Arena Pharmaceuticals Inc.'s (ARNA) leading pipeline candidate, lorcaserin for obesity, continues is its phase III program. Although we remain somewhat skeptical of lorcaserin's blockbuster potential, the stock is beginning to look attractive on a long-term basis given the likelihood that Arena will eventually sign a commercialization partnership for the drug in 2009.
Arena's stock has greatly underperformed the market over the past year. High cash burn and a lack of significant catalysts are the two primary culprits of the under-performance. We have been, and remain neutral on the name. The obesity and insomnia market are enormous and vastly underserved. As such, the idea of lorcaserin and APD125 is fantastic. However, we are unconvinced that either product will be a blockbuster. And, at this time, Street expectations may be too high.
In total, Arena's phase III lorcaserin program will enroll approximately 7,800 patients. The cost of this enormous program will be upwards of $175 million. We estimate that Arena will burn $240 to $245 million in cash in 2008. Arena should exit 2008 with roughly $160 million in cash on hand. This is clearly something to keep an eye on, but we note that burn should drop significantly once these trials wrap up and especially if a partner comes on board.
The phase III data on lorcaserin must show significant improvement in weight loss over the 8 lbs demonstrated after 12 weeks in the phase IIb trial or else large-cap pharma may not be interested. In our view, the two-year data, expected in late March 2009, must show weight loss above 25 lbs. The data must also show a clean and reliable safety profile. Both are likely in our view, but with the data still 8 months off, we see little to drive the shares higher until that time.
The long-term is what truly matters, and our model assumes the launch of lorcaserin in late 2010. Arena's APD125 may also come to market in 2011 or 2012. We do not predict profitability before 2012. Our price target is $10.
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