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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2020

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from          to           

COMMISSION FILE NUMBER 000-31161

 

ARENA PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

23-2908305

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

136 Heber Avenue, Suite 204, Park City, UT

 

84060

(Address of principal executive offices)

 

(Zip Code)

858.453.7200

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to 12(b) of the Act:

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

 

 

Common Stock, par value $0.0001 per share

 

ARNA

 

The Nasdaq Global Select Market

 

 

 

Securities registered pursuant to 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes      No  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes      No  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes       No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes       No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  

 

 

Accelerated filer  

Non-accelerated filer   

 

 

Smaller reporting company  

 

 

 

 

Emerging growth company  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes       No  

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $3.6 billion as of June 30, 2020, based on the last sale price of the registrant’s common stock as reported on the Nasdaq Global Select Market on such date. For purposes of this calculation, shares of the registrant’s common stock held by directors and executive officers have been excluded. This number is provided only for purposes of this Annual Report on Form 10-K and does not represent an admission that any particular person or entity is an affiliate of the registrant.

As of February 18, 2021, there were 60,334,648 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information required by Part III of this Annual Report on Form 10-K is incorporated by reference from the Registrant’s Definitive Proxy Statement for the Annual Meeting of Stockholders to be held in June 2021, which will be filed with the Securities and Exchange Commission on or before April 30, 2021.

 

 

 


 

 

ARENA PHARMACEUTICALS, INC.

FORM 10-K – ANNUAL REPORT

For the Fiscal Year Ended December 31, 2020

Table of Contents

 

 

Page

PART I

Item 1.

Business

3

Item 1A.

Risk Factors

24

Item 1B.

Unresolved Staff Comments

50

Item 2.

Properties

51

Item 3.

Legal Proceedings

51

Item 4.

Mine Safety Disclosures

51

 

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

52

Item 6.

Selected Financial Data

54

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

56

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

65

Item 8.

Financial Statements and Supplementary Data

66

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

95

Item 9A.

Controls and Procedures

95

Item 9B.

Other Information

97

 

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

98

Item 11.

Executive Compensation

98

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

98

Item 13.

Certain Relationships and Related Transactions, and Director Independence

98

Item 14.

Principal Accounting Fees and Services

98

 

PART IV

Item 15.

Exhibits, Financial Statement Schedules

98

Item 16.

Form 10-K Summary

103

 

 

 

i


 

 

INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K, or Annual Report, includes forward-looking statements, which involve a number of risks and uncertainties. These forward-looking statements can generally be identified as such because the context of the statement will include words such as “may,” “could,” “will,” “intend,” “plan,” “believe,” “anticipate,” “expect,” “estimate,” “predict,” “potential,” “prospect,” “continue,” “likely,” “opportunity,” “focused on,” “evaluating for,” “in development for,” the negative of these words or other similar words. Similarly, statements that describe our future plans, strategies, intentions, expectations, objectives, goals or prospects and other statements that are not historical facts are also forward-looking statements. Discussions containing these forward-looking statements may be found, among other places, in “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report. For such statements, we claim the protection of the Private Securities Litigation Reform Act of 1995. Readers of this Annual Report are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the time this Annual Report was filed with the Securities and Exchange Commission, or SEC. These forward-looking statements are based largely on our expectations and projections about future events and future trends affecting our business and are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. These risks and uncertainties include, without limitation, those discussed in “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report. In addition, past financial or operating performance is not necessarily a reliable indicator of future performance, and you should not use our historical performance to anticipate results or future period trends. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations and financial condition. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Annual Report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain, and you are cautioned not to unduly rely upon these statements. Except as required by law, we undertake no obligation to update publicly or revise our forward-looking statements to reflect events or circumstances that arise after the filing of this Annual Report or documents incorporated by reference herein that include forward-looking statements.

TRADEMARKS AND CERTAIN TERMS

In this Annual Report, “Arena Pharmaceuticals,” “Arena,” “Company,” “we,” “us” and “our” refer to Arena Pharmaceuticals, Inc., and our wholly owned subsidiaries on a consolidated basis, unless the context otherwise provides. “APD” is an abbreviation for Arena Pharmaceuticals Development.

Arena Pharmaceuticals ® and Arena ® are registered service marks of Arena. Any other brand names or trademarks appearing in this Annual Report are the property of their respective holders.

 

RISK FACTOR SUMMARY

Below is a summary of the material factors that make an investment in our stock speculative or risky. This summary does not address all of the risks that we face. Additional discussion of the risks summarized in this risk factor summary, and other risks that we face, can be found below under the heading “Risk Factors” in Item 1A of Part I of this Annual Report and should be carefully considered, together with other information in this Annual Report and our other filings with the Securities and Exchange Commission, or SEC, before making investment decisions regarding our stock.

 

Drug development programs are expensive, time consuming, uncertain, and susceptible to change, interruption, delay, or termination.

 

We will need to obtain additional funds or enter into collaboration agreements to execute on our corporate strategy, and we may not be able to do so at all or on terms you view as favorable; your ownership may be substantially diluted if we do obtain additional funds; you may not agree with the manner in which we allocate our available resources; and we may not be profitable.

 

Our business may be negatively impacted based on the clinical trials and preclinical studies of, and decisions affecting, one or more of our drug candidates.

 

The development, approval, or commercialization of any of our drug candidates could be negatively affected by circumstances related to other drug candidates or approved products.

 

Topline data may not accurately reflect the complete results of a particular study or trial.

 

The results of preclinical studies and completed clinical trials are not necessarily predictive of future results, and our current drug candidates or any approved drugs may not be further developed or have favorable results in later studies or trials.

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Our product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval, limit the commercial profile of an approved label, or result in significant negative consequences following marketing approval, if any.

 

Drug discovery and development is intensely competitive in the therapeutic areas on which we focus. If the number of our competitors increase or they develop treatments that are approved faster, marketed better, less expensive or demonstrated to be more effective or safer than our drugs or drug candidates, our commercial opportunities will be reduced or eliminated.

 

Our ability to generate revenues from any of our drugs that receive regulatory approval will be subject to a variety of risks, many of which are out of our control. For example, even if approved, our drugs may not be commercially successful for various reasons, including if they are not widely covered and adequately reimbursed by third-party payers.

 

Our efforts will be seriously jeopardized if we are unable to attract and retain key and other employees or manage the growth of our organization.

 

We rely on other companies to carry out certain key activities, including conducting clinical trials and preclinical studies and manufacturing all our drugs and drug candidates.

 

Our business, including our preclinical and clinical programs, may be significantly and adversely affected by the COVID-19 pandemic.

 

Our success is dependent on intellectual property rights held by us and third parties and our interest in these rights is complex and uncertain. We cannot protect these rights throughout the world.

 

 

 

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PART I

Item 1.    Business.

Overview

We are a biopharmaceutical company focused on delivering novel, transformational medicines with optimized pharmacology and pharmacokinetics to patients globally. Our internally developed pipeline includes multiple potentially first- or best-in-class assets with broad clinical utility.

Our most advanced investigational clinical programs include: etrasimod (APD334), being evaluated in a Phase 3 program for ulcerative colitis, or UC, a Phase 2b/3 program for Crohn’s disease, or CD, and a Phase 2 program in alopecia areata, or AA. We also plan to evaluate etrasimod in a Phase 3 program in atopic dermatitis, or AD, and a Phase 2b program for eosinophilic esophagitis, or EoE. Olorinab (APD371) is being evaluated for a broad range of visceral pain conditions associated with gastrointestinal diseases and is currently in a Phase 2b trial for treatment of abdominal pain associated with irritable bowel syndrome, or IBS. In addition, we plan to evaluate APD418, which is being developed for the treatment of acute heart failure, or AHF, in a Phase 2 trial. In January 2021, we announced a second compound in our cardiovascular therapeutic area, temanogrel, that we expect to advance into a Phase 2 proof of mechanism study in coronary microvascular obstruction, or cMVO.

We continue to leverage our two decades of world-class G-protein-coupled receptor, or GPCR, target discovery research to develop breakthrough drugs and ultimately deliver these to patients with unmet needs. Our long-term pipeline prospects include a collaboration with Beacon Discovery, Inc., or Beacon, across a broad range of immune-mediated inflammatory targets and compounds.

We have license agreements or collaborations with various companies, including:

 

United Therapeutics (ralinepag in a Phase 3 program for pulmonary arterial hypertension),

 

Everest Medicines Limited (etrasimod in a Phase 3 program for UC in Greater China and select countries in Asia),

 

Beacon Discovery (early research platform for GPCR targets), and

 

Boehringer Ingelheim International GmbH (undisclosed orphan GPCR program for central nervous system – preclinical).

In October 2020, we announced the launch and $56.0 million financing of Longboard Pharmaceuticals, Inc., or Longboard (formerly known as Arena Neuroscience, Inc.) which is expected to focus on developing novel central nervous system, or CNS, targeted assets discovered by our GPCR research engine. Longboard was previously a wholly owned subsidiary of Arena. As of the completion of Longboard’s Series A financing, our Longboard founder common stock and Series A preferred stock comprised approximately 33.4% of the outstanding shares of capital stock of Longboard. We have licensed certain development and worldwide commercialization rights to Longboard and are entitled to receive royalties on potential sales of LP352, LP143 and LP659, in the future.

Our Strategy

The primary elements of our strategy are:

 

Develop etrasimod – a modulator of the sphingosine 1-phosphate, or S1P, receptor intended for the treatment of a broad range of immune-mediated inflammatory diseases including gastrointestinal and dermatologic diseases;

 

Develop olorinab – an agonist of the cannabinoid receptor 2, or CB2, intended for the treatment of a range of visceral pain associated with gastrointestinal conditions;

 

Develop APD418 – a β3-AdrR antagonist and cardiac myotrope intended for AHF;

 

Develop temanogrel – a peripherally acting and selective 5HT2a inverse agonist intended for cMVO;

 

Progress a broad early-stage pipeline build with Beacon and consider other external opportunities with potential for transformational innovation in our disease areas of interest;  

 

Develop our pipeline by efficiently managing our cash and development timelines, which may include entering strategic agreements for certain clinical and preclinical programs;

 

Explore existing compounds in new indications and progress additional pipeline programs over time in select therapeutic areas; and

 

Prudently build a vibrant, sustainable, high-performing organization.

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Pipeline of Development Programs

Below is a summary of our internally developed, proprietary portfolio:

Etrasimod Program

Etrasimod is a next-generation, oral, highly selective sphingosine 1-phosphate, or S1P, receptor modulator, discovered by Arena, designed to provide systemic and local cell modulation by selectively targeting S1P receptor subtypes 1, 4 and 5. S1P receptors have been demonstrated to be involved in the modulation of several biological responses, including lymphocyte trafficking from lymph nodes to the peripheral blood. By isolating subpopulations of lymphocytes in lymph nodes, fewer immune cells are available in the circulating blood to effect tissue damage. Etrasimod has therapeutic potential in immune-mediated inflammatory disease areas including gastroenterology and dermatology. We are currently evaluating etrasimod in ulcerative colitis, Crohn’s disease, eosinophilic esophagitis, atopic dermatitis, and alopecia areata.

Gastrointestinal Diseases

Inflammatory bowel diseases

Inflammatory bowel diseases, or IBD, like UC and CD are chronic life-long immune-mediated inflammatory conditions of the gastrointestinal tract that affect approximately 1.7 million patients in the United States, or US, alone. The prevalence of UC and CD in the US are currently estimated at approximately 0.9 million and 0.8 million patients, respectively. The prevalence of IBD in France, Germany, Italy and Spain collectively, or EU4, and the United Kingdom, is estimated at 1.3 million with approximately 0.7 million patients with UC and 0.6 million patients with CD. Both conditions represent a significant burden to patients, including hospitalization, surgery, and a longer-term risk of colon cancer, as well as impaired quality of life, economic productivity and social functioning. Additionally, Japan has an estimated prevalence of approximately 0.2 million IBD patients. In aggregate, there are approximately 3.2 million patients across the US, EU4, the United Kingdom, and Japan that are currently living with IBD.

UC is characterized by contiguous mucosal inflammation limited to the colon which involves the rectum in approximately 95% of cases and may extend to involve parts or all of the large intestine. In contrast, CD is characterized by full thickness inflammation that can occur anywhere in the gastrointestinal, or GI, tract but most typically involves the terminal ileum and colon; and causes fistulation and scarring. Symptoms for UC and CD can vary, depending on the location and severity of inflammation, but some of the most common are diarrhea, abdominal cramps, and rectal bleeding.

An important goal of therapy for IBD is durable remission while improving the patient’s quality of life. Although a number of therapies are approved for the treatment of IBD, they are often associated with an inability to induce or maintain remission, serious side effects, and complicated administration regimens. There is therefore an unmet medical need for novel oral agents with an enhanced risk-benefit profile and more convenient administration for the treatment of moderately to severely active IBD.

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Eosinophilic Esophagitis

Eosinophilic esophagitis, or EoE, is a chronic, relapsing and remitting, immune mediated disease of the esophagus driven by an allergic Th2 T cell inflammatory profile. Histologically, EoE is characterized by the accumulation of eosinophils in the lining of the esophagus, a tissue that under normal conditions lacks these cells. In addition to eosinophils, CD4 and CD8 T cells, dendritic cells and mast cells increase in the tissue. The presence of these unwelcome inflammatory cells has been shown to have a direct effect on immune function and tissue damage. Both pediatric and adult populations can develop EoE, however, the disorder is most common in individuals between the ages of 20 and 40 years old. EoE also exhibits a strong hereditability pattern and predominance for males and for Caucasians, and principally in socioeconomically developed countries. EoE affects approximately 135,000 patients of all ages in the US and an estimated 132,000 patients in the EU4 and United Kingdom. There are no approved therapies in the US for the treatment of EoE. We believe that etrasimod may represent a significant opportunity to provide an effective treatment to EoE due to its potential to modulate the trafficking of multiple immune subsets.

Dermatologic Conditions

Atopic Dermatitis

Atopic dermatitis, or AD, is a chronic, inflammatory skin disorder characterized by dry skin, pruritus, and relapsing lesions. AD has a severe impact on quality of life, including potential occupational, social, and psychological impairments. The adult diagnosed prevalence is approximately 8.5 million patients in the US, and 6.5 million patients in the EU4 and United Kingdom. According to a recent survey with dermatologists in the US, 56% of dermatologists reported a high unmet need in atopic dermatitis.

Two new therapies have been marketed in the US since 2016, however these treatments have less desirable administration routes and are not effective in all patients. Therefore, we believe a significant unmet need remains for differentiated, safe, oral agents that are effective and have a favorable side effect profile. AD pathology is driven by a combination of impaired skin epithelial barriers, altered microbiota, and aberrant inflammation driven by activated immune cells, including skin-infiltrating T cells and dendritic cells, or DCs. Etrasimod may have the potential to reduce DC migration/activation (S1P receptor subtypes 1 and 4 mediated) and T cell infiltration (S1P receptor subtype 1 mediated) in the skin. These effects could reduce the T cell-mediated inflammation in the skin that underlies atopic dermatitis pathogenesis.

Alopecia Areata

Alopecia areata is a T-cell-mediated autoimmune skin disorder with unmet medical need that causes non-scarring patchy hair loss, most often on the scalp. The prevalence is approximately 2.9 million patients in the US and 2.2 million in the EU4 and United Kingdom.

The disease may be limited to 1 or more discrete, round or oval patches of hair loss the size of a coin on the scalp, or it may progress to full hair loss of the scalp (alopecia totalis) or the entire body (alopecia universalis). The course of disease is unpredictable, with spontaneous regrowth of hair occurring in 80% of patients within the first year, and sudden relapse at any given time. Patients with extensive disease (at least 50% total scalp hair loss) rarely have spontaneous hair regrowth. Patients with persistent moderate-to-severe AA also often suffer tremendous emotional and psychosocial distress and reduced quality of life as a result of their hair loss. Thus, psychosocial support and therapy is an important part of disease management, as this often-disfiguring disease can be psychosocially burdensome. The estimated lifetime risk of AA is 1.7% among the general population and represents the second most common form of human hair loss, second only to androgenetic alopecia. The current standard of care is injected corticosteroids which have limitations in terms of efficacy. Etrasimod may have the potential to reduce circulating CD4+ and CD8+ lymphocytes available to infiltrate the hair follicle which may decrease inflammation and restore hair growth.

Etrasimod Development

Inflammatory Bowel Disease

We are currently in a Phase 3 program in UC and a Phase 2b/3 program in CD. The first part of the CD program will evaluate approximately 50 participants in multiple doses.

In September 2020, we announced that the first participant had been dosed in ELEVATE UC 12, the second of two pivotal trials of 12 weeks and 52 weeks, respectively, that constitute our Phase 3 ELEVATE UC global registrational program to assess the safety and efficacy of once-daily etrasimod 2 mg in participants with moderately to severely active UC. The other pivotal trial in the ELEVATE UC program, ELEVATE UC 52, is expected to complete enrollment by the end of the first quarter of 2021, with the 52-week treatment period finishing in the first quarter of 2022, and we expect topline data from this trial by the end of the first quarter of

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2022. We continue to monitor the impact of the COVID-19 pandemic on trial enrollment for both ELEVATE UC 52 and ELEVATE UC 12.

We plan to initiate a Phase 2 trial evaluating etrasimod for the potential treatment of moderately active UC, called GLADIATOR UC. This trial will be a multicenter, randomized, placebo-controlled 52-week trial to assess the safety and efficacy of once-daily etrasimod 2 mg in participants with moderately active UC. This trial is intended to evaluate etrasimod in a less severe patient population than ELEVATE UC, potentially broadening the patient population and demonstrating the potential use of a once-a-day oral therapy earlier in the treatment paradigm.

In September 2020, we also announced the addition of Sub-Study A to our Phase 2/3 CULTIVATE program evaluating etrasimod in CD. Sub-Study A is a Phase 2, multicenter, randomized 14-week trial, intended to provide supportive data for dose selection evaluating 2 mg and 3 mg etrasimod in subjects with moderately to severely active CD. The Phase 2/3 program also consists of a Phase 2b dose-ranging multicenter, randomized, double-blinded, placebo-controlled trial to assess the safety and efficacy of once-daily etrasimod in participants with moderately to severely active CD. The Phase 3 portion of the program will include two induction trials, with re-randomization of clinical responders into a single maintenance trial. The program is intended to provide an operationally seamless transition from Phase 2 to Phase 3. Our CULTIVATE Phase 2 dose-ranging trial of etrasimod in CD is ongoing and we are confirming options to help facilitate the availability of topline data for this trial in the second half of 2021. We have withdrawn previously announced overall program guidance for CULTIVATE based on the expected COVID-19 impact on trial execution, including site activation and participant enrollment.

In 2019, we announced positive results from a 34-week open-label extension, or OLE, of the Phase 2 OASIS trial of etrasimod for the treatment of UC. The trial enrolled 118 participants (84% of OASIS study completers), of which 22 completers also received 2 mg in OASIS, for a total of 46 weeks of treatment with etrasimod. Overall, etrasimod demonstrated durable, long-term clinical remission and was generally well tolerated in this trial. Adverse events in the OLE study were generally mild to moderate in severity and no new safety findings were noted. Impact on heart rate and atrioventricular, or AV, conduction was minimal throughout the study with no discontinuations from study related to bradycardia or AV block.

In 2018, we announced topline results from OASIS, a dose finding 12-week randomized, double-blind, placebo-controlled multinational Phase 2 clinical trial of etrasimod in moderate to severe UC. The aim of the trial was to investigate dose response and compare the active arm(s) to placebo. The trial evaluated the effects of etrasimod at 1 mg and 2 mg versus placebo on multiple efficacy measures including a three-component partial Mayo Clinic Score, clinical remission, clinical response, and endoscopic improvement in 156 participants. Etrasimod demonstrated a clear dose response and statistically significant improvements versus placebo in the primary, all secondary, and clinical remission endpoints at the 2 mg dose. There were fewer participants with serious adverse events, or SAEs, compared to placebo (0% in 2 mg, 5.8% in 1 mg and 11.1% in placebo). Impact on heart rate and AV conduction was low throughout the study with no discontinuations from study related to bradycardia or AV block. There were no increases in liver function tests compared to placebo and no reports of macular edema or pulmonary function test abnormalities. In this trial, etrasimod was well tolerated.

Eosinophilic Esophagitis

We are recruiting for a Phase 2b program for eosinophilic esophagitis and will enroll approximately 100 participants. Our Phase 2b VOYAGE trial of etrasimod is a randomized, double-blind, placebo-controlled trial, with a primary efficacy measurement at week 16 and a secondary efficacy analysis at week 24, to assess the safety and efficacy of 1 mg and 2 mg etrasimod in participants with EoE.

Atopic Dermatitis

In November 2020, we announced topline results from our ADVISE Phase 2b trial evaluating etrasimod in atopic dermatitis and our intention to advance etrasimod into a Phase 3 registrational program in AD. In the US approximately 60% of atopic dermatitis patients suffer from moderate to severe disease. Participants in the ADVISE trial were more representative of a moderate patient population (82.9% baseline vIGA 3). In the primary analysis, nearly one-third of participants in the 2 mg etrasimod group achieved clear or almost clear skin, as defined by the validated Investigator Global Assessment, or vIGA, which is the FDA endpoint for Phase 3 registration. The vIGA improvement was statistically significant as compared to placebo at 12 weeks. Across the Eczema Area and Severity Index, or EASI, a 75% reduction from baseline in EASI, or EASI-75, and peak change in pruritis, etrasimod 2 mg demonstrated early and statistically significant effect at week 4. Etrasimod did not meet the Phase 2b primary endpoint of EASI change from baseline at week 12 as compared to placebo.

Overall, the safety profile was consistent with previous trials of etrasimod including low first-dose heart rate effect with no titration, and no serious adverse events across the groups. In the etrasimod groups, there were no cases of venous thromboembolic

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events, opportunistic or serious infections, macular edema, conjunctivitis, acne, or herpes zoster. Additionally, none of the other adverse events commonly associated with first-generation S1P receptor modulators were seen in this trial.

Between weeks 4-8, the trial was impacted by unwarranted dose interruption in 19% (n=9) of the etrasimod 2 mg group. Adjusting for this dose interruption, a post-hoc Completer Analysis, which included only those participants receiving full therapeutic exposure of etrasimod 2 mg, showed statistically significant effect on the EASI score compared to placebo (weeks 4 and 12), EASI-75 at week 4, vIGA at week 12 and pruritis through week 8. The Completer Analysis also showed no plateau of effect over the 12-week trial.

The analysis of the participant cohort with dose interruption showed diminished clinical effect upon withdrawal and a resumption of effect upon reinstatement of study drug consistent with the pharmacodynamics of etrasimod, which we believe further supports the clinical impact of etrasimod.

We have submitted additional data from the ADVISE trial at medical meetings and for publication in a peer-reviewed journal.

ADVISE was a Phase 2b multicenter, randomized, double-blinded, placebo-controlled trial to assess the safety and efficacy of once-daily etrasimod, the first oral S1P receptor modulator to be evaluated in subjects with moderate-to-severe atopic dermatitis. The primary endpoint measured was percent change in EASI from baseline to week 12, followed by a 4-week follow-up observation period. Secondary endpoints included the proportion of participants achieving EASI-75, proportion of participants with a vIGA 0 to 1, and percent change in peak pruritis. The ADVISE trial enrolled approximately 140 participants and was conducted in study sites across the United States, Canada and Australia. An open-label extension of the ADVISE trial is ongoing.

Alopecia Areata

We are currently recruiting a Phase 2 program in Alopecia Areata.

In September 2020, we announced that the first participant had been dosed in a Phase 2 trial evaluating etrasimod for the potential treatment of AA. We plan to enroll 36 participants in this Phase 2 randomized, placebo-controlled trial and will assess the safety and efficacy of once-daily etrasimod 2 mg in participants with moderate-to-severe AA. We expect to announce topline data for this trial in the second half of 2021.

Etrasimod Controlled-Release Formulation

In April 2020, we announced data from a Phase 1 clinical trial evaluating a controlled-release delivery profile for etrasimod.

The controlled-release profiles were designed to retain etrasimod's rapid onset of action while further improving its potentially best-in-class non-titrated, low intrinsic first-dose heart rate effect. A controlled-release formulation has the potential to deliver rapid life-cycle management and extend etrasimod's intellectual property portfolio.

Based on the results, we have initiated a product development program with initial results expected in 2021.

Prior Development

In January 2015, we announced top-line results from a Phase 1b multiple-ascending dose clinical trial for etrasimod. In this trial, etrasimod demonstrated a dose-dependent effect on lymphocyte count lowering in blood, with mean decreases from baseline of up to 69%. Lymphocyte counts, on average, recovered to baseline within one week of conclusion of dosing. There was a modest impact on heart rate, but none of the changes were classified by the investigator as clinically significant. There were also no findings with respect to pulmonary function or liver enzyme tests that were classified by the investigator as clinically significant. The most common treatment-emergent adverse events were mild or moderate contact dermatitis, headache, constipation and diarrhea, with none being clearly drug related. There were no discontinuations for adverse events, and no serious adverse events were observed.

The randomized, double-blind, placebo-controlled Phase 1b clinical trial evaluated the safety, tolerability, pharmacodynamics and pharmacokinetics of multiple-ascending doses of etrasimod. In five different dosing cohorts, 50 healthy volunteers received etrasimod and 10 healthy volunteers received placebo for 21 days.

Prior to commencing the Phase 1b multiple-ascending dose clinical trial for etrasimod, we completed a Phase 1 single-ascending dose clinical trial of the compound. This randomized, double-blind and placebo-controlled trial evaluated the safety, tolerability and pharmacokinetics of single-ascending doses of etrasimod in 40 healthy adult volunteers. In the trial, etrasimod demonstrated favorable pharmacokinetic and pharmacodynamic effects, a dose-responsive reduction in blood lymphocyte count and a slowing of heart rate that appears comparable to other S1P receptor modulators. The terminal half-life was approximately 35 hours.

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Etrasimod Intellectual Property

As of February 5, 2021, we owned issued patents that cover compositions of matter for etrasimod and related compounds, and methods of treatment utilizing etrasimod and related compounds, in 61 jurisdictions, including the United States, China, Japan, Germany, France, Italy, the United Kingdom, Spain, Canada, India, Russia, South Korea and Australia, and had an application pending in one other jurisdiction (Brazil). The earliest priority date for the patents on etrasimod is 2008. The terms of these patents are capable of continuing into 2029 in most jurisdictions without taking into account any patent term adjustment or extension regimes of any country or any additional term of exclusivity we might obtain by virtue of the later filed patent applications.

Olorinab Program

Olorinab, a potentially first-in-class, orally available, potent, peripherally acting, highly selective, full agonist of the CB2 receptor, is an internally discovered investigational drug candidate we are exploring for the treatment of visceral pain, specifically abdominal pain in patients with irritable bowel syndrome.

Visceral pain is defined as pain that originates within muscle, pleura, connective tissue, nervous system or solid organs within the abdomen or peritoneum. It is distinct from somatic or neuropathic pain, and is perceived as stretching, pulling and distention, rather than by cutting, crushing, or burning more commonly associated with neuropathic pain. Visceral pain is one of the most common types of pain and may be caused by a diverse set of organic causes, such as inflammation (e.g., IBD, including CD and UC, pancreatitis, prostatitis, and vaginitis), obstruction (e.g., bowel obstruction, and nephrolithiasis), ischemia, and malignancy, among others. Visceral pain may also be caused by functional disorders such as interstitial cystitis, dyspepsia, IBS, and vulvodynia.

There are approximately 18 million patients in the US with IBS, with 78% reporting frequently recurring or continuous abdominal pain. Common treatments for visceral pain range from non-invasive, conservative approaches (e.g., physical therapy or acupuncture), to pharmacologic (e.g., tricyclic antidepressants acting as neurotransmitter reuptake inhibitors). Analgesics, such as opioids, can adversely affect GI function. Other commonly prescribed analgesics are often not potent enough and may lead to other GI side effects such as bleeding. Treatments such as linaclotide for IBS with predominant constipation or rifaximin for IBS with predominant diarrhea improve abdominal pain as well as abnormal bowel habits, however, no visceral-specific analgesics are currently available.

The CB2 receptor is expressed in the GI nervous system, and in many tissues and organs of the abdomen. CB2 receptors are found on immune cells but also on microglia, terminal neurons, dorsal root ganglia, and on visceral sensory neurons. We believe selectively targeting the CB2 receptor may provide therapeutic benefit for visceral pain without the potential for dependence, abuse, and GI and cardiovascular side effects associated with opiates or nonsteroidal anti-inflammatory drugs, or NSAIDs, which are among the most common pain relievers. In addition to analgesic effects, olorinab may have anti-inflammatory properties.

Olorinab is designed to be a peripherally acting and selective CB2 receptor agonist and is intended to provide pain relief without the unwanted side effects associated with CB1 receptor activation.

Olorinab Development

In October 2020, we announced that we completed full enrollment of our Phase 2b CAPTIVATE trial evaluating olorinab for the potential treatment of abdominal pain in IBS. CAPTIVATE is a Phase 2, 4-arm multi-center, randomized, double-blind, placebo-controlled, 12-week trial to assess the safety and efficacy of olorinab administered three times daily in 273 participants. In CAPTIVATE participants were randomized to placebo, 10 mg, 25 mg or 50 mg. We expect to announce topline data for this trial in the first quarter of 2021.

In 2018, we announced positive topline results from our Phase 2a trial of olorinab in development for the treatment of pain associated with CD. This exploratory study was an open‑label investigation to evaluate safety and tolerability of olorinab in this patient population and to gain initial insights into its efficacy via a pain visual analog scale, or VAS. Fourteen participants were enrolled into two cohorts at 25 mg and 100 mg administered three times daily for up to eight weeks. Reductions in pain were seen within the first week of treatment and statistically significant improvement from baseline in Average Abdominal Pain Score, or AAPS, at weeks four and eight. In this trial, olorinab appeared generally well tolerated with no clinically significant changes in heart rate or blood pressure, no psychotropic effects, and no discontinuations due to adverse events.

In April 2016, we announced favorable results from a Phase 1b multiple-ascending dose clinical trial of olorinab. This randomized, double-blind, placebo-controlled Phase 1b clinical trial enrolled 36 healthy adults to evaluate the safety, tolerability and pharmacokinetics of multiple-ascending doses of olorinab. Cohorts of 12 subjects (nine active, three placebo) were administered doses of 50 mg, 100 mg, or 200 mg of olorinab or placebo three times daily for 10 days and, in connection with the pharmacokinetic evaluation, one time on the 11th day. The most common adverse events were headache and nausea. All adverse events were classified as mild, and there were no serious adverse events reported. There was one discontinuation in the high-dose group due to an adverse

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event of mild thirst and somnolence. Reductions in blood pressure and heart rate were observed, but none were symptomatic or resulted in an adverse event. Drug levels at all doses tested in the trial, including the lowest dose, were well above those believed to be needed to stimulate the CB2 receptor.

In April 2015, we announced favorable top-line results from a Phase 1 single-ascending dose clinical trial of olorinab. The randomized, double-blind and placebo-controlled trial enrolled 56 healthy adults to evaluate the safety, tolerability and pharmacokinetics of single-ascending doses of olorinab. Dose-responsive exposure was observed over the explored dose range of 10-400 mg with good tolerability at all doses administered.

Olorinab Intellectual Property

As of February 5, 2021, we owned issued patents covering compositions of matter for olorinab and related compounds, and methods of treatment utilizing olorinab and related compounds, in 23 jurisdictions, including the United States, China, Japan, Canada, India, Russia, South Korea and Australia, and we had applications pending in 8 other jurisdictions, of which the ones with the largest pharmaceutical markets were Europe, Venezuela, and Brazil. The earliest priority date for the patents on olorinab is 2009. The terms of these patents are capable of continuing into 2030 in most jurisdictions without taking into account any patent term adjustment or extension regimes of any country or any additional term of exclusivity we might obtain by virtue of the later filed patent applications.

APD418 Program

APD418 is a potential first-in-class β3-adrenergic receptor (AdrR) antagonist and cardiac myotrope designed to regulate myofilament calcium sensitivity in order to improve contractility without inducing the serious adverse events associated with currently available inotropes. APD418 is in early-stage clinical development for patients with AHF.

 

AHF is broadly defined as a rapid onset of new or worsening signs and symptoms of HF. It is a potentially life-threatening condition, requiring hospitalization, and emergency treatment is aimed predominantly at managing fluid overload and achieving hemodynamic stability. In most cases, hospitalization for AHF results when the neurohormonal compensatory mechanisms, which act to maintain hemodynamic stability in chronic heart failure, are inadequate.

 

Management of AHF is focused on treating clinical conditions and precipitating factors, immediate stabilization, and symptom relief. Most patients presenting to the emergency department with AHF are congested and have normal to high blood pressures. Diuretics are first line therapy to treat volume overload including congestion; vasodilators are also used as first line therapy for symptom relief in normotensive and hypertensive patients who fail to respond adequately to diuretics. Unfortunately, neither diuretics nor vasodilators have been associated with improved survival.

 

For patients presenting as hypotensive, who are at the highest risk of mortality, and patients who fail to adequately respond to initial therapy, treatment options are particularly limited and may require the use of inotropic agents. These agents aim to increase cardiac contractility and restore hemodynamic status via stimulation of the myocardial β1-AdrR, but they are associated with significant risk of unwanted hemodynamic effects, arrhythmias, and pathway dependent cardiotoxicity, leading to adverse outcomes and increased mortality.

 

Arena is developing APD418, an internally discovered and developed investigational drug candidate, to address the significant unmet need in AHF.

APD418 Development

In November 2020, we announced the completion of a first-in-human Phase 1 safety and tolerability trial of APD418 in AHF. The trial found APD418 was generally well tolerated. The FDA has granted us Fast Track designation for development of APD418 in AHF. A Phase 2 proof of mechanism is planned to initiate in the first half of 2021.

APD418 Intellectual Property

As of February 5, 2021, we owned issued patents covering compositions of matter for APD418 and related compounds, and methods of treatment utilizing APD418 and related compounds, in the United States, Japan and one other country, and we had applications pending in 40 other jurisdictions, of which the ones with the largest pharmaceutical markets were Europe and China. The earliest priority date for the patents on APD418 is 2016. The terms of these patents are capable of continuing into 2037 without taking into account any patent term extension.


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Temanogrel Program

Temanogrel is a peripherally acting and selective 5HT2a inverse agonist designed to inhibit serotonin (5-HT)-mediated amplification of platelet aggregation and vasoconstriction.

A significant proportion of patients undergoing percutaneous coronary intervention, or PCI, for treatment of acute coronary syndrome, or ACS, fail to achieve full myocardial or microcirculatory reperfusion despite resolution of the epicardial coronary occlusion. This condition is referred to as cMVO and has been reported in approximately 40% to 60% patients undergoing PCI for ST-elevation myocardial infraction, or STEMI, and approximately 30% patients undergoing PCI for non-ST-elevation myocardial infarction, or NSTEMI, with the greatest incidence in high-risk NSTEMI patients. Importantly, the presence of cMVO post-PCI has been associated with worse clinical outcomes, including mortality and hospitalization for heart failure, related to suboptimal cardiac function and recovery in the days and months following the PCI procedure.

During PCI, platelets become activated following rupture of the atherosclerotic plaque, which can be either procedure-induced or occur spontaneously. Upon activation, platelets release 5-HT in substantial quantities. Serotonin acts on 5-HT2A receptors on platelets and smooth muscle cells, resulting in amplification of platelet aggregation and vasoconstriction, both of which may detrimentally affect the microcirculation. We believe blocking these 5-HT-mediated effects with temanogrel during and following PCI for STEMI and NSTEMI may prevent or minimize the development of cMVO and facilitate cardiac functional recovery, resulting in improved clinical outcomes.

Temanogrel Development

Arena is developing temanogrel, an internally discovered investigational drug candidate, to address the significant unmet need in cMVO.

In January 2021 at the JP Morgan Healthcare Conference, we announced that we will be conducting a Phase 2 proof of mechanism study for the treatment of coronary microvascular obstruction, or cMVO, and that we have completed four Phase 1 studies with the oral formulation and one Phase 1 study with the IV formulation of temanogrel. The FDA has granted us Fast Track designation for development of temanogrel for cMVO. A Phase 2 proof of mechanism study in cMVO is planned to initiate in the first half of 2021.

Temanogrel Intellectual Property

As of February 5, 2021, we owned issued patents that cover compositions of matter for temanogrel and related compounds, and methods of treatment utilizing temanogrel and related compounds, in 9 jurisdictions, including the United States, Japan, Germany, France, Italy, the United Kingdom, and Spain. The earliest priority date for the patents on etrasimod is 2004. The terms of these patents are capable of continuing into 2025 in most jurisdictions without taking into account any patent term adjustment or extension regimes of any country or any additional term of exclusivity we might obtain by virtue of the later filed patent applications.

Additional Internal Preclinical and Clinical Programs

In January 2020, we entered an agreement with Beacon Discovery for the development of multiple novel, early stage, oral autoimmune programs. The multiple G-protein-coupled receptor, or GPCR, targets in this collaboration with Beacon Discovery and their associated chemistry represent the next generation of oral compounds which, if successfully developed and approved, may transform the way autoimmune diseases are approached and treated. This collaboration includes both novel and validated targets and compounds.

We have additional assets, including other 5-HT2A modulators, which are either in or being evaluated for future clinical and preclinical development. We are also evaluating additional delivery forms of the products in our pipeline to extend clinical utility or improve the product profile.

Collaborations and License Agreements

We have strategic collaborations and licenses with pharmaceutical companies, including United Therapeutics, Everest Medicines Limited, or Everest, Boehringer Ingelheim International GmbH, or Boehringer Ingelheim, Beacon, and Eisai.

United Therapeutics License Agreement

In November 2018, we entered into a collaboration and license agreement with United Therapeutics. Under the United Therapeutics Agreement, we granted United Therapeutics an exclusive, worldwide, royalty-bearing license to develop, manufacture and commercialize ralinepag. This transaction was completed in January 2019. At the closing of the transaction, we transferred to United Therapeutics certain other assets relating to ralinepag, including, among others, related domain names and trademarks, permits,

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certain contracts, inventory, regulatory documentation, IND, and non-clinical, pre-clinical and clinical trial data. United Therapeutics has agreed to assume certain limited liabilities, including, among others, all post-closing obligations under assumed contracts and the IND. United Therapeutics is responsible for all development, manufacture and commercialization of the licensed products globally.

Upon the closing of this transaction, in January 2019, we received an upfront payment of $800.0 million. We are eligible to receive a payment of $150.0 million upon first marketing approval of ralinepag in a major non-US market, and a payment of $250.0 million upon US marketing approval of an inhaled formulation of ralinepag. In addition, we are entitled to receive low double-digit, tiered royalties on net sales of ralinepag products, subject to certain adjustments for third-party license payments.

The United Therapeutics Agreement contains various representations and warranties of Arena and United Therapeutics, and various covenants of the parties, including covenants to cooperate in seeking regulatory approvals, as well as our agreement not to compete, during the period in which royalties are payable (or during the five-year period following the closing if we are subject to a change of control transaction) in the development of a prostacyclin to treat pulmonary hypertension.

Ralinepag Program

Ralinepag is in a Phase 3 program for pulmonary arterial hypertension, or PAH. Ralinepag is a next-generation potent, highly selective oral IP receptor agonist intended for the treatment of PAH. Ralinepag was designed by us to deliver intravenous prostacyclin-like potency and pharmacokinetics in an oral tablet. In non-clinical experiments, ralinepag demonstrated potentially best-in-class activation of the IP receptor resulting in vasodilation, inhibition of smooth muscle cell proliferation and inhibition of platelet aggregation. Additionally, early-stage studies of ralinepag pharmacokinetics in humans revealed an approximately 24-hour half-life and a low peak-to-trough ratio supporting therapeutic blood levels with once daily dosing.

Ralinepag was granted orphan drug status for the treatment of PAH by the US Food and Drug Administration, or FDA, in September 2014, and by the European Medicines Agency in January 2019.

PAH is a progressive, life-threatening disorder characterized by increased pressure in the pulmonary arteries that carry blood from the heart to the lungs. PAH occurs when the pulmonary arteries thicken or grow rigid. This makes blood flow more difficult. The heart must work harder to push blood through the arteries, and the arteries are unable to carry adequate blood to the lungs. The increased pressure strains the heart, which can limit physical activity, result in heart failure and reduce life expectancy. PAH will continue to worsen over time, even with proper treatment. Based on data from the Registry to EValuate Early And Long-term PAH disease management, or REVEAL, of patients in the US, there is an estimated five-year survival rate of 57% from diagnosis.

PAH involves several interrelated mechanisms, with prostacyclin and thromboxane A2 playing a major role in maintaining pulmonary vascular tone through their balanced activity. Prostacyclin, released by endothelial cells, promotes vasodilation and inhibits platelet aggregation. Prostacyclin also has antiproliferative effects on vascular smooth muscle. Despite treatment guidelines, targeting the prostacyclin pathway has been primarily reserved for patients with advanced disease due to limitations of currently available options including parenteral prostacyclins which are the only PAH treatment that have demonstrated a mortality benefit.

Everest Collaboration

In December 2017, we entered into a Collaboration and License Agreement, or the Everest Agreement, with Everest regarding the development and commercialization of ralinepag and etrasimod in China, Taiwan, Hong Kong, Macau and South Korea, or the Everest Territories. In January 2019, we and Everest amended the Everest Agreement by entering into two separate agreements, one for each of ralinepag and etrasimod, with the terms for each program that are substantially the same as in the original Everest Agreement. Under the United Therapeutics Agreement, we assigned the separate Everest Agreement related to ralinepag to United Therapeutics.

Under the separate Everest Agreement related to etrasimod, we granted Everest an exclusive, royalty-bearing license to develop, manufacture and commercialize etrasimod (in oral formulations only), in the Everest Territories.

Everest is responsible for all development, manufacture and commercialization of the licensed products in the Everest Territories, and may participate in the portion of our global clinical trials that is conducted in the Everest Territories.

We are eligible to receive development, regulatory and commercial milestone payments from Everest, as well as tiered royalties on net sales ranging from the high single digits to low double digits. Following an initial royalty term, we are eligible to receive a lower trademark royalty if Everest continues to use our licensed product-related trademarks.

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In the fourth quarter of 2018, the National Medical Products Administration of China, formerly known as the China Food and Drug Administration, or CFDA, accepted the initial clinical trial applications for an oral formulation of ralinepag and for etrasimod. Subsequently, in the fourth quarter of 2019, Everest announced that the first subject has been dosed in a Phase 3 trial evaluating etrasimod in development for the treatment of UC in Greater China and South Korea. This Phase 3 trial is ongoing.

Boehringer Ingelheim Collaboration

In 2015, we entered into an exclusive agreement with Boehringer Ingelheim, to conduct joint research to identify drug candidates targeting a GPCR that belongs to a group of orphan central nervous system, or CNS, receptors. An “orphan receptor” is structurally related to a family of proteins that are known to act as functional cell-surface receptors but whose ligand has not yet been identified. A lead molecule is currently in preclinical development.

In the past, we contracted with Beacon to perform our research obligations under the Boehringer Ingelheim collaboration. In exchange, we agreed to share limited near-term milestones with Beacon as well as the full-time equivalent funding paid to us by Boehringer Ingelheim. We have retained the longer-term success milestones and all royalties.

Beacon Discovery Agreements

In January 2020, we entered into a new multi-year strategic Collaboration and License Agreement with Beacon, aimed at building novel medicines across a range of GPCR targets believed to play a role in immune and inflammatory diseases. Under the terms of this agreement, Beacon is responsible for early drug discovery activities and Arena will be responsible for any potential future development and, ultimately, commercialization activities. We are required to pay to Beacon research initiation fees, make quarterly research funding payments for the duration of Beacon’s research activities as well as research, development and regulatory milestone payments. We are also obligated to pay Beacon tiered royalties on net sales of low single digits levels.

Beginning in September 2016, we entered into a series of agreements with Beacon.

In 2016, we entered into a License and Collaboration Agreement with Beacon, pursuant to which we granted Beacon a non-exclusive, non-assignable and non-sublicensable license to certain database information relating to compounds, receptors and pharmacology, and transferred certain equipment to Beacon. Beacon will seek to engage global partners to facilitate discovery and development. Beacon has agreed to assign to us any intellectual property relating to our existing research and development programs developed in the course of performing research for us and grant us a non-exclusive license to any intellectual property developed outside the course of performing work for us that is reasonably necessary or useful for developing or commercializing the products under our research and development programs. We are also entitled to rights of negotiation and rights of first refusal to potentially obtain licenses to certain compounds discovered and developed by Beacon. In addition, we are entitled to receive (i) a percentage of any revenue received by Beacon on or after the second anniversary of the effective date of the agreement from any third party pursuant to a third-party license, including upfront payments, milestone payments and royalties; (ii) single-digit royalties on the aggregate net sales of any related products sold by Beacon and its affiliates; and (iii) in the event that Beacon is sold, a percentage of the consideration for such sale transaction.

In 2016, we also entered into a Master Services Agreement with Beacon, pursuant to which Beacon performs certain other research services for us relating to our proprietary pipeline.

Beacon was founded and is owned by several of our former employees.

Eisai Agreement

In December 2016, we entered into a Transaction Agreement with Eisai regarding lorcaserin. Pursuant to the Transaction Agreement, we granted Eisai an exclusive, royalty-bearing license, or transferred intellectual property, to develop, manufacture and commercialize lorcaserin in all countries and territories of the world. Under the Transaction Agreement we are entitled to receive tiered royalty payments starting at 9.5% on net sales of lorcaserin.

Lorcaserin was approved for marketing in the U.S., and in certain other territories, for the indication of weight management. On February 13, 2020, the FDA issued a drug safety communication announcing that it requested Eisai voluntarily withdraw lorcaserin from the U.S. market based on the FDA’s analysis of data from the Cardiovascular and Metabolic Effects of Lorcaserin in Overweight and Obese Patients – Thrombolysis in Myocardial Infarction 61 (CAMELLIA-TIMI 61) study, and that Eisai has submitted a request to voluntarily withdraw lorcaserin from the U.S. market. On September 30, 2020, Eisai announced that, after consulting with the FDA, it is continuing the lorcaserin expanded access program and has initiated a Phase 3 clinical study of lorcaserin in patients with Dravet syndrome, a severe type of epilepsy characterized by prolonged seizures that begin in the first year of life.  

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In October 2020, we entered into a Royalty Purchase Agreement with Longboard pursuant to which Longboard purchased from us the right to receive all milestone payments, royalties, interest and other payments relating to net sales of lorcaserin owed or otherwise payable by Eisai.

We believe that Eisai is solely responsible for any expenses and losses associated with product liability claims, except we and Eisai share 50% of losses for any alleged defective manufacturing of lorcaserin that was manufactured by us prior to entering into the Transaction Agreement.  

Intellectual Property

Our success depends in large part on our ability to protect our compounds and information, and to operate without infringing the proprietary rights of third parties. We rely on a combination of patent, trade secret, copyright, and trademark laws, as well as confidentiality, licensing and other agreements, to establish and protect our proprietary rights. We seek patent protection for our key inventions, including drug candidates we identify, routes for chemical synthesis, pharmaceutical formulations and methods of treatment.

There is no assurance that any of our patent applications will issue, or that any of the patents will be enforceable or will cover a drug or other commercially significant product or method. In addition, we regularly review our patent portfolio to identify patents and patent applications for potential abandonment that we deem to have relatively low value to our ongoing business operations. There is also no assurance that we will correctly identify which of our patents and patent applications should be maintained and which should be abandoned. The term of most of our current patents commenced, and most of our future patents, if any, will commence, on the date of issuance and terminate 20 years from the earliest effective filing date of the patent application. Because any marketing and regulatory approval for a drug often occurs several years after the related patent application is filed, the resulting exclusivity afforded by any patent on our drug candidates will likely be substantially less than 20 years.

In the United States, patent term adjustment is available for certain delays in patent office proceedings. In addition, under the Drug Price Competition and Patent Term Restoration Act of 1984, or the Hatch-Waxman Act, the term of a patent that covers an FDA-approved drug may be eligible for patent term extension, or PTE. PTE permits patent term restoration of a US patent as compensation for the patent term lost during product development and the FDA regulatory review process. The Hatch-Waxman Act permits a PTE of up to five years beyond the expiration of the patent. This period is generally one-half the time between the effective date of an Investigational New Drug, or IND (falling after issuance of the patent), and the submission date of an NDA, plus the time between the submission date of an NDA and the approval of that application, provided the sponsor acted with diligence. A PTE cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval and only one patent applicable to an approved drug may be extended. The application for PTE is subject to approval by the US Patent and Trademark Office in conjunction with the FDA.

Outside of the United States, similar provisions may be available in the European Union, Japan, South Korea and some other jurisdictions to extend the term of a patent that covers an approved drug. The length of any such extension may vary by country. Our European patents may be eligible for supplemental protection certificates of up to five years in one or more countries.

Due to the specific requirements for obtaining these extensions, there is no assurance that our patents will be afforded extensions even if we encounter significant delays in patent office proceedings or marketing and regulatory approval.

In addition to patent protection, we rely on trade secrets, proprietary know-how and continuing technological advances to develop and maintain our competitive position. To maintain the confidentiality of our trade secrets and proprietary information, all of our employees are required to enter into and adhere to an employee confidentiality and invention assignment agreement, and invention disclosure procedures as a condition of employment. Additionally, our employee confidentiality and invention assignment agreements require that our employees not bring to us, or use without proper authorization, any third-party proprietary technology. We also generally require our consultants and collaborators that have access to proprietary property and information to execute confidentiality and invention rights agreements in our favor. While such arrangements are intended to enable us to better control the use and disclosure of our proprietary property and provide for our ownership of proprietary technology developed on our behalf, they may not provide us with meaningful protection for such property and technology in the event of unauthorized use or disclosure.

Competition

The biotechnology and pharmaceutical industries are highly competitive and are subject to rapid and significant change. We face significant competition from many organizations with drugs or drug candidates that do or may compete with drug candidates we are developing. We may not be able to compete successfully against these organizations, which include many large, well-financed and experienced pharmaceutical and biotechnology companies, as well as academic and research institutions and government agencies.

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Developments by others may render our drug candidates obsolete or noncompetitive, and we or our collaborators may not be successful in developing either first- or best-in-class drugs.

Etrasimod is currently in development for the treatment of IBD, including in a Phase 3 program in UC and in a Phase 2b/3 program in CD. If approved in IBD, etrasimod would compete with generic drugs, branded oral agents, biologics and biosimilars. There are multiple FDA-approved products for treatment of moderate-to-severe IBD. Many of these products are biologics and include but are not limited to adalimumab by AbbVie, vedolizumab by an affiliate of Takeda Pharmaceuticals, and infliximab and ustekinumab by Janssen Biotech. Additionally, there are approved biosimilar agents to infliximab. There are also approved oral agents, including tofacitinib by Pfizer, as well as multiple oral agents in development. Ozanimod, by Bristol Myers Squibb, or BMS, is an S1P receptor modulator that is approved for use in multiple sclerosis and has completed P3 trials in UC. There are also JAK inhibitors in development, including but not limited to filgotinib by Gilead Sciences and Galapagos, and upadacitinib by AbbVie. There are also oral generic agents such as mesalamine and methotrexate used in the treatment of IBD.

Etrasimod has completed a Phase 2 study in AD and we intend to advance into a Phase 3 program for etrasimod in AD. If approved for that indication, etrasimod would compete with generic topical agents, branded topical agents, oral agents, and biologics. Currently AD patients are treated with generic topical steroids, generic topical calcineurin inhibitors, oral generic agents including cyclosporine and methotrexate, and a branded biologic agent, dupilumab, from Regeneron and Sanofi, which was approved in 2017. There are a number of topical treatments, oral agents, and biologic agents in development for AD. Topical agents may have different indications and limitations of use. Three oral agents have completed Phase 3 trials in AD and include baricitinib by Eli Lilly, abrocitinb by Pfizer, and upadacitinib by AbbVie. Baricitinib is approved in the EU and Japan for moderate to severe atopic dermatitis. Physicians may also use agents such as tofacitinib off-label in the treatment of AD. There are also biologic agents in development for AD including but not limited to IL-13 inhibitors tralokinumab by Leo Pharma and lebrikizumab by Eli Lilly. This list does not include all topical, oral, or biologic agents in development.

Etrasimod is currently in Phase 2 programs for the treatment of EoE and AA. If approved for EoE, etrasimod would compete with generic oral steroids, branded oral steroids, generic and branded proton pump inhibitors, and biologics. If approved for AA, etrasimod would compete with generic topical agents, branded topical agents, oral agents, and biologics.

Olorinab is being studied in IBS-C and IBS-D pain. Currently, there are approved agents and off-label medications used to treat pain associated with IBS-C and IBS-D. Linaclotide by Ironwood Pharmaceuticals is indicated for IBS-C. Eluxadoline by AbbVie is indicated for IBS-D. Generic oral molecules are used off label in IBS-C and IBS-D, including tricyclic antidepressants, serotonin-norepinephrine reuptake inhibitors, or SNRIs, and opioids.

APD418 is in development for AHF. There are currently no approved products to improve outcomes in AHF patients. A number of agents are used off-label, including, inotropic agents, loop diuretics, nitrate vasodilators, PDE3 inhibitors, and calcium sensitizers. Other agents are in development—for example, BMS is developing cimlanod (BMS-986231) in a Phase 2 study and Lee’s Pharma is developing istaroxime, a positive inotropic agent.

Temanogrel is in development for prevention of cMVO in the setting of PCI. A number of drugs are used off-label to manage these patients, including direct thrombin inhibitors, glycoprotein IIb/IIIa inhibitors, and calcium channel blockers. There is one agent in Phase 2 development, revacept, by AdvanceCor, with a mechanism of action of platelet membrane glycoprotein VI inhibition.

Many of our existing and potential competitors have substantially greater drug development capabilities and financial, scientific and marketing resources than we do. Additional consolidation in the pharmaceutical industry may result in even more resources being concentrated with our competitors. As a result, our competitors may be able to devote greater resources than we can to the research, development, marketing and promotion of therapeutic products or drug discovery techniques, or to adapt more readily to technological advances than we can. Accordingly, our competitors may succeed in obtaining patent protection, receiving regulatory approval or commercializing drugs before we do.

We may rely on collaborators for support of development programs and for the manufacturing and marketing of drug candidates. Such collaborators may be conducting multiple drug development efforts within the same disease areas that are the subject of their agreements with us, which may negatively impact the development of drugs that are subject to our agreements. In addition, we face and will continue to face intense competition from other companies for such collaboration arrangements, and technological and other developments by others may make it more difficult for us to establish such relationships.

Government Regulation

We and our collaborators are subject to significant governmental regulation. The FDA and comparable regulatory agencies in state and local jurisdictions and in foreign countries impose substantial requirements upon the preclinical and clinical development, pre-market approval, manufacture, import, export, marketing and distribution of pharmaceutical products. These agencies and other

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regulatory agencies regulate research and development activities and the testing, approval, manufacture, quality control, safety, effectiveness, labeling, storage, tracking, recordkeeping, advertising, pricing and promotion of drug candidates and commercialized drugs. Failure to comply with applicable FDA or other regulatory requirements may result in inspectional notices of violation, warning letters, civil or criminal penalties, suspension or delays in clinical development, recall or seizure of products, partial or total suspension of production, withdrawal of a product from the market or other negative consequences.

In the United States

In the United States, the FDA regulates drug products under the Federal Food, Drug, and Cosmetic Act, or FD&C Act, and its implementing regulations. The process required by the FDA before drug candidates may be marketed in the United States generally involves the following:

 

completion of extensive preclinical laboratory tests and preclinical animal studies, many of which are required to be performed in accordance with the FDA’s Good Laboratory Practice, or GLP, regulations;

 

submission to the FDA of an IND, which must become effective before human clinical trials may begin and be updated annually;

 

performance of adequate and well-controlled human clinical trials, performed in accordance with the FDA’s Good Clinical Practice, or GCP, regulations, to establish the safety and efficacy of the drug candidate for each proposed indication;

 

submission to the FDA of a New Drug Application, or NDA, after completion of adequate and well-controlled human clinical trials, generally accompanied by payment of a substantial user fee to the FDA;

 

a determination by the FDA within 60 days of its receipt of the NDA to file the NDA for review;

 

satisfactory completion of an FDA pre-approval inspection of the manufacturing facilities at which the active pharmaceutical ingredient and finished drug product are produced and tested to assess compliance with Current Good Manufacturing Practices, or cGMP, regulations;

 

FDA review and approval of the NDA prior to any commercial marketing or sale of the drug in the United States; and

 

Prior to commercialization, centrally acting drugs may be subject to review and potential scheduling by the DEA.

The development and approval process requires substantial expertise, time, effort and financial resources, and we cannot be certain that any approvals for our drug candidates will be granted on a timely basis, if at all.

The results of preclinical tests (which include laboratory evaluation as well as GLP studies to evaluate toxicity in animals) for a particular drug candidate, together with related manufacturing information and analytical data, are submitted as part of an IND to the FDA. The initial IND becomes effective 30 days after receipt by the FDA, following its initial safety review. During the 30-day time period the FDA may require additional information. The FDA may institute a clinical hold at the 30-day time period if any questions are not fully addressed or because of other concerns about the conduct of the clinical trial, including concerns that human research subjects will be exposed to unreasonable health risks. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. The FDA may place an IND on partial or full clinical hold at any time during a product candidate’s development. A separate submission to an existing IND must also be made for each successive clinical trial conducted during product development. Further, an independent institutional review board, or IRB, for each medical center proposing to conduct the clinical trial must review and approve the plan for any clinical trial before it commences at that center and it must monitor the study until completed. The FDA, the IRB or the sponsor may suspend a clinical trial at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk. Clinical testing also must satisfy extensive Good Clinical Practice, or GCP, regulations and regulations for informed consent and privacy of individually identifiable information.

Clinical trials. For purposes of NDA submission and approval, clinical trials are typically conducted in the following sequential phases, which may overlap:

 

Phase 1 clinical trials. Studies are initially conducted in a limited population to test the drug candidate for safety, dose tolerance, absorption, metabolism, distribution and excretion, typically in healthy volunteers, but in some cases in patients.

 

Phase 2 clinical trials. Studies are generally conducted in a limited patient population to identify possible adverse effects and safety risks, explore the initial efficacy of the product for specific targeted indications and to determine dose range or pharmacodynamics. Multiple Phase 2 clinical trials may be conducted by the sponsor to obtain information prior to beginning larger and more expensive Phase 3 clinical trials.

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Phase 3 clinical trials. These are commonly referred to as pivotal studies or adequate and well-controlled studies. When Phase 2 evaluations demonstrate that a dose range of the product is effective and has an acceptable safety profile, Phase 3 clinical trials are undertaken in large patient populations to further evaluate dosage, provide substantial evidence of clinical efficacy and further test for safety in an expanded and diverse patient population at multiple, geographically dispersed clinical trial centers.

 

Phase 4 clinical trials. The FDA may approve an NDA for a drug candidate but require that the sponsor conduct additional clinical trials to further assess the drug after NDA approval under a post-approval commitment. In addition, a sponsor may decide to conduct additional clinical trials after the FDA has approved an NDA. Post-approval trials are typically referred to as Phase 4 clinical trials.

New drug applications. The results of drug development, preclinical studies and clinical trials are submitted to the FDA as part of an NDA. NDAs also must contain extensive chemistry, manufacturing and control, or CMC, information. An NDA is usually accompanied by a significant user fee. The FDA reviews all NDAs submitted to ensure that they are sufficiently complete for substantive review before it accepts them for filing, which occurs, if at all, 60 days after submission by the NDA sponsor. Once the submission has been accepted for filing, the FDA’s goal is to review applications within 10 months from its acceptance of the filing or, if the application relates to an unmet medical need in a serious or life-threatening indication, six months from its acceptance of the filing. The review process can be significantly extended by FDA requests for additional information or clarification. The FDA may refer the application to an advisory committee for review, evaluation and recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of an advisory committee. The FDA may deny approval of an NDA by issuing a Complete Response Letter, or CRL, if the applicable regulatory criteria are not satisfied. A CRL may require additional clinical data and/or an additional pivotal Phase 3 clinical trial(s), and/or other significant, expensive and time-consuming requirements related to clinical trials, preclinical studies or manufacturing. Data are not always conclusive, and the FDA may interpret data differently than we or our collaborators interpret data. Approval may occur with Risk Evaluation and Mitigation Strategies, or REMS, that may limit the labeling, distribution or promotion of a drug product. Once issued, the FDA may withdraw product approval if ongoing regulatory requirements are not met or if safety problems occur after the product reaches the market. In addition, the FDA may require testing, including Phase 4 clinical trials, and surveillance programs to monitor the safety effects of approved products which have been commercialized, and the FDA has the power to prevent or limit further marketing of a product based on the results of these postmarketing programs or other information.

Expedited Development and Review Programs. The FDA has four programs that are intended to facilitate and expedite development and review of new drugs to address unmet medical need in the treatment of a serious or life-threatening condition: fast track designation, breakthrough therapy designation, accelerated approval, and priority review designation. These programs do not change the standards for approval but may expedite the development or approval process.

New investigational drugs may qualify for fast track designation if they are intended to treat a serious condition and nonclinical or clinical data demonstrate the potential to address unmet medical need. Fast track designation applies to the drug (either alone or in combination with other drugs) and the specific indication for which it is being studied. A fast track product is afforded opportunities for frequent interactions with the FDA to support efficient development and may be eligible for priority review if supported by clinical data at the time of NDA submission. After preliminary evaluation of clinical data and a determination that a fast track product may be effective, the FDA may consider reviewing portions of an NDA before the complete application is submitted (“rolling review”), if the sponsor gains FDA agreement on the proposed schedule for submission of the various sections of the NDA and the sponsor pays any required user fees upon submission of the first section of the NDA.

An NDA for a drug that treats a serious condition and, if approved, would provide a significant improvement in safety or effectiveness compared to marketed products may qualify for priority review designation. A priority review designation means that the FDA’s goal is to take action on the NDA within six months of the filing date as compared to ten months under its standard review.

In addition, a product may qualify for an accelerated approval pathway if it meets three criteria: treats a serious condition; generally provides a meaningful advantage over available therapies; demonstrates an effect on a surrogate endpoint that is reasonably likely to predict clinical benefit or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality that is reasonably likely to predict an effect on irreversible morbidity or other clinical benefit. As a condition of approval, the FDA may require that a sponsor of a drug receiving accelerated approval perform adequate and well controlled post marketing clinical trials to verify the predicted clinical benefit. Products receiving accelerated approval may be subject to expedited withdrawal procedures if the sponsor fails to conduct the required post-market studies or if such studies fail to verify the predicted clinical benefit. In addition, the FDA currently requires, as a condition for accelerated approval, pre-approval of promotional materials, which could adversely impact the timing of the commercial launch of the product.

The Food and Drug Administration Safety and Innovation Act established a category of drugs and biologics referred to as “breakthrough therapies”, and a drug candidate may qualify for breakthrough therapy designation if it is intended to treat a serious

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condition and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement on a clinically significant endpoint(s) over available therapies. Breakthrough therapy designation affords all of the fast track designation features, as well as more intensive FDA interaction and guidance. Breakthrough therapy designation is distinct from both the accelerated approval pathway and priority review designation, which can also be granted to the same drug if relevant criteria are met.

Other US regulatory requirements. Products manufactured or distributed pursuant to FDA approvals are subject to continuing regulation by the FDA, including recordkeeping, annual product quality review and reporting requirements. Adverse event experience with the product must be reported to the FDA in a timely fashion and pharmacovigilance programs to proactively look for these adverse events are mandated by the FDA. Drug manufacturers and their subcontractors are required to register their establishments with the FDA and certain state agencies and are subject to periodic inspections (which may be unannounced) by the FDA and certain state agencies for compliance with ongoing regulatory requirements, including cGMP regulations, which impose certain procedural and documentation requirements upon us and our third-party manufacturers. Following such inspections, the FDA may issue notices on Form FDA 483 and warning letters that could cause us to modify certain activities. A Form FDA 483 notice, if issued at the conclusion of an FDA inspection or after the appropriate FDA office review of the Establishment Inspection Report prepared by the investigator, can list conditions the FDA believes may have violated cGMP or other FDA regulations. FDA guidelines specify that a warning letter be issued for violations of “regulatory significance,” also known as Official Action Indicated, or OAI. Failure to adequately and promptly correct the observation(s) can result in regulatory action. In addition to Form FDA 483 notices and warning letters, failure to comply with the statutory and regulatory requirements can subject a manufacturer to possible legal or regulatory action, such as suspension of manufacturing, recall of product, seizure of product, injunctive action or possible civil or criminal penalties.

The FDA closely regulates the post-approval marketing and promotion of drugs, including standards and regulations for healthcare professional marketing activities and materials, direct-to-consumer advertising, dissemination of off-label information, industry-sponsored scientific and educational activities and promotional activities involving the Internet. Drugs may be marketed only for their approved indications and in accordance with the provisions of the confines of the pivotal studies and the approved label. Further, we may be required to develop additional data or conduct additional preclinical studies and clinical trials, and we may be required to submit and obtain FDA approval of a new or supplemental NDA for changes to, among other things, the indications, labeling, or manufacturing processes or facilities of a drug. Failure to comply with these requirements can subject a manufacturer to possible legal or regulatory action, such as warning letters, corrective advertising, suspension of manufacturing, seizure of product, injunctive action or potential civil and criminal penalties.

Physicians may prescribe legally available drugs for uses that are not described in the product’s labeling and that differ from those tested by us and approved by the FDA, if in their professional medical judgment, the physicians deem such use to be appropriate. Such off-label uses are common across certain medical specialties. The FDA does not regulate the behavior of physicians in their choice of treatments. The FDA does, however, impose stringent restrictions on manufacturers’ communications regarding off-label use.

To distribute products commercially, we or our collaborators, as applicable, must comply with state laws that require the registration of manufacturers and wholesale distributors of pharmaceutical products in a state, including, in certain states, manufacturers and distributors who ship products into the state even if such manufacturers or distributors have no place of business within the state. Some states also impose requirements on manufacturers and distributors to establish the pedigree of product in the chain of distribution.

Drug Enforcement Administration regulation. The DEA regulates drugs that are controlled substances. Controlled substances are those drugs that appear on one of the five schedules promulgated and administered by the DEA under the Controlled Substances Act, or CSA. The CSA governs, among other things, the inventory, distribution, recordkeeping, handling, security and disposal of controlled substances. Any drug that acts on the central nervous system has the potential to become a controlled substance based on an evaluation of its abuse potential, and scheduling by the DEA is a separate process that may delay the commercial launch of a drug even after FDA approval of the NDA. Companies with a scheduled drug are subject to periodic and ongoing inspections by the DEA and similar state drug enforcement authorities to assess ongoing compliance with the DEA’s regulations. Any failure to comply with these regulations could lead to a variety of sanctions, including the revocation or a denial of renewal of any DEA registration, injunctions, or civil or criminal penalties.

Hatch-Waxman Exclusivity. Market exclusivity provisions of the Hatch-Waxman Act can delay the submission or approval of applications seeking to rely upon the FDA’s findings of safety and effectiveness for a previously approved NDA. A new chemical entity, or NCE, subject to an NDA is entitled to a five-year period of non-patent marketing exclusivity in the United States. A drug is an NCE if the FDA has not previously approved any other new drug containing the same active moiety, which is the molecule or ion responsible for the action of the drug substance. During the exclusivity period, the FDA may not accept for review an abbreviated new drug application, or ANDA, or a 505(b)(2) NDA submitted by another company for another version of such drug where the applicant does not own or have a legal right of reference to all the data required for approval. However, such an application may be submitted

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after four years if it contains a certification of patent invalidity or non-infringement of patents listed with the FDA by the NDA holder. The Hatch-Waxman Act also provides three years of marketing exclusivity for an NDA, or supplement to an existing NDA, if new clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant are deemed by the FDA to be essential to the approval of the application. This three-year exclusivity covers only the conditions of use associated with the new clinical investigations and does not prohibit the FDA from approving ANDAs for drugs containing the original active ingredient. Five-year and three-year exclusivity will not delay the submission or approval of a full NDA. However, an applicant submitting a full NDA would be required to conduct or obtain a right of reference to all of the preclinical studies and adequate and well-controlled clinical trials necessary to demonstrate safety and effectiveness.

Orphan drug designation and exclusivity. Under the Orphan Drug Act, the FDA may designate a drug product as an “orphan drug” if it is intended to treat a rare disease or condition (generally meaning that it affects fewer than 200,000 individuals in the United States, or more in cases in which there is no reasonable expectation that the cost of developing and making a drug product available in the United States for treatment of the disease or condition will be recovered from sales of the product). A company must request orphan product designation before submitting an NDA. If the request is granted, the FDA will disclose the identity of the therapeutic agent and its potential use. Orphan product designation does not convey any advantage in or shorten the duration of the regulatory review and approval process.

If a product with orphan status receives the first FDA approval for the disease or condition for which it has such designation or for a select indication or use within the rare disease or condition for which it was designated, the product generally will receive orphan product exclusivity. Orphan product exclusivity means that the FDA may not approve any other applications for the same product for the same indication for seven years, except in certain limited circumstances. Competitors may receive approval of different products for the indication for which the orphan product has exclusivity and may obtain approval for the same product but for a different indication or the same product for the same indication if demonstrated to be clinically superior. If a drug or drug product designated as an orphan product ultimately receives marketing approval for an indication broader than what was designated in its orphan product application, it may not be entitled to exclusivity.

Pediatric exclusivity. The FDA may issue Written Requests for pediatric studies prior to approval of a new drug application, if the FDA has determined that information related to the use of the drug in the pediatric population may produce health benefits. As an incentive to industry to conduct such studies requested by the FDA, a 6-month period of additional exclusivity may be granted as an add-on to existing marketing exclusivity periods and patent terms.

Outside of the United States

In addition to regulations in the United States, we will be subject to a variety of regulations in other jurisdictions governing, among other things, clinical studies and any commercial sales and distribution of products. Whether or not we obtain FDA approval for a product candidate, we must obtain the requisite approvals from regulatory authorities in foreign jurisdictions prior to the commencement of clinical studies or marketing and sale of the product in those jurisdictions.

Certain countries outside of the United States have a similar process that requires the submission of a clinical trial application much like the IND prior to the commencement of human clinical trials. In the EU, for example, a Clinical Trial Application, or CTA, must be submitted to the national health authority and an independent ethics committee in each country in which we intend to conduct clinical trials, much like the FDA and IRB, respectively. Once the CTA is approved in accordance with a country’s requirements, clinical trial development may proceed in that country. Under the new Regulation on Clinical Trials, which is expected to take effect in 2021, there will be a centralized application procedure in respect of clinical trials to be conducted in the EU where one national authority will take the lead in reviewing the application and the other national authorities have more limited involvement. Any substantial changes to the trial protocol or other information submitted with the clinical trial applications must be notified to or approved by the relevant competent authorities and ethics committees.

