Arena Pharmaceuticals, Inc.
ARENA PHARMACEUTICALS INC (Form: 10-Q, Received: 08/09/2007 13:47:46)

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

 

 

SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

For the quarterly period ended June 30, 2007

 

or

o

 

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

 

(I.R.S. Employer Identification No.)

organization)

 

 

 

 

 

6166 Nancy Ridge Drive, San Diego, CA

 

92121

(Address of principal executive offices)

 

(Zip Code)

858.453.7200

(Registrant’s telephone number, including area code)

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.   x   Yes     o   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.

Large accelerated filer   o

 

Accelerated filer   x

 

Non-accelerated filer   o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o    Yes    x   No

The number of shares of common stock outstanding as of the close of business on July 31, 2007:

Class

 

Number of Shares Outstanding

Common Stock, $0.0001 par value

 

61,052,480

 

 




ARENA PHARMACEUTICALS, INC.

INDEX

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

 

Unaudited Condensed Consolidated Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets - As of June 30, 2007 and December 31, 2006

 

 

 

 

 

Condensed Consolidated Statements of Operations - Three and Six Months Ended June 30, 2007 and 2006

 

 

 

 

 

Condensed Consolidated Cash Flow Statements - Six Months Ended June 30, 2007 and 2006

 

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

 

Item 2.

 

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

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

 

 

Item 4.

 

Controls and Procedures

 

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1A.

 

Risk Factors

 

 

 

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

 

 

Item 6.

 

Exhibits

 

 

 

Signatures

In this report, “Arena Pharmaceuticals,” “Arena,” “we,” “us” and “our” refer to Arena Pharmaceuticals, Inc. and/or our wholly owned subsidiaries, unless the context otherwise provides.

Arena Pharmaceuticals®, Arena® and our corporate logo are registered service marks of Arena. CART™ and BRL Screening™ are unregistered service marks of Arena.

i




PART I. FINANCIAL INFORMATION

Item 1. Unaudited Consolidated Financial Statements.

Arena Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(In thousands)

 

 

June 30,
2007

 

December 31,
2006

 

 

 

(Unaudited)

 

(Note)

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

328,703

 

$

373,044

 

Short-term investments, available-for-sale

 

42,296

 

15,781

 

Accounts receivable

 

834

 

310

 

Prepaid expenses and other current assets

 

9,864

 

10,551

 

Total current assets

 

381,697

 

399,686

 

 

 

 

 

 

 

Land, property and equipment, net

 

56,766

 

56,500

 

Acquired technology, net

 

5,644

 

6,412

 

Other non-current assets

 

7,944

 

5,867

 

Total assets

 

$

452,051

 

$

468,465

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued expenses

 

$

23,712

 

$

20,769

 

Accrued compensation

 

2,032

 

2,178

 

Deferred revenues

 

9,554

 

13,054

 

Current portion of lease financing obligations

 

202

 

 

Total current liabilities

 

35,500

 

36,001

 

 

 

 

 

 

 

Deferred rent

 

832

 

863

 

 

 

 

 

 

 

Lease financing obligations, less current portion

 

62,149

 

13,678

 

 

 

 

 

 

 

Commitments

 

 

 

 

 

 

 

 

 

 

 

Redeemable convertible preferred stock

 

52,846

 

51,808

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock

 

6

 

6

 

Additional paid-in capital

 

729,500

 

723,363

 

Treasury stock

 

(23,070

)

(23,070

)

Accumulated other comprehensive loss

 

 

(13

)

Accumulated deficit

 

(405,712

)

(334,171

)

Total stockholders’ equity

 

300,724

 

366,115

 

Total liabilities and stockholders’ equity

 

$

452,051

 

$

468,465

 

 


Note:  The balance sheet at December 31, 2006 has been derived from audited financial statements at that date. It does not include, however, all of the information and notes required by U.S. generally accepted accounting principles for complete financial statements.

See accompanying notes to unaudited condensed consolidated financial statements.

1




Arena Pharmaceuticals, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Total revenues

 

$

4,811

 

$

9,328

 

$

9,722

 

$

21,454

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

40,860

 

22,076

 

76,615

 

42,566

 

General and administrative

 

6,840

 

3,730

 

11,763

 

9,338

 

Amortization of acquired technology

 

384

 

384

 

768

 

768

 

Total operating expenses

 

48,084

 

26,190

 

89,146

 

52,672

 

Loss from operations

 

(43,273

)

(16,862

)

(79,424

)

(31,218

)

 

 

 

 

 

 

 

 

 

 

Interest and other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

4,834

 

3,330

 

9,635

 

5,858

 

Interest expense

 

(167

)

(460

)

(626

)

(920

)

Non-cash warrant settlement

 

 

(4,554

)

 

(4,554

)

Other

 

(2

)

37

 

(88

)

99

 

Total interest and other income (expense), net

 

4,665

 

(1,647

)

8,921

 

483

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

(38,608

)

(18,509

)

(70,503

)

(30,735

)

Dividends on redeemable convertible preferred stock

 

(524

)

(504

)

(1,038

)

(997

)

Net loss allocable to common stockholders

 

$

(39,132

)

$

(19,013

)

$

(71,541

)

$

(31,732

)

 

 

 

 

 

 

 

 

 

 

Net loss per share allocable to common stockholders, basic and diluted

 

$

(0.64

)

$

(0.40

)

$

(1.18

)

$

(0.71

)

 

 

 

 

 

 

 

 

 

 

Shares used in calculating net loss per share allocable to common stockholders, basic and diluted

 

60,914

 

47,115

 

60,825

 

44,795

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

2




Arena Pharmaceuticals, Inc.

Condensed Consolidated Cash Flow Statements

(In thousands)

(Unaudited)

 

 

Six months ended June 30,

 

 

 

2007

 

2006

 

Operating Activities

 

 

 

 

 

Net loss

 

$

(70,503

)

$

(30,735

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

Depreciation and amortization

 

4,020

 

3,517

 

Amortization of acquired technology

 

768

 

768

 

Non-cash share-based compensation

 

4,132

 

2,360

 

Non-cash warrant settlement

 

 

4,554

 

Amortization/accretion of short-term investment premium/discount

 

(186

)

(370

)

Amortization of prepaid financing costs

 

140

 

 

Amortization of lease financing obligations

 

(361

)

 

Deferred rent

 

(31

)

(20

)

Deferred interest expense

 

(678

)

97

 

Loss on disposal of equipment

 

116

 

6

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(524

)

(763

)

Prepaid expenses and other assets

 

625

 

(2,283

)

Deferred revenues

 

(3,500

)

(4,875

)

Accounts payable, accrued expenses and accrued compensation

 

2,797

 

(1,418

)

Net cash used in operating activities

 

(63,185

)

(29,162

)

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Purchases of short-term investments, available-for-sale

 

(43,392

)

(2,188

)

Proceeds from sales/maturities of short-term investments

 

17,076

 

1,000

 

Purchases of land, property and equipment

 

(4,420

)

(8,125

)

Proceeds from sale of equipment

 

18

 

1

 

Deposits, restricted cash and other assets

 

(462

)

(1,204

)

Net cash used in investing activities

 

(31,180

)

(10,516

)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Principal payments on lease financing obligations

 

(436

)

 

Proceeds from lease financing

 

48,455

 

 

Proceeds from exercise of warrants

 

 

8,298

 

Proceeds from issuance of common stock

 

2,005

 

170,534

 

Net cash provided by financing activities

 

50,024

 

178,832

 

Net increase (decrease) in cash and cash equivalents

 

(44,341

)

139,154

 

Cash and cash equivalents at beginning of period

 

373,044

 

73,781

 

Cash and cash equivalents at end of period

 

$

328,703

 

$

212,935

 

See accompanying notes to unaudited condensed consolidated financial statements.

3




Notes to Unaudited Condensed Consolidated Financial Statements

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Arena Pharmaceuticals, Inc. (together with its wholly owned subsidiaries, the “Company”) should be read in conjunction with the audited financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2006, as filed with the Securities and Exchange Commission, or SEC. The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, since they are interim statements, the accompanying financial statements do not include all of the information and notes required by GAAP for complete financial statements. The accompanying financial statements reflect all adjustments, consisting of normal recurring adjustments, that are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year.

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements and notes thereto. The Company’s critical accounting policies and estimates and assumptions are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is included below in this quarterly report on Form 10-Q.

2. Net Loss Per Share

Basic and diluted net loss per share allocable to common stockholders is presented in conformity with Statement of Financial Accounting Standards, or SFAS, No. 128, “Earnings per Share,” for all periods presented. In accordance with SFAS No. 128, basic and diluted net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period, less any shares subject to repurchase or forfeiture.

The total number of shares of common stock outstanding excluded from the calculation of basic and diluted net loss per share because they were subject to repurchase or forfeiture was 58,924 for each of the three and six-month periods ended June 30, 2007 and 125,421 for each of the three and six-month periods ended June 30, 2006. Had they been dilutive, such shares would have been included in the computation of diluted net loss per share. In addition, the Company has excluded all unvested restricted stock and unvested performance-based restricted stock unit awards, which are both subject to forfeiture, outstanding stock options, preferred stock and warrants from the calculation of basic and diluted net loss per share allocable to common stockholders because these securities are antidilutive for all periods presented.

3. Comprehensive Loss

In accordance with SFAS No. 130, “Reporting Comprehensive Loss,” all components of comprehensive loss, including net loss, are reported in the financial statements in the period in which they are recognized. Comprehensive loss is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Below is a reconciliation, in thousands, of net loss to comprehensive loss for all periods presented.

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Net loss

 

$

(38,608

)

$

(18,509

)

$

(70,503

)

$

(30,735

)

Unrealized gain (loss) on available-for-sale securities and other investments

 

7

 

(21

)

13

 

(133

)

Comprehensive loss

 

$

(38,601

)

$

(18,530

)

$

(70,490

)

$

(30,868

)

 

4




4. Share-based Activity

Share-based Compensation under SFAS No. 123R

The Company recognized share-based compensation expense in accordance with SFAS No. 123R, “Share-Based Payment,” as follows (in thousands, except per share data):

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Research and development

 

$

1,098

 

$

701

 

$

2,100

 

$

1,382

 

General and administrative

 

1,149

 

519

 

2,032

 

978

 

Total share-based compensation expense and impact on net loss allocable to common stockholders

 

$

2,247

 

$

1,220

 

$

4,132

 

$

2,360

 

Impact on net loss per share allocable to common stockholders, basic and diluted

 

$

0.03

 

$

0.03

 

$

0.07

 

$

0.05

 

 

The Company uses a Black-Scholes option pricing model to estimate the grant-date fair value of share-based awards in determining the share-based compensation expense recognized under SFAS No. 123R. The table below sets forth the weighted-average assumptions and estimated fair value of stock options granted under the Company’s equity compensation plans during the three and six-month periods ended June 30, 2007 and 2006:

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Risk-free interest rate

 

4.6

%

4.3

%

4.6

%

4.3

%

Dividend yield

 

0

%

0

%

0

%

0

%

Expected volatility

 

64

%

67

%

64

%

67

%

Expected life (years)

 

5.39

 

5.15

 

5.39

 

5.15

 

Weighted-average estimated fair value of stock options granted

 

$

7.57

 

$

8.96

 

$

8.04

 

$

10.01

 

The table below sets forth the weighted-average assumptions and estimated fair value of the options to purchase stock granted under the 2001 Arena Employee Stock Purchase Plan, as amended, for multiple offering periods during the three and six-month periods ended June 30, 2007 and 2006:

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Risk-free interest rate

 

3.2% — 5.1

%

1.7% — 4.9

%

2.8% — 5.3

%

1.7% — 4.9

%

Dividend yield

 

0

%

0

%

0

%

0

%

Expected volatility

 

67% — 71

%

65 — 75

%

66% — 72

%

65 — 75

%

Expected life (years)

 

0.25 — 2.0

 

0.25 — 2.0

 

0.25 — 2.0

 

0.25 — 2.0

 

Weighted-average estimated fair value of options granted under Employee Stock Purchase Plan

 

$

3.08 — 4.54

 

$

1.99 — 7.29

 

$

2.18 — 5.46

 

$

1.99 — 7.29

 

Expected volatility for awards granted after the adoption of SFAS No. 123R is based on a combination of 75% historical volatility of the Company’s common stock and 25% market-based implied volatility from traded options on its common stock, with historical volatility being more heavily weighted due to the low volume of traded options on its common stock. The expected life of options granted under SFAS No. 123R 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 cancellations. The risk-free interest rates are based on the U.S. Treasury yield curve, with a remaining term approximately equal to the expected term used in the option pricing model.

SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. If actual forfeitures do vary from estimates, the Company will recognize the difference in compensation expense in the period the actual forfeitures occur or when options vest. Forfeitures of unvested

5




options were estimated at 5.4% and 7.2% for the three and six months ended June 30, 2007 and 2006, respectively, based on historical experience.

Tax benefits recognized and related to share-based compensation and related cash flow impacts were not material during the three and six months ended June 30, 2007 and 2006 because the Company is in a net operating loss position.

Share-based Award Activity

The following table summarizes the Company’s stock option activity during the six months ended June 30, 2007:

 

Options

 

Weighted-
Average
Exercise Price

 

Outstanding at January 1, 2007

 

4,522,381

 

$

9.44

 

Granted

 

1,223,037

 

13.40

 

Exercised

 

(118,351

)

5.25

 

Forfeited/cancelled/expired

 

(68,748

)

11.33

 

Outstanding at June 30, 2007

 

5,558,319

 

$

10.38

 

 

In February 2007, the Company granted 1,690,500 performance-based restricted stock unit awards under its 2006 Long-Term Incentive Plan, as amended. The awards provide employees with five years to achieve four key drug development and strategic performance goals. A fixed number of awards will be earned for each goal that is successfully achieved. Once earned, the awards will remain unvested until the five-year performance period is complete. The awards that have been earned at February 26, 2012 will vest and be settled in shares of the Company’s common stock, with the holder receiving one share of common stock for each award earned and vested. Termination of employment prior to vesting will result in the forfeiture of any earned (as well as unearned) awards, except for in limited circumstances such as termination due to death, disability or a change in control. The following table summarizes activity with respect to such awards during the six months ended June 30, 2007:

 

Performance
Units

 

Weighted-
Average
Grant-Date Fair
Value

 

Outstanding at January 1, 2007

 

 

$

 

Granted

 

1,690,500

 

13.50

 

Vested

 

 

 

Forfeited/cancelled

 

(5,100

)

13.50

 

Outstanding at June 30, 2007

 

1,685,400

 

$

13.50

 

5. Short-term Investments, Available-for-Sale

In accordance with SFAS No. 115, “Accounting for Certain Debt and Equity Securities,” short-term investments are classified as available-for-sale. The Company defines short-term investments as income-yielding securities that can be readily converted to cash. These securities are carried at fair value, with unrealized gains and losses reported as 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 judged to be other than temporary 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. Short-term investments held as of June 30, 2007 and 2006 consisted primarily of U.S. Treasury and Federal agency notes and U.S. corporate debt securities.

6. Concentration of Credit Risk and Major Customers

The Company’s financial instruments, which potentially subject it to concentrations of credit risk, consist primarily of cash, cash equivalents and short-term investments. The Company limits its exposure to credit loss by placing its cash and investments, in accordance with the board-approved investment policy, in U.S. government and agency obligations and in debt instruments that are rated investment grade.

6




The Company’s revenues were derived from two collaborators for all periods presented. The percentages of total revenues derived from these collaborators are as follows:

 

 

Three months ended June 30,

 

Six months ended June 30,

 

Collaboration

 

2007

 

2006

 

2007

 

2006

 

Ortho-McNeil Pharmaceutical, Inc.

 

63.2

%

34.0

%

62.3

%

62.1

%

Merck & Co., Inc.

 

36.8

%

66.0

%

37.7

%

37.9

%

 

 

100.0

%

100.0

%

100.0

%

100.0

%

7. Commitments

Leases

In May 2007, the Company sold to BMR-6114-6154 Nancy Ridge Drive LLC, a Delaware limited liability company, or BMR, three properties it owned and continues to occupy, and assigned to BMR an option to purchase a fourth property currently leased and primarily occupied by the Company for total consideration of $50.1 million, resulting in net proceeds to the Company of $48.5 million after financing costs. Concurrently with the closing of the transaction, the Company leased back the three properties sold to BMR under leases with 20-year terms and two consecutive options to extend such terms for five years each. In addition, subject to certain restrictions, the Company has the option to repurchase all of the properties included in the transaction on the 10 th , 15 th  or 20 th  anniversary of the execution date of the leases, and earlier if the leases are terminated under certain circumstances.

The Company has accounted for this transaction in accordance with SFAS No. 66 “Accounting for Sales of Real Estate” and SFAS No. 98 “Accounting for Leases.” The Company’s option to repurchase these properties in the future is considered continued involvement under SFAS No. 66, and, therefore, the Company has applied the financing method under SFAS No. 98. 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. Instead, the sales price of the properties is recorded as a financing obligation and a portion of each lease payment is recorded as interest expense. The Company recorded interest expense of $0.4 million in each of the three and six-month periods ended June 30, 2007 related to this transaction. At June 30, 2007, in accordance with SFAS No. 98, the total financing obligation related to this transaction was $49.8 million.

Initial base rent for the three properties (net of taxes, insurance and maintenance costs (i.e. triple net) for which the Company is responsible) that were purchased as part of this transaction is an aggregate of $4.5 million annually, subject to an annual increase of 2.5% and other specified adjustments. The Company expects to lease the fourth property from BMR if BMR exercises its option to purchase that property.

8. Redeemable Convertible Preferred Stock and Warrants

In December 2003, the Company sold to two institutional investors 3,500 shares of series B-1 redeemable convertible preferred stock, or Series B-1 Preferred, together with (i) seven-year warrants to purchase up to 1,486,200 shares of common stock at an initial exercise price of $10.00 per share; and (ii) unit warrants giving such investors the right to purchase from the Company for a period of approximately 16 months from December 24, 2003, at their option, up to $11.5 million of series B-2 redeemable convertible preferred stock (or “Series B-2 Preferred” and collectively with the Series B-1 Preferred, “Series B Preferred”) and additional seven-year warrants to purchase up to 450,000 shares of common stock at an initial exercise price of $10.00 per share. The aggregate purchase price in such transaction was $35.0 million, and the Company received $34.2 million in net cash proceeds after closing costs. On April 22, 2005, the Company’s preferred stockholders exercised their unit warrants in full. The aggregate purchase price and net cash proceeds to the Company from the exercise of the unit warrants were $11.5 million.

The Series B-1 Preferred is convertible into common stock at a fixed conversion price of $7.50 per share. The holders of the Series B-1 Preferred can require the Company at any time to redeem all or some of their shares of Series B-1 Preferred at such shares’ stated value, plus accrued but unpaid dividends thereon to the date of payment and any applicable penalties. The stated value is the original holder’s investment plus any dividends settled by increasing the stated value at the time the dividend is payable. The Company will be required to redeem any shares of the Series B-1 Preferred that remain outstanding on December 24, 2008 at a price equal to the amount of such shares’ then stated value, plus accrued but unpaid dividends

7




thereon to the date of payment and any applicable penalties. The Company may be able to satisfy all or a portion of any redemption with shares of its common stock. Any redemption amount settled in equity would be computed based on the lesser of the applicable conversion price of $7.50 and 95% of the arithmetic average of the volume weighted-average prices of common stock for the 10 consecutive trading days prior to the date of delivery of the applicable Series B-1 Preferred redemption notice. The Series B-1 Preferred, which accrues dividends at 4% annually, had an aggregate redemption price of $40.3 million at June 30, 2007.

The Series B-2 Preferred is convertible into common stock at a fixed conversion price of $7.00 per share. If not previously converted, the Company must redeem the Series B-2 Preferred on April 22, 2010, or earlier under certain circumstances, at such shares’ stated value, plus accrued but unpaid dividends thereon to the date of payment and any applicable penalties. The Series B-2 Preferred, which accrues dividends at 4% annually, had an aggregate redemption price of $12.5 million at June 30, 2007. The Company may be able to satisfy all or a portion of any redemption with shares of its common stock. Except as set forth in this paragraph, the Series B-2 Preferred has substantially identical terms as the Series B-1 Preferred.

On March 31, 2006, following the Company’s call notice to one of the two warrant holders, Smithfield Fiduciary LLC, an affiliate of Highbridge Capital Management, LLC, such holder exercised its warrants to purchase 829,856 shares of the Company’s common stock, resulting in an aggregate purchase price and net cash proceeds to the Company of $8.3 million. In connection with this exercise in full of its warrants, Smithfield claimed that it was entitled to receive exchange warrants that would include a provision that could require the Company to issue additional exchange warrants in the future. The Company disagreed with this interpretation. On June 30, 2006, the Company entered into a Settlement Agreement and Release with Smithfield. As part of the Settlement Agreement and Release, (a) Smithfield and the Company provided each other with a release of any claims relating to (i) Smithfield’s demand for, and the Company’s non-issuance of, exchange warrants, and (ii) any breach or default under certain of the agreements on account of the foregoing, (b) the Company issued Smithfield a seven-year warrant to purchase 829,856 shares of the Company’s common stock at an initial exercise price of $15.49 per share, and (c) the Company filed a registration statement covering the sale of the shares of common stock issuable under the new warrant. The new warrant does not contain any right for the Company, or for the holder to require the Company, to call the warrant, nor does it provide the holder the right to receive any exchange warrants in the future. The Company recorded a $4.6 million non-cash charge related to the warrant settlement in the second quarter of 2006. The Company does not know whether it will have a similar dispute with its other warrant holder, Mainfield Enterprises, Inc., or, if it does, the likely outcome of the dispute. As such, the Company has not recorded any charges related to the Mainfield warrant.

Each investor has agreed that for so long as it holds Series B Preferred, it shall vote its shares of Series B Preferred and common stock on all matters in which such investor is entitled to vote and on which holders of common stock have the right to vote, in the manner recommended by the Company’s board of directors to all of its stockholders unless the Company’s board of directors elects to permit the investors to vote such shares in their own discretion.

9. Income Taxes

In July 2006, the Financial Accounting Standards Board, or FASB, issued FASB Interpretation, or FIN, No. 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of SFAS No. 109,” which clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes,” and prescribes recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under FIN No. 48, 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. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN No. 48 is effective for fiscal years beginning after December 15, 2006.

The Company adopted the provisions of FIN No. 48 on January 1, 2007. The total amount of unrecognized tax benefits as of the date of adoption was $8.6 million. As a result of the implementation of FIN No. 48, the Company recognized a $7.2 million decrease in deferred tax assets and a corresponding decrease in the valuation allowance. There are no unrecognized tax benefits included in the condensed consolidated balance sheet at June 30, 2007 that would, if recognized, affect the effective tax rate.

The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company did not have any accrued interest or penalties included in its condensed consolidated balance sheets at December

8




31, 2006 or June 30, 2007, and did not recognize any interest and/or penalties in its condensed consolidated statement of operations during the three or six months ended June 30, 2007.

The Company is subject to income taxation in the United States and multiple state jurisdictions. The Company’s tax years for 1997 and later are subject to examination by the United States and California tax authorities due to the carryforward of unutilized net operating losses and research and development credits.

The adoption of FIN No. 48 did not impact the Company’s financial condition, results of operations or cash flows. At January 1, 2007, the Company had net deferred tax assets of $129.8 million. The deferred tax assets are primarily comprised of federal and state tax net operating loss, or NOL, carryforwards and federal and state research and development, or R&D, credit carryforwards. Due to uncertainties surrounding the Company’s ability to generate future taxable income to realize these assets, the Company has not recognized these assets and a full valuation allowance has been established to offset the Company’s net deferred tax assets. The future utilization of the Company’s NOL and R&D credit carryforwards to offset future taxable income may be subject to a substantial annual limitation as a result of ownership changes that may have occurred previously or that could occur in the future. The Company plans to complete a Section 382/383 analysis regarding ownership changes that have occurred, and the Company expects the results of such an analysis will limit the use of the NOL and R&D credits. When this analysis is completed, the Company plans to update its unrecognized tax benefits under FIN No. 48, which may result in a change in unrecognized tax benefits within 12 months of the end of the period covered by this report. At this time, however, the Company cannot estimate how much the unrecognized tax benefits may change. Any carryforwards that will expire prior to utilization as a result of such limitations will be removed from deferred tax assets with a corresponding reduction of the valuation allowance. Due to the existence of the valuation allowance, future changes in the Company’s unrecognized tax benefits will not likely impact the effective tax rate.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This discussion and analysis should be read in conjunction with our financial statements and notes thereto included in this quarterly report on Form 10-Q (this “Quarterly Report”) and the audited financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2006 (the “2006 Annual Report”), as filed with the Securities and Exchange Commission (the “SEC”). Operating results are not necessarily indicative of results that may occur in future periods.

This Quarterly Report includes forward-looking statements. These forward-looking statements involve a number of risks, uncertainties and assumptions. Such forward-looking statements include statements about our strategies, objectives, discoveries, collaborations, clinical or other internal or partnered programs, and other statements that are not historical facts, including statements which may be preceded by the words “may,” “intend,” “will,” “plan,” “expect,” “anticipate,” “estimate,” “believe” or similar words. For such statements, we claim the protection of the Private Securities Litigation Reform Act of 1995. Readers of this Quarterly Report are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the time this Quarterly Report was filed with the SEC. We undertake no obligation to update publicly or revise any forward-looking statements, other than as required by law. 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, the risk factors identified in our SEC reports, including this Quarterly Report.

OVERVIEW AND RECENT DEVELOPMENTS

We are a clinical-stage biopharmaceutical company focused on discovering, developing and commercializing oral drugs in four major therapeutic areas: cardiovascular, central nervous system, inflammatory and metabolic diseases. Our most advanced product candidate, lorcaserin hydrochloride, or lorcaserin, is being investigated in a Phase 3 clinical trial program for the treatment of obesity. Our broad pipeline of novel compounds targeting G protein-coupled receptors, an important class of validated drug targets, includes compounds being evaluated independently and with our partners, Merck & Co., Inc., or Merck, and Ortho-McNeil Pharmaceutical, Inc., a Johnson & Johnson company, or Ortho-McNeil. We incorporated on April 14, 1997 in the state of Delaware and commenced operations in July 1997.

9




Our recent developments include:

·                   Initiated dosing in a Phase 1 clinical trial evaluating APD791, our orally administered, internally discovered drug candidate intended for the treatment of arterial thrombo-embolic diseases. This Phase 1 trial, expected to enroll up to 72 volunteers, is primarily intended to evaluate the safety and tolerability of single ascending doses of APD791 and will also evaluate the pharmacokinetics and pharmacodynamics of APD791.

·                   Completed patient enrollment in a Phase 2 clinical trial of APD125, a randomized, double-blind, placebo-controlled study evaluating the safety and efficacy of nighttime dosing in 173 patients with chronic insomnia at approximately 25 centers in the United States.

·                   Completed the sale to BMR-6114-6154 Nancy Ridge Drive LLC, a Delaware limited liability company, or BMR, of three properties we owned and continue to occupy and the assignment to BMR of our option to purchase a fourth property we currently lease and primarily occupy for total consideration of $50.1 million. Concurrently with the closing of the transaction, we leased back the three properties sold to BMR under leases with 20-year terms and two consecutive options to extend such terms for five years each. As part of the transaction, we also retained the option to purchase from BMR all the properties included in the transaction on the 10 th , 15 th  or 20 th  anniversary of the execution date of the leases.

RESULTS OF OPERATIONS

We are providing the following summary of our revenues and expenses to supplement the more detailed discussion below. The following tables are stated in millions.

Revenues

 

 

Three months ended June 30,

 

Six months ended June 30,

 

Collaboration

 

2007

 

2006

 

2007

 

2006

 

Ortho-McNeil

 

$

3.0

 

$

3.2

 

$

6.0

 

$

13.4

 

Merck

 

1.8

 

6.1

 

3.7

 

8.1

 

Total revenues

 

$

4.8

 

$

9.3

 

$

9.7

 

$

21.5

 

 

Research & development expenses

 

 

Three months ended June 30,

 

Six months ended June 30,

 

Type of expense

 

2007

 

2006

 

2007

 

2006

 

External clinical and preclinical study fees and expenses

 

$

22.1

 

$

6.6

 

$

39.5

 

$

12.4

 

Personnel costs

 

10.8

 

8.1

 

20.8

 

16.2

 

Facility and equipment costs

 

3.8

 

3.2

 

7.4

 

6.3

 

Research supplies

 

3.0

 

3.3

 

6.5

 

6.2

 

Other

 

1.2

 

0.9

 

2.4

 

1.5

 

Total research & development expenses

 

$

40.9

 

$

22.1

 

$

76.6

 

$

42.6

 

 

General & administrative expenses

 

 

Three months ended June 30,

 

Six months ended June 30,

 

Type of expense

 

2007

 

2006

 

2007

 

2006

 

Personnel costs

 

$

3.0

 

$

2.0

 

$

5.7

 

$

3.9

 

Legal, accounting and other professional fees

 

2.6

 

0.7

 

3.9

 

3.7

 

Facility and equipment costs

 

0.7

 

0.6

 

1.4

 

1.1

 

Other

 

0.5

 

0.4

 

0.8

 

0.6

 

Total general & administrative expenses

 

$

6.8

 

$

3.7

 

$

11.8

 

$

9.3

 

 

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THREE MONTHS ENDED JUNE 30, 2007 AND 2006

Revenues. We recorded revenues of $4.8 million during the three months ended June 30, 2007, compared to $9.3 million during the three months ended June 30, 2006. All of our revenues recorded during the three months ended June 30, 2007 resulted from our collaborations with Ortho-McNeil and Merck, and included $2.6 million in amortization of milestone achievements and technology access and development fees, $1.6 million in research funding, and $0.6 million for patent activities. All of our revenues recorded during the three months ended June 30, 2006 were also from our collaborations with Ortho-McNeil and Merck, and included $4.0 million from a clinical milestone achieved in our collaboration with Merck, $2.4 million in amortization of milestone achievements and technology access and development fees, $2.0 million in research funding and $0.9 million in additional sponsored research and patent activities.

