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Arena Pharmaceuticals Inc. (ARNA - Snapshot Report) suffered a loss (excluding special items) of 12 cents per share in the second quarter of 2012 as against a loss of 16 cents incurred in the year-ago quarter. However, second quarter 2012 loss was wider than the Zacks Consensus Estimate of a loss of 8 cents per share. The narrower year-over-year loss was attributable to higher revenues.

Quarterly Results

Arena Pharma recorded second quarter revenues of $22 million compared to revenues of $3.3 million in the prior-year quarter. The jump was mainly attributable to the $20 million milestone payment received from partner, Eisai Inc. related to the agreement between the companies regarding weight loss drug, Belviq. The Zacks Consensus Estimate was much lower at $10 million.

Operating expenses at Arena Pharma declined 13.4% to $20.1 million on account of lower research and development (R&D) and general and administrative (G&A) expenses. R&D expenses recorded a decline of 4.1% to 14.1 million due to decrease in salary and other personnel-related expenses. G&A expenses decreased 14.7% to $5.1 million in the reported quarter due to lower patent-related legal fees.

FDA Approval for Belviq

In June 2012, the US Food and Drug Administration (FDA) approved Belviq (lorcaserin HCl) as an adjunct to a healthy diet (low on calories) and increased physical activity for chronic weight management in obese (Body Mass Index, or BMI, >30) or overweight (BMI >27) adults suffering from at least one weight-related co-morbid condition. The move marks the first FDA approval for a weight-loss drug in 13 years.

While clearing the drug, whose safety and efficacy when coadministered with other weight loss products and the effect on cardiovascular morbidity and mortality are yet to be established, the FDA recommended Belviq to be classified by the US Drug Enforcement Administration (DEA) as a scheduled drug.

Eisai, which will market Belviq in the US, is preparing for the launch of the drug after the DEA gives its verdict on the matter. Eisai is currently expecting Belviq to hit the US market in early 2013.

Both Eisai and Arena Pharma will have to conduct post-marketing studies to evaluate the safety and efficacy of Belviq for weight management in the pediatric population. Post-marketing studies will also be conducted to evaluate the effect of long-term Belviq therapy in overweight and obese patients suffering from cardiovascular disease or who are exposed to cardiovascular risk factors. The companies intend to work with the FDA on the finalization of the post-marketing study designs.

We note that Belviq received a 120 day assessment report from the European Medicines Agency (EMA) for the Marketing Authorization Application (MAA) submitted in the EU. Arena Pharma expects a final decision from the EU in the first half of 2013. Belviq is also under review in Switzerland. Approval in the EU and Switzerland would further boost the sales potential of the drug.

2012 Guidance

For 2012, Arena Pharma increased its revenue guidance to a band of $91 million to $97 million from the earlier range of $66 million to $72 million. This includes a $20 million milestone payment received from Eisai in the first quarter of 2012 and $65 million milestone payments which Arena Pharma will receive following the DEA scheduling designation and launch of Belviq. The company also mentioned that they revenues could be lower by $65 million if the company fails to receive DEA scheduling in 2012.

However Arena Pharma continues to expect R&D expenses in the range of approximately $57 million to $67 million. Arena Pharma also kept its G&A expenses guidance unchanged at $20 million to $24 million.

Arena Pharma expects 2012 cash, cash equivalents and short-term investments to be approximately $215 million instead of the previously mentioned guidance of $84 million to $89 million subject to the DEA scheduling and launch of Belviq.

Our View

We currently have a Neutral recommendation on Arena Pharma which carries a Zacks #2 Rank (short term ‘Buy’ rating) The FDA approval of Belviq is a huge boost for the company. The drug targets the highly lucrative obesity market. However, we note that competition is fast catching up with Vivus Inc.’s (VVUS - Analyst Report) obesity drug Qsymia recently gaining approval from the FDA. Another potential competitor could be Orexigen Therapeutics, Inc.’s (OREX - Analyst Report) Contrave upon approval. We expect investor focus to remain on the DEA scheduling of the drug.

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