Arena Pharma: Sell-Side Squawks

Updated with a Bank of America Merrill Lynch research note published this morning.

SAN DIEGO ( TheStreet) -- Everyone, it seems, has strong opinions about Arena Pharmaceuticals ( ARNA) and its obesity drug lorcaserin. As investors wait for FDA to make an approval decision on Wednesday, here's a summary of what Wall Street's sell-side analysts have been saying recently about Arena and lorcaserin (with ancillary comments about obesity drug competitor Vivus ( VVUS).)

Bank of America Merrill Lynch
Last Arena note: June 26
Rating/price target: Underperform/$5
Analyst comments:
"Is prolactin-mediated cancer really a non-human risk? Several posters and oral presentations at the Endocrinology conference in recent days were focused on the relationship between prolactin levels and various cancers. Recall that Arena hypothesized that the fibroadenoma mammary tumors in lorcaserin-treated rats were due to elevated prolactin levels, which has previously been considered a rat-specific mechanism and not a human risk. The data presented at ENDO and summarized below could reinforce the view among some scientists that there is a causal link between prolactin and human cancers. We believe it is more than likely that the FDA will issue a Complete Response Letter for locaserin by the 6/27 decision date in order to develop risk mitigation plans or to collect more data such as from additional carcinogenicity studies."
From a May 11 note: "Our risk adjusted sales estimate for lorcaserin in 2017 is $530mn, which is below our $900mn and $1.8bn respective risk-adjusted sales estimates for Orexigen's Contrave and Vivus' Qnexa, driven largely by relatively efficacy differences."
Arena's first profitable year: Net income of $6 million in 2014.

BMO Capital Markets
Last Arena note: June 25
Rating/price target: Market perform/$10
Analyst comments:
"We are reducing our rating on ARNA to MARKET PERFORM from OUTPERFORM , but maintaining our $10 price target. With ARNA shares trading at our target price we believe the stock is fully valued and pricing in timely approval, absence of REMS and low burden of monitoring. Upside potential to our $1.6B global peak sales estimate in 2020 and to our 2017 US sales estimate of $550M is difficult to ascertain, in advance of approval, labeling review and early-market trends, but we would highlight incremental $0.14 EPS for every $100M in incremental sales in our 2017 valuation year. Downside risk to nonapproval is low, in our opinion; however, with 17 of 23 panel members recommending regular monitoring for valvulopathy and with 9 of 23 specifically recommending a REMS or regular ECHO monitoring, downside risk to estimates could emerge." KEY POINTS
"In reviewing the transcript from the May 10, 2012, EMDAC panel meeting it is clear that the majority of panel members viewed the benefit-risk profile of lorcaserin as favorable but that a majority was also concerned regarding heart valve risk. To the extent that timing of lorcaserin approval, final labeling and ultimate commercial potential could be affected by FDA's view toward heart valve risk, we believe that it is instructive to review key panel comments around the rationale for the positive vote and monitoring recommendations. We would note that in total 17 of 23 EMDAC panel members recommended some form of heart valve monitoring with 9 of 23 panel members recommending a REMS or routine ECHO monitoring."
Arena's first profitable year: Net income of $27 million in 2015.

Jefferies
Last Arena note: May 14
Rating/price target: Buy/$9
Analyst comments:
"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

JMP Securities
Last Arena note: June 25
Rating/price target: Market perform/NA
Analyst comments:
"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."

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

Lazard Capital Markets
Last Arena note: June 25
Rating/price target: Neutral/$6-$13 depending on outcome of FDA decision and requirement for CV outcomes trial.
Analyst comments:
"Desire for consistent treatment may cave to good old fashioned politics. We believe the FDA should subject all obesity therapies to consistent review policy, particularly as it relates to cardiovascular risk assessment. Given the proximity to the Presidential election, a high-level legal/regulatory consultant views the Agency going against the lorcaserin advisory panel recommendation as unlikely."
"We believe FDA will issue CRL for lorcaserin on Wednesday. Requirement for conduct of a CVOT pre-approval could create significant selling pressure on ARNA shares, in our opinion. However, as long as the deficiencies are minor and the turnaround time is short, we believe the market would view a CRL as roughly equivalent to an approval."
"We see selling pressure for VVUS shares after that drug's PDUFA date. If the FDA does not require a pre-approval CVOT for lorcaserin, we think Qnexa will be treated similarly. VVUS shares could trade well through both PDUFA dates (Qnexa is July 17). Prospects for restrictive REMS program could temper Qnexa uptake, in our opinion."
Lorcaserin sales forecasts: In U.S., $1 billion in 2016, $2 billion in 2019. In Europe, $89 million in 2016, $302.5 million in 2019.

Leerink Swann
Last Arena note: May 11
Rating/price target: Outperform/$9-11
Analyst comments:
"We expect launch of lorcaserin to occur in 4Q12/1Q13 timeframe (PDUFA date 6/27) as the post-approval requirements are negotiated and the DEA scheduling takes place. We are changing our rating to Outperform and raising our valuation to $9-11 per share."
"VVUS's (OP) Qnexa will likely remain the obesity therapy of choice due to its efficacy and be first to market."
"We believe that ARNA's lorcaserin will likely be the 2nd therapy of choice after VVUS's Qnexa based on its lower efficacy but we also believe that the market is large enough to support multiple drugs."
Lorcaserin sales forecasts: 2013 North American sales of $125 million, European sales of $15 million.
Arena's first profitable year: Net income of $14.5 million in 2013.

Oppenheimer
Last Arena note: May 11
Rating/price target: Perform/NA
Analyst comments:
"We expect the FDA's decision to be delayed beyond the 6/27/12 PDUFA, as we believe agreement on post-marketing safety study designs and, potentially, a REMS program, are very likely required for approval. Negotiations regarding DEA scheduling could also delay launch. Although we see reasonable probability of lorcaserin's ultimate US approval, we believe lorcaserin's modest efficacy vs. Qnexa and potential CV monitoring requirements will limit use. On a positive note, we believe ARNA is better positioned for an EU partnership after the AdCom. Although we believe strength in ARNA is warranted, we would remain on the sidelines, given several remaining regulatory/commercial questions."
"Lorcaserin/phentermine combo would likely optimize lorcaserin's efficacy, but data is lacking. We believe there is significant physician interest in combining lorcaserin with phentermine given the potential for very competitive efficacy. However, short of long-term safety/efficacy data and FDA approval, we believe physicians will be reticent to use the combination, given liability concerns."
Lorcaserin sales forecasts: Not mentioned.
Arena's first profitable year: Not mentioned.

Note: Needham and Piper Jaffray research reports could not be found.

--Written by Adam Feuerstein in Boston.

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