In October 2004, we extended and expanded the collaboration we entered into with Merck in 2002, and Merck purchased $7.5 million of our common stock at a price of $8.00 per share, approximately a 70% premium to the then current market price. We performed an evaluation on this stock purchase and determined that $3.9 million of the $7.5 million purchase price was an upfront payment related to the collaboration extension and expansion. Accordingly, we are recognizing the $3.9 million upfront payment, as well as the remaining portion of the unamortized upfront payment at October 2004 of $1.3 million, over the extended research portion of the collaboration term of three years. Additionally, in October 2004, we achieved a $1.0 million milestone under this collaboration, and are recognizing the milestone over the extended term of the research portion of the collaboration because it was reasonably assured to be achieved at the time we extended and expanded the collaboration. In February 2007, we amended the collaboration to reduce the number of Arena research employees funded under the collaboration in exchange for Merck purchasing $1.0 million of our common stock. This equity investment, equal to the reduction in their research funding obligation, was at a price of $24.81 per share, approximately a 70% premium to the then current market price. We performed an evaluation on this stock purchase and determined that $0.5 million of the $1.0 million purchase price was an upfront payment related to the collaboration amendment. Accordingly, we are recognizing this upfront payment over the remaining term of the research portion of the collaboration, which is until October 21, 2007, together with the unamortized portion of the previously received upfront payments. In addition, under our amended agreement, as of June 30, 2007, Merck is obligated to provide $1.3 million in research funding through October 21, 2007.

In December 2004, we entered into our collaboration and license agreement with Ortho-McNeil. This collaboration included a $17.5 million upfront payment, as well as research funding of $2.4 million per year, initially until December 20, 2006 and subsequently extended through December 20, 2007. We are amortizing this $17.5 million upfront payment over three years. In December 2004, we achieved two milestones under our Ortho-McNeil collaboration of $2.5 million each, which we are also recognizing over three years because they were reasonably assured to be achieved at the time we entered into the collaboration.

Our collaborators often pay us before we recognize such payments as current revenues and, accordingly, these payments are recorded as deferred revenues until earned. As of June 30, 2007, we had deferred revenues totaling $9.6 million, the majority of which is expected to be recognized as revenues in 2007. Absent any new collaboration, our revenues for 2007 will likely depend on Ortho-McNeil and Merck. The research funding we receive from these collaborators is scheduled to end in the fourth quarter of 2007. Future revenues for research or clinical milestones that have not yet been achieved are difficult to predict, and we expect our revenues to vary significantly from quarter to quarter and year to year. We expect that our revenues over the next several years will depend on the clinical success of our partnered programs as well as whether we partner lorcaserin, APD125, APD791 or any of our other current or future drug candidates. Ultimately, we expect our future revenues to primarily depend on the regulatory approval and commercialization of partnered or internally developed drugs.

Research and development expenses. Research and development expenses, which account for the majority of our expenses, consisted primarily of costs associated with external clinical and preclinical study fees, manufacturing costs and other related expenses, and the development of our earlier-stage programs and technologies. Our most significant research and development costs are for clinical trials (including payments to contract research organizations, or CROs), preclinical study fees, personnel costs, research supplies, and facility and equipment costs. We expense research and development costs to operations as they are incurred when these expenditures relate to our research and development efforts and have no alternative future uses. Other than partnered, clinical and preclinical programs, we generally do not track our research and development expenses by project; rather, we track such expenses by the type of cost incurred.

Research and development expenses for the three months ended June 30, 2007 increased $18.8 million to $40.9 million, from $22.1 million for the three months ended June 30, 2006. The difference was due primarily to (i) external clinical and

11




preclinical study fees and expenses, including manufacturing costs, increasing by $15.5 million as we continued the first of our three planned Phase 3 pivotal trials of lorcaserin and completed patient enrollment in our Phase 2 clinical trial of APD125, (ii) personnel costs increasing by a total of $2.7 million as we increased the number of our research and development employees from 284 at the end of June 2006 to 331 at the end of June 2007 and recorded an additional $0.4 million in non-cash share-based compensation related to the expensing of share-based compensation under Statement of Financial Accounting Standards, or SFAS, No. 123R, “Share-Based Payment,” and (iii) facility and equipment costs increasing by $0.6 million. Nearly all of the increase in research and development personnel related to the development of our internal programs, primarily lorcaserin, APD125 and APD791.

Included in the $22.1 million total external clinical and preclinical study fees and expenses for the three months ended June 30, 2007 was $11.7 million related to our lorcaserin program, $8.7 million related to our APD125 program and $1.0 million related to our APD791 program. Included in the $6.6 million total external clinical and preclinical study fees and expenses for the three months ended June 30, 2006 was $3.7 million related to our lorcaserin program, $1.3 million related to our APD125 program and $1.0 million related to our APD791 program. We expect research and development expenses to be substantially higher in 2007 than in 2006 due primarily to ongoing and planned clinical trials and studies for our later-stage internal programs as well as due to increases in research and development employees. We expect that the number of our research and development employees will increase significantly in the second half of 2007, assuming favorable results from our month-six Data Safety Monitoring Board, or DSMB, review of BLOOM (Behavioral modification and Lorcaserin for Overweight and Obesity Management), the first of our three planned Phase 3 pivotal trials evaluating the efficacy and safety of lorcaserin for the treatment of obesity, and other study results for lorcaserin.

General and administrative expenses. General and administrative expenses increased $3.1 million to $6.8 million for the three months ended June 30, 2007, from $3.7 million for the three months ended June 30, 2006, due primarily to (i) an increase of $1.9 million in patent costs related to our partnered programs and our internal programs and technologies and (ii) personnel costs increasing by a total of $1.0 million as we increased our general and administrative employees from 54 at the end of June 2006 to 64 at the end of June 2007 and recorded an additional $0.6 million in non-cash share-based compensation under SFAS No. 123R. We expect general and administrative expenses to be higher in 2007 than in 2006 due primarily to increases in both the number of personnel and expenses for non-cash share-based compensation recorded in accordance with SFAS No. 123R.

Amortization of acquired technology. We recorded $0.4 million for amortization of acquired technology for each of the three-month periods ended June 30, 2007 and 2006 related to our patented Melanophore technology, our primary screening technology, which we acquired in 2001 for $15.4 million. The Melanophore technology is being amortized over its estimated useful life of 10 years. We expect to recognize $1.5 million for the full year ending December 31, 2007 and for each of the following three years for amortization of this technology.

Interest and other income, net. We recorded interest and other income, net, of $4.7 million for the three months ended June 30, 2007, compared to a net expense of $1.6 million for the three months ended June 30, 2006. Interest and other income, net, for the three months ended June 30, 2007 was primarily comprised of (i) $4.8 million in interest income and (ii) interest expense and financing costs of $0.2 million, which included lease payments accounted for in accordance with SFAS No. 66, “Accounting for Sales of Real Estate” and SFAS No. 98 “Accounting for Leases,” on both our 2003 and 2007 lease financing obligations. The increase in interest income is attributable to higher cash balances and higher interest rates. Interest and other income (expense), net, for the three months ended June 30, 2006 was primarily comprised of (i) a $4.6 million non-cash charge related to a warrant issued in a settlement with one of our warrant holders, (ii) $3.3 million in interest income and (iii) interest expense and financing costs of $0.5 million, which included lease payments accounted for in accordance with SFAS No. 98.

Dividends on redeemable convertible preferred stock. We recorded a dividend expense of $0.5 million related to our series B redeemable convertible preferred stock, or Series B Preferred, for each of the three-month periods ended June 30, 2007 and 2006. The holders of our Series B Preferred are entitled to dividends that accrue at 4% annually. This dividend expense, payable in additional shares of Series B Preferred or in common stock, increases the net loss allocable to common stockholders. Assuming that the Series B Preferred is held until the applicable mandatory redemption date, we expect to record dividends on the Series B Preferred of $1.1 million for the remainder of 2007, and $2.2 million, $0.5 million and $0.2 million in the years ending December 31, 2008, 2009 and 2010, respectively.

12




SIX MONTHS ENDED JUNE 30, 2007 AND 2006

Revenues. We recorded revenues of $9.7 million during the six months ended June 30, 2007, compared to $21.5 million during the six months ended June 30, 2006. All of our revenues during the six months ended June 30, 2007 were from our collaborations with Ortho-McNeil and Merck, and included $5.1 million in amortization of milestone achievements and technology access and development fees, $3.5 million in research funding, and $1.1 million for patent activities. All of our revenues during the six months ended June 30, 2006 were also from our collaborations with Ortho-McNeil and Merck, and included clinical milestone achievements totaling $9.0 million, $4.8 in amortization of milestone achievements and technology access and development fees, $4.1 million in research funding and $3.6 million in additional sponsored research and patent activities.

Research and development expenses. Research and development expenses increased $34.0 million to $76.6 million for the six months ended June 30, 2007, from $42.6 million for the six months ended June 30, 2006. The difference was due primarily to (i) external clinical and preclinical study fees and expenses, including manufacturing costs, increasing by $27.1 million as we completed patient enrollment in our first lorcaserin Phase 3 clinical trial and in our APD125 Phase 2 clinical trial in January and April 2007, respectively, and (ii) personnel costs increasing by a total of $4.6 million as we increased the number of our research and development employees and recorded an additional $0.7 million in non-cash share-based compensation in accordance with SFAS No. 123R. Included in the $39.5 million total external clinical and preclinical study fees and expenses for the six months ended June 30, 2007 was $25.4 million related to our lorcaserin program, $11.4 million related to our APD125 program and $1.5 million related to our APD791 program. Included in the $12.4 million in external clinical and preclinical study fees and expenses for the six months ended June 30, 2006 was $6.6 million related to our lorcaserin program, $2.8 million related to our APD125 program and $1.7 million related to our APD791 program.

General and administrative expenses. General and administrative expenses increased $2.5 million to $11.8 million for the six months ended June 30, 2007, from $9.3 million for the six months ended June 30, 2006. This increase is due primarily to (i) personnel costs increasing by $1.8 million as we hired additional general and administrative personnel and recorded an additional $1.0 million in non-cash share-based compensation under SFAS No. 123R, and (ii) facility and equipment costs increasing by $0.3 million.

Amortization of acquired technology. We recorded $0.8 million for amortization of acquired technology for each of the six-month periods ended June 30, 2007 and 2006 related to our Melanophore screening technology.

Interest and other income (expense), net. We recorded interest and other income, net, of $8.9 million for the six months ended June 30, 2007, compared to $0.5 million for the six months ended June 30, 2006. Interest and other income, net, for the six months ended June 30, 2007 was primarily comprised of (i) $9.6 million in interest income and (ii) interest expense and financing costs of $0.6 million. The increase in interest income is attributable to higher cash balances and higher interest rates. Interest and other income (expense), net, for the six months ended June 30, 2006 was primarily comprised of (i) $5.9 million in interest income, (ii) a $4.6 million non-cash charge related to a warrant issued in a settlement with one of our warrant holders, and (iii) interest expense and financing costs of $0.9 million.

Dividends on redeemable convertible preferred stock . We recorded a dividend expense of $1.0 million related to our Series B Preferred for each of the six-month periods ended June 30, 2007 and 2006. The holders of our Series B Preferred are entitled to dividends that accrue at 4% annually.

LIQUIDITY AND CAPITAL RESOURCES

Short term

We anticipate that our research and development expenditures will be substantially higher in 2007 than they were in 2006 as we continue our Phase 3 BLOOM trial of lorcaserin, initiate two additional planned pivotal Phase 3 lorcaserin trials in the second half of 2007, and continue our Phase 2 clinical trial of APD125 and Phase 1 clinical trial of APD791. We expect that the external expenses for our Phase 3 lorcaserin program, the majority of which we expect will be expensed through the first quarter of 2009, will be substantial. In addition to costs related to these clinical trials, we expect to incur significant manufacturing and other pre-launch costs for lorcaserin. A majority of these clinical trial expenses are expected to be paid through CROs. Our contract with the primary CRO in the Phase 3 BLOOM trial can be terminated if we give five days prior written notice. We estimate that our Phase 3 lorcaserin program will continue into early 2009 and may take significantly longer

13




than expected to complete . The research funding we receive from our collaborations with Ortho-McNeil and Merck is scheduled to end in the fourth quarter of 2007 and, absent any new collaboration, we expect to have no revenues from research funding starting in 2008.

We believe we have sufficient cash to meet our objectives over at least the next year, including continuing our development programs for lorcaserin, APD125, and APD791, continuing development of our other lead internal programs, discovering and developing additional drug candidates, continuing to build our development capabilities, and maintaining our research discovery capabilities. We will continue to monitor and evaluate the proper level of research and development expenditures and may adjust such expenditures based upon a variety of factors, such as our month-six DSMB and other clinical trial and preclinical results for our drug candidates, as well as our ability to generate cash through collaborative and financing activities. We expect our 2007 capital expenditures will be higher than in 2006 due to planned purchases of equipment, improvements to our facilities and the expected $3.2 million purchase of a facility in our research park.

The holders of our Series B-1 Preferred can require us to redeem all or some of their outstanding shares of Series B-1 Preferred at any time. The aggregate redemption price of our Series B-1 Preferred at June 30 , 2007 was $40.3 million. If required to redeem, we may be able to satisfy all or a portion of this amount with shares of our common stock. Our ability and decision whether to use cash or stock to satisfy any redemption will depend on, among other factors, the amount of cash we have, our stock price and the amount of common stock then held by our preferred stockholders.

Our sources of liquidity include our cash balances and short-term investments. As of June 30 , 2007, we had $371.0 million in cash and cash equivalents and short-term investments. In addition to our cash and investments, other potential sources of near-term liquidity include (i) research funding from our collaborators through the fourth quarter of 2007, (ii) milestone payments from our collaborators, (iii) the out-licensing of our drug candidates, internal drug programs and technologies, and (iv) equity or debt financing.

In May 2007, we sold to BMR three properties that we owned and continue to occupy, and assigned to BMR an option to purchase a fourth property that we currently lease and primarily occupy for total consideration of $50.1 million, resulting in net proceeds to us of $48.5 million. Concurrently with the closing of the transaction, we leased back the three properties sold to BMR under leases with 20-year terms and two consecutive options to extend such terms for five years each. Initial base rent for these three properties (net of taxes, insurance and maintenance costs (i.e. triple net) for which we are responsible) is an aggregate of $4.5 million annually, subject to an annual increase of 2.5% and other specified adjustments. If, at our election, we complete certain improvements to the properties sold, BMR will pay us up to an additional $16.0 million and our lease payments would increase. The amount of such increase would depend on the year in which such improvements are completed, if ever, with the initial amount of such increase for 2007 set at, assuming we receive the full $16.0 million, $1.4 million per year and increasing by approximately 2.5% each year. We expect that we may receive $1.0 million of such additional amount for improvements in 2007, but that we will not receive the remaining $15.0 million for several years, if ever.

We will continue to lease a portion of the property that is subject to BMR’s purchase option from the current owner through the expiration of the lease with such owner, at which time we expect that BMR will exercise the purchase option and rent will commence under a lease with BMR for a term that is concurrent with the leases for the other three properties and at an initial base rent for such property (triple net) of $0.8 million per year, which would be subject to an annual increase of 2.5%. If BMR is unable to exercise the option due to (i) an amendment to our lease with the current owner of such property that adversely affects such option and such amendment is not consented to by BMR, or (ii) any casualty loss or proceeding in eminent domain pursuant to which BMR has a right not to exercise the option in accordance with our agreement of purchase and sale, and BMR elects not to exercise the option as a consequence of the occurrence of any event described in (i) and (ii) above, we would be required to pay BMR $12.1 million. If BMR elects to not exercise the option due to (ii) above, the lease payments on the remaining three properties would be reduced. The amount of such reduction would depend on the year in which BMR elects to not exercise the option, if ever, with the initial amount of such reduction for 2007 set at $1.1 million per year and increasing by 2.5% each year. In addition, subject to certain restrictions, we will have the option to repurchase all of the properties included in the transaction on the 10 th , 15 th  or 20 th  anniversary of the execution date of the leases, and earlier if the leases are terminated under certain circumstances.

We will continue to be opportunistic in our efforts to generate cash. We will also continue to regularly evaluate potential acquisitions and in-licensing opportunities. Any such transaction may impact our liquidity as well as affect our expenses if,

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for example, our operating expenses increase as a result of such license or acquisition or we use our cash to finance the license or acquisition.

Long term

We will need to raise or generate significant amounts of cash to achieve our objectives of internally developing drugs, which take many years and potentially hundreds of millions of dollars to develop, and continuing our research programs. If we decide to market lorcaserin or any other drug candidate independently or with a partner, we will need to invest heavily in associated marketing costs. Such costs will be substantial and some will need to be incurred prior to receiving marketing approval from the FDA. We do not currently have adequate internal liquidity to meet these objectives in the long term. In order to do so, we will need to continue our out-licensing activities and look to other external sources of liquidity, including the public and private financial markets and strategic partners.

The length of time that our current cash and cash equivalents, short-term investments and any available borrowings will sustain our operations will be based on, among other things, our progress in preclinical and clinical testing, the time and costs related to current and planned clinical trials and regulatory decisions, our research and development costs (including personnel costs), the progress in our collaborations, costs associated with intellectual property, our capital expenditures, and costs associated with securing in-licensing opportunities, if at all. We do not know whether adequate funding will be available to us or, if available, that such funding will be available on acceptable terms. Any significant shortfall in funding could result in the partial or full curtailment of our development and/or research efforts, which, in turn, will affect our development pipeline and ability to generate cash in the future.

In addition to the public and private financial markets, potential sources of liquidity in the long term are milestone and royalty payments from existing and future collaborators.

Sources and Uses of Our Cash

Net cash used in operating activities was $63.2 million during the six months ended June 30 , 2007, and was primarily used to fund our net losses in the period, adjusted for non-cash expenses. Non-cash expenses included $4.1 million in share-based compensation, $4.0 million in depreciation and amortization expense, and $0.8 million in amortization of acquired technology, as well as changes in operating assets and liabilities. Net cash used in operating activities during the six months ended June 30 , 2006 was $29.2 million, and was used to fund our net loss for the period, adjusted for non-cash expenses, including a $4.6 million charge related to a warrant settlement, $3.5 million in depreciation and amortization expense, $2.4 million in share-based compensation, $0.8 million in amortization of acquired technology, as well as changes in operating assets and liabilities. We expect net cash used in operating activities to be substantially greater in 2007 than in 2006 as we continue our Phase 3 program for lorcaserin, our Phase 2 clinical trial of APD125 and our Phase 1 clinical trial of APD791, and continue to hire employees, primarily in clinical development.

Net cash used in investing activities was $31.2 million during the six months ended June 30 , 2007, and was the result of net purchases of short-term investments of $26.3 million, $4.4 million used for equipment and improvements to our facilities, and $0.5 million used for the purchases of other non-current assets. Net cash used in investing activities was $10.5 million during the six months ended June 30 , 2006, and was primarily the result of $3.6 million used for the purchase of a facility located at 6118 Nancy Ridge Drive, $4.5 million used for equipment and improvements to our facilities, net purchases of short-term investments of $1.2 million and $1.2 million used for the purchases of other long-term assets. We expect our 2007 capital expenditures will be higher than in 2006 due to expected purchases of equipment, improvements to our facilities and the expected $3.2 million purchase of a facility in our research park.

Net cash of $50.0 million was provided by financing activities during the six months ended June 30 , 2007. This was primarily attributable to net proceeds of $48.5 million we received in May 2007 from the lease financing transaction and net proceeds of $2.0 million received from option exercises, purchases under our employee stock purchase plan, and from the equity component of the $1.0 million payment we received from Merck when our collaboration was amended in February 2007. Net cash provided by financing activities during the six months ended June 30 , 2006 was $178.8 million, and was primarily attributable to net proceeds of $169.0 million we received in February 2006 from a public offering of our common stock and proceeds of $8.3 million in March 2006 from the exercise of warrants to purchase our common stock.

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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 U.S. 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. We base our estimates on 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 from those estimates.

Our critical accounting policies include:

Revenue recognition. Our revenue recognition policies are in accordance with the SEC Staff Accounting Bulletin, or SAB, No. 104, “Revenue Recognition,” and Emerging Issues Task Force, or EITF, 00-21, “Revenue Arrangements with Multiple Deliverables,” which provide guidance on revenue recognition in financial statements and are based on the interpretations and practices developed by the SEC. Some of our agreements contain multiple elements, including technology access and development fees, research funding, milestones and royalty obligations.

Revenue from a milestone achievement is recognized when earned, as evidenced by acknowledgment from our collaborator, provided that (i) the milestone event is substantive and its achievability was not reasonably assured at the inception of the agreement, (ii) the milestone represents the culmination of an earnings process, (iii) the milestone payment is non-refundable and (iv) our performance obligations after the milestone achievement will continue to be funded by our collaborator at a level comparable to the level before the milestone achievement. If all of these criteria are not met, the milestone achievement is recognized over the remaining period of our performance obligations under the agreement. We defer non-refundable upfront fees under our collaborations and recognize them over the period in which we have significant involvement or perform services, using various factors specific to the collaboration. Amounts we receive for research funding for a specified number of full-time researchers are recognized as revenue as the services are performed. Advance payments we receive in excess of amounts earned are classified as deferred revenues until earned.

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 the enrollment of subjects, the completion of studies 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. Differences between the actual clinical trial costs and the estimated clinical trial costs that we have accrued in any prior period are recorded in the subsequent period in which the actual costs become known. Historically, these differences have not been material and we have not had to make material adjustments in the amounts recorded in a subsequent period; however, material differences could occur in the future.

Intangibles. Purchase accounting requires estimates and judgments to allocate the purchase price to the fair market value of the assets received and liabilities assumed. In February 2001, we acquired Bunsen Rush Laboratories, Inc. for $15.0 million in cash and assumed $0.4 million in liabilities. We allocated $15.4 million to the patented Melanophore technology acquired in such transaction. The Melanophore technology, our primary screening technology, is being amortized over its estimated useful life of 10 years, which was determined based on an analysis, as of the acquisition date, of the conditions in, and the economic outlook for, the pharmaceutical and biotechnology industries and the patent life of the technology. As with any intangible asset, we will continue to evaluate the value of the Melanophore technology. If, in the future, we determine that the Melanophore technology has become impaired or we no longer use it internally as our primary screening technology, we will record a write-down of the carrying value or we will accelerate the amortization if we determine that its life has been shortened.

Share-based compensation. On January 1, 2006, we adopted SFAS No. 123R using the modified-prospective transition method. Under this method, prior period results are not restated. Compensation expense recognized subsequent to adoption includes: (i) compensation expense for all share-based awards granted prior to, but unvested as of, January 1, 2006, based on the grant-date fair value, estimated in accordance with the original provision of SFAS No. 123 using a Black-Scholes option pricing model, and (ii) compensation expense for all share-based awards granted subsequent to January 1, 2006, based on the grant-date fair value, estimated in accordance with the provisions of SFAS No. 123R using the Black-Scholes option pricing model.

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The determination of the grant-date fair value of share-based awards using the Black-Scholes option pricing model is based on the exercise price of the award and our stock price on the date of grant, as well as assumptions for expected volatility, the expected life of options granted and the risk-free interest rate. Changes in the assumptions can have a material impact on the compensation expense we recognize. Expected volatility for awards granted after adoption of SFAS No. 123R is based on a combination of 75% historical volatility of our common stock and 25% market-based implied volatility from traded options on our common stock, with historical volatility being more heavily weighted due to the low volume of traded options on our common stock. The expected life of options granted under SFAS No. 123R 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 cancellations. The risk-free interest rates are based on the U.S. Treasury yield curve, with a remaining term approximately equal to the expected term used in the option pricing model.

SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. If actual forfeitures do vary from estimates, we will recognize the difference in compensation expense in the period the actual forfeitures occur or when options vest.

We recorded total non-cash share-based compensation expense of $4.1 million during the six months ended June 30 , 2007.

Accounting for lease financing obligations. We have accounted for our sale leaseback transactions in accordance with SFAS No. 66 “Accounting for Sales of Real Estate” and SFAS No. 98 “Accounting for Leases.” Our option to repurchase these properties in the future is considered continued involvement under SFAS No. 66 and, therefore, we have applied the financing method under SFAS No. 98. Under the financing method, the book value of the properties and related accumulated depreciation remain on our balance sheet and no sale is recognized. Instead, the sales price of the properties is recorded as a financing obligation, and a portion of each lease payment is recorded as interest expense. We estimated and apply an incremental borrowing rate to the lease payments to record interest expense.

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 in our 2006 Annual Report, which contain additional accounting policies and other disclosures required by GAAP.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Our management establishes and oversees the implementation of board-approved policies covering our investments. We manage our market risk in accordance with our investment guidelines which (i) emphasize preservation of principal over other portfolio considerations, (ii) require investments to be placed in U.S. government and agency obligations and in debt instruments that are rated investment grade, (iii) establish guidelines for the diversification of our investment portfolio, and (iv) require investments to be placed with maturities that maintain safety and liquidity. We target our portfolio to have an average duration of no more than four years with no one instrument having a duration exceeding five years and one month. We do not invest in derivative instruments, or any financial instruments for trading purposes. Our primary market risk exposure as it affects our cash equivalents, short-term investments, and securities available-for-sale is interest rate risk. We monitor our interest rate risk on a periodic basis and we ensure that our cash equivalents, short-term investments, and securities available-for-sale are invested in accordance with our investments guidelines. Managing credit ratings and the duration of our financial investments enhances the preservation of our capital.

We model interest rate exposure by a sensitivity analysis that assumes a hypothetical parallel shift downward in the U.S. Treasury yield curve of 100 basis points. Under these assumptions, if the yield curve were to shift lower by 100 basis points from the level existing at June 30 , 2007, we would expect future interest income from our portfolio to decline by $3.7 million over the next 12 months.

As of December 31, 2006, this same hypothetical reduction in interest rates would have resulted in a decline in interest income of less than $3.9 million over the 12 months following December 31, 2006. The difference in these two estimates is due to the change in our cash and cash equivalents, short-term investments, and securities available-for-sale between these two periods.

The model we use is not intended to forecast actual losses in interest income, but is used as a risk estimation and investment management tool. These hypothetical changes and assumptions are likely to be different from what actually occurs in the

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future. Furthermore, the computations do not incorporate any actions our management could take if the hypothetical interest rate changes actually occur. As a result, the impact on actual earnings will likely differ from those quantified herein.

Item 4. Controls and Procedures.

Based on an evaluation carried out as of the end of the period covered by this quarterly report, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) are effective. There was no change in our internal control over financial reporting that occurred during the last quarter covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

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 quarterly report on Form 10-Q and our other public filings, 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.

The risk factors set forth below with an asterisk (*) before the title are new risk factors or risk factors containing changes, including any material changes, from the risk factors previously disclosed in Item 1A of our annual report on Form 10-K for the year ended December 31, 2006, as filed with the Securities and Exchange Commission. We did not asterisk risk factors where the only changes relate to deleting the risk factor and another reference that previously addressed the potential financial impact of Statement of Financial Accounting Standards No. 123R, which we adopted as of January 1, 2006.

Risks Relating to Our Business

*We will need additional funds to conduct our planned research and development efforts, and we may not be able to obtain such funds.

We had losses of $88.3 million for the year ended December 31, 2006 and $71.5 million for the six months ended June 30, 2007. We had an accumulated deficit of $405.7 million from our inception in April 1997 through June 30, 2007. Our losses have resulted in large part from the significant research and development expenditures we have made in seeking to identify and validate new drug targets and develop compounds that could become marketed drugs.

We expect that our operating expenses over the next several years will be significant and that we will continue to have significant operating losses for at least the next several years, even if we or our collaborators are successful in advancing our compounds or partnered compounds.

We do not have any commercially available drugs. It takes many years and potentially hundreds of millions of dollars to successfully develop a preclinical or early clinical compound into a marketed drug, and our efforts may not result in a marketed drug. We have substantially less money than we need to develop our compounds into marketed drugs. Additional funding may not be available to us or may not be available on terms that you or we believe are favorable. If additional funding is not available, we may have to delay, reduce the scope of or eliminate one or more of our research or development programs.

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*Our stock price could decline significantly based on the results and timing of clinical trials and preclinical studies of, and decisions affecting, our lead drug candidates.

Results of clinical trials and preclinical studies (including preclinical studies conducted after initiation of clinical trials) of our lead drug candidates may not be viewed favorably by us or third parties, including investors, analysts, potential collaborators, the academic and medical community, and regulators. The same may be true of how we design the development programs of our lead drug candidates and regulatory decisions (including by regulatory authorities) affecting those development programs. Biotechnology company stock prices have declined significantly when such results and decisions were unfavorable or perceived negatively or when a drug candidate did not otherwise meet expectations.

We have several drug programs that are currently in clinical trials. We have only completed long-term preclinical toxicology studies for lorcaserin and have not completed carcinogenicity studies for any of our clinical-stage programs. The results of our clinical trials and preclinical studies are uncertain, and the design of these trials and studies (which may change significantly and be more expensive than currently anticipated depending on our results and regulatory decisions) may also be viewed negatively by third parties. We may not be successful in advancing our programs on our projected timetable, if at all. Failure to initiate or delays in the development programs for any of our drug candidates, or unfavorable results or decisions or negative perceptions regarding any of such programs, could cause our stock price to decline significantly.

*The development programs for our drug candidates 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. Even if the results of our development programs are favorable, the development programs of our most advanced drug candidates, including those being developed by our collaborators, may take significantly longer than expected to complete. In addition, the U.S. Food and Drug Administration, or FDA, other regulatory authorities, our collaborators, or we may suspend, delay or terminate our development programs at any time for various reasons, including:

·                   lack of effectiveness of any drug candidate during clinical trials;

·                   side effects experienced by study participants or other safety issues;

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

·                   delays or inability to manufacture or obtain sufficient quantities of materials for use in clinical trials;

·                   inadequacy of or changes in our 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 agency, 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 ongoing clinical trials and preclinical studies;

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

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·                   scheduling conflicts with participating clinicians and clinical institutions;

·                   failure to construct appropriate clinical trial protocols;

·                   insufficient data to support regulatory approval;

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

·                   difficulty in maintaining contact with subjects during or after treatment, which may result in incomplete data.

