Arena: No Near-Term Relief

Arena Pharmaceuticals (ARNA - Snapshot Report) reported financial results for the third quarter 2008.  Although results were largely in-line with expectations, investors are starting to take notice of Arena’s cash position. Despite the $212.1 million still on the books at the end of September 2008, management has reduced its year-end cash balance guidance from $160 million to $115 million due to the planned redemption of $55.8 million in Series B1 and B2 convertible preferred stock in November 2008. 

This is an unfortunate use of funds, in our view, because it puts Arena’s cash position in danger of running out late in 2009 unless the company either signs a development partner for pipeline candidates lorcaserin or APD-125, or undertakes a significant dilutive offering.  Management does have some additional cash-generating opportunities with its early-stage pipeline and research capabilities, but nothing that would be meaningful enough to put off raising funds to support lorcaserin in 2010. 

When Arena issued 12.6 million shares in late 2007 to raise $103 million, management commented this was so they could negotiate a partnership on lorcaserin from a position of strength.  At that time, we noted that no partnership was likely until after the BLOOM data in March 2009.  Now, with the cash balance forecasted to be below $100 million by the time data comes out in April, this "position of strength" strategy becomes in question.

The being said, of course, if the BLOOM data looks as good as management is hinting, striking a sizable partnership should not be a problem.  On the third-quarter call, CEO Jack Lief noted "a number of companies doing pre-diligence" on lorcaserin.  He also noted "no apparent pattern" from the blinded data that would prohibit the approvability or commercialization of the drug. 

The ideal situation is a bidding war between large-cap pharmaceutical companies over lorcaserin.  We are not quite ready to jump into that camp -- hence the ‘Hold’ rating -- but it is clear obesity is something big pharma is very interested in. 

Our stance on lorcaserin is that the drug looks safe, with no major cardio, CNS, or metabolic concerns to speak of; but, the phase IIb efficacy data fails to impress.  The efficacy of lorcaserin demonstrated in the phase IIb trial (~8 lbs at 12-weeks) falls short of some of the other candidates currently in late-stage trials (~20 to 25 lbs after 24 weeks for Qnexa, Contrave, and pramlintide/metreleptin). 

However, safety remains a chief concern of all interested parties (partners, patients, physicians, and the FDA), and we note that the real long-term efficacy of the drug will not be known until BLOOM offers data in March 2009.  So the stock remains in a holding pattern while we wait for the data in March 2009. 

With respect to APD125, we appreciate the novel approach, but the sleep maintenance / insomnia market is flooded with generic alternatives and has shown little prescription growth over the past few years.  We have yet to ascribe any meaningful value to the candidate before a third party comes in and validates the program.   In the meantime, we rate the shares ‘Hold’ with a $6 target.

Read the full analyst report on ARNA.

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