The requirements and process governing the conduct of clinical trials, product licensing, pricing and reimbursement vary from country to country. In all cases, the clinical trials are conducted in accordance with GCP and the applicable regulatory requirements and the ethical principles that have their origin in the Declaration of Helsinki.

To obtain regulatory approval of an investigational drug or biological product in the EU, we must submit a marketing authorization application either under the so-called centralized or national authorization procedures.

Centralized procedure. The centralized procedure provides for the grant of a single marketing authorization, which is issued by the European Commission based on the opinion of the Committee for Medicinal Products for Human Use, or the CHMP, of the European Medicines Agency, or EMA, and that is valid in all EU member states, as well as Iceland, Liechtenstein and Norway (together, the “EEA”). The Centralized Procedure is mandatory for certain types of products, such as biotechnology medicinal

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products, orphan medicinal products, and medicines that contain a new active substance indicated for the treatment of AIDS, cancer, neurodegenerative disorders, diabetes, auto-immune and viral diseases. The Centralized Procedure is optional for products containing a new active substance not yet authorized in the EEA, or for products that constitute a significant therapeutic, scientific or technical innovation or which are in the interest of public health in the EU. Under the Centralized Procedure the maximum timeframe for the evaluation of an MAA is 210 days (excluding clock stops, when additional written or oral information is to be provided by the applicant in response to questions asked by the CHMP). Accelerated evaluation might be granted by the CHMP in exceptional cases when the authorization of a medicinal product is of major interest from the point of view of public health and in particular from the viewpoint of therapeutic innovation. Under the accelerated procedure the standard 210-day review period is reduced to 150 days.

National authorization procedures. There are also two other possible routes to authorize medicinal products in several EU Member States, which are available for investigational medicinal products that fall outside the scope of the centralized procedure:

 

Decentralized procedure. Using the decentralized procedure, an applicant may apply for simultaneous authorizations in more than one EU country of medicinal products that have not yet been authorized in any EU Member State and that do not fall within the mandatory scope of the centralized procedure.

 

Mutual recognition procedure. In the mutual recognition procedure, a medicine is first authorized in one EU Member State, in accordance with the national procedures of that country. Following this, further marketing authorizations can be sought from other EU Member States in a procedure whereby the countries concerned agree to recognize the validity of the original, national marketing authorization.

In the EEA, upon receiving marketing authorization, new chemical entities generally receive eight years of data exclusivity and an additional two years of market exclusivity. If granted, data exclusivity prevents regulatory authorities in the EU from referencing the innovator’s data to assess a generic application. During the additional two-year period of market exclusivity, a generic marketing authorization can be submitted, and the innovator’s data may be referenced, but no generic product can be marketed until the expiration of the market exclusivity. However, there is no guarantee that a product will be considered by the EU’s regulatory authorities to be a new chemical entity and qualify for data exclusivity.

The EMA grants orphan drug designation to promote the development of products that may offer therapeutic benefits for life-threatening or chronically debilitating conditions affecting not more than five in 10,000 people in the EU. In addition, orphan drug designation can be granted if the drug is intended for a life threatening, seriously debilitating or serious and chronic condition in the EU and without incentives it is unlikely that sales of the drug in the EU would be sufficient to justify developing the drug. Orphan drug designation is only available if there is no other satisfactory method approved in the EU of diagnosing, preventing or treating the condition, or if such a method exists, the proposed orphan drug will be of significant benefit to patients. Orphan drug designation provides opportunities for free protocol assistance, fee reductions for access to the centralized regulatory procedures and ten years of market exclusivity following drug approval, which can be extended to 12 years if trials are conducted in accordance with an agreed-upon pediatric investigational plan. The exclusivity period may be reduced to six years if the designation criteria are no longer met, including where it is shown that the product is sufficiently profitable not to justify maintenance of market exclusivity.

Great Britain, or GB, is no longer covered by the EEA’s procedures outlined above (Northern Ireland will be covered by the centralized authorization procedure and can be covered under the decentralized or mutual recognition procedures). A separate marketing authorization will be required to market drugs in GB.  However, for two years from 1 January 2021, the MHRA may adopt decisions taken by the European Commission on the approval of new marketing authorizations through the centralized procedure, and the MHRA will have regard to marketing authorizations approved in a country in the EEA (although in both cases a marketing authorization will only be granted if any GB-specific requirements are met). Various national procedures are now available to place a drug on the market in the UK, GB, or Northern Ireland, with the main national procedure having a maximum timeframe of 150 days (excluding time taken to provide any further information or data required).  The data exclusivity periods in the UK are currently in line with those in the EU, but the Trade and Cooperation Agreement agreed between the UK and EU provides that the periods for both data and market exclusivity are to be determined by domestic law, and so there could be divergence in the future.  

Orphan designation in GB following Brexit is largely aligned with the position in the EU but is based on the prevalence of the condition in GB.  It is therefore possible that conditions that are currently designated as orphan conditions in GB will no longer be and that conditions that are not currently designated as orphan conditions in the EU will be designated as such in GB.

Prescription drug reimbursement. In the United States and markets in other countries, sales of prescription drug products depend in part on the availability of reimbursement from third-party payers. Third-party payers include government health administrative authorities, managed care organizations, private health insurers and other organizations. The process for determining whether a payer will provide coverage for a drug product may be separate from the process for setting the price or reimbursement rate that the payer will pay for the drug product. Third-party payers may limit coverage to specific drug products on an approved list, or formulary, which might not include all of the FDA-approved drug products for a particular indication. Third-party payers are increasingly challenging the price and examining the medical necessity and cost-effectiveness of medical products and services, in

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addition to their safety and efficacy. We may need to conduct expensive pharmacoeconomic studies to demonstrate the cost-effectiveness of our products. A payer’s decision to provide coverage for a drug product does not imply that an adequate reimbursement rate will be approved. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development. Patients who are prescribed medications for the treatment of their conditions, and their prescribing physicians, generally rely on third-party payers to reimburse all or part of the costs associated with their prescription drugs. Patients are less likely to use our products unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our products. Therefore, coverage and adequate reimbursement are important to new product acceptance.

If a drug is reimbursed by Medicare or Medicaid, pricing and rebate programs must comply with, as applicable, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 as well as the Medicaid rebate requirements of the Omnibus Budget Reconciliation Act of 1990 and the Veterans Health Care Act of 1992, or VHCA, each as amended. If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply. Under the VHCA, drug companies are required to offer certain drugs at a reduced price to a number of federal agencies including US Department of Veterans Affairs and US Department of Defense, the Public Health Service and certain private Public Health Service designated entities in order to participate in other federal funding programs including Medicare and Medicaid. Participation under the VHCA requires submission of pricing data and calculation of discounts and rebates pursuant to complex statutory formulas, as well as entry into government procurement contracts governed by the Federal Acquisition Regulations.

The containment of healthcare costs has become a priority of federal, state and foreign governments, and the prices of drugs have been a focus in this effort, which has resulted in several recent congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for products. In addition, emphasis on managed care in the United States has increased and we expect will continue to increase the pressure on drug pricing. Coverage policies, third-party reimbursement rates and drug pricing regulation may change at any time. In particular, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or collectively the ACA, was enacted in the United States in March 2010 and contains provisions that may reduce the profitability of drug products, including, for example, increased rebates for drugs sold to Medicaid programs, extension of Medicaid rebates to Medicaid managed care plans, mandatory discounts for certain Medicare Part D beneficiaries and annual fees based on pharmaceutical companies’ share of sales to federal healthcare programs. There have been judicial and Congressional challenges to certain aspects of the ACA. For example, since January 2017, President Trump has signed Executive Orders and other directives designed to delay the implementation of certain provisions of the ACA or otherwise circumvent some of the requirements for health insurance mandated by the ACA. Concurrently, Congress has considered legislation that would repeal or repeal and replace all or part of the ACA. While Congress has not passed comprehensive repeal legislation, bills affecting the implementation of certain taxes under the ACA have been signed into law. Legislation enacted in 2017, informally titled the Tax Cuts and Jobs Act of 2017, or TCJA, includes a provision that repealed, effective January 1, 2019, the tax-based shared responsibility payment imposed by the ACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate”. Additionally, the 2020 federal spending package permanently eliminated, effective January 1, 2020, the PPACA-mandated “Cadillac” tax on high-cost employer-sponsored health coverage and medical device tax and, effective January 1, 2021, also eliminated the health insurer tax. Further, the Bipartisan Budget Act of 2018, or the BBA, among other things, amended the ACA, effective January 1, 2019, to increase from 50 percent to 70 percent the point-of-sale discount that is owed by pharmaceutical manufacturers who participate in Medicare Part D and to close the coverage gap in most Medicare drug plans, commonly referred to as the “donut hole”. On December 14, 2018, a Texas U.S. District Court Judge ruled that the ACA is unconstitutional in its entirety because the “individual mandate” was repealed by Congress as part of the TCJA. On December 18, 2019, the U.S. Court of Appeals for the 5th Circuit upheld the District Court ruling that the individual mandate was unconstitutional and remanded the case back to the District Court to determine whether the remaining provisions of the PPACA are invalid as well. The United States Supreme Court is currently reviewing this case, but it is unknown when a decision will be made. Although the U.S. Supreme Court has not yet ruled on the constitutionality of the ACA, on January 28, 2021, President Biden issued an executive order to initiate a special enrollment period from February 15, 2021 through May 15, 2021 for purposes of obtaining health insurance coverage through the ACA marketplace. The executive order also instructs certain governmental agencies to review and reconsider their existing policies and rules that limit access to healthcare, including among others, reexamining Medicaid demonstration projects and waiver programs that include work requirements, and policies that create unnecessary barriers to obtaining access to health insurance coverage through Medicaid or the ACA. It is unclear how the Supreme Court ruling, other such litigation, and the healthcare reform measures of the Biden administration will impact the ACA and our business and operations.

Further, the Trump administration’s budget proposal for fiscal year 2021 included a $135 billion allowance to support legislative proposals seeking to reduce drug prices, increase competition, lower out-of-pocket drug costs for patients, and increase patient access to lower-cost generic and biosimilar drugs.  On July 24, 2020 and September 13, 2020, President Trump announced several executive orders related to prescription drug pricing that seek to implement several of the administration’s proposals. The FDA also released a final rule on September 24, 2020 providing guidance for states to build and submit importation plans for drugs

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from Canada. Further, on November 20, 2020, HHS finalized a regulation removing safe harbor protection for price reductions from pharmaceutical manufacturers to plan sponsors under Part D, either directly or through pharmacy benefit managers, unless the price reduction is required by law. The rule also creates a new safe harbor for price reductions reflected at the point-of-sale, as well as a safe harbor for certain fixed fee arrangements between pharmacy benefit managers and manufacturers. On November 20, 2020, CMS issued an interim final rule implementing President Trump’s Most Favored Nation executive order, which would tie Medicare Part B payments for certain physician-administered drugs to the lowest price paid in other economically advanced countries, effective January 1, 2021. On December 28, 2020, the United States District Court in Northern California issued a nationwide preliminary injunction against implementation of the interim final rule. However, it is unclear whether the Biden administration will work to reverse these measures or pursue similar policy initiatives. At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing.

In countries outside the United States, pricing of pharmaceutical products may be subject to governmental control. Evaluation criteria used by many government agencies for the purposes of pricing and reimbursement typically focus on a product’s degree of innovation and its ability to meet a clinical need unfulfilled by currently available therapies. Some countries operate positive and negative list systems under which products may only be marketed once a reimbursement price has been agreed. To obtain reimbursement or pricing approval, some of these countries may require the completion of clinical trials that compare the cost-effectiveness of a particular drug candidate to currently available therapies. Other countries allow companies to fix their own prices for medicines but monitor and control company profits. In addition, in some countries, cross-border imports from low-priced markets exert a commercial pressure on pricing within a country. There can be no assurance that any country that has price controls or reimbursement limitations for drug products will allow favorable reimbursement and pricing arrangements for any of our products.

Healthcare fraud and abuse. Pharmaceutical companies are subject to various federal and state laws pertaining to healthcare fraud and abuse, including, but not limited to, anti-kickback and false claims laws.

The Federal Anti-Kickback Statute makes it illegal for any person or entity, including a prescription drug manufacturer, or a party acting on its behalf, to knowingly and willfully solicit, offer, receive or provide any remuneration, directly or indirectly, in exchange for, or to induce, the referral of business, including the purchase, order, lease of any good, facility, service or item, including the prescription of a particular drug, for which payment may be made under federal healthcare programs such as Medicare and Medicaid. Some of the state prohibitions are broader in scope and apply to referral of patients for healthcare services reimbursed by any source, not only the Medicare and Medicaid programs.

In the course of practicing medicine, physicians may legally prescribe FDA-approved drugs for an indication that has not been approved by the FDA and which, therefore, is not described in the product’s approved labeling, so-called “off-label use” or “the practice of medicine,” if deemed appropriate in the physicians’ professional medical judgment. The FDA does not ordinarily regulate the behavior of physicians in their choice of treatments. The FDA and other government agencies do, however, restrict communications on the subject of off-label use by a manufacturer or those acting on behalf of a manufacturer. Companies may not promote FDA-approved drugs for off-label uses. The FDA and other governmental agencies do permit a manufacturer (and those acting on its behalf) to engage in some limited, non-misleading, non-promotional exchanges of scientific information regarding unapproved indications.

There are numerous federal false claims laws and civil monetary penalty laws that forbid, among other things, anyone from knowingly presenting, or causing to be presented for payment to third-party payers (including Medicare and Medicaid) claims for reimbursed drugs or services that are false or fraudulent, claims for items or services not provided as claimed or claims for medically unnecessary items or services.

In addition, the federal transparency requirements under the Physician Payments Sunshine Act require applicable manufacturers of covered drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid, or the Children’s Health Insurance Program, with specific exceptions, to track and annually report to the Centers for Medicare & Medicaid Services, or CMS, payments and other transfers of value provided to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, and certain ownership and investment interests held by physicians or their immediate family members. Beginning in 2022, applicable manufacturers also will be required to report such information regarding their transfers of value during the previous year to physician assistants, nurse practitioners, clinical nurse specialists, certified registered nurse anesthetists, anesthesiologist assistants, and certified nurse midwives.

We may also be subject to state equivalents of these fraud and abuse laws.

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Violations of fraud and abuse laws may be punishable by criminal, civil and/or administrative sanctions, including individual imprisonment, disgorgement, criminal fines and civil monetary penalties, possible exclusion from federal healthcare programs (including Medicare and Medicaid), and integrity oversight and reporting obligations to resolve allegations of non-compliance with these laws. In addition, under certain healthcare fraud and abuse laws, there is an ability for private individuals to bring similar actions. Additionally, many states have analogous fraud and abuse laws, some of which may be broader in scope. Further, there are an increasing number of state laws that require pharmaceutical companies to establish marketing compliance programs, file periodic reports with the state, make periodic public disclosures on sales, marketing, pricing, clinical trials and other activities, or register their sales representatives, as well as prohibiting certain other sales and marketing practices. The federal transparency requirements under the ACA require certain manufacturers of drugs, devices, biologics and medical supplies to annually report to the Department of Health and Human Services information related to payments and other transfers of value to physicians and teaching hospitals and physician ownership and investment interests. Additionally, recent federal legislation imposes additional obligations on certain pharmaceutical manufacturers, among others, regarding drug product tracking and tracing.

Our activities are also potentially subject to federal and state consumer protection and unfair competition laws. We are also subject to the US Foreign Corrupt Practices Act, or the FCPA, which prohibits companies and individuals from engaging in specified activities to obtain or retain business or to influence a person working in an official capacity. Under the FCPA, it is illegal to pay, offer to pay, or authorize the payment of anything of value to any foreign government official, governmental staff members, political party or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in an official capacity.

Healthcare and other privacy and security laws. We are subject to numerous laws and regulations regarding the privacy, protection, and security of health information and other personal information. These laws and regulations impose obligations and restrictions on us with respect to the collection, storage, use, disclosure, transfer and security of personal information.

The Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act and its implementing regulations, imposes obligations with respect to safeguarding the privacy, security and transmission of individually identifiable health information on covered entities and their business associations and covered subcontractors that perform services for them involving individually identifiable health information. We may be subject to, or our collaborators’ marketing activities may be limited by, HIPAA and its implementing regulations. In addition, many state laws apply to the use and disclosure of health and other personal information.

For example, as of January 1, 2020, we are subject to the California Consumer Privacy Act, or CCPA. The CCPA has created new individual privacy rights for California residents and places increased privacy and security obligations on entities handling the personal information of such residents. Among other obligations, the CCPA requires covered businesses to provide new disclosures to California residents and to respond to requests to access and/or delete personal information. The CCPA also allows for a private right of action for data breaches.

The European General Data Protection Regulation, or GDPR, imposes many requirements and restrictions that impact our collection, transfer, use and retention of personal data of clinical trial subjects and other individuals in the European Union. For example, the GDPR dictates mandatory contractual terms for service providers that process personal data for us and restricts our ability to transfer data from the European Economic Area to our offices and service providers in the United States and other countries.  Penalties for non-compliance with the GDPR are steep, with potential fines of up to 4% of our global revenue.

Because we have operations in Switzerland, we also are required to comply with the data privacy and security laws and regulations of that country. As we conduct clinical trials and other activities that involve the collection of personal data from individuals in other countries and regions, we may be subject to additional data privacy and security laws and regulations.

Across the United States and globally, laws and regulations governing data privacy and security continue to develop and evolve. The data privacy and security laws and regulations to which we are subject will likely impact (possibly significantly) our business activities. Many of the laws and regulations that apply to us contain ambiguous provisions or impose requirements that differ from country to country, creating uncertainty. Compliance with the enhanced obligations imposed by such laws and regulations may require us to revise our business practices, allocate more resources to privacy and security, and implement new technologies. Such efforts may result in significant costs to our business.

Failure to comply with data privacy and security laws and regulations could result in regulatory penalties and significant legal liability and could have a material adverse impact on our financial results.

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Manufacturing, Revenues from External Customers, and Sources and Availability of Materials

Our revenues of $0.3 million for the year ended December 31, 2020 primarily included royalty revenue from Eisai. Our revenues of $806.4 million for the year ended December 31, 2019, included an $800.0 million upfront payment from United Therapeutics, $5.0 million from Everest, and $1.7 million from Boehringer Ingelheim. Our revenues of $18.0 million for the year ended December 31, 2018, included $6.6 million from Eisai, $4.4 million from Boehringer Ingelheim, $2.8 million from Outpost Medicine, $2.2 million from Axovant, and $2.0 million from Everest. This information excludes revenue activity reported within discontinued operations. See “Note 5. Sale of Manufacturing Operations” to our consolidated financial statements included in this Annual Report for additional information. We do not currently engage in manufacturing activities and we are not dependent on availability of materials for our core business operations.

Compliance with Environmental Regulations

Our business involves the controlled use of hazardous materials, chemicals, biological materials and various radioactive compounds. In the United States, we are subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the US Environmental Protection Agency, the California Environmental Protection Agency, the Toxic Substances Control Act, the Resource Conservation and Recovery Act, the CSA and other federal, state or local regulations.

We may be subject to further such regulations in the future. Although we believe that our operations comply in all material respects with the applicable environmental laws and regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. In the event of such an accident, we could be held liable for any damages that result, and the extent of that liability could exceed our resources. Our compliance with these laws and regulations has not had, and is not expected to have, a material effect upon our capital expenditures, results of operations or competitive position.

Human Capital

Arena’s leadership and employees are guided by our purpose – to deliver our important medicines and a simple statement that defines how we approach everything we do: Care More. Act Differently. 

As of December 31, 2020, we employ 363 full and part-time employees located primarily in our three “hubs” – San Diego, CA, Boston, MA and Zug, Switzerland, as well as home-based employees across the US and Europe. In addition to our employees, we engage consultants, independent contractors, and temporary employees to provide flexibility in support of our business execution and objectives.

We know our success is anchored in our ability to recruit and retain talented, highly skilled team members. We operate in a very competitive employment landscape and recognize that what differentiates Arena from others is more than fair, equitable and competitive salaries, broad-based equity ownership, high-quality health and well-being programs, significant investments in employee development and safe, healthy and conscious workspaces - these are price of entry. We think what differentiates Arena is that we are guided by both our purpose and through the lens of our values - Put People First, Be Curious, Think Disruptive and Be Daring - we actively strive to inspire and cultivate a vibrant, thriving and resilient culture that engenders a sense of purpose, community, connection and gratitude. We also encourage a workplace that is diverse and inclusive at all levels and we continue to strengthen our diversity and inclusion initiatives through our IDE@A (Inclusion, Diversity and Equity at Arena) employee advocacy committee that promotes sharing, learning and engagements in diversity, equity, and inclusion topics and activities.

Our Human Capital practices and commitments are also incorporated into our annual corporate goals and corporate performance metrics. In 2021, we have also added a specific corporate objective related to diversity and inclusion and our Environmental, Social and Governance (ESG) initiatives. 

For additional perspective on our human capital practices and resources, please also see our Corporate ESG Report, proxy statement and corporate website.

Available Information

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, or the Exchange Act, are available free of charge on our website (www.arenapharm.com) as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC.

 

 

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Item 1A.    Risk Factors.

RISK FACTORS

Investment in our stock involves a high degree of risk. You should consider carefully the risks described below, together with other information in this Annual Report on Form 10-K and our other filings with the SEC, before making investment decisions regarding our stock. If any of the following events actually occur, our business, operating results, prospects or financial condition could be materially and adversely affected. This could cause the trading price of our common stock to decline and you may lose all or part of your investment. Moreover, the risks described below are not the only ones that we face. Additional risks not presently known to us or that we currently deem immaterial may also affect our business, operating results, prospects or financial condition.

Risks Relating to Our Business

Drug development programs are expensive, time consuming, uncertain and susceptible to change, interruption, delay or termination.

Drug development programs are very expensive, time consuming and difficult to design and implement. Our drug candidates are in various stages of clinical and preclinical development and are prone to the risks of failure inherent in research and development. Clinical trials and preclinical studies are needed to demonstrate that drug candidates are safe and effective to the satisfaction of the FDA, and similar non-US regulatory authorities, and the FDA or other regulatory authority may require us to, or we or others may decide to, conduct additional research and development even after a drug is approved. The commencement or completion of our clinical trials or preclinical studies could be substantially delayed or prevented by several factors, including the following:

 

limited number of, and competition for, suitable participants required for enrollment in our clinical trials or animals to conduct our preclinical studies;

 

limited number of, and competition for, suitable sites to conduct our clinical trials or preclinical studies;

 

delay or failure to obtain a meeting, approval or agreement from the applicable regulatory authority to commence a clinical trial or approve a study protocol;

 

delay or failure to obtain sufficient supplies of drug candidates, drugs or other materials for the trial or study;

 

delay or failure to reach agreement on acceptable agreement terms or protocols;

 

delay or other disruption related to the COVID-19 pandemic; and

 

delay or failure to obtain institutional review board, or IRB, approval to conduct a clinical trial at a prospective site.

 

For example, recruitment for the indications in our ongoing and planned clinical studies is competitive and challenging, and it is difficult to predict when such trials will be fully enrolled or when data will be available, if at all.

In addition, the FDA, other regulatory authorities, collaborators, or we may suspend, delay or terminate our development programs at any time for various reasons, including those listed above affecting the commencement or completion of trials and the following:

 

side effects experienced by study participants or other safety issues;

 

lack of effectiveness of any drug candidate during clinical trials;

 

slower than expected rates of patient recruitment and enrollment or lower than expected patient retention rates;

 

difficulty in maintaining contact with participants during or after treatment, which may result in incomplete data;

 

inability or unwillingness of medical investigators to follow our clinical protocols;

 

inadequacy of or changes in the manufacturing process or compound formulation;

 

delays in obtaining regulatory approvals to commence a study, or “clinical holds,” or delays requiring suspension or termination of a study by a regulatory authority, such as the FDA, after a study is commenced;

 

changes in applicable regulatory policies and regulations;

 

delays in identifying and reaching agreement on acceptable terms with prospective clinical trial sites;

 

uncertainty regarding proper dosing;

 

unfavorable results from clinical trials or preclinical studies, including those conducted by us, our partners or our licensees;

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failure of our clinical research organizations to comply with all regulatory and contractual requirements or otherwise perform their services in a timely or acceptable manner;

 

scheduling conflicts with participating clinicians and clinical institutions;

 

failure to design appropriate clinical trial protocols;

 

insufficient data to support regulatory approval;

 

failure of participating clinicians and clinical institutions to comply with all legal, regulatory and contractual requirements or otherwise perform in a timely or acceptable manner;

 

lack of sufficient funding to continue clinical trials or preclinical studies; or

 

changes in business priorities or perceptions of the value of the program.

There is typically a high rate of attrition from the failure of drug candidates proceeding through clinical trials, and many companies have experienced significant setbacks in advanced development programs, even after promising results were observed in earlier studies or trials. We have experienced setbacks in our internal and partnered development programs and expect to experience additional setbacks from time to time in the future. In addition, even if the earlier-stage results of our development programs are favorable, these programs may take significantly longer than expected to complete or may not be completed at all. If we or our collaborators abandon or are delayed in our development efforts related to any drug or drug candidate, we may not be able to generate sufficient revenues to continue our operations at the current or planned level or be profitable, our reputation in the industry and in the investment community would likely be significantly damaged, additional funding may not be available to us or may not be available on terms we or others believe are favorable, and our stock price may decrease significantly.

We may not be successful in initiating, enrolling participants in, or completing our studies or trials or advancing our programs on our projected timetable, if at all. Any failure to initiate or delays in our studies, trials or development programs, or unfavorable results or decisions or negative perceptions regarding any of our programs, could cause our stock price to decline significantly. This is particularly the case with respect to our clinical programs.

We will need to obtain additional funds or enter into collaboration agreements to execute on our corporate strategy, and we may not be able to do so at all or on terms you view as favorable; your ownership may be substantially diluted if we do obtain additional funds; you may not agree with the manner in which we allocate our available resources; and we may not be profitable.

It takes many years and potentially hundreds of millions of dollars to successfully develop a compound into a marketed drug. We have accumulated a large deficit that has primarily resulted from the significant expenditures we have made in research and development since our inception. We expect that our losses and operating expenses will continue to be substantial.

All of our internal programs are in the development stage, and we may not have adequate funds to develop all of our compounds into marketed drugs.

We may seek to obtain additional funding through the capital markets or other financing sources. Additional funding may not be available to us or may not be available on terms we or others believe are favorable, including due to negative impacts on the stock market and investor sentiment resulting from the COVID-19 pandemic. Our ability to obtain additional funding may depend on many factors, including those outside our control. Should we obtain additional funding, your ownership interest may be diluted or otherwise negatively impacted.

We have entered into, and may in the future seek to enter into, collaboration or other agreements with other entities to continue to develop and, if successful, commercialize one or more of our drug candidates. We may not be able to enter into any such agreements on terms that we or third parties, including investors or analysts, view as favorable, if at all. Our ability to enter into any such agreement for any of our programs or drug candidates depends on many factors, potentially including the outcomes of additional testing (including clinical trial results) or regulatory applications for marketing approval, and we do not control these outcomes.

We may allocate our resources in ways that do not improve our results of operations or enhance the value of our assets, and our stockholders and others may also not agree with the manner in which we choose to allocate our resources or obtain additional funding. We may also eliminate, scale back, or delay some or all of our research and development programs, and any such reductions or failure to apply our resources effectively or to obtain additional funding could narrow, slow, or otherwise adversely impact the development and commercialization of one or more of our drug candidates, which could reduce our opportunities for success and have a material adverse effect on our business, our prospects, and the market price of our common stock.

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In addition, we cannot assure you that we will be profitable or, if we are profitable for any particular time period, that we will be profitable in the future.

Our business may be negatively impacted based on the clinical trials and preclinical studies of, and decisions affecting, one or more of our drug candidates.

The results and timing of clinical trials and preclinical studies obtained by us or our collaborators or licensees, as well as related decisions by us, collaborators, licensees, and regulators, can affect our stock price. Results of clinical trials and preclinical studies are uncertain and subject to different interpretations by regulatory agencies, us, or others. The design of these trials and studies (which may change significantly and be more expensive than anticipated depending on results and regulatory decisions), as well as related analyses of such results, including adverse effects, may not be viewed favorably by us or third parties, including investors, analysts, current or potential collaborators, the academic and medical communities, and regulators, which could adversely impact the development and opportunities for regulatory approval of drug candidates and commercialization (and even result in withdrawal from the market) of approved drugs. The same may be true of decisions regarding the focus and prioritization of our research and development efforts. Stock prices of companies in our industry have declined significantly when such results and decisions were unfavorable or perceived negatively or when a drug candidate or product did not otherwise meet expectations.

The development, approval or commercialization of any of our drug candidates could be negatively affected by circumstances related to other drug candidates or approved products.

Information on our drug candidates in clinical development is preliminary and incomplete, and for such drug candidates, particularly in the earlier stages of development, information on approved products in the same or related drug classes may indicate potential risks related to the development of our drug candidates. In particular, safety issues affecting other drugs or drug candidates may result in increased regulatory scrutiny of the safety of our drugs or drug candidates, may raise potential adverse publicity, and may affect product sales or result in litigation.

For example, etrasimod is an orally available modulator of the S1P receptors. Other orally available modulators of the S1P receptors, such as Gilenya, have been associated with risks such as adverse cardiovascular effects, including lowering of the heart rate and heart blocks, infection, macular edema, respiratory effects, fetal risk, a rare brain infection, and elevations in liver enzymes. These adverse reactions and risks may be associated with S1P receptor modulation and could be found to be associated with the use of etrasimod. Such adverse reactions and risks, either actual or perceived, could negatively impact the development, approval, or commercialization of etrasimod, or our ability to enter into a collaboration on acceptable terms.

Topline data may not accurately reflect the complete results of a particular study or trial.

We may publicly disclose topline or interim data from time to time, which are based on preliminary analyses of then-available efficacy and safety data, and the results and related findings and conclusions are subject to change following a more comprehensive review of the data related to the particular study or trial.

We also make assumptions, estimations, calculations, and conclusions as part of our analyses of data, and others, including regulatory agencies, may not accept or agree with our assumptions, estimations, calculations, conclusions, or analyses or may interpret or weigh the importance of data differently, which could impact the value of the particular program, the approvability or commercialization of the particular drug candidate or drug, and our company in general. In addition, the information we may publicly disclose regarding a particular study or clinical trial is based on what is typically extensive information, and you, regulators, or others may not agree with what we determine is the material or otherwise appropriate information to include in our disclosure, and any information we determine not to disclose may ultimately be deemed significant with respect to future decisions, conclusions, views, activities, or otherwise regarding a particular drug, drug candidate or our business.

Our hypothesis that selectively targeting receptors can lead to more efficacious or safer drugs may not be correct.

In general, we have designed and optimized the drug candidates that we or our collaborators and licensees are developing (including etrasimod, olorinab, APD418 and ralinepag) to selectively target certain receptors found on cells in humans. Our hypothesis is that selectivity may allow our drug candidates to address diseases more efficaciously or without some of the negative effects associated with less selective drugs. In certain cases, we believe early research and, if available, early clinical testing, provides preliminary support for our hypothesis. However, our hypothesis may not be correct, early research and early phase clinical testing may not be predictive of efficacy or safety in later trials, and our drug candidates may not be approved or, if approved, have the desired efficacy or safety profile.

It is generally our strategy to develop drug candidates that we believe will be first-in-class, best-in-class, or similar descriptions, or otherwise have broad clinical utility, optimized pharmacology, or optimized pharmacokinetics. Some or all of our drug candidates

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may not achieve these goals. For example, failure to complete enrollment in clinical trials on schedule or at all could prevent a drug candidate from being first-in-class. Similarly, comparing data from different trials, or making predictions based on preclinical data, may not allow us to correctly determine whether our drug candidates are superior to competitive drugs or drug candidates in the same way that comparisons can be made from conducting trials in which our and a competitive drug is tested “head to head” in the same trial. The failure of our drugs or drug candidates to be first-in-class, best-in-class, or similar descriptions, or have broad clinical utility, optimized pharmacology, or optimized pharmacokinetics, or a lack of “head to head” data, could adversely affect development, regulatory approval, third-party payor support, or market adoption, which could have a material adverse impact on our business.

The results of preclinical studies and completed clinical trials are not necessarily predictive of future results, and our current drug candidates or any approved drugs may not be further developed or have favorable results in later studies or trials.

Preclinical studies and Phase 1 and Phase 2 clinical trials are not primarily designed to test the efficacy of a drug candidate, but rather to establish potential mechanisms of action, test safety, study pharmacokinetics and pharmacodynamics, and understand the drug candidate’s side effects at various doses, schedules, or routes of administration. Favorable results in early studies or trials may not be confirmed in later studies or trials, including preclinical studies that continue or that are initiated after earlier clinical trials and large-scale clinical trials, and our drug candidates or drugs in subsequent trials or studies may fail to show desired safety and efficacy despite having progressed through earlier-stage trials. For example, we have announced positive topline Phase 2 results for etrasimod in participants with ulcerative colitis, but these results may not be confirmed in any subsequent Phase 3 study. By way of another example, the impact of etrasimod on heart rate that was observed in completed clinical trials may not be observed in subsequent trials, and it could be viewed negatively by the FDA or other regulatory agencies.

Unfavorable results from clinical trials or preclinical studies could result in delays, modifications, or abandonment of ongoing or future clinical trials, or abandonment of a program. Clinical and preclinical results are frequently susceptible to varying interpretations that may delay, limit, or prevent regulatory approvals or commercialization. Negative or inconclusive results or adverse medical events during such trials or studies could cause a clinical trial to be delayed, repeated, or terminated; a program to be abandoned; or negatively impact a related marketed drug, which could have a material adverse effect on our business, financial condition, and results of operations.

Our product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval, limit the commercial profile of an approved label, or result in significant negative consequences following marketing approval, if any.

Undesirable side effects caused by our product candidates could cause us or regulatory authorities to interrupt, delay, or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA, EMA or other comparable foreign authorities. Results of our trials could reveal a high and unacceptable severity and prevalence of these or other side effects. In such an event, our trials could be suspended or terminated, and the FDA, EMA or comparable foreign regulatory authorities could order us to cease further development of or deny approval of our product candidates for any or all targeted indications. The drug-related side effects could affect patient recruitment or the ability of enrolled participants to complete the trial or result in potential product liability claims. Any of these occurrences may harm our business, financial condition, and prospects significantly.

Additionally, if one or more of our product candidates receives marketing approval, and we or others later identify undesirable side effects caused by such products, a number of potentially significant negative consequences could result, including:

 

regulatory authorities may withdraw approvals of such product;

 

regulatory authorities may require additional warnings on the label;

 

we may be required to create a medication guide outlining the risks of such side effects for distribution to patients;

 

we could be sued and held liable for harm caused to patients; and

 

our reputation may suffer.

For example, in February 2020 the FDA issued a drug safety communication announcing that it requested Eisai voluntarily withdraw lorcaserin (previously marketed in the United States as BELVIQ and BELVIQ XR) from the U.S. market based on the FDA’s analysis of data from a study completed by Eisai and a change in the FDA’s risk-benefit assessment of BELVIQ. Eisai agreed to voluntarily withdraw lorcaserin products from the U.S. market, as requested by the FDA, and from foreign markets. Following these events, lawsuits relating to lorcaserin against us and others have been filed in the United States and abroad.

Any of these events could prevent us from achieving or maintaining market acceptance of the particular product candidate, if approved, and could significantly harm our business, results of operations, and prospects.

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Drug discovery and development is intensely competitive in the therapeutic areas on which we focus. If the number of our competitors increase or they develop treatments that are approved faster, marketed better, less expensive, or demonstrated to be more effective or safer than our drugs or drug candidates, our commercial opportunities could be reduced or eliminated.

Many of the drugs we or our collaborators are attempting or may attempt to discover and develop may compete with existing therapies in the United States and other territories. In addition, many companies are pursuing the development of new drugs that target the same diseases and conditions that we target. For example, with regard to etrasimod, there are other drugs that have a similar mechanism of action that entered Phase 3 clinical development before etrasimod for the same indications that we are pursuing, such as ulcerative colitis.

Our competitors, particularly large pharmaceutical companies, may have substantially greater research, development, marketing, and sales capabilities and greater financial, scientific, and human resources than we do. Companies that complete clinical trials, obtain required regulatory agency approvals, and commence commercial sale of their drugs before we do for the same indication may achieve a significant competitive advantage, including certain patent and marketing exclusivity rights. In addition, our competitors’ drugs may have fewer side effects, more desirable characteristics (such as efficacy, route of administration, or frequency of dosing), or be viewed more favorably by patients, healthcare providers, healthcare payers, the medical community, the media, or others than our drug candidates or drugs, if any, for the same indication. Our competitors may also market generic or other drugs that compete with our drugs at a lower price than our drugs, which may negatively impact our drug sales, if any. Any results from our research and development efforts, or from our joint efforts with our existing or any future collaborators, may not compete successfully with existing or newly discovered products or therapies.

Our revenues in the future will be substantially dependent on the success of our or our collaborators’ and licensees’ marketing of drugs we have discovered or developed. To the extent such drugs are not commercially successful, our business, financial condition, and results of operations may be materially adversely affected, and the price of our common stock may decline.

We believe our revenues will be substantially dependent on the success of the drugs we or our collaborators and licensees successfully develop. We do not know whether or when such drug candidates will be approved by regulatory authorities for sale or commercialized. Even if approved and commercialization begins, we do not know if such commercialization will be successful or otherwise meet our, your, analysts’, or others’ expectations, and the market price of our common stock could decline significantly. For example, sales of lorcaserin to date have been less than we and others initially anticipated, and, in February 2020, Eisai (as well as its distributor in South Korea) determined to withdraw lorcaserin (previously marketed in the United States as BELVIQ and BELVIQ XR) from the market based on concerns raised by the FDA.

We cannot guarantee future product sales or achievement of milestones under our collaborations and license agreements. For example, our license agreement with United Therapeutics for ralinepag does not contain a covenant obligating United Therapeutics to use any particular efforts to develop or commercialize any product, and we may never receive any milestone or royalty payments under this license agreement. In addition, our collaboration and license agreements may be terminated in certain circumstances, which may result in us not receiving additional milestone or other payments under the terminated agreement.

The degree of market acceptance and commercial success of a drug will depend on a number of factors, including the following, as well as risks identified in other risk factors:

 

the number of patients treated with the drug and their results;

 

market acceptance and use of the drug, which may depend on the public’s awareness and view of the drug, economic changes, national and world events, potentially seasonal and other fluctuations in demand, the timing and impact of current or new competition, and the drug’s perceived advantages or disadvantages over alternative treatments (including relative convenience, ease of administration, and prevalence and severity of any adverse events, including any unexpected adverse events);

 

the actual and perceived safety and efficacy of the drug on both a short- and long-term basis among actual or potential patients, healthcare providers and others in the medical community, regulatory agencies, and insurers and other payers, including related decisions by any such entity or individual;

 

incidence and severity of any side effects, including as a result of off-label use or in combination with one or more drugs;

 

new data relating to the drug, including as a result of additional studies, trials, or analyses of the drug or related drugs or drug candidates, whether conducted by us or by others;

 

physicians’ awareness of the drug, and the willingness of physicians to prescribe and of patients to use the drug;

 

the claims, limitations, warnings, and other information in the drug’s current or future labeling;

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any current or future scheduling designation for the drug by the U.S. Drug Enforcement Administration, or DEA, or any comparable foreign authorities;

 

our or our collaborators’ maintenance of an effective sales force, marketing team, strategy, program, medical affairs group, and related functions, as well as our or our collaborators’ sales, marketing, and other representatives accurately describing the drug consistent with its approved labeling;

 

the price and perceived cost-effectiveness of the drug, including as compared to possible alternatives;

 

the ability of patients and physicians and other providers to obtain and maintain coverage and adequate reimbursement, if any, by third-party payers, including government payers;

 

the ability and desire of group purchasing organizations, or GPOs, including distributors and other network providers, to sell the drug to their constituencies;

 

introduction of counterfeit or unauthorized versions of the drug;

 

to the extent the drug is approved and marketed in a jurisdiction with a significantly lower price than in another jurisdiction, the impact of the lower pricing in the higher-priced territory, including on the pricing of reimbursement, if available, and by the diversion of lower-priced of the drug into the higher-priced territory; and

 

the availability of adequate commercial manufacturing and supply chain for the drug.

Our drugs may not be commercially successful if not widely covered and adequately reimbursed by third-party payers, and we may depend on others to obtain and maintain third-party payer access; inadequate third-party coverage and reimbursement could make entering into agreements with pharmaceutical companies to collaborate or commercialize our drugs more difficult and diminish our revenues.

Our and our collaborators’ and licensee’s ability to successfully commercialize any of our drugs that have been or may be approved will depend, in part, on government regulation and the availability of coverage and adequate reimbursement from third-party payers, including private health insurers and government payers, such as the Medicaid and Medicare programs, increases in government-run, single-payer health insurance plans, and compulsory licenses of drugs. We expect government and third-party payers will continue their efforts to contain healthcare costs by limiting coverage and reimbursement levels for new drugs. In addition, many countries outside of the U.S. have nationalized healthcare systems in which the government pays for all such products and services and must approve product pricing, and some U.S. politicians advocate for implementation of a comparable system in the United States. A government or third-party payer decision not to approve pricing, or provide adequate coverage and reimbursements, for our drugs, if any, could limit market acceptance of and demand for our drugs.

It is increasingly difficult to obtain coverage and adequate reimbursement levels from third-party payers, and significant uncertainty exists as to the coverage and reimbursement of newly approved prescription drug products. We or our collaborators also face competition in negotiating for coverage from pharmaceutical companies and others with competitive drugs or other treatment, and these competitors may have significantly more negotiating leverage or success with respect to individual payers than we or our collaborators may have.

Federal and state healthcare reform measures that have been or may be implemented in the future may result in more rigorous coverage criteria, more limited coverage, and downward pressure on the price that we may receive for any approved product, which could seriously decrease our future revenues. The Patient Protection and Affordable Care Act, as amended, or the ACA, which was enacted in 2010, is one such healthcare reform measure that has made a number of substantial changes in the way healthcare is financed by both governmental and private insurers. In the years since its enactment, there have been, and continue to be, significant developments in, and continued legislative, executive, and judicial activity around, attempts to repeal, replace, or modify the ACA. While Congress has not passed comprehensive repeal legislation, several bills affecting the implementation of certain taxes under the ACA have been signed into law. The TCJA includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the ACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate”. Additionally, the 2020 federal spending package permanently eliminated, effective January 1, 2020, the ACA-mandated “Cadillac” tax on high-cost employer-sponsored health coverage and medical device tax and, effective January 1, 2021, also eliminated the health insurer tax. Further, the Bipartisan Budget Act of 2018, or the BBA, among other things, amended the ACA, effective January 1, 2019, to increase from 50 percent to 70 percent the point-of-sale discount that is owed by pharmaceutical manufacturers who participate in Medicare Part D and to close the coverage gap in most Medicare drug plans, commonly referred to as the “donut hole”. In December 2018, the United States Department of Health and Human Services’ Centers for Medicare & Medicaid Services, or CMS, published a new final rule permitting further collections and payments to and from certain ACA qualified health plans, or QHPs, and health insurance issuers under the ACA risk adjustment program in response to the outcome of federal district court litigation regarding the method CMS uses to determine this risk adjustment. On April 27, 2020, the United States Supreme Court reversed a Federal Circuit decision that previously upheld Congress’s

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denial of $12 billion in "risk corridor" funding. On December 14, 2018, a Texas U.S. District Court Judge ruled that the ACA is unconstitutional in its entirety because the “individual mandate” was repealed by Congress as part of the TCJA. On December 18, 2019, the U.S. Court of Appeals for the Fifth Circuit upheld the District Court ruling that the individual mandate was unconstitutional and remanded the case back to the District Court to determine whether the remaining provisions of the ACA are invalid as well. The United States Supreme Court is currently reviewing this case, but it is unknown when a decision will be made. Although the U.S. Supreme Court has not yet ruled on the constitutionality of the ACA, on January 28, 2021, President Biden issued an executive order to initiate a special enrollment period from February 15, 2021 through May 15, 2021 for purposes of obtaining health insurance coverage through the ACA marketplace. The executive order also instructs certain governmental agencies to review and reconsider their existing policies and rules that limit access to healthcare, including among others, reexamining Medicaid demonstration projects and waiver programs that include work requirements, and policies that create unnecessary barriers to obtaining access to health insurance coverage through Medicaid or the ACA. It is unclear how the Supreme Court ruling, other such litigation, and the healthcare reform measures of the Biden administration will impact the ACA and our business and operations.

In addition, there has been heightened scrutiny in the United States and other countries of pharmaceutical pricing practices in light of the rising cost of prescription drugs and biologics. In the United States, such scrutiny has resulted in congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drugs. Further, the Trump administration’s budget proposal for fiscal year 2021 included a $135 billion allowance to support legislative proposals seeking to reduce drug prices, increase competition, lower out-of-pocket drug costs for patients, and increase patient access to lower-cost generic and biosimilar drugs. On March 10, 2020, the Trump administration sent “principles” for drug pricing to Congress, calling for legislation that would, among other things, cap Medicare Part D beneficiary out-of-pocket pharmacy expenses, provide an option to cap Medicare Part D beneficiary monthly out-of-pocket expenses, and place limits on pharmaceutical price increases. On July 24, 2020 and September 13, 2020, President Trump announced several executive orders related to prescription drug pricing that seek to implement several of the administration’s proposals. The FDA also released a final rule on September 24, 2020 providing guidance for states to build and submit importation plans for drugs from Canada. Further, on November 20, 2020, HHS finalized a regulation removing safe harbor protection for price reductions from pharmaceutical manufacturers to plan sponsors under Part D, either directly or through pharmacy benefit managers, unless the price reduction is required by law. The rule also creates a new safe harbor for price reductions reflected at the point-of-sale, as well as a safe harbor for certain fixed fee arrangements between pharmacy benefit managers and manufacturers. On November 20, 2020, CMS issued an interim final rule implementing President Trump’s Most Favored Nation executive order, which would tie Medicare Part B payments for certain physician-administered drugs to the lowest price paid in other economically advanced countries, effective January 1, 2021. On December 28, 2020, the United States District Court in Northern California issued a nationwide preliminary injunction against implementation of the interim final rule. However, it is unclear whether the Biden administration will work to reverse these measures or pursue similar policy initiatives. At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. It is possible that additional governmental action is taken in response to the COVID-19 pandemic. For example, the CARES Act and other COVID-19 relief legislation suspended the 2% Medicare rate reduction sequester from May 1, 2020 through March 31, 2021, and extended the sequester by one year, through 2030. Further, on August 6, 2020, the Trump administration issued another executive order that instructs the federal government to develop a list of “essential” medicines and then buy them and other medical supplies from U.S. manufacturers instead of from companies around the world, including China. The order is meant to reduce regulatory barriers to domestic pharmaceutical manufacturing and catalyze manufacturing technologies needed to keep drug prices low and the production of drug products in the United States.

Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors. The implementation of additional cost containment measures or other healthcare reforms may also limit our commercial opportunities by reducing the amount a potential collaborator or licensee is willing to pay to license our programs or drug candidates in the future, which may prevent us from being able to establish and maintain collaborations and license agreements, generate revenue, attain profitability, or commercialize our products.

In the European Union, similar political, economic and regulatory developments may affect our ability to profitably commercialize our product candidates, if approved. In addition to continuing pressure on prices and cost containment measures, legislative developments at the European Union or member state level may result in significant additional requirements or obstacles that may increase our operating costs. The delivery of healthcare in the European Union, including the establishment and operation of health services and the pricing and reimbursement of medicines, is almost exclusively a matter for national, rather than European Union, law and policy. National governments and health service providers have different priorities and approaches to the delivery of healthcare and the pricing and reimbursement of products in that context. In general, however, the healthcare budgetary constraints in most European Union member states have resulted in restrictions on the pricing and reimbursement of medicines by relevant health

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service providers. Coupled with ever-increasing European Union and national regulatory burdens on those wishing to develop and market products, this could prevent or delay marketing approval of our product candidates, restrict or regulate post-approval activities and affect our ability to commercialize our product candidates, if approved.

In markets outside of the United States and the European Union, reimbursement and healthcare payment systems vary significantly by country, and many countries have instituted price ceilings on specific products and therapies.

Certain Governments outside of the United States impose strict price controls, which may adversely affect our revenues, if any.

In some countries, particularly the countries of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available therapies. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be harmed, possibly materially.

Forecasting potential sales for drugs will be difficult, and if our projections are inaccurate, our business and stock price may be adversely affected.

Our business planning requires us to forecast or make assumptions regarding demand and revenues for our drugs if they are approved, despite numerous uncertainties. These uncertainties may be increased if we rely on our collaborators to conduct commercial activities and provide us with accurate and timely information. Actual results may deviate materially from projected results for various reasons, including the following, as well as risks identified in other risk factors:

 

the rate of adoption in the particular market, including fluctuations in demand for various reasons, such as fluctuations related to economic changes, national and world events, holidays, and seasonal changes;

 

pricing (including discounting or other promotions), reimbursement, product returns or recalls, competition, labeling, DEA scheduling, adverse events, and other items that impact commercialization;

 

lack of patient and physician familiarity with the drug;

 

lack of patient use and physician prescribing history;

 

lack of commercialization experience with the drug;

 

actual sales to patients may significantly differ from expectations based on sales to wholesalers;

 

uncertainty relating to when the drug may become commercially available to patients and rate of adoption in other territories; and

 

other changes in regulatory or commercial conditions.

Revenues from drug sales may be based in part on estimates, judgment, and accounting policies, and incorrect estimates or regulators’ or others’ disagreement regarding such estimates or accounting policies may result in changes to guidance, projections, or previously reported results. Expected and actual product sales and quarterly and other results may greatly fluctuate, and such fluctuations can adversely affect the market price of our common stock, perceptions of our ability to forecast demand and revenues, and our ability to maintain and fund our operations.

Our efforts will be seriously jeopardized if we are unable to attract and retain key and other employees.

Our success depends on the continued contributions of our principal management, development, and scientific personnel and the ability to hire and retain key and other personnel. We face competition for such personnel, and we believe that risks and uncertainties related to our business may impact our ability to hire and retain key and other personnel. If we do not recruit and retain effective management and other key employees, particularly our executive officers, our operations, our ability to generate or raise additional capital, and our business in general, may be adversely impacted. For example, to execute our clinical programs, our strategy is to maintain a sufficient and robust program management function with clinical expertise. We are in the process of modifying and building this function, and we may not be able to establish the function we believe necessary to support our clinical goals and meet our corporate objectives.

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We are expanding our organization and may experience difficulties in managing this growth, which could disrupt our operations.

Although we reduced our recruiting and hiring activities in light of the ongoing COVID-19 pandemic, as part of our long-term business plan, we are seeking to expand our employee base to increase our managerial, scientific, operational, manufacturing supply, commercial, financial, and other resources and to hire more consultants and contractors, including in and outside of our office locations. Future growth will impose significant additional responsibilities on our management, including the need to identify, recruit, maintain, motivate and integrate additional employees, consultants and contractors. Also, our management may need to divert attention away from our day-to-day activities and devote a substantial amount of time to managing these growth activities. We may not be able to effectively manage the expansion of our operations, which may result in weaknesses in our infrastructure, give rise to operational mistakes, loss of business opportunities, loss of employees, and reduced productivity among remaining employees. Our future growth could require significant capital expenditures and may divert financial resources from other projects, such as the development of additional product candidates. Moreover, if our management is unable to effectively manage our growth, our expenses may increase more than expected, our ability to generate and/or grow revenues could be reduced, and we may not be able to implement our business strategy. Our future financial performance and our ability to develop and then commercialize any approved products and compete effectively will depend, in part, on our ability to effectively manage any future growth.

Data generated or analyzed with respect to product use in the market or required postmarketing or other studies or trials may result in decreased demand, lower sales, product recall, regulatory action, or litigation.

An NDA holder (or the equivalent outside the United States) is responsible for assessing and monitoring the safety of a drug that has been approved for marketing, including reviewing reports of adverse safety events. In addition, NDA holders often conduct additional studies or trials or analyze new or previous data related to an approved drug, including with respect to required postmarketing studies and in connection with seeking additional regulatory approvals in new territories.

Any new data generated, including from adverse event reports or required postmarketing, registration, or other studies or trials, may result in label changes, adversely affect sales or development, result in withdrawal of the drug from the market, or result in litigation. In addition, analyses of previous data can have similar risks. Regulatory agencies may consider the new data or analyses in reviewing marketing applications for drug candidates in their territories or impose post-approval requirements that require significant additional expenditures. For example, in February 2020, the FDA requested that Eisai withdraw lorcaserin (previously marketed in the United States as BELVIQ and BELVIQ XR) from the U.S. market based on the FDA’s analysis of data from a study completed by Eisai and a change in the FDA’s risk-benefit assessment of BELVIQ, and regulators in other countries have taken similar steps. Eisai agreed to voluntarily withdraw lorcaserin products from the U.S. market, as requested by the FDA, and from foreign markets. Following these events, lawsuits relating to lorcaserin against us and others have been filed in the United States and abroad. While these lawsuits remain in preliminary stages and we are actively disputing the allegations contained therein, to the extent they proceed, and the claims they allege are found to have merit and an adverse judgment ensues, the lawsuits may have a material adverse effect on our business or financial condition.

The discovery of significant problems with a product or class of products similar to any approved drug could have an adverse effect on our or our collaborator’s or licensee’s commercialization.

If we license or otherwise partner our drugs, our failure to maintain such agreements or poor performance or results under such agreements could negatively impact our business.

Our collaborators and licensees may have primary responsibility for the regulatory approval, marketing, distribution, and, in certain circumstances, development, of our drug candidate(s) in the territory or territories under the applicable collaboration. We may have limited or no control over our collaborator’s decisions, including the amount and timing of resources that any of these collaborators will dedicate to such activities. This is the case for our ralinepag exclusive license agreement with United Therapeutics and our lorcaserin Transaction Agreement with Eisai.

When we enter collaboration and license agreements, we are subject to a number of other risks, including:

 

our collaborators and licensees may not comply with applicable laws or regulatory guidelines, which could adversely impact the development or commercialization of the drug or drug candidate;

 

there could be disagreements regarding the agreements or the study or development that delay or terminate the commercialization, research, study, or development, delay or eliminate potential payments under the agreements, or increase our costs under or outside of the agreements;

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our collaborators and licensees may not effectively allocate adequate resources, may have limited experience in a particular territory, or may generate unfavorable data or results; and

 

our collaborators and licensees may not perform as expected, including with regard to making any required payments, and the agreements may not provide adequate protection or may not be effectively enforced.

We or our collaborators or licensees might terminate our agreements in certain circumstances or amend the terms of our agreement, and investors and analysts may not view any termination or amendment as favorable.

We rely on other companies, including third-party manufacturers and sole-source suppliers, to manufacture all our drugs and drug candidates, and we or such other companies may encounter failures or difficulties or not receive or provide adequate supply, which could adversely affect development or commercialization.

We do not own or operate manufacturing facilities that can produce active pharmaceutical ingredient, or API, intermediates, and other material required to make our drug candidates. Instead, we rely on other companies to supply API, intermediates, and other materials. Certain of these materials are available from only one or a small number of suppliers, and using a new supplier, if available, could result in substantial delay and greater cost. Our and our manufacturers’ dependence on single or limited sources of materials may adversely affect our ability to develop and deliver drug products on a timely and competitive basis, or at all.

Any performance failure on the part of us or a third-party manufacturer could result in a product recall or seizure or a delay or other adverse effect on sales of an approved product or the clinical development or regulatory approval of one or more of our other drug candidates. We or third-party manufacturers may encounter difficulties involving production yields, regulatory compliance, lot release, quality control, and quality assurance, as well as shortages of qualified personnel.

The ability to adequately and timely manufacture and supply drug product is dependent on the uninterrupted and efficient operation of the manufacturing facilities, which is impacted by many manufacturing variables, including:

 

availability or contamination of raw materials and components used in the manufacturing process, particularly those for which we have no other source or supplier;

 

ability to accommodate changes in dosage or formulation;

 

capacity of our facilities or those of our contract manufacturers;

 

having the ability to adjust to changes in actual or anticipated use of the facility, including with respect to having sufficient capacity and a sufficient number of qualified personnel;

 

facility contamination by microorganisms or viruses or cross contamination;

 

compliance with regulatory requirements, including inspectional notices of violation and warning letters;

 

maintenance and renewal of any required licenses or certifications;

 

changes in actual or forecasted demand;

 

timing and number of production runs;

 

production success rates and bulk drug yields; and

 

timing and outcome of product quality testing.

In addition, we or our third-party manufacturers may encounter delays and problems in manufacturing our drug candidates or drugs for a variety of reasons, including accidents during operation, failure of equipment, delays in receiving materials, natural or other disasters, health epidemics (including COVID-19), political or governmental unrest or changes, social unrest, intentional misconduct, or other factors inherent in operating complex manufacturing facilities. Commercially available starting materials, reagents and excipients may be or become scarce or more expensive to procure, and we may not be able to obtain favorable terms in agreements with subcontractors. We or our third-party manufacturers may not be able to operate our respective manufacturing facilities in a cost-effective manner or in a time frame that is consistent with our expected future manufacturing needs. If we or our third-party manufacturers cease or interrupt production or if our third-party manufacturers and other service providers fail to supply materials, products, or services to us for any reason, such interruption could delay progress on our programs, or interrupt the commercial supply of drug products, with the potential for additional costs and lost revenues. If this were to occur, we may also need to seek alternative means to fulfill our manufacturing needs.

We may not be able to enter into or maintain agreements with manufacturers whose facilities and procedures comply with applicable law. Manufacturers are subject to ongoing periodic inspection (which may be unannounced) by the FDA, the DEA,

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corresponding state and foreign authorities and other regulatory authorities to ensure strict compliance with Current Good Manufacturing Practices, or cGMPs, regulations, and other applicable government regulations and corresponding foreign standards. We do not have control over a third-party manufacturer’s compliance with these regulations and standards. If we or one of our manufacturers or other company in the supply chain fail to maintain compliance or otherwise experience setbacks, we or they could be subject to civil or criminal penalties, the production of one or more of our drug candidates or any approved products could be interrupted or suspended, or our product could be recalled or withdrawn, resulting in delays, additional costs, and potentially lost revenues.

Our drug candidates are subject to extensive regulation, and we may not receive required regulatory approvals, or timely approvals, for any of our drug candidates.

Preclinical and clinical development, manufacturing, labeling, packaging, storage, recordkeeping, advertising, promotion, export, marketing and distribution, and other activities relating to developing and manufacturing drugs are subject to extensive regulation by the FDA, EMA and other regulatory agencies. We and others we contract with are subject to periodic inspections (which may be unannounced) by the FDA, the DEA, EMA and other regulatory agencies. Failure to comply with applicable regulatory requirements may, either before or after product approval, subject us to administrative or judicially imposed sanctions that may negatively impact research and development or commercialization, or otherwise negatively impact our business. Regulatory agencies have in the past inspected certain aspects of our business, and we were provided with observations of objectionable conditions or practices with respect to our business. There is no assurance that regulatory agencies will not provide us with observations in future inspections or that we satisfactorily addressed observations provided to us in past inspections.

Regulatory approval of a drug candidate is not guaranteed, and our business and reputation may be harmed by any failure or significant delay in receiving regulatory approval. The number and types of preclinical studies and clinical trials that will be required for FDA approval varies depending on the drug candidate, the disease or condition that the drug candidate is designed to target and the regulations applicable to any particular drug candidate. Despite the time and expense exerted in preclinical and clinical studies, failure can occur at any stage, and we could encounter problems that cause us to abandon clinical trials or to repeat or perform additional preclinical studies and clinical trials.

We cannot predict when or whether, or assure you that, our collaborators’ or our past or any future regulatory submissions or responses will be sufficient to the applicable regulatory authority or others, that the applicable regulatory authority or others will consider data or our analyses, interpretations or procedures related to any of our drug candidates as sufficient or persuasive, or that any regulatory authority will ever approve any of our drug candidates in the future.

To market any drugs outside of the United States, we and our current or future collaborators must comply with numerous and varying regulatory requirements of other countries. Approval procedures vary among countries and can involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries might differ from that required to obtain FDA approval. The regulatory approval process in other countries may include all of the risks associated with FDA approval as well as additional risks, some of which may be unanticipated. In addition, in many countries outside the United States, it is required that the product be approved for reimbursement before the product can be approved for sale in that country. We or these third parties may not obtain approvals from regulatory authorities outside the United States on a timely basis, if at all. Approval by the FDA or any other regulatory authority does not assure or predict with any certainty that any other regulatory authority will approve the drug. The failure to obtain approval in one jurisdiction may negatively impact our ability to obtain approval elsewhere. We may not be able to file for marketing approvals and may not receive necessary approvals to commercialize our products in any jurisdiction, which could materially impair our ability to generate revenue. In addition, existing regulatory policies and laws may change. We cannot predict the likelihood, nature, or extent of new government regulation, either in the United States or in other countries, or the impact on our drug candidates or drugs. For example, new FDA regulation could delay or prevent marketing approvals, increase the cost of research and development, and result in narrower product labeling and expensive post-marketing requirements.

Fast Track, Breakthrough Therapy, Accelerated Approval, Priority Review, or similar designations by the FDA or other applicable regulatory agencies may not lead to a faster development or review process.

The FDA may grant Fast Track, Breakthrough Therapy, Accelerated Approval, Priority Review, or other designations to product candidates that meet applicable guidelines in order to speed the availability of certain drugs. Other applicable regulatory agencies may grant similar designations. These designations may apply only to the combination of a product candidate and a specific indication or patient population. Product candidates that receive these designations may not actually receive faster clinical development or regulatory review or approval any sooner than other product candidates that do not have such designation, or at all. Furthermore, a product’s receipt of such a designation does not increase the likelihood that the product candidate will receive marketing approval. The FDA or other regulatory agency may also withdraw a designation if it determines that the product candidate no longer meets the relevant criteria.

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For example, the FDA has granted Fast Track designation for APD418 for treatment of decompensated heart failure, or DHF, which we refer to as acute heart failure, or AHF, in patients who have heart failure with reduced ejection fraction, or HFrEF, and for temanogrel for improvement of cardiovascular outcomes and myocardial recovery by the prevention and treatment of microvascular obstruction (MVO) in patients undergoing percutaneous coronary intervention (PCI). Despite receiving these Fast Track designations, such designations may be withdrawn in the future, and in any event APD418 and temanogrel may not actually receive faster clinical development or regulatory review or approval any sooner than other product candidates that do not have such designation, or at all.

Our activities and drugs will still be subject to extensive postmarketing regulation if approved.

Following regulatory approval of any of our drug candidates, we and our collaborators will be subject to ongoing obligations and continued regulatory review from the FDA, EMA and other applicable regulatory agencies, such as continued adverse event reporting requirements. There may also be additional postmarketing obligations imposed by the FDA, EMA or other regulatory agencies. These obligations may result in significant expense and limit the ability to commercialize such drugs.

The FDA, EMA or other regulatory agencies may also require that the sponsor of the NDA or foreign equivalent, as applicable, conduct additional clinical trials to further assess approved drugs after approval under a post-approval commitment. Such additional studies may be costly and may impact the commercialization of the drug. Unfavorable trial results from postmarketing studies could negatively impact market acceptance of the drug, limit the revenues we generate from sales, result in the drug’s withdrawal from the market, negatively impact the potential approval of the drug in other territories, and result in litigation.

The FDA, EMA or other regulatory agencies may also impose significant restrictions on the indicated uses for which a drug may be marketed. Additionally, the FDA may require a Risk Evaluation and Mitigation Strategies, or REMS, program, including in connection with a drug’s approval, to help ensure that the benefits of the drug outweigh its risks. A REMS may be required to include various elements, such as a medication guide or patient package insert, a communication plan to educate healthcare providers of the drug’s risks, limitations on who may prescribe or dispense the drug, requirements that patients enroll in a registry or undergo certain health evaluations, or other measures that the FDA deems necessary to ensure the safe use of the drug.

With regard to any drug that receives regulatory approval, the labeling, packaging, adverse event reporting, storage, advertising, and promotion for the drug will be subject to extensive regulatory requirements. We and the manufacturers of our products are also required to comply with cGMP regulations, which include requirements relating to quality control and quality assurance, as well as the corresponding maintenance of records and documentation. Further, regulatory agencies must approve these manufacturing facilities before they can be used to manufacture our products, and these facilities are subject to ongoing regulatory inspections. In addition, regulatory agencies subject a drug, its manufacturer, and the manufacturer’s facilities to continual review and inspections. The subsequent discovery of previously unknown problems with a drug, including adverse events of unanticipated severity or frequency, or problems with the facility where the drug is manufactured, may result in restrictions on the marketing of that drug, up to and including withdrawal of the drug from the market. In the United States, the DEA and comparable state-level agencies also heavily regulate the manufacturing, holding, processing, security, recordkeeping, and distribution of drugs that are considered controlled substances, and the DEA periodically inspects facilities for compliance with its rules and regulations.

Our ability to generate revenues from any of our drugs that receive regulatory approval will be subject to a variety of risks, many of which are out of our control.

Despite having been approved for marketing by a regulatory agency, a drug may not gain market acceptance among patients, healthcare providers, healthcare payers or the medical community. We believe that the degree of market acceptance and our ability to generate revenues from such products will depend on a number of factors, including:

 

timing of market introduction of our drugs and competitive drugs and alternative treatments;

 

physician and patient awareness of our drugs;

 

actual and perceived efficacy and safety of our drugs;

 

incidence and severity of any side effects;

 

potential or perceived advantages or disadvantages as compared to alternative treatments;

 

effectiveness of sales, marketing and distribution support;

 

price of our future products, both in absolute terms and relative to alternative treatments;

 

the general marketplace for the particular drug;

 

the effect of current and future healthcare laws on our drug candidates;

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availability of coverage and adequate reimbursement from government and other third-party payers; and

 

product labeling or product insert requirements of the FDA or other regulatory authorities.

If our approved drugs fail to achieve market acceptance, we may not be able to generate significant revenues to be profitable.

Collaboration and license agreement relationships may lead to disputes, divert management’s attention, expose us to liability, and delay drug development and commercialization, and we may not realize the full commercial potential of our drug candidates or drugs.

We may have conflicts with our prospective, current, or past collaborators or licensees, such as conflicts concerning rights and obligations under our agreements (including, for example, relating to indemnification for product liability claims and losses), the interpretation of preclinical or clinical data, the achievement of milestone or other payments, the ownership of intellectual property, or research and development, regulatory, commercialization, litigation, or other strategy. Collaborators or licensees may stop supporting our drug candidates or drugs, including if they no longer view the program as in their best financial or other interests or they develop or obtain rights to competing drug candidates or drugs. In addition, collaborators or licensees may fail to effectively develop, obtain approval for, or commercialize our drugs, which may result in us not realizing their full commercial potential. If any conflicts arise with any of our current, past, or prospective collaborators or licensees, the other party may act in a manner that is adverse to our interests. Any such disagreement could result in one or more of the following, each of which could delay, or lead to termination of, development or commercialization of our drug candidates or drugs, and in turn prevent us from generating revenues or cause us to incur liabilities:

 

unwillingness or inability on the part of a collaborator or licensee to pay for studies or other research, milestones, royalties or other payments that we believe are due to us under a collaboration;

 

uncertainty regarding ownership of intellectual property rights arising from our collaboration or license agreement activities, which could prevent us from entering into additional collaborations;

 

unwillingness on the part of a collaborator or licensee to keep us informed regarding the progress of its development, regulatory, commercialization, pharmacovigilance, or other activities or to permit public disclosure of the results of those activities;

 

slowing or cessation of a collaborator’s or licensee’s research, development, regulatory, or commercialization efforts with respect to our drug candidates or drugs; or

 

litigation or arbitration with our collaborator or licensee, or with third parties (including relating to product liability, intellectual property, or other subject matters).

Setbacks and consolidation in the pharmaceutical and biotechnology industries could make entering into agreements with pharmaceutical companies to collaborate or commercialize our drugs more difficult and diminish our revenues.

Setbacks in the pharmaceutical and biotechnology industries, such as those caused by safety concerns relating to drugs or drug candidates, as well as competition from generic drugs, litigation and industry consolidation, may have an adverse effect on us, including by making it more difficult to enter into agreements with pharmaceutical companies to collaborate or commercialize our drugs and diminishing our revenues. For example, the FDA may be more cautious in approving our drug candidates based on safety concerns relating to these or other drugs or drug candidates, or pharmaceutical companies may be less willing to enter into new collaborations or continue existing collaborations if they are integrating a new operation as a result of a merger or acquisition or if their therapeutic areas of focus change following a merger.

We and our collaborators rely on third parties to conduct clinical trials and preclinical studies. If those parties do not comply with regulatory and contractual requirements, successfully carry out their contractual obligations, or meet expected deadlines, our drug candidates may not advance in a timely manner or at all.

In the course of our discovery, preclinical testing, and clinical trials, we and our collaborators rely on third parties, including investigators, clinical research organizations, manufacturers, and laboratories, to perform critical services. For example, we rely on third parties to conduct our clinical trials and many of our preclinical studies. Clinical research organizations are responsible for many aspects of the trials, including finding and enrolling participants for testing and administering the trials. Although we rely on these third parties to conduct our clinical trials, we are responsible for ensuring that each of our clinical trials is conducted in accordance with its investigational plan and protocol. Moreover, the FDA and foreign regulatory authorities require us to comply with regulations and standards, commonly referred to as Good Clinical Practices, or GCPs, for conducting, monitoring, recording, and reporting the results of clinical trials to ensure that the data and results are scientifically credible and accurate and that the trial participants are adequately informed of the potential risks of participating in clinical trials. Our reliance on third parties does not relieve us of these

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responsibilities and requirements. These third parties may not be available when we need them or, if they are available, may not comply with all legal, regulatory, and contractual requirements or may not otherwise perform their services in a timely or acceptable manner, and we may need to enter into new arrangements with alternative third parties, and our preclinical studies or clinical trials may be extended, delayed, or terminated. These independent third parties may also have relationships with other commercial entities, some of which may compete with us. In addition, if such third parties fail to perform their obligations in compliance with legal and regulatory requirements and our protocols, our preclinical studies or clinical trials may not meet regulatory requirements or may need to be repeated. As a result of our dependence on third parties, we may face delays or failures outside of our direct control. These risks also apply to the development activities of collaborators, and we do not control their research and development, clinical trial, or regulatory activities.

We may participate in new strategic transactions that could impact our liquidity, increase our expenses, present significant distractions to our management, and be viewed as unfavorable.

