Arena Pharma: Sell-Side Squawks

J.P. Morgan
Last Arena note: May 11
Rating/price target: Neutral/$8
Analyst comments:
"Lorcaserin's PDUFA date is June 27. It's now certainly feasible that the drug is approved at that time. However, a number of panelists mentioned their desire for a Risk Evaluation and Mitigation Strategy (REMS) and a post-approval CV outcomes trial (CVOT), and we are not aware of ARNA having submitted a REMS (this will be a question for the conf call). In addition, we are not sure how far along planning is for a CVOT. Thus, we would not be surprised to see either a standard 3-month delay for a major amendment to the NDA upon submission of a REMS, if not a Complete Response Letter (CRL) to fully work through a REMS, if it is indeed deemed necessary. In the end, while a positive vote is far from a guarantee for FDA approval (see OREX's Contrave), we now assume a 70% probability of approval, which is agnostic to a potentially brief delay."
"It's still difficult to pinpoint the commercial potential of lorcaserin. Obviously, obesity represents a huge potential opportunity, but there are a number of factors to consider for lorcaserin. For example, on the negative side a number of panelists suggested that echocardiograms should be required until the risk of valvulopathy can be comfortably ruled out, which could present a major commercial deterrent (we doubt this happens). Then on the positive side, if lorcaserin is combined in the real world with generically available phentermine (to recreate a next-gen Fen-Phen), the potential weight loss (if anything like the original) could attract a lot of interest. At this point our base-case scenario assumes peak sales of lorcaserin of ~$1B, but our valuation reflects the possibility for a wide range of commercial outcomes."
"Valuation: We are establishing a price target of $8. Incorporating all of the aforementioned information into our valuation, we are establishing a December 2012 price target of $8. We value ARNA using a risk-adjusted NPV model (60% weighting) and a real options price/royalty scenario analysis (40% weighting; see page 3 of this note). Again, this reflects a 70% probability of approval. If we were to boost that to 100% (with all corresponding weighting going to our base sales scenario that assumes peak), our price target would be $10."
Arena's first profitable year: Net income of $39.7 million in 2015

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