Arena Pharmaceuticals Inc. takes a case-by-case approach when it comes to partnering its drug candidates. If the economics are right, the San Diego-based company will sign on the dotted line.

The economics were right with Ortho, and Arena has partnered two small molecules in preclinical development for Type II diabetes and other disorders. Each could bring the company $295 million in downstream milestone payments, according to terms of a global collaboration and licensing agreement entered with Ortho-McNeil Pharmaceutical Inc., a unit of New Brunswick, N.J.-based Johnson & Johnson.

On top of the $590 million in potential milestone payments, Arena is receiving a $17.5 million up-front payment, and it is entitled to receive low-double-digit royalties that would rise based on worldwide sales, if the products reach the market. In terms of research funding, Arena will receive $4.8 million over two years.

The bottom line for Arena, if two products are developed and approved, is $612.3 million, not including royalties.

"I'm not aware of any preclinical transaction that was ever bigger, from a financial perspective, than this one," said Jack Lief, Arena's president and CEO.

It could get even bigger.

Ortho-McNeil can elect to develop more than the two lead molecules, and if that happens, Arena could receive another $295 million in development, approval and sales milestones for each additional compound developed.

"Initially, it's $600 million for two compounds that we expect them to select and move forward," Lief told BioWorld Today. "But they have the ability to move others forward."

Johnson & Johnson Pharmaceutical Research & Development LLC, an affiliate of Ortho-McNeil, is responsible for future development and expenses for products that come out of the collaboration.

The two preclinical lead molecules discovered by Arena modulate an orphan G protein-coupled receptor called the 19AJ receptor, which has a potential role in Type II diabetes. It is located primarily on pancreatic islet beta cells, the ones that are the source of insulin in the human body.

Arena's lead compounds are selective agonists of that receptor. They have shown in animals their ability to increase the sensitivity of islet beta cells to increased levels of glucose, which leads to increased insulin secretion only under conditions of hyperglycemia.

"It's glucose dependent," Lief said. "You don't want hypoglycemia. You don't want to release insulin without the presence of glucose because then there's this roller coaster effect of where patients have too much sugar or too little sugar. It sensitizes the islet cells to release insulin only in the presence of glucose, which is the biggest advantage of this new therapy over conventional therapy."

Currently used sulfonylurea drugs cause insulin secretion in the presence of normal or low blood sugar levels.

At the preclinical stage, Arena's compounds significantly reduced fasting blood sugar and glycosylated hemoglobin levels when administered chronically to diabetic rodents. If Arena and Ortho-McNeil can show safety and efficacy in humans, a 19AJ agonist could be the first in a new class of oral drugs to treat Type II diabetes as a monotherapy or in combination with other drugs.

The first 19AJ diabetes compound is expected to enter a Phase I study in the second half of 2005.

A potential competitor for Arena's compound would be exenatide, a 39-amino-acid peptide that is waiting for FDA approval. In the summer, San Diego-based Amylin Pharmaceuticals Inc. and partner Eli Lilly and Co., of Indianapolis, filed a new drug application for exenatide to treat Type II diabetes. (See BioWorld Today, July 1, 2004.)

"Exenatide is a twice-a-day injection," Lief said, "and we hope that our compound will provide similar benefits or possibly greater benefits regarding safety, as it's an orally available, bioavailable pill."

Arena also has two clinical products in development. APD356, a selective 5-HT2C serotonin receptor agonist, has completed two Phase I trials and will move into a four-arm, 400-patient Phase II trial this month for obesity. The company's second product, APD125, a selective 5-HT2A receptor antagonist, is in Phase I development to treat insomnia.

Neither of those products is partnered.

"We will partner when we can get the right sorts of economics, like you see in the J&J transaction," Lief said.

Founded in 1997, Arena focuses on G protein-coupled receptors in metabolic, cardiovascular, inflammatory and central nervous system diseases. In addition to its collaboration with Ortho-McNeil, Arena is working with Whitehouse Station, N.J.-based Merck & Co. Inc., as well as Osaka, Japan-based Fujisawa Pharmaceutical Co. Ltd.; Tokyo-based Taisho Pharmaceutical Co. Ltd.; and Taiwan-based TaiGen Biotechnology Co. Ltd.

Arena recently extended and expanded its cardiovascular collaboration begun in October 2002 with Merck. (See BioWorld Today, Oct. 18, 2002.)

The agreement is extended through October 2007, and Merck agreed to provide an additional $17.1 million over three years in research funding. Merck also purchased $7.5 million in Arena's stock (NASDAQ:ARNA), which rose 58 cents on Tuesday, or 10 percent, to close at $6.38.