Arena Pharmaceuticals, Inc.
ARENA PHARMACEUTICALS INC (Form: 10-Q, Received: 08/07/2009 16:32:44)
Table of Contents

 

 

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, 2009

or

 

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

For the transition period from                      to                     

Commission File Number: 000-31161

ARENA PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   23-2908305
(State or other jurisdiction of incorporation or   (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     ¨   No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes    ¨     No   ¨

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

 

Large accelerated filer    ¨   Accelerated filer    x
Non-accelerated filer    ¨   Smaller reporting company   ¨
(Do not check if a smaller reporting company)  

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

¨   Yes     x   No

The number of shares of common stock outstanding as of the close of business on August 5, 2009:

 

Class

  

Number of Shares Outstanding

Common Stock, $0.0001 par value

   92,624,580

 

 

 


Table of Contents

ARENA PHARMACEUTICALS, INC.

INDEX

PART I—FINANCIAL INFORMATION

 

Item 1.

   Financial Statements    1
   Condensed Consolidated Balance Sheets — As of June 30, 2009 and December 31, 2008    1
   Condensed Consolidated Statements of Operations — Three and Six Months Ended June 30, 2009 and 2008    2
   Condensed Consolidated Cash Flow Statements — Six Months Ended June 30, 2009 and 2008    3
   Notes to Unaudited Condensed Consolidated Financial Statements    4

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    10

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    17

Item 4.

   Controls and Procedures    17
PART II—OTHER INFORMATION

Item 1A.

   Risk Factors    17

Item 4.

   Submission of Matters to a Vote of Security Holders    33

Item 6.

   Exhibits    35

Signatures

   37

In this report, “Arena Pharmaceuticals,” “Arena,” “we,” “us” and “our” refer to Arena Pharmaceuticals, Inc., and 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. Any other brand names or trademarks appearing in this Quarterly Report on Form 10-Q are the property of their respective holders.

 

i


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

Arena Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(In thousands)

 

     June 30,
2009
    December 31,
2008
 
     (Unaudited)     (Note)  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 35,516      $ 73,329   

Short-term investments, available-for-sale

     4,083        36,800   

Accounts receivable

     1,663        1,823   

Prepaid expenses and other current assets

     4,666        5,031   
                

Total current assets

     45,928        116,983   

Land, property and equipment, net

     97,082        102,740   

Acquired technology and other intangibles, net

     14,953        16,262   

Other non-current assets

     5,562        5,346   
                

Total assets

   $ 163,525      $ 241,331   
                

Liabilities and Stockholders’ Equity

    

Current liabilities:

    

Accounts payable, accrued compensation and other accrued liabilities

   $ 11,342      $ 20,747   

Accrued clinical and preclinical study fees

     11,175        26,042   

Warrant liability

     4,245        —     

Current portion of lease financing obligations

     587        410   
                

Total current liabilities

     27,349        47,199   

Deferred rent

     632        693   

Deferred revenues

     4,049        4,049   

Note payable to Siegfried

     8,592        8,567   

Lease financing obligations, less current portion

     77,164        62,657   

Deferred income taxes

     801        534   

Commitments

    

Stockholders’ equity:

    

Common stock

     8        8   

Additional paid-in capital

     868,594        859,374   

Treasury stock, at cost

     (23,070     (23,070

Accumulated other comprehensive income (loss)

     (614     256   

Accumulated deficit

     (799,980     (718,936
                

Total stockholders’ equity

     44,938        117,632   
                

Total liabilities and stockholders’ equity

   $ 163,525      $ 241,331   
                

 

Note: The balance sheet data at December 31, 2008 has been derived from audited financial statements at that date. It does not include, however, all of the information and notes required by US generally accepted accounting principles for complete financial statements.

See accompanying notes to unaudited condensed consolidated financial statements.

 

1


Table of Contents

Arena Pharmaceuticals, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2009     2008     2009     2008  

Revenues:

        

Manufacturing services

   $ 1,508      $ 2,000      $ 2,926      $ 4,019   

Collaborative agreements

     920        645        2,160        1,235   
                                

Total revenues

     2,428        2,645        5,086        5,254   

Operating Expenses:

        

Cost of manufacturing services

     1,643        2,290        2,997        4,620   

Research and development

     24,205        56,206        66,825        103,574   

General and administrative

     5,660        7,153        13,302        16,014   

Restructuring charges

     3,324        —          3,324        —     

Amortization of acquired technology and other intangibles

     573        588        1,139        1,169   
                                

Total operating expenses

     35,405        66,237        87,587        125,377   
                                

Loss from operations

     (32,977     (63,592     (82,501     (120,123

Interest and Other Income (Expense):

        

Interest income

     46        1,763        216        5,196   

Interest expense

     (1,935     (1,516     (3,652     (2,967

Loss from valuation of warrant liability

     (2,492     —          (2,127     —     

Warrant settlement provision

     —          (1,994 )     —          (1,994 )

Other

     (625     70        (533     154   
                                

Total interest and other income (expense), net

     (5,006     (1,677 )     (6,096     389   
                                

Net loss

     (37,983     (65,269     (88,597     (119,734

Dividends on redeemable convertible preferred stock

     —          (546     —          (1,086
                                

Net loss allocable to common stockholders

   $ (37,983   $ (65,815   $ (88,597   $ (120,820
                                

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

   $ (0.48   $ (0.89   $ (1.16   $ (1.64
                                

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

     79,212        73,815        76,701        73,710   
                                

See accompanying notes to unaudited condensed consolidated financial statements.

 

2


Table of Contents

Arena Pharmaceuticals, Inc.

Condensed Consolidated Cash Flow Statements

(In thousands)

(Unaudited)

 

     Six months ended
June 30,
 
     2009     2008  

Operating Activities

    

Net loss

   $ (88,597   $ (119,734

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

    

Depreciation and amortization

     5,583        5,756   

Amortization of acquired technology and other intangibles

     1,139        1,168   

Share-based compensation

     3,740        4,304   

Deferred income tax provision

     267        —     

Loss from valuation of warrant liability

     2,127        —     

Warrant settlement provision

     —          1,994   

Amortization of short-term investment premium

     66        173   

Amortization of prepaid financing costs

     64        169   

Accretion of note payable to Siegfried

     120        121   

(Gain)/Loss on disposal of equipment

     249        (20

Changes in assets and liabilities:

    

Accounts receivable

     139        (567

Prepaid expenses and other current assets

     (22     582   

Accounts payable and accrued liabilities

     (22,009     11,997   

Deferred rent

     (61     (47
                

Net cash used in operating activities

     (97,195     (94,104

Investing Activities

    

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

     —          (43,713

Proceeds from sales/maturities of short-term investments, available-for-sale

     32,622        11,988   

Purchase of drug product facility

     —          (19,573

Purchases of land, property and equipment

     (2,536     (13,675

Proceeds from sale of equipment

     259        21   

Deposits, restricted cash and other non-current assets

     135        (342
                

Net cash provided by (used in) investing activities

     30,480        (65,294

Financing Activities

    

Principal payments on lease financing obligations

     (316     (105

Proceeds from lease financing

     15,000        1,000   

Proceeds from issuance of common stock

     15,151        957   
                

Net cash provided by financing activities

     29,835        1,852   

Effect of exchange rate changes on cash

     (933     10   
                

Net decrease in cash and cash equivalents

     (37,813     (157,536

Cash and cash equivalents at beginning of period

     73,329        386,989   
                

Cash and cash equivalents at end of period

   $ 35,516      $ 229,453   
                

See accompanying notes to unaudited condensed consolidated financial statements.

 

3


Table of Contents

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 consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2008, as filed with the Securities and Exchange Commission, or SEC. The accompanying financial statements have been prepared in accordance with US 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 to 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. There have been no significant changes in such policies, estimates and assumptions from those included in the Company’s annual report on Form 10-K for the year ended December 31, 2008 other than as described in Note 2.

In May 2009, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 165, “Subsequent Events,” which requires disclosure of the date through which a company evaluated subsequent events, as well as whether that date is the date the company issued its financial statements or the date its financial statements were available for the company to issue. The Company adopted SFAS No. 165 effective June 30, 2009. In accordance with SFAS No. 165 and as reflected in Note 13, the Company evaluated subsequent events after the balance sheet date of June 30, 2009 through August 7, 2009, which is the date the Company issued its financial statements. The adoption of SFAS No. 165 did not impact the Company’s condensed consolidated financial statements.

2. New Accounting Standards

In January 2009, the Company adopted Emerging Issues Task Force, or EITF, Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock.” EITF 07-5 provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature in a financial instrument is indexed to an issuer’s own stock, which would qualify as a scope exception under Paragraph 11(a) of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” Paragraph 11(a) of SFAS No. 133 specifies that a contract that would otherwise meet the definition of a derivative but is both (i) indexed to the company’s own stock and (ii) classified in the stockholders’ equity section of the balance sheet would not be considered a derivative financial instrument. The Company’s adoption of EITF 07-5 resulted in the identification of warrants that were determined to be ineligible for equity classification because of certain provisions that may result in an adjustment to their exercise price. See Note 12 for the impact adoption of EITF Issue No. 07-5 had on the Company’s condensed consolidated financial statements.

In April 2009, the Company adopted several new pronouncements issued by the FASB related to fair value measurement, recording and disclosure. FASB Staff Position, or FSP, No. 107-1, “Interim Disclosures about Fair Value of Financial Instruments,” requires disclosures relating to fair value of financial instruments for both interim and annual reporting periods. FSP No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” provides additional guidance on estimating the fair value of a financial instrument when the volume and level of activity for the asset or liability has significantly decreased in relation to normal market activity for the asset or liability. FSP No. 115-2 and FSP No. 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” provide additional guidance for recording impairment losses on securities. All of these fair value measurement pronouncements were effective for interim and annual reporting periods ending after June 15, 2009. The adoption of these pronouncements did not have a material impact on the Company’s condensed consolidated financial statements.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162.” The FASB Accounting Standards Codification, or Codification, will become the single official source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP, with the exception of guidance issued by the SEC and its staff. The Codification did not change GAAP, but reorganizes the thousands of GAAP pronouncements into roughly 90 accounting topics and displays all topics using a consistent structure. SFAS No. 168 is effective for financial statements issued for interim and annual reporting periods ending after September 15, 2009. The Company does not expect the adoption of SFAS No. 168 to have a material impact on its condensed consolidated financial statements.

3. Net Loss Per Share

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

 

4


Table of Contents

There were no 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 for the three and six months ended June 30, 2009. For each of the three and six-month periods ended June 30, 2008, there were 29,312 shares excluded from the calculation of basic and diluted net loss per share because they were subject to repurchase or forfeiture. Because the Company is in a net loss position, the Company has excluded all unvested performance-based restricted stock unit awards, which are 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. Had they been dilutive, such shares would have been included in the computation of diluted net loss per share allocable to common stockholders.

4. Comprehensive Income (Loss)

In accordance with SFAS No. 130, “Reporting Comprehensive Income,” all components of comprehensive income (loss), including foreign currency translation gain and loss and unrealized gains and losses on investment securities, are reported in the financial statements in the period in which they are recognized. Comprehensive income (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,
 
     2009     2008     2009     2008  

Net loss

   $ (37,983   $ (65,269   $ (88,597   $ (119,734

Foreign currency translation gain (loss)

     1,336        (791     (841     2,407   

Unrealized loss on available-for-sale securities and other investments

     (12     (112     (29     (41
                                

Comprehensive loss

   $ (36,659   $ (66,172   $ (89,467   $ (117,368
                                

5. Share-based Activity

Equity Compensation Plans

On June 25, 2009, the Company’s stockholders approved the Company’s 2009 Long-Term Incentive Plan, or 2009 LTIP. When the Company’s 2006 Long-Term Incentive Plan, as amended, or 2006 LTIP, was adopted, the Company’s Amended and Restated 1998 Equity Compensation Plan, Amended and Restated 2000 Equity Compensation Plan, and 2002 Equity Compensation Plan (or together with the 2006 LTIP, the “Prior Plans”) were terminated. Upon stockholder approval of the 2009 LTIP, the 2006 LTIP was also terminated. However, notwithstanding such termination of the Prior Plans, all outstanding awards under the Prior Plans will continue to be governed under the terms of the Prior Plans.

As of the date of stockholder approval of the 2009 LTIP and at June 30, 2009, there were 6,488,112 shares available for issuance under the 2009 LTIP, which may be granted as incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards and performance awards. Subject to certain limited exceptions, (i) stock options and stock appreciation rights granted under the 2009 LTIP reduce the available number of shares by one share for every share issued while awards other than stock options and stock appreciation rights granted under the 2009 LTIP reduce the available number of shares by 1.3 shares for every share issued, and (ii) shares that are released from awards granted under the Prior Plans or the 2009 LTIP because the awards expire, are forfeited or are settled for cash will increase the number of shares available under the 2009 LTIP by one share for each share released from a stock option or stock appreciation right and by 1.3 shares for each share released from a restricted stock award or restricted stock unit award.

Stock options granted under the 2009 LTIP generally vest 25% a year for four years and are exercisable for up to 10 years from the date of grant. The recipient of a restricted stock award has all rights of a stockholder at the date of grant, subject to certain restrictions on transferability and a risk of forfeiture. The minimum performance period under a performance award is 12 months. Neither the exercise price of an option nor the grant price of a stock appreciation right may be less than 100% of the fair market value of the common stock on the date such option is granted, except in specified situations. The 2009 LTIP prohibits repricings of options and stock appreciation rights (other than to reflect stock splits, spin-offs or certain other corporate events) unless stockholder approval is obtained.

Employee Stock Purchase Plan

On June 25, 2009, the Company’s stockholders approved the Company’s 2009 Employee Stock Purchase Plan, or 2009 ESPP, which provides for the issuance of up to 1,500,000 shares of the Company’s common stock and qualifies under Section 423 of the Internal Revenue Code. As of June 30, 2009, a total of 1,412,311 shares of common stock were available for issuance under the 2009 ESPP.

Upon stockholder approval of the 2009 ESPP, the Company’s 2001 Employee Stock Purchase Plan, as amended, or 2001 ESPP, was terminated. However, notwithstanding such termination of the 2001 ESPP, all offering periods existing under the 2001 ESPP on the effective date of the 2009 ESPP continue in effect under the 2009 ESPP, but in accordance with the terms of the 2001 ESPP.

 

5


Table of Contents

Under the 2009 ESPP, substantially all employees can choose to have up to 15% of their annual compensation withheld to purchase up to 625 shares of common stock per purchase period, subject to certain limitations. The shares of common stock may be purchased over an offering period with a maximum duration of 24 months and at a price of not less than 85% of the lesser of the fair market value of the common stock on (i) the first trading day of the applicable offering period or (ii) the last trading day of the applicable three-month purchase period.

Share-based Compensation

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,
     2009    2008    2009    2008

Research and development

   $ 932    $ 1,183    $ 1,824    $ 2,208

General and administrative

     481      678      1,610      2,096

Restructuring charges

     306      —        306      —  
                           

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

   $ 1,719    $ 1,861    $ 3,740    $ 4,304
                           

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

   $ 0.02    $ 0.02    $ 0.05    $ 0.06
                           

The Company uses the 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, 2009 and 2008:

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2009     2008     2009     2008  

Risk-free interest rate

     1.7     2.5     2.0     2.5

Dividend yield

     0     0     0     0

Expected volatility

     80     57     86     57

Expected life (years)

     5.72        5.50        5.72        5.50   

Weighted-average estimated fair value of stock options granted

   $ 1.63      $ 2.97      $ 2.87      $ 3.67   

The table below sets forth the weighted-average assumptions and estimated fair value of options to purchase stock granted under the applicable employee stock purchase plan for multiple offering periods during the three and six months ended June 30, 2009 and 2008:

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2009     2008     2009     2008  

Risk-free interest rate

   0.1% - 5.0     1.4% -5.3   0.1% - 5.1   1.4% - 5.3 %

Dividend yield

   0     0   0   0

Expected volatility

   53% - 82     53% - 69   53% - 82   53% - 69

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 plans

   $1.45 - 4.70      $ 2.64 – 5.46      $1.45 - 4.70      $2.64 -5.46   

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 volatilities 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 terminations. The risk-free interest rates are based on the US Treasury yield curve, with a remaining term approximately equal to the expected term used in the option pricing model.

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. Based on historical experience, forfeitures of unvested options were estimated to be 8.5% at June 30, 2009 and 5.1% at June 30, 2008. If actual forfeitures vary from estimates, the Company will recognize the difference in compensation expense in the period the actual forfeitures occur or when stock options vest.

 

6


Table of Contents

Share-based Award Activity

The following table summarizes the Company’s stock option activity during the six months ended June 30, 2009:

 

     Options     Weighted-
Average 
Exercise Price

Outstanding at January 1, 2009

   6,556,630      $ 9.74

Granted

   1,236,269        4.02

Exercised

   (60,750     0.60

Forfeited/cancelled/expired

   (448,326     8.18
            

Outstanding at June 30, 2009

   7,283,823      $ 8.95
            

The following table summarizes activity with respect to the Company’s performance-based restricted stock unit awards during the six months ended June 30, 2009:

 

     Performance
Units
    Weighted-
Average 
Grant-
Date
Fair Value

Outstanding at January 1, 2009

   1,950,100      $ 12.30

Granted

   —          —  

Vested

   —          —  

Forfeited/cancelled

   (212,350     11.60
            

Outstanding at June 30, 2009

   1,737,750      $ 12.39
            

6. 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 a separate component of accumulated other comprehensive income or loss. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included in interest income. Realized gains and losses and declines in securities 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.

The following table summarizes available-for-sale securities at June 30, 2009 and December 31, 2008, in thousands:

 

June 30, 2009

   Maturity in
Years
   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Estimated
Fair
Value

Federal agency notes

   Less than 1    $ 2,602    $ 2    $ —        $ 2,604

Corporate debt securities

   Less than 1      1,476      3      —          1,479
                               

Total available-for-sale securities

      $ 4,078    $ 5    $ —        $ 4,083
                               

December 31, 2008

                         

Federal agency notes

   Less than 1    $ 29,024    $ 54    $ —        $ 29,078

Corporate debt securities

   Less than 1      7,741      12      (31     7,722
                               

Total available-for-sale securities

      $ 36,765    $ 66    $ (31   $ 36,800
                               

7. Fair Value Disclosures

In accordance with SFAS No. 157, “Fair Value Measurements,” fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability, based upon an exit price, in an orderly transaction between market participants at the measurement date.

 

7


Table of Contents

SFAS No. 157 establishes a three-level valuation hierarchy of valuation techniques that is based on observable and unobservable inputs.

 

Level 1 -

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

Level 2 -

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

Level 3 -

  unobservable inputs based on the Company’s own assumptions.