From time to time we consider strategic transactions, such as out-licensing or in-licensing of compounds or technologies, acquisitions of companies, asset purchases, and spin-offs. Additional potential transactions we may consider include a variety of different business arrangements, such as strategic collaborations, joint ventures, restructurings, divestitures, business combinations, and investments. In addition, another entity may pursue us as an acquisition target. Any such transaction may be viewed as unfavorable by our stockholders or others and may require us to incur non-recurring or other charges, may create potential liabilities, may increase our near- and long-term expenditures, and may pose significant integration challenges, require additional expertise, or disrupt our management or business, any of which could harm our operations and financial results.

When we evaluate significant proposed transactions we conduct business, legal, and financial due diligence with the goal of identifying and evaluating material risks involved in the transaction. Despite our efforts, we ultimately may be unsuccessful in ascertaining or evaluating all such risks and, as a result, might not realize the intended advantages of the transaction. If we fail to realize the expected benefits from any transaction we may consummate, whether as a result of unidentified risks, integration difficulties, regulatory setbacks, or other events, our business, results of operations, and financial condition could be adversely affected.

We may incur substantial liabilities for any product liability claims or otherwise as a drug product developer.

We develop, test, manufacture, and expect to commercialize drugs for use by humans. We face an inherent risk of product liability exposure related to the testing of our drug candidates in clinical trials, and a risk with the commercialization of lorcaserin (previously marketed in the United States as BELVIQ and BELVIQ XR) as well as any other drug that may be approved for marketing.

Whether or not we are ultimately successful in any product liability or related litigation, such litigation would consume substantial amounts of our financial and managerial resources and might result in adverse publicity, all of which would impair our business. In addition, damages awarded in a product liability action could be substantial and could have a negative impact on our financial condition.

An individual may bring a liability claim against us if one of our drugs or drug candidates causes, or merely appears to have caused, an injury. Regardless of merit or eventual outcome, liability claims may result in:

 

decreased demand for our drug;

 

injury to our reputation;

 

increased difficulty to attract, or withdrawal of, clinical trial participants;

 

costs of related litigation;

 

substantial monetary awards to clinical trial participants, patients, or other claimants;

 

loss of revenues; and

 

the inability to commercialize our drugs or drug candidates.

We have limited product liability insurance that covers our clinical trials and products as well as indemnification protection in certain of our collaboration or license agreements. Our insurance costs continue to rise, and we may not be able to maintain or obtain insurance coverage at a reasonable cost, we may not have insurance coverage that will be adequate to satisfy any liability that may arise, and our collaborators or licensees may not indemnify us, each of which could have an adverse effect on our results of operations and financial condition.

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For example, in December 2016 we granted Eisai an exclusive, royalty-bearing license, or transferred intellectual property, to develop, manufacture, and commercialize lorcaserin (previously marketed in the United States as BELVIQ and BELVIQ XR) in all countries and territories of the world. Our former subsidiary Arena Pharmaceuticals GmbH, or Arena GmbH, manufactured BELVIQ and other products for commercialization or clinical trials up until the sale of that manufacturing business to Siegfried effective March 31, 2018. Under our agreements with Eisai, we and Eisai will each bear 50% of losses arising from any alleged defective manufacturing of BELVIQ by Arena GmbH prior to the date of the sale to Siegfried, and Eisai will be solely responsible for any expenses and losses associated with other product liability claims. In February 2020, the FDA requested that Eisai withdraw lorcaserin products from the U.S. market based on the FDA’s analysis of data from a study completed by Eisai and a change in the FDA’s risk-benefit assessment of lorcaserin, and regulators in other countries have taken similar steps. Eisai agreed to voluntarily withdraw lorcaserin products from the U.S. market, as requested by the FDA, and from foreign markets. Following these events, lawsuits relating to lorcaserin against us and others have been filed in the United States and abroad. Any damages awarded in connection with lorcaserin litigation could be substantial and have a negative impact on our financial condition. Eisai or others could also take the position that some or all claims fall outside their indemnification obligations, or they could be unable to indemnify us, in connection with litigation or other claims, and seeking to enforce rights to indemnification could require significant financial resources and management attention. Even if we are successful in defending against all claims or are fully indemnified or insured, such claims could still consume significant financial resources, divert attention away from our day-to-day activities, and result in adverse publicity, all of which could have a negative impact on our financial condition and our business.

We have significant contractual obligations that may adversely affect our cash flow, cash position, and stock price.

We have long-term leases on real properties and other contractual obligations, and limited revenues. If we are unable to generate cash from operations in the future sufficient to meet our financial obligations we will need to obtain additional funds from other sources, and we may not be able to do so at all or on terms favorable to our stockholders or us.

Also, if we do not have sufficient cash in the future and are unable to generate cash from operations or obtain additional funds from other sources sufficient to meet our contractual obligations, we may have to delay or curtail some or all of our development and commercialization programs, sell or license some or all of our assets on terms that you or others may view as unfavorable, or default on obligations under our agreements.

We may be subject, directly or indirectly, to federal, state, and international healthcare laws and regulations, including but not limited to fraud and abuse and false claims laws. If we are unable to comply, or have not fully complied, with such laws or regulations, we could face substantial penalties and prosecution.

In the United States, drug manufacturers and marketers are subject to various state and federal fraud and abuse laws, including, without limitation, the Federal Anti-Kickback Statute and Federal False Claims Act. There are similar laws in other countries. These laws may impact, among other things, the research, manufacturing, sales, marketing, and education programs for our drugs.

The Federal Anti-Kickback Statute prohibits persons and entities from knowingly and willingly soliciting, offering, receiving, or providing any remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the purchase, lease, order, or furnishing or arranging for, a good, item, facility, or service, for which payment may be made, in whole or in part, under a federal healthcare program such as the Medicare and Medicaid programs. Several courts have interpreted the statute’s intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, the statute has been violated. The Federal Anti-Kickback Statute is broad and, despite a series of narrow statutory exceptions and regulatory safe harbors, prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry. Moreover, the ACA, among other things, amended the intent requirement of the Federal Anti-Kickback Statute and certain criminal healthcare fraud statutes. A person or entity no longer needs to have actual knowledge of these statutes or specific intent to violate them. The ACA also provides that the government may assert that a claim including items or services resulting from a violation of the Federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the Federal Civil False Claims Act. Many states have also adopted laws similar to the Federal Anti-Kickback Statute, some of which apply to the referral of patients for healthcare items or services reimbursed by any source, not only the Medicare and Medicaid programs.

The Federal Civil False Claims Act prohibits, among other things, persons or entities from knowingly presenting, or causing to be presented, a false claim to, or the knowing use of false statements to obtain payment from, the federal government. Suits filed under the Federal Civil False Claims Act can be brought by any individual on behalf of the government, known as “qui tam” actions, and such individuals, commonly known as “whistleblowers,” may share in any amounts paid by the entity to the government in fines or settlement. The filing of qui tam actions has caused a number of pharmaceutical, medical device, and other healthcare companies to have to defend a Federal Civil False Claims Act action. When an entity is determined to have violated the Federal Civil False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties for each separate false claim, in addition to other penalties that may apply. Various states have also enacted laws modeled after the Federal Civil False Claims Act, some of which are broader in scope and may apply regardless of payer.

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The Federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, created federal criminal statutes that prohibit, among other actions, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private third-party payers, knowingly and willfully embezzling or stealing from a healthcare benefit program, willfully obstructing a criminal investigation of a healthcare offense, and knowingly and willfully falsifying, concealing, or covering up a material fact or making any materially false, fictitious, or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items, or services. Additionally, the civil monetary penalties statute imposes penalties against any person or entity that, among other things, is determined to have presented or caused to be presented a claim to a federal health program that the person knows or should know is for an item or service that was not provided as claimed or is false or fraudulent. 

The Federal Physician Payments Sunshine Act, created under the ACA, and its implementing regulations require certain manufacturers of drugs, devices, biologicals, and medical supplies for which payment is available under Medicare, Medicaid, or the Children’s Health Insurance Program (with certain exceptions) to report annually to the U.S. Department of Health and Human Services, or HHS, information related to payments or other transfers of value made to physicians (defined to include doctors, dentists, optometrists, podiatrists, and chiropractors) and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members. Beginning in 2022, applicable manufacturers also will be required to report such information regarding their transfers of value during the previous year to physician assistants, nurse practitioners, clinical nurse specialists, certified registered nurse anesthetists, anesthesiologist assistants, and certified nurse midwives.

We may be subject to healthcare data privacy and security regulation by both the federal government and the states in which we conduct our business. HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and their respective implementing regulations, impose specified requirements on certain healthcare providers, health plans, and healthcare clearinghouses, known as covered entities, as well as their business associates and their covered subcontractors that perform services involving the use or disclosure of individually identifiable health information relating to the privacy, security, and transmission of individually identifiable health information. Further, we may also be subject to state health information privacy and data breach notification laws which govern the collection, use, disclosure, and protection of health-related and other personal information, many of which differ from each other in significant ways and often are not pre-empted by HIPAA, thus requiring additional compliance efforts.

Additionally, the Drug Supply Chain Security Act imposes obligations on manufacturers of pharmaceutical products, among others, related to product tracking and tracing. Among the requirements, manufacturers will be required to provide certain information regarding the drug product to individuals and entities to which product ownership is transferred, label drug product with a product identifier, and keep certain records regarding the drug product. The transfer of information to subsequent product owners by manufacturers will eventually be required to be done electronically. Manufacturers will also be required to verify that purchasers of the manufacturers’ products are appropriately licensed. Further, manufacturers will have drug product investigation, quarantine, disposition, and notification responsibilities related to counterfeit, diverted, stolen, and intentionally adulterated products, as well as products that are the subject of fraudulent transactions or which are otherwise unfit for distribution such that they would be reasonably likely to result in serious health consequences or death.

Outside the United States, interactions between pharmaceutical companies and physicians are also governed by strict laws, such as national anti-bribery and kickback laws of European countries, regulations, industry self-regulation codes of conduct, and physicians’ codes of professional conduct. Payments made to physicians in certain European Union Member States must be publicly disclosed. Moreover, agreements with physicians often must be the subject of prior notification and approval by the physician’s employer, his or her competent professional organization, and/or the regulatory authorities of the individual European Union Member States. Failure to comply with these requirements could result in reputational risk, public reprimands, administrative penalties, fines, or imprisonment. Risks associated with these laws may increase as new laws and regulations are adopted and as enforcement agencies adopt or increase enforcement efforts.

We are unable to predict whether we could be subject to actions under any of these fraud and abuse or other laws, or the impact of such actions. If we are found to be in violation of any of the laws described above and other applicable federal, state and international laws, we may be subject to penalties, including significant civil, criminal and/or administrative penalties, damages, fines, individual imprisonment, disgorgement, possible exclusion from government healthcare reimbursement programs, integrity oversight and reporting obligations to resolve allegations of non-compliance with these laws, and the curtailment or restructuring of our operations, all of which could have a material adverse effect on our business and results of operations.

We may be subject to a variety of laws regarding data privacy and protection, which carry potentially significant penalties for non-compliance.

Across the United States and globally, laws and regulations governing data privacy and security continue to develop and evolve. The data privacy and security laws and regulations to which we are subject may significantly impact our business activities. Many of the laws and regulations that apply to us contain ambiguous provisions or impose requirements that differ from country to country, creating uncertainty. Compliance with the enhanced obligations imposed by such laws and regulations may require us to revise our

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business practices, allocate more resources to privacy and security, and implement new technologies. Such efforts may result in significant costs to our business.

For example, the European Union, Switzerland, and certain other foreign territories have restrictions on the transfer, use and maintenance of certain personal data, including providing that transfers of personal data outside of their territories may only take place if the country to which the personal data is transferred ensures an “adequate” level of privacy protection. The European Commission has previously found that the United States did not provide adequate levels of protection. In addition, the European Commission has approved a data protection regulation, known as the General Data Protection Regulation, or GDPR, which became effective on May 25, 2018. The GDPR contains provisions specifically directed at the processing of health information, higher sanctions and extra-territoriality measures intended to bring non-EU companies under the regulation. We conduct clinical trials in the European Union, and in the future we may expand our business operations to include additional operations in the European Union. With such expansion, we would be subject to increased governmental regulation, including the GDPR, in the EU countries in which we operate, including restrictions on data transfers that may negatively impact our ability and increase our costs to maintain international operations. Penalties for non-compliance with the GDPR are steep, with potential fines of up to 4% of our global revenue.

Additionally, the California Consumer Privacy Act, or CCPA, went into effect on January 1, 2020. The CCPA created new individual privacy rights for consumers (as that word is broadly defined in the law) and places increased privacy and security obligations on entities handling personal data of consumers or households. It requires covered companies to provide new disclosures to California consumers, provide such consumers new ways to opt-out of certain sales of personal information, and allow for a new cause of action for data breaches. The CCPA may impact our business activities and exemplifies the vulnerability of our business to not only cyber threats but also the evolving regulatory environment related to personal data and protected health information.

Failure to comply with data privacy and security laws and regulations could result in regulatory penalties and significant legal liability and could have a material adverse impact on our financial results.

We may not be able to effectively integrate, manage or maintain our international operations, and such difficulty could adversely affect our business operations, financial condition, results of operations and stock price.

We have personnel in Switzerland, and we engage in clinical trials and other activities in many territories outside of the United States. There are significant risks associated with foreign operations, including but not limited to:

 

compliance with various local laws and regulations, which may conflict or change, such as privacy regulations, tax laws, export and import restrictions, employment laws, regulatory requirements, and other governmental approvals, permits, and licenses;

 

complexities and difficulties in obtaining protection for and enforcing our intellectual property rights;

 

difficulties in staffing and managing foreign operation, such as the integration of our corporate culture with local customs and cultures;

 

the distraction to our management;

 

foreign currency exchange rates and the impact of shifts in the United States and local economies on those rates;

 

certain expenses including, among others, expenses for travel, translation, and insurance; and

 

integration of our policies and procedures, including disclosure controls and procedures and internal control over financial reporting, with our international operations.

Any of these risks could adversely affect our business.

We and third parties we contract with use hazardous materials in our operations.

Our activities involve the use of materials that could be hazardous to human health and safety or the environment. We cannot completely eliminate the risks associated with their use, storage, or disposal, which could cause:

 

interruption of our development or manufacturing efforts;

 

injury to our employees and others;

 

environmental damage resulting in costly cleanup; and

 

liabilities under domestic or foreign laws and regulations governing the use, storage, handling, and disposal of these materials and specified waste products.

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In such an event, we may be held liable for any resulting damages, and any such liability could exceed our resources. Although we carry insurance in amounts and type that we consider commercially reasonable, we cannot be certain that the coverage or coverage limits of our insurance policies will be adequate, and we do not have insurance coverage for losses relating to an interruption of our research and development efforts caused by contamination.

Our business, including our preclinical and clinical programs, may be significantly and adversely affected by the COVID-19 pandemic.

Coronavirus disease 2019, or COVID-19, has spread globally, including in the United States and Switzerland, where we have operations, and in many other countries where we are conducting or plan to conduct clinical trials or have manufacturing activities conducted. COVID-19 is impacting domestic and worldwide economic activity, including global financial markets on which we rely for financing to fund our operations. The COVID-19 pandemic poses the risk that we or our clinical trial participants, employees, contractors, collaborators and vendors may be prevented from conducting certain clinical trials or other business activities for an indefinite period of time, including due to “stay-at-home” orders or shutdowns that have been or may be requested or mandated by governmental authorities. Beginning the week of March 16, 2020, substantially all of our workforce began working from home either all or substantially all of the time. The pandemic, stay-at-home orders, and our work-from-home policies may negatively impact productivity, disrupt our business, and delay our development programs, all of which may delay our regulatory and commercialization timelines. The magnitude of these impacts will depend, in part, on the length and severity of the restrictions and other limitations on our ability to conduct our business in the ordinary course.

The COVID-19 pandemic has impacted and may continue to impact our clinical programs, including our etrasimod, olorinab, and APD418 programs. For example, some clinical site activations and participant enrollment and screening rates slowed for certain periods in certain regions. These timing changes, however, have been highly variable and their aggregate impact remains uncertain. As a result, it is not possible at this time to estimate the total impact COVID-19 will have on our clinical programs. If the COVID-19 pandemic continues in the United States and around the world, we may experience, or continue to experience, disruptions that could severely impact our preclinical studies and clinical trials, including:

 

delays in receiving approval from local regulatory authorities to initiate our planned clinical trials;

 

delays or difficulties in enrolling or retaining participants in our clinical trials;

 

delays or difficulties in clinical site initiation, including difficulties in recruiting clinical site investigators and clinical site staff;

 

delays in clinical sites receiving the supplies and materials needed to conduct our clinical trials, including interruption in global shipping that may affect the transport of clinical trial materials;

 

changes in local regulations as part of a response to the COVID-19 pandemic which may require us to change the ways in which our clinical trials are conducted, which may result in unexpected costs, or to discontinue the clinical trials altogether;

 

diversion of healthcare resources away from the conduct of clinical trials, including the diversion of hospitals serving as our clinical trial sites and hospital staff supporting the conduct of our clinical trials;

 

interruption of key clinical trial activities, such as clinical trial site monitoring, due to limitations on travel imposed or recommended by federal or state governments, employers and others, or interruption of clinical trial participant visits and study procedures, the occurrence of which could affect the integrity of clinical trial data;

 

risk that participants enrolled in our clinical trials will acquire COVID-19 while the clinical trial is ongoing, which could impact the results of the clinical trial, including by increasing the number of observed adverse events;

 

interruptions in preclinical studies due to restricted or limited operations at our research and development facilities;

 

delays in necessary interactions with local regulators, ethics committees, and other important agencies and contractors due to limitations in employee resources or forced furlough of employees;

 

limitations in employee resources that would otherwise be focused on the conduct of our clinical trials, including because of sickness of employees or their families or the desire of employees to avoid contact with large groups of people;

 

refusal of the FDA or other regulatory authorities to accept data from clinical trials in affected geographies; and

 

interruption or delays to our sourced discovery and clinical activities.

The COVID-19 pandemic continues to rapidly evolve. The extent to which the outbreak impacts our business, preclinical studies, and clinical programs will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the disease, the duration of the pandemic, stay-at-home orders, travel restrictions, and “social distancing” in the United States, Switzerland and other countries, business closures or business disruptions,

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and the effectiveness of actions taken in the United States and other countries to contain and treat the disease and vaccinate their populations.

Our business and operations might be disrupted or adversely affected by catastrophic events and security breaches, including any cybersecurity incidents.

Our U.S. operations are primarily located in a business park in San Diego, California and an office in Boston, Massachusetts, and our principal executive offices are located in Park City, Utah. We also have certain operations in Zug, Switzerland. We depend on our facilities and on collaborators, licensees, contractors and vendors for the continued operation of our business, some of whom are located in Europe and Asia. As a result, natural disasters or other catastrophic events in various parts of the world, including interruptions in the supply of natural resources, political and governmental changes, disruption in transportation networks or delivery services, severe weather conditions, wildfires and other fires, explosions, actions of animal rights activists, terrorist attacks, earthquakes, wars, and public health issues (including the COVID-19 pandemic) could disrupt our operations or those of our collaborators, contractors, and vendors or contribute to unfavorable economic or other conditions that could adversely impact us.

In addition, we depend on the efficient and uninterrupted operation of our computer and communications systems, which we use for, among other things, sensitive company data, including our financial data, intellectual property, and other proprietary business information.

While certain of our operations have business continuity and disaster recovery plans and other security measures intended to prevent and minimize the impact of IT-related interruptions, our IT infrastructure and the IT infrastructure of our current and any future collaborators, contractors, and vendors are vulnerable to damage from cyberattacks, computer viruses, unauthorized access, electrical failures and natural disasters or other catastrophic events. We could experience failures in our information systems and computer servers, which could result in an interruption of our normal business operations and require substantial expenditure of financial and administrative resources to remedy. System failures, accidents, or security breaches can cause interruptions in our operations and can result in a material disruption of our research and development programs and other business operations. The loss of data from completed or future studies or clinical trials could result in delays in our research, development, or regulatory approval efforts and significantly increase our costs to recover or reproduce the data. Similarly, we and our licensees rely on third parties to conduct studies and clinical trials of our drug candidates and manufacture our drug candidates, and similar events relating to these third parties’ computer systems could also have a material adverse effect on our business. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liabilities and the development of any of our other drug candidates and the commercialization of drugs could be delayed or otherwise adversely affected.

Even though we believe we carry commercially reasonable business interruption and liability insurance, and our contractors may carry liability insurance that protect us in certain events, we might suffer losses as a result of business interruptions that exceed the coverage available under our and our contractors’ insurance policies or for which we or our contractors do not have coverage. For example, we are not insured against a terrorist attack. Any natural disaster or catastrophic event could have a significant negative impact on our operations and financial results. Moreover, any such event could delay our research and development programs and adversely affect, which may include stopping, our commercial production.

We and our employees and directors may be named as defendants in litigation that could result in substantial costs and divert management’s attention.

Securities class action litigation may be brought against a company following a decline in the market price of its securities. This risk is especially relevant for us because companies in the pharmaceuticals industry often experience significant stock price volatility. For example, beginning in 2010, a number of lawsuits were filed against us and certain of our employees and directors alleging we and the other defendants violated federal securities laws by making materially false and misleading statements regarding our lorcaserin trials, thereby artificially inflating the price of our common stock. These lawsuits were settled in 2018.

While we carry liability insurance, any losses we incur in connection with any current or future lawsuits may not be covered by insurance in an amount sufficient to cover our losses or at all, and our assets may be insufficient to cover any amounts that exceed our insurance coverage. We may have to pay damage awards or otherwise may enter into settlement arrangements in connection with any future claims. A settlement of any of future lawsuit against us could also involve the issuance of common stock or other equity, which may dilute your ownership interest. Any payments or settlement arrangements could have material adverse effects on our business, operating results, financial condition, or your ownership interest. Even if the plaintiffs’ claims are not successful, any future lawsuit against us and/or our directors or executive officers could result in substantial costs and significantly and adversely impact our reputation and divert our management’s attention and resources, which could have a material adverse effect on our business, operating results or financial condition. In addition, any such lawsuits may make it more difficult to finance our operations, obtain certain types of insurance (including directors’ and officers’ liability insurance), and attract and retain qualified executive officers, other employees, and directors.

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Negative U.S. and global economic conditions may pose challenges to our business strategy, which relies on funding from collaborators or the financial markets, and may create other financial risks for us.

While significant uncertainty remains as to the aggregate impact of the COVID-19 pandemic on our operations and liquidity, and on the global economy as a whole, the COVID-19 pandemic has already had a significant adverse impact on domestic and global economies, as well as global financial markets. Negative conditions in the U.S. or global economy, including financial markets, may adversely affect our business and the business of our current and prospective collaborators, distributors, and licensees, which we sometimes refer to generally as our collaborators, and others with which we do or may conduct business. The duration and severity of these conditions is uncertain. If negative economic conditions persist or worsen, we may be unable to secure funding to sustain our operations or to find suitable collaborators to advance our internal programs, even if we achieve positive results from our research and development or business development efforts. Such negative conditions could also impact commercialization of any drugs we and our collaborators and licensees develop, as well as our financial condition. From time to time we may maintain a portfolio of investments in marketable debt securities, which are recorded at fair value. Although we have established investment guidelines relative to diversification and maturity with the objectives of maintaining safety of principal and liquidity, we rely on credit rating agencies to help evaluate the riskiness of investments, and such agencies may not accurately predict such risk. In addition, such agencies may reduce the credit quality of our individual holdings, which could adversely affect their value. Lower credit quality and other market events, such as changes in interest rates and deterioration in credit markets, may have an adverse effect on the fair value of our investment holdings and cash position.

Currency fluctuations may negatively affect our financial condition.

We primarily spend and generate cash in U.S. dollars and present our consolidated financial statements in U.S. dollars. However, a portion of our expected and potential payments and receipts, including relating to our Swiss operations and under certain of our agreements, are in foreign currencies. A fluctuation of the exchange rates of foreign currencies versus the U.S. dollar may, thus, adversely affect our financial results, including cash balances, expenses and revenues. We may in the future enter into hedging transactions to try to reduce our foreign currency exposure, but there is no assurance that such transactions will occur or be successful.

Our ability to use net operating losses and certain other tax attributes to offset future taxable income or taxes may be limited.

As of December 31, 2020, we had federal and state net operating loss carryforwards of $945.7 million and $446.6 million, respectively. Portions of our federal net operating loss carryforwards will begin to expire, if not utilized, beginning in 2028, and our state net operating loss carryforwards of $446.6 million begin expiring in 2028. Our net operating loss carryforwards could expire unused and be unavailable to offset future income tax liabilities. Under the TCJA, as modified by the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, federal net operating losses incurred in tax years beginning after December 31, 2017, may be carried forward indefinitely, but the deductibility of such federal net operating losses in tax years beginning after December 31, 2020 is limited to 80% of taxable income. It is uncertain if and to what extent various states will conform to federal tax laws. In addition, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or the IRC, and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50% change, by value, in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income or taxes may be limited. We have experienced ownership changes in the past and we may experience additional ownership changes in the future as a result of subsequent shifts in our stock ownership, some of which may be outside of our control. If an ownership change occurs and our ability to use our net operating loss carryforwards is materially limited, it would harm our future operating results by effectively increasing our future tax obligations. Similar provisions of state law may also apply to limit the use of our state net operating loss carryforwards.  In addition, at the state level, there may be periods during which the use of net operating losses is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed.  For example, California passed legislation imposing limits on the usability of California state net operating losses and certain tax credits in tax years beginning after 2019 and before 2023.

Risks Relating to Our Intellectual Property

Our success is dependent on intellectual property rights held by us and third parties and our interest in these rights is complex and uncertain.

Our success will depend on our own and on current or future collaborators’ abilities to obtain, maintain, and defend patents. In particular, the patents directed to our drug candidates and drugs are important to developing and commercializing drugs and to our revenue. We have numerous U.S. and foreign patents issued and patent applications pending for our technologies. There is no assurance that any of our patent applications will issue, or that any of the patents will be enforceable or will cover a drug or other commercially significant technology or method, or that the patents will be held to be valid for their expected terms.

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The procedures for obtaining a patent are complex. These procedures require an analysis of the scientific technology related to the invention and many sophisticated legal issues. Obtaining patent rights outside the United States often requires the translation of highly technical documents and an improper translation may jeopardize our patent protection. Ensuring adequate quality of translators and foreign patent attorneys is often very challenging. Consequently, the process for having our pending patent applications issue as patents will be difficult, complex, time consuming, and expensive. Our patent position is very uncertain, and we do not know when, or if, we will obtain additional patents, or if the scope of the patents obtained will be sufficient to protect our drugs or be considered sufficient by parties reviewing our patent positions pursuant to a potential marketing, licensing, or financing transaction.

In addition, other entities may challenge the validity or enforceability of our patents in litigation or administrative proceedings. We cannot make assurances as to how much protection, if any, our patents will provide if we attempt to enforce them or if they are challenged. It is possible that a competitor or a generic pharmaceutical provider may successfully challenge our patents and those challenges may result in reduction or elimination of our patent coverage.

We also rely on confidentiality agreements and trade secrets to protect our technologies. However, such information is difficult to protect. We require our employees to contractually agree not to improperly use our confidential information or disclose it to others, but we may be unable to determine if our employees have conformed or will conform to their legal obligations under these agreements. We also enter into confidentiality agreements with prospective collaborators, collaborators, service providers, and consultants, but we may not be able to adequately protect our trade secrets or other proprietary information in the event of any unauthorized use or disclosure or the lawful development by others of this information. Many of our employees and consultants were, and many of them may currently be, parties to confidentiality agreements with other pharmaceutical and biotechnology companies, and the use of our technologies could violate these agreements. In addition, third parties may independently discover our trade secrets or other proprietary information.

Some of our research and development collaborators and scientific consultants have rights to publish data and information to which we have rights. We generally seek to prevent our collaborators and consultants from disclosing scientific discoveries before we have the opportunity to file patent applications on such discoveries. In some of our collaborations we do not control our collaborators’ ability to disclose their own discoveries under the collaboration, and in some of our academic relationships we are limited to relatively short periods to review a proposed publication and file a patent application. If we cannot maintain confidentiality in connection with our collaborations and relationships, our ability to receive patent protection or protect our proprietary information will be impaired.

We believe that the United States is by far the largest single market for pharmaceuticals in the world. Because of the critical nature of patent rights to our industry, changes in U.S. patent laws could have a profound effect on our future profits, if any. It is unknown which, if any, patent laws will change, how changes to patent laws would ultimately be enforced by the courts, and how they would impact our business.

A dispute regarding the infringement or misappropriation of our proprietary rights or the proprietary rights of others could be costly and result in delays or termination of our future research, development, manufacturing, and sales activities.

Our commercial success depends upon our ability to develop and manufacture our drugs and drug candidates, market and sell drugs, and conduct our research and development activities without infringing or misappropriating the proprietary rights of others. There are many issued patents and pending patent applications owned by others relating to research and development programs that could be determined to be similar, identical, or superior to ours or our licensors or collaborators. We may be exposed to future litigation by others based on claims that our drugs, drug candidates, technologies, or activities infringe the intellectual property rights of others. Numerous issued patents and pending patent applications owned by others exist in the areas of our research and development, including some that purport to allow the patent holder to control the use of all drugs that modulate a particular drug target regardless of whether the infringing drug bears any structural resemblance to a chemical compound known to the patent holder at the time of patent filing. Numerous issued patents and pending patent applications owned by others also exist in the therapeutic areas in which we are developing drugs. There are also numerous issued patents and pending patent applications owned by others that are directed to chemical compounds or synthetic processes that may be necessary or useful to our research, development, manufacturing, or commercialization activities. These could materially affect our ability to develop our drug candidates or manufacture, import, or sell drugs, and our activities, or those of our licensors or collaborators, could be determined to infringe these patents. Because patent applications can take many years to issue, there may be currently pending applications, unknown to us, that may later result in issued patents that our drugs, drug candidates, or technologies may infringe. There also may be existing patents owned by others, of which we are not aware, that our drug candidates or technologies may infringe. Further, there may be issued patents or pending patent applications owned by others in fields relevant to our business, of which we are or may become aware, that we believe (i) are invalid, unenforceable, or we do not infringe; (ii) relate to immaterial portions of our overall research and development, manufacturing, and commercialization efforts; or (iii) in the case of pending patent applications, the resulting patent would not be granted or, if granted, would not likely be enforced in a manner that would materially impact such efforts. We cannot assure you that others holding any of these patents or patent applications will not assert infringement claims against us and seek

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damages or enjoinment of our activities. We also cannot assure you that, in the event of litigation, we will be able to successfully assert non-infringement, unenforceability, invalidity, or immateriality, or that any infringement claims will be resolved in our favor.

In addition, others may infringe or misappropriate our proprietary rights. We may have to institute costly legal action to protect our intellectual property rights, or we may not be able to afford the costs of enforcing or defending our intellectual property rights.

There could be significant litigation and other administrative proceedings in our industry that affect us regarding patent and other intellectual property rights. Any legal action or administrative action against us, or our collaborators, claiming damages or seeking to enjoin commercial activities relating to our research and development, manufacturing, and commercialization activities could:

 

require us, or our collaborators, to obtain a license which may not be available on commercially reasonable terms, if at all;

 

prevent us from importing, making, using, selling, or offering to sell the subject matter claimed in patents held by others and subject us to potential liability for damages;

 

consume a substantial portion of our managerial, scientific, and financial resources; or

 

be costly, regardless of the outcome.

Furthermore, because of the substantial amount of pre-trial document and witness discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised. In addition, during the course of intellectual property litigation, there could be public announcements of the results of hearings, motions, or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the trading price of our common stock.

We are aware of third-party patents, as well as third-party patent applications, that could adversely affect the potential commercialization of etrasimod. For example, we are aware of third-party patents, as well as a third-party patent application, with broad claims to administering an S1P modulator by starting with a lower dose and then increasing to a higher, standard daily dose. While we do not believe that any such claims that would cover the potential commercialization of etrasimod are valid and enforceable, we may be incorrect in this belief.

We have been contacted from time to time by third parties regarding their intellectual property rights, sometimes asserting that we may need a license to use their technologies. If we fail to obtain any required licenses or make any necessary changes to our technologies, we may become involved in expensive and time-consuming litigation or we may be unable to develop or commercialize some or all of our drugs or drug candidates.

We cannot predict the outcome of any litigation matter. For example, our existing patents could be invalidated, found unenforceable or found not to cover a generic form of our drugs.

We cannot protect our intellectual property rights throughout the world.

Filing, prosecuting, defending, and enforcing patents on all of our drug candidates throughout the world would be prohibitively expensive. The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States, and many companies have encountered significant problems in protecting and defending such rights in foreign jurisdictions. Many countries, including certain countries in Europe, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties (for example, the patent owner has failed to “work” the invention in that country or the third party has patented improvements). In addition, many countries limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of the patent. Compulsory licensing of life-saving drugs is also becoming increasingly popular in developing countries either through direct legislation or international initiatives. Such compulsory licenses could be extended to include some of our drug candidates, which could limit our potential revenue opportunities. Moreover, the legal systems of certain countries, particularly certain developing countries, do not favor the aggressive enforcement of patents and other intellectual property protection, particularly those relating to pharmaceuticals, which makes it difficult for us to stop the infringement of our patents. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our business.

Risks Relating to Our Securities

Our stock price will likely be volatile, and your investment in our stock could decline in value.

Our stock price has fluctuated historically. From January 1, 2020, to February 18, 2021, the market price of our stock was as low as $32.95 per share and as high as $90.19 per share. The stock market, particularly in recent years, has experienced significant

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volatility particularly with respect to pharmaceutical and biotechnology stocks, and this trend may continue. The ongoing COVID-19 pandemic, for example, has previously negatively affected the stock market and investor sentiment and has resulted in significant volatility, and the COVID-19 pandemic may have these effects in the future.

Very few drug candidates being tested will ultimately receive regulatory approval, and companies in our industry sometimes experience significant volatility in their stock price. Our stock price may fluctuate significantly depending on a variety of factors, including:

 

results or decisions affecting the development or commercialization of any of our drug candidates or drugs, including the results of studies, trials and other analyses;

 

the success, failure or setbacks of our or a perceived competitor’s drugs or drug candidates;

 

the timing of the development of our drug candidates;

 

discussions or recommendations affecting our drugs or drug candidates by the FDA or other reviewers of preclinical or clinical data or other information related to our drug candidates or drugs;

 

regulatory actions or decisions or legislation affecting drugs or drug candidates, including ours and those of our competitors;

 

the commercial availability and success or failure of any of our drug candidates;

 

the development and implementation of our continuing development and research plans;

 

the entrance into, or failure to enter into, a new collaboration or the modification or termination of an existing collaboration or other material transaction;

 

the timing and receipt by us of milestone and other payments or failing to achieve and receive the same;

 

fluctuation in prescriptions, sales, or financial results (including with respect to revenue recognition, expenses, and other operating results) or inaccurate sales or cash forecasting;

 

accounting restatements and changes;

 

supply chain or manufacturing issues;

 

changes in our research and development budget or the research and development budgets of our existing or potential collaborators;

 

the introduction, development or withdrawal of drug candidates or drugs by others that target the same diseases and conditions that we or our collaborators target or the introduction of new drug discovery techniques;

 

expenses related to, and the results of, litigation, other disputes and other proceedings;

 

financing strategy or decisions;

 

the allocation of our resources;

 

our ability, or the perception by investors of our ability, to continue to meet all applicable requirements for continued listing of our common stock on The Nasdaq Stock Market, and the possible delisting of our common stock if we are unable to do so;

 

developments in intellectual property rights or related announcements;

 

disruptions caused by man-made or natural disasters or public health pandemics or epidemics or other business interruptions, including, for example, the COVID-19 pandemic; and

 

capital market and other macroeconomic conditions.

We are not able to control many of these factors. If our financial or scientific results in a particular period do not meet stockholders’ or analysts’ expectations, our stock price may decline, and such decline could be significant.

Any future equity or debt issuances or other financing transactions may have dilutive or adverse effects on our existing stockholders.

We have been opportunistic in our efforts to obtain cash, and we expect we will evaluate various funding alternatives from time to time. We may issue additional shares of common stock or convertible securities that could dilute your ownership in our company and may include terms that give new investors rights that are superior to yours. We have effective registration statements to sell shares of our common stock and certain other securities, and we may elect to sell shares pursuant to such registration from time to time. In

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February 2020, we entered into a sales agreement with Credit Suisse Securities (USA) LLC, SVB Leerink LLC and Cantor Fitzgerald & Co., pursuant to which we may sell and issue shares of our common stock having an aggregate offering price of up to $250.0 million from time to time in transactions that are deemed to be “at-the-market offering” as defined in Rule 415(a)(4) under the Securities Act of 1933, as amended, or Securities Act. As of the date of this report we have sold 1.2 million shares for aggregate gross proceeds of $100.6 million under the sales agreement and may sell and issue approximately $149.4 million in additional shares under the sales agreement.

Moreover, any issuances by us of equity securities may be at or below the prevailing market price of our common stock and in any event may have a dilutive impact on your ownership interest, which could cause the market price of our common stock to decline. In addition, we may also raise additional funds through the incurrence of debt or other financing transaction, and the investors may have rights superior to your rights in the event we are not successful and are forced to seek the protection of bankruptcy laws or the transaction may otherwise adversely affect our business prospects and existing stockholders.

There are a substantial number of shares of our common stock that may become eligible for future sale in the public market, and the sale of our common stock could cause the market price of our common stock to fall.

As of February 18, 2021, there were (i) options to purchase 8,344,308 shares of our common stock outstanding under our equity incentive plans at a weighted-average exercise price of $41.02 per share, (ii) 242,563 restricted stock unit awards outstanding under our equity incentive plans, (iii) performance restricted stock units outstanding under our equity incentive plans under which up to 25,200 shares of common stock may be issuable upon achievement of all specified performance goals, (iv) 2,465,387 additional shares of common stock remaining issuable under our Amended and Restated 2020 Long-Term Incentive Plan, and (v) 935,544 shares issuable under our 2019 Employee Stock Purchase Plan.

Once issued, the shares described above will be available for immediate resale in the public market. The market price of our common stock could decline as a result of such resales due to the increased number of shares available for sale in the market. As of February 18, 2021, there were 60,334,648 shares of our common stock outstanding.

Our executive officers and directors, and other holders of our common stock and other securities, may take actions that are contrary to your interests, including selling their stock.

Sales of our stock by our executive officers and directors, or the perception that such sales may occur, could adversely affect the market price of our stock. Our executive officers and directors may sell stock in the future, either as part, or outside, of trading plans under Rule 10b5-1 of the SEC.

A small number of stockholders may hold or acquire a significant amount of our outstanding stock. From time to time, there is a large short interest in our stock. These holders of such stock or positions may seek control of us, may support transactions that we or you do not believe are favorable, and may have interests that are different from yours. In addition, sales of a large number of shares of our stock by these large stockholders or other stockholders within a short period of time could adversely affect our stock price.

We may also be involved in disagreements with the holders of our stock, warrants, or other securities in the future. Such disagreements may lead to proxy contests or litigation, which may be expensive and consume management’s time, involve settlements, the terms of which may not be favorable to us, or result in other negative consequences to our business.

Certain of our agreements, provisions in our charter documents, possible future agreements and Delaware law could delay or prevent a change in management or a takeover attempt that you may consider to be in your best interests.

There is a standstill provision in our transaction agreement with Eisai, and we may enter into agreements with others that contain similar provisions. In addition, we may in the future adopt a stockholders’ rights agreement, which would cause substantial dilution to any person who attempts to acquire us in a manner or on terms not approved by our board of directors. These provisions or agreements, as well as other provisions in our certificate of incorporation and bylaws and under Delaware law, could delay or prevent the removal of directors and management and could make more difficult a merger, tender offer, or proxy contest involving us that you may consider to be in your best interests. For example, our charter provisions:

 

allow our board of directors to issue preferred stock without stockholder approval;

 

limit who can call a special meeting of stockholders;

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eliminate stockholder action by written consent; and

 

establish advance notice requirements for nomination for election to the board of directors or for proposing matters to be acted upon at stockholders’ meetings.

Our bylaws provide that the Court of Chancery of the State of Delaware and the federal district courts of the United States of America are the exclusive forums for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.

Our bylaws provide that the Court of Chancery of the State of Delaware will be the exclusive forum for (a) any derivative action or proceeding brought on behalf of us, (b) any action asserting a claim of breach of a fiduciary duty owed by any of our directors or any of our officers or other employees to us or our stockholders, (c) any action asserting a claim against us or any of our directors or any of our officers or other employees arising pursuant to any provision of the Delaware General Corporation Law, our certificate of incorporation or our bylaws, or (d) any action asserting a claim against us or any of our directors or any of our officers or other employee governed by the internal affairs doctrine. This provision does not apply to suits brought to enforce a duty or liability created by the Securities Act or the Exchange Act. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our bylaws further provides that, unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States of America will be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. While the Delaware courts have determined that such choice of forum provisions are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provisions. In such instance, we would expect to vigorously assert the validity and enforceability of the exclusive forum provisions of our bylaws. This may require significant additional costs associated with resolving such action in other jurisdictions and there can be no assurance that the provisions will be enforced by a court in those other jurisdictions.

These exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers and other employees. If a court were to find either exclusive forum provision in our bylaws to be inapplicable or unenforceable in an action, we may incur further significant additional costs associated with resolving the dispute in other jurisdictions, all of which could seriously harm our business.

General Risk Factors

Laws, rules, and regulations, including relating to public companies, may be costly and impact our ability to attract and retain directors and executive officers.

Laws and regulations affecting public companies, including rules adopted by the SEC and by Nasdaq, judicial rulings, and other laws and regulations, including, for example, of state, federal, and foreign governments and relating to privacy, may result in increased costs to us, particularly as we continue to develop the required capabilities in the United States and abroad to develop and commercialize our product candidates. These laws, rules, and regulations could make it more difficult or costly for us to obtain certain types of insurance, including directors’ and officers’ liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws, rules, and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, on our board committees, or as executive officers. We cannot estimate accurately the amount or timing of additional costs we may incur to respond to these laws, rules, and regulations.

Changes in funding for the FDA, the SEC, and other government agencies could hinder their ability to hire and retain key leadership and other personnel, prevent new products and services from being developed or commercialized in a timely manner, or otherwise prevent those agencies from performing normal functions on which the operation of our business may rely, which could negatively impact our business.

The ability of the FDA to review and approve new products can be affected by a variety of factors, including government budget and funding levels, ability to hire and retain key personnel and accept payment of user fees, and statutory, regulatory, and policy changes. Average review times at the agency have fluctuated in recent years as a result. In addition, government funding of the SEC and other government agencies on which our operations may rely, including those that fund research and development activities, is subject to the political process, which is inherently fluid and unpredictable.

Disruptions at the FDA and other agencies may also slow the time necessary for new drugs to be reviewed and/or approved by necessary government agencies, which would adversely affect our business. For example, over the last several years, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA and the SEC, have had to furlough critical

48


 

FDA, SEC, and other government employees and stop critical activities. If a prolonged government shutdown occurs, it could significantly impact the ability of the FDA to timely review and process our regulatory submissions, which could have a material adverse effect on our business. Further, future government shutdowns could impact our ability to access the public markets and obtain capital necessary to properly capitalize and continue our operations.

The withdrawal of the United Kingdom from the European Union, commonly referred to as “Brexit,” may adversely impact our ability to obtain regulatory approvals of our product candidates in the European Union, result in restrictions or imposition of taxes and duties for importing our product candidates into the European Union, and may require us to incur additional expenses in order to develop, manufacture and commercialize our product candidates in the European Union.

Following the result of a referendum in 2016, the United Kingdom left the European Union on January 31, 2020, commonly referred to as “Brexit.” Pursuant to the formal withdrawal arrangements agreed between the United Kingdom and the European Union, the United Kingdom was subject to a transition period that ended December 31, 2020, or the Transition Period, during which EU rules continued to apply. A trade and cooperation agreement, or the Trade and Cooperation Agreement, that outlines the future trading relationship between the United Kingdom and the European Union was agreed in December 2020.

Since a significant proportion of the regulatory framework in the United Kingdom applicable to our business and our product candidates is derived from EU directives and regulations, Brexit has had, and may continue to have, a material impact on the regulatory regime with respect to the development, manufacture, importation, approval and commercialization of our product candidates in the United Kingdom or the European Union. For example, Great Britain is no longer covered by the centralized procedures for obtaining EU-wide marketing authorization from the EMA and, and a separate marketing authorization will be required to marker our product candidates in Great Britain. It is currently unclear whether the Medicines & Healthcare products Regulatory Agency, or MHRA, in the U.K. is sufficiently prepared to handle the increased volume of marketing authorization applications that it is likely to receive.

While the Trade and Cooperation Agreement provides for the tariff-free trade of medicinal products between the UK and the EU there may be additional non-tariff costs to such trade which did not exist prior to the end of the Transition Period.  Further, should the UK diverge from the EU from a regulatory perspective in relation to medicinal products, tariffs could be put into place in the future.  We could therefore, both now and in the future, face significant additional expenses (when compared to the position prior to the end of the Transition Period) to operate our business, which could significantly and materially harm or delay our ability to generate revenues or achieve profitability of our business. Any further changes in international trade, tariff and import/export regulations as a result of Brexit or otherwise may impose unexpected duty costs or other non-tariff barriers on us. These developments, or the perception that any of them could occur, may significantly reduce global trade and, in particular, trade between the impacted nations and the UK It is also possible that Brexit may negatively affect our ability to attract and retain employees, particularly those from the EU. These developments, or the perception that any of them could occur, may significantly reduce global trade and, in particular, trade between the impacted nations and the United Kingdom.

Our employees, clinical trial investigators, CROs, CMOs, consultants, vendors, and collaborators may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements and insider trading.

We are exposed to the risk of fraud or other misconduct by our employees, clinical trial investigators, CROs, CMOs, consultants, vendors, and collaborators. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to us that violates:

 

FDA regulations or those of comparable foreign regulatory authorities, including those laws that require the reporting of true, complete and accurate information;

 

manufacturing standards;

 

federal and state health and data privacy, security, fraud and abuse, government price reporting, transparency reporting requirements, and other healthcare laws and regulations in the United States and abroad;

 

sexual harassment and other workplace misconduct; or

 

laws that require the true, complete and accurate reporting of financial information or data.

Such misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and cause serious harm to our reputation.

We have adopted a Code of Business Conduct and Ethics and other policies and procedures, but it is not always possible to identify and deter misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming

49


 

from a failure to comply with these laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant civil, criminal, and administrative penalties, damages, fines, disgorgement, imprisonment, exclusion from government funded healthcare programs, such as Medicare, Medicaid, and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, additional integrity reporting and oversight obligations, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations.

Our disclosure controls and procedures and our internal control over financial reporting may not prevent potential errors and fraud.

Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all potential errors and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. There are inherent limitations in all control systems, and no system of controls can provide absolute assurance that all control issues and instances of fraud, if any, or misstatements due to error, if any, within the company have been detected. While we believe that our disclosure controls and procedures and internal control over financial reporting are and have been effective at the reasonable assurance level, we intend to continue to examine and refine our disclosure controls and procedures and internal control over financial reporting and to monitor ongoing developments in these areas.

Current and future tax laws and regulation could adversely affect our business and financial condition.

New income, sales, use, or other tax laws, statutes, rules, regulations, or ordinances could be enacted at any time, which could affect the tax treatment of our domestic and foreign earnings. Any new taxes could adversely affect our domestic and international business operations, and our business and financial performance. Further, existing tax laws, statutes, rules, regulations, or ordinances could be interpreted, changed, modified, or applied adversely to us. For example, the TCJA significantly revised the IRC. Future guidance from the Internal Revenue Service and other tax authorities with respect to the TCJA may affect us, and certain aspects of the TCJA could be repealed or modified in future legislation. For example, the CARES Act modified certain provisions of the TCJA. In addition, it is uncertain if and to what extent various states will conform to the TCJA, the CARES Act, or any newly enacted federal tax legislation. Changes in corporate tax rates, the realization of net deferred tax assets relating to our operations, the taxation of foreign earnings, and the deductibility of expenses under the TCJA or future reform legislation could have a material impact on the value of our deferred tax assets, could result in significant one-time charges, and could increase our future U.S. tax expense.

We have an international corporate structure and intercompany arrangements that includes licensing of worldwide intellectual property rights related to certain of our drug candidates to one or more wholly owned subsidiaries in order to, among other things, build a platform for long-term operational and financial efficiencies. One such efficiency is the potential reduction of our worldwide effective tax rate on certain potential future revenues. The application of the tax laws of the jurisdictions in which we operate our international business activities is subject to interpretation and depends on our ability to operate our business in a manner consistent with our corporate structure and intercompany arrangements. Future changes in U.S. and non-U.S. tax laws, including implementation of international tax reform relating to the tax treatment of multinational corporations, if enacted, may reduce or eliminate any potential financial efficiencies that we hoped to achieve by establishing this operational structure. Additionally, taxing authorities, such as the U.S. Internal Revenue Service, may audit and otherwise challenge these types of arrangements, and have done so with other companies in the pharmaceutical industry. If any such changes in tax law are enacted, or our international corporate structure and intercompany arrangements are otherwise challenged, our business could be materially adversely impacted.

Changes or modifications in financial accounting standards, including those related to revenue recognition, may harm our results of operations.

From time to time the Financial Accounting Standards Board, or FASB, either alone or jointly with other organizations, promulgates new accounting principles that could have an adverse impact on our financial position, results of operations, or reported cash flows. Any difficulties in adopting or implementing any new accounting standard, or updating or modifying our internal controls as needed on a timely basis, could result in our failure to meet our financial reporting obligations, which could result in regulatory discipline and harm investors’ confidence in us. In addition, if we were to change our critical accounting estimates, including those related to the recognition of revenue, our operating results could be significantly affected.

 

 

Item 1B.    Unresolved Staff Comments.

None.

50


 

Item 2.    Properties.

We were incorporated in the state of Delaware in April 1997 and our principal executive offices are in Park City, Utah. We also have operations in San Diego, California; Boston, Massachusetts and Zug, Switzerland.

We lease real property to support our business, including research and development, sales, marketing and administration. We believe our leased properties are not material to our business. We believe our facilities are suitable and adequate for our current and near-term needs, and that we will be able to locate additional facilities as needed.

We are not currently subject to any material legal proceedings.

Item 4.    Mine Safety Disclosures.

Not applicable.

 

51


 

 

PART II

Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market information

Our common stock is listed on the Nasdaq Global Select Market under the symbol “ARNA.”

Holders

As of February 18, 2021, there were approximately 81 stockholders of record of our common stock, one of which is Cede & Co., a nominee for Depository Trust Company, or DTC. Shares of common stock that are held by financial institutions as nominees for beneficial owners are deposited into participant accounts at DTC and are considered to be held of record by Cede & Co. as one stockholder.

Dividends

We have never paid cash dividends on our capital stock. We anticipate that we will retain earnings, if any, to support operations and finance the growth and development of our business and, therefore, do not expect to pay cash dividends in the foreseeable future.

Performance graph

The graph below compares the cumulative five-year total return on our common stock from December 31, 2015, through December 31, 2020, to the cumulative total return over such period for (i) the Nasdaq Composite Index and (ii) the Nasdaq Biotechnology Index. The graph assumes the investment of $100 on December 31, 2015, with the reinvestment of dividends, although dividends have not been declared on our common stock, and is calculated according to the Securities and Exchange Commission’s methodology. We caution that the stock price performance shown in the graph may not be indicative of future stock price performance. The graph, including each of the graph lines, was provided by Research Data Group, Inc.

52


 

This information, including the graph below, is not deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission, or subject to the Securities and Exchange Commission’s proxy rules, other than as provided in such rules, or to the liabilities of Section 18 of the Securities Exchange Act of 1934, and shall not be deemed incorporated by reference into any prior or subsequent filing by us under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that we specifically incorporate it by reference into any such filing.

 

 

 

 

53


 

Item 6.    Selected Financial Data.

The following Selected Financial Data should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data” included below in this Annual Report on Form 10-K.

The following amounts related to earnings per share and shares outstanding have been adjusted for all periods reported for the 1-for-10 reverse stock split that we effected in June 2017.

 

 

 

Years ended December 31,

 

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

 

(In thousands, except per share data)

 

Consolidated Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United Therapeutics revenue

 

$

 

 

$

800,000

 

 

$

 

 

$

 

 

$

 

Collaboration revenue

 

 

57

 

 

 

7,284

 

 

 

11,402

 

 

 

19,632

 

 

 

92,163

 

Royalty revenue

 

 

262

 

 

 

(853

)

 

 

6,568

 

 

 

1,705

 

 

 

 

Total revenues

 

 

319

 

 

 

806,431

 

 

 

17,970

 

 

 

21,337

 

 

 

92,163

 

Operating Costs and Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

323,740

 

 

 

231,496

 

 

 

115,029

 

 

 

70,988

 

 

 

63,782

 

Selling, general and administrative

 

 

103,218

 

 

 

77,616

 

 

 

45,257

 

 

 

30,341

 

 

 

27,529

 

Transaction costs

 

 

 

 

 

14,573

 

 

 

2,467

 

 

 

 

 

 

 

Litigation settlement expense, net

 

 

 

 

 

 

 

 

 

 

 

11,975

 

 

 

 

Restructuring charges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,115

 

Total operating costs and expenses

 

 

426,958

 

 

 

323,685

 

 

 

162,753

 

 

 

113,304

 

 

 

97,426

 

Interest and other income (expense), net

 

 

21,905

 

 

 

25,142

 

 

 

5,949

 

 

 

(3,887

)

 

 

(7,037

)

(Loss) income from continuing operations before income taxes

 

 

(404,734

)

 

 

507,888

 

 

 

(138,834

)

 

 

(95,854

)

 

 

(12,300

)

Income tax (provision) benefit

 

 

 

 

 

(110,333

)

 

 

110,265

 

 

 

 

 

 

 

(Loss) income from continuing operations

 

 

(404,734

)

 

 

397,555

 

 

 

(28,569

)

 

 

(95,854

)

 

 

(12,300

)

(Loss) income from discontinued operations

 

 

 

 

 

 

 

 

(830

)

 

 

3,122

 

 

 

(10,596

)

Net (loss) income

 

 

(404,734

)

 

 

397,555

 

 

 

(29,399

)

 

 

(92,732

)

 

 

(22,896

)

Less net loss attributable to noncontrolling interest

     in consolidated variable interest entity

 

 

 

 

 

 

 

 

 

 

 

1,325

 

 

 

380

 

Net (loss) income attributable to common stockholders

 

$

(404,734

)

 

$

397,555

 

 

$

(29,399

)

 

$

(91,407

)

 

$

(22,516

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts attributable to stockholders of Arena:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from continuing operations

 

$

(404,734

)

 

$

397,555

 

 

$

(28,569

)

 

$

(94,529

)

 

$

(11,920

)

(Loss) income from discontinued operations

 

 

 

 

 

 

 

 

(830

)

 

 

3,122

 

 

 

(10,596

)

 

 

$

(404,734

)

 

$

397,555

 

 

$

(29,399

)

 

$

(91,407

)

 

$

(22,516

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income attributable to stockholders of Arena

    per share, basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(7.39

)

 

$

7.99

 

 

$

(0.61

)

 

$

(2.87

)

 

$

(0.49

)

Discontinued operations

 

 

 

 

 

-

 

 

 

(0.02

)

 

 

0.10

 

 

 

(0.44

)

 

 

$

(7.39

)

 

$

7.99

 

 

$

(0.63

)

 

$

(2.77

)

 

$

(0.93

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income attributable to stockholders of Arena

    per share, diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(7.39

)

 

$

7.69

 

 

$

(0.61

)

 

$

(2.87

)

 

$

(0.49

)

Discontinued operations

 

 

 

 

 

-

 

 

 

(0.02

)

 

 

0.10

 

 

 

(0.44

)

 

 

$

(7.39

)

 

$

7.69

 

 

$

(0.63

)

 

$

(2.77

)

 

$

(0.93

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used in calculating net income (loss) per share

     allocable to common stockholders, basic

 

 

54,767

 

 

 

49,779

 

 

 

47,041

 

 

 

32,990

 

 

 

24,313

 

Shares used in calculating net income (loss) per share

     allocable to common stockholders, diluted

 

 

54,767

 

 

 

51,698

 

 

 

47,041

 

 

 

32,990

 

 

 

24,313

 

 

54


 

 

 

 

 

As of December 31,

 

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

 

(In thousands)

 

Consolidated Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

219,544

 

 

$

243,274

 

 

$

161,037

 

 

$

158,837

 

 

$

90,712

 

Total available-for-sale securities

 

 

884,497

 

 

 

867,229

 

 

 

367,006

 

 

 

112,482

 

 

 

 

Total assets

 

 

1,190,720

 

 

 

1,174,123

 

 

 

686,903

 

 

 

339,275

 

 

 

169,010

 

Total lease financing obligations

 

 

45,612

 

 

 

49,427

 

 

 

52,709

 

 

 

61,748

 

 

 

65,266

 

Accumulated deficit

 

 

(1,507,731

)

 

 

(1,102,997

)

 

 

(1,500,552

)

 

 

(1,490,187

)

 

 

(1,398,736

)

Total equity

 

 

1,080,469

 

 

 

1,071,465

 

 

 

606,258

 

 

 

207,144

 

 

 

40,395

 

 

55


 

 

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis in conjunction with “Item 8. Financial Statements and Supplementary Data” included below in this Annual Report on Form 10-K, or Annual Report. Operating results are not necessarily indicative of results that may occur in future periods.

This discussion and analysis contains forward-looking statements that involve a number of risks, uncertainties and assumptions. Actual events or results may differ materially from our expectations. Important factors that could cause actual results to differ materially from those stated or implied by our forward-looking statements include, but are not limited to, those set forth in “Item 1A. Risk Factors” in this Annual Report. All forward-looking statements included in this Annual Report are based on information available to us as of the time we file this Annual Report and, except as required by law, we undertake no obligation to update publicly or revise any forward-looking statements. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Annual Report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain.

OVERVIEW AND RECENT DEVELOPMENTS

We are a biopharmaceutical company focused on delivering novel, transformational medicines with optimized pharmacology and pharmacokinetics to patients globally. Our internally developed pipeline includes multiple potentially first- or best-in-class assets with broad clinical utility.

Our most advanced investigational clinical programs include:

 

Etrasimod, which we are evaluating in a Phase 3 program for ulcerative colitis, or UC, a Phase 2b/3 program for Crohn’s disease, or CD, and a Phase 2 program in alopecia areata, or AA. We also plan to evaluate etrasimod in a Phase 3 program in atopic dermatitis, or AD, and a Phase 2b program for eosinophilic esophagitis, or EOE.

 

 

Olorinab, which we are evaluating for a broad range of visceral pain conditions associated with gastrointestinal diseases and is currently in a Phase 2b trial for treatment of abdominal pain associated with irritable bowel syndrome, or IBS.

 

 

APD418, which we are evaluating for acute heart failure, or AHF, is planning for a Phase 2 trial.

 

 

Temanogrel, a second compound in our cardiovascular therapeutic area, which we expect to advance into a Phase 2 proof of mechanism study in coronary microvascular obstruction, or cMVO.

We continue to leverage our two decades of world-class G-protein-coupled receptor, or GPCR, target discovery research to develop breakthrough drugs and ultimately deliver these to patients with large unmet needs. Our long-term pipeline prospects include an enhanced collaboration with Beacon Discovery across a broad range of immune-mediated inflammatory targets and compounds.

We have license agreements or collaborations with various companies, including:

 

United Therapeutics (ralinepag in a Phase 3 program for pulmonary arterial hypertension),

 

Everest Medicines Limited (etrasimod in a Phase 3 program for UC in Greater China and select countries in Asia),

 

Beacon Discovery (early research platform for GPCR targets), and

 

Boehringer Ingelheim International GmbH (undisclosed orphan GPCR program for central nervous system – preclinical).

In October 2020, we announced the launch and $56.0 million financing of Longboard Pharmaceuticals, Inc., or Longboard (formerly known as Arena Neuroscience, Inc.) which is expected to focus on developing novel central nervous system, or CNS, targeted assets discovered by our GPCR research engine. Longboard was previously a wholly owned subsidiary of Arena. As of the completion of Longboard’s Series A financing, our Longboard founder common stock and Series A preferred stock comprised approximately 33.4% of the outstanding shares of capital stock of Longboard. We have licensed certain development and worldwide commercialization rights to Longboard and are entitled to receive royalties on potential sales of LP352, LP143 and LP659, in the future. As Longboard continues to progress, it may seek additional capital to fund its future operating needs and may pursue various financing alternatives, like issuing shares of its stock in private or public financings, issuing debt instruments, or securing lines of credit. Longboard may also consider entering into collaborations related to its pipeline to provide for additional operating cash. In addition, we entered into a separate services agreement with Longboard, pursuant to which we agreed to perform certain research and development services, general and administrative services, management services and other mutually agreed services for Longboard

56


 

and receive service fees. Our investment is accounted for as an equity method investment, and the investee, Longboard, is considered a related party.

To limit the spread of COVID-19, governments have taken various actions including the issuance of stay-at-home orders and social distancing guidelines, causing some businesses to suspend operations and a reduction in demand for many products from direct or ultimate customers. Accordingly, many businesses have adjusted, reduced or suspended operating activities. The impact of this pandemic has been and will likely continue to be extensive in many aspects of society, which has resulted in and will likely continue to result in significant disruptions to businesses and capital markets around the world. The extent to which COVID-19 impacts us will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others. Beginning the week of March 16, 2020, substantially all of our workforce began working from home, either all or substantially all of the time. In addition, we have experienced delays in site initiation and participant enrollment and screening rates in certain of our clinical development programs as a result of the COVID-19 pandemic. The potential impact, if any, that these site-level delays could have on our development program timelines remains uncertain. The effects of the stay-at-home orders and our work-from-home policies may negatively impact productivity, disrupt our business and delay our development programs, and may delay our regulatory and commercialization timelines, the magnitude of which will depend, in part, on the length and severity of the restrictions and other limitations on our ability to conduct our business in the ordinary course. Our future research and development expenses and selling, general and administrative expenses may vary significantly based on developments related to the coronavirus outbreak and impact of it and COVID-19 on the costs and timing associated with the conduct of our clinical trials and other related business activities.

Program development update.

In February 2021, we dosed the first participant in our Phase 2b VOYAGE trial of etrasimod in EoE. VOYAGE is a Phase 2b randomized, double-blind, placebo-controlled trial, with a primary efficacy measurement at week 16 and a secondary efficacy analysis at week 24, to assess the safety and efficacy of 1 mg and 2 mg etrasimod in participants with EoE.

In February 2021, we also announced that we completed full enrollment of ELEVATE UC 52, the first of two pivotal trials of 52 weeks and 12 weeks, respectively, that constitute our Phase 3 ELEVATE UC global registrational program to assess the safety and efficacy of once-daily etrasimod 2 mg in participants with moderately to severely active UC. We expect topline data from this trial in the first quarter of 2022.

In November 2020, we announced topline results from our ADVISE Phase 2b trial evaluating etrasimod in atopic dermatitis, or AD, and our intention to advance etrasimod into a Phase 3 registrational program in AD. ADVISE was a Phase 2b multicenter, randomized, double-blinded, placebo-controlled trial to assess the safety and efficacy of once-daily etrasimod in participants with moderate-to-severe atopic dermatitis. The ADVISE trial enrolled approximately 140 participants and was conducted in study sites across the United States, Canada and Australia. An open-label extension of the ADVISE trial is ongoing.

In November 2020, we also announced the completion of a first-in-human Phase 1 safety and tolerability trial of APD418 in AHF. The trial found APD418 was generally safe and well tolerated. The FDA has granted us Fast Track designation for development of APD418 in AHF. Phase 2 planning is ongoing.

In October 2020, we announced that we completed full enrollment of our Phase 2b CAPTIVATE trial evaluating olorinab for the potential treatment of abdominal pain in IBS. CAPTIVATE is a Phase 2, multi-center, randomized, double-blind, placebo-controlled, 12-week trial to assess the safety and efficacy of olorinab administered three times daily in 273 participants. We expect to announce topline data for this trial in the first quarter of 2021.

In September 2020, we announced that the first participant has been dosed in ELEVATE UC 12, the second of two pivotal trials of 52 weeks and 12 weeks, respectively, that constitute our Phase 3 ELEVATE UC global registrational program to assess the safety and efficacy of once-daily etrasimod 2 mg in participants with moderately to severely active UC. We expect topline data from this trial in the first quarter of 2022, subject to any potential impact of the COVID-19 pandemic on trial enrollment for ELEVATE UC 12.

In September 2020, we announced that we plan to initiate a Phase 2 trial evaluating etrasimod for the potential treatment of moderately active UC. GLADIATOR UC is a Phase 2 multicenter, randomized, placebo-controlled 52-week trial to assess the safety and efficacy of once-daily etrasimod 2 mg in participants with moderately active UC. This trial is intended to evaluate etrasimod in a less severe patient population than ELEVATE UC, potentially broadening the patient population and demonstrating the potential use of a once a day oral therapy earlier in the treatment paradigm.

In September 2020, we announced the addition of Sub-Study A to our Phase 2/3 CULTIVATE program evaluating etrasimod in CD. Sub-Study A is a Phase 2 multicenter, randomized 14-week trial, intended to provide supportive data for dose selection evaluating 2 mg and 3 mg etrasimod in subjects with moderate to severely active CD. The Phase 2/3 program also consists of a Phase 2b dose-ranging multicenter, randomized, double-blinded, placebo-controlled trial to assess the safety and efficacy of once-daily etrasimod in participants with moderate to severely active CD. The Phase 3 portion of the program will include two induction trials, with re-randomization of clinical responders into a single maintenance trial. The program is intended to provide an operationally seamless transition from Phase 2 to Phase 3. Our CULTIVATE Phase 2 dose-ranging trial of etrasimod in CD is ongoing and we are confirming

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options to help facilitate the availability of topline data for this trial in 2021. We have withdrawn previously announced overall program guidance for CULTIVATE based on the expected COVID-19 impact on trial execution, including site activation and participant enrollment.

In September 2020, we also announced that the first participant has been dosed in a Phase 2 trial evaluating etrasimod for the potential treatment of AA. This Phase 2 multicenter, randomized, placebo-controlled trial will assess the safety and efficacy of once-daily etrasimod 2 mg in participants with moderate-to-severe AA. We expect to announce topline data for this trial in the second half of 2021.

In April 2020, we announced positive topline data from a Phase 1 clinical study evaluating controlled-release delivery profiles, or CR, for our investigational agent, etrasimod, a highly selective, once-daily, oral sphingosine 1-phosphate (S1P) receptor modulator. We plan to expand our current development program to rapidly develop etrasimod CR and integrate it into multiple, ongoing clinical development programs.

In January 2020, we announced acceptance of our investigational new drug application and were granted Fast Track designation for APD418.

Collaborations and license agreements update.

In October 2020, we entered into a License Agreement with Longboard under which we licensed to Longboard certain development and worldwide commercialization rights and are entitled to receive royalties on potential sales of LP352, LP143 and LP659, in the future. We also entered into a Royalty Purchase Agreement with Longboard pursuant to which Longboard purchased from us the right to receive all milestone payments, royalties, interest and other payments relating to net sales of lorcaserin owed or otherwise payable by Eisai.

In January 2020, we entered into a new multi-year strategic Collaboration and License Agreement with Beacon, aimed at building novel medicines across a range of GPCR targets believed to play a role in immune and inflammatory diseases. Under the terms of this agreement, Beacon is responsible for early drug discovery activities and Arena will be responsible for any potential future development and, ultimately, commercialization activities. We are required to pay to Beacon research initiation fees, make quarterly research funding payments for the duration of Beacon’s research activities as well as research, development and regulatory milestone payments. We are also obligated to pay Beacon tiered royalties on net sales of low single digits levels.

Other corporate events.

In June 2020, we completed the sale of an aggregate of 6,325,000 shares of our common stock in an underwritten public offering. Net proceeds from the offering were approximately $301.8 million after deducting underwriting discounts and commissions and offering expenses payable by us. We anticipate using the net proceeds from the offering for the clinical and preclinical development of drug candidates and for general corporate purposes, including working capital and capital expenditures.

In February 2020, we entered into a Sales Agreement, or the Sales Agreement, with Credit Suisse Securities (USA) LLC, SVB Leerink LLC and Cantor Fitzgerald & Co., as sales agents (collectively, the “Sales Agents”), pursuant to which we may offer and sell up to $250.0 million of shares of our common stock from time to time through the Sales Agents. Sales of shares of our common stock may be made at market prices by any method deemed to be an “at-the-market offering” as defined in Rule 415(a)(4) under the Securities Act of 1933, as amended. We are not obligated to sell any shares under the Sales Agreement. Each of the Sales Agents has agreed to use its commercially reasonable efforts to sell on our behalf all of the shares of common stock requested to be sold by us, consistent with its normal trading and sales practices, on mutually agreed terms among the Sales Agents and us. We did not make any sales of our common stock under the Sales Agreement during the year ended December 31, 2020. From January 1, 2021 through the date of this report, we have sold an aggregate of 1.2 million shares under the Sales Agreement for gross proceeds of $100.6 million.

See the above “Business” section for a more complete discussion of our business.

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RESULTS OF OPERATIONS

We are providing the following summary of our revenues, research and development expenses and selling, general and administrative expenses to supplement the more detailed discussion below. The dollar values in the following tables are in millions.

For our discussion of the year ended December 31, 2019, compared to the year ended December 31, 2018, please read Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations located in our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC on February 27, 2020.

Research and development expenses

 

 

 

Years ended December 31,

 

 

% change from

 

Type of expense

 

2020

 

 

2019

 

 

2019 to 2020

 

External clinical and preclinical study fees

 

$

220.4

 

 

$

141.1

 

 

 

56.2

%

Salary and other personnel costs (excluding non-cash

   share-based compensation)

 

 

64.7

 

 

 

48.3

 

 

 

34.0

%

Non-cash share-based compensation

 

 

26.0

 

 

 

27.4

 

 

 

(5.1

)%

Facility and equipment costs

 

 

6.7

 

 

 

6.2

 

 

 

8.1

%

Other

 

 

5.9

 

 

 

8.5

 

 

 

(30.6

)%

Total research and development expenses

 

$

323.7

 

 

$

231.5

 

 

 

39.8

%

 

Selling, general and administrative expenses

 

 

 

Years ended December 31,

 

 

% change from

 

Type of expense

 

2020

 

 

2019

 

 

2019 to 2020

 

Non-cash share-based compensation

 

$

33.9

 

 

$

25.7

 

 

 

31.9

%

Salary and other personnel costs (excluding non-cash

   share-based compensation)

 

 

31.8

 

 

 

20.8

 

 

 

52.9

%

Legal, accounting and other professional fees

 

 

23.8

 

 

 

21.8

 

 

 

9.2

%

Facility and equipment costs

 

 

9.0

 

 

 

5.9

 

 

 

52.5

%

Other

 

 

4.7

 

 

 

3.4

 

 

 

38.2

%

Total selling, general and administrative expenses

 

$

103.2

 

 

$

77.6

 

 

 

33.0

%

YEAR ENDED DECEMBER 31, 2020, COMPARED TO YEAR ENDED DECEMBER 31, 2019

Revenues. We recognized revenues of $0.3 million for the year ended December 31, 2020, compared to $806.4 million for the year ended December 31, 2019. The decrease resulted primarily from revenue associated with the upfront payment of $800.0 million we received in January 2019 pursuant to an exclusive license agreement with United Therapeutics. In connection with the United Therapeutics transaction, during the first quarter of 2019, we incurred transaction expenses of $14.6 million, which are presented as transaction costs in our consolidated statement of operations for the year ended December 31, 2019.

