this year. AP371 or CB2 agonist for the treatment of pain is currently in a single ascending dose trial. And we expect to have results in the first quarter of next year. The Phase 1C trial of Temanogrel or 5HT2A inverse agonist for the treatment of thrombotic disease being conducted by Ildong remains ongoing. With continued BELVIQ prescription growth encouraging results from the investigational Phase 2 studies of Lorcaserin for smoking cessation and co-administration with Phentermine and continued progress on advancing our development pipeline I am pleased with the progress we’re making and remain enthusiastic about the future of Arena. We look forward to updating you on additional progress in the coming months. We will now open the call for questions. Samantha.

[Operator:]

Thank you. (Operator Instructions) Our first question comes from Jason Butler with JMP Securities . Your line is now open.

[Jason Butler:]

Hi thanks for taking the questions. Let me start from a smoking cessation trial, can you first off put into context for us the magnitude of benefit you are seeing here versus current standards of care and other treatment approaches for smoking cessation.

[Jack Lief:]

Bill.

[Bill Shanahan:]

Sure. So, what we have here is a rate of about 5.5% in the placebo group versus about 15% and our highest dose Lorcaserin group. The ratio there is consistent with the ratios seeing with other drugs including varenicline. However, the placebo rate is at the low end of that range so what we need to do is obviously see if these ratios will obtain in later trials there certainly can be further efforts enhance the placebo or the counseling response rate. So these are things -- I think one of the interesting things in the trial also is that we saw the response rates for month two to month three almost double for the two Lorcaserin groups so it was flat for placebo so we did see was people starting to quit more as the trial went on so there are lot of that interesting questions to answer.

[Jason Butler:]

Okay that’s helpful I guess just following on from that. You mentioned that the drug seems to be working or there have to maybe improving our time. Is that something that you do expect to see? How did the placebo respond to change over time I guess is there -- based on that is there a suggestion that the longer you ran the extended studies out the better the efficacy would be?

[Jack Lief:]

Well that’s obviously will be just speculation. But if you just take the rate of responses it did increase substantially between the second and third months with Lorcaserin and it was flat with placebo. And that’s more typical most of the other trials that we treated for 12 weeks and that when we typically saw the peak so one of the interesting questions to be answered with Lorcaserin is what would happen with continued efforts.

[Operator:]

Our next question comes from Alan Carr with Needham & Company. Your line is open.

[Alan Carr:]

Hi thanks for taking my question. I like to continue on the smoking a bit more. I mean there is a difference in the absolute numbers there particularly with placebo. Can you tell us, how was this designed differently from some of the other trials, with the trials, which had a bigger placebo response early on a lot more counseling in some of those registration trials with than what you all did.

[Jack Lief:]

I was going to say I’m going to let Bill say that question. Did you have anything else to ask?

[Alan Carr:]

As far as follow-up with them what are the next step here for you Phentermine, Lorcaserin combo program.

[Bill Shanahan:]

Okay so we, the short answer we are not sure of why we got such a lower placebo rate we did refer but it’s hard to get real detailed information what was done in the other programs we expected at least a part of this we use less intense counseling perhaps even less intense screening of patients for willingness to quit. So there are modifications that we can definitely make in the program there is also, this hardening hypothesis for the chart there but it’s more speculative were rates do tend to be coming down a little bit at least with a placebo groups overtime and the registration trials for varenicline approved in 2006. So all of these are interesting questions but I think the fact that we saw clear dose response and a very substantial rate ratio that validate the hypothesis for us.

[Craig Audet:]

So Alan I think, this is Craig. You kind of hit the nail on the head there, so what we did was we took Lorcaserin and we plugged it into a fairly standardized design for smoking cessation Phase 2 trial. And really what was we build subcutaneous what we need to do now is to take the design of trial that fit on molecule moving forward to make sure that we are getting the biggest bang for buck out of that and that includes the weight neutrality aspect that we are looking for as well as the smoking cessation. So a future study design will probably look different from the standard smoking cessation trials.

[Alan Carr:]

Is it a combination maybe more intense counseling but also something is under registration trials or a longer duration would you be looking at that simultaneously. Would you take I guess another question here is there was another Phase 2 needed or can you start a registration trial of more intense counseling and work the one year duration into that?

