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Arena Pharmaceuticals, Inc. | 6166 Nancy Ridge Drive | San Diego, California 92121
www.arenapharm.com
ARENA
2 0 1 1
LORCASERIN FOR WEIGHT MANAGEMENT
PHARMACEUTICALS, INC.
ANNUAL REPORT
Our most advanced drug candidate, lorcaserin, is
The lorcaserin Phase 3 clinical trial program (comprised
intended for weight management, including weight loss
of the BLOOM, BLOSSOM and BLOOM-DM trials)
and maintenance of weight loss, in
enrolled approximately 7,800 patients. Following one
obese patients and in
year of treatment, lorcaserin patients achieved statisti-
overweight patients with
cally signifi cant weight loss and favorable changes over
at least one weight-related
placebo in a variety of parameters associated with
co-morbid condition, such as
cardiovascular and metabolic risk. The most frequent
hypertension, dyslipidemia, cardiovascular disease
adverse events were headache, nausea, dizziness,
and impaired fasting glucose. More than one-third of
fatigue and dry mouth, with headache being the only
US adults were obese in 2009-2010, and studies have
adverse event increased over placebo by greater than 5%.
shown that a weight loss of 5% to 10% of body weight
from baseline can result in meaningful improvements in
cardiovascular risk factors, quality of life and functional
capacity, and a signifi cant reduction in the incidence of
type 2 diabetes. There are currently limited pharmaceu-
tical treatment options to help patients lose weight.
We believe lorcaserin has the potential to be an
important option for physicians to address the medical
management of obesity, and we are focused on
obtaining marketing approval of lorcaserin in the
United States, the European Union and ultimately
in other regions.
PHASE 3 PROGRAM RESULTS: SIGNIFICANT WEIGHT LOSS
(cid:48)(cid:58)(cid:61)(cid:61)(cid:59)
(cid:48)(cid:58)(cid:61)(cid:65)(cid:65)(cid:61)(cid:59)
(cid:48)(cid:58)(cid:61)(cid:61)(cid:59)(cid:27)(cid:50)(cid:59)
(cid:24)
(cid:24)
(cid:97)
(cid:98)
(cid:92)
(cid:83)
(cid:87)
(cid:98)
(cid:79)
(cid:62)
(cid:14)
(cid:84)
(cid:93)
(cid:14)
(cid:19)
(cid:38)(cid:30)
(cid:36)(cid:30)
(cid:34)(cid:30)
(cid:32)(cid:30)
(cid:30)
(cid:24)
(cid:24)
ARENA PIPELINE
(cid:24)
(cid:24)
(cid:24)
(cid:24)
(cid:24)
(cid:24)
(cid:24)
(cid:24)
(cid:58)(cid:93)(cid:96)(cid:81)(cid:79)(cid:97)(cid:83)(cid:96)(cid:87)(cid:92)(cid:26)(cid:14)(cid:59)(cid:55)(cid:66)(cid:66)(cid:29)(cid:58)(cid:61)(cid:49)(cid:52)
(cid:62)(cid:90)(cid:79)(cid:81)(cid:83)(cid:80)(cid:93)(cid:26)(cid:14)(cid:59)(cid:55)(cid:66)(cid:66)(cid:29)(cid:58)(cid:61)(cid:49)(cid:52)
(cid:58)(cid:93)(cid:96)(cid:81)(cid:79)(cid:97)(cid:83)(cid:96)(cid:87)(cid:92)(cid:26)(cid:14)(cid:49)(cid:93)(cid:91)(cid:94)(cid:90)(cid:83)(cid:98)(cid:83)(cid:96)(cid:97)
(cid:62)(cid:90)(cid:79)(cid:81)(cid:83)(cid:80)(cid:93)(cid:26)(cid:14)(cid:49)(cid:93)(cid:91)(cid:94)(cid:90)(cid:83)(cid:98)(cid:83)(cid:96)(cid:97)
(cid:114)(cid:0)(cid:35)(cid:19)
(cid:114)(cid:0)(cid:31)(cid:30)(cid:19)
(cid:114)(cid:0)(cid:35)(cid:19)
(cid:114)(cid:0)(cid:31)(cid:30)(cid:19)
(cid:114)(cid:0)(cid:35)(cid:19)
(cid:114)(cid:0)(cid:31)(cid:30)(cid:19)
(cid:24)(cid:14)(cid:94)(cid:42)(cid:30)(cid:28)(cid:30)(cid:30)(cid:31)(cid:14)(cid:100)(cid:97)(cid:28)(cid:14)(cid:81)(cid:93)(cid:96)(cid:96)(cid:83)(cid:97)(cid:94)(cid:93)(cid:92)(cid:82)(cid:87)(cid:92)(cid:85)(cid:14)(cid:94)(cid:90)(cid:79)(cid:81)(cid:83)(cid:80)(cid:93)
APD811 for Pulmonary Arterial Hypertension (PAH)
APD334 for Autoimmune Diseases
■ Internally discovered, orally available agonist
■ Internally discovered, orally available agonist
of the prostacyclin receptor intended for
of the S1P1 receptor intended for the treatment
once-daily treatment of PAH
of a number of conditions related to autoimmune
■ Completed single-dose, Phase 1
diseases, including multiple sclerosis
clinical trial in 2011
■ Plan to fi le an IND application this year
■ Plan to initiate multiple-
APD371 for Pain
dose, Phase 1 clinical
trial this year
■ Internally discovered, orally available agonist
of the cannabinoid receptor 2 intended for the
treatment of pain
■ Plan to complete IND-enabling preclinical
work this year
PHARMACEUTICALS, INC.
