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 recentdays were focused on the relationship between prolactin levels and variouscancers. Recall that Arena hypothesized that the fibroadenoma mammary tumorsin lorcaserin-treated rats were due to elevated prolactin levels, which haspreviously been considered a rat-specific mechanism and not a human risk. Thedata presented at ENDO and summarized below could reinforce the view amongsome 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 ResponseLetter for locaserin by the 6/27 decision date in order to develop risk mitigationplans 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 fromOUTPERFORM , but maintaining our $10 price target. With ARNA sharestrading at our target price we believe the stock is fully valued and pricing intimely approval, absence of REMS and low burden of monitoring. Upsidepotential to our $1.6B global peak sales estimate in 2020 and to our 2017 USsales estimate of $550M is difficult to ascertain, in advance of approval, labelingreview and early-market trends, but we would highlight incremental $0.14 EPSfor every $100M in incremental sales in our 2017 valuation year. Downside riskto nonapproval is low, in our opinion; however, with 17 of 23 panel membersrecommending regular monitoring for valvulopathy and with 9 of 23 specificallyrecommending a REMS or regular ECHO monitoring, downside risk toestimates could emerge."KEY POINTS
"In reviewing the transcript from the May 10, 2012, EMDAC panel meeting it is clear that themajority of panel members viewed the benefit-risk profile of lorcaserin as favorable but that amajority was also concerned regarding heart valve risk. To the extent that timing of lorcaserinapproval, final labeling and ultimate commercial potential could be affected by FDA's viewtoward heart valve risk, we believe that it is instructive to review key panel comments aroundthe rationale for the positive vote and monitoring recommendations. We would note that in total17 of 23 EMDAC panel members recommended some form of heart valve monitoring with 9 of23 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 monthsto lorcaserin approval to finalize a REMS program and/or post-marketingcommitments. We are adjusting our model for an early 2013 launch, as well asa likely tax benefit from manufacturing lorcaserin in Switzerland. We remainbullish on likely FDA approval and eventual blockbuster combination sales."
"An important update on this morning's conference call was thedisclosure that ARNA is still in “very preliminary” discussions with the FDA on post-marketingcommitments 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 FDAwould require one and what it would entail. In addition, ARNA has not submitted a design fora post-marketing CV outcomes study, which we believe will be required. Whether a potentialdelay 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 believewould delay approval to early 2013, would depend on whether ARNA can negotiate and filea proposed REMS/post-marketing study designs quickly. We assume a modest delay (3-6months), but this has no material impact on our valuation. We now assume a lorcaserinlaunch 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 MarketPerform 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 notfavorable 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 PDUFAextension is likely. Furthermore, based on our NPV scenario analysis, our base case salesassumptions for lorcaserin do not support the current valuation and our upside scenario is in linewith the current $10 per share value. Therefore, we believe there is limited upside on a positiveapproval decision and downside on a delay. If there is a delay we believe the most likely CRLrequirements will focus on risk mitigation approaches (even if there is no need for a formalREMS) and less likely on additional substantial clinical data requirements or a pre-approvalcardiovascular outcomes trial."
"Why we expect a delay. In our view there are multiple questions that the FDA has had insufficienttime to resolve since the positive Advisory Committee recommendation in May. These primarilyrelate to risk mitigation of lorcaserin combination use with phentermine and SSRIs (we do notexpect contraindications) and post-approval commitments (specifically focused on cardiovascularrisk). While a formal REMS program may not be necessary, we do anticipate the need for certaineducational materials and possibly a patient registry. Additionally, although preclinical receptor dataare encouraging and no overt signal of valvulopathy was observed in the lorcaserin developmentprogram, multiple AdComm panel members expressed the need for further study of the drug'spotential cardiovascular risk/benefit profile. This, together with the recent AdComm that broadlyrequested more outcomes data for obesity drugs, leads us to anticipate a post-approvalcardiovascular outcomes trial requirement. It is possible for such a trial to be designed followingapproval; 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 outcomesbenefit. As shown on page 2, our NPV analysis of lorcaserin determines a base case value of $5per share, projecting peak sales of ~$650MM which assumes modest off-label use in combinationwith phentermine. Our upside scenarios take into consideration: 1) future approval of alorcaserin/phentermine combination, and 2) eventual demonstration of cardiovascular outcomesbenefit, 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 thattime. However, a number of panelists mentioned their desire for a Risk Evaluationand 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 questionfor the conf call). In addition, we are not sure how far along planning is for aCVOT. Thus, we would not be surprised to see either a standard 3-month delay for amajor amendment to the NDA upon submission of a REMS, if not a CompleteResponse Letter (CRL) to fully work through a REMS, if it is indeed deemednecessary. In the end, while a positive vote is far from a guarantee for FDAapproval (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 toconsider for lorcaserin. For example, on the negative side a number of panelists suggestedthat echocardiograms should be required until the risk of valvulopathy can be comfortablyruled 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 genericallyavailable phentermine (to recreate a next-gen Fen-Phen), the potential weight loss (ifanything like the original) could attract a lot of interest. At this point our base-casescenario assumes peak sales of lorcaserin of ~$1B, but our valuation reflects thepossibility for a wide range of commercial outcomes."
"Valuation: We are establishing a price target of $8. Incorporating all of theaforementioned information into our valuation, we are establishing a December 2012price 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% (withall corresponding weighting going to our base sales scenario that assumes peak), our pricetarget 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 oldfashioned politics. We believe the FDA should subject allobesity therapies to consistent review policy, particularly as itrelates to cardiovascular risk assessment. Given the proximity tothe Presidential election, a high-level legal/regulatory consultantviews the Agency going against the lorcaserin advisory panelrecommendation as unlikely."
"We believe FDA will issue CRL for lorcaserin onWednesday. Requirement for conduct of a CVOT pre-approvalcould create significant selling pressure on ARNA shares, in ouropinion. However, as long as the deficiencies are minor and theturnaround time is short, we believe the market would view aCRL as roughly equivalent to an approval."
"We see selling pressure for VVUS shares after that drug'sPDUFA date. If the FDA does not require a pre-approval CVOTfor lorcaserin, we think Qnexa will be treated similarly. VVUSshares could trade well through both PDUFA dates (Qnexa isJuly 17). Prospects for restrictive REMS program could temperQnexa 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 firstto 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 bedelayed beyond the 6/27/12 PDUFA, as we believe agreement on post-marketingsafety study designs and, potentially, a REMS program, are very likely required forapproval. Negotiations regarding DEA scheduling could also delay launch. Althoughwe see reasonable probability of lorcaserin's ultimate US approval, we believelorcaserin's modest efficacy vs. Qnexa and potential CV monitoring requirementswill limit use. On a positive note, we believe ARNA is better positioned for an EUpartnership after the AdCom. Although we believe strength in ARNA is warranted,we would remain on the sidelines, given several remaining regulatory/commercialquestions."
"Lorcaserin/phentermine combo would likely optimize lorcaserin's efficacy,but data is lacking. We believe there is significant physician interest in combininglorcaserin with phentermine given the potential for very competitive efficacy.However, short of long-term safety/efficacy data and FDA approval, we believephysicians 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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Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.

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