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Expert Financial Analysis and Reporting

Trying to Define Path Forward for Lorcaserin with FDA (ARNA,$1.49)

Arena held a conference call on March 11, 2011 to update investors on the possible regulatory path forward for lorcaserin.

It is trying to answer concerns raised by the FDA and addressed in the advisory committee last September on the finding that lorcaserin is associated with mammary tumors in rats and the relevance for women who would take lorcaserin. Specifically, Arena needs to answer the question as to whether these tumors are malign or malignant and the biological mechanism that caused them, which the company hypothesizes to be prolonged high levels of prolactin. In addition, it needs to determine an as yet unidentified mechanism to account for brain astrocytomas that occurred in male rats treated at the highest dose of lorcaserin.

Arena indicated that the FDA has suggested approaches for answering these questions. Based on these, Arena has submitted protocols for rat studies which would require about three months to complete. The FDA also has also suggested that Arena consider another study that would take about one year to complete. The company is awaiting FDA comments on the shorter term studies in order to judge if the twelve month study is necessary. Arena maintains that it still hopes answer the FDA’s concerns and to refile the lorcaserin NDA by yearend 2011. However, if a twelve month study is required, the refilling of the NDA would slip to the middle of 2012 or later.

ARNA ended 2010 with $151 million in cash and recently paid $20 million of debt owed to Deerfield. Arena anticipates a cash burn of $78 to $84 million in 2011 and anticipates that it will end 2011 with $47 to $53 million of cash. If so, this would likely be less than one year of cash needs and put the company in a strained balance sheet position. I think that they will need to raise cash in 2011, something on the order of $30 to $50 million if they want to maintain a strong balance sheet.

It is not possible to predict whether these studies requested will satisfy FDA’s concerns. The agency has shown an extremely high level of risk aversion when it comes to obesity drugs. The agency’s actions on lorcaserin, Qnexa and Contrave suggest that there is very high safety hurdle for drugs in this area. It may be the case that these studies will not be able to alleviate the agency’s concerns. Also working negatively in this equation is that lorcaserin has only demonstrated modest efficacy in its clinical trials.

When this issue first became public in September of 2010, my initial thinking was that Arena could resolve it favorably. This was based on my past experience in regard to carcinogenicity signals seen in rats and mice and the arguments made by Arena experts in support of lorcaserin approval. I have changed my thinking and now believe there is a better than 70% chance that lorcaserin will ultimately be abandoned by Arena

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