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 in earlier studies or trials. We may experience similar setbacks in our development programs. If we or our collaborators abandon or are delayed in our development efforts related to lorcaserin, APD125, APD668, APD791 or any other drug candidate, we may not be able to generate sufficient revenues to continue our operations at the current level or become profitable, our reputation in the industry and in the investment community would likely be significantly damaged, it may not be possible to complete financings, and our stock price would likely decrease significantly.

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

The clinical development, manufacturing, labeling, packaging, storage, record-keeping, advertising, promotion, export, marketing and distribution, and other possible activities relating to our drug candidates are, and any resulting drugs will be, subject to extensive regulation by the FDA and other regulatory agencies in the United States. Neither our collaborators nor we are permitted to market our drug candidates in the United States until we receive regulatory approval from the FDA. Neither our collaborators nor we have received marketing approval for any of our drug candidates. Specific preclinical data, chemistry, manufacturing and controls data, a proposed clinical study protocol and other information must be submitted to the FDA as part of an IND application, and clinical trials may commence only after the IND application becomes effective. To market a new drug in the United States, we must submit to the FDA and obtain FDA approval of a New Drug Application, or NDA. An NDA must be supported by extensive clinical and preclinical data, as well as extensive information regarding chemistry, manufacturing and controls to demonstrate the safety and effectiveness of the drug candidate.

We do not expect any drugs resulting from our research and development efforts to be commercially available for several years, if ever. Our most advanced drug candidates, including lorcaserin and APD125, have not completed all preclinical studies and the large, pivotal Phase 3 clinical trials for efficacy and safety that are required for FDA approval. Also, we have not previously filed NDAs with the FDA, nor have we previously conducted large-scale Phase 3 clinical trials, which are significantly larger and more complex than earlier-stage trials. This lack of experience may impede our ability to successfully complete these trials and obtain FDA approval in a timely manner, if at all, for our drug candidates for which development and commercialization is our responsibility. Even if we believe that data collected from our preclinical studies and clinical trials of our drug candidates are promising and that our information and procedures regarding chemistry, manufacturing, and controls are sufficient, our data may not be sufficient to support approval by the FDA or any other U.S. or foreign regulatory authority. As a result, we cannot predict when or whether regulatory approval will be obtained for any drug we develop. Our business and reputation may be harmed by any failure or significant delay in receiving regulatory approval for the sale of any drugs resulting from our drug candidates.

In order to market any drugs outside of the United States, we and our 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, presently unanticipated, risks. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may negatively impact the regulatory process in others. Failure to obtain regulatory approval in other countries or any delay or setback in obtaining such approval could have the same adverse effects associated with regulatory approval in the United States, including the risk that our drug candidates may not be approved for all indications requested and that such approval may be subject to limitations on the indicated uses for which the drug may be marketed.

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The results of preclinical studies and completed clinical trials are not necessarily predictive of future results, and our current drug candidates may not 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 test safety, to study pharmacokinetics and pharmacodynamics, and to understand the drug candidate’s side effects at various doses and schedules. To date, long-term safety and efficacy have not yet been demonstrated in clinical trials for any of our drug candidates. Favorable results in our early studies or trials may not be repeated in later studies or trials, including continuing preclinical studies and large-scale clinical trials, and our drug candidates in later-stage trials may fail to show desired safety and efficacy despite having progressed through earlier-stage trials. In particular, preclinical data and the limited clinical results that we have obtained for lorcaserin and APD125 may not predict results from studies in larger numbers of subjects drawn from more diverse populations treated for longer periods of time. They also may not predict the ability of lorcaserin or APD125 to achieve or sustain the desired effects in the intended population or to do so safely. Unfavorable results from ongoing preclinical studies or clinical trials could result in delays, modifications or abandonment of ongoing or future clinical trials. Preclinical and clinical 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 a clinical trial could cause a clinical trial to be delayed, repeated or terminated. In addition, we may report top-line data from time to time, which is based on a preliminary analysis of key efficacy and safety data, and is subject to change following a more comprehensive review of the data related to the applicable clinical trial.

Our development of lorcaserin may be adversely impacted by cardiovascular side effects previously associated with fenfluramine and dexfenfluramine.

We have developed lorcaserin to more selectively stimulate the 5-HT 2c  serotonin receptor because we believe this may avoid the cardiovascular side effects associated with fenfluramine and dexfenfluramine, two serotonin-releasing agents and non-selective serotonin receptor agonists, both of which were withdrawn from the market in 1997 after reported incidences of heart valve disease and pulmonary hypertension associated with their usage. We may not be correct in this belief, however, or lorcaserin’s selectivity profile may not avoid these undesired side effects. Moreover, the potential relationship between the activity of lorcaserin and the activity of fenfluramine and dexfenfluramine may result in increased FDA regulatory scrutiny of the safety of lorcaserin and may raise potential adverse publicity in the marketplace, which could affect clinical enrollment or ultimately sales if lorcaserin is approved for sale.

Many of our research and development programs are in early stages of development, and may not result in the commencement of clinical trials.

Many of our research and development programs are in the discovery or preclinical stage of development. The process of discovering compounds with therapeutic potential is expensive, time consuming and unpredictable. Similarly, the process of conducting preclinical studies of compounds that we discover requires the commitment of a substantial amount of our technical and financial resources and personnel. We may not discover additional compounds with therapeutic potential, and any of the compounds for which we are conducting preclinical studies may not result in the commencement of clinical trials. We cannot be certain that results sufficiently favorable to justify commencement of Phase 1 studies will be obtained in these preclinical investigations. If we are unable to identify and develop new drug candidates, we may not be able to maintain a clinical development pipeline or generate revenues.

The technologies on which we rely may not result in the discovery or development of commercially viable drugs or could become obsolete.

Our GPCR technologies include technologies that allow us to discover drug-like compounds that act on receptor subtypes of known GPCRs and novel GPCRs where the native ligands have not been identified. These methods of identifying, prioritizing and screening molecular targets are unproven, and may not result in the regulatory approval and commercialization of any therapeutic products. We do not believe that there are any drugs on the market that have been discovered or developed using our proprietary technologies. If we are unable to identify additional drug candidates using our proprietary drug discovery technologies, we may not be able to maintain a clinical development pipeline or generate revenues.

Another company, organization or individual could have, or could develop, a technology targeting GPCRs to discover and develop compounds into drugs more effectively or efficiently than our screening and other technologies. Such a technology could render our technologies, in particular our constitutively activated receptor technology, or CART, and Melanophore technology, obsolete or noncompetitive.

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*If we do not partner one or more unpartnered programs or raise additional funds, we may have to curtail some of our activities.

If we do not receive additional funding from partners, we will need to raise capital through the capital markets or by licensing some or all of our programs on financial terms that may be unfavorable to us. Also, without additional capital or funding from partners, we would need to re-evaluate our strategy of moving multiple drug discovery and development programs forward while at the same time maintaining our research and discovery capabilities. Based on such evaluation, we may need to significantly curtail some of our current and planned programs and expenditures. We do not know what programs, if any, we would need to curtail, but we believe narrowing our pipeline would reduce our opportunities for success.

*Our revenues depend upon the actions of our existing and potential collaborators.

Our revenues were $30.6 million for the year ended December 31, 2006, and were $9.7 million for the six months ended June 30, 2007. We expect that, for at least the next few years, our revenues will depend upon the success of our existing collaborations and on our ability to enter into new collaborations. We will receive little additional revenues from our existing collaborators if our own or our collaborators’ research, development or, ultimately, marketing efforts are unsuccessful, or if our agreements are terminated early. Typically, our collaborators (and not us) control the development of compounds into drugs after we have met early preclinical scientific milestones. In addition, we may not have complete access to information about the results and status of our collaborators’ clinical trials and regulatory programs and strategies. We are not entitled to the more significant milestone payments under our agreements until our collaborators have advanced compounds in clinical testing. Our partners may not devote adequate resources to the development of our compounds and may not develop or implement a successful clinical or regulatory strategy. Only two of our partners, Merck and Ortho-McNeil, have advanced our drug candidates into clinical testing and paid us the applicable milestone payments. We cannot guarantee that any other development, approval or sales milestones in our existing or future collaborations will be achieved, or that we will receive any payments for the achievement of any future milestones.

For the year ended December 31, 2006 and for the six months ended June 30, 2007, 100% of our revenues were from our collaborations with Merck and Ortho-McNeil. Absent any new collaborator, we expect all of our revenues for 2007 to be derived from our collaborations with Merck and Ortho-McNeil. Our revenues will be materially impacted if:

·                   our agreement with either Merck or Ortho-McNeil is terminated;

·                   our collaborators do not devote their time and financial resources to develop compounds under our collaborations;

·                   our collaborators dispute whether we have achieved a milestone, rights to a particular receptor or compound, or other terms of our agreements;

·                   our collaborators use alternative technologies to our technologies and compete with us in developing drugs; or

·                   our collaborators experience failures in the discovery or development of compounds identified with our technologies or in the clinic or marketplace with other products that cause them to discontinue or slow down our collaboration.

Our ability to enter into new collaborations depends on the outcomes of our preclinical and clinical testing. We do not control these outcomes. In addition, even if our testing is successful, pharmaceutical companies may not partner with us on terms that we believe are acceptable until we have advanced our drug candidates into the clinic and, possibly, through later-stage clinical trials, if at all.

Our collaboration agreements with Merck and Ortho-McNeil may be terminated in certain circumstances.

The term of our amended collaborative research program with Merck is until October 21, 2007. Merck can terminate this program (i) for “Technical Grounds”, by giving 30 days prior notice, if both Merck and we agree that Technical Grounds have occurred; or (ii) in the event of our change in control (as defined in the agreement), by giving 30 days prior notice. Technical Grounds include circumstances where (1) our joint research committee (a committee comprised of an equal number of Merck and our representatives) concludes that (a) a significant adverse event affecting all the targets, all program compounds and all active compounds under the program has arisen during the conduct of the program, or (b) continuation of the program is no longer scientifically promising because the role of all the targets proves incorrect, or none of the targets are valid as a suitable target for development of a pharmaceutical product; or (2) Merck’s patent department, upon consultation with our patent

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attorneys, makes a reasonable determination that valid third-party patent rights block the achievement of significant program goals.

In addition, either party can terminate the agreement if the other party breaches its material obligations under the agreement by causes and reasons within its control, has not cured such breach within 90 days of receiving a letter requesting such cure, and there is no dispute as to whether such breach has occurred. In lieu of terminating the agreement, however, Merck can terminate the research program and certain other aspects of the agreement after giving 90 days prior notice if we materially breach our obligations during the course of the program and fail to cure such breach, if such default cannot be cured within such 90-day period, or if we do not commence and diligently continue good faith efforts to cure such default during such period.

The term of the research program under our agreement with Ortho-McNeil is until December 20, 2007. We and Ortho-McNeil each have the right to terminate the agreement early if the other party commits an uncured material breach of its obligations. Further, Ortho-McNeil may terminate the agreement without cause during the term of the research program, provided that in such event it pays us the balance of its research funding obligation for the initial term of the research program in a lump sum, unless the termination is due to a change of control of Arena (as defined in the agreement), in which case Ortho-McNeil may terminate either the agreement or the research program under the agreement without the payment of additional research funding to us. At any time after the end of the research program, Ortho-McNeil may terminate the agreement by providing us at least 60 days prior written notice. Upon termination of the agreement, all rights to the compounds developed under the collaboration will revert to us.

We may have conflicts with our prospective, current or past collaborators that could delay or prevent the development or commercialization of our drug candidates.

We may have conflicts with our prospective, current or past collaborators, such as conflicts concerning the interpretation of preclinical or clinical data, the achievement of milestones, or the ownership of intellectual property. If any conflicts arise with Ortho-McNeil, Merck or any other prospective, current or past collaborator, such collaborator 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 prevent the development or commercialization of our drug candidates, and in turn prevent us from generating revenues:

·                   unwillingness on the part of a collaborator to pay us research funding, milestone payments or royalties that we believe are due to us under a collaboration;

·                   uncertainty regarding ownership of intellectual property rights arising from our collaborative activities, which could prevent us from entering into additional collaborations;

·                   unwillingness on the part of a collaborator to keep us informed regarding the progress of its development and commercialization activities or to permit public disclosure of the results of those activities; or

·                   slowing or cessation of a collaborator’s development or commercialization efforts with respect to our drug candidates.

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

We focus our efforts on GPCRs. Because GPCRs are an important target class for drug discovery efforts, we believe that many pharmaceutical and biotechnology companies and other organizations have internal drug discovery programs focused on GPCRs. Many of the drugs that our collaborators or we are attempting to discover and develop would compete with existing therapies. In addition, many companies are pursuing the development of new drugs that target the same diseases and conditions that we target. Many of our competitors, particularly large pharmaceutical companies, have substantially greater research and development 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 FDA marketing exclusivity rights. In addition, our competitors may develop drugs with fewer side effects, more desirable characteristics (such as route of administration or frequency of dosing) or greater efficacy than our drug candidates or drugs, if any, for the same indication. Any

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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.

*Setbacks and consolidation in the pharmaceutical and biotechnology industries, and our or our collaborators’ inability to obtain third-party coverage and adequate reimbursement, could make partnering more difficult and diminish our revenues.

Setbacks in the pharmaceutical and biotechnology industries, such as those caused by safety concerns relating to high-profile drugs like Avandia, Vioxx and Celebrex, or drug candidates such as rimonabant and torcetrapib, as well as competition from generic drugs, litigation, and industry consolidation, may have an adverse effect on us. For example, 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. Moreover, our and our collaborators’ ability to commercialize future drugs will depend in part on government regulation and the availability of coverage and adequate reimbursement from third-party payers, including government payers, such as the Medicaid and Medicare programs, increases in government-run, single-payer health insurance plans and compulsory licenses of drugs. Government and third-party payers are increasingly attempting to contain healthcare costs by limiting coverage and reimbursement levels for new drugs. These efforts may limit our commercial opportunities by reducing the amount a potential collaborator is willing to pay to license our programs or drug candidates in the future due to a reduction in the potential revenues from drug sales.

*We rely on third parties to conduct our clinical trials and many of our preclinical studies. If those parties do not successfully carry out their contractual duties 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 rely on third parties, including laboratories, investigators, clinical research organizations and manufacturers, to perform critical services for us. 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 subjects for testing and administering the trials. These third parties may not be available when we need them or, if they are available, may not comply with all regulatory and contractual requirements or may not otherwise perform their services in a timely or acceptable manner. These independent third parties may also have relationships with other commercial entities, some of which may compete with us. 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 our collaborators, and we do not control our collaborators’ research and development, clinical trials or regulatory activities. We do not expect any drugs resulting from our collaborators’ research and development efforts to be commercially available for many years, if ever.

We or a third-party manufacturer may encounter failures or difficulties that could delay the clinical development or regulatory approval of our drug candidates, or their ultimate commercial production if approved.

We and third parties manufacture our drug candidates. Should we obtain FDA approval for any of our drug candidates, we expect to rely, in whole or in part, on third-party manufacturers for commercial production. Any performance failure on the part of us or a third-party manufacturer could delay clinical development or regulatory approval of our drug candidates. We or third-party manufacturers may encounter difficulties involving production yields, regulatory compliance, quality control and quality assurance, as well as shortages of qualified personnel. Approval of our drug candidates could be delayed, limited or denied if the FDA does not approve our or a third-party manufacturer’s processes or facilities. Manufacturers are subject to ongoing periodic unannounced inspection by the FDA, the Drug Enforcement Administration of the U.S. Department of Justice, or DEA, and corresponding state and foreign authorities to ensure strict compliance with current good manufacturing practices 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 one of our manufacturers fails to maintain compliance, the production of our drug candidates could be interrupted or suspended, or our product could be recalled or withdrawn, resulting in delays, additional costs and potentially lost revenues.

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We may engage in strategic transactions that could impact our liquidity, increase our expenses and present significant distractions to our management.

From time to time we consider strategic transactions, such as acquisitions of companies, asset purchases and out-licensing or in-licensing of compounds or technologies. Additional potential transactions we may consider include a variety of different business arrangements, including spin-offs, strategic partnerships, joint ventures, restructurings, divestitures, business combinations and investments. Any such transaction may require us to incur non-recurring or other charges, may increase our near and long-term expenditures and may pose significant integration challenges or disrupt our management or business, which could harm our operations and financial results.

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

Our success depends on the continued contributions of our principal management, development and scientific personnel, and the ability to hire and retain key personnel, particularly in the clinical development area as we transition more of our programs from research into drug development. We face intense competition for such personnel. The loss of services of any principal member of our management or scientific staff, particularly Jack Lief, our President and Chief Executive Officer, and Dominic P. Behan, Ph.D., our Senior Vice President and Chief Scientific Officer, could adversely impact our operations and ability to raise additional capital. To our knowledge, neither Mr. Lief nor Dr. Behan plans to leave, retire or otherwise disassociate with us in the near future.

*We may encounter significant delays or problems with our chemical development facility.

We have a chemical development facility for process research, scale-up and production of intermediates and other compounds for research and development purposes, and production of active pharmaceutical ingredients for use in clinical trials. We may encounter delays and problems in operating our chemical development facility due to:

·                   governmental approvals, permits and regulation of the facility;

·                   accidents during operation of the facility;

·                   failure of equipment for the facility;

·                   delays in receiving materials from suppliers;

·                   natural or other disasters; or

·                   other factors inherent in operating a complex manufacturing facility.

We may not be able to operate our chemical development facility in a cost-effective manner or in a time frame that is consistent with our expected future manufacturing needs. If this were to occur, we would need to seek alternative means to fulfill our manufacturing needs, which could delay progress on our programs.

We use biological materials, hazardous materials, chemicals and radioactive compounds.

Our research and development activities involve the use of potentially harmful biological materials as well as materials, chemicals and various radioactive compounds that could be hazardous to human health and safety or the environment. These materials and various wastes resulting from their use are stored at our facility pending ultimate use and disposal. We cannot completely eliminate the risk of contamination, which could cause:

·                   interruption of our research and development efforts;

·                   injury to our employees and others;

·                   environmental damage resulting in costly clean up; and

·                   liabilities under federal, state and local 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.

We may incur substantial liabilities from any product liability claims if our insurance coverage for those claims is inadequate.

We face an inherent risk of product liability exposure related to the testing of our drug candidates in clinical trials, and will face an even greater risk if we sell drugs commercially. An individual may bring a liability claim against us if one of our drug candidates or drugs causes, or merely appears to have caused, an injury. If we cannot successfully defend ourselves against a product liability claim, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

·                   decreased demand for our drug;

·                   injury to our reputation;

·                   withdrawal of clinical trial subjects;

·                   costs of related litigation;

·                   substantial monetary awards to subjects or other claimants;

·                   loss of revenues; and

·                   the inability to commercialize our drug candidates.

We have limited product liability insurance that covers our clinical trials. We intend to expand our insurance coverage to include the sale of drugs if marketing approval is obtained for any of our drug candidates. However, insurance coverage is increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost, and we may not have insurance coverage that will be adequate to satisfy any liability that may arise.

Our operations might be interrupted by the occurrence of a natural disaster or other catastrophic event.

Our laboratories, offices and chemical development facility are located in the same business park in San Diego. We depend on our facilities and on our collaborators, contractors and vendors for the continued operation of our business. Natural disasters or other catastrophic events, including terrorist attacks, power interruptions, wildfires and other fires, actions of animal rights activists, earthquakes and wars could disrupt our operations or those of our collaborators, contractors and vendors. 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.

Even if any of our drug candidates receives regulatory approval, our drug candidates will still be subject to extensive post-marketing regulation.

If we or our collaborators receive regulatory approval for our drug candidates, we will also be subject to ongoing FDA obligations and continued regulatory review, such as continued adverse event reporting requirements. We may also be subject to additional FDA post-marketing obligations, all of which may result in significant expense and limit our ability to commercialize such drugs.

If any of our drug candidates receive United States regulatory approval, the FDA may still impose significant restrictions on the indicated uses for which such drugs may be marketed or impose ongoing requirements for potentially costly post-approval

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studies. 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. Failure to comply with applicable regulatory requirements may result in:

·                   issuance of warning letters by the FDA;

·                   imposition of fines and other civil penalties;

·                   criminal prosecutions;

·                   injunctions, suspensions or revocations of marketing licenses;

·                   suspension of any ongoing clinical trials;

·                   suspension of manufacturing;

·                   delays in commercialization;

·                   refusal by the FDA to approve pending applications or supplements to approved applications filed by us or our collaborators;

·                   refusals to permit drugs to be imported to or exported from the United States;

·                   restrictions on operations, including costly new manufacturing requirements; and

·                   product recalls or seizures.

The FDA’s policies may change and additional government regulations may be enacted that could prevent or delay regulatory approval of our drug candidates or further restrict or regulate post-approval activities. We cannot predict the likelihood, nature or extent of adverse government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are not able to maintain regulatory compliance, we might not be permitted to market our drugs and our business could suffer.

Laws, rules and regulations 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 the provisions of the Sarbanes-Oxley Act of 2002 and rules adopted by the Securities and Exchange Commission, or SEC, and by the NASDAQ Global Market, may result in increased costs to us. These laws, rules and regulations could make it more difficult or costly for us to obtain certain types of insurance, including director and officer 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. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. We cannot predict or estimate the amount or timing of additional costs we may incur to respond to these laws, rules and regulations.

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 our collaborators’ abilities to obtain, secure and defend patents. In particular, the patents directed to our most advanced drug candidates and other compounds discovered using our technologies or that are otherwise part of our collaborations are important to commercializing drugs. We have numerous U.S. and foreign patent applications pending for our technologies, including patent applications on drug leads and methods of treatment involving their

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use, drug discovery techniques using CART, genetically altered GPCRs, GPCRs that we have discovered, new uses for previously discovered GPCRs, and other technologies.

The procedures for obtaining a patent in the United States and in most foreign countries 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 lead to the loss of, or otherwise jeopardize, the patent protection of our inventions. Ensuring adequate quality of translators and foreign patent attorneys is often very challenging. Consequently, the process for having our patents issue will be difficult, complex and time consuming. Our patent position is very uncertain and we do not know when, or if, we will obtain additional patents for our technologies, or if the scope of the patents obtained will be sufficient to protect our drugs.

In addition, other entities may challenge the validity or enforceability of our patents and patent applications in litigation or administrative proceedings. Even the issuance of a patent is not conclusive as to its validity or enforceability. We cannot make assurances as to how much protection, if any, will be given to our patents if we attempt to enforce them or 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 patents’ coverage.

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. In 2000, the United States Patent and Trademark Office began issuing broad patent claims that could allow patent holders to control the use of all drugs that modulate a particular drug target or GPCR, 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. We believe that the question of whether these new patent claims are valid is controversial and the subject of litigation. Whether we or our competitors are able to obtain and enforce such patent claims, particularly as they apply to the GPCRs that are the subject of our drug development activities, may have a significant impact on our potential revenues from any drugs that we are able to develop.

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 proprietary information.

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

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

Our commercial success also depends upon our ability to develop and manufacture our drug candidates and market and sell drugs, if any, and conduct our research and development activities without infringing or misappropriating the proprietary rights of others. There are many patents and patent applications filed, and that may be filed, by others relating to drug discovery 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 drug candidates, technologies or activities infringe the intellectual property rights of others. Numerous United States and foreign issued patents and pending patent applications owned by others exist in the area of GPCRs, including some which purport to allow the patent holder to control the use of all drugs that modulate a particular drug target or GPCR, 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 United States and foreign issued patents

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and pending patent applications owned by others also exist in the therapeutic areas in, and for the therapeutic targets for, which we are developing drugs. These could materially affect our ability to develop our drug candidates 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, which may later result in issued patents that our drug candidates or technologies may infringe. There also may be existing patents, of which we are not aware, that our drug candidates or technologies may infringe. Further, there may be issued patents and pending patent applications in fields relevant to our business, of which we are or may become aware, that we believe we do not infringe or that we believe are invalid or relate to immaterial portions of our overall drug discovery and development efforts. We cannot assure you that others holding any of these patents or patent applications will not assert infringement claims against us for damages or seeking to enjoin our activities. We also cannot assure you that, in the event of litigation, we will be able to successfully assert any belief we may have as to non-infringement, invalidity or immateriality, or that any infringement claims will be resolved in our favor.

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

Other organizations, companies and individuals are seeking proprietary positions on genomics information that overlap with the government-sponsored project to sequence the human genome. Our activities, or those of our licensors or collaborators, could be affected by conflicting positions that may exist between any overlapping genomics information made available publicly as a result of the government-sponsored project and genomics information that other organizations, companies or individuals consider to be proprietary. There could also 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 drug discovery and development programs could:

·                   require us, or our collaborators, to obtain a license to continue to use, manufacture or market the affected drugs, methods or processes, 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 risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, during the course of this kind of 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 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 be unable to develop or commercialize some or all of our drug candidates.

We cannot protect our intellectual property rights throughout the world.

Filing, prosecuting and defending patents on all of our drug discovery technologies and all of our potential drug candidates throughout the world would be prohibitively expensive. Competitors may use our technologies to develop their own drugs in jurisdictions where we have not obtained patent protection. These drugs may compete with our drugs, if any, and may not be covered by any of our patent claims or other intellectual property rights. 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

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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 biotechnology and/or 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, 2005 to June 30, 2007, the market price of our stock was as low as $4.85 per share and as high as $20.68 per share.

Very few drug candidates being tested will ultimately receive FDA approval, and biotechnology or biopharmaceutical companies may experience a significant drop in stock price based on a clinical trial result or regulatory action. Our stock price may fluctuate significantly depending on a variety of factors, including:

·                   the success or failure of our clinical-stage development programs, or other results or decisions affecting, the development of our drug candidates;

·                   the timing of the discovery of drug leads and the development of our drug candidates;

·                   the entrance into a new collaboration or the modification or termination of an existing collaboration;

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

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

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

·                   regulatory actions;

·                   expenses related to, and the results of, litigation and other proceedings relating to intellectual property rights or other matters; and

·                   accounting changes.

We are not able to control all 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.

*Holders of our Series B Preferred can require us to redeem their Series B Preferred.

On December 24, 2003, we completed a private placement of (i) 3,500 shares of our series B-1 redeemable convertible preferred stock, or Series B-1 Preferred , (ii) seven-year warrants to purchase 1,486,200 shares of our common stock at an exercise price of $10.00 per share (subject to weighted-average adjustment in certain circumstances) and (iii) unit warrants to purchase $11.5 million of our series B-2 redeemable convertible preferred stock, or Series B-2 Preferred (the Series B-1 Preferred and the Series B-2 Preferred are collectively referred to as the Series B Preferred), and additional seven-year warrants to purchase 450,000 shares of our common stock at an exercise price of $10.00 per share (subject to weighted-average adjustment in certain circumstances). On April 22, 2005, the investors exercised their unit warrants in full.

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The holders of our Series B-1 Preferred can require us at any time to redeem all or some of their shares of Series B-1 Preferred at such shares’ stated value, plus accrued but unpaid dividends thereon to the date of payment and any applicable penalties. The stated value is the original holder’s investment plus any dividends settled by increasing the stated value at the time the dividend is payable. The Series B-1 Preferred, which accrues dividends at 4% annually, had an aggregate redemption price of $40.3 million at June 30, 2007 .

The holders of our Series B-2 Preferred will be entitled to require us to redeem their shares of Series B-2 Preferred at such shares’ stated value, plus accrued but unpaid dividends thereon to the date of payment and any applicable penalties if, in the future, the average of the closing prices of our common stock for any 30 consecutive trading days is below $7.00 per share, which is the conversion price for the Series B-2 Preferred. The Series B-2 Preferred, which accrues dividends at 4% annually, had an aggregate redemption price of $12.5 million at June 30, 2007 .

Also, the holders of the Series B-2 Preferred may require us to redeem their shares if we issue common stock or common stock equivalents for an effective net price to us per share less than approximately $5.33 (excluding, among other things, certain common stock and common stock equivalents issued or issuable (i) to our officers, directors, employees or consultants, (ii) in connection with certain strategic partnerships or joint ventures, and (iii) in connection with certain mergers and acquisitions). “Effective net price” is not defined in the Certificate of Designations governing our Series B-2 Preferred. The holders of our Series B-2 Preferred may assert that effective net price should be calculated as the amount we receive after paying any discounts and other expenses related to any such issuance.

At the option of any holder of any Series B Preferred, any Series B Preferred held by such holder may be converted into common stock based on the applicable conversion price then in effect for such shares of Series B Preferred.

In addition to the foregoing redemption rights, at any time following the occurrence of a “Triggering Event,” a holder of the Series B Preferred may require us to repurchase all or any portion of the Series B Preferred then held by such holder at a price per share equal to the greater of 115% of the stated value or the market value (as calculated under the Certificate of Designations for the Series B-1 Preferred and the Series B-2 Preferred) of such shares of Series B Preferred plus all accrued but unpaid dividends thereon to the date of payment. “Triggering Event” is specifically defined in the Certificate of Designations for the Series B-1 Preferred and the Series B-2 Preferred, and includes any of the following events (i) immediately prior to a bankruptcy event; (ii) we fail for any reason to timely deliver a certificate evidencing any securities to a purchaser or the exercise or conversion rights of the holders are otherwise suspended for other than a permissible reason; (iii) any of certain events of default (as set forth in the Registration Rights Agreement with the Series B Preferred holders) occur and remain uncured for 60 days; (iv) we fail to make any cash payment required under the Series B Preferred transaction documents and such failure is not timely cured; (v) the issuance of a going concern opinion by our independent registered public accounting firm that is not timely cured; (vi) we breach a section of the Series B Preferred purchase agreement relating to indebtedness and subordination; or (vii) we default in the timely performance of any other obligation under the Series B Preferred transaction documents and such default is not timely cured.

We will also be required to redeem any shares of the Series B Preferred that remain outstanding on the fifth anniversary of their issuance at a price equal to the amount of such shares’ then stated value, plus all accrued but unpaid dividends thereon to the date of payment and any applicable penalties.