Absent any new collaborations, we expect our 2021 revenues will primarily consist of potential milestone payments from our existing collaborations and license agreements.

Revenues from milestones and royalties are difficult to predict, and our overall revenues will likely continue to vary from quarter to quarter and year to year. In the short term, we expect the amount of revenue we earn to fluctuate.

Research and development expenses. Research and development expenses, which account for the majority of our expenses, consist primarily of clinical trial costs (including payments to contract research organizations, or CROs), salaries and other personnel costs, preclinical study fees, manufacturing costs for non-commercial products, research supply costs and facility and equipment costs. We expense research and development costs as they are incurred when these expenditures have no alternative future uses. We generally do not track our earlier-stage, internal research and development expenses by project; rather, we track such expenses by the type of cost incurred.

Research and development expenses increased by $92.2 million to $323.7 million for the year ended December 31, 2020, from $231.5 million for the year ended December 31, 2019. This increase was primarily due to an increase of $79.3 million in external clinical and preclinical study fees in connection with advancing our programs and $16.4 million in salary and other personnel costs. The increases in compensation costs are primarily due to an increase in the number of research and development employees.

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We expect to incur substantial research and development expenses in 2021 and for the aggregate amount in 2021 to be greater than the amount incurred in 2020 primarily due to higher external clinical trial costs and increasing headcount in connection with advancing the etrasimod and olorinab programs. Our actual expenses may be higher or lower than anticipated due to various factors, including our progress and results. For example, patient enrollment in our Phase 3 clinical program for etrasimod is expected to be competitive and challenging, and could take longer than originally projected, which may result in our related external expenses being lower in 2021 than anticipated (but which might increase the overall costs for completing this multi-year program).

Included in the $220.4 million of total external clinical and preclinical study fees noted in the table above in this section for the year ended December 31, 2020, were the following:

 

$170.7 million related to etrasimod, and

 

$25.8 million related to olorinab.

Included in the $141.1 million of total external clinical and preclinical study fees noted in the table above in this section for the year ended December 31, 2019, were the following:

 

$108.6 million related to etrasimod, and

 

$17.8 million related to olorinab.

Cumulatively from our inception through December 31, 2020, we have recognized (i) external clinical and preclinical study fees of $307.8 million for lorcaserin, $365.1 million for etrasimod, $64.1 million for ralinepag, $43.8 million for nelotanserin, $57.7 million for olorinab and $18.8 million for temanogrel and (ii) $53.2 million for non-commercial manufacturing and other development costs for lorcaserin and, to a lesser extent, nelotanserin.

Expenditures on current and future clinical development programs are expected to be substantial and subject to many uncertainties, which include having adequate funding and developing our drug candidates independently or with collaborators. As a result of such uncertainties, we cannot predict with any significant degree of certainty the duration and completion costs of our research and development projects or whether, when and to what extent we will generate revenues from the commercialization and sale of any of our drug candidates. The duration and cost of clinical trials may vary significantly over the life of a project as a result of unanticipated events arising during clinical development and a variety of factors, including:

 

the nature and number of trials and studies in a clinical program;

 

the potential therapeutic indication;

 

the number of patients who participate in the trials;

 

the number and location of sites included in the trials;

 

the rates of patient recruitment, enrollment and withdrawal;

 

the duration of patient treatment and follow-up;

 

the costs of manufacturing drug candidates; and

 

the costs, requirements, timing of, and the ability to secure and maintain regulatory approvals.

Selling, general and administrative expenses. Selling, general and administrative expenses increased by $25.6 million to $103.2 million for the year ended December 31, 2020, from $77.6 million for the year ended December 31, 2019. This increase was primarily due to increases of $8.2 million in non-cash share-based compensation expenses and $11.0 million in salary and other personnel costs. The increases in compensation costs are primarily due to an increase in the number of selling, general and administrative employees. 

Interest and other income, net. Interest and other income, net, was $21.9 million for the year ended December 31, 2020, compared to $25.1 million for the year ended December 31, 2019. This change was primarily due to a decline of $15.8 million in interest income from our available-for-sale investments activity partially offset by a gain on deconsolidation of $13.0 million from deconsolidating our investment in Arena Neurosciences, Inc. (now Longboard Pharmaceuticals, Inc.) which subsequent to deconsolidation, is accounted for as an equity method investment.

Income tax expense. We have not recorded a benefit for income taxes for the year ended December 31, 2020 because we have a full valuation allowance. The income tax provision was $110.3 million for the year ended December 31, 2019, as a result of the treatment of the agreement with United Therapeutics income as a discrete item during the first quarter of 2019 and the utilization of the deferred tax assets that were recorded in the fourth quarter of 2018.

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LIQUIDITY AND CAPITAL RESOURCES

We have accumulated a large deficit since inception that has primarily resulted from the significant research and development expenditures we have made in seeking to identify and develop compounds that could become marketed drugs. We expect to continue to incur substantial losses for at least the short term.

To date, we have obtained cash and funded our operations primarily through the sale of common and preferred stock, the issuance of debt and related financial instruments, payments from collaborators and customers and sale leaseback transactions. From our inception through December 31, 2020, we have generated $3.9 billion in cash from these sources, of which approximately $2.3 billion was through sales of equity, $1.4 billion was through payments from collaborators and customers, $96.9 million was through the issuance of debt and related financial instruments and $77.1 million was from sale and leaseback transactions.

We believe our cash resources are sufficient to allow us to continue operations for at least the next 12 months from the date this Annual Report is filed with the SEC. There is no guarantee that adequate funds will be available when needed from additional debt or equity financing, development and commercialization partnerships or from other sources, or on terms acceptable to us. If our efforts to obtain sufficient additional funds are not successful, we would be required to delay, scale back, or eliminate some or all of our research or development, manufacturing operations, administrative operations, and clinical or regulatory activities, which could negatively affect our ability to achieve certain corporate goals.

Short term liquidity

At December 31, 2020, we had $1.1 billion in cash and cash equivalents and available-for-sale investments. Our potential sources of liquidity in the short term include (i) milestone and other payments from collaborators, (ii) entering into new collaboration, licensing or commercial agreements for one or more of our drug candidates or programs, (iii) the lease of our facilities or sale of other assets and (iv) sale of equity, issuance of debt or other transactions.

Long term liquidity

It will require substantial cash to achieve our objectives of discovering, developing and commercializing drugs, and this process typically takes many years and potentially several hundreds of millions of dollars for an individual drug. We may not have adequate available cash, or assets that could be readily turned into cash, to meet these objectives in the long term. We will need to obtain significant funds under our existing collaborations, under new collaboration, licensing or other commercial agreements for one or more of our drug candidates and programs or patent portfolios, or from other potential sources of liquidity, which may include the sale of equity, issuance of debt or other transactions.

In addition to potential payments from our current collaborators, as well as funds from public and private financial markets, potential sources of liquidity in the long term include (i) upfront, milestone, royalty and other payments from any future collaborators or licensees and (ii) revenues from sales of any drugs we obtain regulatory approval to commercialize on our own. The length of time that our current cash and cash equivalents and any available borrowings will sustain our operations is based on, among other things, the rate of adoption and commercial success of any drugs we or our collaborators obtain regulatory approval to market, regulatory decisions affecting our and our collaborator’s drug candidates, prioritization decisions regarding funding for our programs, progress in our clinical and earlier-stage programs, the time and costs related to current and future clinical trials and nonclinical studies, our research, development, manufacturing and commercialization costs (including personnel costs), our progress in any programs under collaborations, costs associated with intellectual property, our capital expenditures, and costs associated with securing any in-licensing opportunities. Any significant shortfall in funding may result in us reducing our development and/or research activities, which, in turn, would affect our development pipeline and ability to obtain cash in the future.

We evaluate from time to time potential acquisitions, in-licensing and other opportunities. Any such transaction may impact our liquidity as well as affect our expenses if, for example, our operating expenses increase as a result of such acquisition or license or we use our cash to finance the acquisition or license.

Sources and uses of our cash

Net cash used in operating activities was $353.1 million in the year ended December 31, 2020, compared to net cash provided in operating activities of $568.7 million in the year ended December 31, 2019. This change was primarily the result of an $800.0 million upfront payment from United Therapeutics received in 2019 and an increase of $98.7 million in payments made for external clinical study fees, and an increase in cash expenditures of approximately $28.6 million for personnel costs resulting primarily from an increase in the number of employees.

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Net cash used in investing activities decreased by $475.5 million to $21.4 million in the year ended December 31, 2020, compared to $496.9 million in the year ended December 31, 2019. This change was primarily due to a decrease of $435.6 million in net purchases of available-for-sale investments, partially offset by an increase of $38.0 million in proceeds from the sales and maturity of available-for-sale investments.

Net cash of $350.6 million was provided by financing activities in the year ended December 31, 2020, primarily as a result of proceeds from the issuance of common stock. Net cash of $9.9 million was provided by financing activities in the year ended December 31, 2019, as a result of net proceeds of $13.1 million from stock option exercises and stock award releases, partially offset by $3.3 million of principal payments on our lease financing obligations.

Contractual Obligations

 

Our financing obligations relate to sale and leaseback transactions for certain of our properties. We have applied the financing method to these sale and leaseback transactions, which requires that the book value of the properties and related accumulated depreciation remain on our balance sheet with no sale recognized. The sales price of the properties is recorded as a financing obligation and a portion of each lease payment is recorded as interest expense. At December 31, 2020, we expect our interest expense over the remaining term of these leases to total $16.7 million. Our other properties are under operating leases.

Off-balance sheet arrangements

We do not have and did not have at December 31, 2020, any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

CRITICAL ACCOUNTING POLICIES AND MANAGEMENT ESTIMATES

The SEC defines critical accounting policies as those that are, in management’s view, important to the portrayal of our financial condition and results of operations and demanding of management’s judgment. Our discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with the US generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. We base our estimates on historical experience and on various assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ significantly from those estimates.

Our significant accounting policies are more fully described in Note 1 of the consolidated financial statements included in this Annual Report. As disclosed in Note 1, the preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates. We believe that the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments.

Revenue recognition. Our revenues to date have been generated primarily through collaboration or license agreements. Our collaboration and license agreements frequently contain multiple types of promised goods or services including (i) intellectual property licenses, (ii) product research, development and regulatory services and (iii) product manufacturing. Consideration we receive under these arrangements may include upfront payments, research and development funding, cost reimbursements, milestone payments, payments for product sales and royalty payments. 

We recognize revenue when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration that we expect to be entitled to receive in exchange for these services and excludes sales incentives and amounts collected on behalf of third parties. We analyze the nature of these performance obligations in the context of individual collaboration and license agreements in order to assess the distinct performance obligations. We apply the following five steps to recognize revenue:

i) Identify the contract with a customer. We consider the terms and conditions of our collaboration and license agreements to identify contracts within the scope of ASC 606. We consider that we have a contract with a customer when the contract is approved, we can identify each party's rights regarding the goods and services to be transferred, we can identify the payment terms for the goods and services, we have determined the customer has the ability and intent to pay and the contract has commercial substance. We use

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judgment in determining the customer's ability and intent to pay, which is based upon factors including the customer's historical payment experience or, for new customers, credit and financial information pertaining to the customers.

ii) Identify the performance obligations in the contract. Performance obligations in our collaboration and license agreements are identified based on the goods and services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the services is separately identifiable from other promises in the contract. Our performance obligations generally consist of intellectual property licenses, research, development and/or regulatory services and manufacturing and supply commitments. Determining whether a promised goods or service is a separate performance obligation requires the use of significant judgment. A change in such judgment could result in a significant change in the period in which revenue is recognized.

Most of our collaboration and license agreements with customers contain multiple promised goods or services. Based on the characteristics of the promised goods and services we analyze whether they are separate or combined performance obligations. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. We determine standalone selling price based on our overall pricing and discounting objectives, taking into consideration the type of services, estimates of hourly market rates, and stage of the research, development or clinical trials.

 iii) Determine the transaction price. We determine the transaction price based on the consideration to which we expect to be entitled in exchange for transferring goods and services to the customer. In determining the transaction price, any variable consideration would be considered, to the extent applicable, if, in our judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. In accordance with the royalty exception under ASC 606 for licenses of intellectual property, the transaction price excludes future royalty payments to be received from our customers. None of our collaboration and license agreements contain consideration payable to our customer or a significant financing component. The process for determining the transaction price involves significant judgment and includes consideration of multiple factors such as estimated revenues, market size, and development risk, among other factors contemplated in negotiating the arrangement with the customer.

Our contracts with customers primarily include two types of variable consideration: (i) development and regulatory milestone payments, which are due to us upon achievement of specific development and regulatory milestones and (ii) one-time sales-based payments and sales-based royalties associated with sold or licensed intellectual property.

Due to uncertainty associated with achievement of the development and regulatory milestones, the related milestone payments are excluded from the contract consideration and the corresponding revenue is not recognized until we conclude it is probable that reversal of such milestone revenue will not occur.

Product sales-based royalties under licensed intellectual property and one-time payments are accounted for under the royalty exception. We recognize revenue for sales-based royalties under licensed intellectual property and one-time payments at the later of when the sales occur or the performance obligation is satisfied or partially satisfied.

 iv) Allocate the transaction price to performance obligations in the contract. If the contract contains a single performance obligation, the entire transaction price is allocated to that performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price.

 v) Recognize revenue when or as we satisfy a performance obligation. Revenue is recognized at the time the related performance obligation is satisfied by transferring the promised goods or services to a customer. We recognize revenue when we transfer control of the goods or services to our customers for an amount that reflects the consideration that we expect to receive in exchange for those services.

Performance Obligations.

The following is a description of principal goods and services from which we generate revenue.

Intellectual property licenses

We generate revenue from licensing our intellectual property including know-how and development and commercialization rights. These licenses provide customers with a term-based license to further research, develop and commercialize our internally-discovered drug candidates. The consideration we receive in the form of nonrefundable upfront consideration related to the functional intellectual property licenses is recognized when we transfer such license to the customer unless the license is combined with other goods or services into one performance obligation, in which case the revenue is recognized over a period of time based on our estimated pattern in which we satisfy the combined performance obligation. Our licensing agreements are generally cancelable.

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Customers have the right to terminate their contracts upon notice. We have the right to terminate the contracts generally only if the customer is in breach of the contract and fails to remedy the breach in accordance with the contractual terms.

Intellectual property sales

We generate royalty revenue from sales of our intellectual property. We estimate the future royalty payments and recognize revenue with a corresponding contract asset at a point in time when we transfer the intellectual property to the customer. We periodically reassess our estimate of the future royalty payments and recognize any estimate adjustments as revenue in the current period.

Research, development and regulatory services

We generate revenue from research, development and regulatory services we provide to our customers in connection with the licensed intellectual property. The services we provide to our customers primarily include scientific research activities, preparation for and management of clinical trials, and assistance during the regulatory approval application process. Revenue associated with these services is recognized based on our estimate of total consideration to be received for such services and the pattern in which we perform the services. The pattern of performance is generally determined to be the amount of incurred expenses reimbursed by the customer as a percentage of total expected reimbursable expenses associated with the contract.

Clinical trial expenses. We accrue clinical trial expenses based on work performed. In determining the amount to accrue, we rely on estimates of total costs incurred based on enrollment, the completion of trials and other events. We follow this method because we believe reasonably dependable estimates of the costs applicable to various stages of a clinical trial can be made. However, the actual costs and timing of clinical trials are uncertain, subject to risks and may change depending on a number of factors. Differences between the actual clinical trial costs and the estimated clinical trial costs that we have accrued in any prior period are recognized in the subsequent period in which the actual costs become known. Historically, these differences have not been material; however, material differences could occur in the future.

Share-based compensation. Our share-based awards are measured at fair value and recognized over the requisite service or performance period. We estimate the fair value of each stock option on the date of grant using the Black-Scholes option pricing model which requires the input of subjective assumptions, including price volatility of the underlying stock, risk-free interest rate, dividend yield, and expected life of the option. Expected volatility is computed using historical volatility for a period equal to the expected term. The expected term of options is determined based on historical experience of similar awards, giving consideration to the contractual terms of the share-based awards, vesting schedules and post-vesting terminations. The risk-free interest rates are based on the US Treasury yield curve, with a remaining term approximately equal to the expected term used in the option pricing model. We account for the forfeitures in the period they occur. The fair value of each restricted stock unit award is determined based on the market price of the underlying common stock on the date of the grant. We estimate the fair value of restricted stock unit awards that include market-based performance conditions on the date of grant using a Monte Carlo simulation model, based on the market price of the underlying common stock, expected performance measurement period, expected stock price volatility and expected risk-free interest rate.

Income taxes. Significant judgment is required by management to determine our provision for income taxes, our deferred tax assets and liabilities, and the valuation allowance to record against our net deferred tax assets, which are based on complex and evolving tax regulations throughout the world. Our tax calculation is impacted by tax rates in the jurisdictions in which we are subject to tax and the relative amount of income earned in each jurisdiction. Our deferred tax assets and liabilities are determined using the enacted tax rates expected to be in effect for the years in which those tax assets are expected to be realized.

The effect of an uncertain income tax position is recognized at the largest amount that is “more-likely-than-not” to be sustained under audit by the taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.

The realization of our deferred tax assets is dependent upon our ability to generate sufficient future taxable income. We establish a valuation allowance when it is more-likely-than-not that the future realization of all or some of the deferred tax assets will not be achieved. The evaluation of the need for a valuation allowance is performed on a jurisdiction-by-jurisdiction basis, and includes a review of all available evidence, both positive and negative.

Impairment of investments. At each reporting date, we perform an evaluation of impairment of our available-for-sale investments to determine if any unrealized losses are the result of credit losses. Impairment is assessed at the individual security level. Factors considered in determining whether a loss resulted from a credit loss or other factors include the Company’s intent and ability to hold the investment until the recovery of its amortized cost basis, the extent to which the fair value is less than the amortized cost basis, the financial condition of the issuer, any historical failure of the issuer to make scheduled interest or principal payments, any changes to the rating of the security by a rating agency, any adverse legal or regulatory events affecting the issuer or issuer’s industry, and any significant deterioration in economic conditions. If a decline in the fair value below the amortized cost basis of available-for-

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sale securities is determined to be due to credit-related factors, we will record the losses in earnings through an allowance account. Unrealized gains and losses that are not credit-related are included in accumulated other comprehensive income.

The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP. See our audited consolidated financial statements and notes thereto included elsewhere in this Annual Report, which contain additional accounting policies and other disclosures required by GAAP.

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk

We invest our excess cash in investment-grade, interest-bearing securities. The primary objective of our investment activities is to preserve principal and liquidity. To achieve this objective, we invest in money market funds, US Treasury notes, and high-quality marketable debt instruments of corporations and government-sponsored enterprises with contractual maturity dates of generally less than two years. All investment securities have a credit rating of at least A or better, as determined by Moody’s Investors Service, Standard & Poor’s or Fitch Ratings. If a 1% change in interest rates were to have occurred on December 31, 2020, this change would not have had a material effect on the fair value of our investment portfolio as of that date.

Foreign Currency Exchange Risk

We have a wholly owned subsidiary in Switzerland, which exposes us to foreign currency exchange risk. The functional currency of our subsidiary in Switzerland is the Swiss franc. Accordingly, all assets and liabilities of our Swiss subsidiary are translated to US dollars based on the applicable exchange rate on the balance sheet date. Revenue and expense components are translated to US dollars at weighted-average exchange rates in effect during the period. Gains and losses resulting from foreign currency translation are reported as a separate component of accumulated other comprehensive income in the equity section of our consolidated balance sheets.

Foreign currency transaction gains and losses recorded in continuing operations are insignificant. If a 10% change in the US dollar-to-Swiss franc exchange rate were to have occurred on December 31, 2020, this change would not have had a material effect on the financial results of our continuing operations.

We have not hedged exposures denominated in foreign currencies but may do so in the future.

 

65


 

Item 8.    Financial Statements and Supplementary Data.

ARENA PHARMACEUTICALS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Page

 

 

Report of Independent Registered Public Accounting Firm

67

Consolidated Balance Sheets

69

Consolidated Statements of Operations and Comprehensive (Loss) Income

70

Consolidated Statements of Equity

71

Consolidated Statements of Cash Flows

72

Notes to Consolidated Financial Statements

74

 

 

66


 

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

Arena Pharmaceuticals, Inc.:

 

 

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Arena Pharmaceuticals, Inc. and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive (loss) income, equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 23, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standards Codification Topic 842, Leases.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

67


 

Evaluation of the accrued clinical and preclinical study fees

As discussed in Note 1 to the consolidated financial statements, the Company accrues clinical trial costs and preclinical study fees based on the work performed. The Company has entered into various contracts with contract research organizations (CROs) to perform research and development activities. When billing terms under these contracts do not coincide with the timing of the work performed, the Company is required to make estimates of outstanding obligations as of year-end to those CROs. These estimates are based on a number of factors, including the Company’s knowledge of patient enrollment, the status of each of the clinical trials, invoicing to date, and the provisions in the contracts. The accrued clinical and preclinical study fees were $18.3 million as of December 31, 2020. The clinical and preclinical study fees included within research and development expenses were $220.4 million for the year ended December 31, 2020.

We identified the evaluation of accrued clinical and preclinical study fees as a critical audit matter. Challenging auditor judgment was involved in evaluating the status of each of the clinical trials.

The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s process to estimate the outstanding obligations for the work performed by the CROs over clinical trials, including controls over the status of the clinical trials. We assessed the amount billed to date for a selection of contracts with CROs by confirming the costs incurred with the respective CROs and the underlying invoices. We further evaluated the status of the selected clinical trials by inquiring with individuals of the Company responsible for monitoring and tracking the status of clinical trials, reviewing the provisions of the contracts, and inspecting government clinical trial databases. We also examined certain invoices received after December 31, 2020 and evaluated whether services received prior to December 31, 2020 were included in the accrued clinical and preclinical study fee balance as of December 31, 2020.

 

/s/ KPMG LLP

 

We have served as the Company’s auditor since 2010.

San Diego, California

February 23, 2021

 

 

68


 

ARENA PHARMACEUTICALS, INC.

Consolidated Balance Sheets

(In thousands, except share and per share data)

 

 

 

December 31,

 

 

 

2020

 

 

2019

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

219,544

 

 

$

243,274

 

Short-term investments, available-for-sale

 

 

884,497

 

 

 

496,291

 

Prepaid expenses and other current assets

 

 

35,266

 

 

 

20,369

 

Total current assets

 

 

1,139,307

 

 

 

759,934

 

Investments, available-for-sale

 

 

 

 

 

370,938

 

Land, property and equipment, net

 

 

22,090

 

 

 

25,128

 

Other non-current assets

 

 

29,323

 

 

 

18,123

 

Total assets

 

$

1,190,720

 

 

$

1,174,123

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and other accrued liabilities

 

$

35,351

 

 

$

25,499

 

Accrued clinical and preclinical study fees

 

 

18,325

 

 

 

15,654

 

Current portion of lease financing obligations

 

 

4,401

 

 

 

3,814

 

Total current liabilities

 

 

58,077

 

 

 

44,967

 

Lease financing obligations, less current portion

 

 

41,211

 

 

 

45,613

 

Other long-term liabilities

 

 

10,963

 

 

 

12,078

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value, 7,500,000 shares authorized, no shares issued

   and outstanding at December 31, 2020, and 2019

 

 

 

 

 

 

Common stock, $0.0001 par value, 147,000,000 and 73,500,000 shares authorized at December 31, 2020, and 2019, respectively; 58,611,210 and 50,170,953 shares issued and outstanding at December 31, 2020 and 2019, respectively

 

 

6

 

 

 

5

 

Additional paid-in capital

 

 

2,587,494

 

 

 

2,173,154

 

Accumulated other comprehensive income

 

 

700

 

 

 

1,303

 

Accumulated deficit

 

 

(1,507,731

)

 

 

(1,102,997

)

Total stockholders' equity

 

 

1,080,469

 

 

 

1,071,465

 

Total liabilities and equity

 

$

1,190,720

 

 

$

1,174,123

 

 

See accompanying notes to consolidated financial statements.

 

 

69


 

ARENA PHARMACEUTICALS, INC.

Consolidated Statements of Operations and Comprehensive (Loss) Income

(In thousands, except per share data)

 

 

 

Years ended December 31,

 

 

 

2020

 

 

2019

 

 

2018

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

United Therapeutics revenue

 

$

 

 

$

800,000

 

 

$

 

Collaboration and other revenue

 

 

57

 

 

 

7,284

 

 

 

11,402

 

Royalty revenue

 

 

262

 

 

 

(853

)

 

 

6,568

 

Total revenues

 

 

319

 

 

 

806,431

 

 

 

17,970

 

Operating costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

323,740

 

 

 

231,496

 

 

 

115,029

 

Selling, general and administrative

 

 

103,218

 

 

 

77,616

 

 

 

45,257

 

Transaction costs

 

 

 

 

 

14,573

 

 

 

2,467

 

Total operating costs and expenses

 

 

426,958

 

 

 

323,685

 

 

 

162,753

 

(Loss) income from operations

 

 

(426,639

)

 

 

482,746

 

 

 

(144,783

)

Interest and other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

11,052

 

 

 

26,872

 

 

 

8,772

 

Interest expense

 

 

(4,523

)

 

 

(4,791

)

 

 

(5,695

)

Other income, net

 

 

2,421

 

 

 

3,061

 

 

 

2,872

 

Gain on deconsolidation of Longboard

 

 

12,955

 

 

 

 

 

 

 

Total interest and other income, net

 

 

21,905

 

 

 

25,142

 

 

 

5,949

 

(Loss) income from continuing operations before income taxes

 

 

(404,734

)

 

 

507,888

 

 

 

(138,834

)

Income tax (provision) benefit

 

 

 

 

 

(110,333

)

 

 

110,265

 

(Loss) income from continuing operations

 

 

(404,734

)

 

 

397,555

 

 

 

(28,569

)

Loss from discontinued operations

 

 

 

 

 

 

 

 

(830

)

Net (loss) income

 

$

(404,734

)

 

$

397,555

 

 

$

(29,399

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income per share, basic:

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(7.39

)

 

$

7.99

 

 

$

(0.61

)

Discontinued operations

 

 

 

 

 

 

 

 

(0.02

)

 

 

$

(7.39

)

 

$

7.99

 

 

$

(0.63

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income per share, diluted:

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(7.39

)

 

$

7.69

 

 

$

(0.61

)

Discontinued operations

 

 

 

 

 

 

 

 

(0.02

)

 

 

$

(7.39

)

 

$

7.69

 

 

$

(0.63

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used in calculating net (loss) income per share, basic

 

 

54,767

 

 

 

49,779

 

 

 

47,041

 

Shares used in calculating net (loss) income per share, diluted

 

 

54,767

 

 

 

51,698

 

 

 

47,041

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive (Loss) Income:

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(404,734

)

 

$

397,555

 

 

$

(29,399

)

Foreign currency translation adjustment

 

 

161

 

 

 

(11

)

 

 

72

 

Unrealized (loss) gain on available-for-sale investments

 

 

(764

)

 

 

1,469

 

 

 

(113

)

Comprehensive (loss) income

 

$

(405,337

)

 

$

399,013

 

 

$

(29,440

)

 

See accompanying notes to consolidated financial statements.

 

 

70


 

 

ARENA PHARMACEUTICALS, INC.

Consolidated Statements of Equity

(In thousands, except share data)

 

 

Common Stock

 

Additional

Paid-In

Capital

 

Accumulated

Other

Comprehensive

Income (Loss)

 

Accumulated

Deficit

 

Total Equity

 

 

Shares

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

39,280,687

 

$

4

 

$

1,698,543

 

$

(1,216

)

$

(1,490,187

)

$

207,144

 

Adoption of ASC 606

 

 

 

 

 

 

 

1,102

 

 

19,034

 

 

20,136

 

Issuance of common stock to underwriters, net

 

9,775,000

 

 

1

 

 

383,141

 

 

 

 

 

 

383,142

 

Issuance of common stock upon exercise of options

 

317,636

 

 

 

 

5,888

 

 

 

 

 

 

5,888

 

Issuance of common stock upon vesting of restricted

    stock unit awards

 

49,668

 

 

 

 

(166

)

 

 

 

 

 

(166

)

Share-based compensation expense

 

 

 

 

 

19,554

 

 

 

 

 

 

19,554

 

Unrealized loss on available-for-sale investments

 

 

 

 

 

 

 

(113

)

 

 

 

(113

)

Translation gain

 

 

 

 

 

 

 

72

 

 

 

 

72

 

Net loss

 

 

 

 

 

 

 

 

 

(29,399

)

 

(29,399

)

Balance at December 31, 2018

 

49,422,991

 

 

5

 

 

2,106,960

 

 

(155

)

 

(1,500,552

)

 

606,258

 

Issuance of common stock upon exercise of options

 

625,757

 

 

 

 

15,184

 

 

 

 

 

 

15,184

 

Issuance of common stock upon vesting of restricted

    stock unit awards

 

122,205

 

 

 

 

(2,037

)

 

 

 

 

 

(2,037

)

Share-based compensation expense

 

 

 

 

 

53,047

 

 

 

 

 

 

53,047

 

Unrealized gain on available-for-sale investments

 

 

 

 

 

 

 

1,469

 

 

 

 

1,469

 

Translation loss

 

 

 

 

 

 

 

(11

)

 

 

 

(11

)

Net income

 

 

 

 

 

 

 

 

 

397,555

 

 

397,555

 

Balance at December 31, 2019

 

50,170,953

 

 

5

 

 

2,173,154

 

 

1,303

 

 

(1,102,997

)

 

1,071,465

 

Issuance of common stock to underwriters, net

 

6,325,000

 

 

1

 

 

301,819

 

 

 

 

 

 

301,820

 

Issuance of common stock upon exercise of options

 

2,038,829

 

 

 

 

50,005

 

 

 

 

 

 

50,005

 

Issuance of common stock under employee stock purchase plan and upon vesting of restricted stock unit awards

 

76,428

 

 

 

 

2,596

 

 

 

 

 

 

2,596

 

Share-based compensation expense

 

 

 

 

 

59,920

 

 

 

 

 

 

59,920

 

Unrealized loss on available-for-sale investments

 

 

 

 

 

 

 

(764

)

 

 

 

(764

)

Translation gain

 

 

 

 

 

 

 

161

 

 

 

 

161

 

Net loss

 

 

 

 

 

 

 

 

 

(404,734

)

 

(404,734

)

Balance at December 31, 2020

 

58,611,210

 

$

6

 

$

2,587,494

 

$

700

 

$

(1,507,731

)

$

1,080,469

 

 

See accompanying notes to consolidated financial statements.

 

 

71


 

 

ARENA PHARMACEUTICALS, INC.

Consolidated Statements of Cash Flows

(In thousands)

 

 

 

Years ended December 31,

 

 

 

2020

 

 

2019

 

 

2018

 

Operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(404,734

)

 

$

397,555

 

 

$

(29,399

)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations

 

 

 

 

 

 

 

 

830

 

Depreciation and amortization

 

 

3,858

 

 

 

3,233

 

 

 

3,759

 

Deferred income taxes

 

 

 

 

 

110,333

 

 

 

(110,333

)

Non-cash collaboration revenue

 

 

 

 

 

 

 

 

(1,500

)

Non-cash royalty revenue

 

 

 

 

 

3,744

 

 

 

(3,315

)

Share-based compensation

 

 

59,920

 

 

 

53,047

 

 

 

19,543

 

Gain on deconsolidation of Longboard

 

 

(12,955

)

 

 

 

 

 

 

Amortization of prepaid financing costs

 

 

90

 

 

 

90

 

 

 

110

 

Amortization of original issue discounts, net of premiums, on available-

        for-sale investments

 

 

1,550

 

 

 

(5,628

)

 

 

(664

)

Loss (gain) on disposal of property and equipment

 

 

 

 

 

112

 

 

 

(791

)

Other operating activities, net

 

 

664

 

 

 

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

344

 

 

 

3,432

 

 

 

(2,760

)

Prepaid expenses and other assets

 

 

(12,602

)

 

 

(8,133

)

 

 

(2,929

)

Payables and accrued liabilities

 

 

11,856

 

 

 

12,347

 

 

 

10,871

 

Accrued litigation settlement

 

 

 

 

 

 

 

 

(11,975

)

Deferred revenues

 

 

 

 

 

 

 

 

(2,061

)

Deferred rent

 

 

(1,085

)

 

 

(1,438

)

 

 

 

Other long-term liabilities

 

 

 

 

 

 

 

 

(1,265

)

Net cash (used in) provided by operating activities - continuing operations

 

 

(353,094

)

 

 

568,694

 

 

 

(131,879

)

Net cash used in operating activities - discontinued operations

 

 

 

 

 

 

 

 

(333

)

Net cash (used in) provided by operating activities

 

 

(353,094

)

 

 

568,694

 

 

 

(132,212

)

Investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of available-for-sale investments

 

 

(1,033,665

)

 

 

(1,469,220

)

 

 

(364,539

)

Proceeds from sale and maturity of available-for-sale investments

 

 

1,014,083

 

 

 

976,093

 

 

 

110,564

 

Purchases of property and equipment

 

 

(820

)

 

 

(4,819

)

 

 

(692

)

Other non-current assets

 

 

(1,000

)

 

 

 

 

 

(11

)

Net cash used in investing activities - continuing operations

 

 

(21,402

)

 

 

(497,946

)

 

 

(254,678

)

Net cash provided by investing activities - discontinued

        operations

 

 

 

 

 

997

 

 

 

3,405

 

Net cash used in investing activities

 

 

(21,402

)

 

 

(496,949

)

 

 

(251,273

)

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Principal payments on lease financing obligations

 

 

(3,815

)

 

 

(3,282

)

 

 

(4,000

)

Proceeds from issuance of common stock

 

 

354,421

 

 

 

13,147

 

 

 

389,031

 

Net cash provided by financing activities

 

 

350,606

 

 

 

9,865

 

 

 

385,031

 

Effect of exchange rate changes on cash

 

 

160

 

 

 

(10

)

 

 

654

 

Net increase in cash, cash equivalents and restricted cash

 

 

(23,730

)

 

 

81,600

 

 

 

2,200

 

Cash, cash equivalents and restricted cash at beginning of year

 

 

243,500

 

 

 

161,900

 

 

 

159,700

 

Cash, cash equivalents and restricted cash at end of year

 

$

219,770

 

 

$

243,500

 

 

$

161,900

 

72


 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

 

 

 

 

Interest paid

 

$

4,458

 

 

$

4,787

 

 

$

5,696

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing

   information:

 

 

 

 

 

 

 

 

 

 

 

 

Disposition of property and land upon lease expiration

 

$

 

 

$

 

 

$

3,944

 

Reduction in lease financing obligation from release of residual value

   upon lease expiration

 

$

 

 

$

 

 

$

5,039

 

 

See accompanying notes to consolidated financial statements.

 

73


 

 

ARENA PHARMACEUTICALS, INC.

Notes to Consolidated Financial Statements

 

1. The Company and Summary of Significant Accounting Policies

The Company

Arena Pharmaceuticals, Inc., or Arena, was incorporated on April 14, 1997, and commenced operations in July 1997. The Company is a biopharmaceutical company focused on delivering novel, transformational medicines with optimized pharmacology and pharmacokinetics to patients globally. The Company’s internally developed pipeline includes multiple potentially first- or best-in-class assets with broad clinical utility.

The Company’s most advanced investigational clinical programs include: etrasimod (APD334), being evaluated in a Phase 3 program for ulcerative colitis, or UC, a Phase 2b/3 program for Crohn’s disease, or CD, and a Phase 2 program in alopecia areata, or AA. The Company also plans to evaluate etrasimod in a Phase 3 program in atopic dermatitis, or AD, and a Phase 2b program for eosinophilic esophagitis, or EoE. Olorinab (APD371) is being evaluated for a broad range of visceral pain conditions associated with gastrointestinal diseases and is currently in a Phase 2b trial for treatment of abdominal pain associated with irritable bowel syndrome, or IBS. In addition, the Company plans to evaluate APD418, which is being developed for the treatment of acute heart failure, or AHF, in a Phase 2 trial. In January 2021, the Company announced a second compound in its cardiovascular therapeutic area, temanogrel, that will begin a Phase 2 proof of mechanism study in coronary microvascular obstruction, or cMVO.

The Company operates in one business segment. The Company’s principal executive offices are located in Park City, Utah, and its primary clinical operations are conducted in San Diego, California and Boston, Massachusetts; and in Zug, Switzerland by Arena Pharmaceuticals Development GmbH, or APD GmbH, the Company’s wholly-owned subsidiary.

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with US generally accepted accounting principles, or GAAP, and reflect all of the Company’s activities, including those of its wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. Certain prior period amounts in the consolidated financial statements have been reclassified to conform to the current period presentation. As a result of the sale of the Company’s Manufacturing Operations (see Note 5), the operations and cash flows of the Manufacturing Operations are reflected as discontinued operations for the year ended December 31, 2018.

To limit the spread of coronavirus disease 2019, or COVID-19, governments have taken various actions including the issuance of stay-at-home orders and social distancing guidelines, causing some businesses to suspend operations and or experience a reduction in demand for many products from direct or ultimate customers. Accordingly, businesses have adjusted, reduced or suspended operating activities. Beginning the week of March 16, 2020, substantially all of the Company’s workforce began working from home, either all or substantially all of the time. In addition, the Company has experienced delays in site initiation and participant enrollment and screening rates in certain of its clinical development programs as a result of the COVID-19 pandemic. The potential impact, if any, that these site-level delays could have on the Company’s development program timelines remains uncertain. The effects of the stay-at-home orders and the Company’s work-from-home policies may negatively impact productivity, disrupt its business and delay its development programs, and may delay the Company’s regulatory and commercialization timelines, the magnitude of which will depend, in part, on the length and severity of the restrictions and other limitations on its ability to conduct its business in the ordinary course. The Company’s future research and development expenses and selling, general and administrative expenses may vary significantly if it experiences an increased impact from COVID-19 on the costs and timing associated with the conduct of its clinical trials and other related business activities. For further information, refer to “Part I - Item 1A - Risk Factors” of this 10-K.

Liquidity

As of December 31, 2020, the Company had cash, cash equivalents and available-for-sale investments of approximately $1.1 billion. The Company believes its cash, cash equivalents and available-for-sale investments will be sufficient to fund its operations for at least the next 12 months from the date these consolidated financial statements are issued.

The Company will require substantial cash to achieve its objectives of discovering, developing and commercializing drugs, as this process typically takes many years and potentially hundreds of millions of dollars for an individual drug. The Company may not have adequate available cash, or assets that could be readily turned into cash, to meet these objectives in the long term. The Company will need to obtain significant funds under its existing collaborations and license agreements, under new collaboration, licensing or other commercial agreements for one or more of its drug candidates and programs or patent portfolios, or from other potential sources of liquidity, which may include the sale of equity, issuance of debt or other transactions.

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Changes in Accounting Policies - Leases.

Effective January 1, 2019, the Company adopted Accounting Standard Codification Topic 842, Leases, or ASC 842, issued by the Financial Accounting Standards Board, or FASB. ASC 842 requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. The new standard established a right-of-use model that requires a lessee to recognize a right-of-use asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of operations. As a result, the Company changed its accounting policy for leases as detailed below.

The Company implemented ASC 842 using the modified retrospective transition approach by applying the new standard to leases existing at the date of initial application. The Company used the effective date as its date of initial application. Therefore, the Company did not update the financial information and did not provide the disclosures required under the new standard for dates and periods before January 1, 2019.

The Company applied ASC 842 using a package of practical expedients, which permitted it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to it.

Upon adoption of ASC 842, the Company recorded an operating lease liability of $6.3 million based on the present value of the remaining minimum rental payments under the terms of its existing operating lease pertaining to one of its leased properties with a corresponding right-of-use asset of $5.9 million. Adoption of this standard did not have a material impact on its consolidated statements of operations or cash flows.

The new standard also provides practical expedients for an entity’s ongoing accounting. The Company elected the short-term lease recognition exemption for its office equipment leases and short-term office space leases. This means, for those leases that qualify, the Company does not recognize right-of-use assets or lease liabilities. See Note 6 for disclosures related to leases.

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which established ASC 326, Financial Instruments - Credit Losses. The ASU, along with related amendments, revised the measurement of credit losses for financial assets measured at amortized cost from an incurred loss to an expected loss methodology. The ASU affected receivables, debt securities, net investment in leases, and most other financial assets that represent a right to receive cash. The Company adopted ASU No. 2016-13 on January 1, 2020 which did not have a material impact on its consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12 which modifies ASC 740, Income Taxes to simplify the accounting for income taxes in various areas. The amendments in ASU No. 2019-12 are effective for the Company for fiscal years beginning after December 15, 2020, including interim periods therein. The Company does not expect ASU No. 2019-12 will have a material impact on its consolidated financial statements.

In October 2020, the FASB issued ASU, No. 2020-08, Codification Improvements to Subtopic 310-20, Receivables—Nonrefundable Fees and Other Costs. ASU No. 2020-08 clarifies an entity should, for each reporting period, reevaluate the amortization period for a premium paid on an individual callable debt security that has multiple call dates. ASU No. 2020-08 is effective for annual reporting periods beginning after December 15, 2020, including interim periods within the year of adoption. The Company does not expect ASU No. 2020-08 will have a material impact on its consolidated financial statements.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts (including assets, liabilities, revenues and expenses) and related disclosures. The amounts reported could differ under different estimates and assumptions.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash and highly liquid investments with remaining maturities of three months or less when purchased. The following table provides a reconciliation of the components of cash, cash equivalents and restricted cash reported in the consolidated balance sheets to the total of the amount presented in the consolidated statements of cash flows, in thousands:

75


 

 

 

 

December 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Cash and cash equivalents

 

$

219,544

 

 

$

243,274

 

Restricted cash included in other non-current assets

 

 

226

 

 

 

226

 

Total cash, cash equivalents and restricted cash presented in the consolidated

      statements of cash flows

 

$

219,770

 

 

$

243,500

 

The restricted cash relates to the Company’s property leases. The restriction will lapse when the related leases expire.

Available-for-Sale Investments

The Company defines investments as income-yielding securities that can be readily converted to cash and classifies such investments as available-for-sale. The Company carries these securities at fair value and reports unrealized gains and losses as a separate component of accumulated other comprehensive income or loss. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included in interest income. Realized gains and losses and declines in securities are included in other income or expense. The cost of securities sold is based on the specific identification method. Interest and dividends on available-for-sale securities are included in interest income.

Concentrations of Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash, cash equivalents and available-for-sale investments. The Company limits its exposure to credit loss by holding cash primarily in US dollars or placing its cash and investments in US government, agency or government-sponsored enterprise obligations and in corporate debt instruments that are rated investment grade, in accordance with an investment policy approved by its Board of Directors.

The Company’s customers are typically other biopharmaceutical companies to which it licenses its intellectual property, or sells research and development services or other services under license or collaboration agreements. For the year ended December 31, 2020, the Company recognized an immaterial amount of revenue. For the year ended December 31, 2019, more than 99% of the Company’s annual revenue was from United Therapeutics. For the year ended December 31, 2018, Eisai, Boehringer Ingelheim, Outpost Medicine, Axovant and Everest accounted for 36.6%, 24.8%, 15.3%, 12.1% and 11.1%, respectively, of total revenues.     

The Company monitors its customers’ financial credit worthiness in order to assess and respond to any changes in their credit profile. During the years ended December 31, 2020, 2019, and 2018, the Company did not record any write-offs or reserves against accounts receivable.

Equity Method Investment

Investments and ownership interests are accounted for under equity method accounting if the Company has the ability to exercise significant influence but does not have a controlling financial interest. The Company records its interest in the net earnings of its equity method investees within other income or loss in the consolidated statements of operations. The Company records its interest in the net earnings of its equity method investments based on the most recently available financial statements of the investees.

The carrying amount of the investment in equity interests is adjusted to reflect the Company's interest in net earnings, dividends received and impairments. The Company reviews for impairment whenever factors indicate that the carrying amount of the investment might not be recoverable. In such a case, the decrease in value is recognized in the period the impairment occurs in the consolidated statements of operations.

In October 2020, the Company announced the launch and $56.0 million financing of Longboard Pharmaceuticals, Inc., or Longboard (formerly known as Arena Neuroscience, Inc.). Longboard was previously a wholly owned subsidiary of Arena. As of the completion of Longboard’s Series A financing, the Company’s Longboard founder common stock and Series A preferred stock comprised approximately 33.4% of the outstanding shares of capital stock of Longboard. The Company has the ability to exercise significant influence over, but does not control Longboard, which is accounted for as an equity method investment and is considered a related party. In October 2020, the Company entered into a separate services agreement with Longboard, pursuant to which it agreed to perform certain research and development services, general and administrative services, management services and other mutually agreed services for Longboard and receive service fees. As of December 31, 2020, the balance of the Company’s equity method investment was $12.3 million which is reported in “other non-current assets” in the consolidated balance sheets. The Company’s interest in Longboard’s results of operations, which is reported in “other income, net” in the consolidated statements of operations, was not material during the year ended December 31, 2020. In addition, accounts receivable due from Longboard related to the service agreement was $0.8 million as of December 31, 2020.

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Property and Equipment

Property and equipment are stated at cost and depreciated over the estimated useful lives of the assets (generally 3 to 15 years) using the straight-line method. Buildings are stated at cost and depreciated over an estimated useful life of approximately 20 years using the straight-line method. Leasehold improvements are stated at cost and amortized over the shorter of the estimated useful lives of the assets or the lease term using the straight-line method. Capital improvements are stated at cost and amortized over the estimated useful lives of the underlying assets using the straight-line method.

Long-lived Assets

If indicators of impairment exist, the Company assesses the recoverability of the affected long-lived assets by determining whether the carrying value of such assets can be recovered through undiscounted cash flows. If impairment is indicated, the Company measures the impairment loss by comparing the fair value to the carrying value of the asset.

Foreign Currency

The functional currency of the Company’s wholly owned subsidiaries in Switzerland, APD GmbH and, until March 31, 2018, Arena Pharmaceuticals GmbH, or Arena GmbH, was the Swiss franc. Accordingly, all assets and liabilities of these subsidiaries are translated to US dollars based on the applicable exchange rate on the balance sheet date. Revenue and expense components are translated to US dollars at weighted-average exchange rates in effect during the period. Gains and losses resulting from foreign currency translation are reported as a separate component of accumulated other comprehensive income or loss in the equity section of the Company’s consolidated balance sheets.

Foreign currency transaction gains and losses are primarily the result of remeasuring US dollar-denominated receivables and payables of the Company’s foreign subsidiaries. Foreign currency transaction gains and losses recorded by Arena GmbH are included in net income (loss) from discontinued operations.

Share-based Compensation

The Company’s share-based awards are measured at fair value and recognized over the requisite service or performance period. The fair value of each stock option is estimated on the date of grant using the Black-Scholes option pricing model, based on the market price of the underlying common stock, expected term, expected stock price volatility and expected risk-free interest rate. Expected volatility is computed using historical volatility for a period equal to the expected term. The expected term of options is determined based on historical experience of similar awards, giving consideration to the contractual terms of the share-based awards, vesting schedules and post-vesting terminations. The risk-free interest rates are based on the US Treasury yield curve, with a remaining term approximately equal to the expected term used in the option pricing model. The Company accounts for forfeitures in the period they occur. The fair value of each restricted stock unit award is estimated based on the market price of the underlying common stock on the date of the grant. The fair value of restricted stock unit awards that include market-based performance conditions is estimated on the date of grant using a Monte Carlo simulation model, based on the market price of the underlying common stock, expected performance measurement period, expected stock price volatility and expected risk-free interest rate.

Revenue Recognition

The Company’s revenues to date have been generated primarily through collaboration and license agreements. The Company’s collaboration and license agreements frequently contain multiple types of promised goods or services including (i) intellectual property licenses, (ii) product research, development and regulatory services and (iii) product manufacturing. Consideration received under these arrangements may include upfront payments, research and development funding, cost reimbursements, milestone payments, payments for product sales and royalty payments.

 

Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration that the Company expects to be entitled to receive in exchange for these services and excludes sales incentives and amounts collected on behalf of third parties. The Company analyzes the nature of these performance obligations in the context of individual collaboration and license agreements in order to assess the distinct performance obligations. The Company applies the following five steps to recognize revenue:

i) Identify the contract with a customer. The Company considers the terms and conditions of its collaboration and license agreements to identify contracts within the scope of ASC 606. The Company considers that it has a contract with a customer when the contract is approved, it can identify each party's rights regarding the goods and services to be transferred, it can identify the payment terms for the goods and services, it has determined the customer has the ability and intent to pay and the contract has commercial

77


 

substance. The Company uses judgment in determining the customer's ability and intent to pay, which is based upon factors including the customer's historical payment experience or, for new customers, credit and financial information pertaining to the customers.

ii) Identify the performance obligations in the contract. Performance obligations in the Company’s collaboration and license agreements are identified based on the goods and services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the services is separately identifiable from other promises in the contract. The Company’s performance obligations generally consist of intellectual property licenses, research, development and/or regulatory services and manufacturing and supply commitments.

 iii) Determine the transaction price. The Company determines the transaction price based on the consideration to which it expects to be entitled in exchange for transferring goods and services to the customer. In determining the transaction price, any variable consideration would be considered, to the extent applicable, if, in its judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. In accordance with the royalty exception under ASC 606 for licenses of intellectual property, the transaction price excludes future royalty payments to be received from the Company’s customers. None of the Company’s collaboration and license agreements contain consideration payable to its customer or a significant financing component.

 iv) Allocate the transaction price to performance obligations in the contract. If the contract contains a single performance obligation, the entire transaction price is allocated to that performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price.

 v) Recognize revenue when or as performance obligation are satisfied. Revenue is recognized at the time the related performance obligation is satisfied by transferring the promised goods or services to a customer. The Company recognizes revenue when it transfers control of the goods or services to its customers for an amount that reflects the consideration that it expects to receive in exchange for those services.

Performance Obligations

The following is a description of principal goods and services from which the Company generates revenue.

 

Intellectual property licenses

The Company generates revenue from licensing its intellectual property including know-how and development and commercialization rights. These licenses provide customers with a term-based license to further research, develop and commercialize its internally discovered drug candidates. The consideration the Company receives in the form of nonrefundable upfront consideration related to the functional intellectual property licenses is recognized when it transfers such license to the customer unless the license is combined with other goods or services into one performance obligation, in which case the revenue is recognized over a period of time based on the Company’s estimated pattern in which it satisfies the combined performance obligation. The Company’s licensing agreements are generally cancelable. Customers have the right to terminate their contracts upon notice. The Company has the right to terminate the contracts generally only if the customer is in breach of the contract and fails to remedy the breach in accordance with the contractual terms.

 

Intellectual property sales

The Company generates royalty revenue from sales of its intellectual property. The Company estimates the future royalty payments and recognizes revenue with a corresponding contract asset at a point in time when it transfers the intellectual property to the customer. The Company periodically reassesses its estimate of the future royalty payments and recognizes any estimate adjustments as revenue in the current period.

 

Research, development and regulatory services

The Company generates revenue from research, development and regulatory services it provides to its customers in connection with the licensed intellectual property. The services the Company provides to its customers primarily includes scientific research activities, preparation for and management of clinical trials, and assistance during the regulatory approval application process. Revenue associated with these services is recognized based on its estimate of total consideration to be received for such services and the pattern in which it performs the services. The pattern of performance is generally determined to be the amount of incurred expenses reimbursed by the customer as a percentage of total expected reimbursable expenses associated with the contract.

 


78


 

 

Product manufacturing

In the past, the Company generated revenue from manufacturing and clinical supply promises to its customers in connection with securing a supply of drug products for development and clinical trial purposes. The drug products were generally manufactured by its contract manufacturing organizations. The Company used its product manufacturing facility in Zofingen, Switzerland for a portion of the product manufacturing requirements until it sold the Manufacturing Operations on March 31, 2018 (see Note 5). Revenue associated with product manufacturing obligations is recognized at a point in time as control of the related product is transferred to the customer.

Contracts with Multiple Performance Obligations

Most of the Company’s collaboration and license agreements with customers contain multiple promised goods or services. Based on the characteristics of the promised goods and services the Company analyzes whether they are separate or combined performance obligations. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. The Company determines standalone selling price based on its overall pricing and discounting objectives, taking into consideration the type of services, estimates of hourly market rates, and stage of the research, development or clinical trials.

Variable Consideration

The Company’s contracts with customers primarily include two types of variable consideration: (i) development and regulatory milestone payments, which are due to the Company upon achievement of specific development and regulatory milestones and (ii) one-time sales-based payments and sales-based royalties associated with sold or licensed intellectual property.

Due to uncertainty associated with achievement of the development and regulatory milestones, the related milestone payments are excluded from the contract consideration and the corresponding revenue is not recognized until the Company concludes it is probable that reversal of such milestone revenue will not occur.

Product sales-based royalties under licensed intellectual property and one-time payments are accounted for under the royalty exception. The Company recognizes revenue for sales-based royalties under licensed intellectual property and one-time payments at the later of when the sales occur or the performance obligation is satisfied or partially satisfied.

Disaggregation of Revenue

The Company operates in one reportable business segment. The Company provides goods and services to its customers in collaboration and license agreements pursuant to various geographical markets.

Cost to Obtain and Fulfill a Contract

The Company generally does not incur costs to obtain new contracts. Costs to fulfill contracts are expensed as incurred.

Remaining Performance Obligations

The estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) pursuant to the Company’s existing collaboration and license agreements as of December 31, 2020 is immaterial.

Under the royalty exception in ASC 606 for licensed intellectual property the Company does not recognize any revenue for the variable amounts related to sales-based royalties and milestones until the later of when the sales occur or the performance obligation is satisfied or partially satisfied. Accordingly, the revenue related to future sales-based royalties and milestones are excluded from the estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied.

Research and Development Expenses

Research and development expenses, which consist primarily of salaries and other personnel costs, clinical trial costs and preclinical study fees, manufacturing costs for non-commercial products, and the development of earlier-stage programs and technologies, are expensed as incurred when these expenditures have no alternative future use.

The Company accrues clinical trial expenses based on work performed. In determining the amount to accrue, the Company relies on estimates of total costs incurred based on enrollment, the completion of trials and other events. The Company follows this method because it believes reasonably dependable estimates of the costs applicable to various stages of a clinical trial can be made. However, the actual costs and timing of clinical trials are uncertain, subject to risks and may change depending on a number of factors. Differences between the actual clinical trial costs and the estimated clinical trial costs that the Company has accrued in any prior period are recognized in the subsequent period in which the actual costs become known. Historically, these differences have not

79


 

been material; however, material differences could occur in the future. Payments made to reimburse collaborators for the Company’s share of their research and development activities are recorded as research and development expenses, and are recognized as the work is performed.

Comprehensive Income (Loss)

Comprehensive income or loss is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. The Company reports components of comprehensive income or loss in the period in which they are recognized. For the years ended December 31, 2020, 2019 and 2018, comprehensive income (loss) consisted of net income (loss), foreign currency translation gains and losses, and unrealized gains and losses related to available-for-sale investments.

Income (Loss) Per Share

The Company calculates basic and diluted income (loss) from continuing operations, income (loss) from discontinued operations and net income (loss) per share using the weighted-average number of shares of common stock outstanding during the period, without consideration for common stock equivalents. Diluted net income (loss) per share is computed by dividing the net income (loss) by the weighted average number of common shares and common stock equivalents outstanding for the period determined using the treasury stock method. For purposes of this calculation, stock options, employee stock purchase plan rights, restricted stock units, and warrants are considered to be common stock equivalents but are not included in the calculations of diluted net loss per share for periods of losses as their effect would be anti-dilutive.

Since the Company reported a loss from continuing operations for the years ended December 31, 2020, and 2018, in addition to excluding potentially dilutive out-of-the money securities, the Company excluded from its calculation of loss per share all potentially dilutive in-the-money (i) stock options, (ii) restricted stock unit awards, or RSUs, (iii) Performance-Based Restricted Stock Units, or PRSUs, (iv) Total Stockholder Return performance restricted stock unit awards, or TSR PRSUs, and (v) unvested restricted stock in is deferred compensation plan, and its diluted net loss per share is the same as its basic net loss per share as their effect would have been anti-dilutive. The table below presents the weighted-average number of potentially dilutive securities that were excluded from the Company’s calculation of diluted income (loss) per share for the years presented, in thousands.

 

 

 

Years ended December 31,

 

 

 

2020

 

 

2019

 

 

2018

 

Stock options

 

 

4,794

 

 

 

3,962

 

 

 

5,835

 

RSUs, PRSUs, and unvested restricted stock

 

 

393

 

 

 

 

 

 

20

 

Total

 

 

5,187

 

 

 

3,962

 

 

 

5,855

 

 

Income Taxes

The Company uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The Company’s deferred tax assets and liabilities are determined using the enacted tax rates expected to be in effect for the years in which those tax assets are expected to be realized.

The realization of the Company’s deferred tax assets is dependent upon its ability to generate sufficient future taxable income. The Company establishes a valuation allowance when it is more-likely-than-not the future realization of all or some of the deferred tax assets will not be achieved. The evaluation of the need for a valuation allowance is performed on a jurisdiction-by-jurisdiction basis, and includes a review of all available evidence, both positive and negative.

The impact of an uncertain income tax position is recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.

 

 

2. Fair Value Disclosures

The Company’s investments include cash equivalents, available-for-sale investment securities consisting of money market funds, U.S. treasury notes, and high quality, marketable debt instruments of corporations and government sponsored enterprises in accordance with the Company’s investment policy. The Company’s investment policy defines allowable investment securities and establishes guidelines relating to credit quality, diversification, and maturities of its investments to preserve principal and maintain liquidity.

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The Company measures its financial assets and liabilities at fair value, which is defined as the exit price, or the amount that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The Company uses the following three-level valuation hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs to value its financial assets and liabilities:

 

Level 1

 

-

 

Observable inputs such as unadjusted quoted prices in active markets for identical instruments.

Level 2

 

-

 

Quoted prices for similar instruments in active markets or inputs that are observable for the asset or liability, either directly or indirectly.

Level 3

 

-

 

Significant unobservable inputs based on the Company’s assumptions.

The following tables present the Company’s valuation hierarchy for its financial assets and liabilities that are measured at fair value on a recurring basis, in thousands:

 

 

 

Fair Value Measurements

 

December 31, 2020

 

Balance

 

 

Quoted Prices in

Active Markets

(Level 1)

 

 

Significant Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable Inputs

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds(1)

 

$

64,361

 

 

$

64,361

 

 

$

 

 

$

 

US government and government agency notes(2)

 

 

621,400

 

 

 

621,400

 

 

 

 

 

 

 

Corporate debt instruments(2)

 

 

294,431

 

 

 

 

 

 

294,431

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements

 

December 31, 2019

 

Balance

 

 

Quoted Prices in

Active Markets

(Level 1)

 

 

Significant Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable Inputs

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds(1)

 

$

147,752

 

 

$

147,752

 

 

$

 

 

$

 

US government and government agency notes(2)

 

 

398,419

 

 

 

398,419

 

 

 

 

 

 

 

Corporate debt instruments(2)

 

 

483,788

 

 

 

 

 

 

483,788

 

 

 

 

 

 

 

(1)

Included in cash and cash equivalents in the accompanying consolidated balance sheets.

 

(2)

Included in either cash and cash equivalents or available-for-sale investments in the accompanying consolidated balance sheets.

 

The Company obtains the fair value of its Level 2 financial instruments from third-party pricing services. The pricing services utilize industry standard valuation models whereby all significant inputs, including benchmark yields, reported trades, broker/dealer quotes, issuer spreads, bids, offers, or other market-related data, are observable. The Company validates the prices provided by the third-party pricing services by reviewing their pricing methods and matrices and obtaining market values from other pricing sources. The Company did not adjust or override any fair value measurements provided by these pricing services as of December 31, 2020 and 2019, respectively. The Company has not transferred any investment securities between the classification levels.

 

3. Investments, Available-for-Sale

Investments, available-for-sale, consisted of the following, in thousands:

 

81


 

 

December 31, 2020

 

Maturity

in years

 

Amortized

Cost

 

 

Gross

Unrealized Gains

 

 

Gross

Unrealized Losses

 

 

Estimated

Fair Value

 

US government and government agency

    notes

 

Less than 1

 

$

621,281

 

 

$

178

 

 

$

(59

)

 

$

621,400

 

Corporate debt securities

 

Less than 1

 

 

262,757

 

 

 

384

 

 

 

(44

)

 

 

263,097

 

Short-term investments, available-for-sale

 

 

 

$

884,038

 

 

$

562

 

 

$

(103

)

 

$

884,497

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

Maturity

in years

 

Amortized

Cost

 

 

Gross

Unrealized Gains

 

 

Gross

Unrealized Losses

 

 

Estimated

Fair Value

 

US government and government agency

    notes

 

Less than 1

 

$

201,046

 

 

$

292

 

 

$

(5

)

 

$

201,333

 

Corporate debt securities

 

Less than 1

 

 

294,481

 

 

 

495

 

 

 

(18

)

 

 

294,958

 

Short-term investments, available-for-sale

 

 

 

$

495,527

 

 

$

787

 

 

$

(23

)

 

$

496,291

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US government and government agency

    notes

 

1 - 5

 

$

197,157

 

 

$

85

 

 

$

(155

)

 

$

197,087

 

Corporate debt securities

 

1 - 5

 

 

173,322

 

 

 

603

 

 

 

(74

)

 

 

173,851

 

Investments, available-for-sale

 

 

 

$

370,479

 

 

$

688

 

 

$

(229

)

 

$

370,938

 

 

4. Balance Sheet Details

Land, property and equipment, net consisted of the following, in thousands:

 

 

 

December 31,

 

 

 

2020

 

 

2019

 

Land

 

$

4,950

 

 

$

4,950

 

Building and capital improvements

 

 

45,246

 

 

 

45,246

 

Leasehold improvements

 

 

19,464

 

 

 

19,277

 

Machinery and equipment

 

 

158

 

 

 

169

 

Computers and software

 

 

2,943

 

 

 

2,749

 

Furniture and office equipment

 

 

1,992

 

 

 

1,531

 

 

 

 

74,753

 

 

 

73,922

 

Less accumulated depreciation and amortization

 

 

(52,663

)

 

 

(48,794

)

Land, property and equipment, net

 

$

22,090

 

 

$

25,128

 

As of December 31, 2020, the majority of the Company’s long-lived assets were located in the United States.

Accounts payable and other accrued liabilities consisted of the following, in thousands:  

 

 

 

December 31,

 

 

 

2020

 

 

2019

 

Accounts payable

 

$

12,004

 

 

$

6,043

 

Accrued compensation

 

 

18,846

 

 

 

14,329

 

Other accrued liabilities

 

 

4,501

 

 

 

5,127

 

Total accounts payable and other accrued liabilities

 

$

35,351

 

 

$

25,499

 

 

 

82


 

5. Sale of Manufacturing Operations

In order to further focus the Company’s efforts and resources on its strategic objectives of developing its pipeline drug candidates, in March 2018, the Company entered into an Asset Purchase Agreement, or Sale Agreement, with Siegfried Pharma AG and Siegfried AG, (collectively and individually, Siegfried). Under the Sale Agreement, the Company agreed to sell and assign to Siegfried, and Siegfried agreed to purchase and assume from Arena GmbH, certain drug product finishing facility assets and know-how, including fixtures, equipment, other personal property and real estate assets located in Zofingen, Switzerland and related contracts and certain related liabilities, or collectively, the Manufacturing Operations. The Company refers to this transaction as the Siegfried Transaction. The Siegfried Transaction was completed on March 31, 2018. In connection with the Siegfried Transaction, all of Arena GmbH’s approximately 50 employees transferred to Siegfried. The Company has excluded from its continuing operations for all periods presented in this report revenues and expenses associated with the disposed Manufacturing Operations, which are reported as discontinued operations. The total sales price for the Manufacturing Operations was approximately CHF 4 million of which approximately CHF 3 million was received in cash in March 2018 and the remaining portion was received in March 2019.

The following table summarizes the results of discontinued operations in the consolidated statements of operations for the year ended December 31, 2018, in thousands:

 

 

 

 

 

Revenues

 

2018

 

Net product sales

 

$

1,129

 

Other collaboration revenue

 

 

372

 

Toll manufacturing

 

 

1,006

 

Total revenues

 

 

2,507

 

Operating costs and expenses

 

 

 

 

Cost of product sales

 

 

1,858

 

Cost of toll manufacturing

 

 

1,411

 

General and administrative

 

 

329

 

Other expense, net

 

 

464

 

Total costs and expenses

 

 

4,062

 

Loss from operations of discontinued operations

 

 

(1,555

)

Gain on sale of discontinued operations

 

 

725

 

Loss from discontinued operations

 

$

(830

)

 

 

6. Leases

San Diego, California

The Company has three properties in San Diego, California, under sale and leaseback agreements. The terms of these leases contain a purchase option and stipulate annual increases in monthly lease payments of 2.5%. The Company accounts for its sale and leaseback transactions using the financing method. Under the financing method, the book value of the properties and related accumulated depreciation remain on the Company’s balance sheet and no sale is recognized. The adoption of ASC 842 did not result in a change to the Company’s current accounting policy related to its sale and leaseback agreements. The sales price of the properties is recorded as a financing obligation, and a portion of each lease payment is recorded as interest expense. For the years ended December 31, 2020, 2019, and 2018, the Company recorded interest expense of $4.5 million, $4.8 million, and $5.7 million respectively, related to these leases. The Company expects interest expense related to its facilities to total $16.7 million from December 31, 2020, through the remaining terms of the leases in fiscal year 2027. At December 31, 2020, the total financing obligation associated with these sale and leaseback agreements was $45.6 million. The aggregate residual value of the facilities at the end of the lease terms is $5.0 million.

The Company leases an additional property in San Diego, California under an operating lease, which expires in May 2027, contains a purchase option and stipulates annual increases in monthly lease payments of 2.5%. Upon adoption of ASC 842, the Company recorded an operating lease liability of $6.3 million based on the present value of the remaining minimum lease payments under the terms of its existing operating lease with a corresponding right-of-use asset of $5.9 million. As this lease did not provide an implicit rate, the Company used its estimated incremental borrowing rate based on the information available at the effective date of adoption in determining the present value of the remaining minimum lease payments. The weighted-average discount rate used was 7.25%.


83


 

 

Boston, Massachusetts

In the third quarter of 2019, the Company entered into a new lease agreement for approximately 12,755 square feet of office space in Boston, Massachusetts with a lease inception date of September 1, 2019. This lease is classified as an operating lease and expires in December 2026. The lease stipulates annual increases in monthly lease payments of 2.0%. At the lease inception date, the Company recorded an operating lease liability of $5.2 million based on the present value of the remaining minimum lease payments under the terms of this lease with a corresponding right-of-use asset of $5.2 million. As this lease did not provide an implicit rate, the Company used its estimated incremental borrowing rate based on the information available at effective date of adoption in determining the present value of remaining minimum lease payments. The weighted-average discount rate used was 7.25%.

Zug, Switzerland

In the second quarter of 2019, the Company entered into a lease in Zug, Switzerland, for approximately 10,500 square feet of office space with a lease inception date of June 1, 2019. This lease expires in May 2024. At the lease inception, the Company recorded an operating lease liability of $1.4 million based on the present value of the remaining minimum lease payments under the terms of this operating lease with a corresponding right-of-use asset of $1.5 million. As this lease did not provide an implicit rate, the Company used its estimated incremental borrowing rate based on the information available as of the lease inception in determining the present value of remaining minimum lease payments. The weighted-average discount rate used was 7.25%. In the third quarter of 2019, the Company entered into an addendum to this lease for approximately 4,050 square feet of additional office space in the same location with the same landlord and a lease inception date of January 1, 2020.

As of December 31, 2020, the balance of the right-of-use assets associated with the leases described above was $10.8 million and is included in other non-current assets in the accompanying consolidated balance sheets. As of December 31, 2020, the current portion of the corresponding lease liabilities of $1.6 million is included in accounts payable and other accrued liabilities and the non-current portion of the lease liabilities of $10.3 million is included in other long-term liabilities in the accompanying consolidated balance sheets. The operating lease costs and cash paid for the amounts included in the measurement of lease liabilities are classified as operating activities in the accompanying consolidated statements of cash flows. The Company recognizes rent expense on a straight-line basis over the term of each lease. Rent expense of $2.4 million, $1.9 million and $1.2 million was recognized for the years ended December 31, 2020, 2019, and 2018, respectively. The weighted-average remaining lease term for all operating leases as of December 31, 2020 was 5.8 years.

At December 31, 2020, the future lease payments under the Company’s existing financing and non-cancellable operating leases were as follows, in thousands:

 

Year ending December 31,

 

Financing

Obligations

 

 

Operating

Leases

 

2021

 

$

7,766

 

 

$

2,387

 

2022

 

 

8,672

 

 

 

2,586

 

2023

 

 

8,889

 

 

 

2,630

 

2024

 

 

9,111

 

 

 

2,293

 

2025

 

 

9,339

 

 

 

2,066

 

Thereafter

 

 

13,601

 

 

 

2,576

 

Total minimum lease payments

 

 

57,378

 

 

$

14,538

 

Less amounts representing interest

 

 

(16,716

)

 

 

 

 

Add amounts representing residual value

 

 

4,950

 

 

 

 

 

Lease financing obligations

 

 

45,612

 

 

 

 

 

Less current portion

 

 

(4,401

)

 

 

 

 

 

 

$

41,211

 

 

 

 

 

The Company has other leases primarily for office space that it enters into from time to time. These leases have terms of 12 months or less from lease commencement date and are considered short-term leases and not recorded on the consolidated balance sheets; however, the lease expenditures recognized are captured and reported as incurred.

Subleases

In 2016 and 2017, the Company entered into agreements to sublease several of its California properties. All the Company’s subleases expire in May 2027. The terms of the subleases stipulate annual increases in monthly rental payments. For the years ended December 31, 2020, 2019 and 2018, the Company recognized rent income from its subleases of $3.0 million, $3.0 million and $2.5 million, respectively.

The Company recognizes rent income on a straight-line basis over the term of the subleases.