The following table presents the Company’s valuation hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2009, in thousands:

 

     Fair Value Measurements at June 30, 2009
     Balance at
June 30,
2009
   Quoted
Prices in
Active
Markets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)

Assets:

           

Money market funds and cash equivalents (1)

   $ 30,144    $ 30,144    $ —      $ —  

US government, agency and government-sponsored enterprise obligations (2)

     2,604      —        2,604      —  

Corporate debt instruments (2)

     1,479      —        1,479      —  

Liabilities:

           

Warrants

   $ 4,245    $ —      $ —      $ 4,245

 

(1) Included in cash and cash equivalents on the accompanying condensed consolidated balance sheet.

 

(2) Included in either cash and cash equivalents or short-term investments, available-for-sale on the accompanying condensed consolidated balance sheet.

The following table presents the activity for the Company’s warrants that were outstanding during the six months ended June 30, 2009, in thousands:

 

     Significant
Unobservable
Inputs
(Level 3)

Balance at January 1, 2009 after reclassification from additional paid-in
capital upon adoption of EITF Issue No. 07-5

   $ 2,118

Unrealized loss from valuation of warrant liability

     2,127
      

Balance at June 30, 2009

   $ 4,245
      

8. Restructuring Charges

In June 2009, the Company completed a reduction of its US workforce of approximately 31%, or a total of approximately 130 employees, that was announced in April 2009 to preserve cash and to focus on its clinical development program for lorcaserin and select earlier-stage research and development programs. The Company accounted for its restructuring activities in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which requires that a liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. As a result of this workforce reduction, the Company recorded a charge of $3.3 million in the three and six months ended June 30, 2009, including non-cash, share-based compensation charges of $0.3 million, which is reflected as a separate line item in the accompanying condensed consolidated statements of operations. As of June 30, 2009, $2.9 million of this charge has been paid, resulting in a remaining accrual of $0.4 million that will be paid in the third quarter of 2009.

9. Acquired Technology and Other Intangibles

In January 2008, the Company acquired certain assets from Siegfried Ltd, or Siegfried, including a licensed production facility and an assembled workforce originally valued at $12.1 million and $1.6 million, respectively. The Company determined that the licensed production facility has an indefinite useful life since the facility is qualified to produce and package tablets broadly and is not a specific-purpose manufacturing plant. The licensed production facility will be tested for impairment annually in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” If, in the future, the Company determines that the nature of the licensed production facility has changed to a finite useful life, amortization would begin to be recorded over the estimated useful life of the

 

8


Table of Contents

facility. The acquired workforce is being amortized over its estimated benefit of two years, which was determined based on an analysis as of the acquisition date. As of June 30, 2009 and using the exchange rate in effect on June 30, 2009, the Company expects to record expense of $0.4 million in the remainder of 2009 for amortization of the acquired workforce.

In February 2001, the Company acquired Bunsen Rush for $15.0 million in cash and assumed $0.4 million in liabilities. The Company allocated $15.4 million to the patented Melanophore technology, its primary screening technology, acquired in such transaction. The Melanophore 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 of June 30, 2009, the Company expects to record expense of $0.8 million in the remainder of 2009, $1.5 million in 2010 and $0.3 million in 2011 for amortization of this technology.

Acquired technology and other intangibles, net, consisted of the following at June 30, 2009, in thousands:

 

     Gross
Carrying
Amount
   Accumulated
Amortization
    Net
Carrying
Amount

Amortizable intangible assets:

       

Acquired technology from Bunsen Rush

   $ 15,378    $ (12,808   $ 2,570

Acquired workforce from Siegfried

     1,553      (1,165     388
                     
   $ 16,931    $ (13,973     2,958
                 

Indefinite-lived intangible assets:

       

Acquired licensed production facility from Siegfried

          11,995
           

Total identifiable intangible assets, net

        $ 14,953
           

10. Concentration of Credit Risk and Major Customers

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

The Company manufactures drug products for Siegfried under a manufacturing services agreement, and all of the Company’s manufacturing services revenues are attributable to Siegfried.

Percentages of the Company’s total revenues derived from its manufacturing services agreement and from its two most significant collaborators are as follows:

 

     Three months ended June 30,     Six months ended June 30,  

Source of Revenue

   2009     2008     2009     2008  

Manufacturing services agreement with Siegfried

   62.1   75.6   57.5   76.5

Collaboration with Ortho-McNeil-Janssen Pharmaceuticals, Inc.

   37.5   24.0   42.1   23.1

Collaboration with Merck & Co., Inc.

   0.4   0.4   0.4   0.4
                        
   100.0   100.0   100.0   100.0
                        

11. Commitments

On June 17, 2009, the Company entered into a Facility Agreement with Deerfield Private Design Fund, L.P., Deerfield Private Design International, L.P., Deerfield Partners, L.P., Deerfield International Limited, Deerfield Special Situations Fund, L.P., and Deerfield Special Situations Fund International Limited, or collectively Deerfield, pursuant to which Deerfield agreed to provide the Company with a $100.0 million secured loan and the Company agreed to issue Deerfield warrants to purchase an aggregate of 28,000,000 shares of its common stock at an exercise price of $5.42 per share upon the closing of such loan. The closing of the loan occurred on July 6, 2009, at which time the Company recorded the transaction in its consolidated financial statements.

The loan matures on June 17, 2013, and the outstanding principal accrues interest at a rate of 7.75% per annum, payable quarterly in arrears. The schedule of required principal repayments is as follows: $10.0 million in July 2010, $20.0 million in July 2011, $30.0 million in July 2012, and the remainder at maturity. At any time the Company may prepay any or all of the outstanding principal at par, and the Company may be required to make the scheduled repayments earlier in connection with certain equity issuances. In addition, the Company is required to make mandatory prepayments of the loan under certain circumstances.

On or before June 17, 2011, Deerfield may make a one-time election to loan the Company up to an additional $20.0 million under the same terms as the $100.0 million loan, with the additional loan also maturing on June 17, 2013. For each additional $1.0 million that Deerfield loans the Company under the Facility Agreement, the Company will issue Deerfield warrants for 280,000 shares of common stock at an exercise price of $5.42 per share. The warrants issued or issuable in connection with the Facility Agreement are exercisable until June 17, 2013.

 

9


Table of Contents

See Note 13 for subsequent event related to the secured loan.

12. Warrant Liability

In June 2006 and August 2008, the Company issued seven-year warrants, which the Company refers to as the Series B warrants, to purchase 829,856 and 1,106,344 shares of its common stock, respectively, at an exercise price of $15.49 and $7.71 per share, respectively. The Series B warrants are related to the Company’s then outstanding Series B Convertible Preferred Stock. As a result of subsequent equity sales at prices below the pre-defined adjustment price of $6.72, as of June 30, 2009, the number of outstanding Series B warrants increased to 869,721 and 1,160,532, respectively, while the per share exercise price decreased to $14.78 and $7.35, respectively. See Note 13.

Upon adoption of EITF Issue No. 07-5, and as a result of the provisions in the agreements for the Series B warrants that may result in an adjustment to the warrant exercise price, on January 1, 2009, the Company recorded a $9.7 million adjustment to equity, a $2.1 million current liability for the fair value of the Series B warrants and a $7.6 million adjustment to the opening accumulated deficit balance as a cumulative effect of a change in accounting principle. The Company revalued these warrants at March 31, 2009 and June 30, 2009, and will continue to revalue its outstanding Series B warrants on each subsequent balance sheet date until they are fully exercised or expire, with any changes in the fair value between reporting periods recorded as other income or expense. Accordingly, for the three and six months ended June 30, 2009, the Company recorded a loss of $2.5 million and $2.1 million, respectively, in the interest and other income (expense) section of the accompanying condensed consolidated statements of operations. The warrants issued in June 2006 were valued at June 30, 2009 using an option pricing model and the following assumptions: expected life of 4 years, risk-free interest rate of 2.1%, expected volatility of approximately 66% and no dividend yield. The warrants issued in August 2008 were valued at June 30, 2009 using an option pricing model and the following assumptions: expected life of 6 years, risk-free interest rate of 2.9%, expected volatility of approximately 58% and no dividend yield.

13. Subsequent Events

Closing of Secured Loan

On July 6, 2009, the Company received net proceeds of approximately $95.6 million from a $100.0 million secured loan provided by Deerfield, and issued Deerfield warrants to purchase an aggregate of 28,000,000 shares of its common stock at an exercise price of $5.42 per share.

In accordance with provisions in the agreements for the outstanding Series B warrants, subsequent equity sales at an effective net price below $6.72 result in adjustments to the number of common shares issuable under the Series B warrants and the per share exercise price. Upon the issuance of warrants to Deerfield, the number of shares underlying the then outstanding Series B warrants increased from 1,160,532 to 1,222,050 and from 869,721 to 916,213, respectively, while the per share exercise price decreased from $7.35 to $6.98 and from $14.78 to $14.03, respectively.

The Company is evaluating the components of this transaction and the applicable fair values for financial reporting purposes.

Equity Financing

On July 13, 2009, the Company received net proceeds of approximately $49.7 million from a public offering of 12,500,000 shares of its common stock at $4.17 per share. As a result of the closing of this offering, the Company was required to repay Deerfield $10.0 million that was scheduled to be repaid in July 2010 (see Note 11).

 

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, or Quarterly Report, and the audited consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2008, or 2008 Annual Report, as filed with the Securities and Exchange Commission, or SEC. Operating results are not necessarily indicative of results that may occur in future periods.

This Quarterly Report includes forward-looking statements, which involve a number of risks and uncertainties. These forward-looking statements can generally be identified as such because the context of the statement will include words such as “may,” “will,” “intend,” “plan,” “believe,” “anticipate,” “expect,” “estimate,” “predict,” “potential,” “continue,” “likely,” or “opportunity,” the negative of these words or other similar words. Similarly, statements that describe our future plans, strategies, intentions, expectations, objectives, goals or prospects and other statements that are not historical facts are also forward-looking statements. 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. These forward-looking statements are based largely on our expectations and projections about future events and future trends affecting our business, and are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. These risks and uncertainties include, without limitation, the risk factors

 

10


Table of Contents

identified in our SEC reports, including this Quarterly Report. In addition, past financial or operating performance is not necessarily a reliable indicator of future performance, and you should not use our historical performance to anticipate results or future period trends. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations and financial condition. Except as required by law, we undertake no obligation to update publicly or revise our forward-looking statements.

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 drug candidate, lorcaserin hydrochloride, or lorcaserin, is being investigated in a Phase 3 clinical trial program for weight management. We have a broad pipeline of novel compounds targeting G protein-coupled receptors, or GPCRs, an important class of validated drug targets, which includes compounds being evaluated independently and with partners, including Merck & Co., Inc., or Merck, and Ortho-McNeil-Janssen Pharmaceuticals, Inc., or Ortho-McNeil-Janssen. We incorporated on April 14, 1997 in the state of Delaware and commenced operations in July 1997.

Our recent developments include:

 

   

Completed dosing in all clinical trials expected to be included in the planned New Drug Application, or NDA, submission for lorcaserin. We plan to report results from BLOSSOM (Behavioral modification and LOrcaserin Second Study for Obesity Management), the second of two pivotal trials evaluating the safety and efficacy of lorcaserin for weight management, in September 2009.

 

   

Completed enrollment in BLOOM-DM (Behavioral modification and Lorcaserin for Overweight and Obesity Management in Diabetes Mellitus), a one-year study evaluating lorcaserin in obese and overweight patients with type 2 diabetes. Results from BLOOM-DM will be submitted as a supplement to the lorcaserin NDA filing.

 

   

Announced a late-breaking poster presentation of positive results from BLOOM (Behavioral modification and Lorcaserin for Overweight and Obesity Management), the first of two pivotal trials evaluating the safety and efficacy of lorcaserin for weight management, at the 69 th Scientific Sessions of the American Diabetes Association. Lorcaserin patients achieved highly significant categorical and absolute weight loss in Year 1, and continued treatment with lorcaserin in Year 2 helped significantly more patients maintain their weight loss as compared to those on placebo. 66.4% of lorcaserin patients who completed one year of treatment according to the trial’s protocol lost at least 5% of their weight and the average weight loss in this responder population was 26 pounds. Treatment with lorcaserin also resulted in highly significant improvements as compared to placebo in multiple secondary endpoints associated with cardiovascular risk. Lorcaserin was very well tolerated, did not result in increased risk of depression and was not associated with development of cardiac valvular insufficiency.

 

   

Ortho-McNeil-Janssen completed a Phase 1 clinical trial evaluating the safety, tolerability, pharmacokinetics and pharmacodynamics of a single ascending dose of APD597 for the treatment of type 2 diabetes in healthy volunteers. Ortho-McNeil-Janssen has initiated another clinical trial evaluating multiple ascending doses of APD597.

 

   

Completed a public offering of 12.5 million shares of our common stock, resulting in net proceeds of approximately $49.7 million.

 

   

Received net proceeds of $95.6 million from a $100.0 million secured loan provided by Deerfield Management. The outstanding principal accrues interest until maturity in June 2013 at a rate of 7.75% per annum. In connection with the loan, we issued Deerfield warrants for 28,000,000 shares of our common stock at an exercise price of $5.42 per share. On or before June 17, 2011, Deerfield may make a one-time election to loan us up to an additional $20.0 million under the same terms, with the additional loan also maturing in June 2013. For each additional $1.0 million in funding, we will issue Deerfield warrants for 280,000 shares of our common stock at an exercise price of $5.42 per share. We repaid Deerfield the first scheduled principal repayment of $10.0 million upon completion of our public offering in July.

 

   

Received aggregate net proceeds of $14.7 million from the sale of approximately 5.7 million shares of common stock under a $50.0 million equity financing commitment with Azimuth Opportunity Ltd, or Azimuth. During the 18-month term of the equity financing commitment, we may sell newly issued registered shares of our common stock to Azimuth at a pre-negotiated discount to the market price.

 

   

Completed a reduction of our US workforce of approximately 31%, or a total of approximately 130 employees.

RESULTS OF OPERATIONS

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

 

11


Table of Contents

Revenues

 

     Three months ended June 30,    Six months ended June 30,

Source of revenue

           2009                    2008                    2009                    2008        

Manufacturing services agreement

   $ 1.5    $ 2.0    $ 2.9    $ 4.0

Collaborative agreements

     0.9      0.6      2.2      1.2
                           

Total revenues

   $ 2.4    $ 2.6    $ 5.1    $ 5.2
                           

Research and development expenses

 

     Three months ended June 30,    Six months ended June 30,

Type of expense

           2009                    2008                    2009                    2008        

External clinical and preclinical study fees and expenses

   $ 8.9    $ 36.0    $ 32.2    $ 63.0

Salary and other personnel costs (excluding non-cash share-based compensation)

     8.6      10.5      19.5      21.1

Facility and equipment costs

     3.9      3.9      7.9      7.8

Non-cash share-based compensation

     0.9      1.2      1.8      2.2

Research supplies

     0.7      2.7      3.0      5.9

Other

     1.2      1.9      2.4      3.6
                           

Total research and development expenses

   $ 24.2    $ 56.2    $ 66.8    $ 103.6
                           

General and administrative expenses

 

     Three months ended June 30,    Six months ended June 30,

Type of expense

           2009                    2008                    2009                    2008        

Salary and other personnel costs (excluding non-cash share-based compensation)

   $ 2.1    $ 2.5    $ 4.6    $ 5.0

Legal, accounting and other professional fees

     1.8      2.4      4.3      5.4

Facility and equipment costs

     0.9      0.9      1.9      1.8

Non-cash share-based compensation

     0.5      0.7      1.6      2.1

Other

     0.4      0.7      0.9      1.7
                           

Total general and administrative expenses

   $ 5.7    $ 7.2    $ 13.3    $ 16.0
                           

THREE MONTHS ENDED JUNE 30, 2009 AND 2008

Revenues. We recorded revenues of $2.4 million during the three months ended June 30, 2009, compared to $2.6 million during the three months ended June 30, 2008. Our revenues for the three months ended June 30, 2009 included $1.5 million under our manufacturing services agreement with Siegfried Ltd, or Siegfried, a decrease of $0.5 million from the $2.0 million of manufacturing services revenues recorded in the three months ended June 30, 2008. Our revenues for the three months ended June 30, 2009 also included $0.9 million for patent activities from our collaborations with Ortho-McNeil-Janssen and Merck, compared to $0.6 million of such revenues recorded in the three months ended June 30, 2008.

Absent any new collaborations or achievement of a milestone in one of our existing collaborations, we expect our 2009 revenues will consist of reimbursement for patent activities from our collaborators and manufacturing services revenue under our manufacturing services agreement with Siegfried. Under such Siegfried agreement, until at least December 31, 2010, Siegfried may sub-contract to us the manufacture of certain drug products it previously manufactured for its customers, and we agreed to perform such manufacturing up to certain specified amounts. Also under such agreement, Siegfried guarantees a minimum level of cost absorption, which we will record as revenues, of CHF 3.7 million in the remaining two quarters of 2009 and CHF 6.6 million in 2010. Using the exchange rate in effect on June 30, 2009, this would translate to approximately $3.4 million and $6.1 million in manufacturing services revenues for the balance of 2009 and 2010, respectively.

Revenues from our collaborators for milestones that may be achieved in the future are difficult to predict, and our revenues may vary significantly from quarter to quarter and year to year. We expect that any significant revenues over the next several years will depend on the clinical success of our partnered programs as well as whether we partner lorcaserin or any of our other current or future drug candidates. Ultimately, we expect our revenues in the long term to primarily depend upon the regulatory approval and commercialization of our partnered or internally developed drugs.

Cost of manufacturing services. Cost of manufacturing services is comprised of direct costs associated with manufacturing drug products for Siegfried under our manufacturing services agreement, including related salaries, other personnel costs and machinery depreciation costs. Cost of manufacturing services of $1.6 million and $2.3 million were recorded for the three months ended June 30, 2009 and 2008, respectively.

 

12


Table of Contents

Research and development expenses. Research and development expenses, which account for the majority of our expenses, consist 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, salaries and personnel, research supplies, and facility and equipment costs. We expense research and development expenses to operations as they are incurred when these expenditures relate to our research and development efforts and have no alternative future uses. Other than external expenses for our 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 decreased by $32.0 million to $24.2 million for the three months ended June 30, 2009, from $56.2 million for the three months ended June 30, 2008. This was primarily due to decreases of (i) $27.1 million in external clinical and preclinical study fees and expenses due to completing our BLOOM trial and nearing the completion of our BLOSSOM trial, as well as the completion of our clinical studies of APD125 and APD791 and our preclinical studies of APD916, as we prioritized our spending towards activities that support filing an NDA for lorcaserin, (ii) $2.0 million in research supplies due to our cost-containment efforts and (iii) $1.9 million in salary and other personnel costs as a result of our recently completed workforce reduction. Personnel-related employee separation costs resulting from the workforce reduction are reflected as a separate line item in our condensed consolidated statements of operations. Although we expect to continue to incur substantial research and development expenses in 2009, primarily related to lorcaserin, we expect that our total research and development expenses in 2009 will be significantly lower than the 2008 level as we believe that the majority of expenses from our BLOOM and BLOSSOM trials have been recognized through the first half of 2009. In addition, we do not plan to initiate in the near term any clinical trials of any other of our drug candidates. Further, as a result of the recently completed workforce reduction, we expect that our research and development expenses, particularly salary, other personnel costs and research supplies, in the second half of 2009 will be significantly lower than in the first half of 2009.