If we are required to redeem all or some of the currently outstanding shares of our Series B Preferred, we may be able to pay all or a portion of the redemption price using shares of our common stock if certain enumerated conditions are satisfied, including:

·                   we have sufficient number of shares of common stock available for issuance;

·                   the shares of common stock to be issued are registered under an effective registration statement or are otherwise available for sale under Rule 144(k) under the Securities Act of 1933, as amended, or Securities Act;

·                   our common stock is listed on the NASDAQ Global Market or other eligible market;

·                   the shares to be issued can be issued without violating the rules of the NASDAQ Global Market or any applicable trading market or a provision of our Certificate of Designations for the Series B Preferred; and

·                   no bankruptcy event has occurred.

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If we are permitted to satisfy all or a portion of a redemption by using shares of our common stock, and if we elect to do so, the number of shares to be issued to holders of Series B Preferred will be determined by dividing their cash redemption price by the lesser of the conversion price or 95% of the average of the volume weighted-average price of our common stock for either 10 or 15 trading days.

There can be no assurance that if we have to redeem our Series B Preferred, that we will be able to pay a portion of the redemption price using shares of our common stock. If we use common stock to redeem a portion of the Series B Preferred, the ownership interests of the current holders of our common stock may be significantly diluted. If we are required or elect to redeem shares of the Series B Preferred using cash, we may not have sufficient cash to redeem these shares or to continue our planned research and discovery activities. In such event we may try to raise additional capital by issuing new stock, but there can be no assurance that capital will be available on acceptable terms or at all.

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

There were 61,045,666 shares of our common stock outstanding as of June 30, 2007. The outstanding shares of our Series B-1 Preferred are convertible into up to 5,372,317 shares of common stock at $7.50 per share of common stock. The outstanding shares of our Series B-2 Preferred are convertible into up to 1,793,382 shares of common stock at $7.00 per share of common stock. Holders of Series B Preferred are entitled to receive a 4% annual dividend that is payable by issuing common stock or by increasing the amount of common stock that is issuable upon conversion of the Series B Preferred. In connection with the Series B Preferred financing, we issued warrants to acquire 1,936,200 shares of common stock at an exercise price of $10.00 per share to the two purchasers in our Series B Preferred financing. As of June 30, 2007, 1,106,344 of such warrants are outstanding. Such warrants provide that if the closing price of our common stock is equal to or above $14.00 per share for 30 consecutive trading days, upon 10 trading days’ prior written notice, we will have the right to, and the warrant holders will have the right to require us to, call and cancel any unexercised portion of the warrants (subject to certain conditions). Following such a call notice, we would be obligated to issue to the warrant holder an exchange warrant entitling the holder to purchase shares of our common stock equal to the “Call Amount” (as such term is defined in the warrants). This exchange warrant would contain the same terms and conditions as the original warrant, except that the maturity date would be seven years from the date of issuance of such exchange warrant and the exercise price would be equal to 130% of the average of the volume weighted-average price of our common stock for the five trading days preceding the original warrant cancellation date.

On March 31, 2006, following our call notice to one of our two warrant holders, Smithfield Fiduciary LLC, such holder exercised its warrants to purchase 829,856 shares of our common stock. In connection with this exercise in full of its warrants, Smithfield claimed that it was entitled to receive exchange warrants that would include a provision that could require us to issue additional exchange warrants in the future. We disagreed with this interpretation and, on June 30, 2006, we entered into a Settlement Agreement and Release with Smithfield. As part of the Settlement Agreement and Release, (a) Smithfield and we provided each other with a release of any claims relating to (i) Smithfield’s demand for, and our non-issuance of, exchange warrants, and (ii) any breach or default under certain of our agreements on account of the foregoing, (b) we issued Smithfield a seven-year warrant to purchase 829,856 shares of our common stock at an initial exercise price of $15.49 per share, and (c) we filed a registration statement covering the sale of the shares of common stock issuable under the new warrant. The new warrant does not contain any right for us, or for the holder to require us, to call the warrant, nor does it provide the holder the right to receive any exchange warrants in the future.

In addition, as of June 30, 2007, there were 5,558,319 options to purchase shares of our common stock issued and outstanding under our equity incentive plans at a weighted-average exercise price of $10.38, 1,685,400 performance-based restricted stock unit awards outstanding under our 2006 Long-Term Incentive Plan, as amended, 2,604,961 additional shares of common stock issuable under our 2006 Long-Term Incentive Plan, as amended, 575,962 shares of common stock issuable under our 2001 Employee Stock Purchase Plan, as amended, and 107,919 shares of common stock issuable under our Deferred Compensation Plan. A substantial number of the shares described above, when issued upon exercise, 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.

Any future equity or debt issuances by us may have dilutive or adverse effects on our existing stockholders.

We have financed our operations, and we expect to continue to finance our operations, primarily by issuing and selling our common stock or securities convertible into or exercisable for shares of our common stock. In light of our need for additional financing, we may issue additional shares of common stock or additional convertible securities that could dilute your ownership

32




in our company and may include terms that give new investors rights that are superior to yours. 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. The terms of our Series B Preferred limit our ability to engage in certain equity issuances.

We may also raise additional funds through the incurrence of debt, and the holders of any debt we may issue would have rights superior to your rights in the event we are not successful and are forced to seek the protection of bankruptcy laws. The terms of our Series B Preferred limit our ability to incur debt.

Our largest stockholders may take actions that are contrary to your interests, including selling their stock.

A small number of our stockholders hold a significant amount of our outstanding stock. These stockholders may support competing transactions and have interests that are different from yours. 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 have disagreements with our warrant holders.

We previously had a disagreement with one of our two warrant holders regarding whether such holder was entitled to receive exchange warrants following the exercise of its warrants in full. Although we entered into a Settlement Agreement and Release with this holder, we may have a similar dispute with the other warrant holder. Moreover, we may be involved with other disagreements with our warrant holders in the future. Such disagreements may lead to litigation which may be expensive and consume management’s time, or involve settlements, the terms of which may not be favorable to us.

Provisions of our Series B Preferred may prevent or make it more difficult for us to raise funds or take certain other actions.

Provisions of our Series B Preferred require us to obtain approval of the preferred stockholders, or otherwise trigger rights of first refusal or payment provisions, to (i) offer or sell new securities, other than in specified underwritten offerings or strategic partnerships or joint venture and certain other exceptions, (ii) sell or issue common stock or securities issuable into common stock below certain prices, (iii) incur debt or allow liens on our property, other than certain permitted debt and liens, (iv) amend our certificate of incorporation so as to affect adversely any rights of the preferred stockholders, (v) authorize or create a new class of stock that will be senior or equal to the Series B Preferred in terms of dividends, redemption or distribution of assets, or (vi) take certain other actions. These provisions may make it more difficult for us to take certain corporate actions and could delay, discourage or prevent future financings.

Our rights agreement and certain provisions in our charter documents and Delaware law could delay or prevent a change in management or a takeover attempt that you may consider to be in your best interest.

We have adopted certain anti-takeover provisions, including a stockholders’ rights agreement, dated as of October 30, 2002, between us and Computershare Trust Company, Inc., as Rights Agent, as amended. The rights agreement will cause substantial dilution to any person who attempts to acquire us in a manner or on terms not approved by our board of directors.

The rights agreement and Certificate of Designations for the Series B Preferred, 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 other management and could make more difficult a merger, tender offer or proxy contest involving us that you may consider to be in your best interest. For example, these provisions:

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

·                   limit who can call a special meeting of stockholders;

·                   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.

33




Item 4. Submission of Matters to a Vote of Security Holders.

The annual meeting of our stockholders was held on June 11, 2007 for the purposes of (i) electing eight directors to our Board to serve for the ensuing year and until their successors are elected and qualified or until their resignation or removal and (ii) ratifying the appointment of Ernst & Young LLP, an independent registered public accounting firm, as our independent auditors for the fiscal year ending December 31, 2007. Proxies for the meeting were solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934 and there was no solicitation in opposition to the director nominees.

Set forth below are the voting results of our common stock for each of the proposals. There were no broker non-votes with respect to either of the proposals.

Director Election

Jack Lief, Dominic P. Behan, Ph.D., Donald D. Belcher, Scott H. Bice, Harry F. Hixson, Jr., Ph.D., J. Clayburn La Force, Jr., Ph.D., Tina S. Nova, Ph.D., and Christine A. White, M.D. were elected as directors to our Board to serve for the ensuing year and until their successors are elected and qualified or until their resignation or removal. The votes cast by proxy or in person with respect to the election of directors, as determined by the final report of the inspectors of election, are set forth below.

Director Nominee

 

“For”

 

“Withheld”

 

 

 

 

 

 

 

Jack Lief

 

54,336,430

 

289,658

 

Dominic P. Behan, Ph.D.

 

54,347,280

 

278,808

 

Donald D. Belcher

 

54,330,994

 

295,094

 

Scott H. Bice

 

54,155,648

 

470,440

 

Harry F. Hixson, Jr., Ph.D.

 

53,752,722

 

873,366

 

J. Clayburn La Force, Jr., Ph.D.

 

54,315,856

 

310,232

 

Tina S. Nova, Ph.D.

 

53,947,047

 

679,041

 

Christine A. White, M.D.

 

54,343,135

 

282,953

 

 

Ratification of the Appointment of Ernst & Young LLP

Stockholders ratified the appointment of Ernst & Young LLP as our independent auditors for the fiscal year ending December 31, 2007, and the voting results, as determined by the final report of the inspectors of election, are set forth below.

Votes for approval

 

54,243,115

 

 

 

 

 

Votes against approval

 

360,700

 

 

 

 

 

Abstentions

 

22,273

 

 

In addition, all of our outstanding series B redeemable convertible preferred stock voted “for” for each of the above proposals. As of the record date for our 2007 annual meeting of stockholders, the series B redeemable convertible preferred stock had 7,095,600 votes.

Item 6. Exhibits.

EXHIBIT
NO.

 

DESCRIPTION

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 period 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)

 

34




 

3.3

 

Certificate of Designations of Series A Junior Participating Preferred Stock of Arena, dated November 4, 2002 (incorporated by reference to Exhibit 3.3 to Arena’s quarterly report on Form 10-Q for the period ended September 30, 2002, filed with the Securities and Exchange Commission on November 14, 2002, Commission File No. 000-31161)

3.4

 

Certificate of Designations of Series B-1 Convertible Preferred Stock and Series B-2 Convertible Preferred Stock of Arena, dated December 24, 2003 (incorporated by reference to Exhibit 3.1 to Arena’s current report on Form 8-K filed with the Securities and Exchange Commission on December 30, 2003, Commission File No. 000-31161)

3.5

 

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 December 21, 2005, Commission File No. 000-31161)

4.1

 

Rights Agreement, dated October 30, 2002, between Arena and Computershare Trust Company, Inc. (incorporated by reference to Exhibit 4.1 to Arena’s current report on Form 8-K filed with the Securities and Exchange Commission on November 1, 2002, Commission File No. 000-31161)

4.2

 

Amendment No. 1, dated December 24, 2003, to Rights Agreement, dated October 30, 2002, between Arena and Computershare Trust Company, Inc. (incorporated by reference to Exhibit 4.1 to Arena’s current report on Form 8-K filed with the Securities and Exchange Commission on December 30, 2003, Commission File No. 000-31161)

4.3

 

Amendment No. 2, dated November 16, 2006, to Rights Agreement, dated October 30, 2002, between Arena and Computershare Trust Company, Inc. (incorporated by reference to Exhibit 4.3 to Amendment No. 2 to Arena’s Registration Statement on Form 8-A filed with the Securities and Exchange Commission on November 16, 2006, Commission File No. 000-31161)

4.4

 

Form of common stock certificates (incorporated by reference to Exhibit 4.2 to Arena’s registration statement on Form S-1, as amended, filed with the Securities and Exchange Commission on July 19, 2000, Commission File No. 333-3594)

10.1*

 

Arena 2006 Long-Term Incentive Plan, as Amended (incorporated by reference to Exhibit 10.1 to Arena’s current report on Form 8-K filed with the Securities and Exchange Commission on April 13, 2007, Commission File No. 000-31161)

10.2*

 

Form of Indemnification Agreement between Arena and its directors (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 18, 2007, Commission File No. 000-31161)

10.3*

 

Form of Indemnification Agreement between Arena and its executive officers (incorporated by reference to Exhibit 10.2 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*

 

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)

10.5

 

Lease agreement between BMR-6114-6154 Nancy Ridge Drive LLC and Arena for 6114 Nancy Ridge Drive, San Diego, California

10.6

 

Lease agreement between BMR-6114-6154 Nancy Ridge Drive LLC and Arena for 6118 Nancy Ridge Drive, San Diego, California

10.7

 

Lease agreement between BMR-6114-6154 Nancy Ridge Drive LLC and Arena for 6122, 6124 and 6126 Nancy Ridge Drive, San Diego, California

10.8

 

Lease agreement between BMR-6114-6154 Nancy Ridge Drive LLC and Arena for 6154 Nancy Ridge Drive, San Diego, California

31.1

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(A) promulgated under the Securities Exchange Act of 1934

31.2

 

Certification of Chief Financial Officer pursuant to Rule 13a-14(A) promulgated under the Securities Exchange Act of 1934

32.1

 

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(B) promulgated under the Securities Exchange Act of 1934

 


* Management contract or compensatory plan or arrangement.

35




SIGNATURES

Pursuant to the requirements 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.

Date: August 9, 2007

ARENA PHARMACEUTICALS, INC.

 

 

 

 

By:

/s/ Jack Lief

 

 

Jack Lief

 

 

President and Chief Executive Officer (principal
executive officer authorized to sign on behalf of the
registrant)

 

 

 

 

By:

/s/ Robert E. Hoffman

 

 

Robert E. Hoffman, CPA

 

 

Vice President, Finance and Chief Financial Officer
(principal financial and chief accounting officer
authorized to sign on behalf of the registrant)

 

36




EXHIBIT INDEX

EXHIBIT
NO.

 

DESCRIPTION

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 period 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 Designations of Series A Junior Participating Preferred Stock of Arena, dated November 4, 2002 (incorporated by reference to Exhibit 3.3 to Arena’s quarterly report on Form 10-Q for the period ended September 30, 2002, filed with the Securities and Exchange Commission on November 14, 2002, Commission File No. 000-31161)

3.4

 

Certificate of Designations of Series B-1 Convertible Preferred Stock and Series B-2 Convertible Preferred Stock of Arena, dated December 24, 2003 (incorporated by reference to Exhibit 3.1 to Arena’s current report on Form 8-K filed with the Securities and Exchange Commission on December 30, 2003, Commission File No. 000-31161)

3.5

 

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 December 21, 2005, Commission File No. 000-31161)

4.1

 

Rights Agreement, dated October 30, 2002, between Arena and Computershare Trust Company, Inc. (incorporated by reference to Exhibit 4.1 to Arena’s current report on Form 8-K filed with the Securities and Exchange Commission on November 1, 2002, Commission File No. 000-31161)

4.2

 

Amendment No. 1, dated December 24, 2003, to Rights Agreement, dated October 30, 2002, between Arena and Computershare Trust Company, Inc. (incorporated by reference to Exhibit 4.1 to Arena’s current report on Form 8-K filed with the Securities and Exchange Commission on December 30, 2003, Commission File No. 000-31161)

4.3

 

Amendment No. 2, dated November 16, 2006, to Rights Agreement, dated October 30, 2002, between Arena and Computershare Trust Company, Inc. (incorporated by reference to Exhibit 4.3 to Amendment No. 2 to Arena’s Registration Statement on Form 8-A filed with the Securities and Exchange Commission on November 16, 2006, Commission File No. 000-31161)

4.4

 

Form of common stock certificates (incorporated by reference to Exhibit 4.2 to Arena’s registration statement on
Form S-1, as amended, filed with the Securities and Exchange Commission on July 19, 2000, Commission File No. 333-3594)

10.1*

 

Arena 2006 Long-Term Incentive Plan, as Amended (incorporated by reference to Exhibit 10.1 to Arena’s current report on Form 8-K filed with the Securities and Exchange Commission on April 13, 2007, Commission File No. 000-31161)

10.2*

 

Form of Indemnification Agreement between Arena and its directors (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 18, 2007, Commission File No. 000-31161)

10.3*

 

Form of Indemnification Agreement between Arena and its executive officers (incorporated by reference to Exhibit 10.2 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*

 

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)

10.5

 

Lease agreement between BMR-6114-6154 Nancy Ridge Drive LLC and Arena for 6114 Nancy Ridge Drive, San Diego, California

10.6

 

Lease agreement between BMR-6114-6154 Nancy Ridge Drive LLC and Arena for 6118 Nancy Ridge Drive, San Diego, California

10.7

 

Lease agreement between BMR-6114-6154 Nancy Ridge Drive LLC and Arena for 6122, 6124 and 6126 Nancy Ridge Drive, San Diego, California

10.8

 

Lease agreement between BMR-6114-6154 Nancy Ridge Drive LLC and Arena for 6154 Nancy Ridge Drive, San Diego, California

31.1

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(A) promulgated under the Securities Exchange Act of 1934

 

37




 

31.2

 

Certification of Chief Financial Officer pursuant to Rule 13a-14(A) promulgated under the Securities Exchange Act of 1934

32.1

 

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 and Rule
13a-14(B) promulgated under the Securities Exchange Act of 1934

 


* Management contract or compensatory plan or arrangement.

38



Exhibit 10.5

EXECUTION VERSION

 

LEASE

by and between

BMR-6114-6154 Nancy Ridge Drive LLC ,

a Delaware limited liability company,

as Landlord

and

Arena Pharmaceuticals, Inc.,

a Delaware corporation,

as Tenant

Building D:  6114 Nancy Ridge Drive, San Diego, CA




TABLE OF CONTENTS

 

Page

 

 

 

1.

Lease of Premises

1

2.

Basic Lease Provisions

1

3.

Term

2

4.

Term Commencement Date and Possession

2

5.

Rent

2

6.

Rent Adjustments

3

7.

Taxes

3

8.

Security Deposit

5

9.

Use

6

10.

Brokers

8

11.

Holding Over

8

12.

Property Management Fee

9

13.

Condition of Premises

9

14.

Regulations and Parking Facilities

9

15.

Utilities and Services

10

16.

Intentionally Omitted

11

17.

Alterations

11

18.

Repairs and Maintenance

12

19.

Liens

14

20.

Indemnification and Exculpation

14

21.

Insurance; Waiver of Subrogation

15

22.

Damage or Destruction

17

23.

Eminent Domain

19

24.

Defaults and Remedies

20

25.

Assignment or Subletting

23

26.

Attorneys’ Fees

26

27.

Bankruptcy

26

28.

Definition of Landlord

27

29.

Estoppel Certificate

27

30.

Purchase Option

27

31.

Limitation of Landlord’s Liability

31

32.

Premises Control by Landlord

31

33.

Quiet Enjoyment

32

34.

Subordination and Attornment

32

35.

Surrender

33

36.

Waiver and Modification

33

37.

Waiver of Jury Trial and Counterclaims

33

38.

Hazardous Materials

34

39.

Miscellaneous

35

40.

Option to Extend Term

37

41.

Tenant’s Authority

37

41.

Landlord’s Authority

38

42.

Confidentiality

38

43.

Odors and Exhaust

38

44.

Excavation

38

 




LEASE

THIS LEASE (this “ Lease ”) is entered into as of this 2nd day of May, 2007 (the “ Execution Date ”), by and between BMR-6114-6154 Nancy Ridge Drive LLC, a Delaware limited liability company (“ Landlord ”), and Arena Pharmaceuticals, Inc., a Delaware corporation (“ Tenant ”).

RECITALS

A.             Landlord owns certain real property (the “ Property ”) and the improvements thereon located at 6114 Nancy Ridge Drive, San Diego, California, including the approximately 40,000 rentable square foot building located thereon (the “ Building ”) in which the Premises (as defined below) are located; and

B.             Landlord wishes to lease to Tenant, and Tenant desires to lease from Landlord, the Premises (as defined below) pursuant to the terms and conditions of this Lease, as detailed below.

AGREEMENT

NOW, THEREFORE, Landlord and Tenant, in consideration of the mutual promises contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound, agree as follows:

1.              Lease of Premises .  Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, the Premises, as more particularly described on Exhibit A attached hereto.  The Property and all landscaping, parking facilities and other improvements and appurtenances related thereto, including, without limitation, the Building are hereinafter collectively referred to as the “ Premises .”

2.              Basic Lease Provisions .  For convenience of the parties, certain basic provisions of this Lease are set forth herein.  The provisions set forth herein are subject to the remaining terms and conditions of this Lease and are to be interpreted in light of such remaining terms and conditions.

2.1.           This Lease shall take effect upon the date of execution and delivery hereof by all parties hereto and, except as specifically otherwise provided within this Lease, each of the provisions hereof shall be binding upon and inure to the benefit of Landlord and Tenant from the date of execution and delivery hereof by all parties hereto.  Notwithstanding anything to the contrary contained in this Lease, the delivery of this Lease by each party hereto to the other shall occur concurrently with, and as part of, the consummation of the transactions contemplated by that certain Agreement of Purchase and Sale dated as of March 21, 2007 (the “ Purchase Agreement ”).

2.2.           Rentable Area of the Premises:  As of the Term Commencement Date, the Rentable Area of the Premises is approximately 40,000 rentable square feet for the Building.

2.3.           Initial monthly installment of Basic Annual Rent for the Premises (“ Basic Annual Rent ”) as of the Term Commencement Date shall be $168,594.90, subject to the rental adjustments provided in Article 6 hereof.

2.4.           Term Commencement Date: May 2, 2007.

2.5.           Term Expiration Date:  May 31, 2027.

2.6.           Security Deposit: An amount equal to $168,594.90, which amount shall be increased in accordance with Section  8.1 .

2.7.           Permitted Use:  General office and/or laboratory use, together with all manufacturing, research and development in connection with such laboratory use, in conformity with Applicable Laws (as defined below) and consistent with applicable zoning for the Premises.

2.8.           Address for Rent Payment:

 

BMR-6114-6154 Nancy Ridge Drive LLC

 

 

17140 Bernardo Center Drive, Suite 222

 

 

San Diego, California 92128

 

Attn:  Karen Sztraicher

 

1




 

2.9.           Address for Notices to Landlord:

 

BMR-6114-6154 Nancy Ridge Drive LLC

 

 

17140 Bernardo Center Drive, Suite 222

 

 

San Diego, California  92128

 

 

Attn:  General Counsel/Real Estate

 

 

 

2.10.         Address for Notices to Tenant:

 

Arena Pharmaceuticals, Inc.

 

 

6166 Nancy Ridge Drive

 

 

San Diego, California  92121

 

 

Attn:  Chief Financial Officer

 

 

 

With a copy to:

 

Arena Pharmaceuticals, Inc.

 

 

6166 Nancy Ridge Drive

 

 

San Diego, California  92121

 

 

Attn:  General Counsel

 

2.11.         The following Exhibits are attached hereto and incorporated herein by reference:

Exhibit A

Premises

Exhibit B

Acknowledgement of Term Commencement Date and Term Expiration Date

Exhibit C

Rules and Regulations

Exhibit D

Form of Estoppel Certificate

Exhibit E

Form of Letter of Credit

Exhibit F

Form of Notice of Exercise of Purchase Option

 

3.              Term .

3.1.           This Lease shall take effect upon the date of execution and delivery hereof by all parties hereto and, except as specifically otherwise provided within this Lease, each of the provisions hereof shall be binding upon and inure to the benefit of Landlord and Tenant from the date of execution and delivery hereof by all parties hereto.

3.2.           The actual term of this Lease (the “ Term ”) shall be that period from the Term Commencement Date through the Term Expiration Date, subject to earlier termination of this Lease as provided herein.

4.              Term Commencement Date and Possession .

4.1.           Tenant currently occupies and shall continue to occupy the Premises on the Term Commencement Date.  Tenant and Landlord shall execute and deliver to each other a written acknowledgement of the actual Term Commencement Date and the Term Expiration Date within ten (10) days after the Term Commencement Date, in the form attached as Exhibit B hereto.  Failure to execute and deliver such acknowledgement, however, shall not affect the Term Commencement Date or Landlord’s or Tenant’s liability hereunder.

5.              Rent .

5.1.           Tenant shall pay to Landlord as Basic Annual Rent for the Premises, commencing on the Term Commencement Date, the sum set forth in Section 2.3 , subject to the rental adjustments provided in Article 6 hereof.  Basic Annual Rent shall be paid in equal monthly installments (as set forth in Section 2.3 ), subject to the rental adjustments provided in Article 6 hereof, each in advance on the first day of each and every calendar month during the Term.

5.2.           In addition to Basic Annual Rent, Tenant shall pay to Landlord as additional rent (“ Additional Rent ”) at times hereinafter specified in this Lease (a) amounts related to Insurance Costs and Taxes (each as defined below) and (b) any other amounts that Tenant assumes or agrees to pay under the provisions of this Lease that are owed to Landlord, including, without limitation, any and all other sums that may become due by reason of any default of Tenant or failure on Tenant’s part to comply with the agreements, terms, covenants and conditions of this Lease to be performed by Tenant, after notice and the lapse of any applicable cure periods.

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5.3.           Basic Annual Rent and Additional Rent shall together be denominated “ Rent .”  Rent shall be paid to Landlord, without abatement, deduction or offset, in lawful money of the United States of America at the office of Landlord as set forth in Section 2.9 or to such other person or at such other place as Landlord may from time to time designate in writing.  In the event the Term commences or ends on a day other than the first day of a calendar month, then the Rent for such fraction of a month shall be prorated for such period on the basis of a thirty (30) day month and shall be paid at the then-current rate for such fractional month.

6.              Rent Adjustments .  The Basic Annual Rent shall be subject to the following adjustments:

6.1.           Annual Adjustment .  The Basic Annual Rent shall be subject to an annual upward adjustment of two and one-half percent (2.5%) of the then-current Basic Annual Rent.  The first such adjustment shall become effective commencing with that monthly rental installment that is due on or after the first (1 st ) anniversary of the Term Commencement Date, and subsequent adjustments shall become effective on every successive anniversary for so long as this Lease continues in effect.

6.2.           Building F Option: Basic Annual Rent Reduction .  Pursuant to the Purchase Agreement, Tenant assigned to Landlord Tenant’s existing option (the “ Building F Option ”) to acquire that certain real property located at 6122, 6124 and 6126 Nancy Ridge Drive, San Diego, California, including the approximately 68,000 rentable square foot building located thereon (the “ Building F Property ”).  In the event: (a) Landlord elects not to exercise the Building F Option as a result of any casualty loss or proceeding in eminent domain in accordance with Section 1.2 of the Purchase Agreement; and (b) Tenant pays Landlord the Building F Option Termination Payment in accordance with Section 1.2 of the Purchase Agreement, the monthly rental installment of Basic Annual Rent shall be reduced by the applicable amount set forth in Schedule 1 attached hereto (the “ Basic Annual Rent Reduction ”), and the Basic Annual Rent as so adjusted shall be subject to further rental adjustments as provided in Section 6.1 hereof.

7.              Taxes .

7.1.           Commencing with the Term Commencement Date and continuing for each calendar year or, at Landlord’s option, tax year (each such “tax year” being a period of twelve (12) consecutive calendar months for which the applicable taxing authority levies or assesses Taxes), for the balance of the Term, Tenant shall pay to Landlord the amount of all Taxes levied and assessed for any such year upon the Premises.  “ Taxes ” shall mean all government impositions including, without limitation, property tax costs consisting of real and personal property taxes and assessments (including amounts due under any improvement bond upon the Premises or any portion thereof, including the parcel or parcels of real property upon which the Building is located or assessments levied in lieu thereof) imposed by any federal, state, regional, local or municipal governmental authority, agency or subdivision (each, a “ Governmental Authority ”) on the Premises or improvements thereon, any tax on or measured by gross rentals received from the rental of space in the Building (other than gross receipt taxes assessed against Landlord based solely on Landlord’s business entity structure), or tax based on the square footage of the Premises or the Building as well as any parking charges, utilities surcharges, or any other costs levied, assessed or imposed by, or at the direction of, or resulting from statutes or regulations, or interpretations thereof, promulgated by any Governmental Authority in connection with the use or occupancy of the Premises or the parking facilities serving the Premises; any tax on this transaction or this Lease; provided , however, that “ Taxes ” shall in no event include any franchise or income tax or any tax based on net rentals received from the rental of space in the Building. Any amount paid by Tenant for any partial year of the Term shall be prorated on the basis of the number of days of such partial year.  Payment shall be made in the following manner:  Tenant shall pay to Landlord the amounts owed under this Article 7 within thirty (30) days after Landlord gives notice to Tenant of the amount of such Taxes payable by Tenant (or not less than ten (10) days prior to delinquency, whichever is later).  Landlord also shall provide Tenant with a copy of the applicable tax bill or tax statement from the relevant taxing authority.  Notwithstanding the foregoing, if Applicable Laws allow any such Taxes to be paid in installments, then Tenant may make such payments to Landlord in installments, provided that each such installment shall be payable to Landlord not less than ten (10) days prior to the date upon which payment of the applicable installment to the taxing authority becomes delinquent.  In addition to any other amounts due from Tenant to Landlord, if Tenant fails to pay Taxes to Landlord as herein required, Tenant shall pay to Landlord the amount of any interest, penalties or late charges imposed for late payment.  “ Applicable Laws ” means all federal, state,

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municipal and local laws, codes, ordinances, rules and regulations of Governmental Authorities, committees, associations, or other regulatory committees, agencies or governing bodies having jurisdiction over the Premises, Landlord or Tenant, including both statutory and common law and hazard waste rules and regulations.

