JPMorgan Healthcare Conference Highlights: Arena Pharmaceuticals

The JPMorgan Healthcare Conference currently under way in San Francisco is arguably the most important event of the entire year for the health care sector. This is one of the rarest opportunities for biotechnology, pharmaceutical, and medical device companies to open up about where they've been and where they're headed, so it pays to take notice.

2012 was a blockbuster year for obesity drugs with the approval of VIVUS' (NASDAQ: VVUS  ) Qsymia and Arena Pharmaceuticals' (NASDAQ: ARNA  ) Belviq, and the advancement of Orexigen Therapeutics' (NASDAQ: OREX  ) Contrave deeper into clinical trials. These new anti-obesity medications aren't a substitute for proper diet and exercise, but they offer those with chronic weight management issues a clear path to losing at least some weight.

Following Qsymia's failure to get approval in the European Union, and health insurer Aetna's (NYSE: AET  ) recent announcement that it'll cover both Qsymia and Belviq, I felt that Arena would be one of the most interesting presentations at the conference -- needless to say I wasn't disappointed.

If I were an investor in Arena, I'd:

  • Want to know about Arena's revenue share percentages with Eisai (NASDAQOTH: ESALY  ) and Ildong;
  • Want to know about what's coming down the clinical pipeline beyond Belviq;
  • Want to know when we can expect EU approvals.

Lo and behold, within the first few minutes of his presentation, CEO Jack Lief hit on all of these points and gave me reassurance that Belviq could very well be the blockbuster it's shaping up to be.

The beauty of Belviq
Jogging around the order of my expectations a bit, Lief noted that a decision is expected on approval in the EU within the first half of the year, and in Switzerland just a few months later. In addition, Eisai is getting its data together to file for a new drug application in Mexico, Canada, and Brazil sometime in 2013, while Ildong -- its newest partner in South Korea -- should also being filing an NDA this year.

In terms of compensation, investors have been wondering for a while if Arena had a shot at making big profits, or if its costs and low royalties would simply get the company by. Yesterday's presentation cleared that up in a big way! On the low end of the scale, Arena will be getting 31.5% of sales on all U.S. revenue, with the potential to hit as high as 36.5% of the split when Belviq sales expand beyond $750 million. This doesn't even factor in the countless milestone payments and purchase price adjustments that can boost Arena's bottom line and provide it up to $2.5 billion in one-time payments! If you're curious about its Ildong partnership, Arena will be netting around 35% to 45% of total sales there in that collaborative partnership.

What's really telling is how well Arena's has orchestrated keeping its costs to a minimum. Unlike VIVUS, which is going it alone, Arena's choice to collaborate with Eisai has removed 90% of the costs associated with a $200 million-$300 million cardiovascular follow-up study from its plate, and places almost the entirety of Belviq's launch costs squarely on Eisai's shoulders. Arena also received a 10-year tax holiday for its manufacturing facility in Switzerland, further lowering its costs.

We are, GPCR!
In what was a nice change of pace, we also got an intimate look at Arena's pipeline beyond Belviq. CEO Jack Lief -- who was this year's runner-up for CEO of the year as voted by The Motley Fool community -- noted his company's focus on G protein-coupled receptors, or GPCRs, and highlighted three pipeline compounds in particular: APD811, APD334, and Temanogrel.

APD811, which is an oral treatment being targeted at pulmonary arterial hypertension, is currently in two phase 1 studies, and Lief expects to release certain data on the drug later this quarter. Lief specifically noted that APD811 could be a once-a-day oral solution to those needing constant infusions and works at the prostacyclin receptor -- a key target for the most effective pulmonary arterial hypertension medications currently on the market.

APD334 is being advanced as an autoimmune disease drug, such as for multiple sclerosis, and should advance to phase 1 trials this year along with APD811. Specifically, Lief notes that this compound is expected to target the S1P1 receptor, but he feels confident that its specialization will not result in bradycardia or other adverse pulmonary side effects like competing compounds.

Finally, Temanogrel, an inverse agonist of the serotonin 2A receptor, is being targeted at thrombotic diseases. Arena actually completed phase 1 trials of the drug years ago but is currently undergoing proof-of-concept trials with partner Ildong in South Korea. Temanogrel's focus on preventing serotonin-induced coagulation without creating an increase in bleeding risk could be a major benefit to those suffering from thrombotic diseases.

The makings of a winner
All told, Arena has all the makings of a winner. It ended its most recent quarter with $165 million in cash and stands to receive another $65 million milestone payment when the DEA classifies Belviq in the next month or so. With the majority of its costs covered by its partners, a sea of milestone payments still to come, and about 500 million people worldwide that could benefit from Belviq -- even more potentially if Belviq gains additional indications -- I see no reason why Arena can't be a solid long-term hold for serious biotech investors.


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