Included in the $8.9 million total external clinical and preclinical study fees and expenses noted in the table above for the three months ended June 30, 2009 was $8.3 million related to our lorcaserin program and $0.4 million related to APD811, our lead drug candidate for the treatment of pulmonary arterial hypertension. Included in the $36.0 million total external clinical and preclinical study fees and expenses noted in the table above for the three months ended June 30, 2008 was $31.1 million related to our lorcaserin program, $3.9 million related to our APD125 program, $0.5 million related to our APD916 program and $0.2 million related to our APD791 program.

General and administrative expenses. General and administrative expenses decreased by $1.5 million to $5.7 million for the three months ended June 30, 2009, from $7.2 million for the three months ended June 30, 2008. This was primarily due to decreases of (i) $0.6 million in legal and other professional fees and (ii) $0.4 million in salary and other personnel costs as a result of our recently completed workforce reduction. Personnel-related employee separation costs resulting from the workforce reduction are reflected as a separate line item in our condensed consolidated statements of operations. We expect that our total general and administrative expenses in 2009 will be lower than the 2008 level as a result of this workforce reduction and other cost-containment measures. We also expect that, unless a partner pays for commercialization, marketing and business development expenses related to lorcaserin, our total general and administrative expenses will increase significantly beginning in 2010 primarily due to increases in such expenses.

Restructuring charges. We recorded a charge of $3.3 million in the three months ended June 30, 2009 in connection with our recently completed workforce reduction.

Amortization of acquired technology and other intangibles. We recorded $0.6 million for amortization of acquired technology and other intangibles in both of the three month periods ended June 30, 2009 and 2008. The workforce we acquired from Siegfried in January 2008 is being amortized over its estimated benefit of two years, for which we expect to record additional amortization expense of $0.4 million in the remainder of 2009. Our patented Melanophore technology, which we acquired in 2001 for $15.4 million, is our primary screening technology and is being amortized over its estimated useful life of 10 years. We expect to record charges of $0.8 million in the remainder of 2009, $1.5 million in 2010 and $0.3 million in 2011 for amortization of this technology.

Interest and other income (expense), net. Interest and other expense, net, increased by $3.3 million to $5.0 million for the three months ended June 30, 2009, from $1.7 million for the three months ended June 30, 2008. This increase in expense was primarily due to (i) a $2.5 million non-cash loss from the revaluation of our warrant liability, (ii) a $1.7 million decrease in interest income attributable to lower interest rates and significantly lower cash balances and (iii) a $0.5 million increase in interest expense and financing costs, which included lease payments on our lease financing obligations accounted for in accordance with Statement of Financial Accounting Standards, or SFAS, No. 66, “Accounting for Sales of Real Estate” and SFAS No. 98 “Accounting for Leases.” These changes were partially offset by a decrease in other expense as a result of the $2.0 million non-cash warrant settlement that was recorded in the three months ended June 30, 2008. As a result of higher cash balances provided by our recent financings, we expect that our interest income in the second half of 2009 will be higher than in the first half of 2009. We also expect that our interest expense will increase significantly as a result of the secured loan we received in July 2009.

 

13


Table of Contents

Dividends on redeemable convertible preferred stock. Because we redeemed all of the outstanding shares of our Series B Convertible Preferred Stock, or Series B Preferred, in November 2008, we recorded no dividends related to such stock in the three months ended June 30, 2009, compared to $0.5 million in the three months ended June 30, 2008.

SIX MONTHS ENDED JUNE 30, 2009 AND 2008

Revenues. We recorded revenues of $5.1 million during the six months ended June 30, 2009, compared to $5.2 million during the six months ended June 30, 2008. Our revenues for the six months ended June 30, 2009 included $2.9 million under our manufacturing services agreement with Siegfried and $2.2 million for patent activities from our collaborations with Ortho-McNeil-Janssen and Merck. Our revenues for the six months ended June 30, 2008 included $4.0 million under our manufacturing services agreement with Siegfried and $1.2 million for patent activities from our collaborations with Ortho-McNeil-Janssen and Merck.

Cost of contract manufacturing. Cost of manufacturing services of $3.0 million and $4.6 million were recorded for the six months ended June 30, 2009 and 2008, respectively.

Research and development expenses. Research and development expenses decreased $36.8 million to $66.8 million for the six months ended June 30, 2009, from $103.6 million for the six months ended June 30, 2008. This was primarily due to decreases of (i) $30.8 million in external clinical and preclinical study fees and expenses primarily due to completing our BLOOM trial and nearing the completion of our BLOSSOM trial, (ii) $2.9 million in research supplies due to our cost-containment efforts and (iii) $1.6 million in salary and personnel costs. Included in the $32.2 million of total external clinical and preclinical study fees and expenses for the six months ended June 30, 2009 was $31.0 million related to our lorcaserin program, $0.5 million related to our APD811 program and $0.4 million related to receipt of the complete data package from our Phase 2b clinical trial of APD125. Included in the $63.0 million of total external clinical and preclinical study fees and expenses for the six months ended June 30, 2008 was $54.3 million related to our lorcaserin program, $5.7 million related to our APD125 program, $1.3 million related to our APD916 program and $1.1 million related to our APD791 program.

General and administrative expenses. General and administrative expenses decreased $2.7 million to $13.3 million for the six months ended June 30, 2009, from $16.0 million for the six months ended June 30, 2008. This was primarily due to decreases of (i) $1.1 million in legal fees, primarily patent fees, and (ii) $0.4 million in marketing research expenses.

Amortization of acquired technology and other intangibles. We recorded $1.1 million for amortization of acquired technology in each of the six-month periods ended June 30, 2009 and 2008 related to our Melanophore screening technology and the workforce we acquired from Siegfried.

Interest and other income (expense), net. Interest and other income (expense), net, for the six months ended June 30, 2009 decreased $6.5 million to an expense of $6.1 million, from income of $0.4 million for the six months ended June 30, 2008, primarily due to (i) a $5.0 million decrease in interest income, (ii) a $2.1 million non-cash loss from the revaluation of our warrant liability, (iii) a $2.0 million non-cash warrant settlement that was recorded in the first half of 2008 and (iv) a $0.8 million increase in interest expense and financing costs.

Dividends on redeemable convertible preferred stock . We recorded a dividend of $1.1 million related to our then outstanding Series B Preferred in the six months ended June 30, 2008.

LIQUIDITY AND CAPITAL RESOURCES

Short term

Our sources of liquidity include our cash balances and short-term investments. As of June 30, 2009, we had $39.6 million in cash and cash equivalents and short-term investments. On July 6, 2009, we received net proceeds of approximately $95.6 million from a secured loan provided by Deerfield Private Design Fund, L.P., Deerfield Private Design International, L.P., Deerfield Partners, L.P., Deerfield International Limited, Deerfield Special Situations Fund, L.P., and Deerfield Special Situations Fund International Limited, or collectively Deerfield. Additionally, on July 13, 2009, we received net proceeds of approximately $49.7 million from a public offering of our common stock. Upon the closing of this public offering, we were required to repay the first scheduled payment of $10.0 million of the Deerfield loan. Other potential sources of near-term liquidity include (i) the partnering or out-licensing of our drug candidates, internal drug programs and technologies, (ii) equity, debt or other financing, (iii) the sale of facilities that we own, and (iv) milestone payments from our collaborators. In addition, on or before June 17, 2011, Deerfield can make a one-time election to loan us up to an additional $20.0 million under the same terms as the initial $100.0 million loan. Although we will continue to be opportunistic in our efforts to obtain cash, we believe that our ability to obtain cash has been reduced based on the ongoing difficulties in the global economic market and our stock price. There is no guarantee that additional funding will be available or that, if available, such funding will be available on terms that we or our stockholders view as favorable.

We are prioritizing our available cash towards funding activities that support completing our lorcaserin Phase 3 program and filing an NDA for lorcaserin, which we expect to file by the end of 2009, assuming positive data from our BLOSSOM trial. In connection with such prioritization, we are deferring the initiation of any new clinical trials for our other programs, deferring certain costs related to lorcaserin that are non-essential to the initial commercialization of lorcaserin and continuing our cost-containment efforts. We recently completed a workforce reduction of approximately 130 employees, which we expect will result in annual operating cost

 

14


Table of Contents

savings of approximately $25.0 million. Along with this workforce reduction, we decreased the number of our research programs as well as our planned activities. We will continue to monitor and evaluate the level of our research, development and manufacturing expenditures, and may further adjust such expenditures based upon a variety of factors, such as our available cash, our ability to obtain additional cash and partner programs, the results and progress in our clinical and earlier-stage programs, the time and costs related to clinical trials and regulatory decisions, as well as the global economic environment.

Although most of the external expenses for our Phase 3 lorcaserin program have been expensed through June 30, 2009, we expect that our research and development expenditures will continue to be substantial as we continue our lorcaserin program and select earlier-stage research and development programs. In addition to clinical trial costs for lorcaserin, we expect that we will continue to incur increasing manufacturing costs and other pre-launch costs for lorcaserin.

Long term

We will need to obtain substantial amounts of cash to achieve our objectives of internally developing drugs, which take many years and potentially several hundreds of millions of dollars to develop. If we decide to market and commercialize lorcaserin or any other drug candidate independently or with a partner, we may need to invest heavily in associated manufacturing, marketing and commercialization costs. Such costs will be substantial and some will need to be incurred prior to receiving marketing approval. We do not currently have adequate internal liquidity to meet these objectives in the long term. To do so, we will need to continue our partnering 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 prioritization decisions regarding funding for our programs, our progress in our clinical and earlier-stage programs, the time and costs related to current and future clinical trials and regulatory decisions, our research, development, manufacturing and commercialization costs (including personnel costs), the progress in our collaborations, costs associated with intellectual property, our capital expenditures, and costs associated with securing any in-licensing opportunities. 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 will result in additional curtailment of our development and/or research activities, which, in turn, will affect our development pipeline and ability to obtain 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 and revenues from sales of any drugs we own.

We evaluate from time to time potential acquisitions and in-licensing and other opportunities. Any such transaction may impact our liquidity as well as affect our expenses if, for example, our operating expenses increase as a result of such license or acquisition or we use our cash to finance the license or acquisition. In January 2008, we entered into strategic cooperation agreements with Siegfried that are primarily related to the manufacturing of lorcaserin, and which are expected to be necessary for our planned NDA submission to the FDA and for commercialization of lorcaserin after regulatory marketing approval. We paid CHF 21.8 million, or $19.6 million, of the cash purchase price in January 2008, and are scheduled to pay the remaining cash portion of the purchase price of CHF 10.0 million in three equal installments in the third, fourth and fifth years after closing.

Sources and Uses of Our Cash

Net cash used in operating activities was $97.2 million during the six months ended June 30, 2009, and primarily was used to fund our net losses in the period, adjusted for non-cash items. Non-cash items included $5.6 million in depreciation and amortization expense, $3.7 million in share-based compensation expense, $2.1 million loss from the revaluation of our warrant liability, $1.1 million in amortization expense related to acquired technology and other intangibles, as well as changes in operating assets and liabilities. Net cash used in operating activities was $94.1 million during the six months ended June 30, 2008, and primarily was used to fund our net losses in the period, adjusted for non-cash expenses. Non-cash expenses included $5.8 million in depreciation and amortization expense, $4.3 million in share-based compensation, $2.0 million warrant settlement provision charge related to a disagreement with one of our warrant holders, $1.2 million in amortization of acquired technology and other intangibles, as well as changes in operating assets and liabilities. We expect net cash used in operating activities in 2009 will decrease significantly from the 2008 level as we completed our BLOOM trial and are nearing the completion of our BLOSSOM trial, prioritize our spending towards activities that support filing an NDA for lorcaserin and realize expected operating cost savings from our recently completed workforce reduction.

Net cash of $30.5 million was provided by investing activities during the six months ended June 30, 2009, and was primarily attributable to proceeds of $32.6 million from our short-term investments, which were partially offset by $2.5 million used for equipment and improvements to our facilities. Net cash used in investing activities was $65.3 million during the six months ended June 30, 2008, and was primarily the result of net purchases of short-term investments of $31.7 million, $19.6 million used for the purchase of our drug product manufacturing and packaging facility in Switzerland and $13.7 million used for equipment and

 

15


Table of Contents

improvements to our facilities. We expect that our capital expenditures in 2009 will be substantially less than in 2008 due to our ongoing cost-containment efforts.

Net cash provided by financing activities was $29.8 million during the six months ended June 30, 2009, and was primarily attributable to $15.0 million in reimbursements for improvements made to one of our facilities and net proceeds of $14.7 million from the sale of a total of 5,745,591 shares of common stock under our equity financing commitment with Azimuth. Net cash provided by financing activities was $1.9 million during the six months ended June 30, 2008, and was primarily attributable to $1.0 million in reimbursements for improvements made to one of our facilities and net proceeds of $1.0 million received from option exercises and purchases under our employee stock purchase plan.

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 US generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. We base our estimates on historical experience and on various assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ significantly from those estimates.

Our critical accounting policies include:

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 trials and other events. We follow this method because we believe reasonably dependable estimates of the costs applicable to various stages of a clinical trial can be made. However, the actual costs and timing of clinical trials are highly uncertain, subject to risks and may change depending on a number of factors. Differences between the actual clinical trial costs and the estimated clinical trial costs that we have accrued in any prior period are 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.

Revenue recognition. Our revenue recognition policies are in accordance with the SEC Staff Accounting Bulletin, or SAB, No. 101, “Revenue Recognition in Financial Statements,” as amended by 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. Some of our agreements contain upfront technology access fees, research funding, milestone achievements and royalties.

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 minimum 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 each 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.

We manufacture drug products under a manufacturing services agreement for a single customer, Siegfried. Upon Siegfried’s acceptance of drug products manufactured by us, we recognize manufacturing services revenues at agreed upon prices for such drug products. We have also contracted with Siegfried for them to provide us with administrative and other services in exchange for a fee paid to Siegfried. We determined that we are receiving an identifiable benefit for these services from Siegfried, and are recording such fees in the operating expense section of our consolidated statements of operations.

Share-based compensation. On January 1, 2006, we adopted SFAS No. 123R using the modified-prospective transition method. 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 the 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.

 

16


Table of Contents

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 the fair market value of 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 volatilities 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 US Treasury yield curve, with a remaining term approximately equal to the expected term used in the option pricing model.

As compensation expense recognized is based on awards ultimately expected to vest, it is reduced for estimated forfeitures. 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 vary from estimates, we will recognize the difference in compensation expense in the period the actual forfeitures occur or when options vest.

Accounting for lease financing obligations. We have accounted for our sale and leaseback transactions in accordance with SFAS Nos. 66 and 98. 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 the borrowing rate that we use to impute interest expense on our lease payments.

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 2008 Annual Report, which contain additional accounting policies and other disclosures required by GAAP.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

There have been no material changes from the information we included in this section of our annual report on Form 10-K for the year ended December 31, 2008.

 

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 Vice President, Finance and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, our Chief Executive Officer and Vice President, Finance 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) were effective. There was no change in our internal control over financial reporting that occurred during the 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 substantive changes, including any material changes, from the risk factors previously disclosed in Item 1A to Part I of our annual report on Form 10-K for the year ended December 31, 2008, as filed with the Securities and Exchange Commission.

 

17


Table of Contents

Risks Relating to Our Business

*We will need additional funds to conduct our planned research and development efforts, we may not be able to obtain such funds and may never become profitable.

We have accumulated a large deficit since inception that has primarily resulted from the significant research and development expenditures we have made in seeking to identify and validate new drug targets and develop compounds that could become marketed drugs. We expect that our losses will continue to be substantial for at least the next several years and that our operating expenses will also continue to be substantial, even if we or our collaborators are successful in advancing our compounds or partnered compounds.

We do not have any commercially available drugs, and we have substantially less money than we need to develop our compounds into marketed 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 any marketed drugs.

We will need additional funds or a partner to bring our most advanced drug candidate, lorcaserin, to market, if ever, and we may not be able to secure adequate funding or find an acceptable partner at all or on terms you or we believe are favorable. We also believe that due to global economic challenges, and as our cash balances decline, it may be difficult for us to obtain additional financing or enter into strategic relationships on terms acceptable to us, if at all. If additional funding is not available, we will have to eliminate or further postpone or scale back some or all of our research or development programs or delay the development of one or more of such programs, including our lorcaserin program.

The current global economic environment poses severe challenges to our business strategy, which relies on access to capital from the markets and our collaborators, and creates other financial risks for us.

The global economy, including credit markets and the financial services industry, has been experiencing a period of substantial turmoil and uncertainty. These conditions have generally made equity and debt financing more difficult to obtain, and may negatively impact our ability to complete financing transactions. The duration and severity of these conditions is uncertain, as is the extent to which they may adversely affect our business and the business of current and prospective collaborators and vendors. If the global economy does not improve or worsens, we may be unable to secure additional funding to sustain our operations or to find suitable partners to advance our internal programs, even if we receive positive results from our research and development or business development efforts.

We maintain a portfolio of investments in marketable debt securities which are recorded at fair value. Although we have established investment guidelines relative to diversification and maturity with the objectives of maintaining safety of principal and liquidity, credit rating agencies may reduce the credit quality of our individual holdings which could adversely affect their value. Lower credit quality and other market events, such as changes in interest rates and further deterioration in the credit markets, may have an adverse effect on the fair value of our investment holdings and cash position.

We are focusing our activities and resources on the development of lorcaserin and depend on its success.

We are focusing our near-term research and development activities and resources on lorcaserin, and we believe a significant portion of the value of our company relates to our ability to develop this drug candidate. The development of lorcaserin is subject to many risks, including the risks discussed in other risk factors. If the results of clinical trials and preclinical studies of lorcaserin, the regulatory decisions affecting lorcaserin, the anticipated or actual timing and plan for commercializing lorcaserin, or, ultimately, the market acceptance of lorcaserin do not meet our, your, analysts’ or others’ expectations, the market price of our common stock could decline significantly.

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

We announce results of clinical trials and preclinical studies from time to time. For example, we announced the results from our Phase 3 BLOOM pivotal trial for lorcaserin in March 2009 and expect to announce the results of our Phase 3 BLOSSOM pivotal trial for lorcaserin by the end of September 2009.

The results and timing of clinical trials and preclinical studies can affect our stock price. Preclinical studies include experiments performed in test tubes, in animals, or in cells or tissues from humans or animals. These studies include all drug studies except those conducted in human subjects, and may occur before or after initiation of clinical trials for a particular compound. Results of clinical trials and preclinical studies of lorcaserin or our other 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 most advanced drug candidates and regulatory decisions (including by us or 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.