(a)          If the Premises are separately assessed, Tenant shall have the right, by appropriate proceedings, to protest or contest in good faith any assessment or reassessment of Taxes, any special assessment, or the validity of any Taxes or of any change in assessment or tax rate; provided , however, that prior to any such challenge Tenant must either (i) pay to the appropriate Governmental Authority the Taxes alleged to be due in their entirety and seek a refund from the appropriate authority (which payment may be under protest if payment under protest will not materially adversely affect Landlord) or (ii) post a bond (or provide to Landlord other security acceptable to Landlord) in an amount sufficient to ensure full payment of the Taxes, including any potential interest, late charges and penalties.  Upon a final determination with respect to any such contest or protest, Tenant shall promptly pay to the appropriate Governmental Authority all sums found to be due with respect thereto.  In any such protest or contest, Tenant may act in its own name, and at the request of Tenant, Landlord shall cooperate with Tenant in any way Tenant may reasonably require in connection with such contest or protest, including signing such documents as Tenant reasonably shall request, provided that such cooperation shall be at no expense to Landlord and shall not require Landlord to attend any appeal or other hearing unless (x) such attendance is mandatory or reasonably determined by Tenant to be reasonably required in order to materially increase the prospects of a successful contest or protest, and (y) Tenant pays all costs and expenses of Landlord’s appearance and fairly compensates Landlord for all time spent at such appeal or hearing.  Any such contest or protest shall be at Tenant’s sole expense (subject to reimbursement of such expenses whenever Tenant prevails in such contest or protest but only to the extent of available proceeds therefor from any portion of the refund that would not have accrued to the benefit of Landlord absent Tenant’s protest or contest), and if any penalties, interest or late charges become payable with respect to the Taxes as a result of such contest or protest, Tenant shall pay the same.

(b)         If Tenant obtains a refund as the result of Tenant’s protest or contest, and subject to Tenant’s obligation to pay Landlord’s costs (if any) associated therewith, Tenant shall be entitled to such refund to the extent it relates to the Premises during the Term.

7.2.           Tenant shall be solely responsible for the payment of any and all taxes levied upon personal property and trade fixtures located upon the Premises, and shall pay the same at least ten (10) days prior to delinquency.  Tenant shall have the right by appropriate proceedings to protest or contest in good faith the assessment or validity of any such taxes.  Any such contest or protest shall be at Tenant’s sole expense.

7.3.           If, at any time during the Term under the laws of any Governmental Authority, a tax or excise on rent or any other tax howsoever described is levied or assessed by any such political body against Landlord on account of rentals payable to Landlord hereunder, such tax or excise shall be considered “ Taxes ” for the purposes of this Article 7 .  Notwithstanding the foregoing, “Taxes” shall not include any amount assessed against Landlord as any local, state or federal income tax, including any gross receipt taxes assessed against Landlord based solely on Landlord’s business entity structure.

7.4.           Within ten (10) business days after the end of each calendar month, Tenant shall submit to Landlord an invoice, or, in the event an invoice is not available, an itemized list, of all costs and expenses paid by Tenant that (a) Tenant has incurred (either internally or by employing third parties) during the prior month and (b) for which Tenant reasonably believes it is entitled to reimbursements from Landlord pursuant to the terms of this Lease.  Landlord shall pay to Tenant each invoiced amount within twenty (20) days after Landlord’s receipt of the applicable invoice unless Landlord, in good faith, disputes any obligation to pay the invoice; provided , however , Landlord shall pay to Tenant any undisputed portion of such invoice and shall notify Tenant in writing of those portions of such invoice which Landlord disputes (the “ Disputed Amounts ”).  Upon resolution of any Disputed Amount, in a manner in which Landlord is either determined to owe, or has agreed to pay, any of the Disputed Amounts, then Landlord shall promptly pay to Tenant the amount it is determined to owe or has agreed to pay, as applicable.

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8.              Security Deposit .

8.1.           Prior to the Term Commencement Date, Tenant shall deposit with Landlord the sum set forth in Section 2.6 (the “ Security Deposit ”), which sum shall be held by Landlord as security for the faithful performance by Tenant of all of the terms, covenants and conditions of this Lease to be kept and performed by Tenant during the Term of this Lease.  If Tenant defaults with respect to any provision of this Lease, including, but not limited to, any provision relating to the payment of Rent, then Landlord may (but shall not be required to) use, apply or retain all or any part of the Security Deposit for the payment of any Rent or any other sum in default, or to compensate Landlord for any other loss or damage that Landlord may suffer by reason of Tenant’s default.  If any portion of the Security Deposit is so used or applied, then Tenant shall, within ten (10) days following demand therefor, deposit cash with Landlord in an amount sufficient to restore the Security Deposit to its original amount, and Tenant’s failure to do so shall be a material breach of this Lease.  Landlord shall not be required to keep this Security Deposit separate from its general fund, and Tenant shall not be entitled to interest on the Security Deposit.  The provisions of this Article 8 shall survive the expiration or earlier termination of this Lease.  TENANT HEREBY WAIVES THE REQUIREMENTS OF SECTION 1950.7 OF THE CALIFORNIA CIVIL CODE, AS THE SAME MAY BE AMENDED FROM TIME TO TIME, WHICH, AMONG OTHER THINGS, (a) ESTABLISH THE TIME FRAME BY WHICH LANDLORD MUST REFUND A SECURITY DEPOSIT UNDER A LEASE, AND/OR (b) PROVIDE THAT LANDLORD MAY CLAIM FROM THE SECURITY DEPOSIT ONLY THOSE SUMS REASONABLY NECESSARY TO REMEDY DEFAULTS IN THE PAYMENT OF RENT, TO REPAIR DAMAGE CAUSED BY TENANT OR TO CLEAN THE PREMISES.

8.2.           In the event of bankruptcy or other debtor-creditor proceedings against Tenant, the Security Deposit shall be deemed to be applied first to the payment of Rent and other charges due Landlord for all periods prior to the filing of such proceedings.

8.3.           Landlord may deliver to any purchaser of Landlord’s interest in the Premises the funds deposited hereunder by Tenant, and thereupon Landlord shall be discharged from any further liability with respect to such deposit.  This provision shall also apply to any subsequent transfers.

8.4.           The Security Deposit, or any balance thereof after Landlord applies the Security Deposit to the payment of Rent or the amount reasonably necessary to repair damage to the Premises caused by Tenant or to compensate Landlord for any breach by Tenant, shall be returned to Tenant (or, at Landlord’s option, to the last assignee of Tenant’s interest hereunder) within thirty (30) days after the later of: (a) the expiration or earlier termination of this Lease so long as Tenant is not then in Default under this Lease nor is any event then occurring which with the giving of notice or the passage of time, or both, would constitute a Default hereunder; or (b) the date that Tenant has cured all such Defaults or prospective Defaults under this Lease.

8.5.           The Security Deposit may be in the form of cash, a letter of credit or any other security instrument acceptable to Landlord in its sole discretion.  Tenant may at any time, except during Default, deliver a letter of credit (the “ L/C Security ”) as the entire Security Deposit, as follows.

(a)          If Tenant elects to deliver L/C Security, then Tenant shall provide Landlord, and maintain in full force and effect throughout the Term, a letter of credit in substantially the form of Exhibit E issued by any national bank that has (x) a branch office within San Diego County where Landlord may present drafts under the L/C Security and (y) an issuer reasonably satisfactory to Landlord, in the amount of the Security Deposit, with an initial term of at least one year.  If, at the Term Expiration Date, any Rent remains uncalculated or unpaid, then:  (i) Landlord shall with reasonable diligence complete any necessary calculations; (ii) Tenant shall extend the expiry date of such L/C Security from time to time as Landlord reasonably requires; and (iii) in such extended period, Landlord shall not unreasonably refuse to consent to an appropriate reduction of the L/C Security.  Tenant shall reimburse Landlord’s out-of-pocket legal costs not to exceed the sum of Two Thousand Dollars ($2,000) in handling Landlord’s acceptance of L/C Security or its replacement or extension, except with respect to any replacement in accordance with subparagraph (d) of this Section 8.5 .

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(b)         If Tenant delivers to Landlord satisfactory L/C Security in place of the entire Security Deposit, Landlord shall promptly remit to Tenant any cash Security Deposit Landlord previously held.

(c)          Landlord may draw upon the L/C Security, and hold and apply the proceeds in the same manner and for the same purposes as the Security Deposit, if:  (i) an uncured Default exists; (ii) as of the date 45 days before any L/C Security expires (even if such scheduled expiry date is after the Term Expiration Date) Tenant has not delivered to Landlord an amendment or replacement for such L/C Security, reasonably satisfactory to Landlord, extending the expiry date to the earlier of (1) the date two (2) months after the then-current Term Expiration Date or (2) the date one year after the then-current expiry date of the L/C Security; (iii) the L/C Security provides for automatic renewals, Landlord asks the issuer to confirm the current L/C Security expiry date, and the issuer fails to do so within ten (10) business days; (iv) Tenant fails to pay (when and as Landlord reasonably requires) any bank charges for Landlord’s transfer of the L/C Security; (v) the issuer of the L/C Security ceases, or announces that it will cease, to maintain an office within San Diego County where Landlord may present drafts under the L/C Security; or (vi) upon the expiration or earlier termination of this Lease, the conditions set forth in Section 8.4 have not been satisfied, and the L/C Security expires in less than thirty (30) days.  This paragraph does not limit any other provisions of this Lease allowing Landlord to draw the L/C Security under specified circumstances.

(d)         Tenant shall not seek to enjoin, prevent, or otherwise interfere with Landlord’s draw under L/C Security, even if it violates this Lease.  Tenant acknowledges that the only effect of a wrongful draw would be to substitute a cash Security Deposit for L/C Security, causing Tenant no legally recognizable damage.  Landlord shall hold the proceeds of any draw in the same manner and for the same purposes as a cash Security Deposit.  In the event of a wrongful draw, the parties shall cooperate to allow Tenant to post replacement L/C Security simultaneously with the return to Tenant of the wrongfully drawn sums, and Landlord shall upon request confirm in writing to the issuer of the L/C Security that Landlord’s draw was erroneous.

(e)          If Landlord transfers its interest in the Premises, then Tenant shall at Tenant’s expense, within fifteen (15) Business Days after receiving a written request from Landlord, deliver (and, if the issuer requires, Landlord shall consent to) an amendment to the L/C Security naming Landlord’s grantee as substitute beneficiary.  If the required Security changes while L/C Security is in force, then Tenant shall deliver (and, if the issuer requires, Landlord shall consent to) a corresponding amendment to the L/C Security.

(f)          Notwithstanding an election by Tenant during the Term to substitute a cash Security Deposit for L/C Security, Tenant shall nevertheless have the right to replace the L/C Security with a cash Security Deposit, at Tenant’s sole cost and expense.  If Tenant delivers the cash Security Deposit to Landlord in place of the L/C Security, Landlord shall promptly cancel or surrender the L/C Security.  Tenant may effect such substitutions on multiple occasions during the Term, provided Tenant shall not effect such substitutions more than twice in any calendar year.

9.              Use .

9.1.           Tenant shall use the Premises for the purposes set forth in Section 2.7 (or any one, or any combination of, such purposes), and shall not use the Premises, or permit or suffer the Premises to be used, for any other purpose without Landlord’s prior written consent, which consent Landlord may withhold in its sole and absolute discretion.

9.2.           Tenant shall not use or occupy the Premises in violation of Applicable Laws; zoning ordinances; or the certificate of occupancy issued for the Building, and shall, upon five (5) days’ written notice from Landlord, discontinue any use of the Premises if such use is in violation of Applicable Law or declared or claimed by any Governmental Authority having jurisdiction to be a violation of any of the above.  Tenant shall, at its sole cost and expense, promptly and properly observe and comply with (including in the making by Tenant of the any Alterations to the Premises): (a) all present and future orders, regulations, directions, rules, laws, ordinances, and requirements of all Governmental Authorities arising from the use or occupancy of, or applicable to, the Premises or any portion thereof (except for any orders, regulations, directions, rules, laws, ordinances or requirement that it is contesting in accordance with this

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Section 9.2 ); and (b) any direction of any Governmental Authority having jurisdiction that shall, by reason of the nature of Tenant’s use or occupancy of the Premises, impose any duty upon Tenant or Landlord with respect to the Premises or with respect to the use or occupation thereof.  Tenant shall comply with all safety, fire protection and evacuation procedures and regulations established by any Governmental Authority.  Notwithstanding the foregoing, Tenant shall not be obligated to comply with any declaration, direction or other governmental rule or governmental action (a) whose application or validity is being contested by Tenant diligently and in good faith by appropriate proceedings if Tenant’s failure to comply therewith neither creates any material risk of any financial liability or criminal sanction against Landlord or the Premises, nor creates any material risk of damage to the Premises, nor creates any risk to Landlord’s title to or rights in the Premises, or (b) compliance with which shall have been excused or exempted by a nonconforming use permit, waiver, extension or forbearance exempting it from such declaration, direction or other governmental rule or governmental action.

9.3.           Tenant shall not do or permit to be done anything that will invalidate the cost of any fire, environmental, extended coverage or any other insurance policy covering the Premises, and shall comply with all rules, orders, regulations and requirements of the insurers of the Premises, and Tenant shall promptly, upon demand, reimburse Landlord for any additional premium charged for such policy by reason of Tenant’s failure to comply with the provisions of this Article.

9.4.           Tenant shall, upon termination of this Lease, return to Landlord all keys to offices and restrooms either furnished to or otherwise procured by Tenant.  In the event any key so furnished to Tenant is lost, Tenant shall pay to Landlord the cost of replacing the same or of changing the lock or locks opened by such lost key if Landlord shall deem it necessary to make such change.

9.5.           No awnings or other projections shall be attached to any outside wall of the Building in violation of any Applicable Laws.

9.6.           Tenant shall, at Tenant’s sole cost and expense, have the right to install legally permitted signage on the Premises (including any building thereon) (“ Signage ”), which Signage shall be subject to Landlord’s prior written consent, which consent shall not be unreasonably withheld, conditioned or delayed.  Tenant shall keep the Signage in good condition and repair.  The size, design, and other physical aspects of any sign shall be subject to Landlord’s written approval prior to installation, which approval will not unreasonably be withheld, and shall conform to all covenants, conditions, and restrictions encumbering the Premises and all Applicable Laws. The cost of the sign(s), including but not limited to the permitting, installation, maintenance and removal thereof shall be at Tenant’s sole cost and expense. If Tenant fails to maintain its sign(s), or if Tenant fails to remove such sign(s) upon termination of this Lease, or fails to repair any damage caused by such removal (including without limitation, painting the damaged portions of the Building and any other portions of the Building that Landlord reasonably determines in good faith shall be painted so that repainting the damaged portion of the Building does not adversely affect the visual appearance of the Building, if required by Landlord), Landlord may do so at Tenant’s expense. Tenant shall reimburse Landlord within twenty (20) days after written demand for all reasonable costs incurred by Landlord to effect such maintenance, removal or repair, which amounts shall be deemed Additional Rent and shall include without limitation, all sums disbursed, incurred or deposited by Landlord, including Landlord’s costs, expenses and actual attorneys’ fees with interest thereon.  Notwithstanding the foregoing, Landlord has observed, and hereby approves, all existing signage on the Premises, and all future repairs and replacements to such existing signage, so long as such repairs and replacements: (a) are consistent with the size, design, quality and other physical aspects of the existing signage, (b) are in compliance with Applicable Laws, (c) are paid for at Tenant’s sole cost and expense, and (d) do not adversely affect the visual appearance of the Building.  In addition, Tenant shall have the right to incorporate its company logo and trademarks as part of the design of its Signage.

9.7.           Tenant shall only place equipment within the Premises with floor loading consistent with the structural design of the Building without Landlord’s prior written approval, and such equipment shall be placed in a location designed to carry the weight of such equipment.  If Tenant desires to place equipment within the Premises that exceeds the floor loading consistent with the structural design of the Building, Tenant shall make any structural

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enhancements necessary to carry the weight of such equipment in accordance with the terms and conditions of Article 17 hereof.

9.8.           Tenant shall not (a) use or allow the Premises to be used for unlawful purposes or (b) cause, maintain or permit any waste in, on or about the Premises.

9.9.           Notwithstanding any other provision herein to the contrary but subject to Section 9.2 hereof, Tenant shall be responsible for all liabilities, costs and expenses arising out of or in connection with the compliance during the Term of the Premises with the Americans with Disabilities Act, 42 U.S.C. § 12101, et seq. (together with regulations promulgated pursuant thereto, the “ ADA ”).

10.            Brokers .

10.1.         Tenant represents and warrants that it knows of no other real estate broker or agent other than Antaeus Capital, Inc. (“ Antaeus ”) / Coastline Capital Partners (“ Coastline Capital ” and, together with Antaeus, the “ Brokers ”), that is or might be entitled to a commission in connection with this Lease.  Tenant shall compensate Antaeus in relation to this Lease pursuant to a separate agreement between Tenant and Antaeus, and it is Tenant’s understanding that Antaeus will compensate Coastline Capital in relation to this Lease pursuant to a separate agreement between Antaeus and Coastline Capital.  Landlord represents and warrants that it knows of no other real estate broker or agent other than Brokers that is or might be entitled to a commission in connection with this Lease.

10.2.         Tenant and Landlord represent and warrant to the other that no broker or agent has made any representation or warranty relied upon by it in its decision to enter into this Lease, other than as contained in this Lease.

10.3.         Tenant acknowledges and agrees that the employment of brokers by Landlord is for the purpose of solicitation of offers of leases from prospective tenants and that no authority is granted to any broker to furnish any representation (written or oral) or warranty from Landlord unless expressly contained within this Lease.  Landlord is executing this Lease in reliance upon Tenant’s representations, warranties and agreements contained within Sections 10.1 and 10.2 , and Tenant is executing this Lease in reliance upon Landlord’s representations, warranties and agreements contained within Sections 10.1 and 10.2 .

11.            Holding Over .

11.1.         If, with Landlord’s prior written consent, Tenant holds possession of all or any part of the Premises after the Term, Tenant shall become a tenant from month to month after the expiration or earlier termination of the Term, and in such case Tenant shall continue to pay (a) the Basic Annual Rent in accordance with Article 5 , as adjusted in accordance with Article 6 , and (b) any amounts for which Tenant would otherwise be liable under this Lease if the Lease were still in effect, including, without limitation, payments for Taxes and insurance.  Any such month-to-month tenancy shall be subject to every other term, covenant and agreement contained herein.

11.2.         Notwithstanding the foregoing, if Tenant remains in possession of the Premises after the expiration or earlier termination of the Term without Landlord’s prior written consent, Tenant shall become a tenant at sufferance subject to the terms and conditions of this Lease, except that the per diem monthly rent shall be equal to: (a) for the first three (3) months that Tenant remains in possession of the Premises after the expiration or earlier termination of this Lease,  one hundred twenty-five percent (125%) of the Basic Annual Rent in effect during the last thirty (30) days of the Term; and (b) for any time thereafter that Tenant remains in possession of the Premises after the expiration or earlier termination of this Lease, one hundred fifty percent (150%) of the Basic Annual Rent in effect during the last thirty (30) days of the Term.

11.3.         Acceptance by Landlord of Rent after the expiration or earlier termination of the Term shall not result in an extension, renewal or reinstatement of this Lease.

11.4.         The foregoing provisions of this Article 11 are in addition to and do not affect Landlord’s right of reentry or any other rights of Landlord hereunder or as otherwise provided by Applicable Laws.

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12.            Property Management Fee .  Tenant shall pay to Landlord on the first day of each calendar month of the Term, as Additional Rent, the “ Property Management Fee ,” which shall equal one percent (1%) of the monthly installment of Basic Annual Rent then due from Tenant.

13.            Condition of Premises .

13.1.         Tenant acknowledges that immediately prior to the Term Commencement Date, Tenant occupied the Premises, is familiar with the condition of the Premises and accepts the entire Premises in its “as is” condition with all faults, and Landlord makes no representation or warranty of any kind with respect to the condition of the Premises or with respect to the suitability of the Premises for the conduct of Tenant’s business, and Landlord shall have no obligation to alter, repair or otherwise prepare the Premises for Tenant’s occupancy or to pay for or construct any improvements to the Premises.  It is understood and agreed that Landlord is not obligated to install any equipment, or make any repairs, improvements or Alterations to the Premises.  Tenant’s possession of the Premises as of the Term Commencement Date shall, except as otherwise agreed to in writing by Landlord and Tenant, conclusively establish that the Premises were at such time in good, sanitary and satisfactory condition and repair.

13.2.         NOTWITHSTANDING ANYTHING TO THE CONTRARY HEREIN, IT IS EXPRESSLY UNDERSTOOD AND AGREED THAT LANDLORD IS LEASING THE PREMISES “AS IS” AND “WHERE IS,” AND WITH ALL FAULTS AND THAT, LANDLORD IS MAKING NO REPRESENTATIONS AND WARRANTIES WHETHER EXPRESS OR IMPLIED, BY OPERATION OF LAW OR OTHERWISE, WITH RESPECT TO THE QUALITY OR PHYSICAL CONDITION OF THE PREMISES, THE INCOME OR EXPENSES FROM OR OF THE PREMISES, OR THE COMPLIANCE OF THE PREMISES WITH APPLICABLE BUILDING OR FIRE CODES, ENVIRONMENTAL LAWS OR OTHER LAWS, RULES, ORDERS OR REGULATIONS.  WITHOUT LIMITING THE FOREGOING, IT IS UNDERSTOOD AND AGREED THAT LANDLORD MAKES NO WARRANTY WITH RESPECT TO THE HABITABILITY, SUITABILITY, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.  TENANT AGREES THAT IT ASSUMES FULL RESPONSIBILITY FOR, AND THAT IT HAS HAD AN OPPORTUNITY TO PERFORM EXAMINATIONS AND INVESTIGATIONS OF THE PREMISES, INCLUDING SPECIFICALLY, WITHOUT LIMITATION, EXAMINATIONS AND INVESTIGATIONS FOR THE PRESENCE OF ASBESTOS, PCBS AND OTHER HAZARDOUS SUBSTANCES, MATERIALS AND WASTES (AS THOSE TERMS MAY BE DEFINED HEREIN OR BY APPLICABLE FEDERAL OR STATE LAWS, RULES OR REGULATIONS) ON OR IN THE PREMISES.  WITHOUT LIMITING THE FOREGOING, TENANT IRREVOCABLY WAIVES ALL CLAIMS THAT EXIST AS OF THE EXECUTION DATE AGAINST LANDLORD WITH RESPECT TO ANY ENVIRONMENTAL CONDITION, INCLUDING CONTRIBUTION AND INDEMNITY CLAIMS, WHETHER STATUTORY OR OTHERWISE.  TENANT ASSUMES FULL RESPONSIBILITY (AS BETWEEN LANDLORD AND TENANT) FOR ALL COSTS AND EXPENSES REQUIRED TO CAUSE THE PREMISES TO COMPLY WITH ALL APPLICABLE BUILDING AND FIRE CODES, MUNICIPAL ORDINANCES, ENVIRONMENTAL LAWS AND OTHER LAWS, RULES, ORDERS, AND REGULATIONS.

14.            Regulations and Parking Facilities .

14.1.         Tenant shall faithfully observe and comply with the rules and regulations attached hereto as Exhibit C , together with such other reasonable and nondiscriminatory rules and regulations as are hereafter promulgated by Landlord in its reasonable discretion (the “ Rules and Regulations ”).  During the Term, Landlord shall not promulgate any rules and regulations that (a) have a material adverse effect on Tenant’s use or occupancy of the Premises, or (b) materially increase Tenant’s costs under this Lease, without Tenant’s prior written consent, which consent shall not be unreasonably withheld, conditioned or delayed.

14.2.         Tenant shall have a non-exclusive license to use all parking facilities located on the Premises during the Term except to the extent of any covenants, conditions and restrictions existing as of the Execution Date providing for rights in favor of others to use the parking facilities in common with Tenant.  Landlord shall not use or grant a license or any other right to use the parking facilities located on the Premises to any person or entity (other than Tenant pursuant to the terms and conditions of this Lease and any Required Lease (as defined below)).

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14.3.         Landlord reserves the right to subdivide the real property; provided, however, that such right shall be exercised in a way that does not materially adversely affect Tenant’s beneficial use and occupancy of the Premises in any way whatsoever, including Tenant’s Permitted Use and Tenant’s access to the Premises and use of parking facilities serving the Premises.

15.            Utilities and Services .

15.1.         Tenant shall, at Tenant’s sole cost and expense, hire contractors and procure and maintain contracts, in customary form and substance for, and with contractors adequately qualified and experienced in the maintenance of the following equipment and improvements, if and when installed on the Premises (a) HVAC equipment, (b) boilers and pressure vessels, (c) fire extinguishing systems, including fire alarm and smoke detection devices, (d) landscaping and irrigation systems (to the extent not maintained by the owners’ association), (e) roof coverings and drains, (f) clarifiers, (g) basic utility feeds to the perimeter of the Building (except to the extent the owner’s association, City of San Diego or applicable utility provider is responsible for such maintenance) and (h) any other equipment reasonably required by Landlord; provided, however, Tenant may provide such maintenance using its own personnel so long as it hires personnel with adequate experience and qualifications in maintaining such equipment.  Tenant shall deliver to Landlord copies of any such contracts that contemplate total expenditures for such services of One Hundred Thousand Dollars ($100,000) or more.   Notwithstanding the foregoing, in the event Tenant fails either to maintain the contracts required under this Section 15.1 or to employ experienced and qualified personnel, Landlord reserves the right, upon three (3) days prior written notice to Tenant, to procure and maintain any such contracts which Tenant has failed to maintain, and if Landlord so elects, Tenant shall reimburse Landlord, upon demand, for the actual documented costs thereof.

15.2.         Within sixty (60) days after the Term Commencement Date, and within sixty (60) days after the beginning of each calendar year during the Term, Landlord shall give Tenant a good faith written estimate for such calendar year of the cost of insurance provided by Landlord, in connection with the Premises (“ Insurance Costs ”), and any repair and maintenance expenses Landlord incurs pursuant to Section 18.4 (“ Landlord’s Maintenance Costs ”).  Such written estimate shall be consistent with then prevailing expenses in the applicable industries and reflect allowable expenditures by Landlord pursuant to this Lease.  Tenant shall pay such estimated amount to Landlord in advance in equal monthly installments. Within ninety (90) days after the end of each calendar year, Landlord shall furnish to Tenant a statement showing in reasonable detail the Insurance Costs and Landlord’s Maintenance Costs incurred by Landlord during such year (the “ Annual Statement ”), and Tenant shall pay to Landlord the Insurance Costs and Landlord’s Maintenance Costs incurred in excess of the payments previously made by Tenant within ten (10) days of receipt of the Annual Statement.  In the event that the payments previously made by Tenant for Insurance Costs and Landlord’s Maintenance Costs exceed Tenant’s obligation, such excess amount shall be credited by Landlord to the Rent or other charges next due and owing, provided that, if the Term has expired, Landlord shall promptly remit such excess amount to Tenant.

15.3.         Tenant shall make all arrangements for and pay for all water, electricity, air, sewer, refuse, gas, heat, light, power, telephone service and any other service or utility Tenant requires at the Premises.  Landlord shall cooperate with Tenant, at Tenant’s sole cost and expense, in its arrangements for such services and utilities and shall use commercially reasonable efforts to avoid impeding the continued provision of such services and utilities to the Premises in any way.  Landlord shall not be liable for, nor shall any eviction of Tenant result from, the unintentional failure (unless such failure is caused by Landlord’s willful misconduct or gross negligence), or Landlord’s inability, to furnish any utility or service, whether or not such failure is caused by accident; breakage; repair; strike, lockout or other labor disturbance or labor dispute of any character; act of terrorism; shortage of materials, which shortage is not unique to Landlord or Tenant, as the case may be; or governmental regulation, moratorium or other governmental action (collectively, “ Force Majeure ”).  In the event of such failure, Tenant shall not be entitled to termination of this Lease, any abatement or reduction of Rent, or relief from the operation of any covenant or agreement of this Lease.  Tenant shall pay for, prior to delinquency of payment therefor, any utilities and services that may be furnished to the Premises during or, if Tenant occupies the Premises after the expiration or earlier termination of the Term, after the Term.

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15.4.         Tenant shall not, without Landlord’s prior written consent, use any device in the Premises that will in any way increase the amount of ventilation, air exchange, gas, steam, electricity or water beyond the then existing capacity of the Building.

16.            [Intentionally Omitted].

17.            Alterations .

17.1.         Tenant shall, at Tenant’s sole cost and expense, have the right at any time, and from time to time during the Term, to make such Alterations (as defined below) to the Building, and improvements and fixtures hereafter erected on the Premises, including, without limitation, solar panels on the roof of the Building, as Tenant shall deem necessary or desirable in connection with the requirements of its business, which Alterations (other than Alterations of Tenant’s movable trade fixtures and equipment) shall be made in compliance with the requirements described in this Article 17 .  Tenant shall make no alterations, additions or improvements in or to the Premises or engage in any construction, demolition, reconstruction, renovation, or other work of any kind in, at, or serving the Premises (“ Alterations ”) without Landlord’s prior written approval, which approval Landlord may withhold in its sole and absolute discretion in connection with any Alteration that: (a) adversely affects the exterior appearance of the Building or the Premises; (b) adversely affects the structural aspects of the Building, including, without limitation, the roof, foundation, load bearing walls and structural elements of the Premises; (c) adversely affects any base-building system or equipment, including, without limitation, the base building HVAC, mechanical, electrical, plumbing or life safety systems; (d) violates any Applicable Law; (e) violates any recorded document affecting the Premises; provided that during the Term, Landlord shall not record any document affecting the Premises which has (or will have in the event Tenant exercises the Purchase Option and acquires the Premises) a material adverse effect on Tenant’s use or occupancy of the Premises without Tenant’s prior written consent, which consent shall not be unreasonably withheld, conditioned or delayed; (f) causes the Building to be inconsistent with the then existing quality of the Building and other office buildings in the vicinity of the Building; (g) involves a use of the Premises that is inconsistent with the Permitted Use of the Premises; or (h) reduces the value of the Building or the Premises (each, a “ Design Problem ”).