84


 

Expected minimum rental payments to be received under the sublease are as follows, in thousands:

 

Year ending December 31,

 

 

 

 

2021

 

$

2,477

 

2022

 

 

3,487

 

2023

 

 

3,794

 

2024

 

 

3,896

 

2025

 

 

4,000

 

Thereafter

 

 

5,840

 

Total

 

$

23,494

 

 

 

7. Stockholders’ Equity

In June 2020, the Company completed the sale of an aggregate of 6,325,000 shares of common stock in an underwritten public offering. Net proceeds from the offering were approximately $301.8 million after deducting underwriting discounts and commissions and offering expenses payable by the Company.

In March 2018, the Company completed the sale of an aggregate of 9,775,000 shares of common stock in an underwritten public offering. Net proceeds from the offering were approximately $383.1 million after deducting underwriting discounts and commissions and offering expenses payable by the Company.

Equity Compensation Plans

In June 2020, the Company’s stockholders approved the 2020 Long-Term Incentive Plan, or 2020 LTIP. Upon such approval, the Company’s Amended and Restated 2017 Long-Term Incentive Plan, or 2017 LTIP, was terminated. Notwithstanding such termination or the previous termination of its 2013 Long-Term Incentive Plan, 2012 Long-Term Incentive Plan, 2009 Long-Term Incentive Plan, and 2006 Long-Term Incentive Plan, as amended, or, together with the 2017 LTIP, the Prior Plans, all outstanding awards under the Prior Plans continue to be governed under the terms of the Prior Plans. Since the Company’s stockholders approved the 2020 LTIP, the Compensation Committee of the Company’s Board of Directors has from time to time amended the 2020 LTIP to incorporate into the 2020 LTIP inducement equity awards granted to new employees of the Company or its subsidiary APD GmbH. The number of shares of common stock authorized for issuance under the 2020 LTIP may be increased by the number of shares subject to any stock awards under the Prior Plans that are forfeited, expire or otherwise terminate without the issuance of such shares and would otherwise be returned to the share reserve under the Prior Plans but for their termination and as otherwise provided in the 2020 LTIP.

The aggregate number of shares of the Company’s common stock that initially could be issued pursuant to stock awards granted under the 2020 LTIP is 1,887,250 shares, less 1 share for every share that was subject to an award granted under the 2020 LTIP after March 31, 2020. Shares issued after the effective date of the 2020 LTIP pursuant to awards granted under the 2020 LTIP or any of the Company’s Prior Plans reduce the number of shares available for issuance under the 2020 LTIP by 1 share for every share issued.

Shares under the 2020 LTIP may be granted as incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards and performance awards. Performance awards may be based on the achievement of operational, financial, research and development, collaboration and license arrangements and other performance metrics provided under the 2020 LTIP, such as total stockholder return, revenue, research, development and regulatory achievements and strategic and operational initiatives.

A total of 12,880,928 shares of the Company’s common stock were reserved for future issuance at December 31, 2020, pursuant to the 2020 LTIP and the Company’s Prior Plans, or collectively, its Equity Compensation Plans.

Stock options granted under the 2020 LTIP generally vest over four years with 25% of the shares subject to each option vesting on the first anniversary of the grant date and the remainder of the shares vesting monthly over the following three years in equal installments and, to the extent vested, are exercisable for up to seven years from the date of grant. The recipient of a restricted stock award has all rights of a stockholder at the date of grant, subject to certain restrictions on transferability and a risk of forfeiture. Restricted stock unit awards generally vest over one or four years from the date of grant. Neither the exercise price of an option nor the grant price of a stock appreciation right may be less than 100% of the fair market value of the common stock on the date such equity award is granted, except in specified situations. The 2020 LTIP prohibits option and stock appreciation right repricings (other than to reflect stock splits, spin-offs or certain other corporate events) without stockholder approval.

85


 

The following table summarizes the Company’s stock option activity under its Equity Compensation Plans, for the year ended December 31, 2020, in thousands (except per share data):

 

 

 

Options

 

 

Weighted-

Average

Exercise Price

 

 

Weighted-Average

Remaining

Contractual

Term (in years)

 

 

Aggregate

Intrinsic

Value

 

Outstanding at December 31, 2019

 

 

8,535

 

 

$

34.31

 

 

 

 

 

 

 

 

 

Granted

 

 

2,839

 

 

$

49.96

 

 

 

 

 

 

 

 

 

Exercised

 

 

(1,944

)

 

$

26.78

 

 

 

 

 

 

 

 

 

Forfeited/cancelled/expired

 

 

(731

)

 

$

43.42

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2020

 

 

8,699

 

 

$

40.33

 

 

 

4.63

 

 

$

317,925

 

Vested and expected to vest at December 31, 2020

 

 

8,699

 

 

$

40.33

 

 

 

4.63

 

 

$

317,925

 

Vested and exercisable at December 31, 2020

 

 

3,855

 

 

$

32.87

 

 

 

3.54

 

 

$

169,556

 

 

Restricted stock awards, restricted stock unit awards and performance awards are share awards that, upon vesting, will deliver to the holder shares of the Company’s common stock. The following table summarizes the Company’s restricted stock awards, restricted stock unit awards and performance awards activity during the year ended December 31, 2020, in thousands (except per share data):

 

 

 

Number of Shares

 

 

Weighted-

Average

Grant Date Fair Value

 

 

Aggregate

Intrinsic

Value

 

Non-vested at December 31, 2019

 

 

234

 

 

$

32.38

 

 

 

 

 

Granted

 

 

322

 

 

$

47.73

 

 

 

 

 

Vested

 

 

(138

)

 

$

32.97

 

 

 

 

 

Forfeited/cancelled

 

 

(38

)

 

$

37.63

 

 

 

 

 

Non-vested at December 31, 2020

 

 

380

 

 

$

44.65

 

 

$

29,166

 

 

The aggregate intrinsic value in the above tables is calculated as the difference between the closing price of the Company’s common stock at December 31, 2020, of $76.83 per share and the exercise price of stock options that had strike prices below the closing price. The intrinsic value of all stock options exercised during the years ended December 31, 2020, 2019, and 2018, was $73.5 million, $17.2 million, and $7.1 million, respectively. During the year ended December 31, 2020, cash of $52.1 million was received from stock option exercises. There is no tax impact related to share-based compensation or stock option exercises because the Company is in a net operating loss position with a full valuation allowance on our deferred tax assets.

In January 2019, a total of 297,000 target Performance-Based Restricted Stock Units, or PRSUs, were granted to employees in a company-wide grant. The PRSUs vest upon the closing price of the Company’s common stock, or the Closing Price, reaching certain price thresholds during the three-year performance period beginning January 4, 2019, and ending January 3, 2022, or the Performance Period, and the participant’s subsequent satisfaction of a continuing service requirement of generally 90 calendar days. If, on five consecutive trading days or ten non-consecutive trading days during the Performance Period, the Closing Price equals or exceeds $60.00, $67.50 or $75.00, and the participant thereafter satisfies a continuing service requirement, then the PRSUs are deemed vested at 50%, 100% or 200%, respectively, of the participant’s respective target PRSU amount. The shares may be issued following achievement of each price threshold, and the maximum number of common shares that may be issued pursuant to each PRSU grant equals 200% of the number of PRSUs granted. As these awards contain a market condition, the Company used a Monte Carlo simulation model to estimate the grant-date fair value, which totaled $18.1 million. The grant-date fair value is recognized as compensation expense over the requisite service period of approximately 1.2 years which was derived from the Monte Carlo simulation; no compensation expense is recognized for service not provided in case of separation from the Company. There is no adjustment of compensation expense recognized for service performed regardless of the number of PRSUs, if any, that ultimately vest. The $60.00 market condition threshold was achieved in 2019 and the $67.50 and $75.00 market condition thresholds were achieved in 2020. As a result, the PRSU shares vested at 200% and were issued to employees upon the satisfaction of the continuing service requirement.

Employee Stock Purchase Plan

In June 2019, the Company’s stockholders approved the 2019 Employee Stock Purchase Plan, or 2019 ESPP. Under the 2019 ESPP, substantially all employees can elect to have up to 15% of their annual compensation withheld to purchase up to 2,000 shares of common stock per purchase period, subject to certain limitations. The shares of common stock can be purchased over an offering period with a maximum duration of 12 months and at a price of not less than 85% of the lesser of the fair market value of the common stock on (i) the first trading day of the applicable offering period or (ii) the last trading day of the applicable six-month purchase period. Under applicable accounting guidance, the 2019 ESPP is considered a compensatory plan.

86


 

 There were no purchases under the 2019 ESPP in 2019. During the year ended December 31, 2020, a total of 64,456 shares were purchased by the Company’s employees under the 2019 ESPP. The amount of compensation expense associated with the 2019 ESPP for the year ended December 31, 2020 was $0.7 million and for the year ended December 31, 2019 was immaterial.  

Share-based Compensation

The Company estimates the grant-date fair value of all share-based awards in determining its share-based compensation expense. The Company’s share-based awards include stock options, options to purchase stock granted under its employee stock purchase plan, RSUs, and PRSU awards.

 

The table below sets forth the weighted-average assumptions and estimated fair value of stock options the Company granted under its Equity Compensation Plans during the years presented:

 

 

 

Years ended December 31,

 

 

 

2020

 

 

2019

 

 

2018

 

Risk-free interest rate

 

 

0.7

%

 

 

2.3

%

 

 

2.6

%

Dividend yield

 

 

%

 

 

%

 

 

%

Expected volatility

 

 

57

%

 

 

64

%

 

 

63

%

Expected life (years)

 

4.51

 

 

4.47

 

 

4.58

 

Weighted-average estimated fair value per share of stock options granted

 

$

23.18

 

 

$

23.47

 

 

$

20.01

 

 

 

The Company recognized share-based compensation expense as follows for the years presented, in thousands, except per share data:

 

 

 

Years ended December 31,

 

 

 

2020

 

 

2019

 

 

2018

 

Research and development

 

$

26,001

 

 

$

27,361

 

 

$

8,385

 

Selling, general and administrative

 

 

33,919

 

 

 

25,686

 

 

 

11,158

 

Discontinued operations

 

 

 

 

 

 

 

 

11

 

Total share-based compensation expense

 

$

59,920

 

 

$

53,047

 

 

$

19,554

 

Impact on net loss per share, basic

 

$

1.09

 

 

$

1.07

 

 

$

0.42

 

Impact on net loss per share, diluted

 

$

1.09

 

 

$

1.03

 

 

$

0.42

 

The table below sets forth the Company’s total unrecognized estimated compensation expense at December 31, 2020, by type of award and the weighted-average remaining requisite service period over which such expense is expected to be recognized:

 

 

 

Unrecognized

Expense (in

thousands)

 

 

Remaining

Weighted-Average

Recognition

Period (in years)

 

Unvested stock options

 

$

98,179

 

 

 

2.61

 

Stock awards

 

 

10,349

 

 

 

2.07

 

 

 

 

 

8. Collaborations and License Agreements

The Company has collaborations or license agreements with the following companies: United Therapeutics Corporation, or United Therapeutics, Everest Medicines Limited, Eisai Co., Ltd. and Eisai Inc., or collectively, Eisai, Boehringer Ingelheim International GmbH, or Boehringer Ingelheim, and Beacon Discovery, Inc., or Beacon Discovery.  

In the following table, revenue is disaggregated by major customers and timing of revenue recognition, in thousands:

87


 

 

Year ended December 31,

 

Customers

2020

 

 

2019

 

United Therapeutics

$

 

 

$

800,000

 

Everest

 

 

 

 

5,000

 

Eisai

 

262

 

 

 

(1,077

)

Other

 

57

 

 

 

2,508

 

    Total

$

319

 

 

$

806,431

 

 

 

 

 

 

 

 

 

Timing of revenue recognition

 

 

 

 

 

 

 

Revenue recognized at a point in time

$

57

 

 

$

803,580

 

Revenue recognized over time

 

262

 

 

 

2,851

 

    Total

$

319

 

 

$

806,431

 

 

United Therapeutics Corporation

In November 2018, the Company entered into an exclusive license agreement with United Therapeutics. Under this agreement, the Company granted United Therapeutics an exclusive, worldwide, royalty-bearing license to develop, manufacture and commercialize ralinepag in any formulation. This transaction was completed in January 2019. United Therapeutics is responsible for all development, manufacturing and commercialization of the licensed products globally. In connection with this transaction, the Company incurred transaction fees of approximately $17.0 million, of which $14.6 million was incurred in 2019 and $2.4 million was incurred in 2018, and are presented as transaction costs in the accompanying consolidated statements of operations.

The Company received an upfront payment of $800.0 million under the agreement in the first quarter of 2019. The Company is also eligible to receive up to an aggregate of $400.0 million in regulatory milestone payments related to ralinepag, consisting of a payment of $150.0 million upon first marketing approval of an oral formulation of ralinepag in a major non-U.S. market, and a payment of $250.0 million upon U.S. marketing approval of an inhaled formulation of ralinepag to treat pulmonary arterial hypertension, as well as low double-digit, tiered royalties on net sales of ralinepag products, subject to certain adjustments for third party license payments.

The promised goods and services under this agreement are accounted for as a single performance obligation consisting of a research, development and commercialization license. The Company’s performance obligation under this agreement was satisfied upon the closing of the transaction in January 2019, and accordingly, the estimated total transaction price of the agreement of $800.0 million was recognized as revenue at the commencement of this agreement in 2019. The future potential milestone payments were excluded from the estimated total transaction price as they are considered constrained. Under the royalty exception in ASC 606 for licensed intellectual property, the Company does not include any variable amounts related to sales-based royalties in the transaction price until the later of when the sales occur or the performance obligation is satisfied or partially satisfied.

Everest

In December 2017, the Company and Everest entered into an exclusive agreement, or the Everest Agreement, to conduct joint development for the ralinepag and etrasimod programs. Under the Everest Agreement, the Company granted Everest an exclusive, royalty-bearing license to develop and commercialize ralinepag (in any formulation) and etrasimod (in oral formulations), in mainland China, Taiwan, Hong Kong, Macau and South Korea, or collectively, the Territories. Everest is generally responsible for development and commercialization of the licensed products in the Territories and may participate in the portion of the Company’s global clinical trials that is conducted in the Territories. In January 2019, the Company and Everest amended the Everest Agreement by entering into two separate agreements, one for each development program with the terms identical to the original Everest Agreement. Under the agreement with United Therapeutics described above, the Company assigned all its rights and obligations with respect to the ralinepag program under the Everest Agreement, to United Therapeutics.  

The Company is also eligible to receive up to an aggregate of $110.0 million in success milestones in case of full commercial success of etrasimod products. The Company is also eligible to receive tiered royalties on net sales of etrasimod products in the Territories.

The promised goods and services under the Everest Agreement are accounted for as a single performance obligation consisting of a development and commercialization license. As of December 31, 2020, all remaining future potential milestone payments were excluded from the estimated total transaction price as they are considered constrained.

88


 

For the years ended December 31, 2019 and 2018, the Company recognized revenues of $5.0 million and $2.0 million, respectively, from the Everest Agreement. The Company did not recognize revenue from the Everest Agreement during the year ended December 31, 2020.

Eisai

In December 2016, the Company amended and restated the terms of the marketing and supply agreement for lorcaserin with Eisai by entering into a Transaction Agreement and a Supply Agreement (collectively, the Eisai Agreement). Under the Transaction Agreement, Eisai acquired an exclusive royalty-bearing license or transfer of intellectual property to global commercialization and manufacturing rights to lorcaserin, including in the territories retained by the Company under the prior agreement, with control over global development and commercialization decisions. Eisai is responsible for all lorcaserin development expenses in the future. The Company also assigned to Eisai its rights under the commercial lorcaserin distribution agreements with Ildong Pharmaceutical Co., Ltd., or Ildong, for South Korea; CY Biotech Company Limited, or CYB, for Taiwan; and Teva Pharmaceuticals Ltd.’s Israeli subsidiary, Abic Marketing Limited, or Teva, for Israel.

Under the Supply Agreement, Eisai paid the Company for finished drug product plus monthly manufacturing support payments through March 2018 totaling CHF 8.7 million.

Until March 31, 2018, when the Company sold the Manufacturing Operations, including the assignment of the Supply Agreement, to Siegfried (see Note 5), it manufactured lorcaserin at its manufacturing facility in Zofingen, Switzerland. Revenues earned for (i) lorcaserin sold by the Company to Eisai under the manufacturing and supply commitment within the Supply Agreement and (ii) the manufacturing support payments are classified within discontinued operations as part of the Manufacturing Operations in the consolidated statements of operations (see Note 5). All other revenues earned under the Transaction Agreement, such as royalties, are classified within continuing operations in the consolidated statements of operations.

Royalty payments.

Pursuant to the Transaction Agreement, the Company was eligible to receive tiered royalty payments from Eisai starting at 9.5% on net sales of lorcaserin. In October 2020, the Company entered into a Royalty Purchase Agreement with Longboard Pharmaceuticals, Inc. pursuant to which Longboard purchased from the Company the right to receive all milestone payments, royalties, interest and other payments relating to net sales of lorcaserin owed or otherwise payable by Eisai.

Upfront payments.

Prior to the Transaction Agreement, the Company received from Eisai total upfront payments of $115.0 million under prior lorcaserin collaboration agreements and $7.5 million from the prior commercial lorcaserin distribution agreements with Ildong and CYB described below, and Teva. Revenues from these upfront payments were previously deferred, as the Company determined that the exclusive rights did not have standalone value without its ongoing development and regulatory activities. Accordingly, these payments were recognized ratably as revenue over the periods in which the Company expected the services to be rendered. The Transaction Agreement effectively eliminated the Company’s obligation to continue performing the development and regulatory activities required in the original agreement.

In total, prior to the Transaction Agreement, the Company received a total of $102.1 million in milestone payments from Eisai, and other lorcaserin distributors. These payments were recognized as revenue upon the achievement of the milestones.


89


 

 

Accounting for Eisai Agreement under ASC 606.

Upon implementation of ASC 606 on January 1, 2018, the Company applied a practical expedient for contract modifications applicable to contracts that were modified before the implementation date. The promised goods and services under the Eisai Agreement were assessed in combination with promised goods and services under the Company’s previous agreements with Eisai and commercial lorcaserin distribution agreements with Ildong, CYB, and Teva. The total estimated transaction price of these contracts at the implementation date was $344.4 million, which included previously received upfront payments, milestone payments, proceeds from net products sales, reimbursement of development expenses, reimbursement of patent expenses, manufacturing support payments received and expected to be received under the Supply Agreement, proceeds from the sale of on-hand inventory of bulk lorcaserin and the precursor material, royalty payments received through December 31, 2017, and estimated future royalty payments related to intellectual property sold to Eisai. The future potential milestone payments were excluded from the estimated total transaction price as they are considered constrained due to its assessment of the probability of a significant revenue reversal. The future royalties related to licensed intellectual property were excluded from the estimated total transaction price under the royalty exception in ASC 606. The estimated future royalties that relate to intellectual property sold to Eisai do not qualify for the royalty exception in ASC 606 and were included in the estimated total transaction price.

The estimated total transaction price was allocated between satisfied and unsatisfied performance obligations based on the relative standalone selling prices of the identified performance obligations. The remaining manufacturing and supply obligation under the Supply Agreement was the only unsatisfied performance obligation. As a result of this allocation, on January 1, 2018, the Company reduced the balance of deferred revenues associated with the Eisai Agreement at the implementation date by $25.5 million, recognized a contract asset of $6.1 million related to future manufacturing support payments under the Supply Agreement and recognized a contract asset of $4.1 million related to estimated future royalty payments from intellectual property sold to Eisai under the Transaction Agreement. In connection with the sale of the Manufacturing Operations on March 31, 2018, the Company derecognized the remaining portion of the contract asset associated with the Supply Agreement. During 2018, the Company adjusted its estimate of future royalty payments from intellectual property sold to Eisai under the Transaction Agreement based on the CVOT study results reported by Eisai and its estimate of the qualifying sales of BELVIQ in the future years and recorded associated royalty revenue and an increase to the contract asset of $3.3 million. As of December 31, 2018, the contract asset balance was $6.0 million. Subsequent to year end, Eisai agreed to voluntarily withdraw BELVIQ products from the U.S. market based on a change in the FDA’s risk-benefit assessment of BELVIQ, and as requested by the FDA. As a result, the Company revised its estimate of future royalties and recorded a $3.7 million reduction to its contract asset as of December 31, 2019.

Based on the bill-and-hold accounting guidance in ASC 606, effective January 1, 2018, the Company derecognized $3.6 million of inventory of bulk lorcaserin and the precursor material previously sold to Eisai for which the revenue recognition criteria were met on the implementation date under ASC 606.

For the years ended December 31, 2020, 2019 and 2018, the Company recorded royalty revenues of $0.3 million, $(1.1) million and $6.6 million, respectively related to the Transaction Agreement. For the year ended December 31, 2018, the Company recognized revenue of $1.5 million related to the Supply Agreement (classified under discontinued operations), all of which was recorded during the first quarter of 2018 and primarily consisted of net product sales and other collaboration revenue.

The Manufacturing and Supply Commitment Deliverable was provided over 2017 and 2018 as product was shipped to Eisai until March 31, 2018.  

Boehringer Ingelheim International GmbH

In December 2015, the Company and Boehringer Ingelheim entered into a collaboration and license agreement, or Boehringer Ingelheim Agreement, under which the Company and Boehringer Ingelheim conduct joint research to identify drug candidates targeting an undisclosed G-protein-coupled receptor, or GPCR, that belongs to the group of orphan central nervous system receptors. Under the Boehringer Ingelheim Agreement, the Company granted Boehringer Ingelheim exclusive rights to its internally discovered, novel compounds and intellectual property for an orphan CNS receptor. The agreement grants Boehringer Ingelheim exclusive worldwide rights to develop, manufacture and commercialize products resulting from the collaboration.

In December 2018 and October 2019, the Company earned a milestone payment of $3.5 million and $1.5 million, respectively, upon Boehringer Ingelheim’s initiation of preclinical development of a first and an additional compound.

The Company is also eligible to receive up to an aggregate of $246.0 million (of which the first $7.0 million is also payable to Beacon) in additional success milestone payments in case of full commercial success of multiple drug products.

The promised goods and services under the Boehringer Ingelheim Agreement are accounted for as a single combined performance obligation consisting of a research license, a development and commercialization license and research services. The

90


 

Company’s research services performance obligation under the original term of the Boehringer Ingelheim Agreement was completely satisfied as of January 2018, and accordingly the estimated total transaction price of the Boehringer Ingelheim Agreement under the original contractual term was fully recognized as revenue over the period from January 2016 through January 2018. The Company recognizes revenue for the combined performance obligation based on the amount of incurred development expenses reimbursed by the customer as a percentage of total expected reimbursable expenses associated with the contract. As of December 31, 2020, all future potential milestone payments were excluded from the estimated total transaction price as they are considered constrained.

For the years ended December 31, 2019, and 2018, the Company recognized revenues of $1.7 million and $4.4 million, respectively from the Boehringer Ingelheim Agreement. The Company did not recognize revenue from the Boehringer Ingelheim Agreement during the year ended December 31, 2020.

Beacon Discovery, Inc.

In September 2016, the Company entered into a series of agreements with Beacon, a privately held drug discovery incubator which focuses on identifying and advancing molecules targeting GPCRs. Beacon was founded in 2016 by several of the Company’s former employees.

The Company entered into an agreement, or License and Collaboration Agreement, with Beacon, pursuant to which the Company transferred certain equipment to Beacon and granted Beacon a non-exclusive, non-assignable and non-sublicensable license to certain database information relating to compounds, receptors and pharmacology, and transferred certain equipment to Beacon. Beacon will seek to engage global partners to facilitate discovery and development. Beacon has agreed to assign to the Company any intellectual property relating to its existing research and development programs developed in the course of performing research for the Company and grant the Company a non-exclusive license to any intellectual property developed outside the course of performing work for it that is reasonably necessary or useful for developing or commercializing the products under the Company’s research and development programs. The Company is also entitled to rights of negotiation and rights of first refusal to potentially obtain licenses to compounds discovered and developed by Beacon. In addition, the Company is entitled to receive (i) a percentage of any revenue received by Beacon on or after the second anniversary of the effective date of the agreement from any third party pursuant to a third-party license, including upfront payments, milestone payments and royalties; (ii) single-digit royalties on the aggregate net sales of any related products sold by Beacon and its affiliates; and (iii) in the event that Beacon is sold, a percentage of the consideration for such sale transaction.

The Company entered a services agreement with Beacon, or Master Services Agreement, pursuant to which Beacon performs certain research services for it.

The Company also entered into a separate services agreement with Beacon, or Beacon Services Agreement, pursuant to which Beacon performed its research obligations under the Company’s agreement with Boehringer Ingelheim. In consideration for performing these research obligations, Beacon is entitled to receive the applicable FTE payments that are paid to the Company by Boehringer Ingelheim for the research services and certain milestone payments.

The Company also entered into a sublease agreement, or Sublease, with Beacon, pursuant to which it subleases approximately 30,000 square feet of laboratory, office and meeting room space to Beacon until May 2027.

In January 2020, the Company entered into a new multi-year strategic Collaboration and License Agreement with Beacon, aimed at building novel medicines across a range of GPCR targets believed to play a role in immune and inflammatory diseases. Under the terms of this agreement Beacon is responsible for early drug discovery activities and the Company will be responsible for any potential future development and, ultimately, commercialization activities. The Company is required to pay to Beacon research initiation fees, make quarterly research funding payments for the duration of Beacon’s research activities as well as research, development and regulatory milestone payments depending on the future research and development progress. The Company is also obligated to pay Beacon tiered royalties on net sales of low single digits levels.

Outpost Medicine LLC

In April 2018, the Company and Outpost Medicine entered into a license agreement, or Outpost Agreement, under which Outpost Medicine has an exclusive right to advance LP352 for the potential treatment of genitourinary disorders.

For the years ended December 31, 2019 and 2018, the Company recognized revenues of $0.5 million and $2.8 million, respectively from the Outpost Agreement. During the year ended December 31, 2020, the Outpost Agreement was terminated.

91


 

Axovant Sciences GmbH

In 2015, the Company entered into a development, marketing and supply agreement with Roivant Sciences Ltd., which subsequently assigned the exclusive rights to develop and commercialize nelotanserin to its subsidiary, Axovant. Under this agreement, Axovant had exclusive worldwide rights to develop and commercialize nelotanserin, subject to regulatory approval. The Company also provided certain services and manufactured and sold nelotanserin to Axovant. The Company refers to this agreement as the Axovant Agreement.

For the year ended December 31, 2018, the Company recognized revenues of $2.2 million from the Axovant Agreement. No revenue was recognized under this agreement for the year ended December 31, 2019. In the fourth quarter of 2019, the Axovant Agreement was terminated.

 

9. Income Taxes

The following table summarizes the Company’s (loss) income before provision (benefit) for income taxes by region for the years presented, in thousands:

 

 

 

Years ended December 31,

 

 

 

2020

 

 

2019

 

 

2018

 

United States

 

$

(386,292

)

 

$

298,315

 

 

$

(138,522

)

Foreign

 

 

(18,442

)

 

 

209,573

 

 

 

(1,142

)

Total (loss) income before income taxes

 

$

(404,734

)

 

$

507,888

 

 

$

(139,664

)

 

The Company did not record an expense or benefit for income taxes for the year ended December 31, 2020, because it had a full valuation allowance. The Company recorded an expense for income taxes for the year ended December 31, 2019, due to the usage of the deferred tax assets that were set up in 2018 related to the taxable gain pursuant to the United Therapeutics transaction. The Company recorded a benefit for income taxes for the year ended December 31, 2018, due to the estimated taxable gain pursuant to the United Therapeutics transaction.

The Company’s effective income tax rate differs from the statutory federal rate of 21% for 2020, 2019 and 2018 due to the following, in thousands:

 

 

 

Years ended December 31,

 

 

 

2020

 

 

2019

 

 

2018

 

Benefit for income taxes at statutory federal rate

 

$

(84,994

)

 

$

106,657

 

 

$

(29,090

)

Change in federal and foreign valuation allowance

 

 

101,091

 

 

 

34,712

 

 

 

(76,336

)

Permanent differences and other

 

 

(4,430

)

 

 

601

 

 

 

1,963

 

Deferred adjustment related to foreign net operating losses

 

 

 

 

 

15,133

 

 

 

 

Capital loss on foreign subsidiary liquidation

 

 

 

 

 

(43,685

)

 

 

 

Share-based compensation expense

 

 

(5,906

)

 

 

1,624

 

 

 

889

 

Foreign losses at lower effective rates

 

 

3,856

 

 

 

21

 

 

 

257

 

Research and development and Orphan Drug credits

 

 

(9,617

)

 

 

(4,730

)

 

 

(7,948

)

Provision (benefit) for income taxes

 

$

 

 

$

110,333

 

 

$

(110,265

)

 

The components of the Company’s net deferred tax assets are as follows, in thousands:  

 

 

92


 

 

 

 

December 31,

 

 

 

2020

 

 

2019

 

Deferred tax assets:

 

 

 

 

 

 

 

 

Federal and California NOL carryforwards

 

$

230,994

 

 

$

140,762

 

Federal and California research and development credit carryforwards

 

 

83,589

 

 

 

73,956

 

Foreign NOL carryforwards

 

 

472

 

 

 

 

Share-based compensation expense

 

 

13,572

 

 

 

11,010

 

Depreciation

 

 

3,015

 

 

 

3,183

 

Lease liability

 

 

2,200

 

 

 

2,359

 

Other, net

 

 

1,217

 

 

 

354

 

Total deferred tax assets

 

 

335,059

 

 

 

231,624

 

Deferred tax liabilities:

 

 

 

 

 

 

 

 

Right-of-use assets

 

 

(2,051

)

 

 

(2,218

)

Equity investment

 

 

(2,512

)

 

 

 

Total deferred tax liabilities

 

 

(4,563

)

 

 

(2,218

)

Net deferred tax assets

 

 

330,496

 

 

 

229,406

 

Valuation allowance

 

 

(330,496

)

 

 

(229,406

)

Net deferred tax assets

 

$

 

 

$

 

A valuation allowance is recorded against all of the Company’s deferred tax assets, as realization of any of these assets is not more-likely-than-not. The realization of the Company’s deferred tax assets is dependent upon future taxable income. In January 2019, the transaction pursuant to the United Therapeutics Agreement created taxable income, resulting in the realization of a portion of the Company’s deferred tax assets. A portion of the valuation allowance in 2018 was released for the anticipated taxable income generating event. The Company utilized net operating losses to offset taxable income in 2019. The Company’s ability to generate taxable income is analyzed regularly on a jurisdiction-by-jurisdiction basis. At such time as it is more-likely-than-not that the Company will generate taxable income in a jurisdiction, it will further reduce or remove the valuation allowance. The valuation allowance increased by $101.1 million from December 31, 2019, to December 31, 2020.

At December 31, 2020, the Company had federal NOL carryforwards of $945.7 million that will begin to expire in 2028 unless previously utilized. At the same date, the Company had California NOL carryforwards of $446.6 million, which begin expiring in 2028. Net operating losses generated after December 31, 2017 carry forward indefinitely. At December 31, 2020, the Company had $555.2 million of net operating losses with no expiration. Net operating losses generated after December 31, 2017 are also subject to an 80% limitation if utilized after 2020. At December 31, 2020, the Company also had federal and California research and development tax credit carryforwards, net of reserves, of $47.1 million and $26.7 million, respectively. At December 31, 2020, the Company had a Federal Orphan Drug Credit carryforward, net of reserves, of $15.0 million. Federal credit carryforwards will begin to expire after 2026 unless previously utilized. The California research and development credit carries forward indefinitely.

Sections 382 and 383 of the IRC limit the utilization of tax attribute carryforwards that arise prior to certain cumulative changes in a corporation’s ownership. The Company has completed an IRC Section 382/383 analysis through 2019 and did not identify any ownership changes that limit its utilization of tax attribute carryforwards since 2010. The Company has completed a high-level calculation for the 2020 stock activity and it appears that no Section 382 limitation has occurred during 2020. Pursuant to IRC Section 382 and 383, use of the Company’s net operating loss and research and development income tax credit carryforwards may be limited in the event of cumulative changes in ownership subsequent to 2020 of more than 50% within a three-year period. Due to the existence of the full valuation allowance, future changes in the Company’s unrecognized tax benefits will not impact the Company’s effective tax rate.

In accordance with authoritative guidance, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.

The following table reconciles the beginning and ending amount of unrecognized tax benefits for the years presented, in thousands:  

 

 

93


 

 

 

 

Years ended December 31,

 

 

 

2020

 

 

2019

 

 

2018

 

Gross unrecognized tax benefits at the beginning of the year

 

$

9,954

 

 

$

9,033

 

 

$

7,762

 

Additions from tax positions taken in the current year

 

 

1,706

 

 

 

1,017

 

 

 

1,269

 

Additions from tax positions taken in prior years

 

 

50

 

 

 

 

 

 

2

 

Reductions from tax positions taken in prior years

 

 

 

 

 

(96

)

 

 

 

Gross unrecognized tax benefits at end of the year

 

$

11,710

 

 

$

9,954

 

 

$

9,033

 

 

Of the Company’s total unrecognized tax benefits at December 31, 2020, $10.3 million will impact its effective tax rate in the event the valuation allowance is removed. The Company does not anticipate that there will be a substantial change in unrecognized tax benefits within the next 12 months.

The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. Because the Company has incurred net losses since its inception, it did not have any accrued interest or penalties included in its consolidated balance sheets at December 31, 2020, or 2019, and did not recognize any interest and/or penalties in its consolidated statements of operations and comprehensive income (loss) for the years ended December 31, 2020, 2019, and 2018.

The Company is subject to income taxation in the United States at the Federal and state levels. Tax years beginning in 2003 are subject to examination by US and California tax authorities due to the carryforward of unutilized NOLs and tax credits. The Company is also subject to foreign income taxes in the countries in which it operates. To the Company’s knowledge, it is not currently under examination by any taxing authorities.

 

 

10. Legal Proceedings

The Company is not currently subject to any material legal proceedings.

 

 

11. Quarterly Financial Data (Unaudited)

The following tables present selected quarterly financial data for the years presented, in thousands, except per share data:  

 

2020

 

Quarter ended

December 31

 

 

Quarter ended

September 30

 

 

Quarter ended

June 30

 

 

Quarter ended

March 31

 

Revenues

 

$

37

 

 

$

20

 

 

$

 

 

$

262

 

Operating costs and expenses

 

 

135,338

 

 

 

98,822

 

 

 

87,823

 

 

 

104,975

 

Net (loss)

 

 

(122,161

)

 

 

(97,438

)

 

 

(84,928

)

 

 

(100,207

)

Net (loss) per share, basic

 

 

(2.10

)

 

 

(1.69

)

 

 

(1.61

)

 

 

(2.00

)

Net (loss) per share, diluted

 

 

(2.10

)

 

 

(1.69

)

 

 

(1.61

)

 

 

(2.00

)

 

 

2019

 

Quarter ended

December 31

 

 

Quarter ended

September 30

 

 

Quarter ended

June 30

 

 

Quarter ended

March 31

 

Revenues

 

$

3,002

 

 

$

1,350

 

 

$

1,022

 

 

$

801,057

 

Operating costs and expenses

 

 

96,875

 

 

 

80,685

 

 

 

69,578

 

 

 

76,547

 

Net (loss) income

 

 

(88,311

)

 

 

(72,865

)

 

 

(61,403

)

 

 

620,134

 

Net (loss) income per share, basic

 

 

(1.76

)

 

 

(1.46

)

 

 

(1.24

)

 

 

12.53

 

Net (loss) income per share, diluted

 

 

(1.76

)

 

 

(1.46

)

 

 

(1.24

)

 

 

12.10

 

 

 

12. Subsequent Events

In February 2020, the Company entered into a sales agreement with Credit Suisse Securities (USA) LLC, SVB Leerink LLC and Cantor Fitzgerald & Co., pursuant to which it may sell and issue shares of its common stock having an aggregate offering price of up to $250.0 million from time to time in transactions that are deemed to be “at-the-market offering” as defined in Rule 415(a)(4) under the Securities Act of 1933, as amended, or Securities Act.

Subsequent to December 31, 2020, through the date of this report, the Company sold 1.2 million shares of common stock under the sales agreement at a weighted average price of $81.06 per share and realized gross proceeds of $100.6 million.

 

 

94


 

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A.    Controls and Procedures.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic and current reports that we file with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

As of December 31, 2020, we conducted an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this Annual Report on Form 10-K.

Management’s Report on Internal Control Over Financial Reporting

Our management is also responsible for establishing and maintaining for us adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the Internal Control—Integrated Framework (2013 framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under this framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2020.

The registered public accounting firm that audited our financial statements as of and for the year ended December 31, 2020, included in this Annual Report on Form 10-K, has issued an attestation report on our internal control over financial reporting, and such report is included below.

Changes in Internal Control Over Financial Reporting

An evaluation was also performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of any changes in our internal control over financial reporting that occurred during our last fiscal quarter and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. That evaluation did not identify any change in our internal control over financial reporting during the fourth quarter of the year ended December 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

95


 

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

Arena Pharmaceuticals, Inc.:

 

 

Opinion on Internal Control Over Financial Reporting

We have audited Arena Pharmaceuticals, Inc. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.  

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated  statements of operations and comprehensive (loss) income, equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements), and our report dated February 23, 2021 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

 

 

 

/s/ KPMG LLP

 

 

San Diego, California

 

February 23, 2021

 

 


96


 

 

Item 9B.    Other Information.

 

Not applicable.

 

 

97


 

 

PART III

Item 10.    Directors, Executive Officers and Corporate Governance.

We have adopted a Code of Business Conduct and Ethics that applies to our directors and employees (including our principal executive officer, principal financial officer, principal accounting officer and controller), and have posted the text of the policy on our website (www.arenapharm.com) in connection with “Investor” materials. In addition, we intend to promptly disclose on our website in the future (i) the date and nature of any amendment (other than technical, administrative or other non-substantive amendments) to the policy that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions and relates to any element of the code of ethics definition enumerated in Item 406(b) of Regulation S-K, and (ii) the nature of any waiver, including an implicit waiver, from a provision of the policy that is granted to one of these specified individuals that relates to one or more of the elements of the code of ethics definition enumerated in Item 406(b) of Regulation S-K, the name of such person who is granted the waiver and the date of the waiver.

The other information required by this item will be included under the captions “Election of Directors,” “Compensation and Other Information Concerning Executive Officers, Directors and Certain Stockholders” and “Delinquent Section 16(a) Reports” in our definitive proxy statement for the annual meeting of stockholders to be held in June 2021 to be filed with the SEC on or before April 30, 2021, or the Proxy Statement, and is incorporated herein by reference.

Item 11.    Executive Compensation.

The information required by this item will be included under the captions “Compensation and Other Information Concerning Executive Officers, Directors and Certain Stockholders” and “Compensation Committee Interlocks and Insider Participation” in the Proxy Statement and is incorporated herein by reference.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required by this item will be included under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Securities Authorized for Issuance Under Equity Compensation Plans” in the Proxy Statement and is incorporated herein by reference.

The information required by this item will be included under the captions “Certain Relationships and Related Transactions” and “Election of Directors” in the Proxy Statement and is incorporated herein by reference.

Item 14.    Principal Accounting Fees and Services.

The information required by this item will be included under the captions “Independent Auditors’ Fees” and “Pre-approval Policies and Procedures” in the Proxy Statement and is incorporated herein by reference.

 

 

PART IV

Item 15.    Exhibits, Financial Statement Schedules.

(a)

1. FINANCIAL STATEMENTS

Reference is made to the Index to Financial Statements under Item 8, Part II hereof.

2. FINANCIAL STATEMENT SCHEDULES

The financial statement schedules have been omitted either because they are not required or because the information has been included in the consolidated financial statements or the notes thereto included in this annual report.

98


 

 

 

3. EXHIBITS

 

Exhibit

No.

 

Exhibit Description

 

 

2.1*

 

Agreement of Purchase and Sale, dated as of March 21, 2007, by and between Arena and BMR-6114-6154 Nancy Ridge Drive LLP (as assignee of BioMed Realty, L.P.) (incorporated by reference to Exhibit 2.1 to Arena’s current report on Form 8-K filed with the Securities and Exchange Commission on May 8, 2007, Commission File No. 000-31161)

 

 

2.2+*

 

Exclusive License Agreement, dated as of November 15, 2018, by and between Arena and United Therapeutics Corporation (incorporated by reference to Exhibit 2.1 to Arena’s current report on Form 8-K filed with the Securities and Exchange Commission on January 25, 2019, Commission File No. 000-31161)

 

 

3.1

 

Fifth Amended and Restated Certificate of Incorporation of Arena (incorporated by reference to Exhibit 3.1 to Arena’s quarterly report on Form 10-Q for the quarter ended June 30, 2002, filed with the Securities and Exchange Commission on August 14, 2002, Commission File No. 000-31161)

 

 

 

 

3.2

 

Certificate of Amendment of the Fifth Amended and Restated Certificate of Incorporation of Arena (incorporated by reference to Exhibit 4.2 to Arena’s registration statement on Form S-8 filed with the Securities and Exchange Commission on June 28, 2006, Commission File No. 333-135398)

 

 

3.3

 

Certificate of Amendment No. 2 of the Fifth Amended and Restated Certificate of Incorporation of Arena, as amended (incorporated by reference to Exhibit 4.3 to Arena’s registration statement on Form S-8 filed with the Securities and Exchange Commission on June 30, 2009, Commission File No. 333-160329)

 

 

3.4

 

Certificate of Amendment No. 3 of the Fifth Amended and Restated Certificate of Incorporation of Arena, as amended (incorporated by reference to Exhibit 3.4 to Arena’s registration statement on Form S-8 filed with the Securities and Exchange Commission on June 20, 2012, Commission File No. 333-182238)

 

 

3.5

 

Certificate of Amendment No. 4 of the Fifth Amended and Restated Certificate of Incorporation of Arena, as amended (incorporated by reference to Exhibit 3.1 to Arena’s current report on Form 8-K filed with the Securities and Exchange Commission on June 15, 2017, Commission File No. 000-31161)

 

 

3.6

 

Certificate of Amendment No. 5 of the Fifth Amended and Restated Certificate of Incorporation of Arena, as amended (incorporated by reference to Exhibit 3.1 to Arena’s current report on Form 8-K filed with the Securities and Exchange Commission on June 16, 2020, Commission File No. 000-31161)

 

 

3.7

 

Amended and Restated Bylaws of Arena (incorporated by reference to Exhibit 3.2 to Arena’s current report on Form 8-K filed with the Securities and Exchange Commission on June 16, 2020, Commission File No. 000-31161)

 

 

 

4.1

 

Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, 3.5, 3.6 and 3.7

 

 

4.2

 

Form of common stock certificate (incorporated by reference to Exhibit 4.7 to Arena’s registration statement on Form S-8, filed with the Securities and Exchange Commission on June 22, 2017, Commission File No. 333-218905)

 

 

4.3

 

Description of Arena’s common stock (incorporated by reference to Exhibit 4.3 to Arena’s annual report on Form 10-K filed with the Securities and Exchange Commission on February 27, 2020, Commission File No. 000-31161)

 

 

10.1**

 

Form of Indemnification Agreement between Arena and its directors

 

 

 

10.2**

 

Form of Indemnification Agreement between Arena and its executive officers

 

 

 

10.3**

 

Form of Indemnification Agreement between Arena and individuals serving as its directors and executive officers (incorporated by reference to Exhibit 10.3 to Arena’s current report on Form 8-K filed with the Securities and Exchange Commission on June 18, 2007, Commission File No. 000-31161)

 

 

 

10.4

 

Lease agreement between BMR-6114-6154 Nancy Ridge Drive LLC and Arena for 6114 Nancy Ridge Drive, San Diego, California (incorporated by reference to Exhibit 10.5 to Arena’s quarterly report on Form 10-Q for the quarter ended June 30, 2007, filed with the Securities and Exchange Commission on August 9, 2007, Commission File No. 000-31161)

 

 

 

10.5

 

Lease agreement between BMR-6114-6154 Nancy Ridge Drive LLC and Arena for 6118 Nancy Ridge Drive, San Diego, California (incorporated by reference to Exhibit 10.6 to Arena’s quarterly report on Form 10-Q for the quarter ended June 30, 2007, filed with the Securities and Exchange Commission on August 9, 2007, Commission File No. 000-31161)

99


 

Exhibit

No.

 

Exhibit Description

 

 

 

10.6

 

Lease agreement between BMR-6114-6154 Nancy Ridge Drive LLC and Arena for 6122, 6124 and 6126 Nancy Ridge Drive, San Diego, California (incorporated by reference to Exhibit 10.7 to Arena’s quarterly report on Form 10-Q for the quarter ended June 30, 2007, filed with the Securities and Exchange Commission on August 9, 2007, Commission File No. 000-31161)

 

 

 

10.7

 

Lease agreement between BMR-6114-6154 Nancy Ridge Drive LLC and Arena for 6154 Nancy Ridge Drive, San Diego, California (incorporated by reference to Exhibit 10.8 to Arena’s quarterly report on Form 10-Q for the quarter ended June 30, 2007, filed with the Securities and Exchange Commission on August 9, 2007, Commission File No. 000-31161)

 

 

 

10.8**

 

Arena’s 2009 Long-Term Incentive Plan (incorporated by reference to Exhibit 99.1 to Arena’s registration statement on Form S-8 filed with the Securities and Exchange Commission on June 30, 2009, Commission File No. 333-160329)

 

 

 

10.9**

 

Form of Amended and Restated Termination Protection Agreement, dated December 30, 2008, by and between Arena and Steven W. Spector (incorporated by reference to Exhibit 10.2 to Arena’s Form 8-K filed with the Securities and Exchange Commission on December 31, 2008, Commission File No. 000-31161)

 

 

 

10.10**

 

Form of Amendment to Amended and Restated Termination Protection Agreement, dated May 9, 2016, by and between Arena and Steven W. Spector (incorporated by reference to Exhibit 10.3 to Arena’s current report on Form 8-K filed with the Securities and Exchange Commission on May 9, 2016, Commission File No. 000-31161)

 

 

 

10.11**

 

Transition and Retirement Agreement, dated January 13, 2020, by and between Arena and Steven W. Spector

 

 

 

10.12**

 

Consulting Services Agreement, dated March 2, 2020, by and between Arena and Steven W. Spector

 

 

 

10.13**

 

Form of Incentive Stock Option Grant Agreement for Employees under the Arena 2009 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.7 to Arena’s quarterly report on Form 10-Q for the quarter ended June 30, 2009, filed with the Securities and Exchange Commission on August 7, 2009, Commission File No. 000-31161)

 

 

 

10.14**

 

Form of Stock Option Grant Agreement for Employees or Consultants under the Arena 2009 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.8 to Arena’s quarterly report on Form 10-Q for the quarter ended June 30, 2009, filed with the Securities and Exchange Commission on August 7, 2009, Commission File No. 000-31161)

 

 

 

10.15**

 

Arena’s 2012 Long-Term Incentive Plan (incorporated by reference to Exhibit 99.1 to Arena’s registration statement on Form S-8 filed with the Securities and Exchange Commission on June 20, 2012, Commission File No. 333-182238)

 

 

 

10.16**

 

Form of Stock Option Grant Agreement for Employees or Consultants for grants prior to December 13, 2012, under the Arena 2012 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.4 to Arena’s current report on Form 8-K filed with the Securities and Exchange Commission on June 20, 2012, Commission File No. 000-31161)

 

 

 

10.17**

 

Arena’s 2013 Long-Term Incentive Plan, as amended (incorporated by reference to Exhibit 10.3 to Arena’s quarterly report on Form 10-Q for the quarter ended March 31, 2017, filed with the Securities and Exchange Commission on May 9, 2017, Commission File No. 000-31161)

 

 

 

10.18**

 

Form of Stock Option Grant Agreement for Employees or Consultants under the Arena 2013 Long-Term Incentive Plan, as amended (incorporated by reference to Exhibit 10.3 to Arena’s quarterly report on Form 10-Q for the quarter ended June 30, 2016, filed with the Securities and Exchange Commission on August 9, 2016, Commission File No. 000-31161)

 

 

 

10.19**

 

Form of Incentive Stock Option Grant Agreement for Employees under the Arena 2013 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.3 to Arena’s current report on Form 8-K filed with the Securities and Exchange Commission on June 14, 2013, Commission File No. 000-31161)

 

 

 

10.20**

 

Executive Employment Agreement, dated as of May 6, 2016, by and between Arena and Amit D. Munshi (incorporated by reference to Exhibit 10.1 to Arena’s current report on Form 8-K filed with the Securities and Exchange Commission on May 9, 2016, Commission File No. 000-31161)

 

 

 

10.21**

 

Employment Agreement, dated as of June 14, 2016, by and between Arena and Kevin R. Lind (incorporated by reference to Exhibit 10.1 to Arena’s current report on Form 8-K filed with the Securities and Exchange Commission on June 16, 2016, Commission File No. 000-31161)

 

 

 

10.22**

 

Separation Agreement, dated as of October 27, 2020, by and between Arena and Kevin R. Lind

100


 

Exhibit

No.

 

Exhibit Description

 

 

 

10.23**

 

Amended and Restated Severance Agreement, dated as of January 4, 2019, by and between Arena and Amit D. Munshi (incorporated by reference to Exhibit 10.1 to Arena’s quarterly report on Form 10-Q for the quarter ended March 31, 2019, filed with the Securities and Exchange Commission on May 9, 2019, Commission File No. 000-31161)

 

 

 

10.24**

 

Amended and Restated Severance Benefit Plan, effective January 4, 2019, and providing benefits for certain of Arena’s executive officers (incorporated by reference to Exhibit 10.2 to Arena’s quarterly report on Form 10-Q for the quarter ended March 31, 2019, filed with the Securities and Exchange Commission on May 9, 2019, Commission File No. 000-31161)

 

 

 

10.25**

 

Annual Incentive Plan for Arena’s executive officers, approved February 11, 2019 (incorporated by reference to Exhibit 10.28 to Arena’s annual report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission on February 28, 2019, Commission File No. 000-31161)

 

 

 

10.26**

 

Employment Agreement, dated as of August 9, 2016, by and between Arena and Vincent E. Aurentz (incorporated by reference to Exhibit 10.3 to Arena’s quarterly report on Form 10-Q for the quarter ended September 30, 2016, filed with the Securities and Exchange Commission on November 9, 2016, Commission File No. 000-31161)

 

 

 

10.27**

 

Employment Agreement, dated as of October 30, 2018, by and between Arena and Robert Lisicki (incorporated by reference to Exhibit 10.3 to Arena’s quarterly report on Form 10-Q for the quarter ended June 30, 2019, filed with the Securities and Exchange Commission on August 9, 2019, Commission File No. 000-31161)

 

 

 

10.28+

 

Transaction Agreement, dated as of December 28, 2016, by and among 356 Royalty Inc., Eisai Inc. and Eisai Co., Ltd. (incorporated by reference to Exhibit 10.52 to Arena’s annual report on Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission on March 15, 2017, Commission File No. 000-31161)

 

 

 

10.29

 

Amendment No. 1 dated as of March 9, 2018, to Transaction Agreement, dated as of December 28, 2016, by and among 356 Royalty Inc., Eisai Inc. and Eisai Co. Ltd. (incorporated by reference to Exhibit 10.46 to Arena’s annual report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission on March 14, 2018, Commission File No. 000-31161)

 

 

 

10.30

 

Amendment, dated October 5, 2018, to Transaction Agreement, dated as of December 28, 2016 and amended as of March 9, 2018, by and among 356 Royalty Inc., Eisai Inc. and Eisai Co. Ltd. (incorporated by reference to Exhibit 10.33 to Arena’s annual report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission on February 28, 2019, Commission File No. 000-31161)

 

 

 

10.31+

 

Supply Agreement, dated as of December 28, 2016, by and among Arena Pharmaceuticals GmbH, Eisai Inc. and Eisai Co., Ltd. (incorporated by reference to Exhibit 10.53 to Arena’s annual report on Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission on March 15, 2017, Commission File No. 000-31161)

 

 

 

10.32

 

Amendment No. 1 dated as of March 9, 2018, to Supply Agreement, dated as of December 28, 2016, by and among Arena Pharmaceuticals GmbH, Eisai Inc. and Eisai Co., Ltd. (incorporated by reference to Exhibit 10.48 to Arena’s annual report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission on March 14, 2018, Commission File No. 000-31161)

  

 

 

10.33**

 

Arena’s Amended and Restated 2017 Long-Term Incentive Plan, effective June 13, 2019 (incorporated by reference to Exhibit 99.1 to Arena’s registration statement on Form S-8 filed with the Securities and Exchange Commission on June 14, 2019, Commission File No. 333-232142)

 

 

 

10.34**

 

Form of Nonqualified Stock Option Grant Agreement for Employees and Consultants under the Arena 2017 Long-Term Incentive Plan (incorporated by reference to Exhibit 99.2 to Arena’s registration statement on Form S-8 filed with the Securities and Exchange Commission on June 22, 2017, Commission File No. 333-218905)

  

 

 

10.35**

 

Form of Incentive Stock Option Grant Agreement under the Arena 2017 Long-Term Incentive Plan (incorporated by reference to Exhibit 99.3 to Arena’s registration statement on Form S-8 filed with the Securities and Exchange Commission on June 22, 2017, Commission File No. 333-218905)

  

 

 

10.36**

 

Form of Restricted Stock Unit Grant Agreement (other than for non-employee directors) under the Arena 2017 Long-Term Incentive Plan (incorporated by reference to Exhibit 99.4 to Arena’s registration statement on Form S-8 filed with the Securities and Exchange Commission on June 22, 2017, Commission File No. 333-218905)

 

 

 

10.37**

 

Form of Performance Restricted Stock Unit Grant Agreement under the Arena 2017 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.45 to Arena’s annual report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission on February 28, 2019, Commission File No. 000-31161)

101


 

Exhibit

No.

 

Exhibit Description

 

 

 

10.38**

 

Form of Restricted Stock Unit Grant Agreement for Non-Employee Directors under the Arena 2017 Long-Term Incentive Plan (incorporated by reference to Exhibit 99.5 to Arena’s registration statement on Form S-8 filed with the Securities and Exchange Commission on June 22, 2017, Commission File No. 333-218905)

  

 

 

10.39**

 

Form of Nonqualified Stock Option Grant Agreement for Non-Employee Directors under the Arena 2017 Long-Term Incentive Plan (incorporated by reference to Exhibit 99.6 to Arena’s registration statement on Form S-8 filed with the Securities and Exchange Commission on June 22, 2017, Commission File No. 333-218905)

  

 

 

10.40**

 

Arena’s 2019 Employee Stock Purchase Plan (incorporated by reference to Exhibit 99.2 to Arena’s registration statement on Form S-8 filed with the Securities and Exchange Commission on June 14, 2019, Commission File No. 333-232142)

 

 

 

10.41**

 

Employment Agreement, dated as of December 10, 2019, by and between Arena and Joan Schmidt (incorporated by reference to Exhibit 10.2 to Arena’s quarterly report on Form 10-Q for the quarter ended March 31, 2020, filed with the Securities and Exchange Commission on May 7, 2020, Commission File No. 000-31161)

 

 

 

10.42**

 

Amendment No. 1, dated as of February 24, 2020, to the Employment Agreement dated December 10, 2019, by and between Arena and Joan Schmidt (incorporated by reference to Exhibit 10.3 to Arena’s quarterly report on Form 10-Q for the quarter ended March 31, 2020, filed with the Securities and Exchange Commission on May 7, 2020, Commission File No. 000-31161)

 

 

 

10.43**

 

Employment Agreement, dated as of February 22, 2020, by and between Arena and Laurie Stelzer (incorporated by reference to Exhibit 10.4 to Arena’s quarterly report on Form 10-Q for the quarter ended March 31, 2020, filed with the Securities and Exchange Commission on May 7, 2020, Commission File No. 000-31161)

 

 

 

10.44**

 

Form of Performance Restricted Stock Unit Grant Agreement under the Arena Amended and Restated 2017 Long-Term Incentive Plan entered into by and between Arena and each of Joan Schmidt and Laurie Stelzer (incorporated by reference to Exhibit 10.5 to Arena’s quarterly report on Form 10-Q for the quarter ended March 31, 2020, filed with the Securities and Exchange Commission on May 7, 2020, Commission File No. 000-31161)

 

 

 

10.45**

 

Arena’s Amended and Restated 2020 Long-Term Incentive Plan, amended as of February 12, 2021

 

 

 

10.46**

 

Form of Nonqualified Stock Option Grant Agreement for Employees and Consultants under the Arena Pharmaceuticals, Inc. Amended and Restated 2020 Long-Term Incentive Plan (incorporated by reference to Exhibit 99.3 to Arena’s Registration Statement on Form S8, filed with the Securities and Exchange Commission on June 19, 2020, Commission File No. 333-239330)

 

 

 

10.47**

 

Form of Restricted Stock Unit Grant Agreement under the Arena Pharmaceuticals, Inc. Amended and Restated 2020 Long-Term Incentive Plan (incorporated by reference to Exhibit 99.4 to Arena’s Registration Statement on Form S8, filed with the Securities and Exchange Commission on June 19, 2020, Commission File No. 333-239330)

 

 

 

10.48**

 

Form of Restricted Stock Unit Grant Agreement for Non-Employee Directors under the Arena Pharmaceuticals, Inc. Amended and Restated 2020 Long-Term Incentive Plan (incorporated by reference to Exhibit 99.5 to Arena’s Registration Statement on Form S8, filed with the Securities and Exchange Commission on June 19, 2020, Commission File No. 333-239330)

 

 

 

10.49**

 

Form of Nonqualified Stock Option Grant Agreement for Non-Employee Directors under the Arena Pharmaceuticals, Inc. Amended and Restated 2020 Long-Term Incentive Plan (incorporated by reference to Exhibit 99.6 to Arena’s Registration Statement on Form S8, filed with the Securities and Exchange Commission on June 19, 2020, Commission File No. 333-239330)

 

 

 

10.50**

 

Form of Performance Restricted Stock Unit Grant Agreement under the Arena Pharmaceuticals, Inc. Amended and Restated 2020 Long-Term Incentive Plan

 

 

 

10.51

 

Sales Agreement, dated February 27, 2020, by and among Arena, Credit Suisse Securities (USA) LLC, SVB Leerink LLC and Cantor Fitzgerald & Co. (incorporated by reference to Exhibit 1.2 to Arena’s registration statement on Form S-3 filed with the Securities and Exchange Commission on February 27, 2020, Commission File No. 333-236717)

 

 

 

10.52**

 

Summary of compensation for Arena’s non-employee directors, approved June 12, 2020 (incorporated by reference to Exhibit 10.1 to Arena’s quarterly report on Form 10-Q for the quarter ended June 30, 2020, filed with the Securities and Exchange Commission on August 5, 2020, Commission File No. 000-31161)

 

 

 

21.1

 

Subsidiaries of the Registrant

102


 

Exhibit

No.

 

Exhibit Description

 

 

 

23.1

 

Consent of Independent Registered Public Accounting Firm

 

 

 

31.1

 

Certification of principal executive officer pursuant to Rule 13a-14(A) promulgated under the Securities Exchange Act of 1934

 

 

 

31.2

 

Certification of principal financial and accounting officer pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(B) promulgated under the Securities Exchange Act of 1934

 

 

 

32.1

 

Certification of principal executive officer and principal financial and accounting officer pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(B) promulgated under the Securities Exchange Act of 1934

 

 

 

101.INS

 

Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

104

 

Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibit 101.INS)

 

+

Confidential treatment has been requested or granted with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.

*

Exhibits and schedules to this agreement have been omitted pursuant to the rules of the Securities and Exchange Commission. We will submit copies of such exhibits and schedules to the Securities and Exchange Commission upon request.

**

Management contract or compensatory plan or arrangement.

(b)EXHIBITS

See Item 15(a)(3) above.

(c)FINANCIAL STATEMENT SCHEDULES

See Item 15(a)(2) above.

Item 16.    Form 10-K Summary.

None.

103


 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

ARENA PHARMACEUTICALS, INC.

 

 

 

Date: February 23, 2021

By:

/ S /    AMIT D. MUNSHI

 

 

Amit D. Munshi

President and Chief Executive Officer

(principal executive office)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signatures

 

Title

 

Date

 

 

 

 

 

 

 

By:

 

/ S /    AMIT D. MUNSHI

 

President and Chief Executive Officer and Director (principal executive officer)

 

February 23, 2021

 

 

Amit D. Munshi

 

 

 

 

 

 

 

 

 

 

By:

 

/ S /   LAURIE STELZER

 

Executive Vice President and Chief Financial Officer (principal financial and accounting officer)

 

February 23, 2021

 

 

Laurie Stelzer

 

 

 

 

By:

 

/ S /    GARRY A. NEIL

 

Chair of the Board

 

February 23, 2021

 

 

Garry A. Neil, M.D.

 

 

 

 

 

 

 

 

 

 

 

By:

 

/ S /    JAYSON DALLAS

 

Director

 

February 23, 2021

 

 

Jayson Dallas, M.D.

 

 

 

 

 

 

 

 

 

 

 

By:

 

/ S /    OLIVER FETZER

 

Director

 

February 23, 2021

 

 

Oliver Fetzer, Ph.D.

 

 

 

 

 

 

 

 

 

 

 

By:

 

/ S /    KIERAN T. GALLAHUE

 

Director

 

February 23, 2021

 

 

Kieran T. Gallahue

 

 

 

 

 

 

 

 

 

 

 

By:

 

/ S /    JENNIFER JARRETT

 

Director

 

February 23, 2021

 

 

Jennifer Jarrett

 

 

 

 

 

 

 

 

 

 

 

By:

 

/ S /    KATHARINE KNOBIL

 

Director

 

February 23, 2021

 

 

Katharine Knobil, M.D.

 

 

 

 

 

 

 

 

 

 

 

By:

 

/ S /    TINA S. NOVA

 

Director

 

February 23, 2021

 

 

Tina S. Nova, Ph.D.

 

 

 

 

 

 

 

 

 

 

 

By:

 

/ S /    NAWAL OUZREN

 

Director

 

February 23, 2021

 

 

Nawal Ouzren

 

 

 

 

By:

 

/ S /    MANMEET S. SONI

 

Director

 

February 23, 2021

 

 

Manmeet S. Soni

 

 

 

 

 

 

 

 

 

 

 

 

 

104

Exhibit 10.1

 

INDEMNIFICATION AGREEMENT

(Director)

 

This Indemnification Agreement (“Agreement”) is made as of ___________ by and between Arena Pharmaceuticals, Inc., a Delaware corporation (the “Company”), and _____________________________ (“Indemnitee”).

 

RECITALS

 

WHEREAS, Indemnitee is currently serving as a director of the Company;

 

WHEREAS, Article V of the Fifth Amended and Restated Certificate of Incorporation of the Company (the “Certificate of Incorporation”) and Article IV of the Amended and Restated Bylaws of the Company (the “Bylaws”), each as currently in effect, require the Company under certain circumstances to indemnify and advance expenses to its directors and officers to the fullest extent permitted by the Delaware General Corporation Law (the “DGCL”) and Indemnitee has been serving and continues to serve as a director of the Company in part in reliance on such provisions;

 

WHEREAS, in recognition of Indemnitee’s need for substantial protection against personal liability in order to promote Indemnitee’s continued service to the Company in an effective manner, Indemnitee’s reliance on the aforesaid Certificate of Incorporation and Bylaw provisions, and, in part, to provide Indemnitee with specific contractual assurance that the protection provided by the Certificate of Incorporation and Bylaws will be available to Indemnitee (regardless of, among other things, any amendment to or revocation of such Certificate of Incorporation and Bylaws or any change in the composition of the Board of Directors of the Company (the “Board”) or any Change in Control (as defined below)), the Company wishes to provide in this Agreement for the indemnification of, and the advancing of expenses to, Indemnitee to the fullest extent (whether partial or complete) permitted by law, and, to the extent insurance is maintained, for the continued coverage of Indemnitee under the Company’s directors’ and officers’ liability insurance policies; and

 

WHEREAS, the Board has determined that (i) it is essential for the Company to retain and attract highly qualified individuals to serve as directors and executive officers; (ii) it is essential to the best interests of the Company’s stockholders that the Company act to assure its directors and executive officers that there will be increased certainty of such protection in the future; and (iii) it is reasonable, prudent and necessary for the Company contractually to obligate itself to indemnify and to advance Expenses (as defined below) on behalf of its directors and executive officers to the fullest extent permitted by applicable law as provided in this Agreement so that they will continue to act in their capacities as directors and/or executive officers of the Company (and the Company can attract new directors and executive officers) free from undue concern that they will not be so indemnified;

 

NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the Company and Indemnitee do hereby covenant and agree as follows:


 

 

Section 1.Definitions.   As used in this Agreement:

 

(a)A “Change in Control” shall be deemed to occur upon the earliest to occur after the date of this Agreement of any of the following events:

 

i.Acquisition of Stock by Third Party.  Any person or group of persons acting in concert (excluding Company employee benefit plans) becoming the beneficial owner of securities of the Company having at least 30% of the voting power of the Company’s then outstanding securities (unless the event causing the 30% threshold to be crossed is an acquisition of voting common securities directly from the Company);

 

ii.Change in Board.  Within any 24 month period, the persons who were directors immediately before the beginning of such period (the “Incumbent Directors”) shall cease to constitute at least a majority of the Board or the board of directors of a successor to the Company.  For this purpose, any director who was not a director at the beginning of such period shall be deemed to be an Incumbent Director if such director was elected to the Board by, or on the recommendation of or with the approval of, at least three-quarters of the directors who then qualified as Incumbent Directors (so long as such director was not nominated by a person who has expressed an intent to effect a Change in Control or engage in a proxy or other control contest);

 

iii.Corporate Transactions.  Any merger or other business combination of the Company, any sale or lease of the Company’s assets or any combination of the foregoing transactions (the “Transactions”) other than a Transaction immediately following which the stockholders of the Company immediately prior to the Transaction own at least 60% of the voting power, directly or indirectly, of (A) the surviving corporation in any such merger or other business combination; (B) the purchaser or lessee of the Company’s assets; or (C) both the surviving corporation and the purchaser or lessee in the event of any combination of Transactions;

 

iv.Liquidation.  The approval by the stockholders of the Company of a complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets; or

 

v.Other Events.  There occurs any other event of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or a response to any similar item on any similar schedule or form) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), whether or not the Company is then subject to such reporting requirement.

 

(b)Disinterested Director” means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee.

 

(c)Enterprise” means any corporation, limited liability company, partnership, joint venture, trust plan, employee benefit plan or other enterprise of which

2


Indemnitee is or was serving at the request of the Company as a director, officer, employee, agent or fiduciary; and, with respect to employee benefit plans, the references herein to (i) “fines shall include any excise tax assessed with respect to such plans, (ii) serving at the request of the Company shall include any service which imposes duties on, or involves service by, Indemnitee with respect to such plans, its participants or beneficiaries, and (iv) a person who acted in good faith and in a manner he or she reasonably believed to be in the best interests of the participants and beneficiaries of such a plan shall be deemed to have acted in a manner not opposed to the best interests of the Company as referred to in this Agreement.

 

(d)Expenses” shall include, without limitation, all reasonable attorneys’ fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, being or preparing to be a witness in, or otherwise participating in, a Proceeding.  “Expenses” also shall include (i) Expenses incurred in connection with any appeal, counterclaims and crossclaims resulting from or in connection with any Proceeding, including without limitation the premium, security for, and other costs relating to any cost bond, supersedeas bond, or other appeal bond or its equivalent, and (ii) for purposes of Section 11(d) only, Expenses incurred by Indemnitee or on Indemnitee’s behalf associated with the interpretation, enforcement or defense of Indemnitee’s rights under this Agreement, by litigation or otherwise.  “Expenses”, however, shall not include amounts paid in settlement by Indemnitee or the amount of judgments or fines against Indemnitee.

 

(e)Independent Counsel” means a law firm, or a member of a law firm, that is experienced in matters of corporation law and who neither at the time of its engagement as Independent Counsel is, nor in the preceding five years has been, retained to represent:  (i) the Company or Indemnitee in any matter material to either such party (other than with respect to matters concerning Indemnitee under this Agreement, or of other indemnitees under similar indemnification agreements), or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder.  Notwithstanding the foregoing, the term “Independent Counsel” shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee’s rights under this Agreement.  The Company agrees to pay the reasonable fees and expenses of the Independent Counsel referred to above and to fully indemnify such counsel against any and all Expenses, claims, liabilities and damages arising out of or relating to this Agreement or such Independent Counsel’s engagement pursuant hereto.

 

(f)Proceeding” shall include, without limitation, any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or any other actual, threatened or completed proceeding, whether brought in the right of the Company or otherwise and whether of a civil, criminal, administrative, legislative, or investigative nature, including any appeal therefrom, in which Indemnitee was, is or will be involved as a party, potential party, non-party witness or otherwise by reason of the fact that Indemnitee is or was a director or an officer of the Company, by reason of any action taken or omitted to be taken by Indemnitee or on Indemnitee’s part, or alleged to have been so taken or omitted to be taken, while acting as a director or an officer of the Company, or by

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reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee, agent or fiduciary of another Enterprise, in each case whether or not serving in such capacity at the time any liability or Expense is incurred for which indemnification, reimbursement, or advancement of Expenses can be provided under this Agreement; except for any such Proceeding initiated by Indemnitee to enforce Indemnitees rights under this Agreement (which shall be governed by Section 11 of this Agreement).

 

(g)to the fullest extent permitted by applicable law” and “to the fullest extent not prohibited by applicable law” shall include, but not be limited to:

 

i.to the fullest extent permitted or not prohibited, as the case may be, by the provision of the DGCL that authorizes or contemplates additional indemnification by agreement, or the corresponding provision of any amendment to or replacement of the DGCL; and

 

ii.to the fullest extent authorized or permitted or not prohibited, as the case may be, by any amendments to or replacements of the DGCL adopted after the date of this Agreement that increase the extent to which a corporation may indemnify its officers and directors.

 

Section 2.Indemnity in Third-Party Proceedings.  The Company shall indemnify Indemnitee in accordance with the provisions of this Section 2 if Indemnitee is, or is threatened to be made, a party to or a participant in any Proceeding, other than a Proceeding by or in the right of the Company to procure a judgment in its favor.  Pursuant to this Section 2, Indemnitee shall be indemnified to the fullest extent permitted by applicable law against all Expenses, judgments, fines and amounts paid in settlement, actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf, in connection with such Proceeding or any claim, issue or matter therein, if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company and, in the case of a criminal proceeding, had no reasonable cause to believe that Indemnitee’s conduct was unlawful.