 

18


Table of Contents

We have drug programs that are currently in clinical trials. In addition to successfully completing clinical trials, to conduct long-term clinical trials and gain regulatory approval to commercialize drug candidates, regulatory authorities require that all drug candidates complete short- and long-term preclinical toxicity and carcinogenicity studies. These preclinical, animal studies are required to help us and regulatory authorities assess the potential risk that drug candidates may be toxic or cause cancer in humans. The results of clinical trials and preclinical studies are uncertain and subject to different interpretations, and the design of these trials and studies (which may change significantly and be more expensive than anticipated depending on results and regulatory decisions) may also be viewed negatively by us, regulatory authorities or other third parties and adversely impact the development and opportunities for regulatory approval and commercialization of our and our partnered drug candidates. 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. This is particularly the case with respect to lorcaserin.

*We have significant indebtedness and debt service obligations as a result of our $100 million secured loan, which may adversely affect our cash flow, cash position and stock price.

We substantially increased our total debt and debt service obligations when we received a $100.0 million secured loan on July 6, 2009. This loan matures on June 17, 2013, and the outstanding principal accrues interest at a rate of 7.75% per annum, payable quarterly in arrears. The schedule of our required principal repayments is follows: $10.0 million in July 2010, $20.0 million in July 2011, $30.0 million in July 2012, and the remainder at maturity. We may be required to make the scheduled repayments earlier in connection with certain equity issuances. For example, we were required to make the first scheduled repayment of $10.0 million in connection with the closing of our July 2009 public offering. In addition, we are required to make mandatory prepayments of the loan upon certain changes of control and in the event we issue equity securities (other than certain exempted issuances) at a price of less than $2.00 per share.

On or before June 17, 2011, the lender may elect to provide us with an additional loan in a principal amount of up to $20.0 million under the same terms as the $100.0 million loan, with the additional loan also maturing on June 17, 2013.

In the future, if we are unable to generate cash from operations sufficient to meet these debt obligations, we will need to obtain additional funds from other sources, which may include one or more financings. However, we may be unable to obtain sufficient additional funds when we need them, on favorable terms or at all. The sale of equity or convertible debt securities in the future may be dilutive to our stockholders, and debt-financing arrangements may require us to enter into covenants that would restrict certain business activities or our ability to incur further indebtedness, and may contain other terms that are not favorable to our stockholders or us.

Also, if we are unable to generate cash from operations or obtain additional funds from other sources sufficient to meet these debt obligations, or we need to use existing cash to fund these debt obligations, we may have to delay or curtail some or all of our research, development and commercialization programs or sell or license some or all of our assets. Our indebtedness could have significant additional negative consequences, including, without limitation:

 

   

increasing our vulnerability to general adverse economic conditions;

 

   

limiting our ability to obtain additional funds; and

 

   

placing us at a possible competitive disadvantage to less leveraged competitors and competitors that have better access to capital resources.

If an event of default occurs under our loan documents, including in certain circumstances the warrants issued in connection with the loan transaction, the lender may declare the outstanding principal balance and accrued but unpaid interest owed to it immediately due and payable, which would have a material adverse affect on our financial position. We may not have sufficient cash to satisfy this obligation. Also, if a default occurs under our $100.0 million loan, and we are unable to repay the lender, the lender could seek to enforce its rights under its security interest in substantially all of our assets. If this were to happen, we may lose some or all of our assets in order to satisfy our debt, which could cause our business to fail.

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

In light of our financial resources, we decided to focus our near-term research and development efforts on our lorcaserin Phase 3 program and select earlier-stage preclinical and research programs. We also decreased the number of our US employees in June 2009 by approximately 31% in a workforce reduction. While we believe this strategy will conserve resources, our ability to advance our drug candidate pipeline outside of lorcaserin will be limited. Without additional capital or funding from partners, we will need to significantly curtail some of our planned activities and expenditures. Any such further reductions may adversely impact our lorcaserin development and commercialization timeline or narrow or slow the development of our pipeline, which we believe would reduce our

 

19


Table of Contents

opportunities for success. Our decision to limit near-term development of drug candidates other than lorcaserin will likely extend the time it will take us to reach the market in these other therapeutic areas and may allow competing products to reach the market before our drug candidates.

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 serotonin 2C receptor because we believe this may avoid the cardiovascular side effects associated with fenfluramine and dexfenfluramine (often used in combination with phentermine, the combination of which was commonly referred to as “fen-phen”). These two drugs were serotonin-releasing agents and non-selective serotonin receptor agonists, and 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 our belief that selectively stimulating the serotonin 2C receptor will avoid these undesired side effects or lorcaserin’s selectivity profile may not be adequate to avoid these side effects. Moreover, the potential relationship between the activity of lorcaserin and the activity of fenfluramine and dexfenfluramine may result in increased US Food and Drug Administration, or FDA, regulatory scrutiny of the safety of lorcaserin and may raise potential adverse publicity in the marketplace, which could affect clinical enrollment or sales if lorcaserin is approved for commercialization.

*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. Our drug candidates are in various stages of research and development and are prone to the risks of failure inherent in drug development. Clinical trials and preclinical studies are needed to demonstrate that drug candidates are safe and effective to the satisfaction of the FDA and similar non-US regulatory authorities. These trials are expensive and uncertain processes that take years to complete. Failure can occur at any stage of the process, and successful early clinical or preclinical trials do not ensure that later trials or studies will be successful. In addition, the commencement or completion of our planned clinical trials could be substantially delayed or prevented by several factors, including:

 

   

limited number of, and competition for, suitable patients required for enrollment in our clinical trials;

 

   

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

 

   

delay or failure to obtain FDA approval or agreement to commence a clinical trial;

 

   

delay or failure to obtain sufficient supplies of our drug candidates for our clinical trials;

 

   

delay or failure to reach agreement on acceptable clinical trial agreement terms or clinical trial protocols with prospective sites or investigators; and

 

   

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

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 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 authority, such as the FDA, after a study is commenced;

 

   

changes in applicable regulatory policies and regulations;

 

   

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

 

   

uncertainty regarding proper dosing;

 

   

unfavorable results from ongoing clinical trials and preclinical studies;

 

20


Table of Contents
   

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

 

   

scheduling conflicts with participating clinicians and clinical institutions;

 

   

failure to design appropriate clinical trial protocols;

 

   

insufficient data to support regulatory approval;

 

   

termination of clinical trials by one or more clinical trial sites;

 

   

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

 

   

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

 

   

lack of sufficient funding to continue clinical trials and preclinical studies.

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. For example, because our drug candidate for insomnia, APD125, did not meet the primary or secondary endpoints of a Phase 2b clinical trial, we are not planning any further clinical development of APD125. We have experienced setbacks in other development programs and may experience additional setbacks in the future. If we or our collaborators abandon or are delayed in our development efforts related to lorcaserin 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, additional funding may not be available to us or may not be available on terms you or we believe are favorable, and our stock price would likely decrease significantly.

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

The clinical development, manufacturing, labeling, packaging, storage, recordkeeping, 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 trial protocol and other information must be submitted to the FDA as part of an investigational new drug, or 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.

Obtaining approval of an NDA can be a lengthy, expensive and uncertain process. As part of the Prescription Drug User Fee Act, or PDUFA, the FDA has a goal to review and act on a percentage of all submissions in a given time frame. The general review goal for a drug application is 10 months for a standard application and six months for priority review. The FDA has missed a portion of their PDUFA goals, and it is unknown whether the review of an NDA filing for lorcaserin, or for any of our other drug candidates, will be completed within the FDA review goals or will be delayed. Moreover, the duration of the FDA’s review may depend on the number and type of other NDAs that are filed with the FDA around the same time period. For example, we believe that at least two companies are planning to file an NDA for a drug candidate for weight management at around the time we expect the FDA will review our NDA for lorcaserin, which may impact the review of our NDA. Furthermore, any drug that acts on the central nervous system, or CNS, such as lorcaserin, has the potential to be scheduled as a controlled substance by the Drug Enforcement Administration of the United States Department of Justice, or DEA. DEA scheduling is an independent process that can delay drug launch beyond an NDA approval date.

In addition, failure to comply with FDA and other applicable regulatory requirements may, either before or after product approval, if any, subject our company to administrative or judicially imposed sanctions, including:

 

   

Form 483 notices and Warning Letters;

 

   

civil and criminal penalties;

 

   

injunctions;

 

   

withdrawal of approved products;

 

21


Table of Contents
   

product seizure or detention;

 

   

product recalls;

 

   

total or partial suspension of production;

 

   

imposition of restrictions on operations, including costly new manufacturing requirements; and

 

   

refusal to approve pending NDAs or supplements to approved NDAs.

Regulatory approval of an NDA or NDA supplement is not guaranteed. Despite the time and expense exerted, failure can occur at any stage, and we could encounter problems that cause us to abandon clinical trials or to repeat or perform additional preclinical studies and clinical trials. The number of preclinical studies and clinical trials that will be required for FDA approval varies depending on the drug candidate, the disease or condition that the drug candidate is designed to target and the regulations applicable to any particular drug candidate. The FDA can delay, limit or deny approval of a drug candidate for many reasons, including:

 

   

a drug candidate may not be deemed adequately safe and effective;

 

   

FDA officials may not find the data from preclinical studies and clinical trials sufficient;

 

   

the FDA may not approve the manufacturing processes or facilities;

 

   

the FDA may change its approval policies or adopt new regulations; or

 

   

the FDA may not accept our NDA submission (which is expected to be electronic) due to, among other reasons, the formatting of the submission.

We do not expect any drugs resulting from our research and development efforts to be commercially available until at least late 2010. We have not previously filed NDAs with the FDA, either by paper or electronically. This lack of corporate 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 United States or foreign regulatory authority. In addition, we believe that the regulatory review of NDAs for drug candidates intended for widespread use by a large proportion of the general population is becoming increasingly focused on safety. In this regard, it is possible that some of our drug candidates, including lorcaserin, will be subject to increased scrutiny to show adequate safety than would drug candidates for more acute or life-threatening diseases such as cancer. Even if approved, drug candidates may not be approved for all indications requested and such approval may be subject to limitations on the indicated uses for which the drug may be marketed. 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. As a result, we cannot predict when or whether regulatory approval will be obtained for any drug we develop.

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.

*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, except lorcaserin. 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 the case of lorcaserin, results in one pivotal trial (BLOOM) may not be confirmed in another pivotal trial (BLOSSOM). Unfavorable results from ongoing preclinical studies or clinical trials could result in delays, modifications or abandonment of ongoing or future clinical trials, or abandonment of a clinical program. 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

 

22


Table of Contents

delayed, repeated or terminated, or a clinical program to be abandoned. 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.

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 clinical trials will be obtained in these preclinical investigations. Even if such favorable preclinical results are obtained, our financial resources may not allow us to commence Phase 1 clinical trials. 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.

Our revenues, for at least the short-term, depend upon the actions of our collaborators and our ability to enter into new collaborations.

We expect that, for at least the next few years, our ability to generate significant revenues will depend upon the success of our existing collaborations and our ability to enter into new collaborations. Future revenues from our collaborations with Merck and Ortho-McNeil-Janssen will depend on, in addition to patent reimbursements, milestone and royalty payments, if any. Thus, we will receive little additional revenues from our existing collaborators if our own or our collaborators’ research, development or, ultimately, marketing efforts are unsuccessful.

Typically, our collaborators (and not us) control the development of partnered 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. We cannot guarantee that any development, approval or sales milestones in our existing or future collaborations will be achieved in the future, or that we will receive any payments for the achievement of any milestones. In addition, our existing collaborations, including our collaborations with Merck and Ortho-McNeil-Janssen, may be terminated early in certain circumstances, in which case we may not receive future milestone or royalty payments or patent reimbursements.

Moreover, 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.

*We may participate in new partnerships and other 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 out-licensing or in-licensing of compounds or technologies, acquisitions of companies and asset purchases. Additional potential transactions we may consider include a variety of different business arrangements, including strategic partnerships, joint ventures, spin-offs, restructurings, divestitures, business combinations and investments. In addition, another entity may pursue us as an acquisition target. Any such transactions may require us to incur non-recurring or other charges, may increase our near- and long-term expenditures and may pose significant integration challenges, require additional expertise or disrupt our management or business, which could harm our operations and financial results.

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

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, less expensive 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.

 

23


Table of Contents

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, development and marketing 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 better efficacy than our drug candidates or drugs, if any, for the same indication. Our competitors may also market generic or other drugs that compete with our drugs at a lower price than our drugs, which may negatively impact our drug sales, if any. Any results from our research and development efforts, or from our joint efforts with our existing or any future collaborators, may not compete successfully with existing or newly discovered products or therapies.

Collaborative relationships may lead to disputes and delays in drug development and commercialization.

We have had conflicts with collaborators and may in the future 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. Our collaborators may stop supporting our drug candidates if they develop or obtain rights to competing drug candidates or drugs. If any conflicts arise with Ortho-McNeil-Janssen, 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 lead to termination of, development or commercialization of our partnered 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;

 

   

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

 

   

litigation or arbitration.

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, 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 any of our drugs that may be approved will depend in part on government regulation and the availability of coverage and adequate reimbursement from third-party payers, including private health insurers and government payers, such as the Medicaid and Medicare programs, increases in government-run, single-payer health insurance plans and compulsory licenses of drugs. Government and third-party payers are increasingly attempting to contain healthcare costs by limiting coverage and reimbursement levels for new drugs. Given the continuing discussion regarding the cost of healthcare, managed care, universal healthcare coverage and other healthcare issues, we cannot predict with certainty what additional healthcare initiatives, if any, will be implemented or the effect any future legislation or regulation will have on our business. 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. Moreover, legislation and regulations affecting the pricing of pharmaceuticals may change before regulatory agencies approve our drug candidates for marketing. Adoption of such legislation and regulations could further limit pricing approvals for, and reimbursement of, drugs. A government or third-party payer decision not to approve pricing for, or provide adequate coverage and reimbursements of, our drugs, if any, could limit market acceptance of such drugs.

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,

 

24


Table of Contents

including finding and enrolling subjects for testing and administering the trials. Although we rely on these third parties to conduct our clinical trials, we are responsible for ensuring that each of our clinical trials is conducted in accordance with its investigational plan and protocol. Moreover, the FDA and foreign regulatory authorities require us to comply with regulations and standards, commonly referred to as good clinical practices, or GCPs, for conducting, monitoring, recording and reporting the results of clinical trials to ensure that the data and results are scientifically credible and accurate and that the trial subjects are adequately informed of the potential risks of participating in clinical trials. Our reliance on third parties does not relieve us of these responsibilities and requirements. 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, and we may need to enter into new arrangements with alternative third parties and our clinical trials may be extended, delayed or terminated. These independent third parties may also have relationships with other commercial entities, some of which may compete with us. In addition, if such third parties fail to perform their obligations in compliance with our clinical trial protocols or GCPs, our clinical trials may not meet regulatory requirements or may need to be repeated. As a result of our dependence on third parties, we may face delays or failures outside of our direct control. These risks also apply to the development activities of 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 rely on third-party manufacturers and we or such third parties 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. We do not have manufacturing facilities that can produce sufficient quantities of drug candidates for large-scale clinical trials. Accordingly, we must either develop such facilities, which will require substantial additional funds, or rely, at least to some extent, on third-party manufacturers for the production of drug candidates. Furthermore, should we obtain FDA approval for any of our drug candidates, we expect to rely, at least to some extent, on third-party manufacturers for commercial production. Our dependence on others for the manufacture of our drug candidates may adversely affect our ability to develop and deliver such drug candidates on a timely and competitive basis.

Any performance failure on the part of us or a third-party manufacturer could delay clinical development, regulatory approval or, ultimately, sales 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. Moreover, the ability to adequately and timely manufacture and supply drug candidates is dependent on the uninterrupted and efficient operation of the manufacturing facilities, which is impacted by many manufacturing variables including:

 

   

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

 

   

facility capacity of our facilities or those of our contract manufacturers;

 

   

facility contamination by microorganisms or viruses;

 

   

compliance with regulatory requirements, including Form 483 notices and Warning Letters;

 

   

changes in forecasts of future demand;

 

   

timing and actual number of production runs;

 

   

production success rates and bulk drug yields; and

 

   

timing and outcome of product quality testing.

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

We may not be able to enter into agreements for the manufacture of our drug candidates with manufacturers whose facilities and procedures comply with applicable law. Manufacturers are subject to ongoing periodic unannounced inspection by the FDA, the DEA and corresponding state and foreign authorities to ensure strict compliance with current Good Manufacturing Practices, or cGMPs,

 

25


Table of Contents

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. In addition, our Swiss subsidiary, Arena Pharmaceuticals GmbH, or Arena GmbH, has contracted with Siegfried to provide safety, health and environmental services and assess compliance, train personnel and oversee Arena GmbH’s compliance with the applicable safety, health and environmental regulations. We are, therefore, relying at least in part on Siegfried’s judgment, experience and expertise. If we or one of our manufacturers fail to maintain compliance, we or they could be subject to civil or criminal penalties, 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.

*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 area of clinical development. We face competition for such personnel. The loss of services of any principal member of our management or scientific staff or other key personnel, particularly Jack Lief, our Chairman, 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 incur substantial liabilities from any product liability claims if our insurance coverage for those claims is inadequate.

We develop, test and manufacture drugs that are used by humans. 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 our own 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 obtain or 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.

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

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 in the United States or other jurisdictions, we will also be subject to ongoing obligations and continued regulatory review from the FDA and other applicable regulatory agencies, 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 in the United States or other jurisdictions.

If any of our drug candidates receive US regulatory approval or approval in other jurisdictions, the FDA or other regulatory agencies 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 studies. If the FDA or other regulatory agencies approve any of our drug candidates, the labeling, packaging, adverse event reporting, storage, advertising and promotion for the drug will be subject to extensive regulatory requirements. We and the manufacturers of our products are also required to comply with cGMP regulations, which include requirements relating to quality control and quality assurance as well as the corresponding maintenance of records and documentation. Further, regulatory agencies must approve these manufacturing facilities before they can be used to manufacture our products, and these facilities are subject to ongoing regulatory inspections. In addition, regulatory agencies subject a drug, its

 

26


Table of Contents

manufacturer and the manufacturer’s facilities to continual review and inspections. The subsequent discovery of previously unknown problems with a drug, including adverse events of unanticipated severity or frequency, or problems with the facility where the drug is manufactured, may result in restrictions on the marketing of that drug, up to and including withdrawal of the drug from the market. In the United States, the DEA and comparable state-level agencies also heavily regulate the manufacturing, holding, processing, security, recordkeeping and distribution of drugs that are considered controlled substances. If any of our drug candidates are scheduled by the DEA as controlled substances (due to abuse potential), we will become subject to the DEA’s regulations. The DEA periodically inspects facilities for compliance with its rules and regulations. If our manufacturing facilities or those of our suppliers fail to comply with applicable regulatory requirements, it could result in regulatory action and additional costs to us. Failure to comply with applicable FDA and other regulatory requirements may, either before or after product approval, if any, subject our company to administrative or judicially imposed sanctions, including:

 

   

issuance of Form 483 notices or Warning Letters by the FDA or other regulatory agencies;

 

   

imposition of fines and other civil penalties;

 

   

criminal prosecutions;

 

   

injunctions, suspensions or revocations of regulatory approvals;

 

   

suspension of any ongoing clinical trials;

 

   

total or partial 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 into or exported from the United States;

 

   

restrictions on operations, including costly new manufacturing requirements; and

 

   

product recalls or seizures.