17.2.         Notwithstanding the foregoing, Tenant may make non-structural Alterations to the Premises (“ Acceptable Changes ”) upon at least ten (10) business days prior written notice to Landlord but without Landlord’s prior consent provided (a) the Acceptable Changes do not involve Design Problems; and (b) the cost of such Acceptable Changes do not exceed Seventy-Five Thousand Dollars ($75,000) per occurrence or an aggregate amount of One Hundred Seventy-Five Thousand Dollars ($175,000) in any twelve (12) month period; provided , however , Tenant shall not be required to provide Landlord any notice in connection with any non-structural Alterations in any twelve (12) month period where the total combined cost of such non-structural Alterations do not exceed Twenty Thousand Dollars ($20,000).

17.3.         If Landlord’s approval of proposed Alterations is required, Tenant shall provide Landlord, at least ten (10) days in advance of any proposed construction, with plans, specifications, bid proposals, work contracts, requests for laydown areas and such other information concerning the nature and cost of the Alterations as Landlord may reasonably request.  If Landlord’s approval of the proposed Alterations is required, Landlord shall notify Tenant in writing within ten (10) business days after receipt of the applicable plans, whether Landlord has approved or disapproved the plans (and, in the case of disapproval, shall provide a detailed explanation of the reason(s) for disapproval).  If Landlord’s approval of proposed Alterations is not required, Tenant shall (a) give Landlord at least ten (10) business days’ prior written notice of the proposed commencement of such proposed Alterations, and (b) a copy of the applicable plans upon Landlord’s written request after Tenant’s completion of the Alterations.

17.4.         Tenant shall not construct or permit to be constructed partitions or other obstructions in a manner that will interfere with free access to mechanical installation or service facilities of the Building.

17.5.         Tenant shall accomplish any work performed on the Premises in such a manner as to permit any fire sprinkler system and fire water supply lines to remain fully operable at all times, unless such interruption in service is temporary and commercially reasonable

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arrangements are made for the provision of temporary services, all in accordance with Applicable Laws and the applicable insurance policies.

17.6.         Tenant covenants and agrees that all work done by Tenant or Tenant’s contractors shall be performed in full compliance with Applicable Laws.  Within thirty (30) days after completion of any Alterations, Tenant shall provide Landlord, to the extent available, with complete “as-built” drawing print sets and electronic CADD files on disc (or files in such other current format in common use as Landlord reasonably approves or requires) showing any changes in the Premises.

17.7.         All Alterations shall (a) unless, prior to such construction or installation Landlord elects otherwise, become the property of Landlord upon the expiration or earlier termination of the Term, (b) remain upon and be surrendered with the Premises as a part thereof, and (c) remain on the Premises and not be removed by Tenant at any time during the Term, other than items that Tenant replaces with a comparable item of equal quality and quantity as existed as of the time of such removal.  The Premises shall at all times remain the property of Landlord and shall be surrendered to Landlord upon the expiration or earlier termination of this Lease.  Subject to the first sentence of this Section 17.7 , the Tenant’s Personal Property, whether owned by Tenant or leased by Tenant from a lessor/owner (the “ Owner/Secured Party ”), shall be and remain the property of Tenant or any such Owner/Secured Party and may be removed by Tenant or any such Owner/Secured Party at any time.  Tenant shall promptly repair any damage to the Property caused by the removal of Tenant’s Personal Property.  The Premises shall at all times remain the property of Landlord and shall be surrendered to Landlord upon the expiration or earlier termination of this Lease.

17.8.         Tenant shall repair any damage to the Premises caused by Tenant’s removal of any property from the Premises.  During any such restoration period, Tenant shall pay Rent to Landlord as provided herein as if said space were otherwise occupied by Tenant.  The provisions of this Section shall survive the expiration or earlier termination of this Lease.

17.9.         If Tenant shall fail to remove any of its effects from the Premises prior to termination of this Lease, then Landlord may, at its option, remove the same in any manner that Landlord shall choose and store said effects without liability to Tenant for loss thereof or damage thereto, and Tenant shall pay Landlord, upon demand, any costs and expenses incurred due to such removal and storage or Landlord may, at its sole option and without notice to Tenant, sell such property or any portion thereof at private sale and without legal process for such price as Landlord may obtain and apply the proceeds of such sale against any (a) amounts due by Tenant to Landlord under this Lease and (b) any expenses incident to the removal, storage and sale of said personal property.

17.10.       Notwithstanding any other provision of this Article 17 to the contrary, in no event shall Tenant remove any improvement from the Premises as to which Landlord directly contributed payment without Landlord’s prior written consent, unless Tenant replaces such improvement with improvements having equal or greater value than those removed, as reasonably determined by, and subject to the prior written approval of, Landlord, which approval shall not be unreasonably withheld, conditioned or delayed.

17.11.       Upon Landlord’s written request, within sixty (60) days after final completion of any Alterations performed by Tenant with respect to the Premises, Tenant shall submit to Landlord documentation showing the amounts expended by Tenant with respect to such Alterations, together with supporting documentation reasonably acceptable to Landlord.

17.12.       Tenant shall reimburse Landlord for any extra expenses incurred by Landlord during the Term by reason of faulty work done by Tenant or its contractors.

17.13.       Tenant shall require its contractors and subcontractors performing work on the Premises to name Landlord and its affiliates and lenders as additional insureds on their respective insurance policies.

18.            Repairs and Maintenance .

18.1.         Tenant, at its sole cost and expense, shall maintain and keep the Premises, all improvements thereon, and all appurtenances thereto, including but not limited to sidewalks,

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parking areas, curbs, roads, driveways, lighting standards, landscaping, sewers, water, gas and electrical distribution systems and facilities, drainage facilities, and all signs, both illuminated and non-illuminated that are now or hereafter on the Premises, in good condition (ordinary wear and tear excepted) and in a manner consistent with the Permitted Use provided, however, Tenant shall not be required to maintain any of the foregoing to the extent such maintenance is the responsibility of an owners’ association, City of San Diego or any utility provider.  Tenant shall make all repairs, replacements and improvements, including, without limitation, all structural, roof, HVAC, plumbing and electrical repairs, replacements and improvements required, and shall keep the same free and clear from all rubbish and debris.  All repairs made by Tenant shall be at least equal in quality to the original work, and shall be made only by a licensed, bonded contractor approved in advance by Landlord (which shall not be unreasonably withheld, conditioned or delayed); provided , however , Tenant may make such repairs using its own personnel so long as it hires personnel with adequate experience and qualifications in performing such work; provided , further , that such contractor or qualified personnel need not be bonded or approved by Landlord if the Alterations, repairs, additions or improvements to be performed do not exceed Seventy-Five Thousand Dollars ($75,000) per occurrence or an aggregate amount of One Hundred Seventy-Five Thousand Dollars ($175,000) in any twelve (12) month period.  Tenant shall not take or omit to take any action, the taking or omission of which shall cause waste, damage or injury to the Premises, ordinary wear and tear excepted.

18.2.         Tenant shall, and shall cause Tenant’s contractors or agents to, maintain the lines designating the parking spaces in good condition and paint the same as often as may be necessary, so that they are discernable at all times; resurface the parking areas as necessary to maintain them in good condition; paint any exterior portions of the Building as necessary to maintain them in good condition; maintain the roof and landscaping in good condition; maintain sight screens, barricades or enclosures around any waste or storage areas; and take all reasonable precautions to insure that the drainage facilities of the roof are not clogged and are in good and operable condition at all times; provided, however, Tenant shall not be required to maintain any of the foregoing that are the responsibility of any Governmental Authority or an owners’ association to maintain.

18.3.         There shall be no abatement of Rent and no liability of Landlord by reason of any injury to or interference with Tenant’s business arising from the making of any repairs, Alterations or improvements in or to any portion of the Premises, or in or to improvements, fixtures, equipment and personal property therein unless such damage is caused by Landlord or its agents’ gross negligence or willful misconduct.

18.4.         Landlord shall not be required to maintain or make any repairs or replacements of any nature or description whatsoever to the Premises.  Except for repairs arising as a result of damage caused by Landlord or its agents’ gross negligence or willful misconduct, Tenant hereby expressly waives the right to make repairs at the expense of Landlord as provided for in any Applicable Laws in effect at the time of execution of this Lease, or in any other Applicable Laws that may hereafter be enacted, and waives its rights under Applicable Laws relating to a landlord’s duty to maintain its premises in a tenantable condition.  Notwithstanding the foregoing, if Tenant shall fail during the Term, after reasonable notice, to maintain or to commence and thereafter to proceed with diligence to make any repair required of it pursuant to the terms of this Lease, Landlord, without being under any obligation to do so and without thereby waiving such default by Tenant, may so maintain or make such repair and may charge Tenant for the costs thereof.  Any expense reasonably incurred by Landlord in connection with the making of such repairs may be billed by Landlord to Tenant monthly or, at Landlord’s option, immediately, and shall be due and payable within twenty (20) days after such billing or, at Landlord’s option, may be deducted from the Security Deposit.

18.5.         During the Term, Landlord and Landlord’s agents shall have the reasonable right to enter upon the Premises or any portion thereof for the purposes of performing any repairs or maintenance Landlord is permitted to make pursuant to this Lease, and of ascertaining the condition of the Premises or whether Tenant is observing and performing Tenant’s obligations hereunder, all without unreasonable interference from Tenant or Tenant’s Agents.  Except for emergency maintenance or repairs, the right of entry contained in this paragraph shall be exercisable at reasonable times, at reasonable hours and on reasonable notice in compliance with Section 32.3 hereof, conducted in a manner that protects Tenant’s intellectual property and does not unreasonably interfere with Tenant’s business.

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18.6.         Tenant shall, upon the expiration or sooner termination of the Term, surrender the Premises to Landlord in as good of a condition as when received, ordinary wear and tear and casualty excepted.  Landlord shall have no obligation to alter, remodel, improve, repair, decorate or paint the Premises or any part thereof.

18.7.         This Article 18 relates to repairs and maintenance arising in the ordinary course of operation of the Premises and any related facilities.  In the event of fire, earthquake, flood, vandalism, war, terrorism, natural disaster or similar cause of damage or destruction, Article 22 shall apply in lieu of this Article 18 .

19.            Liens .

19.1.         Subject to the immediately succeeding sentence Tenant shall keep the Premises free from any liens arising out of work performed, materials furnished or obligations incurred by Tenant.  Tenant further covenants and agrees that any mechanic’s lien filed against the Premises for work claimed to have been done for, or materials claimed to have been furnished to, shall be discharged or bonded by Tenant within twenty (20) days after the filing thereof, at Tenant’s sole cost and expense.

19.2.         Should Tenant fail to discharge or bond against any lien of the nature described in Section 19.1 , Landlord may, at Landlord’s election, pay such claim or post a bond or otherwise provide security to eliminate the lien as a claim against title, and Tenant shall within twenty (20) days, reimburse Landlord for the costs thereof as Additional Rent.

19.3.         In the event that Tenant leases or finances the acquisition of office equipment, furnishings or other personal property of a removable nature utilized by Tenant in the operation of Tenant’s business, Tenant warrants that any Uniform Commercial Code financing statement executed by Tenant shall, upon its face or by exhibit thereto, indicate that such financing statement is applicable only to removable personal property of Tenant located within the Premises.  In no event shall the address of the Premises be furnished on a financing statement without qualifying language as to applicability of the lien only to removable personal property located within the Premises.  Should any holder of a financing statement executed by Tenant record or place of record a financing statement that appears to constitute a lien against any interest of Landlord or against equipment that may be located other than within an identified suite leased by Tenant, Tenant shall, within twenty (20) days after filing such financing statement, (a) cause a copy of the lender security agreement or other documents to which the financing statement pertains to be furnished to Landlord to facilitate Landlord’s ability to demonstrate that the lien of such financing statement is not applicable to Landlord’s interest and (b) take commercially reasonable efforts to cause Tenant’s lender to amend such financing statement and any other documents of record to clarify that any liens imposed thereby are not applicable to any interest of Landlord in the Premises.

20.            Indemnification and Exculpation .

20.1.         Tenant agrees to indemnify, defend and save Landlord harmless from and against any and all demands, claims, liabilities, losses, costs, expenses, actions, causes of action, damages or judgments, and all reasonable expenses (including, without limitation, reasonable attorneys’ fees, charges and disbursements) incurred in investigating or resisting the same (collectively, “ Claims ”) arising from (a) injury or death to any person or injury to any property occurring within or about the Premises arising directly or indirectly out of Tenant’s or any of Tenant’s officers, employees, agents, contractors, invitees, customers and subcontractors (collectively, “ Tenant’s Agents ”) use or occupancy of the Premises, (b) a breach or default by Tenant in the performance of any of its obligations hereunder, including, without limitation, tenant’s failure to perform any of its obligations in Sections 9.6 and 18.1 , (c) any of the Tenant’s Alterations, (d) any determination by a Governmental Authority that the Premises during the Term, any of Tenant’s Alterations at any time, fails or failed to comply with the ADA, and (e) any and all cost or liability for compensation claimed by any other broker or agent, other than the Brokers, employed or engaged by Tenant or claiming to have been employed or engaged by Tenant, except to the extent caused by Landlord’s Parties’ willful misconduct or gross negligence.

20.2.         Notwithstanding any provision of Section 20.1 to the contrary, Landlord shall not be liable to Tenant for, and Tenant assumes all risk of, damage to personal property or scientific

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research, including, without limitation, loss of records kept by Tenant within the Premises and damage or losses caused by fire, electrical malfunction, gas explosion or water damage of any type (including, without limitation, broken water lines, malfunctioning fire sprinkler systems, roof leaks or stoppages of lines), unless any such loss is due to Landlord’s willful disregard of written notice by Tenant of need for a repair that Landlord is responsible to make for an unreasonable period of time or to Landlord Parties’ willful misconduct or gross negligence.  Tenant further waives any claim for injury to Tenant’s business or loss of income relating to any such damage or destruction of personal property as described in this Section 20.2 except to the extent caused by Landlord Parties’ willful misconduct or gross negligence.

20.3.         Landlord shall not be liable for any damages arising from any act, omission or neglect of any third party other than the gross negligence or willful misconduct of the Landlord Parties.

20.4.         Tenant acknowledges that security devices and services, if any, while intended to deter crime, may not in given instances prevent theft or other criminal acts.  Landlord shall not be liable for injuries or losses caused by criminal acts of third parties other than Landlord’s affiliates and agents, and Tenant assumes the risk that any security device or service may malfunction or otherwise be circumvented by a criminal.  Tenant may, subject to Article 17 , at its expense, install such security devices and contract for such services as Tenant determines are appropriate to deter crime or otherwise protect against criminal acts.  If Tenant desires protection against such criminal acts, then Tenant shall, at Tenant’s sole cost and expense, obtain appropriate insurance coverage.

20.5.         Landlord agrees to indemnify, defend and save Tenant harmless from and against any and all Claims arising from (a) injury or death to any person or injury to any property occurring within or about the Premises arising directly or indirectly out of Landlord Parties’ willful misconduct or gross negligence, (b) a breach or default by Landlord in the performance of its obligations hereunder, or (c) any and all cost or liability for compensation claimed by any other broker or agent, other than the Brokers, employed or engaged by Landlord or claiming to have been employed or engaged by Landlord.

20.6.         If a party (the “ Indemnified Party ”) becomes aware of a Claim which would reasonably be expected to result in an obligation to indemnify the Indemnified Party by the other party (the “ Obligated Party ”) under this Lease, the Indemnified Party shall notify the Obligated Party thereof in writing within thirty (30) days after it becomes so aware, giving a reasonably detailed description of the Claim to the extent then known, and providing a copy of any written demand, notice, summons or other paper received by the Indemnified Party; provided , however , the Indemnified Party’s failure to provide the Obligated Party notice under this Section 20.6 shall not relieve the Obligated Party’s liability hereunder except to the extent such failure to provide notice created or exacerbated the Obligated Party’s liability hereunder.  In addition, the Indemnified Party shall not settle any Claims under Sections 20.1 and 20.5 without the Obligated Party’s prior written consent, which consent shall not be unreasonably withheld, conditioned or delayed.

20.7.         The provisions of this Article 20 shall survive the expiration or earlier termination of this Lease.

21.            Insurance; Waiver of Subrogation .

21.1.         Landlord shall maintain insurance for the Premises in amounts equal to full replacement cost (exclusive of the costs of excavation, foundations and footings, and without reference to depreciation taken by Landlord upon its books or tax returns) or such lesser coverage as Landlord may elect, provided that such coverage shall not be less than ninety percent (90%) of such full replacement cost or the amount of such insurance Landlord’s lender, mortgagee or beneficiary (each, a “ Lender ”), if any, requires Landlord to maintain (but Tenant shall not be required to pay the incremental costs of obtaining limits greater than the full replacement cost, as determined by Landlord in its reasonable discretion), providing protection against any peril generally included within the classification “Fire and Extended Coverage,” together with insurance against sprinkler damage (if applicable), vandalism and malicious mischief.  Landlord, subject to availability thereof, shall further insure, if Landlord deems it appropriate, coverage against flood, environmental hazard and earthquake, loss or failure of building equipment, rental loss during the period of repairs or rebuilding, workmen’s

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compensation insurance and fidelity bonds for employees employed to perform services.  Notwithstanding the foregoing, Landlord may, but shall not be deemed required to, provide insurance for any improvements or Alterations installed by Tenant hereunder, without regard to whether or not such improvements or Alterations are made a part of or are affixed to the Buildings.

21.2.         In addition, Landlord shall carry public liability insurance with a single limit of not less than One Million Dollars ($1,000,000) for death or bodily injury, or property damage with respect to the Premises.

21.3.         Tenant shall, at its own cost and expense, procure and maintain in effect, beginning on the Term Commencement Date, and continuing throughout the Term (and occupancy by Tenant, if any, after termination of this Lease) commercial general liability insurance with limits of not less than Two Million Dollars ($2,000,000) per occurrence for death or bodily injury and not less than Two Million Dollars ($2,000,000) for property damage with respect to the Premises (including $100,000 fire legal liability (each loss)).

21.4.         The insurance required to be purchased and maintained by Tenant pursuant to this Lease shall name Landlord, BioMed Realty, L.P., BioMed Realty Trust, Inc., and their respective officers, employees, agents, general partners, members, subsidiaries, affiliates and Lenders (“ Landlord Parties ”) as additional insureds.  Said insurance shall be with companies having a rating of not less than policyholder rating of A and financial category rating of at least Class XII in “Best’s Insurance Guide.”  Tenant shall obtain for Landlord from the insurance companies or cause the insurance companies to furnish certificates of coverage to Landlord.  The insurer shall endeavor to provide Landlord at least thirty (30) days’ prior written notice of any reduction of coverage, other modification or cancellation of such policy (except in the event of non-payment of premium, in which case ten (10) days written notice shall be given).  All such policies shall be written as primary policies, not contributing with and not in excess of the coverage that Landlord may carry.  Tenant’s policy may be a “blanket policy” that specifically provides that the amount of insurance shall not be prejudiced by other losses covered by the policy.  Tenant shall, on or before the expiration of such policies, furnish Landlord with a copy of a certificate of insurance for Tenant from a duly licensed insurance company showing all premiums due on the renewal or successor policy have been paid at the time such premiums are due and payable and showing the insurance provided by the renewal or successor policy to be in full force and effect.  Tenant agrees that if Tenant does not take out or does not maintain such insurance, Landlord may (but shall not be required to) procure said insurance on Tenant’s behalf and at its cost to be paid by Tenant as Additional Rent.

21.5.         Subject to Section 20.5 , Tenant assumes the risk of damage to any fixtures, goods, inventory, merchandise, equipment and leasehold improvements, and Landlord shall not be liable for injury to Tenant’s business or any loss of income therefrom, relative to such damage, all as more particularly set forth within this Lease.  Tenant shall, at Tenant’s sole cost and expense, carry such insurance as Tenant desires for Tenant’s protection with respect to personal property of Tenant or business interruption.

21.6.         In each instance where insurance is to name Landlord Parties as additional insureds, Tenant shall, upon Landlord’s written request, also designate and furnish certificates evidencing such Landlord Parties as additional insureds to (a) any Lender of Landlord holding a security interest in the Premises or any portion thereof, (b) the landlord under any lease whereunder Landlord is a tenant of the real property upon which the Building is located if the interest of Landlord is or shall become that of a tenant under a ground lease rather than that of a fee owner, and (c) any management company retained by Landlord to manage the Premises.

21.7.         Landlord and Tenant each hereby waive any and all rights of recovery against the other or against the officers, directors, employees, agents and representatives of the other on account of loss or damage occasioned by such waiving party or its property or the property of others under such waiving party’s control, in each case to the extent that such loss or damage is insured against under any fire and extended coverage insurance policy that either Landlord or Tenant may have in force at the time of such loss or damage.  Such waivers shall continue so long as their respective insurers so permit.  Any termination of such a waiver shall be by written notice to the other party, containing a description of the circumstances hereinafter set forth in this Section 21.7 .  Landlord and Tenant, upon obtaining the policies of insurance required or permitted under this Lease, shall give notice to the insurance carrier or carriers that the foregoing

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mutual waiver of subrogation is contained in this Lease.  If such policies shall not be obtainable with such waiver or shall be so obtainable only at a premium over that chargeable without such waiver, then the party seeking such policy shall notify the other of such conditions, and the party so notified shall have ten (10) days thereafter to either (a) procure such insurance with companies reasonably satisfactory to the other party or (b) agree to pay such additional premium.  If the parties do not accomplish either (a) or (b), then this Section 21.7 shall have no effect during such time as such policies shall not be obtainable or the party in whose favor a waiver of subrogation is desired refuses to pay the additional premium.  If such policies shall at any time be unobtainable, but shall be subsequently obtainable, then neither party shall be subsequently liable for a failure to obtain such insurance until a reasonable time after notification thereof by the other party.  If the release of either Landlord or Tenant, as set forth in the first sentence of this Section 21.7 , shall contravene Applicable Laws, then the liability of the party in question shall be deemed not released but shall be secondary to the other party’s insurer.

21.8.         Landlord may require insurance policy limits required under this Lease to be raised to conform with requirements of Landlord’s Lender, if any, to bring coverage limits to levels then being required of similarly situated tenants under leases of premises that are comparable in size to the Premises, used for similar purposes as the Premises are used and located in buildings comparable in quality to, and in the general vicinity of, the Building.  In addition, upon each tenth (10 th ) anniversary of the Term Commencement Date, Landlord may require insurance policy limits required under this Lease to be adjusted by the percentage change in the Consumer Price Index for All Urban Consumers for the San Diego metropolitan area, as published by the United States Department of Labor’s Bureau of Labor Statistics from the Term Commencement Date through such tenth (10 th ) anniversary of the Term Commencement Date.

21.9.         Any costs incurred by Landlord pursuant to this Article 21 shall be included as Insurance Costs payable by Tenant pursuant to this Lease; provided , however , with respect to insurance coverage for environmental hazard and earthquake, if any, maintained by Landlord under Section 21.8 , the costs included as Insurance Costs payable by Tenant pursuant to this Lease shall not exceed an amount equal to Tenant’s pro rata portion of the cost to Landlord of maintaining portfolio-wide policies with limits of up to $10,000,000 for environmental hazard and up to $20,000,000 for earthquake, in each case as may be adjusted by Landlord in its sole and absolute discretion on each anniversary of the Term Commencement Date of this Lease by the then most recent available 12-month percentage change in the Consumer Price Index for All Urban Consumers for the San Diego metropolitan area, as published by the United States Department of Labor’s Bureau of Labor Statistics.

22.            Damage or Destruction .

22.1.         In the event of a partial destruction of the Premises by fire or other perils covered by extended coverage insurance not exceeding thirty percent (30%) of the full insurable value thereof, and provided that (a) the damage thereto is such that the Premises may be repaired, reconstructed or restored to substantially the same condition as existed immediately before such damage and destruction in accordance with Applicable Laws within a period of twelve (12) months from the date of the happening of such casualty and (b) Landlord shall receive insurance proceeds sufficient to cover the cost of such repairs (except for any deductible amount provided by Landlord’s policy, which deductible amount, if paid by Landlord, shall constitute an Insurance Cost), Landlord shall commence and proceed diligently with the work of repair, reconstruction and restoration of the Premises, and the provisions of this Lease shall continue in full force and effect except as otherwise provided in this Article 22 .

22.2.         In the event of any damage to or destruction of the Premises other than as described in Section 22.1 , Landlord may elect to repair, reconstruct and restore the Premises in which case the provisions of this Lease shall continue in full force and effect except as otherwise provided in this Article 22 .  Landlord shall give written notice to Tenant of its election to repair, reconstruct or restore the Premises or to terminate this Lease within sixty (60) days following the date of damage or destruction (the “ Landlord’s Restoration Notice ”).   Landlord shall include with the Landlord’s Restoration Notice a good faith estimate (the “ Restoration Estimate ”) prepared by Landlord’s architect or engineer of: (a) the time required to substantially complete the repair, reconstruction or restoration of the Premises to its original condition in compliance with Applicable Laws (the “ Restoration Period ”), and (b) the costs and expenses incurred or to be incurred in restoring such damage and destruction, including, without limitation, the design costs, project management costs, insurance costs and all other costs in connection with the repair,

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reconstruction or restoration of such damage or destruction (the “ Restoration Costs ”).  If Landlord elects to repair, reconstruct and restore the Premises but the estimated Restoration Period set forth in the Landlord’s Restoration Notice is greater than twenty-four (24) months, then Tenant shall have the right to terminate this Lease as of the date of such damage or destruction within twenty (20) business days following the date upon which Tenant receives the Landlord’s Restoration Notice.  If Landlord elects to terminate this Lease, then this Lease shall terminate as of the date of such damage or destruction; provided , however , if Landlord elects to terminate this Lease, then Tenant may elect, within such twenty (20) business days following the date upon which Tenant receives the Landlord’s Restoration Notice, to exercise the Purchase Option in accordance with Section 30.1(c)(ii) , in which event Tenant shall receive any insurance proceeds resulting from such damage; and provided further , if the Restoration Period set forth in the Restoration Estimate is less than thirty-six (36) months, Tenant may elect, within such twenty (20) business days following the date upon which Tenant receives the Landlord’s Restoration Notice, to deposit with Landlord an amount that is sufficient to cover any shortfall between the amount of insurance proceeds Landlord expects to receive in connection with the damage or destruction and the expected Restoration Costs set forth in the Restoration Estimate (the “ Restoration Deposit ”), so long as Tenant: (1) reaffirms its intention to pay all Rent as such Rent becomes due and owing under this Lease; (2) waives any claim to offsets, defenses or abatement of such Rent as a consequence of such damage or destruction without regard to the duration of the Restoration Period; and (3) deposits with Landlord the Restoration Deposit, in which event this Lease shall remain in full force and effect and Landlord shall repair, reconstruct or restore such damage or destruction in accordance with the terms and conditions of Section 22.6 , and in the event Landlord thereafter notifies Tenant at any time that the expected Restoration Costs exceed the remaining Restoration Deposit and remaining insurance proceeds to be received by Landlord, Tenant shall within ten (10) days after such notice pay the amount of such deficiency to Landlord.  Landlord shall have the right to use the Restoration Deposit to cover all costs and expenses in excess of the insurance proceeds received by Landlord necessary to complete the repair, reconstruction or restoration of such damage or destruction.  In addition, if the actual cost of such repair, reconstruction or restoration exceeds the amount of the Restoration Fund, Tenant shall promptly deposit with Landlord such excess to be included in the Restoration Fund.  Any sum which remains in the Restoration Fund upon completion of the repair, reconstruction or restoration of such damage or destruction after the payment of all Restoration Costs shall be promptly refunded to Tenant.

22.3.         Upon any termination of this Lease under any of the provisions of this Article 22 (and provided Tenant does not exercise the Purchase Option), the parties shall be released thereby without further obligation to the other from the date possession of the Premises is surrendered to Landlord, except with regard to (a) items occurring prior to the damage or destruction and (b) provisions of this Lease that, by their express terms, survive the expiration or earlier termination hereof.

22.4.         Except as set forth in Section 22.2 , in the event of repair, reconstruction and restoration as provided in this Article 22 , all Rent to be paid by Tenant under this Lease shall be abated proportionately based on the extent to which Tenant’s use of the Premises is impaired during the period of such repair, reconstruction or restoration; provided , however, that the amount of such abatement shall be reduced by the proceeds of lost rental income insurance actually received by Tenant with respect to the Premises.

22.5.         Notwithstanding anything to the contrary contained in this Article 22 , should Landlord be delayed or prevented from completing the repair, reconstruction or restoration of the damage or destruction to the Premises after the occurrence of such damage or destruction by Force Majeure, then the time for Landlord to commence or complete repairs shall be extended on a day-for-day basis.

22.6.         If, and solely to the extent, Landlord is obligated to or elects to repair, reconstruct or restore as herein provided, then Landlord shall be obligated to make such repair, reconstruction or restoration only with regard to: (a) those portions of the Premises that were originally provided at Landlord’s expense, and (b) those portions of the Premises that are covered by the insurance Landlord is required to, or has elected to, obtain in accordance with Article 21 .  Landlord shall not be obligated to repair, reconstruct or restore improvements not originally provided by Landlord or at Landlord’s expense to the extent not covered by the insurance Landlord is required to, or has elected to, obtain in accordance with Article 21 .

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22.7.         Notwithstanding anything to the contrary contained in this Article 22 , Landlord shall not have any obligation whatsoever to repair, reconstruct or restore the Premises if the damage resulting from any casualty covered under this Article 22 occurs during the last twenty-four (24) months of the Term unless Tenant exercises the Extension Option to extend, in which event Landlord shall not have any obligation to repair, reconstruct or restore the Premises if the damages resulting from any casualty covered under this Article 22 occurs during the last twenty-four (24) months of any extension hereof, or to the extent that insurance proceeds are not available therefor.

22.8.         Landlord’s obligation, should it elect or be obligated to repair or rebuild, shall be limited to the Premises; provided that Tenant shall have the right but not the obligation, at its expense, to replace or fully repair all of Tenant’s personal property and any Alterations installed by Tenant existing at the time of such damage or destruction.  If the Premises are to be repaired in accordance with the foregoing, Landlord shall make available to Tenant any portion of insurance proceeds it receives that are allocable to the Alterations constructed by Tenant pursuant to this Lease, provided Tenant is not then in monetary Default under this Lease.