 

Section 3.Indemnity in Proceedings by or in the Right of the Company.   The Company shall indemnify Indemnitee in accordance with the provisions of this Section 3 if Indemnitee is, or is threatened to be made, a party to or a participant in any Proceeding by or in the right of the Company to procure a judgment in its favor.  Pursuant to this Section 3, Indemnitee shall be indemnified to the fullest extent permitted by applicable law against all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection with such Proceeding or any claim, issue or matter therein, if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company.  No indemnification for Expenses shall be made under this Section 3 in respect of any Proceeding or any claim, issue or matter therein as to which Indemnitee shall have been finally adjudged by a court to be liable to the Company, unless and only to the extent that the Delaware Court of Chancery or any court in which the Proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnification.

 

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Section 4.Indemnification for Expenses of a Party Who is Wholly or Partly Successful. Notwithstanding any other provisions of this Agreement, to the fullest extent permitted by applicable law and to the extent that Indemnitee is a party to (or a participant in) and is successful, on the merits or otherwise, in any Proceeding or in defense of any claim, issue or matter therein, in whole or in part, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection therewith.  If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection with each successfully resolved claim, issue or matter.  For purposes of this Section and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter.

 

Section 5.Additional Indemnification.  Notwithstanding any limitation in Section 2, 3, or 4, the Company shall indemnify Indemnitee to the fullest extent permitted by applicable law if Indemnitee is a party to or threatened to be made a party to any Proceeding (including a Proceeding by or in the right of the Company to procure a judgment in its favor) against all Expenses, judgments, fines and amounts paid in settlement, actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf, in connection with the Proceeding.

 

Section 6.Exclusions.  Notwithstanding any provision in this Agreement, the Company shall not be obligated under this Agreement to make any indemnity in connection with any claim made against Indemnitee:

 

(a)Other than as provided in Section 4, for (i) an accounting of profits made from the purchase and sale (or sale and purchase) by Indemnitee of securities of the Company within the meaning of Section 16(b) of the Exchange Act or similar provisions of state statutory law or common law, or (ii) any reimbursement of the Company by Indemnitee of any bonus or other incentive-based or equity-based compensation or of any profits realized by Indemnitee from the sale of securities of the Company, as required in each case under the Exchange Act (including any such reimbursements that arise from an accounting restatement of the Company pursuant to Section 304 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), or the payment to the Company of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 306 of the Sarbanes-Oxley Act); or

 

(b)except as provided in Section 11(d) of this Agreement, in connection with any Proceeding (or any part of any Proceeding) initiated by Indemnitee (whether on Indemnitee’s own behalf or by or in the right of the Company to procure a judgment in its favor), including any Proceeding (or any part of any Proceeding) initiated by Indemnitee against the Company or its directors, officers, employees, agents, fiduciaries or other indemnitees and not by way of defense, unless (i) the Board authorized the Proceeding (or any part of any Proceeding) prior to its initiation or (ii) the Company provides the indemnification, in its sole discretion, pursuant to the powers vested in the Company under applicable law.

 

Section 7.Advances of Expenses.  In accordance with the pre-existing requirement of Article V of the Certificate of Incorporation, and notwithstanding any provision of this

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Agreement to the contrary, the Company shall advance, to the fullest extent not prohibited by applicable law, the Expenses incurred by Indemnitee or on Indemnitees behalf in connection with any Proceeding, and such advancement shall be made within 15 days after the receipt by the Company of a statement or statements requesting such advances from time to time, whether prior to or after final disposition of any Proceeding.  Advances shall (i) be unsecured and interest free; (ii) be made without regard to Indemnitees ability to repay the Expenses and without regard to Indemnitees ultimate entitlement to indemnification under the other provisions of this Agreement; and (iii) include any and all reasonable Expenses incurred pursuing an action to enforce this right of advancement, including Expenses incurred preparing and forwarding statements to the Company to support the advances claimed.  Indemnitee shall qualify for advances upon the execution and delivery to the Company of this Agreement, which shall constitute an unsecured undertaking by Indemnitee to repay the advance if and to the extent that it is ultimately determined that Indemnitee is not entitled to be indemnified by the Company.  The right to advances under this Section 7 shall continue until final disposition of any Proceeding.  This Section 7 shall not apply to any claim made by Indemnitee for which indemnity is excluded pursuant to Section 6.

 

Section 8.Procedure for Notification and Defense of Claim.

 

(a)Indemnitee shall notify the Company in writing of any matter with respect to which Indemnitee intends to seek indemnification or advancement of Expenses hereunder as soon as reasonably practicable following the receipt by Indemnitee of written notice thereof.  The written notification to the Company shall include a reasonable description of the nature of the Proceeding and the facts underlying the Proceeding.  To obtain indemnification under this Agreement, Indemnitee shall submit to the Company a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification following the final disposition of such Proceeding.  The omission by Indemnitee to notify the Company hereunder will not relieve the Company from any liability which it may have to Indemnitee hereunder or otherwise than under this Agreement, and any delay in so notifying the Company shall not constitute a waiver by Indemnitee of any rights under this Agreement.  The Secretary of the Company shall, promptly upon receipt of such a request for indemnification, advise the Board in writing that Indemnitee has requested indemnification.

 

(b)The Company will be entitled to participate in any Proceeding in connection with which Indemnitee seeks indemnification hereunder at its own expense.

 

(c)Any provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement to indemnify Indemnitee under this Agreement for any amounts paid in settlement of a Proceeding effected without the Company’s written consent, such consent not to be unreasonably withheld, delayed or conditioned by the Company.

 

Section 9.Procedure Upon Application for Indemnification.

 

(a)Upon written request by Indemnitee for indemnification pursuant to Section 8(a), a determination, if required by applicable law, with respect to Indemnitee’s

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entitlement thereto shall be made in the specific case:  (i) if a Change in Control shall have occurred, by Independent Counsel in a written opinion to the Board, a copy of which shall be delivered to Indemnitee; or (ii) if a Change in Control shall not have occurred, (A) by a majority vote of the Disinterested Directors, even though less than a quorum of the Board, (B) by a majority vote of a committee of Disinterested Directors designated by a majority vote of the Disinterested Directors, even though less than a quorum of the Board, (C) if there are no Disinterested Directors or, if a majority of the Disinterested Directors so direct, by Independent Counsel in a written opinion to the Board, a copy of which shall be delivered to Indemnitee, or (D) if so directed by the Board, by the stockholders of the Company; and, if it is so determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within 10 days after such determination.  Indemnitee shall cooperate with the person, persons or entity making such determination with respect to Indemnitees entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to make such determination.  Any Expenses incurred by Indemnitee or on Indemnitees behalf in so cooperating with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to Indemnitees entitlement to indemnification) and the Company shall indemnify and hold Indemnitee harmless therefrom.

 

(b)In the event the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 9(a), the Independent Counsel shall be selected as provided in this Section 9(b).  If a Change in Control shall not have occurred, the Independent Counsel shall be selected by the Board, and the Company shall give written notice to Indemnitee advising Indemnitee of the identity of the Independent Counsel so selected.  If a Change in Control shall have occurred, the Independent Counsel shall be selected by Indemnitee (unless Indemnitee shall request that such selection be made by the Board, in which event the preceding sentence shall apply), and Indemnitee shall give written notice to the Company advising it of the identity of the Independent Counsel so selected.  In either event, Indemnitee or the Company, as the case may be, may, within 10 days after such written notice of selection shall have been given, deliver to the Company or to Indemnitee, as the case may be, a written objection to such selection; provided, however, that such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of “Independent Counsel” as defined in Section 1(e), and the objection shall set forth with particularity the factual basis of such assertion.  Absent a proper and timely objection, the person so selected shall act as Independent Counsel.  If such written objection is so made and substantiated, the Independent Counsel so selected may not serve as Independent Counsel unless and until such objection is withdrawn or a court of competent jurisdiction has determined that such objection is without merit.  If, within 20 days after the later of submission by Indemnitee of a written request for indemnification pursuant to Section 8(a) and the final disposition of the Proceeding, no Independent Counsel shall have been selected and not objected to, either the Company or Indemnitee may petition a court of competent jurisdiction for resolution of any objection which shall have been made by the Company or Indemnitee to the other’s selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by the court or by such other person as the court shall designate, and the person with respect to whom all objections are so resolved or the person so appointed shall act as Independent Counsel under Section 9(a).  Upon the due commencement of any judicial proceeding or arbitration pursuant to

7


Section 11(a), Independent Counsel shall be discharged and relieved of any further responsibility in such capacity (subject to the applicable standards of professional conduct then prevailing).

 

Section 10.Presumptions and Effect of Certain Proceedings.

 

(a)In making a determination with respect to entitlement to indemnification hereunder, the person, persons or entity making such determination shall, to the fullest extent not prohibited by applicable law, presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 8(a), and the Company shall, to the fullest extent not prohibited by applicable law, have the burden of proof to overcome that presumption in connection with the making by any person, persons or entity of any determination contrary to that presumption.  Neither the failure of the Company (including by its Disinterested Directors or any committee thereof, by its stockholders or by Independent Counsel) to have made a determination prior to the commencement of any action pursuant to this Agreement that indemnification is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor an actual determination by the Company (including by its Disinterested Directors or any committee thereof or by Independent Counsel) that Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that Indemnitee has not met the applicable standard of conduct.

 

(b)Subject to Section 11(e), if the person, persons or entity empowered or selected under Section 9 to determine whether Indemnitee is entitled to indemnification shall not have made a determination within 60 days after receipt by the Company of the request therefor, the requisite determination of entitlement to indemnification shall, to the fullest extent not prohibited by applicable law, be deemed to have been made and Indemnitee shall be entitled to such indemnification, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee’s statement, in light of the circumstances under which such statement is made, not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law as determined by a court of competent jurisdiction; provided, however, that such 60-day period may be extended for a reasonable time, not to exceed an additional 30 days, if the person, persons or entity making the determination with respect to entitlement to indemnification in good faith requires such additional time for the obtaining or evaluating of documentation and/or information relating thereto; provided, further, that the foregoing provisions of this Section 10(b) shall not apply if the determination of entitlement to indemnification is to be made by (x) the stockholders pursuant to Section 9(a) and if (A) within 15 days after receipt by the Company of the request for such determination the Board has resolved to submit such determination to the stockholders for their consideration at an annual meeting thereof to be held within 75 days after such receipt and such determination is made thereat, or (B) a special meeting of stockholders is called within 15 days after such receipt for the purpose of making such determination, such meeting is held for such purpose within 60 days after having been so called and such determination is made thereat, or (y) Independent Counsel pursuant to Section 9(a).

 

(c)The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the

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right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that Indemnitees conduct was unlawful.

 

(d)For purposes of any determination of good faith, Indemnitee shall be deemed to have acted in good faith if Indemnitee’s action is based on the records or books of account of the Company, including financial statements, or on information supplied to Indemnitee by the officers of the Company in the course of their duties, or on the advice of legal counsel for the Company or on information or records given or reports made to the Company by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Company.  The provisions of this Section 10(d) shall not be deemed to be exclusive or to limit in any way the other circumstances in which Indemnitee may be deemed to have met the applicable standard of conduct set forth in this Agreement.  For purposes of this Section 10(d), the term Company shall include any other Enterprise if Indemnitee is serving such Enterprise as a director, officer, employee, agent or fiduciary at the request of the Company.

 

(e)The knowledge and/or actions, or failure to act, of any director, officer, employee, agent or fiduciary of the Company or of any other Enterprise which Indemnitee serves as a director, officer, employee, agent or fiduciary at the request of the Company shall not be imputed to Indemnitee for purposes of determining the right to indemnification under this Agreement.

 

Section 11.Remedies of Indemnitee.

 

(a)Subject to Section 11(e), in the event that (i) a determination is made pursuant to Section 9 that Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 7, (iii) no determination of entitlement to indemnification shall have been made pursuant to Section 9(a) within 90 days after receipt by the Company of the request for indemnification, (iv) payment of indemnification is not made pursuant to Section 4 or the last sentence of Section 9(a) within 10 days after receipt by the Company of a written request therefor, (v) payment of indemnification pursuant to Section 2, 3 or 5 is not made within 10 days after a determination has been made that Indemnitee is entitled to indemnification, or (vi) the Company or any other person takes or threatens to take any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, Indemnitee the benefits provided or intended to be provided to Indemnitee hereunder, Indemnitee shall be entitled to an adjudication by a court of competent jurisdiction of Indemnitee’s entitlement to such indemnification or advancement of Expenses.  Alternatively, Indemnitee, at Indemnitee’s option, may seek an award in arbitration to be conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association.  Indemnitee shall commence such proceeding seeking an adjudication or an award in arbitration within 180 days following the date on which Indemnitee first has the right to commence such proceeding pursuant to this Section 11(a).  The Company shall not oppose Indemnitee’s right to seek any such adjudication or award in arbitration.

 

(b)In the event that a determination shall have been made pursuant to Section 9(a) that Indemnitee is not entitled to indemnification, any judicial proceeding or

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arbitration commenced pursuant to this Section 11 shall be conducted in all respects as a de novo trial, or arbitration, on the merits and Indemnitee shall not be prejudiced by reason of that adverse determination.  In any judicial proceeding or arbitration commenced pursuant to this Section 11, the Company shall have the burden of proving Indemnitee is not entitled to indemnification or advancement of Expenses, as the case may be.

 

(c)If a determination shall have been made pursuant to Section 9(a) that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 11, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee’s statement, in the light of the circumstances under which such statement is made, not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law as determined by a court of competent jurisdiction.

 

(d)The Company shall, to the fullest extent not prohibited by applicable law, be precluded from asserting in any judicial proceeding or arbitration commenced pursuant to this Section 11 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court or before any such arbitrator that the Company is bound by all the provisions of this Agreement.  It is the intent of the Company that Indemnitee not be required to incur Expenses associated with the interpretation, enforcement or defense of Indemnitee’s rights under this Agreement by litigation or otherwise because such Expenses would substantially detract from the benefits intended to be extended to Indemnitee hereunder.  The Company shall indemnify Indemnitee against any and all Expenses and, if requested by Indemnitee, shall (within 10 days after receipt by the Company of a written request therefor) advance, to the fullest extent not prohibited by applicable law, such Expenses to Indemnitee, which are incurred by Indemnitee or on Indemnitee’s behalf in connection with any action brought by Indemnitee for indemnification or advancement of Expenses from the Company under this Agreement or under any directors’ and officers’ liability insurance policies maintained by the Company, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advancement of Expenses or insurance recovery, as the case may be.

 

(e)Notwithstanding anything in this Agreement to the contrary, no determination as to entitlement to indemnification under this Agreement shall be required to be made prior to the final disposition of the related Proceeding.

 

Section 12.Non-exclusivity; Survival of Rights; Insurance; Subrogation.

 

(a)The rights of indemnification and to receive advancement of Expenses as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Certificate of Incorporation, the Bylaws, any agreement, a vote of stockholders or a resolution of directors, or otherwise.  No amendment, alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right of Indemnitee under this Agreement in respect of any action taken or omitted by Indemnitee prior to such amendment, alteration or repeal.  To the extent that a change in Delaware law, whether by statute or judicial decision, permits greater indemnification or advancement of Expenses than would be afforded currently under the Certificate of

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Incorporation, the Bylaws and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change.  No right or remedy herein conferred is intended to be exclusive of any other right or remedy, and every other right and remedy shall be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise.  The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other right or remedy.

 

(b)To the extent that the Company maintains an insurance policy or policies providing liability insurance for directors, officers, employees, agents or fiduciaries of the Company or of any other Enterprise which Indemnitee serves as a director, officer, employee, agent or fiduciary at the request of the Company, Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for Indemnitee under such policy or policies.  If, at the time of the receipt of a notice of a claim pursuant to the terms hereof, the Company has directors’ and officers’ liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies.  The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies.

 

(c)In the event of payment of indemnification to Indemnitee under this Agreement, the Company shall be subrogated to the extent of such payment to any right of recovery Indemnitee may have and Indemnitee, as a condition of receiving such indemnification from the Company, shall execute all documents and do all things that the Company may deem necessary or desirable to perfect such right of recovery, including the execution of such documents necessary to enable the Company effectively to enforce such recovery.

 

(d)The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder (or for which advancement of Expenses is provided hereunder) if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise, including from any other Enterprise which Indemnitee was serving as a director, officer, employee, agent or fiduciary at the request of the Company.

 

Section 13.Duration of Agreement.  This Agreement shall continue until and terminate upon the later of: (a) 10 years after the latest date that Indemnitee shall have ceased to serve as a director or an officer of the Company or as a director, officer, employee, agent or fiduciary of any other Enterprise at the request of the Company or (b) one year after the final termination of any Proceeding then pending in respect of which Indemnitee is granted rights of indemnification or advancement of Expenses hereunder and of any proceeding commenced by Indemnitee pursuant to Section 11 relating thereto.  This Agreement shall be binding upon the Company and its successors and assigns and shall inure to the benefit of Indemnitee and Indemnitee’s heirs, executors and administrators.

 

Section 14.Severability.  If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever:  (a) the validity, legality

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and enforceability of the remaining provisions of this Agreement (including without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby and shall remain enforceable to the fullest extent permitted by applicable law; (b) such provision or provisions shall be deemed reformed to the extent necessary to conform to applicable law and to give the maximum effect to the intent of the parties hereto; and (c) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested thereby.

 

Section 15.Enforcement.

 

(a)The Company expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on it hereby in order to induce Indemnitee to serve as a director of the Company, and the Company acknowledges that Indemnitee is relying upon this Agreement in serving as a director of the Company.

 

(b)This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral, written and implied, between the parties hereto with respect to the subject matter hereof; provided, however, that this Agreement is a supplement to and in furtherance of the Certificate of Incorporation, the Bylaws and applicable law, and shall not be deemed a substitute therefor, nor to diminish or abrogate any rights of Indemnitee thereunder.

 

Section 16.Modification and Waiver.  No supplement, modification, waiver, cancellation or amendment of this Agreement or any provision hereof shall be binding unless executed in writing by the parties hereto.  No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions of this Agreement nor shall any waiver constitute a continuing waiver.

 

Section 17.Notice by Indemnitee.  Indemnitee agrees promptly to notify the Company in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document relating to any Proceeding or matter which may be subject to indemnification or advancement of Expenses hereunder.  The failure of Indemnitee to so notify the Company shall not relieve the Company of any obligation which it may have to Indemnitee under this Agreement or otherwise.

 

Section 18.Notices.  All notices required hereunder shall be in writing and be delivered personally, sent by internationally recognized express courier service (e.g., FedEx), transmitted via facsimile, or sent via registered or certified mail (postage prepaid) requiring return receipt, and shall be deemed to have been validly served, given or delivered:  (i) date of delivery, if sent by personal delivery; (ii) two days after date of deposit, if sent by express courier service; (iii) date of transmission, if faxed with confirmatory printout of transmission; or (iv) one week after date of mailing, if sent by mail.  Notices shall be addressed as provided below or to such other addressee as either party may in the future designate by written notice to the other in accordance with the terms hereof:

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i.If to Indemnitee, at the address indicated on the signature page of this Agreement, or such other address as Indemnitee shall provide to the Company.

ii.If to the Company to:

Arena Pharmaceuticals, Inc.

6154 Nancy Ridge Drive

San Diego, California  92121

Attention:  General Counsel

Facsimile:  858.677.0065

 

or to any other address as may have been furnished to Indemnitee by the Company.

 

Section 19.Contribution.  To the fullest extent permitted under applicable law, if the indemnification provided for in this Agreement is unavailable to Indemnitee for any reason whatsoever, the Company, in lieu of indemnifying Indemnitee, shall contribute to the amount incurred by Indemnitee or on Indemnitee’s behalf, whether for judgments, fines, penalties, excise taxes, amounts paid or to be paid in settlement and/or for Expenses, in connection with any claim relating to an indemnifiable event under this Agreement, in such proportion as is deemed fair and reasonable in light of all of the circumstances of the related Proceeding in order to reflect (a) the relative benefits received by the Company and Indemnitee as a result of the event(s) and/or transaction(s) giving cause to such Proceeding and (b) the relative fault of the Company (and its directors, officers, employees, agents and fiduciaries) and Indemnitee in connection with such event(s) and/or transaction(s).

 

Section 20.Applicable Law.  This Agreement and the legal relations among the parties hereunder shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware, without regard to its conflict of laws rules.

 

Section 21.Identical Counterparts.  This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement.  

 

Section 22.Headings.  The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof.

 

 

 

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IN WITNESS WHEREOF, the parties have caused this Agreement to be signed as of the day and year first above written.

 

ARENA PHARMACEUTICALS, INC.

 

 

 

By:_________________________________

Name:

Title:

 

 

 

INDEMNITEE

 

 

 

By:_________________________________

Name:

Address:

 

 

Exhibit 10.2

 

INDEMNIFICATION AGREEMENT

(Officer)

 

This Indemnification Agreement (“Agreement”) is made as of ___________ by and between Arena Pharmaceuticals, Inc., a Delaware corporation (the “Company”), and _____________ (“Indemnitee”).

 

RECITALS

 

WHEREAS, Indemnitee is currently serving as an officer of the Company;

 

WHEREAS, Article V of the Fifth Amended and Restated Certificate of Incorporation of the Company (the “Certificate of Incorporation”) and Article IV of the Amended and Restated Bylaws of the Company (the “Bylaws”), each as currently in effect, require the Company under certain circumstances to indemnify and advance expenses to its directors and officers to the fullest extent permitted by the Delaware General Corporation Law (the “DGCL”) and Indemnitee has been serving and continues to serve as an officer of the Company in part in reliance on such provisions;

 

WHEREAS, in recognition of Indemnitee’s need for substantial protection against personal liability in order to promote Indemnitee’s continued service to the Company in an effective manner, Indemnitee’s reliance on the aforesaid Certificate of Incorporation and Bylaw provisions, and, in part, to provide Indemnitee with specific contractual assurance that the protection provided by the Certificate of Incorporation and Bylaws will be available to Indemnitee (regardless of, among other things, any amendment to or revocation of such Certificate of Incorporation and Bylaws or any change in the composition of the Board of Directors of the Company (the “Board”) or any Change in Control (as defined below)), the Company wishes to provide in this Agreement for the indemnification of, and the advancing of expenses to, Indemnitee to the fullest extent (whether partial or complete) permitted by law, and, to the extent insurance is maintained, for the continued coverage of Indemnitee under the Company’s directors’ and officers’ liability insurance policies; and

 

WHEREAS, the Board has determined that (i) it is essential for the Company to retain and attract highly qualified individuals to serve as directors and executive officers; (ii) it is essential to the best interests of the Company’s stockholders that the Company act to assure its directors and executive officers that there will be increased certainty of such protection in the future; and (iii) it is reasonable, prudent and necessary for the Company contractually to obligate itself to indemnify and to advance Expenses (as defined below) on behalf of its directors and executive officers to the fullest extent permitted by applicable law as provided in this Agreement so that they will continue to act in their capacities as directors and/or executive officers of the Company (and the Company can attract new directors and executive officers) free from undue concern that they will not be so indemnified;

 

NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the Company and Indemnitee do hereby covenant and agree as follows:


 

 

Section 1.Definitions.   As used in this Agreement:

 

(a)A “Change in Control” shall be deemed to occur upon the earliest to occur after the date of this Agreement of any of the following events:

 

i.Acquisition of Stock by Third Party.  Any person or group of persons acting in concert (excluding Company employee benefit plans) becoming the beneficial owner of securities of the Company having at least 30% of the voting power of the Company’s then outstanding securities (unless the event causing the 30% threshold to be crossed is an acquisition of voting common securities directly from the Company);

 

ii.Change in Board.  Within any 24 month period, the persons who were directors immediately before the beginning of such period (the “Incumbent Directors”) shall cease to constitute at least a majority of the Board or the board of directors of a successor to the Company.  For this purpose, any director who was not a director at the beginning of such period shall be deemed to be an Incumbent Director if such director was elected to the Board by, or on the recommendation of or with the approval of, at least three-quarters of the directors who then qualified as Incumbent Directors (so long as such director was not nominated by a person who has expressed an intent to effect a Change in Control or engage in a proxy or other control contest);

 

iii.Corporate Transactions.  Any merger or other business combination of the Company, any sale or lease of the Company’s assets or any combination of the foregoing transactions (the “Transactions”) other than a Transaction immediately following which the stockholders of the Company immediately prior to the Transaction own at least 60% of the voting power, directly or indirectly, of (A) the surviving corporation in any such merger or other business combination; (B) the purchaser or lessee of the Company’s assets; or (C) both the surviving corporation and the purchaser or lessee in the event of any combination of Transactions;

 

iv.Liquidation.  The approval by the stockholders of the Company of a complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets; or

 

v.Other Events.  There occurs any other event of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or a response to any similar item on any similar schedule or form) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), whether or not the Company is then subject to such reporting requirement.

 

(b)Disinterested Director” means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee.

 

(c)Enterprise” means any corporation, limited liability company, partnership, joint venture, trust plan, employee benefit plan or other enterprise of which

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Indemnitee is or was serving at the request of the Company as a director, officer, employee, agent or fiduciary; and, with respect to employee benefit plans, the references herein to (i) “fines shall include any excise tax assessed with respect to such plans, (ii) serving at the request of the Company shall include any service which imposes duties on, or involves service by, Indemnitee with respect to such plans, its participants or beneficiaries, and (iv) a person who acted in good faith and in a manner he or she reasonably believed to be in the best interests of the participants and beneficiaries of such a plan shall be deemed to have acted in a manner not opposed to the best interests of the Company as referred to in this Agreement.

 

(d)Expenses” shall include, without limitation, all reasonable attorneys’ fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, being or preparing to be a witness in, or otherwise participating in, a Proceeding.  “Expenses” also shall include (i) Expenses incurred in connection with any appeal, counterclaims and crossclaims resulting from or in connection with any Proceeding, including without limitation the premium, security for, and other costs relating to any cost bond, supersedeas bond, or other appeal bond or its equivalent, and (ii) for purposes of Section 11(d) only, Expenses incurred by Indemnitee or on Indemnitee’s behalf associated with the interpretation, enforcement or defense of Indemnitee’s rights under this Agreement, by litigation or otherwise.  “Expenses”, however, shall not include amounts paid in settlement by Indemnitee or the amount of judgments or fines against Indemnitee.

 

(e)Independent Counsel” means a law firm, or a member of a law firm, that is experienced in matters of corporation law and who neither at the time of its engagement as Independent Counsel is, nor in the preceding five years has been, retained to represent:  (i) the Company or Indemnitee in any matter material to either such party (other than with respect to matters concerning Indemnitee under this Agreement, or of other indemnitees under similar indemnification agreements), or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder.  Notwithstanding the foregoing, the term “Independent Counsel” shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee’s rights under this Agreement.  The Company agrees to pay the reasonable fees and expenses of the Independent Counsel referred to above and to fully indemnify such counsel against any and all Expenses, claims, liabilities and damages arising out of or relating to this Agreement or such Independent Counsel’s engagement pursuant hereto.

 

(f)Proceeding” shall include, without limitation, any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or any other actual, threatened or completed proceeding, whether brought in the right of the Company or otherwise and whether of a civil, criminal, administrative, legislative, or investigative nature, including any appeal therefrom, in which Indemnitee was, is or will be involved as a party, potential party, non-party witness or otherwise by reason of the fact that Indemnitee is or was a director or an officer of the Company, by reason of any action taken or omitted to be taken by Indemnitee or on Indemnitee’s part, or alleged to have been so taken or omitted to be taken, while acting as a director or an officer of the Company, or by

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reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee, agent or fiduciary of another Enterprise, in each case whether or not serving in such capacity at the time any liability or Expense is incurred for which indemnification, reimbursement, or advancement of Expenses can be provided under this Agreement; except for any such Proceeding initiated by Indemnitee to enforce Indemnitees rights under this Agreement (which shall be governed by Section 11 of this Agreement).

 

(g)to the fullest extent permitted by applicable law” and “to the fullest extent not prohibited by applicable law” shall include, but not be limited to:

 

i.to the fullest extent permitted or not prohibited, as the case may be, by the provision of the DGCL that authorizes or contemplates additional indemnification by agreement, or the corresponding provision of any amendment to or replacement of the DGCL; and

 

ii.to the fullest extent authorized or permitted or not prohibited, as the case may be, by any amendments to or replacements of the DGCL adopted after the date of this Agreement that increase the extent to which a corporation may indemnify its officers and directors.

 

Section 2.Indemnity in Third-Party Proceedings.  The Company shall indemnify Indemnitee in accordance with the provisions of this Section 2 if Indemnitee is, or is threatened to be made, a party to or a participant in any Proceeding, other than a Proceeding by or in the right of the Company to procure a judgment in its favor.  Pursuant to this Section 2, Indemnitee shall be indemnified to the fullest extent permitted by applicable law against all Expenses, judgments, fines and amounts paid in settlement, actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf, in connection with such Proceeding or any claim, issue or matter therein, if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company and, in the case of a criminal proceeding, had no reasonable cause to believe that Indemnitee’s conduct was unlawful.

 

Section 3.Indemnity in Proceedings by or in the Right of the Company.   The Company shall indemnify Indemnitee in accordance with the provisions of this Section 3 if Indemnitee is, or is threatened to be made, a party to or a participant in any Proceeding by or in the right of the Company to procure a judgment in its favor.  Pursuant to this Section 3, Indemnitee shall be indemnified to the fullest extent permitted by applicable law against all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection with such Proceeding or any claim, issue or matter therein, if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company.  No indemnification for Expenses shall be made under this Section 3 in respect of any Proceeding or any claim, issue or matter therein as to which Indemnitee shall have been finally adjudged by a court to be liable to the Company, unless and only to the extent that the Delaware Court of Chancery or any court in which the Proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnification.

 

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Section 4.Indemnification for Expenses of a Party Who is Wholly or Partly Successful. Notwithstanding any other provisions of this Agreement, to the fullest extent permitted by applicable law and to the extent that Indemnitee is a party to (or a participant in) and is successful, on the merits or otherwise, in any Proceeding or in defense of any claim, issue or matter therein, in whole or in part, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection therewith.  If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection with each successfully resolved claim, issue or matter.  For purposes of this Section and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter.

 

Section 5.Additional Indemnification.  Notwithstanding any limitation in Section 2, 3, or 4, the Company shall indemnify Indemnitee to the fullest extent permitted by applicable law if Indemnitee is a party to or threatened to be made a party to any Proceeding (including a Proceeding by or in the right of the Company to procure a judgment in its favor) against all Expenses, judgments, fines and amounts paid in settlement, actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf, in connection with the Proceeding.

 

Section 6.Exclusions.  Notwithstanding any provision in this Agreement, the Company shall not be obligated under this Agreement to make any indemnity in connection with any claim made against Indemnitee:

 

(a)Other than as provided in Section 4, for (i) an accounting of profits made from the purchase and sale (or sale and purchase) by Indemnitee of securities of the Company within the meaning of Section 16(b) of the Exchange Act or similar provisions of state statutory law or common law, or (ii) any reimbursement of the Company by Indemnitee of any bonus or other incentive-based or equity-based compensation or of any profits realized by Indemnitee from the sale of securities of the Company, as required in each case under the Exchange Act (including any such reimbursements that arise from an accounting restatement of the Company pursuant to Section 304 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), or the payment to the Company of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 306 of the Sarbanes-Oxley Act); or

 

(b)except as provided in Section 11(d) of this Agreement, in connection with any Proceeding (or any part of any Proceeding) initiated by Indemnitee (whether on Indemnitee’s own behalf or by or in the right of the Company to procure a judgment in its favor), including any Proceeding (or any part of any Proceeding) initiated by Indemnitee against the Company or its directors, officers, employees, agents, fiduciaries or other indemnitees and not by way of defense, unless (i) the Board authorized the Proceeding (or any part of any Proceeding) prior to its initiation or (ii) the Company provides the indemnification, in its sole discretion, pursuant to the powers vested in the Company under applicable law.

 

Section 7.Advances of Expenses.  In accordance with the pre-existing requirement of Article V of the Certificate of Incorporation, and notwithstanding any provision of this

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Agreement to the contrary, the Company shall advance, to the fullest extent not prohibited by applicable law, the Expenses incurred by Indemnitee or on Indemnitees behalf in connection with any Proceeding, and such advancement shall be made within 15 days after the receipt by the Company of a statement or statements requesting such advances from time to time, whether prior to or after final disposition of any Proceeding.  Advances shall (i) be unsecured and interest free; (ii) be made without regard to Indemnitees ability to repay the Expenses and without regard to Indemnitees ultimate entitlement to indemnification under the other provisions of this Agreement; and (iii) include any and all reasonable Expenses incurred pursuing an action to enforce this right of advancement, including Expenses incurred preparing and forwarding statements to the Company to support the advances claimed.  Indemnitee shall qualify for advances upon the execution and delivery to the Company of this Agreement, which shall constitute an unsecured undertaking by Indemnitee to repay the advance if and to the extent that it is ultimately determined that Indemnitee is not entitled to be indemnified by the Company.  The right to advances under this Section 7 shall continue until final disposition of any Proceeding.  This Section 7 shall not apply to any claim made by Indemnitee for which indemnity is excluded pursuant to Section 6.

 

Section 8.Procedure for Notification and Defense of Claim.

 

(a)Indemnitee shall notify the Company in writing of any matter with respect to which Indemnitee intends to seek indemnification or advancement of Expenses hereunder as soon as reasonably practicable following the receipt by Indemnitee of written notice thereof.  The written notification to the Company shall include a reasonable description of the nature of the Proceeding and the facts underlying the Proceeding.  To obtain indemnification under this Agreement, Indemnitee shall submit to the Company a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification following the final disposition of such Proceeding.  The omission by Indemnitee to notify the Company hereunder will not relieve the Company from any liability which it may have to Indemnitee hereunder or otherwise than under this Agreement, and any delay in so notifying the Company shall not constitute a waiver by Indemnitee of any rights under this Agreement.  The Secretary of the Company shall, promptly upon receipt of such a request for indemnification, advise the Board in writing that Indemnitee has requested indemnification.

 

(b)The Company will be entitled to participate in any Proceeding in connection with which Indemnitee seeks indemnification hereunder at its own expense.

 

(c)Any provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement to indemnify Indemnitee under this Agreement for any amounts paid in settlement of a Proceeding effected without the Company’s written consent, such consent not to be unreasonably withheld, delayed or conditioned by the Company.

 

Section 9.Procedure Upon Application for Indemnification.

 

(a)Upon written request by Indemnitee for indemnification pursuant to Section 8(a), a determination, if required by applicable law, with respect to Indemnitee’s

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entitlement thereto shall be made in the specific case:  (i) if a Change in Control shall have occurred, by Independent Counsel in a written opinion to the Board, a copy of which shall be delivered to Indemnitee; or (ii) if a Change in Control shall not have occurred, (A) by a majority vote of the Disinterested Directors, even though less than a quorum of the Board, (B) by a majority vote of a committee of Disinterested Directors designated by a majority vote of the Disinterested Directors, even though less than a quorum of the Board, (C) if there are no Disinterested Directors or, if a majority of the Disinterested Directors so direct, by Independent Counsel in a written opinion to the Board, a copy of which shall be delivered to Indemnitee, or (D) if so directed by the Board, by the stockholders of the Company; and, if it is so determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within 10 days after such determination.  Indemnitee shall cooperate with the person, persons or entity making such determination with respect to Indemnitees entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to make such determination.  Any Expenses incurred by Indemnitee or on Indemnitees behalf in so cooperating with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to Indemnitees entitlement to indemnification) and the Company shall indemnify and hold Indemnitee harmless therefrom.

 

(b)In the event the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 9(a), the Independent Counsel shall be selected as provided in this Section 9(b).  If a Change in Control shall not have occurred, the Independent Counsel shall be selected by the Board, and the Company shall give written notice to Indemnitee advising Indemnitee of the identity of the Independent Counsel so selected.  If a Change in Control shall have occurred, the Independent Counsel shall be selected by Indemnitee (unless Indemnitee shall request that such selection be made by the Board, in which event the preceding sentence shall apply), and Indemnitee shall give written notice to the Company advising it of the identity of the Independent Counsel so selected.  In either event, Indemnitee or the Company, as the case may be, may, within 10 days after such written notice of selection shall have been given, deliver to the Company or to Indemnitee, as the case may be, a written objection to such selection; provided, however, that such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of “Independent Counsel” as defined in Section 1(e), and the objection shall set forth with particularity the factual basis of such assertion.  Absent a proper and timely objection, the person so selected shall act as Independent Counsel.  If such written objection is so made and substantiated, the Independent Counsel so selected may not serve as Independent Counsel unless and until such objection is withdrawn or a court of competent jurisdiction has determined that such objection is without merit.  If, within 20 days after the later of submission by Indemnitee of a written request for indemnification pursuant to Section 8(a) and the final disposition of the Proceeding, no Independent Counsel shall have been selected and not objected to, either the Company or Indemnitee may petition a court of competent jurisdiction for resolution of any objection which shall have been made by the Company or Indemnitee to the other’s selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by the court or by such other person as the court shall designate, and the person with respect to whom all objections are so resolved or the person so appointed shall act as Independent Counsel under Section 9(a).  Upon the due commencement of any judicial proceeding or arbitration pursuant to

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Section 11(a), Independent Counsel shall be discharged and relieved of any further responsibility in such capacity (subject to the applicable standards of professional conduct then prevailing).

 

Section 10.Presumptions and Effect of Certain Proceedings.

 

(a)In making a determination with respect to entitlement to indemnification hereunder, the person, persons or entity making such determination shall, to the fullest extent not prohibited by applicable law, presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 8(a), and the Company shall, to the fullest extent not prohibited by applicable law, have the burden of proof to overcome that presumption in connection with the making by any person, persons or entity of any determination contrary to that presumption.  Neither the failure of the Company (including by its Disinterested Directors or any committee thereof, by its stockholders or by Independent Counsel) to have made a determination prior to the commencement of any action pursuant to this Agreement that indemnification is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor an actual determination by the Company (including by its Disinterested Directors or any committee thereof or by Independent Counsel) that Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that Indemnitee has not met the applicable standard of conduct.

 

(b)Subject to Section 11(e), if the person, persons or entity empowered or selected under Section 9 to determine whether Indemnitee is entitled to indemnification shall not have made a determination within 60 days after receipt by the Company of the request therefor, the requisite determination of entitlement to indemnification shall, to the fullest extent not prohibited by applicable law, be deemed to have been made and Indemnitee shall be entitled to such indemnification, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee’s statement, in light of the circumstances under which such statement is made, not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law as determined by a court of competent jurisdiction; provided, however, that such 60-day period may be extended for a reasonable time, not to exceed an additional 30 days, if the person, persons or entity making the determination with respect to entitlement to indemnification in good faith requires such additional time for the obtaining or evaluating of documentation and/or information relating thereto; provided, further, that the foregoing provisions of this Section 10(b) shall not apply if the determination of entitlement to indemnification is to be made by (x) the stockholders pursuant to Section 9(a) and if (A) within 15 days after receipt by the Company of the request for such determination the Board has resolved to submit such determination to the stockholders for their consideration at an annual meeting thereof to be held within 75 days after such receipt and such determination is made thereat, or (B) a special meeting of stockholders is called within 15 days after such receipt for the purpose of making such determination, such meeting is held for such purpose within 60 days after having been so called and such determination is made thereat, or (y) Independent Counsel pursuant to Section 9(a).

 

(c)The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the

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right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that Indemnitees conduct was unlawful.

 

(d)For purposes of any determination of good faith, Indemnitee shall be deemed to have acted in good faith if Indemnitee’s action is based on the records or books of account of the Company, including financial statements, or on information supplied to Indemnitee by the officers of the Company in the course of their duties, or on the advice of legal counsel for the Company or on information or records given or reports made to the Company by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Company.  The provisions of this Section 10(d) shall not be deemed to be exclusive or to limit in any way the other circumstances in which Indemnitee may be deemed to have met the applicable standard of conduct set forth in this Agreement.  For purposes of this Section 10(d), the term Company shall include any other Enterprise if Indemnitee is serving such Enterprise as a director, officer, employee, agent or fiduciary at the request of the Company.

 

(e)The knowledge and/or actions, or failure to act, of any director, officer, employee, agent or fiduciary of the Company or of any other Enterprise which Indemnitee serves as a director, officer, employee, agent or fiduciary at the request of the Company shall not be imputed to Indemnitee for purposes of determining the right to indemnification under this Agreement.

 

Section 11.Remedies of Indemnitee.

 

(a)Subject to Section 11(e), in the event that (i) a determination is made pursuant to Section 9 that Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 7, (iii) no determination of entitlement to indemnification shall have been made pursuant to Section 9(a) within 90 days after receipt by the Company of the request for indemnification, (iv) payment of indemnification is not made pursuant to Section 4 or the last sentence of Section 9(a) within 10 days after receipt by the Company of a written request therefor, (v) payment of indemnification pursuant to Section 2, 3 or 5 is not made within 10 days after a determination has been made that Indemnitee is entitled to indemnification, or (vi) the Company or any other person takes or threatens to take any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, Indemnitee the benefits provided or intended to be provided to Indemnitee hereunder, Indemnitee shall be entitled to an adjudication by a court of competent jurisdiction of Indemnitee’s entitlement to such indemnification or advancement of Expenses.  Alternatively, Indemnitee, at Indemnitee’s option, may seek an award in arbitration to be conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association.  Indemnitee shall commence such proceeding seeking an adjudication or an award in arbitration within 180 days following the date on which Indemnitee first has the right to commence such proceeding pursuant to this Section 11(a).  The Company shall not oppose Indemnitee’s right to seek any such adjudication or award in arbitration.

 

(b)In the event that a determination shall have been made pursuant to Section 9(a) that Indemnitee is not entitled to indemnification, any judicial proceeding or

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arbitration commenced pursuant to this Section 11 shall be conducted in all respects as a de novo trial, or arbitration, on the merits and Indemnitee shall not be prejudiced by reason of that adverse determination.  In any judicial proceeding or arbitration commenced pursuant to this Section 11, the Company shall have the burden of proving Indemnitee is not entitled to indemnification or advancement of Expenses, as the case may be.

 

(c)If a determination shall have been made pursuant to Section 9(a) that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 11, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee’s statement, in the light of the circumstances under which such statement is made, not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law as determined by a court of competent jurisdiction.

 

(d)The Company shall, to the fullest extent not prohibited by applicable law, be precluded from asserting in any judicial proceeding or arbitration commenced pursuant to this Section 11 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court or before any such arbitrator that the Company is bound by all the provisions of this Agreement.  It is the intent of the Company that Indemnitee not be required to incur Expenses associated with the interpretation, enforcement or defense of Indemnitee’s rights under this Agreement by litigation or otherwise because such Expenses would substantially detract from the benefits intended to be extended to Indemnitee hereunder.  The Company shall indemnify Indemnitee against any and all Expenses and, if requested by Indemnitee, shall (within 10 days after receipt by the Company of a written request therefor) advance, to the fullest extent not prohibited by applicable law, such Expenses to Indemnitee, which are incurred by Indemnitee or on Indemnitee’s behalf in connection with any action brought by Indemnitee for indemnification or advancement of Expenses from the Company under this Agreement or under any directors’ and officers’ liability insurance policies maintained by the Company, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advancement of Expenses or insurance recovery, as the case may be.

 

(e)Notwithstanding anything in this Agreement to the contrary, no determination as to entitlement to indemnification under this Agreement shall be required to be made prior to the final disposition of the related Proceeding.

 

Section 12.Non-exclusivity; Survival of Rights; Insurance; Subrogation.

 

(a)The rights of indemnification and to receive advancement of Expenses as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Certificate of Incorporation, the Bylaws, any agreement, a vote of stockholders or a resolution of directors, or otherwise.  No amendment, alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right of Indemnitee under this Agreement in respect of any action taken or omitted by Indemnitee prior to such amendment, alteration or repeal.  To the extent that a change in Delaware law, whether by statute or judicial decision, permits greater indemnification or advancement of Expenses than would be afforded currently under the Certificate of

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Incorporation, the Bylaws and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change.  No right or remedy herein conferred is intended to be exclusive of any other right or remedy, and every other right and remedy shall be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise.  The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other right or remedy.

 

(b)To the extent that the Company maintains an insurance policy or policies providing liability insurance for directors, officers, employees, agents or fiduciaries of the Company or of any other Enterprise which Indemnitee serves as a director, officer, employee, agent or fiduciary at the request of the Company, Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for Indemnitee under such policy or policies.  If, at the time of the receipt of a notice of a claim pursuant to the terms hereof, the Company has directors’ and officers’ liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies.  The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies.

 

(c)In the event of payment of indemnification to Indemnitee under this Agreement, the Company shall be subrogated to the extent of such payment to any right of recovery Indemnitee may have and Indemnitee, as a condition of receiving such indemnification from the Company, shall execute all documents and do all things that the Company may deem necessary or desirable to perfect such right of recovery, including the execution of such documents necessary to enable the Company effectively to enforce such recovery.

 

(d)The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder (or for which advancement of Expenses is provided hereunder) if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise, including from any other Enterprise which Indemnitee was serving as a director, officer, employee, agent or fiduciary at the request of the Company.

 

Section 13.Duration of Agreement.  This Agreement shall continue until and terminate upon the later of: (a) 10 years after the latest date that Indemnitee shall have ceased to serve as a director or an officer of the Company or as a director, officer, employee, agent or fiduciary of any other Enterprise at the request of the Company or (b) one year after the final termination of any Proceeding then pending in respect of which Indemnitee is granted rights of indemnification or advancement of Expenses hereunder and of any proceeding commenced by Indemnitee pursuant to Section 11 relating thereto.  This Agreement shall be binding upon the Company and its successors and assigns and shall inure to the benefit of Indemnitee and Indemnitee’s heirs, executors and administrators.

 

Section 14.Severability.  If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever:  (a) the validity, legality

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and enforceability of the remaining provisions of this Agreement (including without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby and shall remain enforceable to the fullest extent permitted by applicable law; (b) such provision or provisions shall be deemed reformed to the extent necessary to conform to applicable law and to give the maximum effect to the intent of the parties hereto; and (c) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested thereby.

 

Section 15.Enforcement.

 

(a)The Company expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on it hereby in order to induce Indemnitee to serve as an officer of the Company, and the Company acknowledges that Indemnitee is relying upon this Agreement in serving as an officer of the Company.

 

(b)This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral, written and implied, between the parties hereto with respect to the subject matter hereof; provided, however, that this Agreement is a supplement to and in furtherance of the Certificate of Incorporation, the Bylaws and applicable law, and shall not be deemed a substitute therefor, nor to diminish or abrogate any rights of Indemnitee thereunder.

 

Section 16.Modification and Waiver.  No supplement, modification, waiver, cancellation or amendment of this Agreement or any provision hereof shall be binding unless executed in writing by the parties hereto.  No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions of this Agreement nor shall any waiver constitute a continuing waiver.

 

Section 17.Notice by Indemnitee.  Indemnitee agrees promptly to notify the Company in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document relating to any Proceeding or matter which may be subject to indemnification or advancement of Expenses hereunder.  The failure of Indemnitee to so notify the Company shall not relieve the Company of any obligation which it may have to Indemnitee under this Agreement or otherwise.

 

Section 18.Notices.  All notices required hereunder shall be in writing and be delivered personally, sent by internationally recognized express courier service (e.g., FedEx), transmitted via facsimile, or sent via registered or certified mail (postage prepaid) requiring return receipt, and shall be deemed to have been validly served, given or delivered:  (i) date of delivery, if sent by personal delivery; (ii) two days after date of deposit, if sent by express courier service; (iii) date of transmission, if faxed with confirmatory printout of transmission; or (iv) one week after date of mailing, if sent by mail.  Notices shall be addressed as provided below or to such other addressee as either party may in the future designate by written notice to the other in accordance with the terms hereof:

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i.If to Indemnitee, at the address indicated on the signature page of this Agreement, or such other address as Indemnitee shall provide to the Company.

ii.If to the Company to:

Arena Pharmaceuticals, Inc.

6154 Nancy Ridge Drive

San Diego, California  92121

Attention:  General Counsel

Facsimile:  858.677.0065

 

or to any other address as may have been furnished to Indemnitee by the Company.

 

Section 19.Contribution.  To the fullest extent permitted under applicable law, if the indemnification provided for in this Agreement is unavailable to Indemnitee for any reason whatsoever, the Company, in lieu of indemnifying Indemnitee, shall contribute to the amount incurred by Indemnitee or on Indemnitee’s behalf, whether for judgments, fines, penalties, excise taxes, amounts paid or to be paid in settlement and/or for Expenses, in connection with any claim relating to an indemnifiable event under this Agreement, in such proportion as is deemed fair and reasonable in light of all of the circumstances of the related Proceeding in order to reflect (a) the relative benefits received by the Company and Indemnitee as a result of the event(s) and/or transaction(s) giving cause to such Proceeding and (b) the relative fault of the Company (and its directors, officers, employees, agents and fiduciaries) and Indemnitee in connection with such event(s) and/or transaction(s).

 

Section 20.Applicable Law.  This Agreement and the legal relations among the parties hereunder shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware, without regard to its conflict of laws rules.

 

Section 21.Identical Counterparts.  This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement.  

 

Section 22.Headings.  The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof.

 

 

 

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IN WITNESS WHEREOF, the parties have caused this Agreement to be signed as of the day and year first above written.

 

ARENA PHARMACEUTICALS, INC.

 

 

 

By:_________________________________

Name:

Title:  

 

 

 

INDEMNITEE

 

 

 

By:_________________________________

Name:

Address:____________________________

____________________________________

____________________________________

____________________________________

 

Exhibit 10.11

 

Arena Pharmaceuticals, Inc.

 

 

January 13, 2020

 

Steven Spector

 

Re: Transition and Retirement Agreement

 

Dear Steven,

 

This letter shall constitute the Transition and Retirement Agreement (the “Agreement”) between you and Arena Pharmaceuticals, Inc. (the “Company”).  

1.Retirement Date.  Your employment with the Company will continue through March 1, 2020, which will become your employment termination date (the “Retirement Date”). As of the Retirement Date, you will be deemed to have resigned from any employment, officer, or director positions you hold with the Company or its subsidiaries.

2.Transition Period.  

a.Duties.  Between now and the Retirement Date (the “Transition Period”), you will continue to perform your regular duties; provided, however, that you will also transition your duties and responsibilities to your successor (in accordance with a plan to be developed by you and Amit Munshi, CEO), and perform such other tasks as may be reasonably requested (collectively, the “Transition Services”).  You agree to perform your Transition Services in good faith and to the best of your abilities. During the Transition Period, you must continue to comply with the Company’s policies and procedures and with all of your statutory and contractual obligations to the Company.  During the Transition Period and thereafter, you must continue to comply with your obligations under your “Arena Pharmaceuticals, Inc. Proprietary Information and Invention Assignment Agreement” (a copy of which is attached hereto as Exhibit A).  

b.Compensation/Benefits.  During the Transition Period, your base salary will remain the same, and you will continue to be eligible for the Company’s standard health and welfare benefits, subject to the terms and conditions applicable to such plans and programs.  Your Company stock options and performance restricted stock unit awards will continue to vest under the existing terms and conditions set forth in the governing plan documents and award agreements.  You will receive your annual performance bonus payment for 2019 at the same time as the Company’s other executives on or before March 15 2020, which amount will be determined pursuant to the terms of the Company’s Annual Incentive Plan for 2019 (such amount, the “2019 Annual Bonus”). Subject to Section 2.c. below, the requirement that you be employed as of the payment date for such bonus shall be waived.

c.Termination. Nothing in this Agreement alters your employment at will status.  Accordingly, during the Transition Period, you are entitled to resign your employment at any time and the Company may terminate your employment at any time for any reason. If, prior

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to the Retirement Date, either (i) you resign your employment or (ii) the Company terminates your employment for Cause (as defined in the Arena Pharmaceuticals, Inc. Severance Benefit Plan, as amended and restated effective January 4, 2019, a copy of which is attached hereto as Exhibit B (the “Severance Benefit Plan”)), you will no longer be eligible to receive Severance Benefits as defined below.  If your employment ends prior to the Retirement Date for any other reason (including death or Disability, as defined in the Severance Benefit Plan), you or your estate will receive the Severance Benefits, subject to the terms and conditions below (provided, however, in such instance you will not be required to comply with Section 2.a above).  If, prior to the payment of the 2019 Annual Bonus, either (x) you resign your employment or (y) the Company terminates your employment for Cause, you will no longer be eligible to receive the 2019 Annual Bonus; in all other cases, including your death or Disability, you or your estate will be paid your 2019 Annual Bonus.

3.Accrued Salary and Vacation/Paid Time Off.  On the Retirement Date, the Company will pay you all accrued salary and accrued but unused vacation/paid time off earned through the last day of your employment, subject to standard payroll deductions and withholdings.

4.Severance Benefits.  In full satisfaction of any obligation to provide you with benefits for a Covered Termination under the terms of the Severance Benefit Plan,  if you: (i) timely return this fully signed Agreement to the Company and allow it to become effective; (ii) comply with your obligations hereunder; and (iii) sign the Retirement Date Release attached hereto as Exhibit C on or within twenty-one (21) days after the Retirement Date and allow that release to become effective; then the Company will provide you with the following severance benefits (the “Severance Benefits”):

a.Cash Severance.  The Company will pay you, as severance, $990,522, which is the equivalent of eighteen (18) months of your base salary in effect as of the Retirement Date and 1.5 times the amount of your target annual bonus (the “Severance Payment”). The Severance Payment will be paid in a lump sum, subject to standard payroll deductions and withholdings, within five (5) business days after the earlier of: (i) the first business day that is six (6) months following the Retirement Date; or (ii) your death.  

b.Health Insurance.  To the extent provided by the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended or, if applicable, state insurance laws (collectively, “COBRA”), and by the Company’s current group health insurance policies, you will be eligible to continue your group health insurance benefits.  You will be provided with a separate notice describing your rights and obligations under COBRA laws on or after the Retirement Date.  As an additional Severance Benefit, provided that you timely elect continued coverage under COBRA, the Company will pay your COBRA premiums directly to continue your group medical, dental and/or vision insurance coverage (including coverage for eligible dependents, if applicable), through the period starting on the Retirement Date and ending on the earliest of: (i) the last day of the month that is eighteen (18) months after the Retirement Date; or (ii) the date you cease to be eligible for COBRA continuation coverage for any reason, including plan termination (the “COBRA Premium Period”).  For purposes of this Section, references to COBRA premiums shall not include any amounts payable by you under a Code Section 125 health care reimbursement plan. Notwithstanding the foregoing, if at any time the Company determines, in its sole discretion, that it cannot pay the COBRA premiums without potentially incurring financial costs or penalties

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under applicable law (including, without limitation, Section 2716 of the Public Health Service Act), then regardless of whether you elect continued health coverage under COBRA, and in lieu of providing the COBRA premiums, the Company will instead pay you, on the last day of each remaining month of the COBRA Premium Period, a fully taxable cash payment equal to 140% of (x) the value of your last monthly group health insurance premiums immediately prior to the Retirement Date or (y) the value of your last monthly COBRA premiums paid by the Company, as applicable (dependent on the time the Company makes such determination that it cannot pay the COBRA premiums directly), and in either case subject to applicable tax withholdings (such amount, the “Health Care Benefit Payment”). The Health Care Benefit Payment shall be paid in monthly installments on the same schedule that the COBRA premiums would otherwise have been paid and shall be paid until the earlier of: (i) expiration of the COBRA Premium Period; or (ii) the date you are no longer enrolled in such COBRA coverage.

c. Equity Acceleration and Extended Exercise Period.  The Company will accelerate the vesting of all stock option awards issued by the Company and held by you as of your Retirement Date (collectively, the “Option Awards”) such that, as of the Retirement Date, you will be immediately vested in the portion of the Option Awards that were scheduled to vest under the vesting schedule of such Option Awards during the eighteen (18) months immediately following the Retirement Date.  For purposes of calculating the vesting acceleration in the preceding sentence, any unvested portion of Option Awards that are scheduled to vest in one or more annual installments shall be treated as if the original grant provided for vesting in equal monthly installments rather than annually.  Additionally, the Company will extend the exercise period for all Option Awards that are vested as of your Retirement Date (including those whose vesting accelerates pursuant to this Section 4.c.) until the later of: (i) the original post-termination exercise period provided in your stock option agreement; or (ii) eighteen (18) months after the Retirement Date; provided that in no event shall any Option Award be exercisable beyond the original contractual life of the Option Award.  The further vesting of all Option Awards will be suspended as of your Retirement Date (after applying the vesting acceleration pursuant to this Section 4.c.), except to the extent the vesting of the Option Awards further accelerate pursuant to the terms of the Consulting Services Agreement attached as Exhibit D (the “Consulting Agreement”) or otherwise pursuant to the terms of the Company’s applicable long-term incentive plan.  Except as expressly modified in this Agreement (or the Consulting Agreement), the Option Awards shall continue to be governed by the terms of the applicable grant notice, stock option agreement and the Company’s long-term incentive plan. Pursuant to tax rules governing the portion of your Option Awards that are considered “incentive stock options” (the “ISOs”) under Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), such Option Awards may lose ISO status as of your Retirement Date as a result of the vesting acceleration described above (due to the IRS $100K limitation on ISOs) and will lose ISO status in any event three months following your Retirement Date, after which such Option Awards will be deemed nonqualified stock options.  In addition, the Consulting Agreement provides for an additional extension of the exercise period for certain of the Option Awards under the circumstances described in the Consulting Agreement (the “Extended Options”) and, as a result, any Extended Options that are ISOs will lose ISO status immediately.  The Company encourages you to seek independent advice concerning the tax status of your Option Awards and the corresponding tax implications of this Agreement and the benefits hereunder.

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In addition, as further described in the Consulting Agreement, your performance restricted stock unit awards  that were granted on January 4, 2019 and that remain outstanding as of your Retirement Date (the “PRSUs”) will remain outstanding and you will remain eligible to receive shares of Company common stock in respect of such PRSUs until March 15, 2021, unless such PRSUs are terminated earlier under the circumstances set forth in the Consulting Agreement.  

c.Attorneys’ Fees. The Company will reimburse you for documented attorneys’ fees actually incurred by you for the purpose of reviewing this Agreement and advising on it up to a maximum of $5,000.00. Such reimbursement will only be payable to you upon submission of appropriate documentation of payment.  For the avoidance of doubt, to the extent that any reimbursements payable to you are subject to the provisions of Section 409A (as defined below):  (i) any such reimbursements will be paid no later than December 31 of the year following the year in which the expense was incurred, (ii) the amount of expenses reimbursed in one year will not affect the amount eligible for reimbursement in any subsequent year, and (iii) the right to reimbursement under this Agreement will not be subject to liquidation or exchange for another benefit.

d.Termination Due to Death or Disability. Subject to applicable state or federal law, your employment with the Company will automatically terminate upon your death or Disability (as defined by the Severance Benefit Plan).  Under the Severance Benefit Plan, you are not entitled to any severance benefits in the case of your death or Disability.  However, as part of this Agreement, the Company will provide you with the Severance Benefits set forth in this Agreement upon your death or Disability occurring prior to the Retirement Date; provided, however, that you, your estate, or your representative (as applicable) signs the Retirement Date Release attached hereto as Exhibit C on or within twenty-one (21) days after the date your employment with the Company ends due to your death or Disability and allows that release to become effective.  

5.Consulting Engagement.  In exchange for your: (i) entering into this Agreement and allowing it to become effective; (ii) complying with it; and (iii) signing the Retirement Date Release and allowing it to become effective; then, as an additional benefit, the Company agrees to retain you as a consultant under the terms specified in the Consulting Agreement.  Your consulting services to the Company under the Consulting Agreement are not expected to exceed more than 20% of the average level of services you performed to the Company in the three years preceding your Retirement Date.

6.No Other Compensation or Benefits.  You acknowledge that, except as expressly provided in this Agreement (including its exhibits and the agreements, plans, instruments and insurance policies referenced herein and therein), you have not earned, will not earn by the Retirement Date, are not entitled to, and will not receive from the Company, any additional compensation, severance, or benefits on or after the Retirement Date, with the exception of any vested right you may have under the express terms of any written ERISA-qualified benefit plan (e.g., 401(k) account).  By way of example, you acknowledge that you have not earned and are not owed any equity, bonus, incentive compensation, severance benefits, or commissions, except as may be provided in this Agreement (including its exhibits).  

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7.Expense Reimbursements.  You agree that, within thirty (30) days after the Retirement Date, you will submit your final documented expense reimbursement statement reflecting all unreimbursed business expenses that you incurred through the Retirement Date, if any, for which you seek reimbursement.  The Company will reimburse you for reasonable business expenses pursuant to its regular business practice.  

8.Return of Company Property.  On the Retirement Date (or earlier if requested by the Company), you agree to return to the Company (or delete) all Company documents (and all copies thereof) and other Company property which you are aware is in your possession or control, including, but not limited to, Company hardcopy or electronic files, email, correspondence, data, images, notes, drawings, records, plans, forecasts, reports, studies, analyses, proposals, agreements, financial information, research and development information, sales and marketing information, customer lists, prospect information, pipeline reports, sales reports, operational and strategic information, personnel information, specifications, code, software, databases, computer-recorded information, tangible property and equipment (including, but not limited to, computers, printers, mobile telephones, servers), credit cards, entry cards, identification badges and keys; and any materials of any kind which contain or embody any proprietary or confidential information of the Company (and all reproductions thereof in whole or in part).  Notwithstanding the foregoing or anything provided below, the Company will allow you to retain Company documents or property in your possession or control (i) you deem potentially helpful for you to perform services in accordance with the Consulting Agreement, or (ii) as otherwise approved by the Company in writing. You agree that you will make a diligent search to locate any such Company documents or property by the Retirement Date.  If you have used any personally owned computer, server, or e-mail system to receive, store, review, prepare or transmit any Company confidential or proprietary data, materials or information, after the Retirement Date you shall permanently delete (and not reinstate) such Company confidential or proprietary information from those systems; and you agree to provide the Company access to your system as requested to verify that the necessary deletion is done.  Your compliance with this paragraph is a condition precedent to your receipt of the Severance Benefits.  

9.Public Announcement and Transition Messaging.  The Company plans to announce your retirement from the Company publicly shortly following the execution of this Agreement.  The Company and you agree that, in communications with Company employees and/or third parties about the circumstances related to your termination of service from the Company, the Company and your statements shall be consistent with the talking points previously exchanged between the Company and you or as subsequently agreed.

10.Nondisparagement.  You agree not to disparage the Company, and the Company’s officers, directors, employees, parents and subsidiaries, in any manner which could reasonably cause substantial harm to them or their business, business reputation or personal reputation, and the Company agrees to instruct its current executive officers and directors to not disparage you in any manner which could reasonably cause substantial harm to you or your business, business reputation or personal reputation; provided that you and the Company and its executive officers and directors may respond accurately to any question, inquiry or request for information if required by legal process or in connection with a government investigation. In addition, nothing in this provision or this Agreement is intended to prohibit or restrain you in any manner from making disclosures that (i) are protected under the whistleblower provisions of

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federal or state law or regulation or under other applicable law or regulation, nor prevent you from disclosing information about unlawful acts in the workplace, including, but not limited to, sexual harassment or (ii) which in good faith you reasonably deem necessary in the performance of your duties to the Company either prior to the Retirement Date or under the Consulting Agreement.  

11.No Admissions.  The promises and payments in consideration of this Agreement shall not be construed to be an admission of any liability or obligation by the Company to you or any other person, and the Company makes no such admission.  

12.Cooperation.  You agree to voluntarily cooperate with the Company, if you have knowledge of facts relevant to any threatened or pending claim, investigation, audit or litigation against or by the Company, by making yourself reasonably available for interviews with the Company or its legal counsel, preparing for and providing truthful and accurate deposition and trial testimony.  

13.Release of Claims.  

a.General Release.  In exchange for the consideration provided to you under this Agreement, you hereby generally and completely release the Company and its affiliated, related, parent and subsidiary entities, and each of their respective current and former directors, officers, employees, shareholders, partners, agents, attorneys, predecessors, successors, insurers, affiliates, and assigns (collectively, the “Released Parties”), of and from any and all claims, liabilities, demands, causes of action, costs, expenses, attorney’s fees, damages, and obligations, of every kind and nature, in law, equity or otherwise, known and unknown, suspected and unsuspected, arising out of or in any way related to (i) your employment, (ii) the termination of your employment or (iii) events, acts conduct or omissions between the Company and you occurring at any time prior to and including the date you sign this Agreement, except for Excluded Claims (defined below) (collectively, the “Released Claims”).

b.Scope of Release.  Subject to the foregoing, the Released Claims include, but are not limited to:  (i) all claims arising out of or in any way related to your employment with the Company, or the termination of that employment; (ii) all claims related to your compensation or benefits from the Company, including salary, bonuses, commissions, vacation, paid time off, sick time, expense reimbursements, severance pay, fringe benefits, stock, stock options, or any other ownership, equity, or profits interests in the Company; (iii) all claims for breach of contract, wrongful termination, and breach of the implied covenant of good faith and fair dealing; (iv) all tort claims, including claims for fraud, defamation, emotional distress, and discharge in violation of public policy; and (v) all federal, state, and local statutory claims, including claims for discrimination, harassment, retaliation, attorneys’ fees, or other claims arising under the federal Civil Rights Act of 1964 (as amended), the federal Americans with Disabilities Act of 1990 (as amended), the federal Age Discrimination in Employment Act (as amended)(the “ADEA”), and the California Labor Code (as amended).  

c.ADEA Waiver. You acknowledge that you are knowingly and voluntarily waiving and releasing any rights you have under the ADEA, and that the consideration given for the waiver and releases you have given in this Agreement is in addition to anything of value to which you were already entitled.  You further acknowledge that you have been advised, as required

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by the ADEA, that:  (i) your waiver and release does not apply to any rights or claims that arise after the date you sign this Agreement; (ii) you should consult with an attorney prior to signing this Agreement (although you may choose voluntarily not to do so); (iii) you have twenty-one (21) days to consider this Agreement (although you may choose voluntarily to sign it sooner); (iv) you have seven (7) days following the date you sign this Agreement to revoke it (in a written revocation sent to me); and (v) this Agreement will not be effective until the date upon which the revocation period expires without such revocation, which will be the eighth day after you sign this Agreement provided that you do not revoke it (the “Effective Date”).  

d.Waiver of Unknown Claims.  In giving the releases set forth in this Agreement, which include claims which may be unknown to you at present, you acknowledge that you have read and understand Section 1542 of the California Civil Code which reads as follows: “A general release does not extend to claims that the creditor or releasing party does not know or suspect to exist in his or her favor at the time of executing the release and that, if known by him or her, would have materially affected his or her settlement with the debtor or released party.” You hereby expressly waive and relinquish all rights and benefits under that section and any law or legal principle of similar effect in any jurisdiction with respect to your release of claims herein, including but not limited to the release of unknown and unsuspected claims.  

e.Excluded Claims. Notwithstanding the foregoing, the following are not included in the Released Claims (the “Excluded Claims”): (i) any rights or claims for indemnification you may have pursuant to your indemnification agreement with the Company, under the certificate of incorporation, bylaws, operating agreements or other charter documents of the Company or its subsidiaries, or under applicable law; (ii) any rights under the Company’s director and officer insurance policy, and any other Company or subsidiary insurance policy; (iii) any rights which cannot be waived as a matter of law, including without limitation claims under the California Fair Employment and Housing Act, to the extent such claims are not waivable as a matter of law with this release; (iv) any rights you have to file or pursue a claim for workers’ compensation or unemployment insurance; and (v) any claims relating to or arising from the breach of this Agreement (including its exhibits and the agreements, plans, instruments and insurance policies referenced herein and therein).  You hereby represent and warrant that, as of the date of this Agreement, other than the Excluded Claims, you are not aware of any claims you have or might have against any of the Released Parties that are not included in the Released Claims.  

14.Protected Rights.  Nothing in this Agreement limits your ability to file a charge or complaint with the Equal Employment Opportunity Commission, the Department of Labor, the National Labor Relations Board, the Occupational Safety and Health Administration, the Securities and Exchange Commission or any other federal, state or local governmental agency or commission (“Government Agencies”).  You further understand that this Agreement does not limit your ability to communicate with any Government Agencies or otherwise participate in any investigation or proceeding that may be conducted by any Government Agency, including providing documents or other information, without notice to the Company.  While this Agreement does not limit your right to receive an award for information provided to the Securities and Exchange Commission, you understand and agree that, to maximum extent permitted by law, you are otherwise waiving any and all rights you may have to individual relief based on any claims that you have released and any rights you have waived by signing this Agreement.  

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15.Representations.  You hereby represent that, as of the date of this Agreement, you have been paid all compensation owed and for all hours worked (except for the consideration to be provided to you under this Agreement and compensation not paid for the Company’s current payroll period), you have received all the leave and leave benefits and protections for which you are eligible pursuant to the federal Family and Medical Leave Act, the California Family Rights Act, or otherwise, and you have not suffered any on-the-job injury for which you have not already filed a workers’ compensation claim.  

16.Dispute Resolution. To ensure the timely and economical resolution of disputes that may arise in connection with your employment with the Company, you and the Company agree that any and all disputes, claims, or causes of action arising from or relating to the enforcement, breach, performance, negotiation, execution or interpretation of this Agreement, your employment, or the termination of your employment, including but not limited to statutory claims, will be resolved to the fullest extent permitted by law by final, binding and confidential arbitration, by a single arbitrator, in San Diego, California, conducted by JAMS, Inc. (“JAMS”) under the then-applicable JAMS rules (available at the following web address: https://www.jamsadr.com/rules-employment-arbitration/, and which will be provided to you on request).  By agreeing to this arbitration procedure, both you and the Company waive the right to resolve any such dispute through a trial by jury or judge or administrative proceeding. In addition, all claims, disputes or causes of action under this provision, whether by you or the Company, must be brought in an individual capacity, and shall not be brought as a plaintiff (or claimant) or class member in any purported class or representative proceeding, nor joined or consolidated with the claims of any other person or entity.  The arbitrator may not consolidate the claims of more than one person or entity, and may not preside over any of form of representative or class proceeding.  To the extent the preceding sentences in this paragraph regarding class claims or proceedings are found to violate applicable law or are otherwise found unenforceable, any claim(s) alleged or brought on behalf of a class shall proceed in a court of law rather than by arbitration.  This provision shall not apply to an action or claim that cannot be subject to mandatory arbitration under applicable law, including without limitation, claims brought pursuant to the California Private Attorney General Act of 2004 (as amended), the California Fair Employment and Housing Act (as amended), and the California Labor Code (as amended), to the extent such claims are not permitted by applicable law(s) to be submitted to mandatory arbitration and the applicable law(s) are not preempted by the Federal Arbitration Act or otherwise invalid (collectively, the “Arbitration Excluded Claims”).  In the event you intend to bring multiple claims, including one of the Arbitration Excluded Claims listed above, the Arbitration Excluded Claims may be publicly filed with a court, while any other claims will remain subject to mandatory arbitration. You will have the right to be represented by legal counsel at any arbitration proceeding.  The arbitrator shall: (i) have the authority to compel adequate discovery for the resolution of the dispute and to award such relief as would otherwise be permitted by law; and (ii) issue a written arbitration decision, to include the arbitrator’s essential findings and conclusions and a statement of the award.  The arbitrator shall be authorized to award any or all remedies that you or the Company would be entitled to seek in a court of law.  The Company shall pay all JAMS’ arbitration fees in excess of the amount of court fees that would be required of you if the dispute were decided in a court of law.  Nothing in this Agreement is intended to prevent either you or the Company from obtaining injunctive relief in court to prevent irreparable harm pending the conclusion of any such arbitration.  Any awards or orders in such arbitrations may be entered and enforced as judgments in the federal and state courts of any competent jurisdiction.