The FDA’s and other regulatory agencies’ 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.

Even if we receive regulatory approval to commercialize our drug candidates, our ability to generate revenues from any resulting products will be subject to a variety of risks, many of which are out of our control.

Even if our drug candidates obtain regulatory approval, resulting products may not gain market acceptance among physicians, patients, healthcare payers or the medical community. We believe that the degree of market acceptance and our ability to generate revenues from such products will depend on a number of factors, including:

 

   

timing of market introduction of competitive drugs;

 

   

efficacy and safety of our drug candidates;

 

   

prevalence and severity of any side effects;

 

   

potential or perceived advantages or disadvantages over alternative treatments;

 

   

strength of sales, marketing and distribution support;

 

   

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

 

   

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

 

   

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

 

   

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

 

27


Table of Contents

If our approved drugs, if any, fail to achieve market acceptance, we may not be able to generate significant revenue to achieve or sustain profitability.

In addition, lorcaserin is being assessed for drug abuse potential. If lorcaserin is approved for marketing, regulatory authorities may determine that lorcaserin will be a scheduled drug if it is found to have abuse potential or for other reasons. If lorcaserin were scheduled as a controlled substance by the DEA, we would expect it would be a schedule IV or V drug, which we believe would have little or no impact on our ability to commercialize lorcaserin. However, if lorcaserin were scheduled in a more tightly controlled category, such scheduling could negatively impact the ability to prescribe lorcaserin, a patient’s willingness to use it and other aspects of our ability to commercialize it.

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

In January 2008, we purchased from Siegfried certain drug product facility assets, including a licensed production facility, fixtures, equipment, other personal property and real estate assets and acquired employees in Zofingen, Switzerland. There are significant risks associated with the establishment of foreign operations, including, but not limited to, compliance with local laws and regulations, the protection of our intellectual property, the ability to integrate our corporate culture with local customs and cultures, the distraction to our management and foreign currency exchange rates and the impact of shifts in the United States and local economies on those rates. We also manufacture drug products for Siegfried and, therefore, are subject to liability for non-performance, product recalls and other claims against manufacturers.

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

Our research and development and manufacturing 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 or manufacturing efforts;

 

   

injury to our employees and others;

 

   

environmental damage resulting in costly clean up; and

 

   

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

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

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

Our US operations, including laboratories, offices and a chemical development facility, are located in the same business park in San Diego. We also have a drug product facility that is located in Zofingen, Switzerland. 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, interruptions in the supply of natural resources, political and governmental changes, wildfires and other fires, explosions, 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.

There may be sales of our stock by our executive officers and directors, and these sales could adversely affect our stock price.

Sales of our stock by our executive officers and directors, or the perception that such sales may occur, could adversely affect the market price of our stock. Some of our executive officers have adopted trading plans under SEC Rule 10b5-1 to dispose of a portion of their stock. Any of our executive officers or directors may adopt such trading plans in the future.

 

28


Table of Contents

Currency fluctuations may negatively affect our financial condition.

We primarily spend and generate cash in US dollars, and present our consolidated financial statements in US dollars. However, a portion of our expected and potential payments and receipts under our agreements are in foreign currencies, including Swiss francs. For example, payments and receipts under our asset purchase agreement, manufacturing services agreement and long-term API manufacturing agreement with Siegfried are required to be paid in Swiss francs. A fluctuation of the exchange rates of foreign currencies versus the US dollar may, thus, adversely affect our financial results, including cash balances, expenses and revenues. We may enter into hedging transactions to try to reduce our foreign currency exposure in the future, but there is no assurance that such transactions will occur or be successful.

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 SEC and by the NASDAQ Global Market, as well as the laws and regulations of foreign governments, may result in increased costs to us, particularly as we continue to develop the required capabilities in the United States and abroad to commercialize our products. 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, on our board committees or as executive officers. We cannot estimate accurately the amount or timing of additional costs we may incur to respond to these laws, rules and regulations.

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 United States and foreign patent applications pending for our technologies. There is no assurance that any of our patent applications will issue, or that any of the patents will be enforceable or will cover a drug or other commercially significant technology or method, or that the patents will be held to be valid for their expected terms.

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 pending patent applications issue as patents 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, or be considered sufficient by parties reviewing our patent positions pursuant to a potential licensing or financing transaction.

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.

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

 

29


Table of Contents

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.

The US Patent and Trademark Office has over the last few years tried to enact and/or has proposed changes in the rules governing (i) the duties of patent applicants to disclose information that relates to their applications, (ii) the ability of patent applicants to file unlimited numbers of patent applications and patent claims that concern closely related inventions and/or different aspects of the same invention, and (iii) the manner in which the US Patent and Trademark Office will decide whether to require patent applicants to separate closely related inventions into separate patent applications. Some of these rule changes are being challenged in the courts. It is unclear which of these rule changes, if any, will be allowed by the courts and which of them will continue to be pursued. In addition, the US Congress is considering changes to federal patent laws on several issues including, but not limited to: (i) the information can be used to determine whether an invention is not new and, therefore, not patentable, (ii) the limits on the independent administrative rulemaking authority of the US Patent and Trademark Office, (iii) the duties of patent applicants to disclose information that relates to their applications, (iv) whether, under what circumstances, and how many times a third party can challenge an issued US patent before the US Patent and Trademark Office, (v) whether and under what circumstances patent applicants can lose their ability to enforce their patents in the United States based on their failure to disclose certain information relating to their inventions, and (vi) how damages for patent infringement may be reduced based by a number of factors, including the similarity of a patented invention to preexisting technologies.

We believe that the United States is by far the largest single market for pharmaceuticals in the world. Because of the critical nature of patent rights to the pharmaceutical industry, changes in US patent rules and laws could have a profound effect on our future profits. Several of the patent rule and law changes that are being considered could significantly weaken patent protections in the United States in general. They may also have a disproportionately large negative impact on the biotechnology and pharmaceutical industries in particular, as well as tilt the balance of market control and distribution of profits between the manufacturers of patented pharmaceutical products and the manufacturers of generic pharmaceutical products towards the generics manufacturers. At present there is considerable uncertainty as to which patent rules and laws will be changed and whether changes to the patent rules will ultimately be enforced or struck down by the courts.

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

Our commercial success 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 US 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 US and foreign issued patents 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. There are also numerous issued patents and patent applications to chemical compounds or synthetic processes that may be necessary or useful to use in our research, development, manufacturing or commercialization activities. These could materially affect our ability to develop our drug candidates or manufacture, import or sell drugs, and our activities, or those of our licensors or collaborators, could be determined to infringe these patents. Because patent applications can take many years to issue, there may be currently pending applications, unknown to us, 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 or pending patent applications in fields relevant to our business, of which we are or may become aware, that we believe (i) are invalid or we do not infringe; (ii) relate to immaterial portions of our overall drug discovery, development, manufacturing and commercialization efforts; or (iii) in the case of pending patent applications, the resulting patent would not be granted or, if granted, would not likely be enforced in a manner that would materially impact such efforts. We cannot assure you that others holding any of these patents or patent applications will not assert infringement claims against us for damages or seek 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.

 

30


Table of Contents

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, development, manufacturing and commercialization activities 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 a 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, defending and enforcing 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 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, 2007 to July 31, 2009, the market price of our stock was as low as $2.26 per share and as high as $14.78 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;

 

31


Table of Contents
   

the modification or termination of an existing collaboration or the entrance into, or failure to enter into, a new 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 or withdrawal of drugs by others that target the same diseases and conditions that we or our collaborators target or the introduction of new drug discovery techniques;

 

   

regulatory actions;

 

   

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

 

   

financing strategy or decisions;

 

   

developments in intellectual property rights or related announcements;

 

   

capital market conditions; and

 

   

accounting changes.

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

*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 92,624,580 shares of our common stock outstanding as of July 31, 2009. We also had outstanding as of July 31, 2009 a seven-year warrant issued in June 2006 to purchase 916,213 shares of our common stock at an exercise price of $14.03 per share and a seven-year warrant issued in August 2008 to purchase 1,222,050 shares of our common stock at an exercise price of $6.98 per share. Such warrants were adjusted as a result of certain equity sales following their issuance, to decrease the exercise price and increase the number of shares issuable upon exercise of the warrants. Certain future equity issuances below the pre-defined warrant adjustment price may result in additional adjustments to any such warrants then outstanding.

On July 6, 2009, in connection with our receipt of a $100.0 million loan, we issued warrants to purchase 28,000,000 shares of our common stock at an exercise price of $5.42 per share. In addition, in certain circumstances we may be obligated to issue additional warrants to purchase up to 5,600,000 shares of common stock at an exercise price of $5.42 per share. All of these warrants are exercisable until June 17, 2013. We have agreed to register for resale all of the shares underlying these warrants.

In addition to our outstanding warrants, as of July 31, 2009, there were (i) options to purchase 7,283,823 shares of our common stock outstanding under our equity incentive plans at a weighted-average exercise price of $8.95, (ii) 1,737,750 performance-based restricted stock unit awards outstanding under our 2006 Long-Term Incentive Plan, as amended, (iii) 6,488,112 additional shares of common stock remaining issuable under our 2009 Long-Term Incentive Plan, (iv) 1,412,311 shares of common stock remaining issuable under our 2009 Employee Stock Purchase Plan, and (v) 101,669 shares of common stock remaining issuable under our Deferred Compensation Plan.

The shares described above, when issued, 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 convertible securities that could dilute your ownership 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. In addition, 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.

 

32


Table of Contents

The holders of our stock and other securities 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 previously had disagreements with the holders of the warrants we issued in connection with our Series B Convertible Preferred Stock financing regarding whether their original warrants entitled them to receive exchange warrants following the exercise of such warrants in full. We entered into agreements to settle such disagreements. We may be involved with other disagreements with the holders of our stock, warrants or other securities 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.

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, 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.

 

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

The annual meeting of our stockholders was held on June 25, 2009 for the purposes of (i) electing 10 directors to our Board of Directors to serve until the next annual meeting of stockholders and until their respective successors are elected and qualified or until their earlier resignation or removal; (ii) approving our 2009 Long-Term Incentive Plan; (iii) approving our 2009 Employee Stock Purchase Plan; (iv) approving an amendment to our Fifth Amended and Restated Certificate of Incorporation to increase the total number of authorized shares from 150.0 million to 250.0 million and the number of authorized shares of common stock from 142.5 million to 242.5 million; and (v) ratifying the appointment of Ernst & Young LLP, independent registered public accounting firm, as our independent auditors for the fiscal year ending December 31, 2009. 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.

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., Phillip M. Schneider, Christine A. White, M.D., and Randall E. Woods were elected as directors to our Board to serve until the next annual meeting of stockholders and until their respective successors are elected and qualified or until their earlier resignation or removal. The voting results with respect to the election of directors, as determined by the final report of the inspectors of election, are set forth below.

 

33


Table of Contents

Director Nominee

   “For”    “Withheld”

Jack Lief

   65,881,252    2,701,923

Dominic P. Behan, Ph.D.

   66,618,324    1,964,851

Donald D. Belcher

   65,759,664    2,823,511

Scott H. Bice

   66,118,945    2,464,230

Harry F. Hixson, Jr., Ph.D.

   65,964,914    2,618,261

J. Clayburn La Force, Jr., Ph.D.

   66,739,641    1,843,534

Tina S. Nova, Ph.D.

   66,014,618    2,568,557

Phillip M. Schneider

   66,384,105    2,199,070

Christine A. White, M.D.

   65,811,655    2,771,520

Randall E. Woods

   66,454,199    2,128,976

Approval of our 2009 Long-Term Incentive Plan

Stockholders approved our 2009 Long-Term Incentive Plan, and the voting results, as determined by the final report of the inspectors of election, are set forth below.

 

Votes for approval

   30,681,667

Votes against approval

   11,737,077

Abstentions

   116,141

Broker non-votes

   26,048,290

Approval of our 2009 Employee Stock Purchase Plan

Stockholders approved our 2009 Employee Stock Purchase Plan, and the voting results, as determined by the final report of the inspectors of election, are set forth below.

 

Votes for approval

   41,594,820

Votes against approval

   830,090

Abstentions

   109,975

Broker non-votes

   26,048,290

Approval of an Amendment to our Fifth Amended and Restated Certificate of Incorporation

Stockholders approved an amendment to our Fifth Amended and Restated Certificate of Incorporation to increase the total number of authorized shares from 150.0 million to 250.0 million and the number of authorized shares of common stock from 142.5 million to 242.5 million, and the voting results, as determined by the final report of the inspectors of election, are set forth below.

 

Votes for approval

   51,739,463

Votes against approval

   16,589,365

Abstentions

   254,347

Broker non-votes

   0

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, 2009, and the voting results, as determined by the final report of the inspectors of election, are set forth below.

 

Votes for approval

   67,168,479

Votes against approval

   1,183,612

Abstentions

   231,084

 

34


Table of Contents
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 quarter ended June 30, 2002, filed with the Securities and Exchange Commission on August 14, 2002, Commission File No. 000-31161)

  3.2  

   Certificate of Amendment of the Fifth Amended and Restated Certificate of Incorporation of Arena (incorporated by reference to Exhibit 4.2 to Arena’s registration statement on Form S-8 filed with the Securities and Exchange Commission on June 28, 2006, Commission File No. 333-135398)

  3.3  

   Certificate of Amendment No. 2 of the Fifth Amended and Restated Certificate of Incorporation of Arena, as amended (incorporated by reference to Exhibit 4.3 to Arena’s registration statement on Form S-8 filed with the Securities and Exchange Commission on June 30, 2009, Commission File No. 333-160329)

  3.4  

   Amended and Restated Bylaws of Arena (incorporated by reference to Exhibit 3.1 to Arena’s current report on Form 8-K filed with the Securities and Exchange Commission on October 4, 2007, Commission File No. 000-31161)

  3.5  

   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 quarter ended September 30, 2002, filed with the Securities and Exchange Commission on November 14, 2002, 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 certificate (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. 333-35944)

10.1  

   Facility Agreement, dated June 17, 2009, between Arena and Deerfield Private Design Fund, L.P., Deerfield Private Design International, L.P., Deerfield Partners, L.P., Deerfield International Limited, Deerfield Special Situations Fund, L.P., and Deerfield Special Situations Fund International Limited (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 23, 2009, Commission File No. 000-31161)

10.2  

   Registration Rights Agreement, dated June 17, 2009, between Arena and Deerfield Private Design Fund, L.P., Deerfield Private Design International, L.P., Deerfield Partners, L.P., Deerfield International Limited, Deerfield Special Situations Fund, L.P., and Deerfield Special Situations Fund International Limited (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 23, 2009, Commission File No. 000-31161)

10.3  

   Security Agreement, dated June 17, 2009, between Arena and Deerfield Private Design Fund, L.P., Deerfield Private Design International, L.P., Deerfield Partners, L.P., Deerfield International Limited, Deerfield Special Situations Fund, L.P., and Deerfield Special Situations Fund International Limited (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 23, 2009, Commission File No. 000-31161)

10.4+

  

Form of Warrant to Purchase Common Stock of Arena (incorporated by reference to Exhibit 10.4 to Arena’s current report on Form 8-K filed with the Securities and Exchange Commission on June 23, 2009, Commission File

No. 000-31161)

10.5*

   Arena’s 2009 Long-Term Incentive Plan (incorporated by reference to Exhibit 99.1 to Arena’s registration statement on Form S-8 filed with the Securities and Exchange Commission on June 30, 2009, Commission File No. 333-160329)

 

35


Table of Contents

EXHIBIT NO.

  

DESCRIPTION

10.6*  

   Arena’s 2009 Employee Stock Purchase Plan (incorporated by reference to Exhibit 99.2 to Arena’s registration statement on Form S-8 filed with the Securities and Exchange Commission on June 30, 2009, Commission File No. 333-160329)

10.7*  

   Form of Incentive Stock Option Grant Agreement for Employees under the Arena 2009 Long-Term Incentive Plan

10.8*  

   Form of Stock Option Grant Agreement for Employees or Consultants under the Arena 2009 Long-Term Incentive Plan

10.9*  

   Form of Stock Option Grant Agreement for Non-Employee Directors under the Arena 2009 Long-Term Incentive Plan

10.10*

   Form of Restricted Stock Grant Agreement under the Arena 2009 Long-Term Incentive Plan

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

 

+ Confidential treatment has been requested for portions of this document.
* Management contract or compensatory plan or arrangement.

 

36


Table of Contents

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 7, 2009     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)

 

37


Table of Contents

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 quarter ended June 30, 2002, filed with the Securities and Exchange Commission on August 14, 2002, Commission File No. 000-31161)
  3.2      Certificate of Amendment of the Fifth Amended and Restated Certificate of Incorporation of Arena (incorporated by reference to Exhibit 4.2 to Arena’s registration statement on Form S-8 filed with the Securities and Exchange Commission on June 28, 2006, Commission File No. 333-135398)
  3.3      Certificate of Amendment No. 2 of the Fifth Amended and Restated Certificate of Incorporation of Arena, as amended (incorporated by reference to Exhibit 4.3 to Arena’s registration statement on Form S-8 filed with the Securities and Exchange Commission on June 30, 2009, Commission File No. 333-160329)
  3.4      Amended and Restated Bylaws of Arena (incorporated by reference to Exhibit 3.1 to Arena’s current report on Form 8-K filed with the Securities and Exchange Commission on October 4, 2007, Commission File No. 000-31161)
  3.5      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 quarter ended September 30, 2002, filed with the Securities and Exchange Commission on November 14, 2002, 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 certificate (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. 333-35944)
10.1      Facility Agreement, dated June 17, 2009, between Arena and Deerfield Private Design Fund, L.P., Deerfield Private Design International, L.P., Deerfield Partners, L.P., Deerfield International Limited, Deerfield Special Situations Fund, L.P., and Deerfield Special Situations Fund International Limited (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 23, 2009, Commission File No. 000-31161)
10.2      Registration Rights Agreement, dated June 17, 2009, between Arena and Deerfield Private Design Fund, L.P., Deerfield Private Design International, L.P., Deerfield Partners, L.P., Deerfield International Limited, Deerfield Special Situations Fund, L.P., and Deerfield Special Situations Fund International Limited (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 23, 2009, Commission File No. 000-31161)
10.3      Security Agreement, dated June 17, 2009, between Arena and Deerfield Private Design Fund, L.P., Deerfield Private Design International, L.P., Deerfield Partners, L.P., Deerfield International Limited, Deerfield Special Situations Fund, L.P., and Deerfield Special Situations Fund International Limited (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 23, 2009, Commission File No. 000-31161)
10.4+    Form of Warrant to Purchase Common Stock of Arena (incorporated by reference to Exhibit 10.4 to Arena’s current report on Form 8-K filed with the Securities and Exchange Commission on June 23, 2009, Commission File No. 000-31161)
10.5*    Arena’s 2009 Long-Term Incentive Plan (incorporated by reference to Exhibit 99.1 to Arena’s registration statement on Form S-8 filed with the Securities and Exchange Commission on June 30, 2009, Commission File No. 333-160329)

 

38


Table of Contents

EXHIBIT NO.

