Last Arena note: May 14
Rating/price target: Buy/$9
"Following Friday's conference call, we now expect a slight delay of 3-6 months to lorcaserin approval to finalize a REMS program and/or post-marketing commitments. We are adjusting our model for an early 2013 launch, as well as a likely tax benefit from manufacturing lorcaserin in Switzerland. We remain bullish on likely FDA approval and eventual blockbuster combination sales."
"An important update on this morning's conference call was the disclosure that ARNA is still in “very preliminary” discussions with the FDA on post-marketing commitments and a potential risk mitigation and evaluation strategy (or REMS). In fact, ARNA has yet to even propose a REMS program, although it is unclear whether the FDA would require one and what it would entail. In addition, ARNA has not submitted a design for a post-marketing CV outcomes study, which we believe will be required. Whether a potential delay would occur though a three-month PDUFA extension, as was the case for Vivus' (VVUS, $24.70, Underperform) Qnexa, or through a complete response letter, which we believe would delay approval to early 2013, would depend on whether ARNA can negotiate and file a proposed REMS/post-marketing study designs quickly. We assume a modest delay (3-6 months), but this has no material impact on our valuation. We now assume a lorcaserin launch in early 2013 (vs. 3Q12 previously). We remain bullish on approval and eventual $1.5b in lorcaserin sales in 2020."
Arena's first profitable year: Net income of $19.1 million in 2012 (On lorcaserin-related milestone payments but no drug sales.) Net income of $29.3 million in 2013
Last Arena note: June 25
Rating/price target: Market perform/NA
"Risk/reward of stock warrants caution ahead of FDA approval decision; reiterate Market Perform rating on Arena Pharmaceuticals. The PDUFA for Arena's novel obesity therapy, lorcaserin, is this Wednesday, June 27 and in our view the risk/reward for the stock is not favorable ahead of the event. We believe the most probable outcome of this event is approval (30%) or a Complete Response Letter (70%) and we do not think a three-month PDUFA extension is likely. Furthermore, based on our NPV scenario analysis, our base case sales assumptions for lorcaserin do not support the current valuation and our upside scenario is in line with the current $10 per share value. Therefore, we believe there is limited upside on a positive approval decision and downside on a delay. If there is a delay we believe the most likely CRL requirements will focus on risk mitigation approaches (even if there is no need for a formal REMS) and less likely on additional substantial clinical data requirements or a pre-approval cardiovascular outcomes trial."
"Why we expect a delay. In our view there are multiple questions that the FDA has had insufficient time to resolve since the positive Advisory Committee recommendation in May. These primarily relate to risk mitigation of lorcaserin combination use with phentermine and SSRIs (we do not expect contraindications) and post-approval commitments (specifically focused on cardiovascular risk). While a formal REMS program may not be necessary, we do anticipate the need for certain educational materials and possibly a patient registry. Additionally, although preclinical receptor data are encouraging and no overt signal of valvulopathy was observed in the lorcaserin development program, multiple AdComm panel members expressed the need for further study of the drug's potential cardiovascular risk/benefit profile. This, together with the recent AdComm that broadly requested more outcomes data for obesity drugs, leads us to anticipate a post-approval cardiovascular outcomes trial requirement. It is possible for such a trial to be designed following approval; however, we view this as unlikely given limited discussions with FDA on this topic to date."
"NPV analysis suggests limited upside without formal phentermine combination or outcomes benefit. As shown on page 2, our NPV analysis of lorcaserin determines a base case value of $5 per share, projecting peak sales of ~$650MM which assumes modest off-label use in combination with phentermine. Our upside scenarios take into consideration: 1) future approval of a lorcaserin/phentermine combination, and 2) eventual demonstration of cardiovascular outcomes benefit, driving peak sales of $1.5bil and $2.6bil respectively. Even considering development/ approval of a lorcaserin/phentermine combination, we view the stock as fairly valued at ~$10."
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