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17.Tax Provisions.

a.Section 409A.  All severance benefits and other payments provided under the Agreement (including the Consulting Agreement) are intended to satisfy the requirements for an exemption from application of Section 409A of the Code and the regulations and other guidance thereunder and any state law of similar effect (collectively “Section 409A”) to the maximum extent that an exemption is available (including but not limited to the exemption provided under Treasury Regulations Sections 1.409A-1(b)(4), 1.409A-1(b)(5) and 1.409A 1(b)(9)) and any ambiguities herein shall be interpreted accordingly; provided, however, that to the extent such an exemption is not available, the severance benefits and other payments provided under the Agreement (including the Consulting Agreement) are intended to comply with the requirements of Section 409A of the Code to the extent necessary to avoid adverse personal tax consequences and any ambiguities herein shall be interpreted accordingly.  Specifically, the cash severance benefits under Section 4.a. of this Agreement are intended to comply with the payment limitation applicable to “specified employees” contained in Section 409A(a)(2)(B)(i), in order to avoid causing you to incur the additional 20% tax under Section 409A.  Each payment under this Agreement shall be treated as a separate and distinct payment for purposes of Section 409A.

b.Section 280G.  If any payment or benefit you may receive (including after your Retirement Date) in connection with a change in control from the Company or otherwise (a “Payment”) would (i) constitute a “parachute payment” within the meaning of Section 280G of the Code, and (ii) but for this sentence, be subject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then the parachute provisions of Section 4(e) of the Severance Benefit Plan shall apply and you acknowledge and agree (x) that, in order to avoid the Excise Tax, you may be required to return certain payments or benefits to the Company pursuant to the provisions of Section 4(e), and (y) to cooperate with the Company (or its acquirer) to promptly return any such payments or benefits as may be required pursuant to Section 4(e).

18.Miscellaneous.  This Agreement, together with its exhibits, constitutes the complete, final and exclusive embodiment of the entire agreement between you and the Company with regard to the subject matter hereof.  It is entered into without reliance on any promise or representation, written or oral, other than those expressly contained herein, and it supersedes any other agreements, promises, warranties or representations concerning its subject matter, including but not limited to your Amended and Restated Termination Protection Agreement, as amended.  This Agreement may not be modified or amended except in a writing signed by both you and a duly authorized officer of the Company.  This Agreement will bind the heirs, personal representatives, successors and assigns of both you and the Company, and inure to the benefit of both you and the Company, their heirs, successors and assigns.  Any ambiguity in this Agreement shall not be construed against either party as the drafter.  Any waiver of a breach of this Agreement, or rights hereunder, shall be in writing and shall not be deemed to be a waiver of any successive breach or rights hereunder.  This Agreement will be deemed to have been entered into and will be construed and enforced in accordance with the laws of the State of California, as applied to contracts made and to be performed entirely within California, without regard to conflicts of law principles. If any provision of this Agreement is determined to be invalid or unenforceable, in whole or in part, this determination shall not affect any other provision of this Agreement and the provision in question shall be modified so as to be rendered enforceable in a manner consistent with the intent of the parties insofar as possible under applicable law.  This Agreement may be

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executed in counterparts which shall be deemed to be part of one original, and facsimile and electronic signatures shall be equivalent to original signatures.

19.notice of default or breach; Opportunity to Cure. Prior to the Company asserting you are in default or breach of this Agreement (or any exhibit), you must (a) receive a written notice which indicates in reasonable detail the facts and circumstances claimed to provide a basis for such breach or default; and (b) be provided with an opportunity during the 30 days following the receipt of such notice to cure or otherwise correct any such default or breach. The Company represents that, as of the date of this Agreement, it is not aware of any facts or circumstances, including any prior action or statement by you, that would constitute a breach or default by you of any provision in this Agreement had the Agreement been in effect at the time of the facts and circumstances.  

[Signature page to follow.]


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If this Agreement is acceptable to you, please sign and date below within twenty-one (21) days, and provide me with a fully signed Agreement.  The Company’s offer contained herein will automatically expire if we do not receive the fully signed Agreement within this timeframe.  

We wish you the best in your future endeavors.

Sincerely,

Arena Pharmaceuticals, Inc.

 

 

 

By:/s/ Suzanne C. Zoumaras

Suzanne C. Zoumaras

Executive Vice President and Chief Human Resources Officer

 

Exhibit A: Arena Pharmaceuticals, Inc. Proprietary Information and Invention Assignment Agreement

Exhibit B: Arena Pharmaceuticals, Inc. Severance Benefit Plan

Exhibit C: Retirement Date Release

Exhibit D: Consulting Services Agreement

 

Understood, Accepted and Agreed:

 

 

/s/ Steven Spector

Steven Spector

 

__________________________________________

Date:  01/13/2020

 

 

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Exhibit A

 

ARENA PHARMACEUTICALS, INC. PROPRIETARY INFORMATION AND INVENTION ASSIGNMENT AGREEMENT

 

 

 

 

 

 


 


 

Exhibit B

Arena Pharmaceuticals, Inc. Severance Benefit Plan


 


 

Exhibit C

Retirement Date Release

(To be signed and returned to the Company on or within twenty-one (21) days after the Retirement Date)

In exchange for the consideration to be provided to me pursuant to that certain Transition and Retirement Agreement between me and Arena Pharmaceuticals, Inc. (the “Company”) (the “Agreement”), I hereby provide the following Retirement Date Release. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Agreement.

I hereby generally and completely release the Company and its affiliated, related, parent and subsidiary entities, and each of their respective current and former directors, officers, employees, shareholders, partners, agents, attorneys, predecessors, successors, insurers, affiliates, and assigns (collectively, the “Released Parties”), of and from any and all claims, liabilities, demands, causes of action, costs, expenses, attorney’s fees, damages and obligations of every kind and nature, in law, equity or otherwise, known and unknown, suspected and unsuspected, arising out of or in any way related to (i) my employment, (ii) the termination of my employment or (iii) events, acts conduct or omissions between the Company and me occurring at any time prior to and including the time I sign this Retirement Date Release, except for Excluded Claims (defined below) (collectively, the “Released Claims”).

Subject to the foregoing, the Released Claims include, but are not limited to:  (i) all claims arising out of or in any way related to your employment with the Company, or the termination of that employment; (ii) all claims related to your compensation or benefits from the Company, including salary, bonuses, commissions, vacation, paid time off, sick time, expense reimbursements, severance pay, fringe benefits, stock, stock options, or any other ownership, equity, or profits interests in the Company; (iii) all claims for breach of contract, wrongful termination, and breach of the implied covenant of good faith and fair dealing; (iv) all tort claims, including claims for fraud, defamation, emotional distress, and discharge in violation of public policy; and (v) all federal, state, and local statutory claims, including claims for discrimination, harassment, retaliation, attorneys’ fees, or other claims arising under the federal Civil Rights Act of 1964 (as amended), the federal Americans with Disabilities Act of 1990 (as amended), the federal Age Discrimination in Employment Act of 1967 (as amended) (the “ADEA”), and the California Labor Code (as amended).  

I acknowledge that I am knowingly and voluntarily waiving and releasing any rights I may have under the ADEA. I also acknowledge that the consideration given for the waiver and releases in this Retirement Date Release is in addition to anything of value to which I am already entitled. I further acknowledge that I have been advised by this writing, as required by the ADEA, that: (i) my waiver and release does not apply to any rights or claims that arise after the date I sign this Retirement Date Release; (ii) I should consult with an attorney prior to signing this Retirement Date Release (although I may choose voluntarily not to do so); (iii) I have twenty-one (21) days to consider this Retirement Date Release (although I may choose to voluntarily sign it sooner); (iv) I have seven (7) days following the date I sign this Retirement Date Release to revoke it, with such revocation to be effective only if I deliver written notice of revocation to the Company within the

 


 

seven (7)-day period; and (v) the Retirement Date Release will not be effective until the date upon which the revocation period has expires without such revocation, which will be the eighth day after I sign this Retirement Date Release provided that I do not revoke it (the  Release Effective Date”).

In giving the general release of claims herein, which includes claims that may be unknown to me at present, I acknowledge that I have read and understand Section 1542 of the California Civil Code, which reads as follows: “A general release does not extend to claims that the creditor or releasing party does not know or suspect to exist in his or her favor at the time of executing the release and that, if known by him or her, would have materially affected his or her settlement with the debtor or released party.” I hereby expressly waive and relinquish all rights and benefits under that section and any law or legal principle of similar effect in any jurisdiction with respect to the releases granted herein, including but not limited to the release of unknown and unsuspected claims granted in this Retirement Date Release.

Notwithstanding the foregoing, the following are not included in the Released Claims (the “Excluded Claims”): (i) any rights or claims for indemnification I may have pursuant to my written indemnification agreement with the Company, under the certificate of incorporation, bylaws, operating agreements or other charter documents of the Company or its subsidiaries, or under applicable law; (ii) any rights under the Company’s director and officer insurance policy, and any other Company or subsidiary insurance policy; (iii) any rights which cannot be waived as a matter of law, including without limitation claims under the California Fair Employment and Housing Act, to the extent such claims are not waivable as a matter of law with this release; (iv) any rights I have to file or pursue a claim for workers’ compensation or unemployment insurance; and (v) any claims relating to or arising from the breach of the Agreement (or its exhibits, and the agreements, plans, instruments and insurance policies referenced herein and therein).

Except as prohibited by law or regulation, (i) I represent that I have not filed any claims against the Company and agree that I will not file any claim against the Company or seek any compensation for any claim other than the payments and benefits referenced in the Agreement (or the exhibits) and (ii) I agree to indemnify and hold the Company harmless from and against any and all loss, cost, and expense, including, but not limited to court costs and attorney’s fees, arising from or in connection with any action which may be commenced, prosecuted, or threatened by me or for my benefit, upon my initiative, or with my voluntary aid or approval, contrary to the provisions of this Retirement Date Release.

 

This Retirement Date Release, together with the Agreement (and its exhibits), constitutes the entire agreement between me, and the Company with respect to the subject matter hereof. I am not relying on any representation not contained herein or in the Agreement (or exhibits). The provisions of this Retirement Date Release shall be deemed severable, and the invalidity or unenforceability of any provision hereof shall not affect the validity or enforceability of the other provisions hereof, and, to the greatest extent legally possible, effect shall be given to the intent manifested by the portion held invalid or inoperative.

 

 

 


 

Understood and Agreed:

___________________________________________________________

Steven SpectorDate

 


 

Exhibit D

 

Consulting Services Agreement

 

Exhibit 10.12

 

CONSULTING SERVICES AGREEMENT

 

THIS CONSULTING SERVICES AGREEMENT (the “Agreement”) is entered into as of March 2, 2020 (“Effective Date”) by and between Arena Pharmaceuticals, Inc., a Delaware corporation (“Arena”), and Steven Spector (“Consultant”).

WHEREAS, Arena wishes to obtain the services of Consultant for certain purposes and Consultant wishes to provide such services, all subject to the terms and conditions of this Agreement.

NOW, THEREFORE, in consideration of the mutual promises hereinafter set forth, and intending to be legally bound hereby, Arena and Consultant hereby agree as follows:

1.Services to be Provided.  During the term of this Agreement, Consultant shall perform for Arena (and if applicable, Arena’s Affiliates) services (the “Services”), described in the written addendum referencing this Agreement (the “Exhibit”).  The Exhibit shall automatically be incorporated into this Agreement by reference.  Arena acknowledges and agrees that during the term of this Agreement, Consultant may perform work for other clients and/or, if Consultant is an individual, for an employer.  Consultant agrees that Consultant will not utilize the confidential information, funds, personnel, space, equipment or facilities of any other client or any employer while performing services for Arena.  All services performed pursuant to this Agreement shall be performed in a good, timely, efficient and professional manner and, if Consultant is a company or other entity, solely by Consultant’s qualified employees. As used herein, “Affiliate” means any entity, which controls, is controlled by, or is under common control with Arena or Consultant, as applicable.  In this context “control” shall mean ownership by one entity, directly or indirectly, of more than fifty percent (50%) of the voting stock of another entity, which voting stock is entitled to vote for the election of directors, or otherwise has the actual right and ability to control and direct the management and business affairs of such other entity.

2.Term.  This Agreement will begin on the Effective Date and continue until December 31, 2020, unless otherwise terminated earlier as permitted herein.  

 

3.

Compensation; No Benefits; Licenses; Insurance; Taxes.

(a)As compensation for Consultant’s performance of the Services, Arena (or its Affiliate) shall pay Consultant the amounts specified in the Exhibit, in accordance with the payment schedule set forth in the Exhibit.  Consultant shall be responsible for all expenses incurred in connection with the performance of the Services, including travel, hotel and meal expenses, unless such expenses are reasonable and approved in advance by Arena.  Arena agrees to pre-approve and pay reasonable travel, hotel and meal expenses incurred by Consultant in connection with Services requested by Arena. All such pre-approved expenses shall be invoiced to Arena at cost and Consultant shall include copies of all receipts for such expenses.  Consultant shall not incur, and Arena shall not be responsible for, any fees or expenses in excess of the amounts set forth in the Exhibit or amendment thereto that has been signed by an authorized representative of Arena.

(b)Except as provided in the Transition Agreement (defined below) or in this Agreement, neither Consultant nor any employee, agent or representative of Consultant, if applicable, is an employee of Arena or is entitled to participate in, or receive any benefit or right

 


 

as an Arena employee under, any Arena employee benefit and welfare plans, including, without limitation, employee insurance, pension, savings and security plans, as a result of Consultant entering into this Agreement.

(c)Consultant is solely responsible for filing all tax returns and submitting all payments as required by any federal, state or local tax authority arising from the payment of fees to Consultant under this Agreement, and agrees to do so in a timely manner.  If applicable, Arena will report the fees paid to Consultant under this Agreement by filing Form 1099-MISC (or other applicable form) with the Internal Revenue Service as required by law.

(d)Consultant is solely responsible for obtaining any business or similar licenses required by any federal, state or local authority.    

(e)Arena will not obtain workers’ compensation insurance on behalf of, or for the benefit of, Consultant or Consultant’s employees.  If employees of Consultant perform Services, Consultant will obtain (at Consultant’s own expense) workers’ compensation insurance to the extent required by law.  

4.Ownership of Work Product

(a)All findings, conclusions, data, inventions, discoveries, trade secrets, techniques, processes, know-how, trademarks, servicemarks, brands, trade dress and tag lines, whether or not patentable or otherwise registrable, that are made by Consultant, either alone or with others, in the performance of the Services or which result, to any extent, from use of Arena’s (or Arena’s Affiliate’s) premises or property (collectively, “Inventions”) shall become the exclusive property of Arena or its designee. Consultant shall provide Arena prompt written notice of each Invention.  Consultant hereby assigns, transfers and conveys all of Consultant’s right, title and interest in and to any and all Inventions to Arena or its designee.

(b)Upon the request and at the expense of Arena or its designee, Consultant will, and will cause Consultant’s employees, if any, to, execute and deliver any and all instruments and documents and take such other acts as may be necessary or desirable to document such transfer or to enable Arena or its designee to apply for, prosecute and enforce patents, trademark registrations or copyrights in any jurisdiction with respect to any Inventions or to obtain any extension, validation, re-issue, continuance or renewal of any such intellectual property right. Without limiting the foregoing, Consultant shall, and shall cause Consultant’s employees, if any, to, assign, grant and convey unto Arena or its designee all of Consultant’s right, title and interest, now existing or that may exist in the future, in and to any copyrights in any findings, reports, data compilations and other information and material resulting from the performance of the Services. Consultant (including Consultant’s employees, if any) shall not submit applications for copyright registration in any country for any information or materials created by Consultant pursuant to this Agreement.

(c) Consultant acknowledges and agrees that the work (the services to be rendered), and all rights therein, including without limitation, copyright, belongs to and shall be the sole and exclusive property of Arena or its designee.

(d)The provisions of this Section 4 shall survive the expiration or sooner termination of the term of this Agreement.

5.Confidentiality.  Consultant shall limit access to confidential or proprietary information (as defined below) of Arena, its Affiliates and its corporate collaborators, to those

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employees, if any, who require it for the performance of Services, are bound by a written obligation of non-use and confidentiality no less restrictive than this section, and are under the direct control and supervision of Consultant.  Consultant will not, and will further not permit its employees, if any, to, either during or after the term of this Agreement, disclose to any third person or use any confidential or proprietary information of Arena, its Affiliates or its corporate collaborators for any purpose other than the performance of the Services without the prior written authorization of Arena. This obligation shall not apply to information that is in the public domain through no fault of Consultant. For purposes of this Section 5, “confidential or proprietary information” is defined as any information disclosed hereunder by Arena or its Affiliates, or on behalf of Arena or its Affiliates, or developed by Consultant in the performance of Services, including without limitation the structure and activity of any chemical compositions provided to Consultant pursuant to this Agreement, as well as synthetic and analytical methods, biomaterials, micro-organisms, cells, cell lines and the progeny and derivatives thereof, including all modified and recombinant DNA molecules and all vectors and hosts containing the same, patent applications, pre-clinical or clinical data, marketing methods and plans, pricing information, manufacturing information and other unpublished information related to the business or the financial condition of Arena and its Affiliates and corporate collaborators. The provisions of this Section 5 shall survive the expiration or sooner termination of this Agreement.

6.Termination.  This Agreement may be terminated upon the mutual agreement of Arena and Consultant.  In addition, (i) Consultant may terminate this Agreement and Consultant’s consulting relationship with Arena for any reason whatsoever, upon thirty (30) days’ written notice to Arena and (ii) Arena may terminate this Agreement and Consultant’s consulting relationship for Cause as provided herein.  “Cause” for Arena to terminate Consultant hereunder shall mean the occurrence of one or more of the following events if such event results in a demonstrably harmful impact on Arena’s business or reputation: (1) Consultant’s willful and continued failure to substantially perform his or her duties with Arena (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to Consultant by Arena’s Board of Directors which specifically identifies the manner in which the Board of Directors believes that Consultant has not substantially performed his duties. For a termination to be for Cause pursuant to this Agreement, Consultant must (a) receive a written notice which indicates in reasonable detail the facts and circumstances claimed to provide a basis for the termination for Cause; and (b) be provided with an opportunity to be heard no earlier than 30 days following the receipt of such notice (during which notice period Consultant has the opportunity to cure and has failed to cure or resolve the behavior in question); (2) Consultant’s conviction of, or plea of guilty or nolo contendere to, a felony or any crime involving fraud, dishonesty or moral turpitude; (3) Consultant’s willful engaging in gross misconduct; or (4) Consultant’s unauthorized use or disclosure of material confidential information or material trade secrets of Arena.

7.Return of Arena Property.  Except as otherwise approved by Arena in writing, Consultant will return to Arena any property of Arena, its Affiliates and corporate collaborators, in Consultant’s possession, at any time when so requested by Arena and in any event upon termination of this Agreement or the Exhibit.  

8.No Conflicting Agreements.  Consultant represents that Consultant is not a party to any existing agreements that would prevent Consultant from entering into and performing this Agreement. Consultant will not enter into any other agreement that is in conflict with

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Consultant’s obligations under this Agreement. Consultant shall not seek or use funding to support the Services from any third party (including the U.S. Government), without the prior written consent of Arena. If Consultant is a member or employee of, or affiliated with, a university or other third party, Consultant represents that Consultant has complied with any and all applicable policies and procedures of such university or other third party pertaining to the disclosure of proposed agreements for services and, to the extent necessary or required, received approval from such university or other third party to enter into this Agreement and be bound by the terms herein. Without limiting the foregoing, Consultant represents that receipt and use of confidential or proprietary information hereunder will not conflict with any agreement Consultant has with any university or third party which Consultant is a member of, employed by or affiliated with, and that no university or third party shall have any interest or rights in such confidential or proprietary information or any Inventions. If requested by Arena, Consultant will provide to Arena, and will require Consultant’s employees, if any, providing Services to provide to Arena, information concerning payments and equity holdings that could be viewed as creating a conflict of interest with respect to the provision of Services hereunder, as well as other information that is required or requested by regulatory authorities.  

9.Independent Contractor.  Consultant is an independent contractor under this Agreement. Neither party shall have the power to bind the other party to any agreement, contract, obligation or liability. Consultant shall not communicate on behalf of Arena or its Affiliates, or report on the Services rendered under this Agreement to any third party without specific written authorization by Arena.

10.No Health Care Providers.   Consultant represents and warrants that Consultant is not a health care provider, and no health care provider will receive payment for Services under this Agreement. The term “health care provider” includes any person with a valid medical (or other applicable) license or certification to practice in the United States, or any other individual or entity based primarily in the United States, in each case, that is in a position to prescribe, purchase, recommend, refer, or arrange for the purchase, sale, or formulary placement of Arena products, including, but not limited to, physicians, pharmacists, nurses, nurse practitioners, physician assistants, medical directors, hospitals, pharmacies, pharmacy benefit managers, group purchasing organizations, wholesalers, insurers, and any individual employed by such entities with responsibility or authority to purchase, prescribe, recommend, influence, or arrange for the purchase or sale of Arena’s products.

11.Formulary Committee Participation.  To the extent Consultant (or any employee or permitted subcontractor of Consultant performing Services) is a member of a committee of any government entity that sets prescription drug formularies or develops clinical guidelines, during the term of this Agreement and for two years following the term, Consultant (or such employee or permitted subcontractor, as applicable) will disclose to such committee the existence of this Agreement and the nature of the Services, and will follow any procedure set forth by such committee relative to Services under this Agreement.  Consultant will notify Arena of such committee membership and of any such procedure that Consultant is required to follow by the committee relative to the Services under this Agreement.

12.Entire Agreement and Amendment.  This Agreement is the sole agreement between Consultant and Arena with respect to the Services to be performed hereunder and it supersedes all prior agreements and understandings with respect thereto, whether oral or written, with the exception of the Transition and Retirement Agreement between Consultant and Arena

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dated January 13, 2020 (the “Transition Agreement”) and any agreements, plans, instruments and insurance policies referenced herein or therein. No modification to any provision of this Agreement shall be binding unless in writing and signed by both Consultant and a duly authorized representative of Arena. All of the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective heirs, executors, administrators, legal representatives, successors and permitted assigns of the parties hereto.

13.Assignment and Subcontracts.  The duties and responsibilities of Consultant hereunder are of a personal nature and shall not be assigned, subcontracted or delegated in whole or in part by Consultant without Arena’s prior written consent.  Consultant remains responsible for the actions and omissions of Consultant’s permitted subcontractors as if the Services were performed by Consultant and Consultant will enforce the terms of Subcontracts (as defined below) against such subcontractors if so requested by Arena.  The terms of each Subcontract shall ensure that all obligations of Consultant and restrictions on Consultant designated in this Agreement shall apply to subcontractors to the extent any failure of such provisions to apply to subcontractors would eliminate or denigrate any of Arena’s rights under this Agreement.  In any agreement between Consultant and a subcontractor: (a) pursuant to which a subcontractor performs Services related to this Agreement, or (b) that otherwise represents a subcontracting of Consultant’s obligations under this Agreement (each, a “Subcontract”), Arena will be named as a third party beneficiary of such Subcontract, with the right to enforce all rights and obligations thereunder. Consultant shall prohibit Consultant’s subcontractors from further subcontracting or otherwise delegating Services under this Agreement.  Arena may withdraw its consent regarding any subcontractor at any time. In the event Consultant performs any of its obligations under this Agreement through a subcontractor, then Consultant shall at all times be fully responsible for the payment of such subcontractor.

14.Governing Law.  This Agreement shall be governed by and interpreted in accordance with laws of the State of California, without giving effect to any conflict of law provisions.

15.Notices.  All notices required hereunder shall be in writing and be delivered personally, sent by an internationally recognized express courier service (e.g., FedEx), transmitted via facsimile, or sent via registered or certified mail (postage prepaid) requiring return receipt, and shall be deemed given as of:  (i) the date of delivery, if sent by personal delivery; (ii) two days after the date of deposit, if sent by express courier service; (iii) the date of transmission, if faxed with confirmatory printout of transmission; or (iv) one week after the date of mailing, if sent by mail. Notices shall be addressed as provided below or to such other addressee as either party may in the future designate by written notice to the other in accordance with the terms hereof:

If to Arena, to:

 

Arena Pharmaceuticals, Inc.

6154 Nancy Ridge Drive

San Diego, CA  92121

USA

Facsimile No.: 858.677.0065

Attention: Chief Executive Officer

With a copy to:  General Counsel

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If to Consultant, to:

 

Steven Spector

13517 Penfield Point

San Diego, CA 92130

 

16.Counterparts.  This Agreement may be executed in counterparts, each of which shall be deemed an original, all of which together shall constitute one and the same instrument.  One or more counterparts of this Agreement may be delivered by facsimile or PDF transmission with the intent that it or they shall constitute an original counterpart hereof.  

 

17.Invalidity and Waiver.  If any portion of this Agreement is held invalid or inoperative, then so far as is reasonable and possible the remainder of this Agreement shall be deemed valid and operative, and, to the greatest extent legally possible, effect shall be given to the intent manifested by the portion held invalid or inoperative.  The failure by either party to enforce against the other party any term or provision of this Agreement shall not be deemed to be a waiver of such party’s right to enforce against the other party the same or any other such term or provision in the future.

18.Conflict of Terms.  To the extent any terms contained in the Exhibit conflict with this Agreement, the terms of the Exhibit shall prevail unless otherwise specified.

  

IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have duly executed, or caused to be duly executed, this Agreement as of the date first above written.

 

Arena Pharmaceuticals, Inc.

Steven Spector              

 

By: /s/ Suzanne C. Zoumaras

 

/s/ Steven Spector

Name: Suzanne C. Zoumaras

 

Title: EVP & CHRO

 

6154 Nancy Ridge Drive

San Diego, CA 92121

13517 Penfield Point

San Diego, CA 92130

 

 

 

Telephone Number:  858-453-7200

Telephone Number: 858-472-3336

Date: January 13, 2020

Date: January 13, 2020

 

 

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The following is made part of the Consulting Services Agreement entered into as of March 2, 2020, by and between Arena Pharmaceuticals, Inc. (“Arena) and Steven Spector (the “Agreement”)

 

Exhibit

 

Description of Consulting Services and Compensation

 

Effective Date: March 2, 2020

 

Scope of Services:

Consultant shall provide consulting services to Arena relating to such matters as may be reasonably requested by Arena’s Chief Executive Officer or his designee.  Consultant’s consulting services shall not exceed thirty (30) hours per month.  

 

Consultant shall be available by, including, but not limited to, phone, email, and in person, at such reasonable times as are agreed upon by both parties, to provide advice and consultation to Arena.

 

Compensation:

 

Consultant shall be paid $350.00/hour; provided, however, that, for each month during the term of the Agreement from March 2, 2020 to September 2, 2020, Consultant will receive a monthly minimum payment equivalent to fifteen (15) hours of work.     

 

All of Consultant’s stock options previously granted by Arena that are outstanding as of the Retirement Date (as defined in the Transition Agreement) are referred to herein as the “Option Awards”.  The vesting of the Option Awards shall be accelerated as described in the Transition Agreement.   As of the Retirement Date, further vesting of the Option Awards shall be suspended but the Option Awards shall continue to remain outstanding and exerciseable during and after the Term of this Agreement (but in any event, not longer than the original contractual life of the options), in accordance with the Transition Agreement and, if applicable, the potential additional vesting acceleration and extended exercise benefits described below under “Accelerated Vesting and Extended Exercise Period.

 

In addition, any portion of Consultant’s performance restricted stock unit awards granted on January 4, 2019 that are outstanding as of the Retirement Date (the “PRSUs”) will remain outstanding until the earlier of: (i) March 15, 2021; (ii) termination of the Agreement by Arena for Cause; and (iii) termination of the Agreement by Consultant prior to December 31, 2020 (unless otherwise agreed to in writing between Consultant and Arena); and (iv) termination of the PRSUs pursuant to the terms of the PRSU Agreement (as defined below) and Arena’s 2017 Long-Term Incentive Plan (other than termination due to termination of Consultant’s services with Arena) (such earliest date, the “PRSU Termination Date”).  

 

Until the PRSU Termination Date, Consultant will remain eligible to be issued shares of Arena common stock pursuant to the vesting and issuance criteria set forth in the PRSU Grant Agreement (including Attachment I thereto) (the “PRSU Agreement”) on the same terms and at

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the same time as Consultant would have received such shares if Consultant’s employment or other services with Arena would have continued through the PRSU Termination Date, provided that if, under the terms of the PRSU Agreement, shares of Arena common stock would be issued to Consultant after March 15, 2021 as a result of a Target Price or Maximum Price (as defined in the PRSU Agreement) occurring prior to March 15, 2021 (and prior to the PRSU Termination Date), such shares shall instead be issued to Consultant on March 15, 2021 and any continuing employment or service required for achievement, and any remaining Service Period (as defined in the PRSU Agreement) required for issuance, of such shares shall be waived. Any PRSUs remaining outstanding following the PRSU Termination Date shall immediately be forfeited for no consideration.  

 

Except as expressly modified in this Exhibit or the Transition Agreement, the PRSUs shall continue to be governed by the terms of the PRSU Agreement and Arena’s 2017 Long-Term Incentive Plan.

 

Expenses: Consultant shall be reimbursed for reasonable travel, hotel and meal expenses incurred in accordance with Section 3(a) of the Agreement.

 

Term:  

This Exhibit shall remain in effect until the earlier to occur of (a) December 31, 2020, or (b) termination of the Agreement as permitted in the Agreement. The provisions under “Compensation”, “Expenses”, “Schedule of Payments” and “Accelerated Vesting and Extended Exercise Period” shall survive the expiration of the term of this Exhibit.

 

Schedule of Payments:

 

Consultant shall be paid in full any undisputed invoiced amount within thirty (30) days from Arena’s receipt of invoice and a completed and signed Form W-9 or equivalent tax form from Consultant.

 

Invoice:

 

Consultant shall send to Arena monthly invoices.  For all work performed, the invoice shall outline the date work was performed, the number of hours worked in each such day, and a brief description of the work performed on behalf of Arena in a form reasonably acceptable to Arena. All invoices shall be sent to Arena, attention Accounts Payable at invoices@arenapharm.com.

 

The period of work covered by each invoice shall not be more than one month and all work performed in any calendar month shall be invoiced within ten (10) days of each month end.

 

Accelerated Vesting and Extended Exercise Period:

 

Upon termination of the Agreement for any reason (including death or Disability, as defined in the Arena Pharmaceuticals, Inc. Severance Benefit Plan, as amended and restated effective January 4, 2019) other than (i) termination by Arena for Cause or (ii) termination by Consultant prior to December 31, 2020, and provided that Consultant (a) complies with the obligations

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hereunder and with the Transition Agreement (excluding any obligations arising following death of Disability (other than the release requirement set forth below)); and (b) on or within twenty-one (21) days after the termination of the Agreement, signs a release of claims in substantially the same form as the Retirement Date Release attached to the Transition Agreement, which will be provided by Arena (the “Release”), and allows the Release to become effective, then Arena will accelerate the vesting of all of the Option Awards such that, as of the date of the effective date of the Release, Consultant will be deemed vested in all remaining unvested Option Awards (the “Accelerated Vesting”).  In addition, subject to satisfaction of such conditions, Arena will extend the exercise period for all Option Awards (i.e., not only the portion of such Option Awards whose vesting was accelerated as provided in the prior sentence, but also the portion of such Option Awards that were previously vested) other than the Excluded Options (as defined below) until thirty-six (36) months after the termination of the Agreement, but in any event not beyond the original contractual life of each such Option Award (the “Extended Exercise Period”).  The “Excluded Options” means the following Option Awards: (i) the Option Award granted on March 17, 2010 covering up to 3,726 shares (Grant Number 20003927), (ii) the Option Award granted on March 15, 2011 covering up to 7,970 shares (Grant Number 20004190), (iii) the Option Award granted on March 19, 2012 covering up to 5,525 shares (Grant Number 20004415), (iv) the Option Award granted on December 17, 2013 covering up to 1,812 shares (Grant Number 2004731), (v) the Option Award granted on December 15, 2014 covering up to 1,875 shares (Grant Number 20005024), and (vi) the Option Award granted on December 15, 2015 covering up to 7,276 shares (Grant Number 20005306).

 

For the avoidance of doubt, if, prior to December 31, 2020, Consultant terminates the Agreement for any reason, or at any time Arena terminates the Agreement or the consulting relationship for Cause, then Consultant will no longer be eligible to receive the Accelerated Vesting or the Extended Exercise Period (as defined above). If the Agreement is terminated due to Consultant’s death or Disability, Arena will provide the Accelerated Vesting and the Extended Exercise Period; provided, however, that Consultant, Consultant’s estate or Consultant’s representative (as applicable) signs the Release on or within twenty-one (21) days after the date the Agreement terminates due to Consultant’s death or Disability and allows that release to become effective.

 

The portion of the Option Awards subject to the Extended Exercise Period that are also considered “incentive stock options” under Section 422 of the Internal Revenue Code of 1986, as amended (the “ISOs”) will immediately lose ISO status upon the execution of the Transition Agreement.  Arena encourages Consultant to seek independent advice concerning the tax status of Consultant’s Option Awards and the corresponding tax implications of the Agreement, this Exhibit, and the benefits hereunder.  

 

Except as expressly modified in this Exhibit or in the Transition Agreement, the Option Awards shall continue to be governed by the terms of the applicable grant notice, stock option agreement and Arena’s long-term incentive plan.


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Counterparts:

 

This Exhibit may be executed by exchange of signatures by facsimile or exchange of PDF copies, and in two or more counterparts, each of which will be deemed an original document, and all of which, together with this writing, will be deemed one instrument.

 

 


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IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have duly executed, or caused to be duly executed, this Exhibit effective as of the Effective Date above written.

 

Arena Pharmaceuticals, Inc.

Steven Spector              

 

By: /s/ Suzanne C. Zoumaras

 

/s/ Steven Spector

Name: Suzanne C. Zoumaras

 

Title: EVP & CHRO

 

Date: January 13, 2020

Date: January 13, 2020

 

 

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Exhibit 10.22

 

Arena Pharmaceuticals, Inc.

 

 

October 27, 2020

 

Mr. Kevin Lind

 

Re: Separation Agreement

 

Dear Kevin,

 

This letter shall constitute the Separation Agreement (the “Agreement”) between you and Arena Pharmaceuticals, Inc. (the “Company”).  

1.Separation Date; Accrued Salary and Paid Time Off.  Your employment with the Company will end on October 27, 2020, which will become your employment separation date (the “Separation Date”). As of the Separation Date, you will be deemed to have voluntarily resigned from any and all employment, officer, or director positions you hold with the Company or its subsidiaries, other than Longboard Pharmaceuticals, Inc. (f/k/a Arena Neuroscience, Inc.). On the Separation Date, the Company will pay you all accrued salary and accrued but unused paid time off earned through the Separation Date, subject to standard payroll deductions and withholdings.

2.Severance Benefits.  If you: (i) sign and return this Agreement to the Company on or within twenty-one (21) days after the Separation Date and allow the releases contained herein to become effective; (ii) comply with all of your legal and contractual obligations to the Company; and (iii) remain available after your Separation Date to answer any questions from the Company regarding your previous job duties; then the Company will provide you with the following severance benefits (the “Severance Benefits”):

a.Prorated 2020 Annual Bonus. You will be eligible for your annual performance bonus payment for 2020, prorated for the period of time you are a Company employee during 2020, at the same time as the Company’s executives on or before March 15, 2021, which amount, if any, will be determined pursuant to the terms of the Company’s Annual Incentive Plan for 2020 (such amount, the “2020 Annual Bonus”), provided that the requirement that you be employed with the Company as of the payment date for such bonus will be waived.

b.Equity Acceleration and Extended Exercise Period.  The Company will accelerate the vesting of all stock option awards issued by the Company and held by you as of your Separation Date (collectively, the “Option Awards”) such that, as of the Separation Date, you will be immediately vested in the portion of the Option Awards that were scheduled to vest under the vesting schedule of such Option Awards during the eighteen (18) months immediately following the Separation Date. For purposes of calculating the vesting acceleration in the preceding sentence, any unvested portion of Option Awards that are scheduled to vest in one or more annual installments shall be treated as if the original grant provided for vesting in equal monthly installments rather than annually. Additionally, the Company will extend the exercise

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period for all Option Awards that are vested as of your Separation Date (including those whose vesting accelerates pursuant to this Section) until the later of: (i) the original post-termination exercise period provided in your stock option agreement; or (ii) February 28, 2023; provided that in no event shall any Option Award be exercisable beyond the original contractual life of the Option Award.  The further vesting of all Option Awards will cease as of your Separation Date (after applying the vesting acceleration pursuant to this Section) and any unvested portion of the Option Awards will immediately terminate. Except as expressly modified in this Agreement, the Option Awards shall continue to be governed by the terms of the applicable grant notice, stock option agreement and the Company’s long-term incentive plan. Pursuant to tax rules governing the portion of your Option Awards that are considered “incentive stock options” (the “ISOs”) under Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), such Option Awards may lose ISO status as of your Separation Date as a result of the benefits set forth in this Section (whether due to the IRS $100K limitation on ISOs and/or the modification to extend the exercise period of such Option Awards) and will lose ISO status in any event three months following your Separation Date, after which such Option Awards will be deemed nonqualified stock options. The Company encourages you to seek independent advice concerning the tax status of your Option Awards and the corresponding tax implications of this Agreement and the benefits hereunder.

In addition, any portion of your performance restricted stock unit awards  that were granted on January 4, 2019 that remain outstanding as of your Separation Date (the “PRSUs”) will remain outstanding and you will remain eligible to receive shares of Company common stock in respect of such PRSUs until the earlier of: (i) March 15, 2021; and (ii) termination of the PRSUs pursuant to the terms of the PRSU Agreement (as defined below) and the Company’s 2017 Long-Term Incentive Plan (such earliest date, the “PRSU Termination Date”).  

Until the PRSU Termination Date, you will remain eligible to be issued shares of Company common stock pursuant to the vesting and issuance criteria set forth in the PRSU Grant Agreement (including Attachment I thereto) (the “PRSU Agreement”) on the same terms and at the same time as you would have received such shares if your employment with The Company would have continued through the PRSU Termination Date, provided that if, under the terms of the PRSU Agreement, shares of Company common stock would be issued to you after March 15, 2021 as a result of the Maximum Price (as defined in the PRSU Agreement) occurring prior to March 15, 2021 (and prior to the PRSU Termination Date), such shares shall instead be issued to you on March 15, 2021 and any continuing employment or service required for achievement, and any remaining Service Period (as defined in the PRSU Agreement) required for issuance of such shares shall be waived. Any PRSUs remaining outstanding following the PRSU Termination Date shall immediately be forfeited for no consideration.  

Except as expressly modified in this Agreement, the PRSUs shall continue to be governed by the terms of the PRSU Agreement and Company’s 2017 Long-Term Incentive Plan.

3.No Other Compensation or Benefits.  You acknowledge that, except as expressly provided in this Agreement (including its exhibits and the agreements, plans, instruments and insurance policies referenced herein and therein), you have not earned, will not earn by the Separation Date, are not vested in, entitled to, and will not receive from the Company, any additional compensation (including base salary, bonus, incentive compensation,

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or equity), severance, or benefits on or after the Separation Date, including without limitation any severance, payments or other benefits under the Arena Pharmaceuticals, Inc. Severance Benefit Plan, as amended and restated effective January 4, 2019 (the “Severance Benefit Plan”), with the exception of any vested right you may have under the express terms of any written ERISA-qualified benefit plan (e.g., 401(k) account).  By way of example, you acknowledge that you have not earned and are not owed any equity, bonus, incentive compensation, severance benefits, or commissions, except as may be provided in this Agreement (including its exhibits).  

4.Expense Reimbursements.  You agree that, within thirty (30) days after the Separation Date, you will submit your final documented expense reimbursement statement reflecting all unreimbursed business expenses that you incurred through the Separation Date, if any, for which you seek reimbursement.  The Company will reimburse you for reasonable business expenses pursuant to its regular business practice.  

5.Return of Company Property.  On the Separation Date (or earlier if requested by the Company), you agree to return to the Company (or delete) all Company documents (and all copies thereof) and other Company property which you are aware is in your possession or control, including, but not limited to, Company hardcopy or electronic files, email, correspondence, data, images, notes, drawings, records, plans, forecasts, reports, studies, analyses, proposals, agreements, financial information, research and development information, sales and marketing information, customer lists, prospect information, pipeline reports, sales reports, operational and strategic information, personnel information, specifications, code, software, databases, computer-recorded information, tangible property and equipment (including, but not limited to, computers, printers, mobile telephones, servers), credit cards, entry cards, identification badges and keys; and any materials of any kind which contain or embody any proprietary or confidential information of the Company (and all reproductions thereof in whole or in part). You agree that you will make a diligent search to locate any such Company documents or property by the Separation Date.  If you have used any personally owned computer, server, or e-mail system to receive, store, review, prepare or transmit any Company confidential or proprietary data, materials or information, after the Separation Date you shall permanently delete (and not reinstate) such Company confidential or proprietary information from those systems; and you agree to provide the Company access to your system as requested to verify that the necessary deletion is done.  Your compliance with this paragraph is a condition precedent to your receipt of the Severance Benefits.  

6.Nondisparagement.  You agree not to disparage the Company, and the Company’s officers, directors, employees, parents and subsidiaries, in any manner which could reasonably cause substantial harm to them or their business, business reputation or personal reputation, and the Company agrees to instruct its current executive officers and directors to not disparage you in any manner which could reasonably cause substantial harm to you or your business, business reputation or personal reputation; provided that you and the Company and its executive officers and directors may respond accurately to any question, inquiry or request for information if required by legal process or in connection with a government investigation. In addition, nothing in this provision or this Agreement is intended to prohibit or restrain you in any manner from making disclosures that (i) are protected under the whistleblower provisions of federal or state law or regulation or under other applicable law or regulation, nor prevent you from disclosing information about unlawful acts in the workplace, including, but not limited to,

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sexual harassment or (ii) which in good faith you reasonably deem necessary in the performance of your duties to the Company prior to the Separation Date.  

7.No Admissions.  The promises and payments in consideration of this Agreement shall not be construed to be an admission of any liability or obligation by the Company to you or any other person, and the Company makes no such admission.  

8.Cooperation.  You agree to voluntarily cooperate with the Company, if you have knowledge of facts relevant to any threatened or pending claim, investigation, audit or litigation against or by the Company, by making yourself reasonably available for interviews with the Company or its legal counsel, preparing for and providing truthful and accurate deposition and trial testimony.  

9.Release of Claims.  

a.General Release.  In exchange for the consideration provided to you under this Agreement, you hereby generally and completely release the Company and its affiliated, related, parent and subsidiary entities, and each of their respective current and former directors, officers, employees, shareholders, partners, agents, attorneys, predecessors, successors, insurers, affiliates, and assigns (collectively, the “Released Parties”), of and from any and all claims, liabilities, demands, causes of action, costs, expenses, attorney’s fees, damages, and obligations, of every kind and nature, in law, equity or otherwise, known and unknown, suspected and unsuspected, arising out of or in any way related to (i) your employment, (ii) the termination of your employment or (iii) events, acts conduct or omissions between the Company and you occurring at any time prior to and including the date you sign this Agreement, except for Excluded Claims (defined below) (collectively, the “Released Claims”).

b.Scope of Release.  Subject to the foregoing, the Released Claims include, but are not limited to: (i) all claims arising out of or in any way related to your employment with the Company, or the termination of that employment; (ii) all claims related to your compensation or benefits from the Company, including salary, bonuses, commissions, vacation, paid time off, sick time, expense reimbursements, severance pay, fringe benefits, stock, stock options, or any other ownership, equity, or profits interests in the Company; (iii) all claims for breach of contract, wrongful termination, and breach of the implied covenant of good faith and fair dealing; (iv) all tort claims, including claims for fraud, defamation, emotional distress, and discharge in violation of public policy; and (v) all federal, state, and local statutory claims, including claims for discrimination, harassment, retaliation, attorneys’ fees, or other claims arising under the federal Civil Rights Act of 1964 (as amended), the federal Americans with Disabilities Act of 1990 (as amended), the federal Age Discrimination in Employment Act (as amended)(the “ADEA”), the California Fair Employment and Housing Act (as amended), and the California Labor Code (as amended).  

c.ADEA Waiver. You acknowledge that you are knowingly and voluntarily waiving and releasing any rights you have under the ADEA, and that the consideration given for the waiver and releases you have given in this Agreement is in addition to anything of value to which you were already entitled.  You further acknowledge that you have been advised, as required by the ADEA, that:  (i) your waiver and release does not apply to any

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rights or claims that arise after the date you sign this Agreement; (ii) you should consult with an attorney prior to signing this Agreement (although you may choose voluntarily not to do so); (iii) you have twenty-one (21) days to consider this Agreement (although you may choose voluntarily to sign it sooner); (iv) you have seven (7) days following the date you sign this Agreement to revoke it (in a written revocation sent to me); and (v) this Agreement will not be effective until the date upon which the revocation period expires without such revocation, which will be the eighth day after you sign this Agreement provided that you do not revoke it (the “Effective Date”).  

d.Waiver of Unknown Claims.  In giving the releases set forth in this Agreement, which include claims which may be unknown to you at present, you acknowledge that you have read and understand Section 1542 of the California Civil Code which reads as follows: “A general release does not extend to claims that the creditor or releasing party does not know or suspect to exist in his or her favor at the time of executing the release and that, if known by him or her, would have materially affected his or her settlement with the debtor or released party.” You hereby expressly waive and relinquish all rights and benefits under that section and any law or legal principle of similar effect in any jurisdiction with respect to your release of claims herein, including but not limited to the release of unknown and unsuspected claims.  

e.Excluded Claims. Notwithstanding the foregoing, the following are not included in the Released Claims (the “Excluded Claims”): (i) any rights or claims for indemnification you may have pursuant to your indemnification agreement with the Company, under the certificate of incorporation, bylaws, operating agreements or other charter documents of the Company or its subsidiaries, or under applicable law; (ii) any rights under the Company’s director and officer insurance policy, and any other Company or subsidiary insurance policy; (iii) any rights which cannot be waived as a matter of law; (iv) any rights you have to file or pursue a claim for workers’ compensation or unemployment insurance; and (v) any claims relating to or arising from the breach of this Agreement (including its exhibits and the agreements, plans, instruments and insurance policies referenced herein and therein).  You hereby represent and warrant that, as of the date of this Agreement, other than the Excluded Claims, you are not aware of any claims you have or might have against any of the Released Parties that are not included in the Released Claims.  

f.Protected Rights.  Nothing in this Agreement limits your ability to file a charge or complaint with the Equal Employment Opportunity Commission, the Department of Labor, the National Labor Relations Board, the Occupational Safety and Health Administration, the Securities and Exchange Commission or any other federal, state or local governmental agency or commission (“Government Agencies”).  You further understand that this Agreement does not limit your ability to communicate with any Government Agencies or otherwise participate in any investigation or proceeding that may be conducted by any Government Agency, including providing documents or other information, without notice to the Company.  While this Agreement does not limit your right to receive an award for information provided to the Securities and Exchange Commission, you understand and agree that, to maximum extent permitted by law, you are otherwise waiving any and all rights you may have to individual relief based on any claims that you have released and any rights you have waived by signing this Agreement.  

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10.Representations.  You hereby represent that, as of the date of this Agreement, you have been paid all compensation owed and for all hours worked (except for the consideration to be provided to you under this Agreement, you have received all the leave and leave benefits and protections for which you are eligible pursuant to the federal Family and Medical Leave Act, the California Family Rights Act, or otherwise, and you have not suffered any on-the-job injury for which you have not already filed a workers’ compensation claim.

11.Continuing Obligations. You acknowledge and reaffirm your continuing obligations under your signed Proprietary Information and Invention Assignment Agreement, attached hereto as Exhibit A and which is incorporated herein by reference, and agree to abide by those continuing obligations.   

12.Dispute Resolution. To ensure the timely and economical resolution of disputes that may arise in connection with your employment with the Company, you and the Company agree that any and all disputes, claims, or causes of action arising from or relating to the enforcement, breach, performance, negotiation, execution or interpretation of this Agreement, your employment, or the termination of your employment, including but not limited to statutory claims, will be resolved to the fullest extent permitted by law by final, binding and confidential arbitration, by a single arbitrator, in San Diego, California, conducted by JAMS, Inc. (“JAMS”) under the then-applicable JAMS rules (available at the following web address: https://www.jamsadr.com/rules-employment-arbitration/, and which will be provided to you on request).  By agreeing to this arbitration procedure, both you and the Company waive the right to resolve any such dispute through a trial by jury or judge or administrative proceeding. In addition, all claims, disputes or causes of action under this provision, whether by you or the Company, must be brought in an individual capacity, and shall not be brought as a plaintiff (or claimant) or class member in any purported class or representative proceeding, nor joined or consolidated with the claims of any other person or entity.  The arbitrator may not consolidate the claims of more than one person or entity, and may not preside over any of form of representative or class proceeding.  To the extent the preceding sentences in this paragraph regarding class claims or proceedings are found to violate applicable law or are otherwise found unenforceable, any claim(s) alleged or brought on behalf of a class shall proceed in a court of law rather than by arbitration. This provision shall not apply to an action or claim that cannot be subject to mandatory arbitration under applicable law, including without limitation, claims brought pursuant to the California Private Attorney General Act of 2004 (as amended), the California Fair Employment and Housing Act (as amended), and the California Labor Code (as amended), to the extent such claims are not permitted by applicable law(s) to be submitted to mandatory arbitration and the applicable law(s) are not preempted by the Federal Arbitration Act or otherwise invalid (collectively, the “Arbitration Excluded Claims”). In the event you intend to bring multiple claims, including one of the Arbitration Excluded Claims listed above, the Arbitration Excluded Claims may be publicly filed with a court, while any other claims will remain subject to mandatory arbitration. You will have the right to be represented by legal counsel at any arbitration proceeding.  The arbitrator shall: (i) have the authority to compel adequate discovery for the resolution of the dispute and to award such relief as would otherwise be permitted by law; and (ii) issue a written arbitration decision, to include the arbitrator’s essential findings and conclusions and a statement of the award.  The arbitrator shall be authorized to award any or all remedies that you or the Company would be entitled to seek in a court of law.  The Company shall pay all JAMS’ arbitration fees in excess of the amount of court

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fees that would be required of you if the dispute were decided in a court of law.  Nothing in this Agreement is intended to prevent either you or the Company from obtaining injunctive relief in court to prevent irreparable harm pending the conclusion of any such arbitration.  Any awards or orders in such arbitrations may be entered and enforced as judgments in the federal and state courts of any competent jurisdiction.

13.Tax Provisions.

a.Section 409A.  All severance benefits and other payments provided under the Agreement are intended to satisfy the requirements for an exemption from application of Section 409A of the Code and the regulations and other guidance thereunder and any state law of similar effect (collectively “Section 409A”) to the maximum extent that an exemption is available (including but not limited to the exemption provided under Treasury Regulations Sections 1.409A-1(b)(4) and 1.409A-1(b)(5)) and any ambiguities herein shall be interpreted accordingly; provided, however, that to the extent such an exemption is not available, the severance benefits and other payments provided under the Agreement are intended to comply with the requirements of Section 409A of the Code to the extent necessary to avoid adverse personal tax consequences and any ambiguities herein shall be interpreted accordingly. Each payment under this Agreement shall be treated as a separate and distinct payment for purposes of Section 409A.

b.Section 280G.  If any payment or benefit you may receive (including after your Separation Date) in connection with a change in control from the Company or otherwise (a “Payment”) would (i) constitute a “parachute payment” within the meaning of Section 280G of the Code, and (ii) but for this sentence, be subject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then the parachute provisions of Section 4(e) of the Severance Benefit Plan shall apply and you acknowledge and agree (x) that, in order to avoid the Excise Tax, you may be required to return certain payments or benefits to the Company pursuant to the provisions of Section 4(e), and (y) to cooperate with the Company (or its acquirer) to promptly return any such payments or benefits as may be required pursuant to Section 4(e).

14.Miscellaneous.  This Agreement, together with its exhibits, constitutes the complete, final and exclusive embodiment of the entire agreement between you and the Company with regard to the subject matter hereof.  It is entered into without reliance on any promise or representation, written or oral, other than those expressly contained herein, and it supersedes any other agreements, promises, warranties or representations concerning its subject matter, including the Severance Benefit Plan or any other severance or change in control plan, agreement or policy maintained by the Company.  This Agreement may not be modified or amended except in a writing signed by both you and a duly authorized officer of the Company.  This Agreement will bind the heirs, personal representatives, successors and assigns of both you and the Company, and inure to the benefit of both you and the Company, their heirs, successors and assigns.  Any ambiguity in this Agreement shall not be construed against either party as the drafter.  Any waiver of a breach of this Agreement, or rights hereunder, shall be in writing and shall not be deemed to be a waiver of any successive breach or rights hereunder.  This Agreement will be deemed to have been entered into and will be construed and enforced in accordance with the laws of the State of California, as applied to contracts made and to be performed entirely within California, without regard to conflicts of law principles. If any

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provision of this Agreement is determined to be invalid or unenforceable, in whole or in part, this determination shall not affect any other provision of this Agreement and the provision in question shall be modified so as to be rendered enforceable in a manner consistent with the intent of the parties insofar as possible under applicable law.  This Agreement may be executed in counterparts which shall be deemed to be part of one original, and facsimile and electronic signatures shall be equivalent to original signatures

15.notice of default or breach; Opportunity to Cure.  Prior to the Company asserting you are in default or breach of this Agreement (or any exhibit), you must (a) receive a written notice which indicates in reasonable detail the facts and circumstances claimed to provide a basis for such breach or default; and (b) be provided with an opportunity during the 30 days following the receipt of such notice to cure or otherwise correct any such default or breach. The Company represents that, as of the date of this Agreement, it is not aware of any facts or circumstances, including any prior action or statement by you, that would constitute a breach or default by you of any provision in this Agreement had the Agreement been in effect at the time of the facts and circumstances.

[Signature page to follow.]


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If this Agreement is acceptable to you, please sign and date below within twenty-one (21) days, and provide me with a fully signed Agreement.  The Company’s offer contained herein will automatically expire if we do not receive the fully signed Agreement within this timeframe.  

We wish you the best in your future endeavors.

Sincerely,

Arena Pharmaceuticals, Inc.

 

 

 

By:/s/ Suzanne C. Zoumaras

Suzanne C. Zoumaras

Executive Vice President and Chief Human Resources Officer

 

Exhibit A: Arena Pharmaceuticals, Inc. Proprietary Information and Invention Assignment Agreement

 

Understood, Accepted and Agreed:

 

 

/s/ Kevin Lind

Kevin Lind

 

10/27/2020

Date

 

 

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Exhibit A

 

ARENA PHARMACEUTICALS, INC. PROPRIETARY INFORMATION AND INVENTION ASSIGNMENT AGREEMENT

 

 

 

 

 

 

 

 

 

Exhibit 10.45

ARENA PHARMACEUTICALS, INC.

AMENDED AND RESTATED 2020 LONG-TERM INCENTIVE PLAN

Arena Pharmaceuticals, Inc. (the “Company”), a Delaware corporation, hereby adopts the following Amended and Restated 2020 Long-Term Incentive Plan which amends and restates the terms of the Company’s 2020 Long-Term Incentive Plan that was previously in effect (the “Plan”) effective as of the Effective Date set forth in Section 13.13.

1.

PURPOSE OF THE PLAN

The purpose of the Plan is to assist the Company and its Affiliates in attracting and retaining employees, directors, consultants and advisors of the Company and its Affiliates who are expected to contribute to the Company’s success and achieve long-term objectives that will benefit the stockholders of the Company through the additional incentives inherent in the Awards hereunder.

2.

DEFINITIONS

 

 

2.1.2017 LTIP” shall mean the Company’s 2017 Long-Term Incentive Plan, as amended and/or restated from time to time.

2.2.Affiliate” shall mean, at the time of determination, any “parent” or “subsidiary” of the Company as such terms are defined in Rule 405 of the Securities Act. The Board or the Committee shall have the authority to determine the time or times at which “parent” or “subsidiary” status is determined within the foregoing definition.

2.3.Award” shall mean any Option, Stock Appreciation Right, Restricted Stock Award, Restricted Stock Unit Award, Performance Award or any other right, interest or option relating to Shares or other property (including cash) granted pursuant to the provisions of the Plan.

2.4.Award Agreement” shall mean any written agreement, contract or other instrument or document evidencing any Award granted hereunder, including through an electronic medium.

2.5.Board” shall mean the Board of Directors of the Company.

2.6.Cause” shall mean, unless otherwise provided in an Award Agreement or another agreement between the Participant and the Company or an Affiliate or a plan maintained by the Company or an Affiliate in which the Participant participates, a determination by the Committee that the Participant has breached his or her employment or service contract with the Company, or has been engaged in disloyalty to the Company, including, without limitation, fraud, embezzlement, theft, commission of a felony or proven dishonesty in the course of his or her employment or service, or has disclosed trade secrets or confidential information of the Company to persons not entitled to receive such information, or has breached any written noncompetition or nonsolicitation agreement between the Participant and the Company or has engaged in such other behavior detrimental to the interests of the Company as the Committee determines in its sole discretion. Any determination of “cause” for the purposes of outstanding Awards held by such Participant shall have no effect upon any determination of the rights or obligations of the Company or such Participant for any other purpose. Notwithstanding the foregoing, neither this provision nor the Plan is intended to, and neither shall be interpreted in a manner that limits or restricts a participant from exercising any legally protected whistleblower rights (including pursuant to Rule 21F under the Securities Exchange Act of 1934).

2.7.Code” shall mean the Internal Revenue Code of 1986, as amended from time to time.

2.8.Committee” shall mean the Compensation Committee of the Board or a subcommittee thereof formed by the Compensation Committee to act as the Committee hereunder. The Committee shall consist of no fewer than two Directors, each of whom is (i) a “Non-Employee Director” within the meaning of Rule 16b-3 of the Exchange Act, and (ii) an “independent director” for purpose of the rules of the Nasdaq Stock Market (or such other principal U.S. national securities exchange on which the Shares are traded) to the extent required by such rules.

2.9.Consultant” shall mean any consultant or advisor who is a natural person and who provides services to the Company or any Affiliate, so long as such person (i) renders bona fide services that are not in connection with the offer and sale of the Company’s

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securities in a capital‑raising transaction and (ii) does not directly or indirectly promote or maintain a market for the Company’s securities.

2.10.Director” shall mean a non-employee member of the Board.

2.11.Dividend Equivalents” shall have the meaning set forth in Section 12.5.

2.12.Effective Date” shall have the meaning set forth in Section 13.13.

2.13.Employee” shall mean any employee of the Company or any Affiliate and any prospective employee conditioned upon, and effective not earlier than, such person becoming an employee of the Company or any Affiliate.

2.14.Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.

2.15.Fair Market Value” shall mean, with respect to Shares as of any date, (i) the per Share closing price of the Shares as reported on the Nasdaq Stock Market on that date (or if there was no reported closing price on such date, on the last preceding date on which the closing price was reported), (ii) if the Shares are not then listed on the Nasdaq Stock Market, the closing price on such other principal U.S. national securities exchange on which the Shares are listed (or if there was no reported closing price on such date, on the last preceding date on which the closing price was reported); or (iii) if the Shares are not listed on a U.S. national securities exchange, the Fair Market Value of Shares shall be determined by the Committee in its sole discretion using appropriate criteria. The Fair Market Value of any property other than Shares shall mean the market value of such property determined by such methods or procedures as shall be established from time to time by the Committee.

2.16.“Incentive Stock Option” shall mean an Option which when granted is intended to be, and qualifies as, as an incentive stock option for purposes of Section 422 of the Code.

2.17.Inducement Award” shall mean an Award that is granted pursuant to Section 3.3 of the Plan.

2.18.Inducement Award Rules” shall mean Nasdaq Listing Rule 5635(c)(4), the related guidance under Nasdaq IM 5635-1 and any successor rule or guidance.

2.19.Inducement Shares” shall have the meaning set forth in Section 3.3.

2.20.Option” shall mean any right granted to a Participant under the Plan allowing such Participant to purchase Shares at such price or prices and during such period or periods as the Committee shall determine.

2.21.Participant” shall mean an Employee, Director or Consultant who is selected by the Committee to receive an Award under the Plan.

2.22.Payee” shall have the meaning set forth in Section 13.1.

2.23.Performance Award” shall mean any Award of Performance Cash, Performance Shares or Performance Units granted pursuant to Article 9.

2.24.“Performance Cash” shall mean any cash incentives granted pursuant to Article 9 payable to the Participant upon the achievement of such performance goals as the Committee shall establish.

2.25.Performance Period” shall mean that period established by the Committee at the time any Performance Award is granted or at any time thereafter during which any performance goals specified by the Committee with respect to such Award are to be measured.

2.26.Performance Share” shall mean any grant pursuant to Article 9 of a unit valued by reference to a designated number of Shares, which value may be paid to the Participant by delivery of such property as the Committee shall determine, including cash, Shares, other property, or any combination thereof, upon achievement of such performance goals during the Performance Period as the Committee shall establish.

2.27.Performance Unit” shall mean any grant pursuant to Section 9 of a unit valued by reference to a designated amount of property other than Shares (or cash), which value may be paid to the Participant by delivery of such property as the Committee shall

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determine, including cash, Shares, other property, or any combination thereof, upon achievement of such performance goals during the Performance Period as the Committee shall establish.

2.28.Permitted Assignee” shall have the meaning set forth in Section 12.3.

2.29.Prior Plan Award” shall mean an award granted under Section 3.1 of the 2017 LTIP or granted under any of the other Prior Plans.

2.30.Prior Plans” shall mean, collectively, the Company’s 2009 Long-Term Incentive Plan, 2012 Long-Term Incentive Plan, 2013 Long-Term Incentive Plan, and 2017 Long-Term Incentive Plan, each as amended and/or restated. Awards granted under the Prior Plans continue to be governed under the terms of those Prior Plans.

2.31.Prior Plans Returning Shares” means any Shares subject to a Prior Plan Award that after March 31, 2020, is forfeited, or expires or otherwise terminates without the issuance of Shares, or is settled for cash (in whole or in part) or otherwise does not result in the issuance of all or a portion of the Shares subject to such Prior Plan Award, to the extent of such forfeiture, expiration or cash settlement; as well as Shares that are, after March 31, 2020, tendered by the Participant or withheld by the Company in payment of the purchase price of an option that is a Prior Plan Award, or Shares that are, after March 31, 2020, used to satisfy any tax withholding obligation with respect to a Prior Plan Award.

2.32.Restricted Stock” shall mean any Share issued with the restriction that the holder may not sell, transfer, pledge or assign such Share and with such other restrictions as the Committee, in its sole discretion, may impose (including any restriction on the right to vote such Share and the right to receive any dividends), which restrictions may lapse separately or in combination at such time or times, in installments or otherwise, as the Committee may deem appropriate.

2.33.Restricted Stock Award” shall have the meaning set forth in Section 7.1.

2.34.Restricted Stock Unit Award” shall have the meaning set forth in Section 8.1.

2.35.“Restricted Stock Unit” means an Award that is valued by reference to a Share, which value may be paid to the Participant by delivery of cash, Shares or such other property as the Committee shall determine, which restrictions may lapse separately or in combination at such time or times, in installments or otherwise, as the Committee may deem appropriate.

2.36.Shares” shall mean the shares of common stock, $0.0001 par value, of the Company.

2.37.Stock Appreciation Right” shall mean the right granted to a Participant pursuant to Section 6.

2.38.Substitute Awards” shall mean Awards granted or Shares issued by the Company in assumption of, or in substitution or exchange for, awards previously granted, or the right or obligation to make future awards, in each case by a company acquired by the Company or any Affiliate or with which the Company or any Affiliate combines.

2.39.Vesting Period” shall mean the period of time specified by the Committee during which vesting restrictions for an Award are applicable.

3.

SHARES SUBJECT TO THE PLAN

 

3.1.Number of Shares.

(a)Subject to adjustment as provided in Section 3.1(b) and Section 12.2, as of the Effective Date, a total of 1,887,250 Shares may be issued pursuant to Awards granted under the Plan, less one (1) Share for every one (1) Share that was subject to an award granted under Section 3.1 of the 2017 LTIP after March 31, 2020, and prior to the Effective Date.

After the Effective Date, no awards may be granted under the Prior Plans.  Any Shares that are subject to Awards granted under the Plan after the Effective Date shall be counted against the limit in this Section 3.1(a) as one (1) Share for every one (1) Share granted, subject to the provisions of Section 3.1(b) below.

(b)If any Shares subject to an Award are forfeited, an Award expires or otherwise terminates without issuance of Shares, or an Award is settled for cash (in whole or in part) or otherwise does not result in the issuance of all or a portion of the Shares subject to such Award (including on payment in Shares on exercise of a Stock Appreciation Right), the Shares subject to such Award shall, to the extent of such forfeiture, expiration or cash settlement, again be available for Awards under the Plan, on a one-for-one basis. In the event that Shares tendered by the Participant or withheld by the Company in payment of the purchase price of an Option,

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or to satisfy any tax withholding obligation with respect to any Award, then in each such case the Shares so tendered or withheld shall be added to the Shares available for grant under the Plan on a one-for-one basis.  In addition, any Shares that become Prior Plans Returning Shares shall also become available for Awards under the Plan, on a one-for-one-basis.

(c)Shares issued under Substitute Awards that qualify for an exemption from the applicable stockholder-approval requirements under Nasdaq Listing Rule 5635(c) or its successor shall not reduce the Shares authorized for grant under the Plan, nor shall Shares subject to a Substitute Award again be available for Awards under the Plan to the extent of any forfeiture, expiration or cash settlement as provided in paragraph (b) above.

3.2.Character of Shares.  Any Shares issued hereunder may consist, in whole or in part, of authorized and unissued shares, treasury shares or shares purchased in the open market or otherwise. The Company will keep available at all times the number of Shares reasonably required to satisfy then-outstanding Awards.

3.3.Inducement Share Pool and Inducement Award Rules.  Subject to adjustment as provided under Section 12.2., an additional 680,795 Shares are reserved under the Plan exclusively for the grant of Inducement Awards in compliance with the Inducement Award Rules (the “Inducement Shares”).  The Inducement Shares that may be awarded under this Section 3.3 shall be in addition to and shall not reduce the Shares available for issuance under Section 3.1(a) of the Plan.

The following rules and restrictions shall apply to any Inducement Award granted pursuant to the Plan:

(a) An Inducement Award may be granted only to an Employee who has not previously been an Employee or a Director of the Company or an Affiliate, except following a bona fide period of non-employment, as an inducement material to the individual’s entering into employment with the Company within the meaning of the Inducement Award Rules.  

(b) No Inducement Award may be designated as an Incentive Stock Option.

(c) All Inducement Awards must be granted by a Committee consisting of the majority of the Company’s independent directors or the Company’s Compensation Committee, in each case in accordance with the requirements of the Inducement Award Rules.  

(d) The Inducement Shares underlying any Inducement Awards shall be subject to the same share counting and share reversion provisions as described in Section 3.1, except that such Inducement Shares shall count against, or shall be added back to, the reserve of Inducement Shares available for grant under this Section 3.3, and shall not count against, or be added back to, the Shares available for issuance under Section 3.1(a) of the Plan.

(e)Inducement Awards shall not be amended without stockholder approval to the extent required by the Inducement Award Rules.

3.4.Non-Employee Director Aggregate Compensation Limit. The aggregate value of all compensation granted or paid, as applicable, to any individual for service as a Director with respect to any period commencing on the date of the Company’s annual meeting of stockholders for a particular year and ending on the day immediately prior to the date of the Company’s annual meeting of stockholders for the next subsequent year, including Awards granted and cash fees paid or payable by the Company to such Director, will not exceed (i) $750,000 in total value or (ii) in the event such Director is first appointed or elected to the Board during such period, or with respect to a lead director or chairman role $1,000,000 in total value, in each case calculating the value of any Awards based on the grant date fair value of such Awards for financial reporting purposes. For the avoidance of doubt, any compensation shall be counted towards this limit for the service year in which it is earned (and not when settled or paid in the event it is deferred).

4.

ELIGIBILITY AND ADMINISTRATION

4.1.Eligibility.  Any Employee, Director or Consultant shall be eligible to be selected as a Participant.

4.2.Administration.

(a)The Plan shall be administered by the Committee. The Committee shall have full power and authority, subject to the provisions of the Plan and subject to such orders or resolutions not inconsistent with the provisions of the Plan as may from time to time be adopted by the Board, to: (i) select the Employees, Directors and Consultants to whom Awards may from time to time be granted hereunder; (ii) determine the type or types of Awards, not inconsistent with the provisions of the Plan, to be granted to each Participant hereunder; (iii) determine the number of Shares (or dollar value) to be covered by each Award granted hereunder; (iv) determine the terms and conditions, not inconsistent with the provisions of the Plan, of any Award granted hereunder (including the power to amend outstanding Awards waive or accelerate any vesting terms or restrictions, subject to any stockholder approval requirement applicable under the Inducement Award Rules for amendment of an Inducement Award); (v) determine whether, to what

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extent and under what circumstances Awards may be settled in cash, Shares or other property; (vi) determine whether, to what extent, and under what circumstances cash, Shares, other property and other amounts payable with respect to an Award made under the Plan shall be deferred either automatically or at the election of the Participant; (vii) determine whether, to what extent and under what circumstances any Award shall be canceled or suspended; (viii) interpret and administer the Plan and any instrument or agreement entered into under or in connection with the Plan, including any Award Agreement; (ix) correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award in the manner and to the extent that the Committee shall deem desirable to carry it into effect; (x) establish such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; (xi) determine whether any Award, other than an Option or Stock Appreciation Right, will have Dividend Equivalents; and (xii) make any other determination and take any other action that the Committee deems necessary or desirable for administration of the Plan.

(b)Decisions of the Committee shall be final, conclusive and binding on all persons or entities, including the Company, any Participant, and any Affiliate. A majority of the members of the Committee may determine its actions, including fixing the time and place of its meetings.

