Arena Needs Cash

I'll post a more complete set of numbers on this over the weekend, but basically, many of us had hoped Arena Pharmaceuticals (ARNA) would partner lorcaserin after the 2-year pivotal Phase III BLOOM data was released at the end of March.  This hasn't happened yet, so at their first quarter earnings call earlier this week, they had to point out that they need cash.

At first glance, it looks to me like they have something like $118 million readily available to them, not counting Level 3 assets (which don't amount to much anyway) and assuming some $34 more million from Azimuth.  Unfortunately, even with the 25% announced headcount reduction (mostly in research, which is where most of ARNA's over 300 employees are), I still think they will be burning around $200 million in 2009.  The NDA for lorcaserin is still planned to be submitted at the end of 2009.  Again, I'm going to go through these numbers again before posting them in detail.  But at any rate, everyone agrees there will be a shortfall.

It should also be remembered that the $34 million from Azimuth would involve some equity dilution -- in the neighborhood of 19% dilution at current prices near $2.50 per share, without taking into account Azimuth's discount.

There was some talk of possibly doing property sale-leasebacks on a property ARNA owns in San Diego and/or on the Siegfried facility in Switzerland.  ARNA has had success with this financing method in the past -- that is, during the 1997-2006 period of Southern California rising real estate prices -- but I'm not convinced it will plug the hole this time.  The Siegfried facility was valued at just $12 million at acquisition.

Of course, if a partnership materializes soon, that would be a great outcome.  But if not, we may see equity or debt issues.  Unsurprisingly, this is putting pressure on the share price.

More tomorrow, and arguments welcome.

Comments

[James Stevens]

I don't agree with your assessment of their burn rate for the rest of this year since their Blossom and Bloom-DM phase III studies are winding down and the impact of their rif savings will be seen as well. I think their burn rate for the rest of the year from April 1st will be in the neighborhood of 105 to 120M which would make their burn rate for 2009 around 160 to 175M. I think they will enter a partnership by the end of October after the Blossom results are announced in September. I expect that these results will be surprising in that they will improve upon the efficacy results while reaffirming the safety and tolerability profiles of the Bloom results.

[Greg]

"But at any rate, everyone agrees there will be a shortfall."

Really, such fine investigative reporting. You admit you haven't run the numbers, yet you proclaim everyone agrees ARNA will run out of cash? What about 6 insiders making massive purchases don't you understand?

Perhaps you're looking to lose dollars as well as pounds.

BTW, good luck with VVUS and Qnexa. I hear amphetamines are effective for weight loss. Doctors are falling all over themselves prescribing phentermine to patients. LOL!

[Michael Murphy, CFA]

Where is your "more complete set of numbers," presumably with a more realistic burn rate, that support your position? I assume you know that potential partners are doing due diligence at Arena right now.