  

DESCRIPTION

10.6*    Arena’s 2009 Employee Stock Purchase Plan (incorporated by reference to Exhibit 99.2 to Arena’s registration statement on Form S-8 filed with the Securities and Exchange Commission on June 30, 2009, Commission File No. 333-160329)
10.7*    Form of Incentive Stock Option Grant Agreement for Employees under the Arena 2009 Long-Term Incentive Plan
10.8*    Form of Stock Option Grant Agreement for Employees or Consultants under the Arena 2009 Long-Term Incentive Plan
10.9*    Form of Stock Option Grant Agreement for Non-Employee Directors under the Arena 2009 Long-Term Incentive Plan
10.10*    Form of Restricted Stock Grant Agreement under the Arena 2009 Long-Term Incentive Plan
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

 

+ Confidential treatment has been requested for portions of this document.
* Management contract or compensatory plan or arrangement.

 

39

Exhibit 10.7

Arena Pharmaceuticals, Inc. 2009 Long-Term Incentive Plan

Incentive Stock Option Grant Agreement for Employees

THIS GRANT AGREEMENT (this “Agreement”), effective as of                                  (the “Grant Date”), is entered into by and between Arena Pharmaceuticals, Inc., a Delaware corporation (the “Company”), and                          (the “Participant”).

1. Grant of Options . The Company hereby grants to the Participant a stock option (the “Option”) to purchase                      shares of common stock of the Company, par value $0.0001 per share (the “Shares”), at the exercise price of $              per Share (the “Exercise Price”). The Option is intended to qualify as an incentive stock option under Section 422 of the Code.

2. Subject to the Plan . This Agreement is subject to the provisions of the Arena Pharmaceuticals, Inc. 2009 Long-Term Incentive Plan (the “Plan”), and, unless the context requires otherwise, terms used herein shall have the same meaning as in the Plan. In the event of a conflict between the provisions of the Plan and this Agreement, the Plan shall control.

3. Term of Options . Unless the Option terminates earlier pursuant to the provisions of this Agreement, the Option shall expire on the tenth anniversary of the Grant Date; provided, however, if the Participant owns stock representing more than 10% of the voting power of all classes of stock of the Company or any Affiliate at the time of this grant, the Option shall expire on the fifth anniversary of the Grant Date.

4. Vesting . Except as otherwise provided in Sections 6(b), (c) or (d) of this Agreement, provided the Participant is then an Employee, a Consultant or a Director, the Option shall become vested and exercisable on the following dates:

Vest Date                      Vested Options

5. Exercise of Option

(a) Manner of Exercise . To the extent vested, the Option may be exercised, in whole or in part, by delivering written notice to the Company in accordance with paragraph (f) of Section 8 in such form as the Company may require from time to time, or through such other means as permitted by the Company. Such notice shall specify the number of Shares subject to the Option as to which the Option is being exercised, and shall be accompanied by full payment of the Exercise Price of such Shares in a manner permitted under the terms of Section 5.5 of the Plan, except that payment with previously acquired Shares may only be made with the consent of the Committee. The Option may be exercised only in multiples of whole Shares and no partial Shares shall be issued.


(b) Issuance of Shares . Upon exercise of the Option and payment of the Exercise Price for the Shares as to which the Option is exercised, the Company shall issue to the Participant the applicable number of Shares in the form of fully paid and nonassessable Shares.

(c) Capitalization Adjustments . The number of Shares subject to the Option and the exercise price per Share shall be equitably and appropriately adjusted as provided in Section 12.2 of the Plan.

(d) Notice of Disposition . Participant agrees to notify the Company in writing within fifteen (15) days after the date of any disposition of any of the Shares issued upon exercise of the Option that occurs within the later of two (2) years after the Grant Date or within one (1) year after such Shares are transferred to the Participant.

(e) Withholding . No Shares will be issued on exercise of the Option unless and until the Participant pays to the Company, or makes satisfactory arrangement with the Company for payment of, any federal, state or local taxes required by law to be withheld in respect of the exercise of the Option. The Participant hereby agrees that the Company may withhold from the Participant’s wages or other remuneration the applicable taxes. At the discretion of the Company, the applicable taxes may be withheld in kind from the Shares otherwise deliverable to the Participant on exercise of the Option, up to the Participant’s minimum required withholding rate or such other rate that will not trigger a negative accounting impact.

6. Termination of Option

(a) Termination of Employment or Service Other Than Due to Retirement, Death, Disability or Cause . Unless the Option has earlier terminated, the Option shall terminate in its entirety, regardless of whether the Option is vested, ninety (90) days after the date the Participant ceases to be in the Company’s continuous service as any of an Employee, a Consultant or a Director for any reason other than the Participant’s Retirement, death, Disability or termination by the Company for Cause. Except as provided below in Section 6(b), (c) or (d), any portion of the Option that is not vested at the time the Participant ceases to be in the Company’s continuous service as any of an Employee, a Consultant or a Director shall immediately terminate.

(b) Retirement . Upon the Retirement of the Participant, unless the Option has earlier terminated, the Option shall continue in effect (and for purposes of vesting pursuant to Section 4 the Participant shall be deemed to continue to be an Employee) until the earlier of (i) two (2) years after the Participant’s Retirement (or, if later, the fifth anniversary of the Grant Date) or (ii) the expiration of the Option’s term pursuant to Section 3. For purposes of this Agreement, “Retirement” shall mean termination of the Participant’s employment with the Company and its Affiliates other than for Cause if (i) the Participant is then at least age 60 and (ii) the Participant has provided at least ten (10) years of continuous service as an Employee to the Company and its Affiliates.

(c) Death . Upon the Participant’s death, unless the Option has earlier terminated, to the extent the Option is not fully vested the installment of the Option that would vest on the next anniversary of the Grant Date following the Participant’s death shall become

 

- 2 -


vested and exercisable based on a fraction, the numerator of which is the number of whole months elapsed since the prior anniversary of the Grant Date (or, if applicable, the Grant Date) and the denominator of which is 12. Notwithstanding the foregoing, if on the date of the Participant’s death the Participant was eligible for Retirement, the installments of the Option that would vest in the next two (2) years following the date of the Participant’s death shall become vested and exercisable. The Participant’s executor or personal representative, the person to whom the Option shall have been transferred by will or the laws of descent and distribution, or such other permitted transferee, as the case may be, may exercise the Option in accordance with paragraph (a) of Section 5, to the extent vested, provided such exercise occurs within twelve (12) months (twenty-four (24) months if the Participant was eligible for Retirement) after the date of the Participant’s death or the end of the term of the Option pursuant to Section 3, whichever is earlier.

(d) Disability . In the event that the Participant ceases to be in the Company’s continuous service as any of an Employee, a Consultant or a Director by reason of Disability, unless the Option has earlier terminated, (i) to the extent the Option is not fully vested, the installment of the Option that would vest on the next anniversary of the Grant Date following the Participant’s Disability shall become vested and exercisable based on a fraction, the numerator of which is the number of whole months elapsed since the prior anniversary of the Grant Date (or, if applicable, the Grant Date) and the denominator of which is 12 and (ii) the Option may be exercised, in accordance with paragraph (a) of Section 5, to the extent vested, provided such exercise occurs within twelve (12) months after the date of Disability or the end of the term of the Option pursuant to Section 3, whichever is earlier. Notwithstanding the foregoing, if on the date of the Participant’s Disability the Participant was eligible for Retirement (x) the installments of the Option that would vest in the next two (2) years following the date of the Participant’s Disability shall become vested and exercisable and (y) the Option may be exercised within twenty-four (24) months after the date of the Participant’s Disability or the end of the term of the Option pursuant to Section 3, whichever is earlier.

For purposes of this Agreement, “Disability” shall mean the Participant’s becoming disabled within the meaning of Section 22(e)(3) of the Code, or as otherwise determined by the Committee in its discretion. The Committee may require such proof of Disability as the Committee in its sole and absolute discretion deems appropriate and the Committee’s determination as to whether the Participant has incurred a Disability shall be final and binding on all parties concerned.

(e) Termination for Cause . Upon the termination of the Participant’s employment or service by the Company or an Affiliate for Cause, unless the Option has earlier terminated, the Option shall immediately terminate in its entirety and shall thereafter not be exercisable to any extent whatsoever. For purposes of this Agreement, except as otherwise provided in a written employment or severance agreement between the Participant and the Company (or an Affiliate) or a severance plan of the Company (or an Affiliate) covering the Participant (including a change in control severance agreement or plan), “Cause” shall mean: a determination by the Committee that the Participant has breached his or her employment or service contract with the Company, or has been engaged in disloyalty to the Company, including, without limitation, fraud, embezzlement, theft, commission of a felony or proven dishonesty in

 

- 3 -


the course of his or her employment or service, or has disclosed trade secrets or confidential information of the Company to persons not entitled to receive such information, or has breached any written noncompetition or nonsolicitation agreement between the Participant and the Company (or an Affiliate) or has engaged in such other behavior detrimental to the interests of the Company (or an Affiliate) as the Committee determines.

(f) Extension of Exercise Period . Notwithstanding any provisions of paragraphs (a), (b), (c) or (d) of this Section to the contrary, if exercise of the Option following termination of employment or service during the time period set forth in the applicable paragraph or sale during such period of the Shares acquired on exercise would violate any of the provisions of the federal securities laws (or any Company policy related thereto), the time period to exercise the Option shall be extended until the later of (i) forty-five (45) days after the date that the exercise of the Option or sale of the Shares acquired on exercise would not be a violation of the federal securities laws (or a related Company policy), or (ii) the end of the time period set forth in the applicable paragraph, but in either case, not beyond the term of the Option pursuant to Section 3.

7. Change in Control; Corporate Transaction .

(a) Effect of Change in Control on Option . In the event of a Change in Control, the Surviving Corporation or the Parent Corporation, if applicable, may assume, continue or substitute for the Option on substantially the same terms and conditions (which may include the right to acquire the same consideration paid to the stockholders of the Company pursuant to the Change in Control). In the event of a Change in Control, to the extent the Surviving Corporation or the Parent Corporation, if applicable, does not assume, continue or substitute for the Option on substantially the same terms and conditions (which may include settlement in the common stock of the Surviving Corporation or the Parent Corporation), the Option shall (i) become fully vested and exercisable immediately prior to the Change in Control if the Participant is then an Employee, a Consultant or a Director, and (ii) terminate on the date of the Change in Control. In the event of a Change in Control, to the extent the Surviving Corporation or the Parent Corporation, if applicable, assumes or substitutes for the Option on substantially the same terms and conditions (which may include providing for settlement in the common stock of the Surviving Corporation or the Parent Corporation), if within 24 months following the date of the Change in Control the Participant ceases to be in the Company’s continuous service as either of an Employee or a Consultant by reason of (i) an involuntary termination without Cause, or (ii) a voluntary termination in connection with a Relocation Requirement, the Option shall become fully vested and exercisable, and may be exercised by the Participant at any time until the first anniversary of the date the Participant ceases to be in the Company’s continuous service as either of an Employee or a Consultant or the end of the term of the Option pursuant to Section 3, whichever is earlier.

 

- 4 -


For purposes of this Agreement (i) if the Company is the Surviving Corporation or the Parent Corporation, if applicable, it shall be deemed to have assumed the Option unless it takes explicit action to the contrary and (ii) “Relocation Requirement” shall mean a requirement by the Company, the Surviving Corporation or an affiliate thereof that the Participant be based anywhere more than fifty (50) miles from both the Participant’s primary office location at the time of the Change in Control and the Participant’s principal residence at the time of the Change in Control.

Notwithstanding the foregoing, if on the date of the Change in Control the Fair Market Value of one Share is less than the Exercise Price, then the Option shall terminate as of the date of the Change in Control, except as otherwise determined by the Committee.

(b) Effect of Corporate Transaction on Option . In the event of a Corporate Transaction that is not a Change in Control, any surviving corporation or acquiring corporation (or the surviving or acquiring corporation’s parent company) may assume, continue or substitute for the Option on substantially the same terms and conditions (which may include the right to acquire the same consideration paid to the stockholders of the Company pursuant to the Corporate Transaction). In the event of a Corporate Transaction that is not a Change in Control, then notwithstanding Section 11 of the Plan and paragraph (a) of this Section, to the extent that the surviving corporation or acquiring corporation (or its parent company) does not assume, continue or substitute for the Option on substantially the same terms and conditions (which may include the right to acquire the same consideration paid to the stockholders of the Company pursuant to the Corporate Transaction), then the Option shall (i) become fully vested and exercisable immediately prior to the Corporate Transaction if the Participant is then an Employee, a Consultant or a Director, and (ii) terminate on the date of the Corporate Transaction.

For purposes of this Agreement, “Corporate Transaction” means (i) the consummation of a merger, consolidation or similar transaction following which the Company is not the surviving corporation; or (ii) the consummation of a merger, consolidation or similar transaction following which the Company is the surviving corporation but the Shares outstanding immediately preceding the merger, consolidation or similar transaction are converted or exchanged by virtue of the merger, consolidation or similar transaction into other property, whether in the form of securities, cash or otherwise. Notwithstanding the foregoing, a “Corporate Transaction” shall not include a transaction that is effected exclusively for the purpose of changing the domicile of the Company.

(c) Other Agreement or Plan . The provisions of this Section (including the definition of Cause) shall be superseded by the specific provisions, if any, of a written employment or severance agreement between the Participant and the Company or a severance plan of the Company covering the Participant, including a change in control severance agreement or plan, to the extent such a provision in such other agreement or plan provides a greater benefit to the Participant.

 

- 5 -


8. Miscellaneous .

(a) No Rights of Stockholder . The Participant shall not have any of the rights of a stockholder with respect to the Shares subject to this Option until such Shares have been issued upon the due exercise of the Option.

(b) Nontransferability of Option . The Option shall be nontransferable otherwise than by will or the laws of descent and distribution, and during the lifetime of the Participant, the Option may be exercised only by the Participant or, during the period the Participant is under a legal disability, by the Participant’s guardian or legal representative. Notwithstanding the foregoing, the Participant may, by delivering written notice to the Company, in a form provided by or otherwise satisfactory to the Company, designate a third party who, in the event of the Participant’s death, shall thereafter be entitled to exercise the Option.

(c) Severability . The provisions of this Agreement shall be deemed severable. If any provision of this Agreement shall be held unlawful or otherwise invalid or unenforceable in whole or in part by a court of competent jurisdiction or by reason of a change in a law or regulation, such provision shall (i) be deemed limited to the extent that such court of competent jurisdiction deems it lawful, valid and/or enforceable (or, if applicable, to the extent necessary to comply with the change in the law or regulation), and as so limited shall remain in full force and effect, and (ii) not affect any other provision of this Agreement or part thereof, each of which shall remain in full force and effect.

(d) Governing Law . This Agreement shall be governed by, and interpreted in accordance with, the laws of the State of Delaware, other than its conflict of laws principles.

(e) Headings . The headings in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement.

(f) Notices . All notices required or permitted under this Agreement shall be in writing and shall be sufficiently made or given if hand delivered or mailed by registered or certified mail, postage prepaid. Notice by mail shall be deemed delivered on the date on which it is postmarked.

Notices to the Company should be addressed to:

Arena Pharmaceuticals, Inc.

6166 Nancy Ridge Drive

San Diego, California 92121

Attention: Chief Financial Officer

With a copy to: General Counsel

Notices to the Participant should be addressed to the Participant at the Participant’s address as it appears on the Company’s records. The Company or the Participant may by writing to the other party, designate a different address for notices. If the receiving party consents in advance, notice may be transmitted and received via facsimile or via such other electronic transmission mechanism as may be available to the parties. Such notices shall be deemed delivered when received.

 

- 6 -


(g) Agreement Not a Contract . This Agreement (and the grant of the Option) is not an employment or service contract, and nothing in the Option shall be deemed to create in any way whatsoever any obligation on Participant’s part to continue as an Employee, a Consultant or a Director, or of the Company or an Affiliate to continue Participant’s service as an Employee, a Consultant or a Director.

(h) Entire Agreement; Modification . This Agreement and the Plan constitute the entire agreement between the parties with respect to the subject matter contained herein and may not be modified, except as provided in the Plan or in a written document signed by each of the parties hereto, and may be rescinded only by a written agreement signed by both parties.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the Grant Date.

 

ARENA PHARMACEUTICALS, INC.

By:

 

 

 

  Participant

 

- 7 -

Exhibit 10.8

Arena Pharmaceuticals, Inc. 2009 Long-Term Incentive Plan

Stock Option Grant Agreement for Employees or Consultants

THIS GRANT AGREEMENT (this “Agreement”), effective as of                                  (the “Grant Date”), is entered into by and between Arena Pharmaceuticals, Inc., a Delaware corporation (the “Company”), and                                  (the “Participant”).

1. Grant of Options . The Company hereby grants to the Participant a non-qualified stock option (the “Option”) to purchase                      shares of common stock of the Company, par value $0.0001 per share (the “Shares”), at the exercise price of $              per Share (the “Exercise Price”). The Option is not intended to qualify as an incentive stock option under Section 422 of the Code.

2. Subject to the Plan . This Agreement is subject to the provisions of the Arena Pharmaceuticals, Inc. 2009 Long-Term Incentive Plan (the “Plan”), and, unless the context requires otherwise, terms used herein shall have the same meaning as in the Plan. In the event of a conflict between the provisions of the Plan and this Agreement, the Plan shall control.

3. Term of Options . Unless the Option terminates earlier pursuant to the provisions of this Agreement, the Option shall expire on the tenth anniversary of the Grant Date.

4. Vesting . Except as otherwise provided in Sections 6(b), (c) or (d) of this Agreement, provided the Participant is then an Employee, a Consultant or a Director, the Option shall become vested and exercisable on the following dates:

Vest Date                      Vested Options

5. Exercise of Option

(a) Manner of Exercise . To the extent vested, the Option may be exercised, in whole or in part, by delivering written notice to the Company in accordance with paragraph (f) of Section 8 in such form as the Company may require from time to time, or through such other means as permitted by the Company. Such notice shall specify the number of Shares subject to the Option as to which the Option is being exercised, and shall be accompanied by full payment of the Exercise Price of such Shares in a manner permitted under the terms of Section 5.5 of the Plan, except that payment with previously acquired Shares may only be made with the consent of the Committee. The Option may be exercised only in multiples of whole Shares and no partial Shares shall be issued.