[Bill Shanahan:]

We will consider all of that and we are still just analyzing this data these are top-line but certainly encouraging and as Craig said that the weight aspect is very important and I think the tolerability advantages this drug offers are also very significant. So I would say that these results are quite encouraging and first time again that we validated this pathway for the 2C agonist, so a lot of positives in here.

[Alan Carr:]

Okay. And my second question was looking to the Lorcaserin and Phentermine program. What are your options at this point? Can you add some of this data to the label as you are heading to a Phase 2 trial now? What’s the next step?

[Jack Lief:]

I think what we need to do out is first of all we need to crunch all the numbers. So we basically have the top-line here we really need to take a deep dive into the data and see what we can find. Then we have to have a conversation with the agency and I think we have spoken little bit about this in the past. There are few different options here one is to look at taking that limitation of use out of the label or go for a fixed dose combination. And I know I sound like a broken record with you but as I have said in the past we are not interesting in doing a BELVIQ like study with 8,000 patients and 2,000 echoes in CVOT. Sorry 20,000 echoes, excuse me. So it’s going to remain to be same how owners of the agency would like to see these trials around.

[Operator:]

Our next question comes from Steve Byrne with Bank of America Merrill Lynch. Your line is open.

[Unidentified Analyst:]

Hi, this is Sarah on for Steve. Thanks for taking my question. The first one I have is could you just breakdown of the 143,000 scripts in terms of how many of were free, discounted and paid? And then what ASP looks like for just the insured patients?

[Robert Hoffman:]

This is Rob. We haven’t given either of those paid outs for further dose at this quarter.

[Unidentified Analyst:]

Okay. And then in terms of the adjustment to the purchase price of payment on October 01, was there another adjustment and was there a change in cash transfer beyond what you mentioned for the pilot program.

[Robert Hoffman:]

So the selling price remains fairly constant so there was no change in the selling price. And in terms of what the tale of Eisai looks like it will be about 19 points going forward.

[Unidentified Analyst:]

Okay, and then in terms of discontinuation trends, I guess what are those trends currently looking like and a doctor comforting the label acquirement of 5% weight loss to 12 week.

[Robert Hoffman:]

We don’t have much data around that. Eisai does the commercial patient part of this.

[Unidentified Analyst:]

Okay, thank you.

[Operator:]

Our next question comes from Edward Tenthoff with Piper Jaffray. Your line is open.

[Edward Tenthoff:]

Great, thank. I think my questions have largely been answered, just to clarify what are left effects with respect to combination of BELVIQ plus Phentermine.

[Bill Shanahan:]

We are fully analyzed data, this is just top-line data. There is a presentation at the obesity society later on this week and we look forward to sharing that information with our investor base. beyond that like Craig indicated is we do need to after we were fully analyzed data we need to discuss with FDA and determine what the best steps moving forward are.

[Edward Tenthoff:]

If I may just ask, when it comes to conversations with physicians, what are their biggest hang-ups in terms of using the drugs together. Is this something that’s going to go a little further for them to potentially start to use the two drugs in combination? Do they want long-term safety? Just from conversations that you had, where is the biggest push back for sensibly using these two drugs companies?

[Jack Lief:]

We’ll tell you, the label has a limitation of use and if it says that the safety and efficacy a combination with BELVIQ and other weight loss agents like Phentermine has not been established. So, we certainly can’t promote that in any way, shape or form. The reason why we did the study is we were under the impression or at least we heard anecdotally that physician will be going to use it this way and we wanted to make sure that there were no safety issues, we want to be ahead of the curve there, so that’s the reason for this study.

[Operator:]

Our next question comes from Bob Ai with Wallach Beth. Your line is open.

[Bob Ai:]

Hi, guys. Can you hear me? I am not sure this question is a best one, can you compare the diagnosis of the program in the Phentermine plus BELVIQ compare to the trial to that today the one you used in the fifth retrial?