(c)To the extent not inconsistent with applicable law, including the Delaware General Corporation Law, or the rules and regulations of the Nasdaq Stock Market (or such other principal U.S. national securities exchange on which the Shares are traded) including Inducement Award Rules, the Committee may delegate to: (i) a committee of one or more members of the Board the authority to take action on behalf of the Committee under the Plan including the right to grant, cancel, suspend or amend Awards and (ii) one or more “executive officers” within the meaning of Rule 16a-1(f) of the Exchange Act or a committee of executive officers the right to grant Awards to Employees who are not executive officers of the Company (provided that the Committee resolutions regarding such delegation will specify the total number of Shares that may be subject to the Awards granted by such person or persons) and the authority to take action on behalf of the Committee pursuant to the Plan to cancel or suspend Awards to Employees who are not directors or executive officers of the Company.

(d)The Board in its discretion may ratify and approve actions taken by the Committee. In addition, to the extent not inconsistent with applicable law or the rules and regulations of the Nasdaq Stock Market or such other principal U.S. national securities exchange on which the Shares are traded, the Board may take any action under the Plan that the Committee is authorized to take. In the event the Board takes such action references to the Committee hereunder shall be understood to refer to the Board.

5.

OPTIONS

5.1.Grant of Options.  Options may be granted hereunder to Participants either alone or in addition to other Awards granted under the Plan. Any Option shall be subject to the terms and conditions of this Article and to such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall deem desirable.

5.2.Award Agreements.  All Options granted pursuant to this Article shall be evidenced by a written Award Agreement in such form and containing such terms and conditions as the Committee shall determine which are not inconsistent with the provisions of the Plan. The terms of Options need not be the same with respect to each Participant. Granting an Option pursuant to the Plan shall impose no obligation on the recipient to exercise such Option. Any individual who is granted an Option pursuant to this Article may hold more than one Option granted pursuant to the Plan at the same time.

5.3.Option Price.  Other than in connection with Substitute Awards, the option price per each Share purchasable under any Option granted pursuant to this Article shall not be less than 100% of the Fair Market Value of one Share on the date of grant of such Option; provided, however, that in the case of an Incentive Stock Option granted to a Participant who, at the time of the grant, owns stock representing more than 10% of the voting power of all classes of stock of the Company or any Affiliate, the option price per share shall be no less than 110% of the Fair Market Value of one Share on the date of grant. Other than pursuant to Section 12.2, the Committee shall not without the approval of the Company’s stockholders (a) lower the option price per Share of an Option after it is granted, (b) cancel an Option when the option price per Share exceeds the Fair Market Value of one Share in exchange for cash or another Award (other than in connection with a Change in Control as defined in Section 11.3 or Substitute Awards), and (c) take any other action with respect to an Option that would be treated as a repricing under the rules and regulations of the Nasdaq Stock Market (or such other principal U.S. national securities exchange on which the Shares are traded).

5.4.Option Term.  The term of each Option shall be fixed by the Committee in its sole discretion; provided that no Option shall be exercisable after the expiration of seven (7) years from the date the Option is granted, except in the event of death or disability; provided, however, that the term of the Option shall not exceed five (5) years from the date the Option is granted in the case of an Incentive Stock Option granted to a Participant who, at the time of the grant, owns stock representing more than 10% of the voting power of all classes of stock of the Company or any Affiliate.

5.5.Exercise of Options.

(a)Vested Options granted under the Plan may be exercised by the Participant or by a Permitted Assignee thereof (or by the Participant’s executors, administrators, guardian or legal representative, as may be provided in an Award Agreement) as to all or part of the Shares covered thereby, by the giving of notice of exercise to the Company or its designated agent, specifying the number

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of Shares to be purchased. The notice of exercise shall be in such form, made in such manner, and shall comply with such other requirements consistent with the provisions of the Plan as the Committee may from time to time prescribe.

(b)Unless otherwise provided in an Award Agreement, full payment of such purchase price shall be made at the time of exercise and shall be made (i) in cash or cash equivalents (including certified check or bank check or wire transfer of immediately available funds), (ii) by tendering previously acquired Shares (either actually or by attestation), valued at their then Fair Market Value, (iii) with the consent of the Committee, by delivery of other consideration (including, where permitted by law and the Committee, other Awards) having a Fair Market Value on the exercise date equal to the total purchase price, (iv) with the consent of the Committee, by withholding Shares otherwise issuable in connection with the exercise of the Option, (v) through any other method specified in an Award Agreement (including same-day sales through a broker), or (vi) any combination of any of the foregoing. In no event may any Option granted hereunder be exercised for a fraction of a Share. No adjustment shall be made for cash dividends or other rights for which the record date is prior to the date of such issuance.

(c)Notwithstanding the foregoing, an Award Agreement may provide that if on the last day of the term of an Option the Fair Market Value of one Share exceeds the option price per Share, the Participant has not exercised the Option and the Option has not expired, the Option shall be deemed to have been exercised by the Participant on such day with payment made by withholding Shares otherwise issuable in connection with the exercise of the Option. In such event, the Company shall deliver to the Participant the number of Shares for which the Option was deemed exercised, less the number of Shares required to be withheld for the payment of the total purchase price and required withholding taxes (in accordance with Section 13.1); provided, however, any fractional Share shall be settled in cash.

(d)No Option granted to an Employee who is a non-exempt employee for purposes of the Fair Labor Standards Act of 1938, as amended, shall be first exercisable for any Shares until at least six months following the date of grant of the Option. Notwithstanding the foregoing, consistent with the provisions of the Worker Economic Opportunity Act, (i) in the event of the Employee’s death or disability, (ii) upon a corporate transaction in which such Option is not assumed, continued, or substituted, (iii) upon a Change in Control, or (iv) upon the Employee’s retirement (as such term may be defined in the Employee’s Award Agreement or in another applicable agreement or in accordance with the Company’s then current employment policies and guidelines), any such vested Options may be exercised earlier than six months following the date of grant. The foregoing provision is intended to operate so that any income derived by a non-exempt employee in connection with the exercise or vesting of an Option will be exempt from his or her regular rate of pay.

5.6.Form of Settlement.  In its sole discretion, the Committee may provide in the form of Award Agreement that the Shares to be issued upon an Option’s exercise shall be in the form of Restricted Stock or other similar securities.

5.7.Incentive Stock Options.  The Committee may grant Options intended to qualify as “incentive stock options” as defined in Section 422 of the Code, to any employee of the Company or any Affiliate, subject to the requirements of Section 422 of the Code; provided, however, that “incentive stock options” may not be granted as Inducement Awards. Notwithstanding anything in Section 3.1 to the contrary and solely for the purposes of determining whether Shares are available for the grant of “incentive stock options” under the Plan, the maximum aggregate number of Shares that may be issued pursuant to “incentive stock options” granted under the Plan is 1,887,250 Shares less the number of Shares issued pursuant to “incentive stock options” granted under the Prior Plans after March 31, 2020, and prior to the Effective Date, subject to adjustment as provided in Section 12.2.

5.8.Extension of Termination Date.  Unless otherwise provided in a Participant’s Award Agreement and in the sole determination of the Committee, if the sale of any Common Stock received on exercise of an Option following the termination of the Participant’s employment by or services to the Company (other than for Cause) would be prohibited at any time solely because the issuance of Shares would violate (i) the registration requirements under the Securities Act, (ii) the Company’s insider trading policy, or (iii) a “lock-up” agreement undertaken in connection with an issuance of securities by the Company, then the Option will terminate on the earlier of (a) the expiration of a total period of 90 days (that need not be consecutive) after the termination of the Participant’s employment by or services to the Company during which the exercise of the Option would not be in violation of any of such registration requirement, insider trading policy or lock-up agreement, and (b) the expiration of the term of the Option as set forth in the applicable Award Agreement.

6.

STOCK APPRECIATION RIGHTS

6.1.Grant and Exercise.  The Committee may provide Stock Appreciation Rights (a) in conjunction with all or part of any Option granted under the Plan or at any subsequent time during the term of such Option, (b) in conjunction with all or part of any Award (other than an Option) granted under the Plan or at any subsequent time during the term of such Award, or (c) without regard to any Option or other Award, in each case upon such terms and conditions as the Committee may establish in its sole discretion.

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6.2.Terms and Conditions.  Stock Appreciation Rights shall be subject to such terms and conditions, not inconsistent with the provisions of the Plan, as shall be determined from time to time by the Committee, including the following:

(a)Upon the exercise of a Stock Appreciation Right, the holder shall have the right to receive the excess of (i) the Fair Market Value of one Share on the date of exercise (or such amount less than such Fair Market Value as the Committee shall so determine at any time during a specified period before the date of exercise) over (ii) the grant price of the Stock Appreciation Right.  

(b)Upon the exercise of a Stock Appreciation Right, the Committee shall determine in its sole discretion whether payment shall be made in cash, in whole Shares or other property, or any combination thereof.

(c)The terms and conditions of Stock Appreciation Rights need not be the same with respect to each recipient.

(d)The Committee may impose such other conditions on the exercise of any Stock Appreciation Right, as it shall deem appropriate. A Stock Appreciation Right shall have (i) a grant price per Share of not less than the Fair Market Value of one Share (x) on the date of grant or (y) if applicable, on the date of grant of an Option with respect to a Stock Appreciation Right granted in exchange for or in tandem with, but subsequent to, the Option (subject to the requirements of Section 409A of the Code with respect to a Stock Appreciation Right granted in exchange for or in conjunction with, but subsequent to, an Option), except in the case of Substitute Awards or in connection with an adjustment provided in Section 12.2, and (ii) a term not greater than seven (7) years. In addition to the foregoing, but subject to Section 12.2, the Committee shall not without the approval of the Company’s stockholders (x) lower the grant price per Share of any Stock Appreciation Right after it is granted, (y) cancel any Stock Appreciation Right when the grant price per Share exceeds the Fair Market Value of the underlying Shares in exchange for cash or another Award (other than in connection with a Change in Control as defined in Section 11.3 or Substitute Awards), and (z) take any other action with respect to any Stock Appreciation Right that would be treated as a repricing under the rules and regulations of the Nasdaq Stock Market (or such other principal U.S. national securities exchange on which the Shares are traded).

(e)In no event may any Stock Appreciation Right granted hereunder be exercised for a fraction of a Share. No adjustment shall be made for cash dividends or other rights for which the record date is prior to the date of such issuance.

(f)An Award Agreement may provide that if on the last day of the term of a Stock Appreciation Right the Fair Market Value of one Share exceeds the grant price per Share of the Stock Appreciation Right, the Participant has not exercised the Stock Appreciation Right or the tandem Option (if applicable), and neither the Stock Appreciation Right nor the Option has expired, the Stock Appreciation Right shall be deemed to have been exercised by the Participant on such day. In such event, the Company shall make payment to the Participant in accordance with this Section, reduced by the number of Shares (or cash) required for withholding taxes (in accordance with Section 13.1); any fractional Share shall be settled in cash.

(g)No Stock Appreciation Right granted to an Employee who is a non-exempt employee for purposes of the Fair Labor Standards Act of 1938, as amended, shall be first exercisable for any Shares until at least six months following the date of grant of the Stock Appreciation Right. Notwithstanding the foregoing, consistent with the provisions of the Worker Economic Opportunity Act, (i) in the event of the Employee’s death or disability, (ii) upon a corporate transaction in which such Stock Appreciation Right is not assumed, continued, or substituted, (iii) upon a Change in Control, or (iv) upon the Employee’s retirement (as such term may be defined in the Employee’s Award Agreement or in another applicable agreement or in accordance with the Company’s then current employment policies and guidelines), any such vested Stock Appreciation Rights may be exercised earlier than six months following the date of grant. The foregoing provision is intended to operate so that any income derived by a non-exempt employee in connection with the exercise or vesting of a Stock Appreciation Right will be exempt from his or her regular rate of pay.

(h)Extension of Termination Date.  Unless otherwise provided in a Participant’s Award Agreement and in the sole determination of the Committee, if the sale of any Common Stock received on exercise of a Stock Appreciation Right following the termination of the Participant’s employment by or services to the Company (other than for Cause) would be prohibited at any time solely because the issuance of Shares would violate (i) the registration requirements under the Securities Act, (ii) the Company’s insider trading policy, or (iii) a “lock-up” agreement undertaken in connection with an issuance of securities by the Company, then the Stock Appreciation Right will terminate on the earlier of (a) the expiration of a total period of 90 days (that need not be consecutive) after the termination of the Participant’s employment by or services to the Company during which the exercise of the Stock Appreciation Right would not be in violation of any of such registration requirement, insider trading policy or lock-up agreement, and (b) the expiration of the term of the Stock Appreciation Right as set forth in the applicable Award Agreement.

7.

RESTRICTED STOCK AWARDS

7.1.Grants.  Awards of Restricted Stock may be issued hereunder to Participants either alone or in addition to other Awards granted under the Plan (a “Restricted Stock Award”), and such Restricted Stock Awards may also be available as a form of payment of Performance Awards and other earned cash-based incentive compensation. A Restricted Stock Award shall be subject to vesting restrictions imposed by the Committee covering a period of time specified by the Committee. The Committee has absolute discretion to determine whether any consideration (other than services) is to be received by the Company or any Affiliate as a condition precedent to the issuance of Restricted Stock.

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7.2.Award Agreements.  The terms of any Restricted Stock Award granted under the Plan shall be set forth in an Award Agreement which shall contain provisions determined by the Committee and not inconsistent with the Plan. The terms of Restricted Stock Awards need not be the same with respect to each Participant.

7.3.Rights of Holders of Restricted Stock.  Unless otherwise provided in the Award Agreement, beginning on the date of grant of the Restricted Stock Award and subject to execution of the Award Agreement, the Participant shall become a stockholder of the Company with respect to all Shares subject to the Award Agreement and shall have all of the rights of a stockholder, including the right to vote such Shares and the right to receive distributions made with respect to such Shares; provided, however, that any Shares or any other property distributable as a dividend or otherwise with respect to any Restricted Stock as to which the restrictions have not yet lapsed shall be subject to the same restrictions as such Restricted Stock and shall not be paid until and unless the underlying award vests.

8.

RESTRICTED STOCK UNIT AWARDS

8.1.Grants.  Other Awards of units having a value equal to an identical number of Shares (“Restricted Stock Unit Awards”) may be granted hereunder to Participants either alone or in addition to other Awards granted under the Plan. Restricted Stock Unit Awards shall also be available as a form of payment of other Awards granted under the Plan and other earned cash-based incentive compensation.

8.2.Award Agreements.  The terms of Restricted Stock Unit Award granted under the Plan shall be set forth in a written Award Agreement which shall contain provisions determined by the Committee and not inconsistent with the Plan. Restricted Stock Unit Awards shall be subject to vesting restrictions imposed by the Committee covering a period of time specified by the Committee. The terms of such Awards need not be the same with respect to each Participant. Notwithstanding anything contained herein to the contrary, cash dividends, stock and any other property (other than cash) distributed as a dividend or otherwise with respect to any Restricted Stock Unit Award shall either (i) not be paid at all, or (ii) be accumulated, and be subject to restrictions and risk of forfeiture to the same extent as the underlying Award and shall not be paid until and unless such restrictions and risk of forfeiture lapse.

8.3.Payment.  Except as provided in Article 10 or as may be provided in an Award Agreement, Restricted Stock Unit Awards may be paid in cash, Shares, other property, or any combination thereof, in the sole discretion of the Committee. Restricted Stock Unit Awards may be paid in a lump sum or in installments or, in accordance with procedures established by the Committee, on a deferred basis subject to the requirements of Section 409A of the Code.

9.

PERFORMANCE AWARDS

9.1.Grants.  Performance Awards in the form of Performance Cash, Performance Shares or Performance Units, as determined by the Committee in its sole discretion, may be granted hereunder to Participants, for no consideration or for such minimum consideration as may be required by applicable law, either alone or in addition to other Awards granted under the Plan. The performance goals to be achieved for each Performance Period shall be conclusively determined by the Committee and may be based upon the criteria set forth in Section 10.1.

9.2.Award Agreements.  The terms of any Performance Award granted under the Plan shall be set forth in an Award Agreement which shall contain provisions determined by the Committee and not inconsistent with the Plan, including whether such Awards shall have Dividend Equivalents. The terms of Performance Awards need not be the same with respect to each Participant. Notwithstanding anything contained herein to the contrary, cash dividends, stock and any other property (other than cash) distributed as a dividend or otherwise with respect to any Award of Performance Shares shall either (i) not be paid at all, or (ii) be accumulated, and be subject to restrictions and risk of forfeiture to the same extent as the underlying Award, and shall not be paid unless and until the restrictions and risk of forfeiture lapse.

9.3.Terms and Conditions.  The performance criteria to be achieved during any Performance Period and the length of the Performance Period shall be determined by the Committee upon the grant of each Performance Award. The amount of the Award to be distributed shall be conclusively determined by the Committee.

9.4.Payment.  Except as provided in Article 11 or as may be provided in an Award Agreement, Performance Awards will be distributed only after the end of the relevant Performance Period. Performance Awards may be paid in cash, Shares, other property, or any combination thereof, in the sole discretion of the Committee. Performance Awards may be paid in a lump sum or in installments following the close of the Performance Period or, in accordance with procedures established by the Committee, on a deferred basis subject to the requirements of Section 409A of the Code.

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10.

PROVISIONS APPLICABLE TO PERFORMANCE-VESTING AWARDS

10.1.Performance Criteria.  If the Committee determines that an Award shall be subject to the achievement of one or more objective performance goals established by the Committee, then such Award may be based on the attainment of specified levels of one or any combination of the following (or any other metric or goal as the Committee may determine): net sales; revenue; revenue or product revenue growth; bookings; operating income or loss (before or after taxes); pre- or after-tax income or loss (before or after allocation of corporate overhead and bonus); net earnings or loss; earnings or loss per share; net income or loss (before or after taxes); return on equity; total stockholder return; return on assets or net assets; attainment of strategic and operational initiatives; appreciation in and/or maintenance of the price of the Shares or any other publicly-traded securities of the Company; market share; gross profits; earnings or losses (including earnings or losses before taxes, earnings or losses before interest and taxes, earnings or losses before interest, taxes and depreciation or earnings or losses before interest, taxes, depreciation and amortization); economic value-added models (or equivalent metrics); comparisons with various stock market indices; reductions in costs; cash flow or cash flow per share (before or after dividends); return on capital (including return on total capital or return on invested capital); cash flow return on investment; improvement in or attainment of expense levels or working capital levels; operating margin; gross margin; year-end cash; cash margin; debt reduction; stockholder’s equity; market share; achievement of drug development milestones; regulatory achievements including approval of a drug candidate; progress of internal research or clinical programs; progress of partnered programs; implementation or completion of projects and processes; partner satisfaction; budget management; clinical achievements; completing phases of a clinical study (including the treatment phase) or announcing or presenting preliminary or final data from clinical studies, in each case, whether on particular timelines or generally; timely completion of clinical trials; submission of INDs and NDAs and other regulatory achievements; partner or collaborator achievements; internal controls, including those related to the Sarbanes-Oxley Act of 2002; research progress, including the development of programs; financing; investor relations, analysts and communication; manufacturing achievements (including obtaining particular yields from manufacturing runs and other measurable objectives related to process development activities); strategic partnerships or transactions (including in-licensing and out-licensing of intellectual property); establishing relationships with commercial entities with respect to the marketing, distribution and sale of the Company’s products (including with group purchasing organizations, distributors and other vendors); supply chain achievements (including establishing relationships with manufacturers or suppliers of active pharmaceutical ingredients and other component materials and manufacturers of the Company’s products); co-development, co-marketing, profit sharing, joint venture or other similar arrangements; financing and other capital raising transactions (including sales of the Company’s equity or debt securities); sales or licenses of the Company’s assets, including its intellectual property (whether in a particular jurisdiction or territory or globally or through partnering transactions); implementation, completion or attainment of measurable objectives with respect to research, development, manufacturing, commercialization, products or projects, production volume levels, acquisitions and divestitures; factoring transactions; and recruiting and maintaining personnel. Any performance goals that are financial metrics, may be determined in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), in accordance with accounting principles established by the International Accounting Standards Board (“IASB Principles”), or may be adjusted when established to include or exclude any items otherwise includable or excludable under GAAP or under IASB Principles. Such performance goals also may be based solely by reference to the Company’s performance or the performance of an Affiliate, division, business segment or business unit of the Company, or based upon the relative performance of other companies or upon comparisons of any of the indicators of performance relative to other companies. The Committee may also exclude charges related to an event or occurrence which the Committee determines should appropriately be excluded, including (a) restructurings or discontinued operations, (b) items that are “unusual” in nature or occur “infrequently” as determined under generally accepted accounting principles, (c) an event either not directly related to the operations of the Company or not within the reasonable control of the Company’s management, or (d) the cumulative effects of tax or accounting changes in accordance with U.S. generally accepted accounting principles. Notwithstanding the foregoing, the Committee, in its sole discretion, may grant performance-based Awards that are not intended to, and do not, meet the requirements set forth in this Section 10.1.

10.2.Adjustments.  Notwithstanding any provision of the Plan (other than Article 11), with respect to any Award that is subject to this Section 10, the Committee may adjust the amount payable pursuant to such Award.

10.3.Restrictions.  The Committee shall have the power to impose such other restrictions on Awards subject to this Article as it may deem necessary or appropriate.

11.

CHANGE IN CONTROL PROVISIONS

11.1.Impact on Certain Awards.  The Committee, in its discretion, may determine that in the event of a Change in Control of the Company (as defined in Section 11.3) Options and Stock Appreciation Rights outstanding as of the date of the Change in Control shall be cancelled and terminated without payment therefor if the Fair Market Value of one Share as of the date of the Change in Control is less than the Option per Share option price or Stock Appreciation Right per Share grant price.

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11.2.Assumption or Substitution of Certain Awards.

(a)To the extent provided in an Award Agreement, in the event of a Change in Control of the Company in which the successor company assumes or substitutes for an Option, Stock Appreciation Right, Restricted Stock Award or Restricted Stock Unit Award (or in which the Company is the ultimate parent corporation and continues the Award), if a Participant’s employment with such successor company (or the Company) or a subsidiary thereof terminates within the time period following such Change in Control set forth in the Award Agreement (or prior thereto if applicable) and under the circumstances specified in the Award Agreement: (i) Options and Stock Appreciation Rights outstanding as of the date of such termination of employment will immediately vest, become fully exercisable, and may thereafter be exercised for the period of time set forth in the Award Agreement, (ii) the restrictions, limitations and other conditions applicable to Restricted Stock shall lapse and the Restricted Stock shall become free of all restrictions, limitations and conditions and become fully vested, and (iii) the restrictions, limitations and other conditions applicable to any Restricted Stock Unit Awards or any other Awards shall lapse, and such Restricted Stock Unit Awards or such other Awards shall become free of all restrictions, limitations and conditions and become fully vested and transferable to the full extent of the original grant. For the purposes of this Section, an Option, Stock Appreciation Right, Restricted Stock Award or Restricted Stock Unit Award shall be considered assumed or substituted for if following the Change in Control the Award confers the right to purchase or receive, for each Share subject to the Option, Stock Appreciation Right, Restricted Stock Award or Restricted Stock Unit Award immediately prior to the Change in Control, the consideration (whether stock, cash or other securities or property) received in the transaction constituting a Change in Control by holders of Shares for each Share held on the effective date of such transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding shares); provided, however, that if such consideration received in the transaction constituting a Change in Control is not solely common stock of the successor company, the Committee may, with the consent of the successor company, provide that the consideration to be received upon the exercise or vesting of an Option, Stock Appreciation Right, Restricted Stock Award or Restricted Stock Unit Award, for each Share subject thereto, will be solely common stock of the successor company substantially equal in fair market value to the per Share consideration received by holders of Shares in the transaction constituting a Change in Control. The determination of such substantial equality of value of consideration shall be made by the Committee in its sole discretion and its determination shall be conclusive and binding.

(b)Unless otherwise provided in an Award Agreement, in the event of a Change in Control of the Company, to the extent that the successor company does not assume or substitute for an Option, Stock Appreciation Right, Restricted Stock Award, Restricted Stock Unit Award or Performance Award (or in which the Company is the ultimate parent corporation and does not continue the Award), then immediately prior to the Change in Control: (i) those Options and Stock Appreciation Rights outstanding as of the date of the Change in Control that are not assumed or substituted for (or continued) shall immediately vest and become fully exercisable, (ii) restrictions, limitations and conditions on Restricted Stock not assumed or substituted for (or continued) shall lapse and the Restricted Stock shall become free of all restrictions, limitations and conditions and become fully vested, (iii) the restrictions limitations and conditions applicable to any Restricted Stock Unit Awards or any other Awards not assumed or substituted for (or continued) shall lapse, and such Restricted Stock Unit Awards or such other Awards shall become free of all restrictions, limitations and conditions and become fully vested and transferable to the full extent of the original grant, (iv) all Performance Awards not assumed or substituted for (or continued) shall be considered to be earned and payable in full, and any deferral or other restriction shall lapse and such Performance Awards shall be immediately settled or distributed, and (v) all Awards not assumed or substituted for (or continued) shall terminate immediately after the Change in Control.

(c)The Committee, in its discretion, may determine that, upon the occurrence of a Change in Control of the Company, each Option and Stock Appreciation Right outstanding shall terminate within a specified number of days after notice to the Participant, and/or that each Participant shall receive, with respect to each Share subject to such Option or Stock Appreciation Right, an amount equal to the excess (if any) of the Fair Market Value of such Share immediately prior to the occurrence of such Change in Control over the exercise price per Share of such Option and/or Stock Appreciation Right; such amount to be payable in cash, in one or more kinds of stock or property (including the stock or property, if any, payable in the transaction) or in a combination thereof, as the Committee, in its discretion, shall determine.

11.3.Change in Control.  For purposes of the Plan, unless otherwise provided in an Award Agreement, Change in Control means the occurrence of any one of the following events:

(i)During any twenty-four (24) month period, individuals who, as of the beginning of such period, constitute the Board (the “Incumbent Directors”) cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the beginning of such period whose election or nomination for election was approved by a vote of at least a majority of the Incumbent Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director; provided, however, that no individual initially elected or nominated as a director of the Company as a result of an actual or threatened election contest with respect to directors or as a result of any other actual or threatened solicitation of proxies by or on behalf of any person other than the Board shall be deemed to be an Incumbent Director;

(ii)Any “person” (as such term is defined in the Exchange Act and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes a “beneficial owner” (as defined in Rule 13d‑3 under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company’s then outstanding securities eligible to vote for the election of the Board (the “Company Voting Securities”); provided, however, that the event described in this paragraph (ii) shall not be deemed to be a Change in Control by virtue of any of the following acquisitions: (A) by the Company or

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any Affiliate, (B) by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Affiliate, (C) by any underwriter temporarily holding securities pursuant to an offering of such securities, (D) pursuant to a Non-Qualifying Transaction, as defined in paragraph (iii), or (E) by any person of Voting Securities from the Company, if a majority of the Incumbent Board approves in advance the acquisition of beneficial ownership of 50% or more of Company Voting Securities by such person;

(iii)The consummation of a merger, consolidation, statutory share exchange or similar form of corporate transaction involving the Company or any of its Affiliates that requires the approval of the Company’s stockholders, whether for such transaction or the issuance of securities in the transaction (a “Business Combination”), unless immediately following such Business Combination: (A) more than 60% of the total voting power of (x) the corporation resulting from such Business Combination (the “Surviving Corporation”), or (y) if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the “Parent Corporation”), is represented by Company Voting Securities that were outstanding immediately prior to such Business Combination (or, if applicable, is represented by shares into which such Company Voting Securities were converted pursuant to such Business Combination), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such Company Voting Securities among the holders thereof immediately prior to the Business Combination, (B) no person (other than any employee benefit plan (or related trust) sponsored or maintained by the Surviving Corporation or the Parent Corporation), is or becomes the beneficial owner, directly or indirectly, of 50% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) and (C) at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) following the consummation of the Business Combination were Incumbent Directors at the time of the Board’s approval of the execution of the initial agreement providing for such Business Combination (any Business Combination which satisfies all of the criteria specified in (A), (B) and (C) above shall be deemed to be a “Non-Qualifying Transaction”); or

(iv)The stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or the consummation of a sale, lease, exclusive license or other disposition of all or substantially all of the Company’s assets.

Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any person acquires beneficial ownership of more than 50% of the Company Voting Securities as a result of the acquisition of Company Voting Securities by the Company which reduces the number of Company Voting Securities outstanding; provided, that if after such acquisition by the Company such person becomes the beneficial owner of additional Company Voting Securities that increases the percentage of outstanding Company Voting Securities beneficially owned by such person, a Change in Control of the Company shall then occur.

12.

GENERALLY APPLICABLE PROVISIONS

12.1.Amendment and Termination of the Plan.  Each of the Board and the Committee may, from time to time, alter, amend, suspend or terminate the Plan as it shall deem advisable, subject to any requirement for stockholder approval imposed by applicable law, including the rules and regulations of the Nasdaq Stock Market (or such other principal U.S. national securities exchange on which the Shares are traded) and the Inducement Award Rules; provided that neither the Board or the Committee may amend the Plan in any manner that would result in noncompliance with Rule 16b-3 of the Exchange Act; and further provided that the Board and the Committee may not, without the approval of the Company’s stockholders to the extent required by such applicable law, amend the Plan to (a) increase the number of Shares that may be the subject of Awards granted pursuant to the share reserve established in Section 3.1 of the Plan (except for adjustments pursuant to Section 12.2); (b) expand the types of awards available under the Plan; (c) materially expand the class of persons eligible to participate in the Plan; (d) amend any provision of Section 5.3 or the last sentence of Section 6.2(d); or (e) increase the maximum permissible term of the Plan or of any Option specified by Section 5.4 or the maximum permissible term of a Stock Appreciation Right specified by Section 6.2(d). Neither the Board nor the Committee may, without the approval of the Company’s stockholders, cancel an Option or Stock Appreciation Right in exchange for cash or take any action with respect to an Option or Stock Appreciation Right that may be treated as a repricing under the rules and regulations of the Nasdaq Stock Market (or such other principal U.S. national securities exchange on which the Shares are traded), including a reduction of the exercise price of an Option or the grant price of a Stock Appreciation Right or the exchange of an Option or Stock Appreciation Right for cash or another Award when the option price or grant price per Share exceeds the Fair Market Value of one Share. In addition, no amendments to, or termination of, the Plan shall in any way impair the rights of a Participant under any Award previously granted without such Participant’s consent.

12.2.Adjustments.  In the event of any merger, reorganization, consolidation, recapitalization, dividend or distribution (whether in cash, shares or other property, other than a regular cash dividend), stock split, reverse stock split, spin-off or similar transaction or other change in corporate structure affecting the Shares or the value thereof, such adjustments and other substitutions shall be made to the Plan and to Awards as the Committee deems equitable or appropriate taking into consideration the accounting and tax consequences, including such adjustments in the aggregate number, class and kind of securities that may be delivered under the Plan and pursuant to Section 3.3, the maximum number of Shares that may be issued pursuant to Incentive Stock Options and, in the aggregate or to any one Participant, in the number, class, kind and option or exercise price of securities subject to outstanding Awards granted under the Plan (including, if the Committee deems appropriate, the substitution of similar options to purchase the shares of, or

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other awards denominated in the shares of, another company) as the Committee may determine to be appropriate in its sole discretion; provided, however, that the number of Shares subject to any Award shall always be a whole number.

12.3.Transferability of Awards.  Except as provided below, no Award and no Shares subject to Awards described in Article 8 that have not been issued or as to which any applicable restriction, performance or deferral period has not lapsed, may be sold, assigned, transferred, pledged or otherwise encumbered, other than by will or the laws of descent and distribution, and such Award may be exercised during the life of the Participant only by the Participant or the Participant’s guardian or legal representative. To the extent and under such terms and conditions as determined by the Committee, a Participant may assign or transfer an Award (each transferee thereof, a “Permitted Assignee”) to a “family member” as such term is defined in the General Instructions to Form S-8 (whether by gift or a domestic relations order for no consideration); provided that such Permitted Assignee shall be bound by and subject to all of the terms and conditions of the Plan and the Award Agreement relating to the transferred Award and shall execute an agreement satisfactory to the Company evidencing such obligations; and provided further that such Participant shall remain bound by the terms and conditions of the Plan. The Company shall cooperate with any Permitted Assignee and the Company’s transfer agent in effectuating any transfer permitted under this Section. Options and Stock Appreciation Rights may not be transferred to a third party financial institution for value.

12.4.Termination of Employment.  The Committee shall determine and set forth in each Award Agreement whether any Awards granted in such Award Agreement will continue to be exercisable, continue to vest or be earned and the terms of such exercise, vesting or earning, on and after the date that a Participant ceases to be employed by or to provide services to the Company or any Affiliate (including as a Director), whether by reason of death, disability, voluntary or involuntary termination of employment or services, or otherwise. The date of termination of a Participant’s employment or services will be determined by the Committee, which determination will be final.

12.5.Deferral; Dividend Equivalents.  The Committee shall be authorized to establish procedures pursuant to which the payment of any Award may be deferred. Subject to the provisions of the Plan and any Award Agreement, the recipient of an Award (including any deferred Award) other than an Option or Stock Appreciation Right may, if so determined by the Committee, be entitled to receive cash, stock or other property dividends, or cash payments in amounts equivalent to cash, stock or other property dividends on Shares (“Dividend Equivalents”) with respect to the number of Shares covered by the Award, as determined by the Committee, in its sole discretion. The Committee may provide that such amounts and Dividend Equivalents (if any) shall be deemed to have been reinvested in additional Shares or otherwise reinvested. Notwithstanding the foregoing, Dividend Equivalents shall in all events be subject to restrictions and risk of forfeiture to the same extent as the Award with respect to which such Dividend Equivalents have been credited and shall not be paid until and unless the underlying Award vests.

13.

MISCELLANEOUS

13.1.Tax Withholding.  The Company shall have the right to make all payments or distributions pursuant to the Plan to a Participant (or a Permitted Assignee thereof) (any such person, a “Payee”) net of any applicable federal, state and local taxes required to be paid or withheld as a result of (a) the grant of any Award, (b) the exercise of an Option or Stock Appreciation Right, (c) the delivery of Shares or cash, (d) the lapse of any restrictions in connection with any Award or (e) any other event occurring pursuant to the Plan. The Company or any Affiliate shall have the right to withhold from wages or other amounts otherwise payable to such Payee such withholding taxes as may be required by law, or to otherwise require the Payee to pay such withholding taxes. If the Payee shall fail to make such tax payments as are required, the Company or its Affiliates shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to such Payee or to take such other action as may be necessary to satisfy such withholding obligations. The Committee shall be authorized to establish procedures for election by Participants to satisfy such obligation for the payment of such taxes by tendering previously acquired Shares (either actually or by attestation, valued at their then Fair Market Value), or by directing the Company to retain Shares (up to the Participant’s maximum statutory tax withholding rate or such other rate that will not cause an adverse accounting consequence or cost) otherwise deliverable in connection with the Award, subject to the discretion of the Committee and in accordance with Company policies.

13.2.Right of Discharge Reserved; Claims to Awards.  Nothing in the Plan nor the grant of an Award hereunder shall confer upon any Employee, Director or Consultant the right to continue in the employment or service of the Company or any Affiliate or affect any right that the Company or any Affiliate may have to terminate the employment or service of (or to demote or to exclude from future Awards under the Plan) any such Employee, Director or Consultant at any time for any reason. Except as specifically provided by the Committee, the Company shall not be liable for the loss of existing or potential profit from an Award granted in the event of termination of an employment or other relationship. No Employee, Director or Consultant shall have any claim to be granted any Award under the Plan, and there is no obligation for uniformity of treatment of Employees, Directors or Consultants under the Plan. In addition, in the event a Participant’s regular level of time commitment in the performance of his or her services for the Company and any Affiliates is reduced (for example, and without limitation, if the Participant is an Employee of the Company and the Employee has a change in status from a full-time Employee to a part-time Employee) after the date of grant of any Award to the

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Participant, the Compensation Committee has the right in its sole discretion to (x) make a corresponding reduction in the number of shares or cash amount subject to any portion of such Award that is scheduled to vest or become payable after the date of such change in time commitment, and (y) in lieu of or in combination with such a reduction, extend the vesting or payment schedule applicable to such Award. In the event of any such reduction, the Participant will have no right with respect to any portion of the Award that is so reduced.

13.3.Prospective Recipient.  The prospective recipient of any Award under the Plan shall not, with respect to such Award, be deemed to have become a Participant, or to have any rights with respect to such Award, until and unless such recipient shall have accepted the Award in accordance with the procedures established by the Company, and otherwise complied with the then applicable terms and conditions.

13.4.Substitute Awards.  Notwithstanding any other provision of the Plan, the terms of Substitute Awards may vary from the terms set forth in the Plan to the extent the Committee deems appropriate to conform, in whole or in part, to the provisions of the awards in substitution for which they are granted.

13.5.Cancellation of Award.

(a)Notwithstanding anything to the contrary contained herein, an Award Agreement may provide that the Award shall be canceled if the Participant, without the consent of the Company, while employed by, or providing services to, the Company or any Affiliate or after termination of such employment or services, establishes a relationship with a competitor of the Company or any Affiliate or engages in activity that is in conflict with or adverse to the interest of the Company or any Affiliate (including conduct contributing to any financial restatements or financial irregularities), as determined by the Committee in its sole discretion. The Committee may provide in an Award Agreement that if within the time period specified in the Agreement the Participant establishes a relationship with a competitor or engages in an activity referred to in the preceding sentence, the Participant will forfeit any gain realized on the vesting or exercise of the Award and must repay such gain to the Company. In addition, all Awards granted under the Plan will be subject to recoupment in accordance with any clawback policy that the Company adopts, including any clawback policy the Company is required to adopt pursuant to the listing standards of any national securities exchange or association on which the Company’s securities are listed or as is otherwise required by the Dodd-Frank Wall Street Reform and Consumer Protection Act or other applicable law. In addition, the Board may impose such other clawback, recovery or recoupment provisions in an Award Agreement as the Board determines necessary or appropriate.

(b)In the event the Participant ceases to be employed by, or provide services to, the Company on account of a termination for Cause by the Company, any Award held by the Participant shall terminate as of the date the Participant ceases to be employed by, or provide services to, the Company. In addition, notwithstanding any other provisions of this Section, if the Committee determines that the Participant has engaged in conduct that constitutes Cause at any time while the Participant is employed by, or providing services to, the Company or after the Participant’s termination of employment or services, any Awards held by the Participant shall immediately terminate. In the event a Participant’s employment or services is terminated for Cause, in addition to the immediate termination of all Awards, the Participant shall automatically forfeit all shares underlying any exercised portion of an Option for which the Company has not yet delivered the share certificates, upon refund by the Company of the option price paid by the Participant for such shares.

13.6.Stop Transfer Orders.  All certificates for Shares delivered under the Plan pursuant to any Award shall be subject to such stop-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Shares are then listed, and any applicable federal or state securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions.

13.7.Nature of Payments.  All Awards made pursuant to the Plan are in consideration of services performed or to be performed for the Company or any Affiliate, division or business unit of the Company. Any income or gain realized pursuant to Awards under the Plan constitutes a special incentive payment to the Participant and shall not be taken into account, to the extent permissible under applicable law, as compensation for purposes of any of the employee benefit plans of the Company or any Affiliate except as may be determined by the Committee or by the Board or board of directors of the applicable Affiliate.

13.8.Other Plans.  Nothing contained in the Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases.

13.9.Severability.  The provisions of the Plan shall be deemed severable. If any provision of the Plan shall be held unlawful or otherwise invalid or unenforceable in whole or in part by a court of competent jurisdiction or by reason of a change in a law or regulation, such provision shall (a) be deemed limited to the extent that such court of competent jurisdiction deems it lawful, valid and/or enforceable and as so limited shall remain in full force and effect, and (b) not affect any other provision of the Plan or part thereof, each of which shall remain in full force and effect. If the making of any payment or the provision of any other benefit required

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under the Plan shall be held unlawful or otherwise invalid or unenforceable by a court of competent jurisdiction, such unlawfulness, invalidity or unenforceability shall not prevent any other payment or benefit from being made or provided under the Plan, and if the making of any payment in full or the provision of any other benefit required under the Plan in full would be unlawful or otherwise invalid or unenforceable, then such unlawfulness, invalidity or unenforceability shall not prevent such payment or benefit from being made or provided in part, to the extent that it would not be unlawful, invalid or unenforceable, and the maximum payment or benefit that would not be unlawful, invalid or unenforceable shall be made or provided under the Plan.

13.10.Construction.  As used in the Plan, the words “include” and “including,” and variations thereof, shall not be deemed to be terms of limitation, but rather shall be deemed to be followed by the words “without limitation.”

13.11.Unfunded Status of the Plan.  The Plan is intended to constitute an “unfunded” plan for incentive and deferred compensation. With respect to any payments not yet made to a Participant by the Company, nothing contained herein shall give any such Participant any rights that are greater than those of a general creditor of the Company. In its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver the Shares or payments in lieu of or with respect to Awards hereunder; provided, however, that the existence of such trusts or other arrangements is consistent with the unfunded status of the Plan.

13.12.Governing Law.  The Plan and all determinations made and actions taken thereunder, to the extent not otherwise governed by the Code or the laws of the United States, shall be governed by the laws of the State of Delaware, without reference to principles of conflict of laws, and construed accordingly.

13.13.Effective Date of Plan; Termination of Plan.  The Plan originally became effective on June 12, 2020 (such date, the “Effective Date”). Awards may be granted under the Plan at any time and from time to time on or prior to the tenth anniversary of the Effective Date, on which date the Plan will expire except as to Awards then outstanding under the Plan; provided, however, in no event may an Incentive Stock Option be granted more than ten (10) years after the earlier of (i) date of the adoption of the Plan by the Board or Committee, as applicable and (ii) the Effective Date. Such outstanding Awards shall remain in effect until they have been exercised or terminated or have expired.

13.14.Foreign Employees and Consultants.  Awards may be granted to Participants who are foreign nationals or employed or providing services outside the United States, or both, on such terms and conditions different from those applicable to Awards to Employees employed or providing services in the United States as may, in the judgment of the Committee, be necessary or desirable in order to recognize differences in local law or tax policy. The Committee also may impose conditions on the exercise or vesting of Awards in order to minimize the Company’s obligation with respect to tax equalization for Employees or Consultants on assignments outside their home country.

13.15.Compliance with Section 409A of the Code. This Plan is intended to comply and shall be administered in a manner that is intended to comply with Section 409A of the Code and shall be construed and interpreted in accordance with such intent. To the extent that an Award or the payment, settlement or deferral thereof is subject to Section 409A of the Code, the Award shall be granted, paid, settled or deferred in a manner that will comply with Section 409A of the Code, including regulations or other guidance issued with respect thereto, except as otherwise determined by the Committee. Any provision of this Plan that would cause the grant of an Award or the payment, settlement or deferral thereof to fail to satisfy Section 409A of the Code shall be amended to comply with Section 409A of the Code on a timely basis, which may be made on a retroactive basis, in accordance with regulations and other guidance issued under Section 409A of the Code.

Should any payments made in accordance with the Plan to a “specified employee” (as defined under Section 409A of the Code) be determined to be payments from a nonqualified deferred compensation plan and are payable in connection with a Participant’s “separation from service” (as defined under Section 409A of the Code), that are not exempt from Section 409A of the Code as a short-term deferral or otherwise, these payments, to the extent otherwise payable within six (6) months after the Participant’s separation from service, and to the extent necessary to avoid the imposition of taxes under Section 409A of the Code, will be paid in a lump sum on the earlier of the date that is six (6) months and one day after the Participant’s date of separation from service or the date of the Participant’s death. For purposes of Section 409A of the Code, the payments to be made to a Participant in accordance with this Plan shall be treated as a right to a series of separate payments.  

13.16.Captions.  The captions in the Plan are for convenience of reference only, and are not intended to narrow, limit or affect the substance or interpretation of the provisions contained herein.

14

Exhibit 10.50

Arena Pharmaceuticals, Inc., 2020 Long-Term Incentive Plan

Performance Restricted Stock Unit Grant Agreement

This Grant Agreement (this “Agreement”), effective as of ________________ (the “Grant Date”), is entered into by and between Arena Pharmaceuticals, Inc., a Delaware corporation (the “Company”), and ______________ (the “Participant”) and evidences the terms of the Company’s grant to the Participant of a performance restricted stock unit (“PRSU”) award on the terms and conditions set forth herein (the “Award”).

1.Threshold, Target and Maximum Number of PRSUs under the Award.  The Award is for the below Target PRSUs, with potential to earn ______% of Target PRSUs upon a designated threshold level of performance below target and additional PRSUs upon a designated level of performance above target, in all cases up to the maximum number of PRSUs equal to ______% of Target PRSUs, subject to the conditions and adjustments specified herein, including the Award Determination, Vesting and Issuance Criteria attached as Attachment I to this Agreement (the “Vesting and Issuance Criteria”). Each PRSU represents the right to potentially be issued one Share on a future date.

Number of PRSUs at target performance: ____________ (“Target PRSUs”)

2.Subject to the Plan.  This Agreement is subject to the provisions of the Arena Pharmaceuticals, Inc., 2020 Long-Term Incentive Plan (the “Plan”).  Certain terms are defined in this Agreement, and, unless the context requires otherwise, other capitalized terms used herein shall have the same meaning as in the Plan.  Except as provided herein, in the event of a conflict between the provisions of the Plan and this Agreement, the Plan shall control.

3.Account.  The Company shall credit to a bookkeeping account (the “Account”) maintained by the Company for the Participant’s benefit the Maximum PRSUs. On each date that cash dividends are paid on the Shares, the Company will credit the Account with a number of additional PRSUs equal to the result of dividing (i) the product of the Maximum PRSUs credited to the Account on the record date for such dividend and the per Share amount of such dividend by (ii) the Fair Market Value of one Share on the date such dividend is paid by the Company to stockholders. The additional PRSUs shall be or become vested to the same extent as the PRSUs that resulted in the crediting of such additional PRSUs, and Shares shall not be issued in settlement unless and until the underlying PRSUs vest.

4.Vesting.  The number of PRSUs that may vest will be determined based on the Company’s actual performance against the performance goals specified in the Vesting and Issuance Criteria, subject to the Participant’s satisfaction of the service vesting conditions set forth therein. The Target PRSUs represent the number of PRSUs that would vest if the Participant satisfies the service vesting conditions set forth in the Vesting and Issuance Criteria and the Company achieves exactly _______% of the Company’s target goal specified in the Vesting and Issuance Criteria. In no event will more than the Maximum PRSUs (plus additional PRSUs representing dividend equivalents set forth in Section 3) vest. With respect to the Participant, this Agreement shall supersede any individually negotiated agreement with Company (or an Affiliate) and any generally applicable severance or change-in-control plan, policy, or practice, whether written or unwritten, of the Company (or an Affiliate) to the extent that such agreement, plan, policy or practice provides for vesting acceleration of equity awards.

5.Capitalization Adjustments.  The number of PRSUs credited to the Account shall be equitably and appropriately adjusted as provided in Section 12.2 of the Plan.

1.


6.Termination of Employment or Service.  In the event the Participant ceases to be in the continuous service of the Company or an Affiliate as any of an Employee, a Consultant or a Director, the number of PRSUs that may vest, if at all, will be determined in accordance with the Vesting and Issuance Criteria. The Company shall have the sole authority to determine when the Participant ceases to be in the continuous service of the Company or an Affiliate for purposes of the PRSUs, in accordance with the terms of the Plan, and such determination shall be final, conclusive and binding.

7.Payment of Shares.  The Company shall make a payment to the Participant of Shares based on the number of the vested PRSUs credited to the Participant’s Account upon each applicable vesting date specified in the Vesting and Issuance Criteria.   However, if a scheduled vesting date falls on a date that is not a trading day, such delivery shall instead fall on the next following trading day.  Notwithstanding the foregoing, in the event that the Company determines that any Shares are scheduled under this Agreement to be delivered on a day (the “Original Distribution Date”) on which the Company determines that a sale by the Participant of such Shares on the open market would be prohibited for any reason, including because it would (i) violate the registration requirements under the Securities Act or (ii) violate any of the provisions of the federal securities laws (or any Company or, if applicable, Affiliate policy related thereto) or (iii) violate a “lock-up” agreement undertaken in connection with an issuance of securities by the Company or (iv) not be permitted under applicable securities laws or Company policies, including insider trading policies applicable to the Participant and (v) the Company elects, prior to the Original Distribution Date, not to satisfy its tax withholding obligation by withholding Shares from the Shares otherwise due to the Participant on the Original Distribution Date under this Agreement, or there is no tax withholding obligation due, then such Shares shall not be delivered on such Original Distribution Date and shall instead be delivered as soon as practicable on the date on which the sale of such Shares by the Participant on the open market would not be in violation of any of such registration requirements, the federal securities laws (or any Company or, if applicable, Affiliate policy related thereto), lock-up agreement or would otherwise be permitted under applicable securities laws or Company policies; provided, however, that in no event shall the delivery of the Shares be delayed pursuant to this provision beyond the later of (a) December 31 of the calendar year in which the Original Issuance Date occurs (that is, the last day of the Participant’s taxable year in which the Original Issuance Date occurs), and (b) if and only if permitted in a manner that complies with U.S. Treasury Regulation Section 1.409A-1(b)(4), the date that is the 15th day of the third calendar month of the year following the year in which the Shares under this Agreement are no longer subject to a “substantial risk of forfeiture” within the meaning of U.S. Treasury Regulation Section 1.409A-1(d).

8.Form of Payment.  Payments pursuant to Section 7 shall be made in Shares (or, if settlement occurs as a result of vesting of PRSUs pursuant to a Change in Control, settlement may be made in the same consideration paid to the stockholders of the Company for Shares pursuant to the Change in Control) equal to the number of vested PRSUs credited to the Account.

9.Beneficiary.  In the event of the Participant’s death prior to payment of the PRSUs credited to the Account, payment shall be made to the last beneficiary designated in writing that is received by the Company prior to the Participant’s death or, if no designated beneficiary survives the Participant, such payment shall be made to the Participant’s estate.

10.Change in Control; Parachute Payments.  In the event of a Change in Control, the number of PRSUs that may vest will be determined in accordance with the Vesting and Issuance Criteria. If any payment or benefit the Participant would receive in connection with a change in control from the Company or otherwise (a “Payment”) would (i) constitute a “parachute payment” within the meaning of Section 280G of the Code, and (ii) but for this sentence, be subject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then such Payment shall be equal to the Reduced Amount. The “Reduced Amount” shall be either (x) the largest portion of the Payment that would result in no portion of the Payment being subject to the Excise Tax or (y) the largest portion of the Payment, up to and including the total Payment, whichever amount, after taking into account all applicable federal, state and local employment taxes, income taxes, and the Excise Tax (all computed at the highest applicable marginal rate), results in the Participant’s receipt, on an after-tax basis, of the greater amount of the Payment notwithstanding that all or some portion of the Payment may be subject to the Excise Tax. If a reduction in

2.


payments or benefits constituting “parachute payments” is necessary so that the Payment equals the Reduced Amount, reduction shall occur in the following order: reduction of cash payments; cancellation of accelerated vesting of stock awards; reduction of employee benefits. If acceleration of vesting of stock award compensation is to be reduced, such acceleration of vesting shall be cancelled in the reverse order of the date of grant of the Participant’s stock awards. Notwithstanding the foregoing, to the extent that it is permitted under Sections 409A, 280G and 4999 of the Code, the Participant may designate a different order of reduction in payments or benefits constituting “parachute payments”.

The Company shall appoint a nationally recognized independent accounting firm to make the determinations required hereunder, which accounting firm shall not then be serving as accountant or auditor for the individual, entity or group that effected the Change in Control. The Company shall bear all expenses with respect to the determinations by such accounting firm required to be made hereunder.

The accounting firm engaged to make the determinations hereunder shall provide its calculations, together with detailed supporting documentation, to the Company and the Participant within ten (10) calendar days after the date on which the Participant’s right to a Payment is triggered (if requested at that time by the Company or the Participant) or such other time as requested by the Company or the Participant. If the accounting firm determines that no Excise Tax is payable with respect to a Payment, either before or after the application of the Reduced Amount, it shall furnish the Company and the Participant with an opinion reasonably acceptable to the Participant that no Excise Tax will be imposed with respect to such Payment. Any good faith determinations of the accounting firm made hereunder shall be final, binding and conclusive upon the Company and the Participant.

11.Source of Payments.  The Participant’s right to receive payment under this Agreement shall be an unfunded entitlement and shall be an unsecured claim against the general assets of the Company. The Participant has only the status of a general unsecured creditor hereunder, and this Agreement constitutes only a promise by the Company to pay the value of the Account on the payment date.

12.Miscellaneous.

(a)Withholding.  The Participant agrees to pay to the Company, or to make satisfactory arrangement with the Company for payment of, any federal, state or local taxes, if any, required by law to be withheld in respect of the PRSUs.  The Participant hereby agrees that the Company or an Affiliate, as applicable, may withhold the applicable taxes from the Participant’s wages or other remuneration. At the discretion of the Company, the applicable taxes may be withheld in kind from the Shares otherwise deliverable to the Participant on the payment in settlement of the PRSUs, up to the lesser of Participant’s maximum statutory tax withholding rate or such other rate that will not trigger a negative accounting impact. Unless the tax withholding obligations of the Company and/or any Affiliate are satisfied, the Company shall have no obligation to deliver to the Participant any Shares. In the event the Company’s obligation to withhold arises prior to the delivery to the Participant of the Shares or it is determined after the delivery of Shares to the Participant that the amount of the Company’s withholding obligation was greater than the amount withheld by the Company, the Participant agrees to indemnify and hold the Company harmless from any failure by the Company to withhold the proper amount.

(b)No Rights of a Stockholder.  The Participant shall not have any of the rights of a stockholder with respect to the Shares that may be issued in settlement of the PRSUs until such Shares have been issued.

(c)Nontransferability of PRSUs.  Except to the extent and under such terms and conditions as determined by the Committee, the PRSUs shall not be transferable otherwise than by will or the laws of descent and distribution or as provided in Section 9.

(d)Severability.  The provisions of this Agreement shall be deemed severable. If any provision of this Agreement shall be held unlawful or otherwise invalid or unenforceable in whole or in part by a court of competent jurisdiction or by reason of a change in a law or regulation, such provision shall (i)

3.


be deemed limited to the extent that such court of competent jurisdiction deems it lawful, valid and/or enforceable (or, if applicable, to the extent necessary to comply with the change in the law or regulation), and as so limited shall remain in full force and effect, and (ii) not affect any other provision of this Agreement or part thereof, each of which shall remain in full force and effect.

(e)Governing Law.  This Agreement shall be governed by, and interpreted in accordance with, the laws of the State of Delaware, other than its conflict of laws principles.

(f)Headings.  The headings in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement.

(g)Notices.  All notices required or permitted under this Agreement shall be in writing and shall be sufficiently made or given if hand delivered or mailed by registered or certified mail, postage prepaid. Notice by mail shall be deemed delivered at the time and on the date on which the same is postmarked.

Notices to the Company should be addressed to:

Arena Pharmaceuticals, Inc.
6154 Nancy Ridge Drive
San Diego, California 92121
Attention:  Chief Financial Officer

With a copy to: General Counsel

Notices to the Participant should be addressed to the Participant at the Participant’s address as it appears on the Company’s records. The Company or the Participant may by writing to the other party, designate a different address for notices. If the receiving party consents in advance, notice may be transmitted and received via facsimile or via such other electronic transmission mechanism as may be available to the parties. Such notices shall be deemed delivered when received.

(h)Agreement Not a Contract. This Agreement (and the grant of PRSUs) is not an employment or service contract, and nothing in this Agreement shall be deemed to create in any way whatsoever any obligation on the Participant’s part to continue as an Employee, a Consultant or a Director, or of the Company or an Affiliate to continue the Participant’s service as an Employee, a Consultant or a Director.  The Participant’s employment shall remain at-will, if applicable, and subject to termination by the Company or an Affiliate, as applicable, at any time, with or without cause or notice.

(i)Entire Agreement; Modification.  Except as provided in the next sentence, this Agreement and the Plan constitute the entire agreement between the parties with respect to the subject matter contained herein and may not be modified, except as provided in the Plan or in a written document signed by each of the parties hereto, and may be rescinded only by a written agreement signed by both parties. This Agreement and Plan may be modified or superseded by the specific provisions, if any, of a written agreement, plan or other arrangement (regardless of whether entered into or established before, concurrently or after the date of this Agreement) of the Company or an Affiliate that is applicable to the Participant, to the extent such an agreement, plan or other arrangement provides a greater benefit to the Participant and otherwise does not cause the payments hereunder to fail to comply with the provisions of Section 409A of the Code.

(j)Compliance with Section 409A of the Code.  This Award is intended to be exempt from the application of Section 409A of the Code, including but not limited to by reason of complying with the “short-term deferral” rule set forth in Treasury Regulation Section 1.409A-1(b)(4) and will be construed and administered in such a manner and any ambiguities herein shall be interpreted accordingly.  Notwithstanding the foregoing, if it is determined that the Award fails to satisfy the requirements of the short-term deferral rule and is otherwise not exempt from, and determined to be deferred compensation subject

4.


to Section 409A of the Code, this Award shall comply with Section 409A to the extent necessary to avoid adverse personal tax consequences and any ambiguities herein shall be interpreted accordingly.  Any provision of this Agreement that would cause the payment or settlement thereof to fail to satisfy Section 409A of the Code shall be amended to comply with Section 409A of the Code on a timely basis, which may be made on a retroactive basis, in accordance with regulations and other guidance issued under Section 409A of the Code.  To the extent that the PRSUs are “deferred compensation” subject to the requirements of Section 409A of the Code, then notwithstanding anything contained in this Agreement to the contrary, if the Company determines that as of the date of payment the Participant is a “specified employee” (as such term is defined under Section 409A of the Code), any Shares (or shares of the common stock of the successor company in the event of a Change in Control) payable by reason of the Participant’s “separation from service” for purposes of Section 409A of the Code (“Separation from Service”) with the Company (or an Affiliate) for any reason other than death or “disability” (as such term is defined under Section 409A of the Code), if applicable, will not be paid until the date that is six months following the date of Separation from Service (or such earlier time permitted under Section 409A of the Code without the imposition of any accelerated or additional taxes under Section 409A of the Code).

 

IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the Grant Date.

ARENA PHARMACEUTICALS, INC.

 

 

By:

 

 

 

Participant

 

5.


 

Attachment I

Award Determination, Vesting and Issuance Criteria

The PRSUs awarded hereunder shall vest, if at all, based upon achievement of both (A) Performance Goal(s) related to Share price and (B) Participant’s continued service to the Company, as described below and subject to the terms and conditions of the Plan, the Agreement and this Attachment I.

1.Performance Goals and Vesting.

(a)Threshold Performance.  The “Threshold Goal” is met when both (i) during the Performance Period, the Closing Price equals or exceeds $   on either (1) five consecutive trading days or (2) ten non-consecutive trading days (such full condition in (i), the “Threshold Price”) and (ii) Participant continues in service of the Company or an Affiliate as any of an Employee, a Consultant or a Director for the Service Period.  Upon achievement of the Threshold Goal, the Threshold PRSUs shall vest on the last day of the Service Period. Target Performance.  The “Target Goal” is met when both (i) during the Performance Period, the Closing Price equals or exceeds $   on either (1) five consecutive trading days or (2) ten non-consecutive trading days (such full condition in (i), the “Target Price”) and (ii) Participant continues in service of the Company or an Affiliate as any of an Employee, a Consultant or a Director for the Service Period.  Upon achievement of the Target Goal, the Target PRSUs shall vest on the last day of the Service Period.

(b)Maximum Performance.  The “Maximum Goal” is met when both (i) during the Performance Period, the Closing Price equals or exceeds $    on either (1) five consecutive trading days or (2) ten non-consecutive trading days (such full condition in (i), the “Maximum Price”) and (ii) Participant continues in service of the Company or an Affiliate as any of an Employee, a Consultant or a Director for the Service Period.  Upon achievement of the Maximum Goal, the Maximum PRSUs shall vest on the last day of the Service Period.

(c)Maximum and Cumulative Performance Goal Achievement.  The maximum number of PRSUs that may vest under the Award is the Maximum PRSUs.  PRSUs may only vest in respect of a particular Performance Goal upon the first occurrence of such Performance Goal. In the event that more than one Performance Goal is achieved during the Performance Period, the total number of PRSUs that vest under the Award shall in no event be more than the number of PRSUs corresponding to the highest Performance Goal achieved during the Performance Period.  For example, if during the Performance Period the Threshold Goal is met and the Threshold PRSUs vest and subsequently the Target Goal is met, the total number of PRSUs that are vested upon achievement of the Target Goal (including the previously vested Threshold PRSUs) is the Target PRSUs (not the Target PRSUs plus the Threshold PRSUs).  

(d)Dividends.  If additional PRSUs are credited to the Participant’s Account as a result of cash dividends paid on the Shares, as described in Section 3 of the Agreement, such additional PRSUs shall vest to the extent the PRSUs that resulted in the crediting of such additional PRSUs vest, if at all, in accordance with Section 3 of the Agreement and references in this Attachment I to Threshold, Target and Maximum PRSUs shall be deemed to also include any such additional PRSUs credited as dividend equivalents.

2.Award Vesting Requirements.  Except as specifically provided below in Section 3 and 4(a), the Participant must remain in the continuous service of the Company or an Affiliate as any of an Employee, a Consultant or a Director through the end of the Service Period, including following achievement of a Threshold, Target or Maximum Price in order for a Performance Goal to be met and for any PRSUs to vest.  For the avoidance of doubt, once a Threshold, Target or Maximum Price is met, the PRSUs shall vest on the last day of the Service Period (if applicable), irrespective of the trading price performance of the Shares following achievement of such Threshold, Target or Maximum Price.  Shares will be issued in respect of the number of the vested PRSUs on the vesting date or such later date pursuant to Section 7 of the

Attachment I - 1.


Agreement.  Any portion of the Award that is not vested as of the earlier of (i) the end of the Performance Period, (ii) the effective time of a Change in Control (after giving effect to any vesting upon such Change in Control described in Section 3), and (iii) the Participant’s Termination of Service (after giving effect to any vesting upon a Qualifying Death/Disability Termination described in Section 4(a)), will immediately terminate and be forfeited.

3.Impact of a Change in Control.  If a Change in Control occurs during the Performance Period and prior to the Participant’s Termination of Service, then the number of PRSUs that will be eligible to become vested under the Award as a result of the Change in Control, if any, shall be determined based on the Change in Control Price.  If the Change in Control Price is equal to or greater than $   , $   or $   , the Threshold Goal, Target Goal or Maximum Goal, respectively, shall be deemed achieved, and as of immediately prior to, but subject to the effectiveness of, such Change in Control, the applicable Threshold, Target or Maximum PRSUs will vest (provided that if the Change in Control Price falls in between any two of the $   , $   or $   prices, the number of PRSUs that vest will be determined by straight line interpolation between the Threshold PRSUs and Target PRSUs (in the case of a Change in Control Price above $   and below $   ) or Target PRSUs and Maximum PRSUs (in the case of a Change in Control Price above $   and below $   ) as applicable), in each case reduced by any PRSUs that previously vested under the Award.

For example, if the Change in Control Price is $   per share, and the Threshold Performance Goal had previously been achieved, then a number of PRSUs equal to ________% of the Target PRSUs (derived using straight line interpolation between Target PRSUs and Maximum PRSUs), reduced by the Threshold PRSUs that previously vested prior to such Change in Control, shall become vested as of immediately prior to such Change in Control.  

Any PRSUs that do not become vested as of the Change in Control (after giving effect to the foregoing provisions of this Section 3) shall automatically terminate and be forfeited, without the payment of any consideration to Participant, as of the effective time of the Change in Control.  The provisions of this Section 3 shall govern the terms of the Award upon a Change in Control in lieu of the provision of Section 11 of the Plan.

4.Impact of Termination of Service.

(a)Death or Disability.  In the event of Participant’s Qualifying Death/Disability Termination, the Participant shall vest, as of the Participant’s Qualifying Death/Disability Termination, in number of PRSUs that would have vested had the Participant remained in the continuous service of the Company or an Affiliate as any of an Employee, a Consultant or a Director through the end of the Service Period, and any other PRSUs credited to the Account that do not so vest will immediately terminate and be forfeited as of such Qualifying Death/Disability Termination.  In the event of Participant’s Termination of Service due to death or Disability that is not a Qualifying Death/Disability Termination (including but not limited to Participant’s Termination of Service due to death or Disability prior to the date a Threshold Price, Target Price or Maximum Price is met), any portion of the Award that is not vested as of such Termination of Service will immediately terminate and be forfeited on such date.  

(b)Other Terminations.  In the event of the Participant’s Termination of Service for any reason other than as a result of a Qualifying Death/Disability Termination, the PRSUs credited to the Account that were not vested at the Participant’s Termination of Service will immediately terminate and be forfeited as of such date.  

5.Definitions:

(a) Change in Control” has the meaning set forth in Section 11.3 of the Plan, except that: (i) Section 11.3(i) and Section 11.3(iii)(C) of the Plan shall be excluded and (ii) it shall also include the occurrence of any other event that the Board determines by an approved resolution constitutes a Change in Control.  

Attachment I - 2.


(b)Change in Control Price” means the per-Share consideration received by the Company stockholders in a Change in Control, provided that if such consideration consists in whole or in part of non-cash consideration, the Committee will determine the value of the non-cash per-Share consideration for purposes of this Award in good faith in its sole discretion.  

(c)Closing Price” means the closing sales price for one (1) Share as reported by the Nasdaq Stock Market (or, if the Nasdaq Stock Market is not the principal trading market for the Shares, the closing sales price reported by the principal trading market for the Shares).

(d)Disability” means the Participant’s becoming disabled within the meaning of Section 22(e)(3) of the Code. The Committee may require such proof of Disability as the Committee in its sole and absolute discretion deems appropriate and the Committee’s determination as to whether the Participant has incurred a Disability shall be final and binding on all parties concerned.

(e)Maximum PRSUs” means the number of PRSUs equal to ______% of the Target PRSUs.

(f)Performance Goal” means each of the Threshold Goal, Target Goal and Maximum Goal as described in Section 1 above.  In the event of any stock split, reverse stock split or other event described in Section 12.2 of the Plan that affects the Shares, each Performance Goal shall be equitably adjusted as determined appropriate by the Committee in its sole discretion.

(g)Performance Period” means the period commencing on the Grant Date and ending on (and including) ______________________.

(h)Qualifying Death/Disability Termination” means a Participant’s Termination of Service due to such Participant’s death or Disability that occurs at a time when the Participant is an Employee and upon or after the date a Threshold Price, Target Price or Maximum Price is met but before the end of the Service Period.

(i)Service Period” means the period commencing on the Grant Date and ending on the date that is the earlier of (i) or (ii) below:

(i)90 calendar days following the achievement of the Threshold Price, Target Price or Maximum Price, as applicable, and

(ii)immediately prior to the effective time of a Change in Control.

(j)Target PRSUs” means the number of PRSUs set forth in Section 1 of the Agreement.

(k)Termination of Service” means the date the Participant ceases to be in the continuous service of the Company or an Affiliate as any of an Employee, a Consultant or a Director for any reason.

(l)Threshold PRSUs” means the number of PRSUs equal to _______% of the Target PRSUs.

Attachment I - 3.

Exhibit 21.1

Subsidiaries of Arena Pharmaceuticals, Inc.

As of December 31, 2020

 

125 Royalty Inc., a Delaware corporation

356 Royalty Inc., a Delaware corporation

Arena Pharmaceuticals Canada Holdings, LP, an Ontario limited partnership

Arena Pharmaceuticals Development GmbH, a limited liability company organized under the laws of Switzerland and having its domicile in Zug

Arena Pharmaceuticals Development, LLC, a Delaware limited liability company

Arena Pharmaceuticals GmbH in Liquidation, a limited liability company organized under the laws of Switzerland and having its domicile in Zofingen

Arena Pharmaceuticals Holdings, Inc., a Delaware corporation

Arena Pharmaceuticals Limited, a limited liability company organized under the laws of Ireland and having its domicile in Dublin

Arena Pharmaceuticals, LLC, a Delaware limited liability company

Exhibit 23.1

 

Consent of Independent Registered Public Accounting Firm

 

The Board of Directors

Arena Pharmaceuticals, Inc.:

We consent to the incorporation by reference in the registration statements (Nos. 333-160329, 333-182238, 333-189213, 333-204999, 333-212012, 333-214529, 333-217805, 333-218905, 333-225608, 333-232142, and 333-239330) on Form S-8 and (Nos. 333-112542, 333-136023, 333-160983, 333-167498, and 333-219237) on Form S-3 of Arena Pharmaceuticals, Inc. of our reports dated February 23, 2021, with respect to the consolidated balance sheets of Arena Pharmaceuticals, Inc. as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive (loss) income, equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes, and the effectiveness of internal control over financial reporting as of December 31, 2020, which reports appear in the December 31, 2020 annual report on Form 10-K of Arena Pharmaceuticals, Inc. Our report refers to the adoption of Accounting Standards Codification Topic 842, Leases.

/s/ KPMG LLP

San Diego, California

February 23, 2021

 

Exhibit 31.1

CERTIFICATION

I, Amit D. Munshi, certify that:

1.    I have reviewed this annual report on Form 10-K of Arena Pharmaceuticals, Inc.;

2.    Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.    Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.    The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

 

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and

 

d)

Disclosed in this annual report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.    The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: February 23, 2021

 

/s/ Amit D. Munshi     

 

 

Amit D. Munshi, President and Chief Executive Officer

 

 

(principal executive officer)

 

Exhibit 31.2

CERTIFICATION

I, Laurie Stelzer, certify that:

1.    I have reviewed this annual report on Form 10-K of Arena Pharmaceuticals, Inc.;

2.    Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.    Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.    The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

 

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and

 

d)

Disclosed in this annual report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.    The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: February 23, 2021

 

/s/ Laurie Stelzer     

 

 

Laurie Stelzer, Executive Vice President and Chief Financial Officer

 

 

(principal financial and accounting officer)

 

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Arena Pharmaceuticals, Inc. (“the Company”) for the period ended December 31, 2020, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Amit D. Munshi, as President and Chief Executive Officer (principal and financial officer) of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:

1.

the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

/s/ Amit D. Munshi         

 

Amit D. Munshi

 

President and Chief Executive Officer

 

(principal executive officer)

 

 

 

 

 

Date: February 23, 2021

 

 

In connection with the Annual Report on Form 10-K of Arena Pharmaceuticals, Inc. (“the Company”) for the period ended December 31, 2020, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Laurie Stelzer, as Executive Vice President and Chief Financial Officer (principal financial and accounting officer) of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:

1.

the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

/s/ Laurie Stelzer

 

Laurie Stelzer

 

Executive Vice President and Chief Financial Officer

 

(principal financial and accounting officer)

 

 

 

 

 

Date: February 23, 2021