(b) Issuance of Shares . Upon exercise of the Option and payment of the Exercise Price for the Shares as to which the Option is exercised, the Company shall issue to the Participant the applicable number of Shares in the form of fully paid and nonassessable Shares.

(c) Capitalization Adjustments . The number of Shares subject to the Option and the exercise price per Share shall be equitably and appropriately adjusted as provided in Section 12.2 of the Plan.

(d) Withholding . No Shares will be issued on exercise of the Option unless and until the Participant pays to the Company, or makes satisfactory arrangement with the Company for payment of, any federal, state or local taxes required by law to be withheld in respect of the exercise of the Option. The Participant hereby agrees that the Company may withhold from the Participant’s wages or other remuneration the applicable taxes. At the discretion of the Company, the applicable taxes may be withheld in kind from the Shares otherwise deliverable to the Participant on exercise of the Option, up to the Participant’s minimum required withholding rate or such other rate that will not trigger a negative accounting impact.

6. Termination of Option

(a) Termination of Employment or Service Other Than Due to Retirement, Death, Disability or Cause . Unless the Option has earlier terminated, the Option shall terminate in its entirety, regardless of whether the Option is vested, ninety (90) days after the date the Participant ceases to be in the Company’s continuous service as any of an Employee, a Consultant or a Director for any reason other than the Participant’s Retirement, death, Disability or termination by the Company for Cause. Except as provided below in Section 6(b), (c) or (d), any portion of the Option that is not vested at the time the Participant ceases to be in the Company’s continuous service as any of an Employee, a Consultant or a Director shall immediately terminate.

(b) Retirement . Upon the Retirement of the Participant, unless the Option has earlier terminated, the Option shall continue in effect (and for purposes of vesting pursuant to Section 4 the Participant shall be deemed to continue to be an Employee) until the earlier of (i) two (2) years after the Participant’s Retirement (or, if later, the fifth anniversary of the Grant Date) or (ii) the expiration of the Option’s term pursuant to Section 3. For purposes of this Agreement, “Retirement” shall mean termination of the Participant’s employment with the Company and its Affiliates other than for Cause if (i) the Participant is then at least age 60 and (ii) the Participant has provided at least ten (10) years of continuous service as an Employee to the Company and its Affiliates.

(c) Death . Upon the Participant’s death, unless the Option has earlier terminated, to the extent the Option is not fully vested the installment of the Option that would vest on the next anniversary of the Grant Date following the Participant’s death shall become vested and exercisable based on a fraction, the numerator of which is the number of whole months elapsed since the prior anniversary of the Grant Date (or, if applicable, the Grant Date) and the denominator of which is 12. Notwithstanding the foregoing, if on the date of the Participant’s death the Participant was eligible for Retirement, the installments of the Option that would vest in the next two (2) years following the date of the Participant’s death shall become vested and exercisable. The Participant’s executor or personal

 

- 2 -


representative, the person to whom the Option shall have been transferred by will or the laws of descent and distribution, or such other permitted transferee, as the case may be, may exercise the Option in accordance with paragraph (a) of Section 5, to the extent vested, provided such exercise occurs within twelve (12) months (twenty-four (24) months if the Participant was eligible for Retirement) after the date of the Participant’s death or the end of the term of the Option pursuant to Section 3, whichever is earlier.

(d) Disability . In the event that the Participant ceases to be in the Company’s continuous service as any of an Employee, a Consultant or a Director by reason of Disability, unless the Option has earlier terminated, (i) to the extent the Option is not fully vested, the installment of the Option that would vest on the next anniversary of the Grant Date following the Participant’s Disability shall become vested and exercisable based on a fraction, the numerator of which is the number of whole months elapsed since the prior anniversary of the Grant Date (or, if applicable, the Grant Date) and the denominator of which is 12 and (ii) the Option may be exercised, in accordance with paragraph (a) of Section 5, to the extent vested, provided such exercise occurs within twelve (12) months after the date of Disability or the end of the term of the Option pursuant to Section 3, whichever is earlier. Notwithstanding the foregoing, if on the date of the Participant’s Disability the Participant was eligible for Retirement (x) the installments of the Option that would vest in the next two (2) years following the date of the Participant’s Disability shall become vested and exercisable and (y) the Option may be exercised within twenty-four (24) months after the date of the Participant’s Disability or the end of the term of the Option pursuant to Section 3, whichever is earlier.

For purposes of this Agreement, “Disability” shall mean the Participant’s becoming disabled within the meaning of Section 22(e)(3) of the Code, or as otherwise determined by the Committee in its discretion. The Committee may require such proof of Disability as the Committee in its sole and absolute discretion deems appropriate and the Committee’s determination as to whether the Participant has incurred a Disability shall be final and binding on all parties concerned.

(e) Termination for Cause . Upon the termination of the Participant’s employment or service by the Company or an Affiliate for Cause, unless the Option has earlier terminated, the Option shall immediately terminate in its entirety and shall thereafter not be exercisable to any extent whatsoever. For purposes of this Agreement, except as otherwise provided in a written employment or severance agreement between the Participant and the Company (or an Affiliate) or a severance plan of the Company (or an Affiliate) covering the Participant (including a change in control severance agreement or plan), “Cause” shall mean: a determination by the Committee that the Participant has breached his or her employment or service contract with the Company, or has been engaged in disloyalty to the Company, including, without limitation, fraud, embezzlement, theft, commission of a felony or proven dishonesty in the course of his or her employment or service, or has disclosed trade secrets or confidential information of the Company to persons not entitled to receive such information, or has breached any written noncompetition or nonsolicitation agreement between the Participant and the Company (or an Affiliate) or has engaged in such other behavior detrimental to the interests of the Company (or an Affiliate) as the Committee determines.

 

- 3 -


(f) Extension of Exercise Period . Notwithstanding any provisions of paragraphs (a), (b), (c) or (d) of this Section to the contrary, if exercise of the Option following termination of employment or service during the time period set forth in the applicable paragraph or sale during such period of the Shares acquired on exercise would violate any of the provisions of the federal securities laws (or any Company policy related thereto), the time period to exercise the Option shall be extended until the later of (i) forty-five (45) days after the date that the exercise of the Option or sale of the Shares acquired on exercise would not be a violation of the federal securities laws (or a related Company policy), or (ii) the end of the time period set forth in the applicable paragraph, but in either case, not beyond the term of the Option pursuant to Section 3.

7. Change in Control; Corporate Transaction .

(a) Effect of Change in Control on Option . In the event of a Change in Control, the Surviving Corporation or the Parent Corporation, if applicable, may assume, continue or substitute for the Option on substantially the same terms and conditions (which may include the right to acquire the same consideration paid to the stockholders of the Company pursuant to the Change in Control). In the event of a Change in Control, to the extent the Surviving Corporation or the Parent Corporation, if applicable, does not assume, continue or substitute for the Option on substantially the same terms and conditions (which may include settlement in the common stock of the Surviving Corporation or the Parent Corporation), the Option shall (i) become fully vested and exercisable immediately prior to the Change in Control if the Participant is then an Employee, a Consultant or a Director, and (ii) terminate on the date of the Change in Control. In the event of a Change in Control, to the extent the Surviving Corporation or the Parent Corporation, if applicable, assumes or substitutes for the Option on substantially the same terms and conditions (which may include providing for settlement in the common stock of the Surviving Corporation or the Parent Corporation), if within 24 months following the date of the Change in Control the Participant ceases to be in the Company’s continuous service as either of an Employee or a Consultant by reason of (i) an involuntary termination without Cause, or (ii) a voluntary termination in connection with a Relocation Requirement, the Option shall become fully vested and exercisable, and may be exercised by the Participant at any time until the first anniversary of the date the Participant ceases to be in the Company’s continuous service as either of an Employee or a Consultant or the end of the term of the Option pursuant to Section 3, whichever is earlier.

For purposes of this Agreement (i) if the Company is the Surviving Corporation or the Parent Corporation, if applicable, it shall be deemed to have assumed the Option unless it takes explicit action to the contrary and (ii) “Relocation Requirement” shall mean a requirement by the Company, the Surviving Corporation or an affiliate thereof that the Participant be based anywhere more than fifty (50) miles from both the Participant’s primary office location at the time of the Change in Control and the Participant’s principal residence at the time of the Change in Control.

Notwithstanding the foregoing, if on the date of the Change in Control the Fair Market Value of one Share is less than the Exercise Price, then the Option shall terminate as of the date of the Change in Control, except as otherwise determined by the Committee.

 

- 4 -


(b) Effect of Corporate Transaction on Option . In the event of a Corporate Transaction that is not a Change in Control, any surviving corporation or acquiring corporation (or the surviving or acquiring corporation’s parent company) may assume, continue or substitute for the Option on substantially the same terms and conditions (which may include the right to acquire the same consideration paid to the stockholders of the Company pursuant to the Corporate Transaction). In the event of a Corporate Transaction that is not a Change in Control, then notwithstanding Section 11 of the Plan and paragraph (a) of this Section, to the extent that the surviving corporation or acquiring corporation (or its parent company) does not assume, continue or substitute for the Option on substantially the same terms and conditions (which may include the right to acquire the same consideration paid to the stockholders of the Company pursuant to the Corporate Transaction), then the Option shall (i) become fully vested and exercisable immediately prior to the Corporate Transaction if the Participant is then an Employee, a Consultant or a Director, and (ii) terminate on the date of the Corporate Transaction.

For purposes of this Agreement, “Corporate Transaction” means (i) the consummation of a merger, consolidation or similar transaction following which the Company is not the surviving corporation; or (ii) the consummation of a merger, consolidation or similar transaction following which the Company is the surviving corporation but the Shares outstanding immediately preceding the merger, consolidation or similar transaction are converted or exchanged by virtue of the merger, consolidation or similar transaction into other property, whether in the form of securities, cash or otherwise. Notwithstanding the foregoing, a “Corporate Transaction” shall not include a transaction that is effected exclusively for the purpose of changing the domicile of the Company.

(c) Other Agreement or Plan . The provisions of this Section (including the definition of Cause) shall be superseded by the specific provisions, if any, of a written employment or severance agreement between the Participant and the Company or a severance plan of the Company covering the Participant, including a change in control severance agreement or plan, to the extent such a provision in such other agreement or plan provides a greater benefit to the Participant.

8. Miscellaneous .

(a) No Rights of Stockholder . The Participant shall not have any of the rights of a stockholder with respect to the Shares subject to this Option until such Shares have been issued upon the due exercise of the Option.

(b) Nontransferability of Option . Except to the extent and under such terms and conditions as determined by the Committee, the Option shall be nontransferable otherwise than by will or the laws of descent and distribution, and during the lifetime of the Participant, the Option may be exercised only by the Participant or, during the period the Participant is under a legal disability, by the Participant’s guardian or legal representative. Notwithstanding the foregoing, the Participant may, by delivering written notice to the Company, in a form provided by or otherwise satisfactory to the Company, designate a third party who, in the event of the Participant’s death, shall thereafter be entitled to exercise the Option.

 

- 5 -


(c) Severability . The provisions of this Agreement shall be deemed severable. If any provision of this Agreement shall be held unlawful or otherwise invalid or unenforceable in whole or in part by a court of competent jurisdiction or by reason of a change in a law or regulation, such provision shall (i) be deemed limited to the extent that such court of competent jurisdiction deems it lawful, valid and/or enforceable (or, if applicable, to the extent necessary to comply with the change in the law or regulation), and as so limited shall remain in full force and effect, and (ii) not affect any other provision of this Agreement or part thereof, each of which shall remain in full force and effect.

(d) Governing Law . This Agreement shall be governed by, and interpreted in accordance with, the laws of the State of Delaware, other than its conflict of laws principles.

(e) Headings . The headings in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement.

(f) Notices . All notices required or permitted under this Agreement shall be in writing and shall be sufficiently made or given if hand delivered or mailed by registered or certified mail, postage prepaid. Notice by mail shall be deemed delivered on the date on which it is postmarked.

Notices to the Company should be addressed to:

Arena Pharmaceuticals, Inc.

6166 Nancy Ridge Drive

San Diego, California 92121

Attention: Chief Financial Officer

With a copy to: General Counsel

Notices to the Participant should be addressed to the Participant at the Participant’s address as it appears on the Company’s records. The Company or the Participant may by writing to the other party, designate a different address for notices. If the receiving party consents in advance, notice may be transmitted and received via facsimile or via such other electronic transmission mechanism as may be available to the parties. Such notices shall be deemed delivered when received.

(g) Agreement Not a Contract . This Agreement (and the grant of the Option) is not an employment or service contract, and nothing in the Option shall be deemed to create in any way whatsoever any obligation on Participant’s part to continue as an Employee, a Consultant or a Director, or of the Company or an Affiliate to continue Participant’s service as an Employee, a Consultant or a Director.

(h) Entire Agreement; Modification . This Agreement and the Plan constitute the entire agreement between the parties with respect to the subject matter contained herein and may not be modified, except as provided in the Plan or in a written document signed by each of the parties hereto, and may be rescinded only by a written agreement signed by both parties.

 

- 6 -


IN WITNESS WHEREOF, the parties have executed this Agreement as of the Grant Date.

 

ARENA PHARMACEUTICALS, INC.
By:  

 

 

Participant

 

- 7 -

Exhibit 10.9

Arena Pharmaceuticals, Inc. 2009 Long-Term Incentive Plan

Stock Option Grant Agreement for Non-Employee Directors

THIS GRANT AGREEMENT (this “Agreement”), effective as of                                  (the “Grant Date”), is entered into by and between Arena Pharmaceuticals, Inc., a Delaware corporation (the “Company”), and                                  (the “Participant”).

1. Grant of Options . The Company hereby grants to the Participant a non-qualified stock option (the “Option”) to purchase                      shares of common stock of the Company, par value $0.0001 per share (the “Shares”), at the exercise price of $              per Share (the “Exercise Price”). The Option is not intended to qualify as an incentive stock option under Section 422 of the Code.

2. Subject to the Plan . This Agreement is subject to the provisions of the Arena Pharmaceuticals, Inc. 2009 Long-Term Incentive Plan (the “Plan”), and, unless the context requires otherwise, terms used herein shall have the same meaning as in the Plan. In the event of a conflict between the provisions of the Plan and this Agreement, the Plan shall control.

3. Term of Options . Unless the Option terminates earlier pursuant to the provisions of this Agreement, the Option shall expire on the tenth anniversary of the Grant Date.

4. Vesting . Except as otherwise provided in Sections 6(b) or (c) of this Agreement, provided the Participant is then a Director, an Employee or a Consultant, the Option shall become vested and exercisable on the following dates:

Vest Date                      Vested Options

5. Exercise of Option

(a) Manner of Exercise . To the extent vested, the Option may be exercised, in whole or in part, by delivering written notice to the Company in accordance with paragraph (f) of Section 8 in such form as the Company may require from time to time, or through such other means as permitted by the Company. Such notice shall specify the number of Shares subject to the Option as to which the Option is being exercised, and shall be accompanied by full payment of the Exercise Price of such Shares in a manner permitted under the terms of Section 5.5 of the Plan, except that payment with previously acquired Shares may only be made with the consent of the Committee. The Option may be exercised only in multiples of whole Shares and no partial Shares shall be issued.

(b) Issuance of Shares . Upon exercise of the Option and payment of the Exercise Price for the Shares as to which the Option is exercised, the Company shall issue to the Participant the applicable number of Shares in the form of fully paid and nonassessable Shares.


(c) Capitalization Adjustments . The number of Shares subject to the Option and the exercise price per Share shall be equitably and appropriately adjusted as provided in Section 12.2 of the Plan.

(d) Withholding . No Shares will be issued on exercise of the Option unless and until the Participant pays to the Company, or makes satisfactory arrangement with the Company for payment of, any federal, state or local taxes required by law to be withheld in respect of the exercise of the Option. The Participant hereby agrees that the Company may withhold from the Participant’s wages or other remuneration the applicable taxes. At the discretion of the Company, the applicable taxes may be withheld in kind from the Shares otherwise deliverable to the Participant on exercise of the Option, up to the Participant’s minimum required withholding rate or such other rate that will not trigger a negative accounting impact.

6. Termination of Option

(a) Termination of Service Other Than Due to Death or Disability . Unless the Option has earlier terminated, the Option shall terminate in its entirety, regardless of whether the Option is vested, three (3) years after the date the Participant ceases to be in the Company’s continuous service as any of a Director, an Employee or a Consultant, for any reason other than the Participant’s death or Disability. Except as provided below in Section 6(b) or (c), any portion of the Option that is not vested at the time the Participant ceases to be in the Company’s continuous service as any of a Director, an Employee or a Consultant, shall immediately terminate.

(b) Death . Upon the Participant’s death, unless the Option has earlier terminated, to the extent the Option is not fully vested the Option shall become fully vested and exercisable. The Participant’s executor or personal representative, the person to whom the Option shall have been transferred by will or the laws of descent and distribution, or such other permitted transferee, as the case may be, may exercise the Option in accordance with paragraph (a) of Section 5, provided such exercise occurs within three (3) years after the date of the Participant’s death or the end of the term of the Option pursuant to Section 3, whichever is earlier.

(c) Disability . In the event that the Participant ceases to be in the Company’s continuous service as any of a Director, an Employee or a Consultant by reason of Disability, unless the Option has earlier terminated, (i) the Option shall become fully vested and exercisable and (ii) the Option may be exercised, in accordance with paragraph (a) of Section 5, provided such exercise occurs within three (3) years after the date of Disability or the end of the term of the Option pursuant to Section 3, whichever is earlier. For purposes of this Agreement, “Disability” shall mean the Participant’s becoming disabled within the meaning of Section 22(e)(3) of the Code, or as otherwise determined by the Committee in its discretion. The Committee may require such proof of Disability as the Committee in its sole and absolute discretion deems appropriate and the Committee’s determination as to whether the Participant has incurred a Disability shall be final and binding on all parties concerned.

(d) Extension of Exercise Period . Notwithstanding any provisions of paragraphs (a), (b) or (c) of this Section to the contrary, if exercise of the Option following termination of service during the time period set forth in the applicable paragraph or sale during such period of the Shares acquired on exercise would violate any of the provisions of the federal securities laws (or any Company policy

 

- 2 -


related thereto), the time period to exercise the Option shall be extended until the later of (i) forty-five (45) days after the date that the exercise of the Option or sale of the Shares acquired on exercise would not be a violation of the federal securities laws (or a related Company policy), or (ii) the end of the time period set forth in the applicable paragraph, but in either case, not beyond the term of the Option pursuant to Section 3.

