Arena Pharma Results Disappoint

Arena’s Weight Loss Drug Provides Thin Results

This morning Arena Pharmaceuticals (ARNA - Analyst Report) released important phase III data on obesity drug lorcaserin. The data show the patients taking 10mg lorcaserin twice daily lost 12.7 lbs, or 5.8% of their body weight on an intent-to-treat basis over the first 12-months of the study vs. 4.7 lbs, or 2.2% of their body weight for patients taking placebo. Additionally, 47.5% of the patient taking lorcaserin lost at least 5% of their body weight compared to only 20.3% taking the placebo.

These results satisfy the 2 FDA requirements for approvability, in our view. More importantly, there was no statistically significant associated risk of developing valvulopathy (heart value damage) for patients taking lorcaserin vs. placebo over the entire two year study period.

Increased risk of heart value damage is what forced Wyeth (WYE) to pull its obesity candidate, Phen-Fen, off the market in 1999. Additionally, rates of adverse events were acceptable, with headache and nausea the 2 main side effects, and lorcaserin showed no signs of central nervous system side effects such as depression, anxiety, or insomnia, key problems that have taken down Sanofi’s (SNY - Analyst Report) rimonabant and Merck’s (MRK - Analyst Report)  taranabant.

While the safety data is encouraging, and the efficacy data clearly meets the requirements set forth by the FDA, we would classify the results as disappointing. The placebo-adjusted 8.0 lbs of weight loss, or only 3.6% of body weight, after one year falls far short of what we would consider a powerful and desirable drug. We were hoping to see more in the line of 20 lbs, or close to 10% placebo-adjusted.

In our view, lorcaserin is the least efficacious of the 3 late-stage obesity drugs making their way through phase III trials now. The data below shows how lorcaserin stacks up against Orexigen’s (OREX - Snapshot Report) Contrave and Vivus’ (VVUS - Analyst Report) Qnexa:


At this point the race is still ongoing, and we would classify lorcaserin as clearly the leader in terms of safety and tolerability, but clearly the lagger in terms of efficacy.

Arena entered 2009 with $110.1 million in cash and equivalents, enough to fund operations into the third quarter 2009. We estimate burn for the 1st quarter will be approximately $50 million, meaning the company should exit the 1st quarter with only $60 million on the books.

A week ago, Arena entered into a committed equity financing for $50 million with Azimuth Opportunity Ltd., where Arena may sell up to 14.8 million shares. Arena already has 74 million shares outstanding, up 3-fold from the only 25 million shares outstanding in 2004, so the painful dilution continues.

Arena’s desperate need for cash will only ease once the company signs a commercialization partnership for the drug. Investors have been waiting for years for both the BLOOM data and a partnership. We view the $50 million committed equity financing from Azimuth as a sign that no partnership on lorcaserin is coming anytime soon.

Data from the second phase III trial, BLOSSOM, is expected in the 3rd quarter 2009. Management’s goal is to file for approval before the end of the year. We believe management may not be able to close a partnership until after the drug is approved in 2010.

The stock opened down roughly 20% on the BLOOM news. We have had a ‘Hold’ rating on Arena the past 2 years. Our advice to clients was to not own the shares before the BLOOM data became available. We see little to change that stance now that the data is out.  Our $8 target is under review.