ANNUAL REPORT
A
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A
P
H
A
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Arena Pharmaceuticals, Inc. | 6166 Nancy Ridge Drive | San Diego, California 92121
www.arenapharm.com
ARENA
2 0 1 1
LORCASERIN FOR WEIGHT MANAGEMENT
Our most advanced drug candidate, lorcaserin, is
The lorcaserin Phase 3 clinical trial program (comprised
intended for weight management, including weight loss
of the BLOOM, BLOSSOM and BLOOM-DM trials)
and maintenance of weight loss, in
enrolled approximately 7,800 patients. Following one
obese patients and in
year of treatment, lorcaserin patients achieved statisti-
overweight patients with
cally signifi cant weight loss and favorable changes over
at least one weight-related
placebo in a variety of parameters associated with
co-morbid condition, such as
cardiovascular and metabolic risk. The most frequent
hypertension, dyslipidemia, cardiovascular disease
adverse events were headache, nausea, dizziness,
and impaired fasting glucose. More than one-third of
fatigue and dry mouth, with headache being the only
US adults were obese in 2009-2010, and studies have
adverse event increased over placebo by greater than 5%.
shown that a weight loss of 5% to 10% of body weight
from baseline can result in meaningful improvements in
cardiovascular risk factors, quality of life and functional
capacity, and a signifi cant reduction in the incidence of
type 2 diabetes. There are currently limited pharmaceu-
tical treatment options to help patients lose weight.
We believe lorcaserin has the potential to be an
important option for physicians to address the medical
management of obesity, and we are focused on
obtaining marketing approval of lorcaserin in the
United States, the European Union and ultimately
in other regions.
PHASE 3 PROGRAM RESULTS: SIGNIFICANT WEIGHT LOSS
(cid:48)(cid:58)(cid:61)(cid:61)(cid:59)
(cid:48)(cid:58)(cid:61)(cid:65)(cid:65)(cid:61)(cid:59)
(cid:48)(cid:58)(cid:61)(cid:61)(cid:59)(cid:27)(cid:50)(cid:59)
(cid:24)
(cid:24)
(cid:24)
(cid:24)
(cid:24)
(cid:24)
(cid:24)
(cid:24)
(cid:24)
(cid:24)
(cid:24)
(cid:24)
(cid:58)(cid:93)(cid:96)(cid:81)(cid:79)(cid:97)(cid:83)(cid:96)(cid:87)(cid:92)(cid:26)(cid:14)(cid:59)(cid:55)(cid:66)(cid:66)(cid:29)(cid:58)(cid:61)(cid:49)(cid:52)
(cid:62)(cid:90)(cid:79)(cid:81)(cid:83)(cid:80)(cid:93)(cid:26)(cid:14)(cid:59)(cid:55)(cid:66)(cid:66)(cid:29)(cid:58)(cid:61)(cid:49)(cid:52)
(cid:58)(cid:93)(cid:96)(cid:81)(cid:79)(cid:97)(cid:83)(cid:96)(cid:87)(cid:92)(cid:26)(cid:14)(cid:49)(cid:93)(cid:91)(cid:94)(cid:90)(cid:83)(cid:98)(cid:83)(cid:96)(cid:97)
(cid:62)(cid:90)(cid:79)(cid:81)(cid:83)(cid:80)(cid:93)(cid:26)(cid:14)(cid:49)(cid:93)(cid:91)(cid:94)(cid:90)(cid:83)(cid:98)(cid:83)(cid:96)(cid:97)
(cid:97)
(cid:98)
(cid:92)
(cid:83)
(cid:87)
(cid:98)
(cid:79)
(cid:62)
(cid:14)
(cid:84)
(cid:93)
(cid:19)
(cid:14)
(cid:38)(cid:30)
(cid:36)(cid:30)
(cid:34)(cid:30)
(cid:32)(cid:30)
(cid:30)
(cid:114)(cid:0)(cid:35)(cid:19)
(cid:114)(cid:0)(cid:31)(cid:30)(cid:19)
(cid:114)(cid:0)(cid:35)(cid:19)
(cid:114)(cid:0)(cid:31)(cid:30)(cid:19)
(cid:114)(cid:0)(cid:35)(cid:19)
(cid:114)(cid:0)(cid:31)(cid:30)(cid:19)
(cid:24)(cid:14)(cid:94)(cid:42)(cid:30)(cid:28)(cid:30)(cid:30)(cid:31)(cid:14)(cid:100)(cid:97)(cid:28)(cid:14)(cid:81)(cid:93)(cid:96)(cid:96)(cid:83)(cid:97)(cid:94)(cid:93)(cid:92)(cid:82)(cid:87)(cid:92)(cid:85)(cid:14)(cid:94)(cid:90)(cid:79)(cid:81)(cid:83)(cid:80)(cid:93)
ARENA PIPELINE
APD811 for Pulmonary Arterial Hypertension (PAH)