7. Change in Control; Corporate Transaction .

(a) Effect of Change in Control on Option . In the event of a Change in Control, the Surviving Corporation or the Parent Corporation, if applicable, may assume, continue or substitute for the Option on substantially the same terms and conditions (which may include the right to acquire the same consideration paid to the stockholders of the Company pursuant to the Change in Control). In the event of a Change in Control, to the extent the Surviving Corporation or the Parent Corporation, if applicable, does not assume, continue or substitute for the Option on substantially the same terms and conditions (which may include settlement in the common stock of the Surviving Corporation or the Parent Corporation), the Option shall (i) become fully vested and exercisable immediately prior to the Change in Control if the Participant is then a Director, an Employee or a Consultant, and (ii) terminate on the date of the Change in Control. In the event of a Change in Control, to the extent the Surviving Corporation or the Parent Corporation, if applicable, assumes or substitutes for the Option on substantially the same terms and conditions (which may include providing for settlement in the common stock of the Surviving Corporation or the Parent Corporation), if within 24 months following the date of the Change in Control the Participant ceases to be in the Company’s continuous service as any of a Director, an Employee or a Consultant for any reason, the Option shall become fully vested and exercisable, and may be exercised by the Participant at any time until the first anniversary of the date the Participant ceases to be in the Company’s continuous service as any of a Director, an Employee or a Consultant or the end of the term of the Option pursuant to Section 3, whichever is earlier. For purposes of this paragraph, if the Company is the Surviving Corporation or the Parent Corporation, if applicable, it shall be deemed to have assumed the Option unless it takes explicit action to the contrary.

Notwithstanding the foregoing, if on the date of the Change in Control the Fair Market Value of one Share is less than the Exercise Price, then the Option shall terminate as of the date of the Change in Control, except as otherwise determined by the Committee.

(b) Effect of Corporate Transaction on Option . In the event of a Corporate Transaction that is not a Change in Control, any surviving corporation or acquiring corporation (or the surviving or acquiring corporation’s parent company) may assume, continue or substitute for the Option on substantially the same terms and conditions (which may include the right to acquire the same consideration paid to the stockholders of the Company pursuant to the Corporate Transaction). In the event of a Corporate Transaction that is not a Change in Control, then notwithstanding Section 11 of the Plan and paragraph (a) of this Section, to the extent that the surviving corporation or acquiring corporation (or its parent company) does not assume, continue or substitute for the Option on substantially the same terms and conditions (which may include the right to acquire the same consideration paid to the stockholders of the Company pursuant to the Corporate Transaction), then the Option shall (i) become fully vested and exercisable immediately prior to the Corporate Transaction if the Participant is then a Director, an Employee or a Consultant, and (ii) terminate on the date of the Corporate Transaction.

 

- 3 -


For purposes of this Agreement, “Corporate Transaction” means (i) the consummation of a merger, consolidation or similar transaction following which the Company is not the surviving corporation; or (ii) the consummation of a merger, consolidation or similar transaction following which the Company is the surviving corporation but the Shares outstanding immediately preceding the merger, consolidation or similar transaction are converted or exchanged by virtue of the merger, consolidation or similar transaction into other property, whether in the form of securities, cash or otherwise. Notwithstanding the foregoing, a “Corporate Transaction” shall not include a transaction that is effected exclusively for the purpose of changing the domicile of the Company.

(c) Other Agreement or Plan . The provisions of this Section shall be superseded by the specific provisions, if any, of a written service agreement between the Participant and the Company, or a change in control severance agreement or plan covering the Participant, to the extent such a provision in such other agreement or plan provides a greater benefit to the Participant.

8. Miscellaneous .

(a) No Rights of Stockholder . The Participant shall not have any of the rights of a stockholder with respect to the Shares subject to this Option until such Shares have been issued upon the due exercise of the Option.

(b) Nontransferability of Option . Except to the extent and under such terms and conditions as determined by the Committee, the Option shall be nontransferable otherwise than by will or the laws of descent and distribution, and during the lifetime of the Participant, the Option may be exercised only by the Participant or, during the period the Participant is under a legal disability, by the Participant’s guardian or legal representative. Notwithstanding the foregoing, the Participant may, by delivering written notice to the Company, in a form provided by or otherwise satisfactory to the Company, designate a third party who, in the event of the Participant’s death, shall thereafter be entitled to exercise the Option.

(c) Severability . The provisions of this Agreement shall be deemed severable. If any provision of this Agreement shall be held unlawful or otherwise invalid or unenforceable in whole or in part by a court of competent jurisdiction or by reason of a change in a law or regulation, such provision shall (i) be deemed limited to the extent that such court of competent jurisdiction deems it lawful, valid and/or enforceable (or, if applicable, to the extent necessary to comply with the change in the law or regulation), and as so limited shall remain in full force and effect, and (ii) not affect any other provision of this Agreement or part thereof, each of which shall remain in full force and effect.

(d) Governing Law . This Agreement shall be governed by, and interpreted in accordance with, the laws of the State of Delaware, other than its conflict of laws principles.

(e) Headings . The headings in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement.

 

- 4 -


(f) Notices . All notices required or permitted under this Agreement shall be in writing and shall be sufficiently made or given if hand delivered or mailed by registered or certified mail, postage prepaid. Notice by mail shall be deemed delivered on the date on which it is postmarked.

Notices to the Company should be addressed to:

Arena Pharmaceuticals, Inc.

6166 Nancy Ridge Drive

San Diego, California 92121

Attention: Chief Financial Officer

With a copy to: General Counsel

Notices to the Participant should be addressed to the Participant at the Participant’s address as it appears on the Company’s records. The Company or the Participant may by writing to the other party, designate a different address for notices. If the receiving party consents in advance, notice may be transmitted and received via facsimile or via such other electronic transmission mechanism as may be available to the parties. Such notices shall be deemed delivered when received.

(g) Agreement Not a Contract . This Agreement (and the grant of the Option) is not a service contract, and nothing in the Option shall be deemed to create in any way whatsoever any obligation on Participant’s part to continue as a Director, an Employee or a Consultant, or of the Company or an Affiliate to continue Participant’s service as a Director, an Employee or a Consultant.

(h) Entire Agreement; Modification . This Agreement and the Plan constitute the entire agreement between the parties with respect to the subject matter contained herein and may not be modified, except as provided in the Plan or in a written document signed by each of the parties hereto, and may be rescinded only by a written agreement signed by both parties.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the Grant Date.

 

ARENA PHARMACEUTICALS, INC.

By:

 

 

 

  Participant

 

- 5 -

Exhibit 10.10

Arena Pharmaceuticals, Inc. 2009 Long-Term Incentive Plan

Restricted Stock Grant Agreement

THIS GRANT AGREEMENT (this “Agreement”), effective as of                                  (the “Grant Date”), is entered into by and between Arena Pharmaceuticals, Inc., a Delaware corporation (the “Company”), and                                  (the “Participant”).

1. Grant of Restricted Stock . The Company hereby grants to the Participant                                  restricted shares of common stock of the Company, par value $0.0001 per share (the “Restricted Stock”).

2. Subject to the Plan . This Agreement is subject to the provisions of the Arena Pharmaceuticals, Inc. 2009 Long-Term Incentive Plan (the “Plan”), and, unless the context requires otherwise, terms used herein shall have the same meaning as in the Plan. In the event of a conflict between the provisions of the Plan and this Agreement, the Plan shall control.

3. Vesting . All of the shares of Restricted Stock shall initially be unvested. Until shares of Restricted Stock vest, the Participant may not sell, assign, transfer, pledge, or otherwise dispose of such shares. Except as otherwise provided in Sections 5(b) or (c) of this Agreement, provided the Participant is then any of an Employee, a Consultant or a Director, the Restricted Stock shall become vested on the following dates:

Vest Date                      Vested Shares

4. Capitalization Adjustments . The number of shares of Restricted Stock shall be equitably and appropriately adjusted as provided in Section 12.2 of the Plan.

5. Termination of Employment .

(a) Termination of Employment or Service Other Than Due to Death or Disability . In the event the Participant ceases to be in the Company’s continuous service as any of an Employee, a Consultant or a Director for any reason other than as a result of death or Disability, the shares of Restricted Stock that were not vested at the time the Participant ceases to be in the Company’s continuous service as any of an Employee, a Consultant or a Director shall be immediately forfeited.

(b) Death . Upon the Participant’s death, to the extent the Restricted Stock is not fully vested the shares of Restricted Stock that would vest on the next anniversary of the Grant Date following the Participant’s death shall become vested based on a fraction, the numerator of which is the number of whole months elapsed since the prior anniversary of the Grant Date (or, if applicable, the Grant Date) and the denominator of which is 12.


(c) Disability . In the event that the Participant ceases to be in the Company’s continuous service as any of an Employee, a Consultant or a Director by reason of Disability, to the extent the Restricted Stock is not fully vested, the shares of Restricted Stock that would vest on the next anniversary of the Grant Date following the Participant’s Disability shall become vested based on a fraction, the numerator of which is the number of whole months elapsed since the prior anniversary of the Grant Date (or, if applicable, the Grant Date) and the denominator of which is 12. For purposes of this Agreement, “Disability” shall mean the Participant’s becoming disabled within the meaning of Section 22(e)(3) of the Code, or as otherwise determined by the Committee in its discretion. The Committee may require such proof of Disability as the Committee in its sole and absolute discretion deems appropriate and the Committee’s determination as to whether the Participant has incurred a Disability shall be final and binding on all parties concerned.

6. Change in Control; Corporate Transaction .

(a) Effect of Change in Control on Restricted Stock . In the event of a Change in Control, the Surviving Corporation or the Parent Corporation, if applicable, may assume, continue or substitute for the unvested shares of Restricted Stock on substantially the same terms and conditions (which may include replacement with shares of the common stock of the Surviving Corporation or the Parent Corporation). In the event of a Change in Control, to the extent the Surviving Corporation or the Parent Corporation, if applicable, does not assume, continue or substitute for the unvested shares of Restricted Stock on substantially the same terms and conditions (which may include replacement with shares of the common stock of the Surviving Corporation or the Parent Corporation), all of such unvested shares of Restricted Stock shall become fully vested immediately prior to the Change in Control, provided the Participant has been in the Company’s continuous service since the Grant Date as any of an Employee, a Consultant or a Director. In the event of a Change in Control, to the extent the Surviving Corporation or the Parent Corporation, if applicable, assumes or substitutes for the unvested shares of Restricted Stock on substantially the same terms and conditions (which may include replacement with shares of the common stock of the Surviving Corporation or the Parent Corporation) and within 24 months following the date of the Change in Control the Participant ceases to be in the Company’s continuous service as either of an Employee or Consultant by reason of (i) an involuntary termination without Cause, or (ii) a voluntary termination in connection with a Relocation Requirement, all of such shares of Restricted Stock shall become fully vested.

For purposes of this Agreement (i) if the Company is the Surviving Corporation or the Parent Corporation, if applicable, it shall be deemed to have assumed the unvested shares of Restricted Stock unless it takes explicit action to the contrary and (ii) “Relocation Requirement” shall mean a requirement by the Company, the Surviving Corporation or an affiliate thereof that the Participant be based anywhere more than fifty (50) miles from both the Participant’s primary office location at the time of the Change in Control and the Participant’s principal residence at the time of the Change in Control. For purposes of this Agreement, except as otherwise

 

-2-


provided in a written employment or severance agreement between the Participant and the Company or a severance plan of the Company covering the Participant (including a change in control severance agreement or plan), “Cause” shall mean: a determination by the Committee that the Participant has breached his or her employment or service contract with the Company (or an Affiliate), or has been engaged in disloyalty to the Company (or an Affiliate), including, without limitation, fraud, embezzlement, theft, commission of a felony or proven dishonesty in the course of his or her employment or service, or has disclosed trade secrets or confidential information of the Company to persons not entitled to receive such information, or has breached any written noncompetition or nonsolicitation agreement between the Participant and the Company (or an Affiliate) or has engaged in such other behavior detrimental to the interests of the Company (or an Affiliate) as the Committee determines.

(b) Effect of Corporate Transaction on Restricted Stock . In the event of a Corporate Transaction that is not a Change in Control, any surviving corporation or acquiring corporation (or the surviving or acquiring corporation’s parent company) may assume, continue or substitute for the unvested shares of Restricted Stock on substantially the same terms and conditions (which may include replacement with shares of the common stock of the surviving corporation, acquiring corporation, or the surviving or acquiring corporation’s parent company). In the event of a Corporate Transaction that is not a Change in Control, then notwithstanding Section 11 of the Plan and paragraph (a) of this Section, to the extent that the surviving corporation or acquiring corporation (or its parent company) does not assume, continue or substitute for the unvested shares of Restricted Stock on substantially the same terms and conditions (which may include replacement with shares of the common stock of the surviving corporation, acquiring corporation, or the surviving or acquiring corporation’s parent company), then all of such unvested shares of Restricted Stock shall become fully vested immediately prior to the Corporate Transaction if the Participant is then an Employee, a Consultant or a Director.

For purposes of this Agreement, “Corporate Transaction” means (i) the consummation of a merger, consolidation or similar transaction following which the Company is not the surviving corporation; or (ii) the consummation of a merger, consolidation or similar transaction following which the Company is the surviving corporation but the Shares outstanding immediately preceding the merger, consolidation or similar transaction are converted or exchanged by virtue of the merger, consolidation or similar transaction into other property, whether in the form of securities, cash or otherwise. Notwithstanding the foregoing, a “Corporate Transaction” shall not include a transaction that is effected exclusively for the purpose of changing the domicile of the Company.

(c) Other Agreement or Plan . The provisions of this Section (including the definition of Cause) shall be superseded by the specific provisions, if any, of a written employment or severance agreement between the Participant and the Company or a severance plan of the Company covering the Participant, including a change in control severance agreement or plan, to the extent such a provision in such other agreement or plan provides a greater benefit to the Participant.

 

-3-


7. Legend . Each certificate issued in respect of shares of Restricted Stock under the Agreement shall be registered in the Participant’s name and deposited by the Participant, together with a stock power endorsed in blank, with the Company and shall bear the following (or a similar) legend:

“The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) contained in an Agreement entered into between the registered owner and Arena Pharmaceuticals, Inc.”

When shares of Restricted Stock become vested, the Company shall redeliver to the Participant (or the Participant’s legal representatives, beneficiaries or heirs) from the shares of Restricted Stock deposited with it the number of shares which have then vested. The Participant agrees that any resale of shares of Restricted Stock received upon vesting shall be made in compliance with the registration requirements of the Securities Act of 1933 or an applicable exemption therefrom, including without limitation the exemption provided by Rule 144 promulgated thereunder (or any successor rule).

8. Nontransferability . Except to the extent and under such terms and conditions as determined by the Committee, the Restricted Stock shall be nontransferable otherwise than by will or the laws of descent and distribution. Notwithstanding the foregoing, the Participant may, by delivering written notice to the Company, in a form provided by or otherwise satisfactory to the Company, designate a third party who, in the event of the Participant’s death, shall thereafter be entitled to receive the vested shares of Restricted Stock.

9. Rights as Stockholder . During the period that shares of Restricted Stock remain unvested, the Participant shall have all of the rights of a stockholder of the Company with respect to the Restricted Stock, including, but not limited to, the right to receive dividends paid on the shares of Restricted Stock and the right to vote such shares.

10. Withholding . The Participant agrees to pay to the Company, or to make satisfactory arrangement with the Company for payment of, any federal, state or local taxes required by law to be withheld in respect of the vesting of the Restricted Stock. The Participant hereby agrees that the Company may withhold from the Participant’s wages or other remuneration the applicable taxes. At the discretion of the Company, the applicable taxes may be withheld in kind from the Shares otherwise deliverable to the Participant on the vesting of the Restricted Stock.

11. Notices . All notices required or permitted under this Agreement shall be in writing and shall be sufficiently made or given if hand delivered or mailed by registered or certified mail, postage prepaid. Notice by mail shall be deemed delivered on the date on which it is postmarked.

 

-4-


Notices to the Company should be addressed to:

Arena Pharmaceuticals, Inc.

6166 Nancy Ridge Drive

San Diego, California 92121

Attention: Chief Financial Officer

With a copy to: General Counsel

Notices to the Participant should be addressed to the Participant at the Participant’s address as it appears on the Company’s records. The Company or the Participant may by writing to the other party, designate a different address for notices. If the receiving party consents in advance, notice may be transmitted and received via facsimile or via such other electronic transmission mechanism as may be available to the parties. Such notices shall be deemed delivered when received.

12. Headings . The headings in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement.

13. Governing Law . This Agreement shall be governed by, and interpreted in accordance with, the laws of the State of Delaware, other than its conflict of laws principles.

14. Agreement Not a Contract . This Agreement (and the grant of Restricted Stock) is not an employment or service contract, and nothing in this Agreement shall be deemed to create in any way whatsoever any obligation on Participant’s part to continue in the employment or service of the Company as an Employee, a Consultant or a Director, or of the Company or an Affiliate to continue Participant’s service as an Employee, a Consultant or a Director.

15. Entire Agreement; Modification . This Agreement and the Plan constitute the entire agreement between the parties with respect to the subject matter contained herein and may not be modified, except as provided in the Plan or in a written document signed by each of the parties hereto, and may be rescinded only by a written agreement signed by both parties.

16. Severability . The provisions of this Agreement shall be deemed severable. If any provision of this Agreement shall be held unlawful or otherwise invalid or unenforceable in whole or in part by a court of competent jurisdiction or by reason of a change in a law or regulation, such provision shall (i) be deemed limited to the extent that such court of competent jurisdiction deems it lawful, valid and/or enforceable (or, if applicable, to the extent necessary to comply with the change in the law or regulation), and as so limited shall remain in full force and effect, and (ii) not affect any other provision of this Agreement or part thereof, each of which shall remain in full force and effect.

 

-5-


IN WITNESS WHEREOF, the parties have executed this Agreement as of the Grant Date.

 

ARENA PHARMACEUTICALS, INC.
By:  

 

 

Participant

 

-6-

Exhibit 31.1

CERTIFICATION

I, Jack Lief, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Arena Pharmaceuticals, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 7, 2009

 

/s/ Jack Lief
Jack Lief, President and Chief Executive Officer

Exhibit 31.2

CERTIFICATION

I, Robert E. Hoffman, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Arena Pharmaceuticals, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 7, 2009

 

/s/ Robert E. Hoffman

Robert E. Hoffman, CPA, Vice President, Finance and Chief Financial Officer

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Arena Pharmaceuticals, Inc. (the “Company”) for the period ended June 30, 2009, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Jack Lief, as President and Chief Executive Officer of the Company, and Robert E. Hoffman, as Vice President, Finance and Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:

 

  1. the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

  2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/ Jack Lief     /s/ Robert E. Hoffman
Jack Lief     Robert E. Hoffman
President and Chief Executive Officer     Vice President, Finance and Chief Financial Officer
Date: August 7, 2009     Date: August 7, 2009