23.            Eminent Domain .

23.1.         In the event the whole of the Premises shall be taken for any public or quasi-public purpose by any lawful power or authority by exercise of the right of appropriation, condemnation or eminent domain, or sold to prevent such taking, Tenant or Landlord may terminate this Lease effective as of the date possession is required to be surrendered to said authority.

23.2.         In the event of a partial taking of the Premises, or of drives, walkways or parking areas serving the Premises for any public or quasi-public purpose by any lawful power or authority by exercise of right of appropriation, condemnation, or eminent domain, or sold to prevent such taking, then Tenant may elect to terminate this Lease as of such taking if such taking is, in Tenant’s reasonable opinion, of a material nature such as to make it impracticable or infeasible to continue use of the unappropriated portion for purposes of renting office or laboratory space.

23.3.         In the event a partial taking of the Premises is threatened (in writing) or instituted by any lawful power or authority by exercise of the right of appropriation, condemnation or eminent domain with respect to: (a) twenty-five percent (25%) or more of the Premises, or (b) the condemnation award is less than the cost to repair the unappropriated portion of the Premises (“ Condemnation Restoration Costs ”), Landlord may, upon thirty (30) days prior written notice to Tenant (the “ Landlord’s Condemnation Notice ”), elect to either (i) terminate this Lease, or (ii) continue this Lease in accordance with Section 23.5 .  Landlord shall include with the Landlord’s Condemnation Notice a good faith estimate (the “ Condemnation Restoration Estimate ”) prepared by Landlord’s architect or engineer of the costs and expenses incurred or to be incurred in restoring the unappropriated portion of the Premises.  If Landlord elects to terminate this Lease because the condemnation award is less than the cost to repair the unappropriated portion of the Premises, then Tenant may elect, within fifteen (15) days following the date upon which Tenant receives Landlord’s Condemnation Notice, to either (1) exercise the Purchase Option in accordance with Section 30.1(c)(iii) , in which event Tenant shall receive any condemnation proceeds resulting from such condemnation, or (2) deposit with Landlord an amount that is sufficient to cover any shortfall between the amount of the condemnation award Landlord expects to receive in connection with the partial taking of the Premises and the expected Condemnation Restoration Costs set forth in the Condemnation Restoration Estimate (the “ Condemnation Restoration Deposit ”), so long as Tenant: (x) reaffirms its intention to pay all Rent as such Rent becomes due and owing under this Lease; (y) waives any claim to offsets, defenses or abatement of such Rent as a consequence of such damage or destruction without regard to the duration of the restoration period; and (z) deposits with Landlord the Condemnation Restoration Deposit, in which event this Lease shall remain in full force and effect and Landlord shall repair, reconstruct or restore the unappropriated portion of the Premises, and in the event Landlord thereafter notifies Tenant at any time that the expected Condemnation Restoration Costs exceeds the remaining Condemnation Restoration Deposit and remaining condemnation proceeds to be received by Landlord, Tenant shall within ten (10) days after such notice pay the amount of such deficiency to Landlord.

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23.4.         Tenant shall be entitled to any award that is specifically awarded as compensation for (a) the taking of Tenant’s personal property that was installed at Tenant’s expense, and (b) the costs of Tenant moving to a new location.  Except as set forth in the previous sentence, any award for such taking shall be the property of Landlord.

23.5.         If, upon any taking of the nature described in this Article 23 , this Lease continues in effect, then Landlord shall promptly proceed to restore the Premises to substantially the same condition prior to such partial taking.  To the extent such restoration is feasible, as reasonably determined by Landlord, the Rent shall be decreased proportionately to reflect the loss of any portion of the Premises no longer available to Tenant.

24.            Defaults and Remedies .

24.1.         Late payment by Tenant to Landlord of Rent and other sums due shall cause Landlord to incur costs not contemplated by this Lease, the exact amount of which shall be extremely difficult and impracticable to ascertain.  Such costs include, but are not limited to, processing and accounting charges and late charges that may be imposed on Landlord by the terms of any mortgage or trust deed covering the Premises.  Therefore, if any installment of Rent due from Tenant is not received by Landlord within five (5) days after written notice that such payment is due, Tenant shall pay to Landlord an additional sum of four percent (4%) of the overdue Rent as a late charge.  The parties agree that this late charge represents a fair and reasonable estimate of the costs that Landlord shall incur by reason of late payment by Tenant.

24.2.         No payment by Tenant or receipt by Landlord of a lesser amount than the Rent payment herein stipulated shall be deemed to be other than on account of the Rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as Rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord’s right to recover the balance of such Rent or pursue any other remedy provided in this Lease or in equity or at law.  If a dispute shall arise as to any amount or sum of money to be paid by Tenant to Landlord hereunder, Tenant shall have the right to make payment “under protest,” such payment shall not be regarded as a voluntary payment, and there shall survive the right on the part of Tenant to institute suit for recovery of the payment paid under protest.

24.3.         If Tenant fails to pay any sum of money required to be paid by it hereunder, or shall fail to perform any other act on its part to be performed hereunder, Landlord may, without waiving or releasing Tenant from any obligations of Tenant, but shall not be obligated to, make such payment or perform such act; provided that Landlord may do so only if (a) such failure by Tenant continues for five (5) days after Landlord delivers notice to Tenant demanding performance by Tenant, or (b) such failure by Tenant unreasonably interferes with the efficient operation of the Premises, or resulted or will result in a violation of Applicable Laws or the cancellation of an insurance policy maintained by Landlord.  Notwithstanding the foregoing, in the event of an emergency, Landlord shall have the right to enter the Premises and act in accordance with its rights as provided elsewhere in this Lease.  In addition to the late charge described in Section 24.1 , Tenant shall pay to Landlord as Additional Rent all sums so paid or incurred by Landlord, together with interest thereon, from the date such sums were paid or incurred, at the annual rate equal to ten percent (10%) per annum or the highest rate permitted by Applicable Laws, whichever is less.

24.4.         The occurrence of any one or more of the following events shall constitute a “ Default ” hereunder by Tenant:

(a)       The abandonment of the Premises by Tenant;

(b)       The failure by Tenant to make any payment of Rent, as and when due, where such failure shall continue for a period of five (5) days after written notice thereof from Landlord to Tenant;

(c)       The failure by Tenant to observe or perform any material obligation or material covenant contained herein (other than described in Sections 24.4(a) and 24.4(b) ) to be performed by Tenant, where such failure shall continue for a period of twenty (20) days after written notice thereof from Landlord to Tenant (except where Tenant has contested in good faith the existence of a breach of a material obligation or material covenant and the parties

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have not yet resolved the dispute by mutual agreement or, if necessary, final court judgment); provided that, if the nature of Tenant’s default is such that it reasonably requires more than twenty (20) days to cure, Tenant shall not be deemed to be in default if Tenant shall commence such cure within said twenty (20) day period and thereafter diligently prosecute the same to completion;

(d)       Tenant makes an assignment for the benefit of creditors;

(e)       A receiver, trustee or custodian is appointed to or does take title, possession or control of all or substantially all of Tenant’s assets and such circumstance is not reversed within sixty (60) days;

(f)        Tenant files a voluntary petition under the United States Bankruptcy Code or any successor statute (the “ Bankruptcy Code ”) or an order for relief is entered against Tenant pursuant to a voluntary or involuntary proceeding commenced under any chapter of the Bankruptcy Code;

(g)       Any involuntary petition if filed against Tenant under any chapter of the Bankruptcy Code and is not dismissed within one hundred twenty (120) days;

(h)       The occurrence of a monetary Default or a material non-monetary Default under the Building E Lease, the Building F Lease or the Building G Lease (each as defined in the Purchase Agreement);

(i)        The occurrence of any Transfer that is not in compliance with the provisions of Article 25 , where such failure shall continue for a period of three (3) business days after written notice thereof from Landlord to Tenant; or

(j)        Tenant’s interest in this Lease is attached, executed upon or otherwise judicially seized and such action is not released within one hundred twenty (120) days of the action.

Notices given under this Section 24.4 shall specify the alleged default and shall demand that Tenant perform the provisions of this Lease or pay the Rent that is in arrears, as the case may be, within the applicable period of time, or quit the Premises.  No such notice shall be deemed a forfeiture or a termination of this Lease unless Landlord elects otherwise in such notice.

24.5.         In the event of a monetary default or a material non-monetary default by Tenant after the lapse of any applicable cure periods, and at any time thereafter, with notice or demand and without limiting Landlord in the exercise of any right or remedy that Landlord may have, Landlord shall be entitled to terminate Tenant’s right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Tenant shall immediately surrender possession of the Premises to Landlord.  In such event, Landlord shall have the immediate right to re-enter and remove all persons and property, and such property may be removed and stored in a public warehouse or elsewhere at the cost and for the account of Tenant, all without service of notice or resort to legal process and without being deemed guilty of trespass or becoming liable for any loss or damage that may be occasioned thereby.  In the event that Landlord shall elect to so terminate this Lease, then Landlord shall be entitled to recover from Tenant the following damages to the extent incurred by Landlord by reason of Tenant’s default:

(a)       The worth at the time of award of any unpaid Rent that had accrued at the time of such termination; plus

(b)       The worth at the time of award of the amount by which the unpaid Rent that would have accrued during the period commencing with termination of this Lease and ending at the time of award exceeds that portion of the loss of Landlord’s rental income from the Premises that Tenant proves could have been reasonably avoided; plus

(c)       The worth at the time of award of the amount by which the unpaid Rent for the balance of the Term after the time of award exceeds that portion of the loss of Landlord’s rental income from the Premises that Tenant proves could have been reasonably avoided; plus

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(d)       Any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant’s failure to perform its obligations under this Lease or that in the ordinary course of things would be likely to result therefrom, including, without limitation, the cost of restoring the Premises to the condition required under the terms of this Lease; plus

(e)       At Landlord’s election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by Applicable Laws.

As used in Sections 24.5(a) and 24.5(b) , “worth at the time of award” shall be computed by allowing interest at the rate specified in Section 24.1 .  As used in Section 24.5(c) above, the “worth at the time of the award” shall be computed by taking the present value of such amount, using the discount rate of the Federal Reserve Bank of San Francisco at the time of the award plus one (1) percentage point.

24.6.         In addition to any other remedies available to Landlord at law or in equity and under this Lease, Landlord shall have the remedy described in California Civil Code Section 1951.4 (Landlord may continue this Lease in effect after Tenant’s Default and abandonment and recover Rent as it becomes due, provided Tenant has the right to sublet or assign, subject only to reasonable limitations).  In addition, Landlord shall not be liable in any way whatsoever for its failure or refusal to relet the Premises.  For purposes of this Section 24.6 , the following acts by Landlord will not constitute the termination of Tenant’s right to possession of the Premises:

(a)       Acts of maintenance or preservation or efforts to relet the Premises, including, but not limited to, alterations, remodeling, redecorating, repairs, replacements or painting as Landlord shall consider advisable for the purpose of reletting the Premises or any part thereof; or

(b)       The appointment of a receiver upon the initiative of Landlord to protect Landlord’s interest under this Lease or in the Premises.

Notwithstanding the foregoing, in the event of a Default by Tenant, Landlord may elect at any time to terminate this Lease and to recover damages to which Landlord is entitled.  If Landlord does not elect to terminate this Lease as provided in Section 24.5 , then Landlord may, from time to time, recover all Rent as it becomes due under this Lease.

24.7.         If Landlord does not elect to terminate this Lease as provided in Section 24.5 , then Landlord may, from time to time, recover all Rent as it becomes due under this Lease.  At any time thereafter, Landlord may elect to terminate this Lease and to recover damages to which Landlord is entitled.

24.8.         In the event Landlord elects to terminate this Lease and relet the Premises, Landlord may execute any new lease in its own name.  Tenant hereunder shall have no right or authority whatsoever to collect any Rent from such tenant.  The proceeds of any such reletting shall be applied as follows:

(a)       First, to the payment of any indebtedness other than Rent due hereunder from Tenant to Landlord, including, without limitation, storage charges or brokerage commissions owing from Tenant to Landlord as the result of such reletting;

(b)       Second, to the payment of the costs and expenses of reletting the Premises, including (i) repairs that Landlord deems reasonably necessary and advisable and (ii) reasonable attorneys’ fees, charges and disbursements incurred by Landlord in connection with the retaking of the Premises and such reletting;

(c)       Third, to the payment of Rent and other charges due and unpaid hereunder; and

(d)       Fourth, to the payment of future Rent and other damages payable by Tenant under this Lease.

24.9.         All of Landlord’s rights, options and remedies hereunder shall be construed and held to be nonexclusive and cumulative.  Landlord shall have the right to pursue any one or all of such remedies, or any other remedy or relief that may be provided by Applicable Laws, whether

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or not stated in this Lease.  No waiver of any default of Tenant hereunder shall be implied from any acceptance by Landlord of any Rent or other payments due hereunder or any omission by Landlord to take any action on account of such default if such default persists or is repeated, and no express waiver shall affect defaults other than as specified in said waiver.

24.10.       Landlord’s termination of (a) this Lease or (b) Tenant’s right to possession of the Premises shall not relieve Tenant of any liability to Landlord that has previously accrued or that shall arise based upon events that occurred prior to the later to occur of (i) the date of Lease termination or (ii) the date Tenant surrenders possession of the Premises.

24.11.       To the extent permitted by Applicable Laws, Tenant waives any and all rights of redemption granted by or under any present or future Applicable Laws if Tenant is evicted or dispossessed for any cause, or if Landlord obtains possession of the Premises due to Tenant’s default hereunder or otherwise.

24.12.       Landlord shall not be in default under this Lease unless Landlord fails to perform obligations required of Landlord within a reasonable time, but in no event shall such failure continue for more than thirty (30) days after written notice from Tenant specifying the nature of Landlord’s failure; provided , however , that if the nature of Landlord’s obligation is such that more than thirty (30) days are required for its performance, then Landlord shall not be in default if Landlord commences performance within such thirty (30) day period and thereafter diligently prosecutes the same to completion.

24.13.       In the event of any default by Landlord, Tenant shall give notice by registered or certified mail to any (a) beneficiary of a deed of trust or (b) mortgagee under a mortgage covering the Premises or any portion thereof and to any landlord of any lease of land upon or within which the Premises are located, and shall offer such beneficiary, mortgagee or landlord the Lender’s Cure Period to cure the default , including time to obtain possession of the Premises by power of sale or a judicial action if such should prove necessary to effect a cure; provided that Landlord shall promptly furnish to Tenant in writing, upon written request by Tenant, the names and addresses of all such persons who are to receive such notices.  “ Lender’s Cure Period ” shall mean sixty (60) days after written notice from Tenant within which to cure or correct such default (of which the initial thirty (30) days may run concurrently with the thirty (30) days after written notice from Tenant described in Section 24.12 above); provided , however , if such default cannot be cured or corrected within that time, then Lender’s Cure Period shall include such additional time as may be necessary to cure such default if such mortgagee, beneficiary or landlord has commenced to cure such Default within such sixty (60) day period and is diligently pursuing the remedies or steps necessary to cure or correct such default; provided , further , if such mortgagee, beneficiary or landlord requires possession of the Premises to prosecute such cure, and such mortgagee, beneficiary or landlord commences foreclosure proceedings within such sixty (60) day period (or is unable to commence foreclosure proceedings because of a bankruptcy proceeding involving Landlord or Tenant, but commences such foreclosure proceeding promptly after it is permitted to do so), then such sixty (60) day period shall commence to run only on the conveyance of the Premises pursuant to such proceeding.

25.            Assignment or Subletting .

25.1.         Except as hereinafter expressly permitted, Tenant shall not, either voluntarily or by operation of Applicable Laws, directly or indirectly sell, hypothecate, assign, pledge, encumber or otherwise transfer this Lease, or sublet the Premises (each, a “ Transfer ”), without Landlord’s prior written consent, which consent Landlord may not unreasonably delay, condition or withhold.  Notwithstanding the foregoing, Tenant shall have the right to Transfer the Premises, upon twenty (20) days prior written notice to Landlord but without obtaining Landlord’s prior written consent, to a corporation or other entity which is a successor-in-interest to Tenant, by way of merger, consolidation or corporate reorganization, or by the purchase of all or substantially all of the assets or the controlling ownership interests of Tenant provided that (a) such merger or consolidation, or such acquisition or assumption, as the case may be, is for a good business purpose and not principally for the purpose of transferring this Lease, and (b) the net worth (as determined in accordance with generally accepted accounting principles (“ GAAP ”) of the assignee is not less than the net worth (as determined in accordance with GAAP) of Tenant as of the date of Tenant’s then most current quarterly or annual financial statements, and (c) such assignee shall agree in writing to assume all of the terms, covenants and conditions of this Lease arising after the effective date of the assignment (collectively, the “ Permitted

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Assignees ”).  Notwithstanding the foregoing, Tenant shall have the right to sublet any portion of the Premises, upon twenty (20) days prior written notice to Landlord, but without obtaining Landlord’s prior written consent,  to a Permitted Subtenant subject to the conditions precedent in Section 25.9 .

25.2.         In the event Tenant desires to effect a Transfer, then, at least twenty (20) days prior to the date when Tenant desires the assignment or sublease to be effective (the “ Transfer Date ”), Tenant shall provide written notice to Landlord (the “ Transfer Notice ”) containing information concerning the character, relevant business experience and financial responsibility and status of the proposed transferee, assignee or sublessee; the Transfer Date; any ownership or commercial relationship between Tenant and the proposed transferee, assignee or sublessee; and the consideration and all other material terms and conditions of the proposed Transfer, all in such detail as Landlord shall reasonably require (the “ Transfer Information ”).  Tenant shall also reimburse Landlord for Landlord’s actual and reasonable costs and expenses, including, without limitation, reasonable attorneys’ fees, charges and other costs or overhead expenses incurred by Landlord in connection with the review, processing and documentation of such request in an amount not to exceed Five Thousand Dollars ($5,000);

25.3.         Landlord, in determining whether consent should be given to a proposed Transfer, may give consideration to (a) the financial strength of such transferee or assignee (notwithstanding Tenant remaining liable for Tenant’s performance), and (b) any change in use that such transferee, assignee or sublessee proposes to make in the use of the Premises to the extent any such change in use is not a Permitted Use.  In no event shall Landlord be deemed to be unreasonable for declining to consent to a Transfer to a transferee or assignee lacking financial qualifications (commensurate with the obligations proposed to be undertaken in connection with such a Transfer) or seeking a change in the Permitted Use, or jeopardizing directly or indirectly the status of Landlord or any of Landlord’s affiliates as a Real Estate Investment Trust under the Internal Revenue Code of 1986.  Notwithstanding anything contained in this Lease to the contrary, (w) no Transfer shall be consummated on any basis such that the rental or other amounts to be paid by the occupant, assignee, manager or other transferee thereunder would be based, in whole or in part, on the income or profits derived by the business activities of such occupant, assignee, manager or other transferee; (x) Tenant shall not furnish or render any services to an occupant, assignee, manager or other transferee with respect to whom transfer consideration is required to be paid, or manage or operate the Premises or any capital additions so transferred, with respect to which transfer consideration is being paid; (y) Tenant shall not consummate a Transfer with any person in which Landlord owns an interest, directly or indirectly (by applying constructive ownership rules set forth in Section 856(d)(5) of the Internal Revenue Code (the “ Revenue Code ”)); and (z) Tenant shall not consummate a Transfer with any person or in any manner that could cause any portion of the amounts received by Landlord pursuant to this Lease or any sublease, license or other arrangement for the right to use, occupy or possess any portion of the Premises to fail to qualify as “rents from real property” within the meaning of Section 856(d) of the Revenue Code, or any similar or successor provision thereto or which could cause any other income of Landlord to fail to qualify as income described in Section 856(c)(2) of the Revenue Code.  The immediately preceding sentence shall not apply if ownership of the Property is transferred or conveyed to a person or entity other than a real estate investment trust or affiliate thereof.

25.4.         As conditions precedent to Tenant subleasing the Premises or to Landlord considering a request by Tenant to Tenant’s transfer of rights or sharing of the Premises, Landlord may require any or all of the following:

(a)       Tenant shall remain fully liable under this Lease during the unexpired Term;

(b)       Tenant shall provide Landlord with the Transfer Information;

(c)       Tenant shall reimburse Landlord for Landlord’s actual and reasonable costs and expenses, including, without limitation, reasonable attorneys’ fees, charges and other costs or overhead expenses incurred by Landlord in connection with the review, processing and documentation of such request in an amount not to exceed Five Thousand Dollars ($5,000);

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(d)       Subject to Section 25.8 , if Tenant’s transfer of rights or sharing of the Premises provides for the receipt by, on behalf of or on account of Tenant of any consideration of any kind whatsoever (including, without limitation, a premium rental for a sublease or lump sum payment for an assignment, but excluding Tenant’s reasonable costs in marketing and subleasing the Premises) in excess of the rental and other charges due to Landlord under this Lease, Tenant shall pay fifty percent (50%) of all of such excess to Landlord, after deductions for any transaction costs incurred by Tenant, including marketing expenses, tenant improvement allowances actually provided by Tenant, alterations, cash concessions, brokerage commissions, attorneys’ fees and free rent.  If said consideration consists of cash paid to Tenant, payment to Landlord shall be made upon receipt by Tenant of such cash payment;

(e)       With respect to any Transfer of all or any portion of the Premises, the proposed transferee, assignee or sublessee shall agree that, in the event Landlord gives such proposed transferee, assignee or sublessee notice that Tenant is in default under this Lease, such proposed transferee, assignee or sublessee shall thereafter make all payments otherwise due Tenant directly to Landlord, which payments shall be received by Landlord without any liability being incurred by Landlord, except to credit such payment against those due by Tenant under this Lease, and any such proposed transferee, assignee or sublessee shall agree to attorn to Landlord or its successors and assigns should this Lease be terminated for any reason; provided , however, that in no event shall Landlord or its Lenders, successors or assigns be obligated to accept such attornment;

(f)        Any such consent to Transfer (if such consent is required hereunder) shall be effected on Landlord’s forms, subject to changes by Tenant that are satisfactory to Landlord in its reasonable discretion;

(g)       Tenant shall not then be in Default hereunder in any respect;

(h)       Such proposed transferee, assignee or sublessee’s use of the Premises shall not violate Section 2.7 ;

(i)        Landlord shall not be bound by any provision of any agreement pertaining to the Transfer, except for Landlord’s written consent to the same;

(j)        Tenant shall pay all transfer and other taxes (including interest and penalties) assessed or payable for any Transfer;

(k)       Landlord’s consent (if such consent is required hereunder) (or waiver of its rights) for any Transfer shall not waive Landlord’s right to consent to any later Transfer;

(l)        Tenant shall deliver to Landlord one executed copy of any and all written instruments evidencing or relating to the Transfer; and

(m)      A list of Hazardous Materials (as defined in Section 38.6 below), certified by the proposed transferee, assignee or sublessee to be true and correct, which the proposed transferee, assignee or sublessee intends to use, store, handle, treat, generate in or release or dispose of from the Premises, together with copies of all documents relating to such use, storage, handling, treatment, generation, release or disposal of Hazardous Materials by the proposed assignee or subtenant in the Premises, including, without limitation: permits; approvals; reports and correspondence; storage and management plans; plans relating to the installation of any storage tanks to be installed in or under the Premises (provided, such installation of tanks shall only be permitted after Landlord has given its written consent to do so, which consent may not be unreasonably withheld); and all closure plans or any other documents required by any and all federal, state and local Governmental Authorities for any storage tanks installed in, on or under the Premises for the closure of any such tanks.  Neither Tenant nor any such proposed transferee, assignee or sublessee is required, however, to provide Landlord with any portion(s) of such documents containing information of a proprietary nature which, in and of themselves, do not contain a reference to any Hazardous Materials or hazardous activities.

25.5.         Any Transfer that is not in compliance with the provisions of this Article 25 shall be void and constitute a “Default” hereunder after the lapse of any applicable notice and cure period set forth in Section 24.4(i) .

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25.6.         The consent by Landlord to a Transfer shall not relieve Tenant or proposed transferee or assignee from obtaining Landlord’s consent to any further Transfer, nor shall it release Tenant or any proposed transferee or assignee of Tenant from liability under this Lease.

25.7.         Notwithstanding any Transfer, Tenant shall remain liable for the payment of all Rent and other sums due or to become due hereunder, and for the full performance of all other terms, conditions and covenants to be kept and performed by Tenant.  The acceptance of Rent or any other sum due hereunder, or the acceptance of performance of any other term, covenant or condition thereof, from any person or entity other than Tenant shall not be deemed a waiver of any of the provisions of this Lease or a consent to any Transfer.

25.8.         Notwithstanding any contrary provision of this Article 25 , the original Tenant named hereunder (but not any assignee or subtenant other than Permitted Assignees) shall have the right, without the receipt of Landlord’s consent, but on prior written notice to Landlord, to license (but not sublease) up to an aggregate of up to ten percent (10%) of the rentable square feet of the Premises to individuals or entities (each, a “ Business Affiliate ”), which license to a Business Affiliate shall be on and subject to all of the following conditions:  (a) Tenant shall have a direct contractual business relationship (relating to a primary business of Tenant conducted in the Premises and other than Business Affiliate’s use of the Premises) with each such Business Affiliate and any such Business Affiliate’s use of the Premises shall be directly and primarily related to such business relationships; (b) each such Business Affiliate shall be of a character and reputation consistent with the quality of the Building; (c) each such license shall clearly specify that it is only a contract right and that the Business Affiliate is not a subtenant and has no interest in real property; (d) each such Business Affiliate’s use of the Premises is in a manner consistent with the Permitted Use; (e) no demising walls or separate entrances shall be constructed in the Premises to accommodate any such license; (f) the term of such license shall not exceed six (6) months unless otherwise agreed to in writing by Landlord; (g) the primary motivation for Tenant’s grant of such license is not to provide space to such Business Affiliate; and (h) such Business Affiliate shall pay no rent to Tenant in respect of such license.  No such license shall relieve Tenant from any liability under this Lease.

25.9.         Notwithstanding any contrary provision of this Article 25 , the original Tenant named hereunder (but not any assignee or subtenant other than Permitted Assignees) shall have the right, without the receipt of Landlord’s consent, but on prior written notice to Landlord, to sublet up to an aggregate of up to thirty-five percent (35%) of the rentable square feet of the Premises to individuals or entities (each, a “ Permitted Subtenant ”) on and subject to all of the following conditions:  (a) the net worth (as determined in accordance with generally accepted accounting principles (“ GAAP ”) of such Permitted Subtenant is not less than Five Million Dollars ($5,000,000); (b) each such Permitted Subtenant shall be of a character and reputation consistent with the quality of the Building; (c) each such Permitted Subtenant’s use of the Premises is in a manner consistent with the Permitted Use; (d) the term of such sublease shall not exceed four (4) years unless otherwise agreed to in writing by Landlord; and (e) all rent and other compensation paid to Tenant by such Permitted Subtenant shall be subject to Section 25.4(d) .  No such sublease shall relieve Tenant from any liability under this Lease.

25.10.       If Tenant sublets the Premises or any portion thereof, Tenant hereby immediately and irrevocably assigns to Landlord, as security for Tenant’s obligations under this Lease, all rent from any such subletting, and Landlord (or a receiver for Tenant appointed on Landlord’s application) may collect such rent and apply it toward Tenant’s obligations under this Lease; provided that, until the occurrence of a Default by Tenant, or if a Default occurs and is cured to the satisfaction of Landlord, Tenant shall have the right to collect such rent.

26.            Attorneys’ Fees .  If either party commences an action against the other party arising out of or in connection with this Lease, then the substantially prevailing party shall be entitled to have and recover from the other party reasonable attorneys’ fees, charges and disbursements and costs of suit.

27.            Bankruptcy .  In the event a debtor, trustee or debtor in possession under the Bankruptcy Code, or another person with similar rights, duties and powers under any other Applicable Laws, proposes to cure any default under this Lease or to assume or assign this Lease and is obliged to provide adequate assurance to Landlord that (a) a default shall be cured, (b) Landlord shall be compensated for its damages arising from any breach of this Lease and (c) future performance of

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Tenant’s obligations under this Lease shall occur, then such adequate assurances shall include any or all of the following, as designated by Landlord in its sole and absolute discretion:

27.1.         Those acts specified in the Bankruptcy Code or other Applicable Laws as included within the meaning of “adequate assurance,” even if this Lease does not concern a shopping center or other facility described in such Applicable Laws;

27.2.         A prompt cash payment to compensate Landlord for any monetary defaults or actual damages arising directly from a breach of this Lease;

27.3.         A cash deposit in an amount at least equal to the then-current amount of the Security Deposit; or

27.4.         The assumption or assignment of all of Tenant’s interest and obligations under this Lease.

28.            Definition of Landlord .  With regard to obligations imposed upon Landlord pursuant to this Lease, the term “ Landlord ,” as used in this Lease, shall refer only to Landlord or Landlord’s then-current successor-in-interest.  In the event of any transfer, assignment or conveyance of Landlord’s interest in this Lease or in Landlord’s fee title to or leasehold interest in the Property, as applicable, Landlord herein named (and in case of any subsequent transfers or conveyances, the subsequent Landlord) shall be automatically freed and relieved, from and after the date of such transfer, assignment or conveyance, from all liability for the performance of any covenants or obligations contained in this Lease thereafter to be performed by Landlord and, without further agreement, the transferee, assignee or conveyee of Landlord’s in this Lease or in Landlord’s fee title to or leasehold interest in the Property, as applicable, shall be deemed to have assumed and agreed to observe and perform any and all covenants and obligations of Landlord hereunder during the tenure of its interest in this Lease or the Property.  Landlord or any subsequent Landlord may transfer its interest in the Premises or this Lease without Tenant’s consent.