[Bill Shanahan:]

It was the lifestyle modification was modeled after what we used in our Phase 3 program. However, was different in some respects and this as far as the difference and of course you’ll see data, but the people were a little heavier in this Phentermine trial. So, there is differences in the trials and poster will put out a lot of detail for you.

[Bob Ai:]

So, the other question down the smoking session that’s maybe balance does have any based on the mechanism how the work make sense to come down with some existing smoking session drugs?

[Jack Lief:]

No, we don’t know what make sense yet, because it hasn’t been tested. But certainly one option is to look at potentially testing it with something else, but we’ll see.

[Operator:]

Our next question comes from Matthew Andrews with Wells Fargo Securities. Your line is open.

[Matthew Andrews:]

Good morning. Thank you for taking the question. Robert, one for you, can you tell us of the R&D expense how much were associated with smoking cessation in the quarter? And for Bill and Craig, what were the assumptions of smoking cessation study terms in of quit rate and show for placebo for the Lorcaserin and Phentermine combination, why wasn’t there a Phentermine only arm. Is this based on FDA guidance? And then lastly and I’ll get the poster on Thursday, but can you characterize pulse rate increases in the Phentermine combination arms, were these plateauing or they contain rise or they rise early and then just sort of flat line or decrease due to [indiscernible]? Thanks.

[Robert Hoffman:]

First nine months ahead of September 30, we sit under $30 million in R&D expenses to smoking cessation. I recall that under our collaboration, we get reimburse for half of that. So, we recognized the full $30 million and then revenue we had just $6.5 million in revenue related to that.

[Bill Shanahan:]

Yeah, so try to address your other questions and I yet to starting with the Phentermine pulse rate increases, these are in line with other studies in the other one to three beats per minute increases versus the two beat per minute decrease with Lorcaserin and these occur early and persist and this is consistent with other agents that have within combined or older data with thin-thin [ph]. In terms of the assumptions with the quit rates, we based it on varenicline data and powered the trial appropriately. We did see about half or so of the expected quit rate in the placebo group, that was a nevertheless had a robust in factory and nice response to share with us very significant results statistically. And then I think you asked also why we didn’t include a Phentermine alone arm in this pilot study. It was really just the pilot study as Craig suggested, we were trying to get some information, the combination had never been studied, at least formally and wanted to get pilot grade information about both -- to inform any further decision. So, it was designed primarily to determine, if we would see any surprises in side effects or tolerability or anything like that and as we reported there really wasn’t any exacerbation in the side effects of the two compounds versus what you would expect for either compound.

[Matthew Andrews:]

Great. Thank you for those details, just one quick one Bill, so you were looking for roughly a 12% placebo for the quit rate smoking cessation, not 17 or 18 as they showed in genetics Phase 3 study?

[Bill Shanahan:]

I don’t actually remember the precise powering assumption, but we did look at the lower end of varenicline data.

[Operator:]

Your next question comes from Rebecca Forest with Jefferies. Your line is now open.

[Rebecca Forest:]

I have a question on the combo data given the weight loss and the after chapters is based on a computer analysis. How would we adjust to get to weight loss based on an intent to treat basis in.

[Jack Lief:]

Bill.

[Bill Shanahan:]

Yes the data are quite similar, well that will all be displayed on Thursday for you.

[Jack Lief:]

Right.

[Rebecca Forest:]

Okay thanks and then, can you say anything about what you would expect to one you expect the combo to hit plateau in terms of rate loss.

[Bill Shanahan:]

I mean that would just be, speculation right now so with our cash and we saw a flat chosen the four to six month range depending on whether people have diabetes or not. We just have to wait.

[Operator:]

This concludes our Q&A session. I would like to turn the call back to Craig Audet for closing remarks.

[Craig Audet:]

Thank you, Operator. Before we close I’d like to let you know that we're planning to participate at some upcoming healthcare conferences in the near future, Credit Suisse and Stefan Nicholas in November, Piper Jaffray in December and JPMorgan in January. So that concludes our third quarter 2014 financial results call. We want to thank you for joining us today and for your continued interest in and support of Arena. Thank you very much.

[Operator:]

Ladies and gentleman thank you for participating in today’s conference. This concludes today’s program. You may know all disconnect. Everyone have a great day.