Arena Study Results Crucial

Highlights include Arena Pharmaceuticals (ARNA - Analyst Report), Merck & Co. (MRK - Analyst Report) and Johnson & Johnson (JNJ - Analyst Report).

Lorcaserin Phase III Data Expected at Month End

All important data from Arena Pharmaceuticals' (ARNA - Analyst Report) phase III BLOOM program, a 2-year study testing obesity candidate lorcaserin, is expected at the end of the month. The announcement will provide a preliminary analysis of top-line data that is likely to include: mean and categorical weight loss, a summary of adverse events, dropout rates, the rates of FDA valvulopathy and a summary of changes in a limited number of secondary endpoints. Management remains highly confidence in the outcome of the trial.

The mean primary endpoint will compare weight loss as a percent of bodyweight after the first and second year of the program in the lorcaserin group vs. the placebo group. To be successful, the placebo-adjusted difference in mean weight loss for the lorcaserin group must exceed 5%. Management expects the placebo group to show weight loss (as a percent of starting weight) to be between 1.5% and 2.5%.

This would be consistent with the data seen in the two phase III programs with rimonabant and the most recent phase III data on Qnexa. Arena has seen blinded data from the program so far, and is clearly encouraged by the weight loss figures seen from the blinded participants. If the placebo group delivers the expected 1.5% to 2.5% weight loss, the lorcaserin group must deliver weight loss after the first year at 6.5% or greater. We believe this is easily achievable.

The categorical primary endpoint will compare the number of patients that exceed total weight loss compared to starting body weight at 5%. To be successful, the percent of patients that achieve 5% weight loss in the lorcaserin group must exceed 30%, and must be at least twice that of the placebo group. Based on phase III data from Qnexa and Contrave, we believe lorcaserin must deliver 5% weight loss in at least 60% of the study participants. The placebo group will probably be in the area of 15% to 20%.

The second phase III program, BLOSSOM, continues on plan. Management expects that the trial will complete around the June 2009 timeframe, and data should be available around September 2009. BLOSSOM will look to confirm the results from BLOOM.

Once BLOOM is complete, Arena will begin to prepare the new drug application (NDA) for U.S. approval. Management hopes to have the bulk of the NDA prepared by the time BLOSSOM reports data in September. Then, management will add the BLOSSOM data to the package and file with the U.S. FDA before the end of the year. Assuming a standard review, the FDA should be in position to make a decision on lorcaserin in late 2010.

We think the data will be positive. As noted above, management has access to the blinded data, and clearly must be seeing a blended mean weight loss consistent with the above figures that would make the trial successful. There have been no safety signals to date, and at this point there seems little to be concerned with as far as valvulopathy. Management still has to conduct an abuse study later this year, but we believe that lorcaserin is unlikely to fail the phase III program based on side-effects or tolerability.

Management has 2 interesting earlier stage collaboration programs, one with Merck & Co. (MRK - Analyst Report) and another with Johnson & Johnson (JNJ - Analyst Report), as well as another mid-stage candidate for cardiovascular disease and 2 IND-ready preclinical candidates.

However, right now, lorcaserin is 90% of the value at Arena. If the drug were to fail, Arena's stock would surely head down below $1. Arena has $110 million in cash on hand, but this is only enough to fund operations into the 3rd quarter 2009 without striking a partnership on lorcaserin or forming another earlier-stage research alliance.

The risk is far too great, in our view, to purchase Arena before the results. As noted, if BLOOM fails, Arena's stock will likely decline by 80% to 90%. Positive data may send the shares up 50% to 100% (on the first day). We would much rather buy Arena at $8 knowing it is going to $12, then roll the dice today at $5 knowing below $1 is a possibility.

We encourage investors to stay nimble, know the story, and be prepared to enter or exit the name quickly once the BLOOM data is released -- sometime around March 31, 2009. We continue to rate the shares Hold, as we have for the past 2-and-a-half years.