29.            Estoppel Certificate .  Tenant shall, within fifteen (15) days after receipt of written notice from Landlord, execute, acknowledge and deliver a statement in writing substantially in the form attached hereto as Exhibit D , or on any other form reasonably requested by a proposed Lender or purchaser, (a) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease as so modified is in full force and effect) and the dates to which rental and other charges are paid in advance, if any, (b) acknowledging (if accurate) that there are not, to Tenant’s knowledge, any uncured defaults on the part of Landlord hereunder, or specifying such defaults if any are claimed, and (c) setting forth such further information with respect to this Lease or the Premises as may be reasonably requested thereon.  Any such statement may be relied upon by any prospective purchaser or encumbrancer of all or any portion of the real property of which the Premises are a part.  Tenant’s failure to deliver such statement within the prescribed time shall be binding upon Tenant that there are no uncured defaults on the part of Landlord hereunder and that this Lease is in full force and effect and without modification except as may be represented by Landlord in any certificate prepared by Landlord and delivered to Tenant for execution and that all other statements set forth in such certificate are true and correct.  Likewise, Landlord shall, within fifteen (15) days after receipt of written notice from Tenant, execute, acknowledge and deliver an estoppel certificate containing substantially the same content shown on Exhibit D (as appropriately modified to reflect that the certificate is being executed by Landlord in favor of Tenant).  Landlord’s failure to deliver such estoppel certificate within the prescribed time shall be binding upon Landlord that there are no uncured defaults on the part of Tenant hereunder and that this Lease is in full force and effect and without modification except as may be represented by Tenant in any certificate prepared by Tenant and delivered to Landlord for execution and that all other statements set forth in such certificate are true and correct.

30.            Purchase Option .

30.1.         Grant of Option .  Landlord hereby grants to Tenant the exclusive option (the “ Purchase Option ”) to purchase the Property, including, without limitation, the Premises, for an amount equal to (a) the annualized aggregate Basic Annual Rent for the month in which the Closing Date (as defined below) occurs (i.e., the Basic Annual Rent for the entire month in which the Closing Date occurs (without giving effect to any free rent or rent abatement),

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multiplied by twelve) under this Lease, divided by (b) seven and nine-tenths percent (7.9%) (the “ Building D Purchase Option Exercise Price ”) , subject to the following provisions:

(a)       The Purchase Option is conditioned upon Tenant: (i) concurrently exercising its purchase option under the Building E Lease, the Building G Lease and, solely in the event Landlord acquires the Building F Property (as defined in the Purchase Agreement), then from and after the closing of such acquisition (the “ Building F Acquisition ”), the Building F Lease (unless the purchase option under such Lease shall have been (1) previously exercised in accordance with Section 30.1(c)(i) through (iv ) under such Lease, or (2) terminated in accordance with the penultimate sentence of Section 30.1(a) of such Lease) in strict accordance with the requirements of each such lease (collectively, the “ Required Leases ”), and (ii) paying the purchase option exercise price under, and in accordance with the terms and conditions of, each Required Lease upon the closing of each such transaction.  For purposes of clarity, Tenant shall only have the right to exercise the Purchase Option in connection with its purchase options under each of the Building E Lease, the Building G Lease and from and after the Building F Acquisition, the Building F Lease and shall not have the right to exercise the Purchase Option with respect to individual buildings.  Notwithstanding the foregoing, solely upon the occurrence of any of the events set forth in Sections 30.1(c)(i) through (iv ) below, (1) Tenant shall have the right to exercise the Purchase Option solely with respect to the Property, (2) Tenant shall not have the right to exercise the respective purchase options under any of the Required Leases at any time other than the times specified therein, and (3) in the event Tenant elects not to acquire the Property in accordance with Section 30.1(c)(ii) or (iii) , Tenant’s right to exercise its Purchase Option under this Lease shall terminate.  Tenant shall have no right to exercise its option to purchase the Building F Property until the Building F Acquisition.

(b)       Tenant shall have no right to exercise the Purchase Option: (i) while a monetary Default or a material non-monetary Default exists under this Lease or any Required Lease; provided that, if the nature of Tenant’s non-monetary Default is such that it could not reasonably be cured before the deadline for Tenant’s exercise of the Purchase Option, then the deadline for Tenant’s exercise of the Purchase Option shall be extended so long as Tenant promptly commences such cure and thereafter diligently prosecutes the same to completion; (ii) during the period of time any monthly installment of Basic Annual Rent under this Lease or any Required Lease is due and unpaid; or (iii) in the event this Lease or any of the Required Leases are terminated (other than any termination as a consequence of a casualty or condemnation or pursuant to Section 30.1(c)(v) ) or rejected as a result of a Tenant bankruptcy.

(c)       The closing of the sale under such Purchase Option must occur on the tenth, fifteenth, or twentieth anniversary of the Execution Date or, in the event Tenant exercises its Purchase Option in accordance with Sections 30.1(c)(i) through (iv) below, thirty (30) days after Tenant exercises its Purchase Option (the applicable date, the “ Closing Date ”).  Tenant may only exercise the Purchase Option by Tenant delivering to Landlord written notice exercising the Purchase Option substantially in the form attached hereto as Exhibit F (the “ Purchase Option Exercise Notice ”) at least twelve (12) months before the corresponding anniversary; provided , however ,

(i)        in the event Landlord directly or indirectly transfers its interest in the Property or this Lease to a party other than Landlord’s Affiliate (as defined in the Purchase Agreement) or a special purpose entity formed solely to own the Property, Landlord shall give Tenant written notice of such transfer (“ Landlord’s Assignment Notice ”) and Tenant shall have a period of fifteen (15) days after receipt of Landlord’s Assignment Notice to exercise its Purchase Option at the Building D Purchase Option Exercise Price in accordance with the terms and conditions of this Article 30 , subject to Tenant’s satisfaction of each of the conditions contained in Sections 30.1(e) and (f) .  “ Affiliate ” of Landlord means (x) an entity that directly or indirectly controls, is controlled by or is under common control with such landlord, (y) a partnership or other entity in which such landlord described in (x) is a partner or other owner, or (z) an entity that acquires substantially all of the assets or stock of such landlord; and the term “control” means the power to direct the management of such landlord through voting rights, ownership or contractual obligations.

(ii)       in the event Landlord elects to terminate this Lease pursuant to Landlord’s Restoration Notice delivered to Tenant in accordance with Section 22.2 , Tenant

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shall have a period of twenty (20) business days after receipt of Landlord’s Restoration Notice to exercise its Purchase Option at the Building D Purchase Option Exercise Price in accordance with the terms and conditions of this Article 30 , subject to Tenant’s satisfaction of each of the conditions contained in Sections 30.1(e) and (f) .  Notwithstanding the foregoing, in no event shall Tenant’s exercise of the Purchase Option in accordance with this Section 30.1(c)(ii) affect or reduce the Building D Purchase Option Exercise Price.  Landlord will assign to Tenant the right to receive and retain any casualty insurance proceeds resulting from such damage.

(iii)      in the event Landlord elects to terminate this Lease pursuant to Landlord’s Condemnation Notice delivered to Tenant in accordance with Section 23.3 , Tenant shall have a period of twenty (20) business days after receipt of Landlord’s Condemnation Notice to exercise its Purchase Option at the Building D Purchase Option Exercise Price in accordance with the terms and conditions of this Article 30 , subject to Tenant’s satisfaction of each of the conditions contained in Sections 30.1(e) and (f) .  Notwithstanding the foregoing, in no event shall Tenant’s exercise of the Purchase Option in accordance with this Section 30.1(c)(iii) affect or reduce the Building D Purchase Option Exercise Price.  Landlord will assign to Tenant the right to receive and retain any condemnation proceeds resulting from such condemnation.

(iv)      in the event Landlord transfers its interest in the Property or this Lease to an entity other than Landlord’s Affiliate and such entity files a voluntary petition under the Bankruptcy Code or an order for relief is entered against such entity pursuant to a voluntary proceeding commenced under any chapter of the Bankruptcy Code, Landlord shall give Tenant written notice of such proceeding (“ Landlord’s Bankruptcy Notice ”) and Tenant shall have a period of twenty (20) days after receipt of Landlord’s Bankruptcy Notice to exercise its Purchase Option at the Building D Purchase Option Exercise Price in accordance with the terms and conditions of this Article 30 to the extent permitted by the Bankruptcy Code and other Applicable Laws, subject to Tenant’s satisfaction of each of the conditions contained in Sections 30.1(e) and (f) .

(v)       in the event Landlord elects to terminate this Lease in accordance with Section 24.5 , Tenant shall have a period of twenty (20) business days after receipt of Landlord’s notice of termination to exercise its Purchase Option at the Building D Purchase Option Exercise Price in accordance with the terms and conditions of this Article 30 , subject to (i) Tenant’s compliance with each of the terms contained in Sections 30.1(e) and (f) , (ii) Tenant’s exercise of its purchase option under each of the Required Leases (Tenant shall not have the right to exercise the Purchase Option under this Section 30.1(c)(v) without exercising its purchase option under each of the Required Leases), and (iii) Tenant’s prepayment of all Rent due from Tenant under this Lease from the termination date through the closing of the sale under the Purchase Option; provided , however , Tenant shall not have the right to exercise its Purchase Option under this Section 30.1(c)(v) in the event Landlord’s termination of this Lease was due to Tenant’s failure to pay either (x) any monthly installment of Basic Annual Rent or (y) any insurance costs, Taxes or Property Management Fee.   Notwithstanding the foregoing, nothing in this Section 30.1(c)(v) shall limit the liability of Tenant under this Lease or Landlord’s ability to exercise any of its rights and remedies available at law or in equity or under this Lease, including Article 24 of this Lease.

(vi)      in the event (a) Tenant exercises its purchase option under any of the Required Leases, and (b) such Required Lease imposes a condition that Tenant exercise its Purchase Option under this Lease, Tenant shall concurrently exercise its Purchase Option under this Lease at the Building D Purchase Option Exercise Price in accordance with the terms and conditions of this Article 30 , subject to Tenant’s satisfaction of each of the conditions contained in Sections 30.1(a) and (b) , and each of the provisions contained in Sections (e) and (f) .

Notwithstanding the foregoing, in the event Tenant exercises its Purchase Option on or before the fourth (4 th ) anniversary of the Execution Date, (a) the closing of the sale under such Purchase Option shall occur on the first (1 st ) business day after the fourth (4 th ) anniversary of the Execution Date, (b) Tenant shall continue to pay Rent in accordance with this Lease until such closing date, and (c) Tenant shall pay Landlord the Building D Purchase Option Exercise Price on, and calculated as of, such closing date.

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(d)       If Tenant does not timely deliver the Purchase Option Exercise Notice on or before the nineteenth anniversary of the Execution Date, the Purchase Option shall terminate except as provided in Section 30.1(b) ; time being of the essence with respect to the delivering thereof.  If Tenant timely delivers the Purchase Option Exercise Notice to Landlord, then Landlord shall sell to Tenant, and Tenant shall purchase from Landlord, the Property for the Building D Purchase Option Exercise Price. Notwithstanding the foregoing, (i) any amounts due from Tenant to Landlord pursuant to this Lease and any prorations in favor of Landlord shall be paid by Tenant on the Closing Date, and (ii) any prorations in favor of Tenant shall be offset against the Building D Purchase Option Exercise Price.

(e)       The Property shall be sold in its then-current, as-is, with all faults conditions and without any representation and warranty, expressed or implied, whatsoever ; provided , however , Landlord shall satisfy all monetary obligations on the Property (including, without limitation, mechanics and materialmens liens or claims thereof, any liens or encumbrances that secure obligations for borrowed money and any encumbrances to title which are created by Seller after the Effective Date), and all nonmonetary encumbrances on the Property which were entered into after the Term Commencement Date and which have not been consented to by Tenant.  Notwithstanding the foregoing, in the event Landlord enters into any nonmonetary encumbrance in accordance with Section 32.1 or otherwise required by Applicable Laws and Landlord elects to request Tenant’s consent in connection with any such encumbrance, Tenant’s consent shall not be unreasonably withheld, conditioned or delayed.

(f)        Any condemnation or damage to the Property (other than damage caused by the willful misconduct or gross negligence of Landlord or its affiliates) shall not affect Tenant’s obligations to purchase the Property after Tenant delivers the Purchase Option Exercise Notice and shall not affect the Building D Purchase Option Exercise Price.  Landlord will assign to Tenant the right to receive and retain any casualty insurance proceeds or condemnation proceeds resulting from such damage or condemnation.

(g)       Upon the termination of the Purchase Option herein granted, (i) Tenant shall execute and deliver such documents as Landlord may reasonably request to evidence the termination thereof, and (ii) Landlord may execute, file and record an instrument evidencing the termination of the Purchase Option herein granted.  If Tenant fails to execute and deliver such documents, then Landlord may do so.  Tenant hereby appoints Landlord its attorney in fact for such purpose, which appointment is coupled with an interest and is irrevocable.  Tenant shall pay all transaction costs (including title insurance premiums and transfer taxes in connection with the conveyance of the Property to Tenant).

30.2.         No Representations and Warranties .  Tenant acknowledges that neither Landlord nor any of its agents or representatives has made any oral or written representations or warranties concerning the Property of any nature whatsoever and that Tenant will be relying on its own independent investigation thereof.

30.3.         Assignment of Purchase Option .  The Purchase Option and Tenant’ rights and obligations under this Article 30 are personal to Tenant, may not be exercised by any assignee or transferee of Tenant and shall irrevocably terminate upon any Transfer of this Lease.  Notwithstanding the foregoing, Tenant shall have the right to assign this Lease without Landlord’s prior written consent to a Permitted Assignee in accordance with Section 25.1 , and in such event the Purchase Option shall not terminate and may be exercised by such Permitted Assignee, but only if  (a) Tenant notifies Landlord in writing prior to the effectiveness of such assignment to such Permitted Assignee, and (b) prior to or concurrently with such assignment, such Permitted Assignee assumes all of Tenant’s obligations under this Article 30 .  Notwithstanding the foregoing, in no event shall Landlord’s consent to a Transfer under Article 25 (to the extent such consent is required) be deemed to include the Purchase Option or the provisions of this Article 30 unless explicitly agreed to in writing by Landlord.

30.4.         Tenant’s Remedies .  In the event the closing of the sales transaction pursuant to the Purchase Option shall fail to occur by reason of a default in Landlord’s obligations under this Article 30 , Tenant may elect one of the following two remedies: (a) reimbursement from Landlord for Tenant’s reasonable actual documented out of pocket costs incurred in connection with this Article 30 (provided that said sum recoverable as reimbursement shall not exceed One Hundred Thousand Dollars ($100,000)); or (b) enforce specific performance of this Article 30

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against Landlord, including the right to recover reasonable attorneys’ fees and court costs, but shall have no right to receive any other equitable relief.  Tenant hereby waives any right to record a lis pendens on the property other than in connection with the filing of an action for specific performance.  In no event shall Tenant be entitled to seek or obtain any other damages of any kind, including, without limitation, actual, consequential, indirect or punitive damages.  Notwithstanding the foregoing, any liability of Landlord under this Article 30 shall be limited strictly to the assets of Landlord only, and not to any of its general partners or their respective partners.

31.            Limitation of Landlord’s Liability .

31.1.         If Landlord is in default under this Lease and, as a consequence, Tenant recovers a monetary judgment against Landlord, the judgment shall be satisfied only out of (a) the proceeds of sale received on execution of the judgment and levy against the right, title and interest of Landlord in the Premises, (b) rent or other income from such real property receivable by Landlord and/or (c) the consideration received by Landlord from the sale, financing, refinancing or other disposition of all or any part of Landlord’s right, title or interest in the Premises.  Notwithstanding the foregoing, the foregoing limitation shall not apply to any default by Landlord of its obligation to convey the Property to Tenant following Tenant’s exercise of its Purchase Option.

31.2.         Except as described in Section 31.1 , Landlord shall not be personally liable for any deficiency under this Lease.  If Landlord is a partnership or joint venture, then the partners of such partnership shall not be personally liable for Landlord’s obligations under this Lease, and no partner of Landlord shall be sued or named as a party in any suit or action relating to the obligations of Landlord under this Lease, and service of process shall not be made against any partner of Landlord relating to the obligations of Landlord under this Lease except as may be necessary to secure jurisdiction of the partnership or joint venture.  If Landlord is a corporation, then the shareholders, directors, officers, employees and agents of such corporation shall not be personally liable for Landlord’s obligations under this Lease, and no shareholder, director, officer, employee or agent of Landlord shall be sued or named as a party in any suit or action, and service of process shall not be made against any shareholder, director, officer, employee or agent of Landlord.  If Landlord is a limited liability company, then the members of such limited liability company shall not be personally liable for Landlord’s obligations under this Lease, and no member of Landlord shall be sued or named as a party in any suit or action, and service of process shall not be made against any member of Landlord except as may be necessary to secure jurisdiction of the limited liability company.  No partner, shareholder, director, employee, member or agent of Landlord shall be required to answer or otherwise plead to any service of process, and no judgment shall be taken or writ of execution levied against any partner, shareholder, director, employee or agent of Landlord, relating to the obligations of Landlord under this Lease.

31.3.         Each of the covenants and agreements of this Article 31 shall be applicable to any covenant or agreement either expressly contained in this Lease or imposed by Applicable Laws and shall survive the expiration or earlier termination of this Lease.

32.            Premises Control by Landlord .

32.1.         Landlord reserves full control over the Premises to the extent not inconsistent with Tenant’s rights under this Lease, including, without limitation, Landlord’s right to subdivide the Property, convert the Building to condominium units, grant easements and licenses to third parties, and maintain or establish ownership of the Building separate from fee title to the Property.

32.2.         Tenant shall, at Landlord’s request, promptly execute such further documents as may be reasonably appropriate to assist Landlord in the performance of its obligations hereunder; provided that Tenant need not execute any document that creates additional liability for Tenant or that deprives Tenant of the quiet enjoyment and use of the Premises as provided by this Lease.

32.3.         During the Term, Landlord may, at any and all reasonable times during non-business hours (or during business hours if Tenant so requests), and upon two (2) business days’ prior notice ( provided that no time restrictions shall apply or advance notice be required if an emergency necessitates immediate entry), enter the Premises to (a) inspect the same and to

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determine whether Tenant is in compliance with its obligations hereunder, (b) supply any service Landlord is required to provide hereunder, (c) show the Premises to prospective purchasers or tenants during the final year of the Term (as extended if Tenant exercises the Extension Option), and (d) post notices of nonresponsibility.  In no event shall Tenant’s Rent abate as a result of Landlord’s activities pursuant to this Section 32.3 ; provided , however , that all such activities shall be conducted in such a manner so as to cause as little interference to Tenant as is reasonably possible, and Landlord shall safeguard all of Tenant’s property, including intellectual property, within the Premises.  Landlord shall comply with Tenant’s customary restrictions, policies and procedures for security and access, particularly with respect to any areas of the Premises containing fragile or expensive equipment or confidential or proprietary information or materials.  If an emergency necessitates immediate access to the Premises, Landlord may use such reasonable force as Landlord believes is appropriate under the circumstances to enter the Premises, and any such entry to the Premises shall not constitute a forcible or unlawful entry to the Premises, a detainer of the Premises, or an eviction of Tenant from the Premises or any portion thereof.

33.            Quiet Enjoyment .  So long as Tenant is not in default under this Lease, Landlord or anyone acting through or under Landlord shall not disturb Tenant’s occupancy of the Premises, except as permitted by this Lease.

34.            Subordination and Attornment .

34.1.         Subject to the delivery of the non-disturbance agreements described in this Article 34 as a condition precedent to any such subordination, this Lease shall be subject and subordinate to the lien of any mortgage, deed of trust, or lease in which Landlord is tenant now or hereafter in force against the Premises or any portion thereof and to all advances made or hereafter to be made upon the security thereof without the necessity of the execution and delivery of any further instruments on the part of Tenant to effectuate such subordination.  In consideration of, and as a condition precedent to, Tenant’s agreement to permit its interest pursuant  to this Lease to be subordinated to any particular future ground or underlying lease of the Building or the Premises or to the lien of any mortgage or trust deed, hereafter enforced against the Building or the Premises and to any renewals, extensions, modifications, consolidations and replacements thereof, Landlord shall deliver to Tenant a non-disturbance agreement on (a) the form of non-disturbance agreement customarily used by the lessor under such ground lease or underlying lease or the holder of such mortgage or trust deed or (b) another commercially reasonable form, provided in either instance that such form (i) is reasonably acceptable to Tenant, and (ii) recognizes Tenant’s Purchase Option.  Landlord’s delivery to Tenant of non-disturbance agreement(s) in favor of Tenant from any ground lessors, mortgage holders or lien holders of Landlord who later came into existence at any time prior to the expiration of the Term shall be in consideration of, and a condition precedent to, Tenant’s agreement to be bound by the terms of this Article 34 .  Tenant shall be entitled, at Tenant’s sole cost and expense, to record any such non-disturbance agreement promptly after full execution and delivery of such agreement.

34.2.         Notwithstanding the foregoing, subject to Landlord’s compliance with the terms of Section 34.1 , Tenant shall execute and deliver upon demand such further instrument or instruments evidencing such subordination of this Lease to the lien of any such mortgage or mortgages or deeds of trust or lease in which Landlord is tenant as may be required by Landlord; provided, however, if any such mortgagee, beneficiary or Landlord under lease wherein Landlord is tenant so elects, this Lease shall be deemed prior in lien to any such lease, mortgage, or deed of trust upon or including the Premises regardless of date and Tenant shall execute a statement in writing to such effect at Landlord’s request.  If Tenant fails to execute any document required from Tenant under this Section within ten (10) days after written request therefor, Tenant hereby constitutes and appoints Landlord or its special attorney-in-fact to execute and deliver any such document or documents in the name of Tenant.  Such power is coupled with an interest and is irrevocable.  Within five (5) business days after Landlord executes any document in accordance with this Section 34.2 as Tenant’s attorney-in-fact, Landlord shall provide Tenant a copy of such document.

34.3.         Upon written request of Landlord and opportunity for Tenant to review, Tenant agrees to execute any Lease amendments not materially altering the terms of this Lease, if required by a mortgagee or beneficiary of a deed of trust encumbering real property of which the Premises constitute a part incident to the financing of the real property of which the Premises

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constitute a part.  Any change affecting the amount or timing of the consideration to be paid by Tenant or modifying the Term of this Lease shall be deemed as materially altering the terms hereof.

34.4.         In the event any proceedings are brought for foreclosure, or in the event of the exercise of the power of sale under any mortgage or deed of trust made by Landlord covering the Premises, Tenant shall at the election of the purchaser at such foreclosure or sale attorn to the purchaser upon any such foreclosure or sale and recognize such purchaser as Landlord under this Lease.

35.            Surrender .

35.1.         At least ten (10) days prior to Tenant’s surrender of possession of any part of the Premises, Tenant shall provide Landlord with (a) a facility decommissioning and Hazardous Materials closure plan for the Premises (“ Exit Survey ”), and (b) written evidence of all appropriate governmental releases obtained by Tenant in accordance with Applicable Laws, including, without limitation, laws pertaining to the surrender of the Premises.  In addition, Tenant agrees to remain responsible after the surrender of the Premises for the remediation of any recognized environmental conditions set forth in the Exit Survey and compliance with any recommendations set forth in the Exit Survey.  Tenant’s obligations under this Section 35.1 shall survive the expiration or earlier termination of the Lease.

35.2.         No surrender of possession of any part of the Premises shall release Tenant from any of its obligations hereunder, unless such surrender is accepted in writing by Landlord.

35.3.         The voluntary or other surrender of this Lease by Tenant shall not effect a merger with Landlord’s fee title or leasehold interest in the Premises or any portion thereof, unless Landlord consents in writing, and shall, at Landlord’s option, operate as an assignment to Landlord of any or all subleases.

35.4.         The voluntary or other surrender of any ground or other underlying lease that now exists or may hereafter be executed affecting the Premises or any portion thereof, or a mutual cancellation thereof or of Landlord’s interest therein by Landlord and its lessor shall not effect a merger with Landlord’s fee title or leasehold interest in the Premises and shall, at the option of the successor to Landlord’s interest in the Premises or any portion thereof, operate as an assignment of this Lease.

35.5.         All permanently attached equipment, permanently attached fixtures, additions and improvements attached to or built into the Premises, including, without limitation, all floor and wall coverings, built-in cabinet work and paneling, sinks and related plumbing fixtures, laboratory benches, exterior venting fume hoods, ductwork, conduits, electrical panels and circuits, together with all additions and accessories thereto is the property of Landlord and shall remain upon and be surrendered with the Premises as a part thereof.

35.6.         In the event Tenant has performed any Alterations in accordance with this Lease, upon surrender of the Premises, Tenant shall reimburse Landlord for any extra costs and expenses incurred by Landlord by reason of any delays in re-leasing the Premises caused by Tenant’s removal of such Alterations.

36.            Waiver and Modification .  No provision of this Lease may be modified, amended or supplemented except by an agreement in writing signed by Landlord and Tenant.  The waiver by either party of any breach by the other party of any term, covenant or condition herein contained shall not be deemed to be a waiver of any subsequent breach of the same or any other term, covenant or condition herein contained.

37.            Waiver of Jury Trial and Counterclaims .  The parties waive trial by jury in any action, proceeding or counterclaim brought by the other party hereto related to matters arising out of or in any way connected with this Lease; the relationship between Landlord and Tenant; Tenant’s use or occupancy of the Premises; or any claim of injury or damage related to this Lease or the Premises.

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38.            Hazardous Materials .

38.1.         Tenant shall not cause or permit any Hazardous Materials (as hereinafter defined) to be brought upon, kept or used in or about the Premises in violation of Applicable Laws by Tenant, its agents, employees, contractors or invitees.  If Tenant breaches such obligation, or if the presence of Hazardous Materials as a result of such a breach results in contamination of the Premises or any adjacent property, or if contamination of the Premises or any adjacent property by Hazardous Materials otherwise occurs during the Term of this Lease or any extension or renewal hereof or holding over hereunder (other than in connection with substances that migrated to the Premises from any adjoining property, except in the event Tenant is aware of such contamination and neither remedies such contamination nor promptly notifies Landlord of the existence of such contamination), then Tenant shall indemnify, save, defend and hold Landlord, its agents and contractors harmless from and against any and all claims, judgments, damages, penalties, fines, costs, liabilities and losses (including, without limitation, diminution in value of the Premises or any portion thereof; damages for the loss or restriction on use of rentable or usable space or of any amenity of the Premises; damages arising from any adverse impact on marketing of space in the Premises; and sums paid in settlement of claims, attorneys’ fees, consultants’ fees and experts’ fees) that arise during or after the Term as a result of such breach or contamination.  This indemnification of Landlord by Tenant includes, without limitation, costs incurred in connection with any investigation of site conditions or any cleanup, remedial, removal or restoration work required by any Governmental Authority because of Hazardous Materials present in the air, soil or groundwater above, on or under the Premises.  Without limiting the foregoing, if the presence of any Hazardous Materials in, on, under or about the Premises or any adjacent property caused or permitted by Tenant results in any contamination of the Premises or any adjacent property, then Tenant shall promptly take all actions at its sole cost and expense as are necessary to return the Premises and any adjacent property to their respective condition existing prior to the time of such contamination; provided that Landlord’s written approval of such action shall first be obtained, which approval Landlord shall not unreasonably withhold ( provided that no time restrictions shall apply or advance approval be required if an emergency necessitates the remediation of such contamination so long as Tenant promptly provides Landlord written notice of any action taken by Tenant pursuant to this Section 38.1 ); and provided , further, that it shall be reasonable for Landlord to withhold its consent if such actions could have a material adverse long-term or short-term effect on the Premises.  Notwithstanding the foregoing, Landlord shall neither (a) settle any Claims under this Section 38.1 without Tenant’s prior written consent, which consent shall not be unreasonably withheld, conditioned or delayed, nor (b) except in the case of an emergency (where there is imminent threat of injury to persons or damage to property), enter into any agreement with a third party for any cleanup, remedial, removal or restoration work in connection with such breach or contamination other than in the event an emergency necessitates immediate entry, without first providing Tenant prior written notice.

38.2.         Landlord acknowledges that it is not the intent of this Article 38 to prohibit Tenant from operating its business as described in Section 2.7 above.  Tenant may operate its business according to the custom of Tenant’s industry so long as the use or presence of Hazardous Materials is strictly and properly monitored according to Applicable Laws.  As a material inducement to Landlord to allow Tenant to use Hazardous Materials in connection with its business, Tenant agrees to deliver to Landlord prior to the Term Commencement Date a list identifying each type of Hazardous Material expected to be present on the Premises and setting forth any and all governmental approvals or permits required in connection with the presence of such Hazardous Material on the Premises (the “ Hazardous Materials List ”).  Within twenty (20) days after Landlord gives to Tenant a written request (which request shall not be made more frequently than annually), Tenant shall deliver to Landlord an updated Hazardous Materials List.  Tenant shall deliver to Landlord true and correct copies of the following documents received from or submitted to any Government Authority (hereinafter referred to as the “ Documents ”) relating to the handling, storage, disposal and emission of Hazardous Materials prior to the Term Commencement Date or, if unavailable at that time, concurrent with the receipt from or submission to any Governmental Authority:  permits; approvals; reports and correspondence; storage and management plans; notices of violations of Applicable Laws; plans relating to the installation of any storage tanks to be installed in or under the Premises ( provided that installation of storage tanks shall only be permitted after Landlord has given Tenant its written consent to do so, which consent Landlord may withhold in its sole and absolute discretion); and all closure plans or any other documents required by any and all Governmental Authorities for

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any storage tanks installed in, on or under the Premises for the closure of any such storage tanks.  Tenant shall not be required, however, to provide Landlord with any portion of the Documents containing information of a proprietary nature that, in and of themselves, do not contain a reference to any Hazardous Materials or activities related to Hazardous Materials.

38.3.         At any time, and from time to time,  prior to the expiration of the Term, Landlord shall have the right to conduct appropriate tests of the Premises to demonstrate that Hazardous Materials are present or that contamination has occurred due to Tenant or Tenant’s agents, employees or invitees.  Tenant shall pay all reasonable costs of any test of the Property demonstrating that Tenant has breached any provision of this Lease regarding Hazardous Materials or has any clean-up obligations under this Article 38 .  Such tests shall be conducted in a