APD334 for Autoimmune Diseases
■ Internally discovered, orally available agonist
■ Internally discovered, orally available agonist
of the prostacyclin receptor intended for
of the S1P1 receptor intended for the treatment
once-daily treatment of PAH
of a number of conditions related to autoimmune
■ Completed single-dose, Phase 1
diseases, including multiple sclerosis
clinical trial in 2011
■ Plan to fi le an IND application this year
■ Plan to initiate multiple-
APD371 for Pain
dose, Phase 1 clinical
trial this year
■ Internally discovered, orally available agonist
of the cannabinoid receptor 2 intended for the
treatment of pain
■ Plan to complete IND-enabling preclinical
work this year
Co-Founders
Jack Lief and
Dominic P. Behan, Ph.D.
“As we progress through 2012, we look forward
to our upcoming lorcaserin milestones and selectively
advancing our earlier-stage programs.”
DEAR STOCKHOLDERS,
Substantial evidence shows that being overweight
Association’s goal of having an HbA1c of less than 7%,
With the upcoming lorcaserin PDUFA date and the
As we progress through 2012, we look forward to
or obese can have dire human health consequences
and many concurrently reduced their use of diabetes
ongoing review process with the EMA, we are focused
our upcoming lorcaserin milestones and selectively
coupled with tremendous economic burden. To help
medications. We believe that the weight loss effi cacy,
on the potential to provide a new treatment for
advancing our earlier-stage programs. We would like
address the need for additional treatment options, we
safety profi le and the additional benefi t for glycemic
physicians to help patients lose weight and improve
to thank our employees, our colleagues at Eisai and
are currently seeking marketing approval of lorcaserin
control shown in BLOOM-DM improve the overall
their overall cardiometabolic health.
our consultants for their continued dedication to
from regulatory agencies in the United States and
benefi t-risk profi le from that presented in our original
European Union. We also plan to seek marketing
lorcaserin NDA.
Beyond lorcaserin, our pipeline includes earlier-stage
our efforts.
approval of lorcaserin in other regions in the future.
In 2011, we focused resources and activities on
submitting a robust response to the US Food and Drug
Administration’s, or FDA, complete response letter,
or CRL, for lorcaserin and preparing our application
for European approval of lorcaserin. We also
selectively advanced other programs in our pipeline,
while maintaining our core research, development and
manufacturing capabilities.
In addition to our US regulatory activities for lorcaserin,
discovery efforts. We intend to advance these programs
our stockholders. Thank you for believing in our vision.
earlier this month we fi led through the centralized
independently or with collaborators. In 2012, we plan to
procedure a Marketing Authorization Application, or
focus our resources on selectively advancing our earlier-
Sincerely,
MAA, with the European Medicines Agency, or EMA,
stage drug candidates by:
and the EMA accepted our fi ling to begin its review.
We look forward to working with the EMA and our
Rapporteur and Co-rapporteur during this process, and
to the potential approval of lorcaserin in the European
Union. We are also continuing to explore collaborative
drug candidates that are the result of our internal
Lastly, we would like to extend a sincere thanks to you,
Last year, we completed studies, analyses and other
opportunities for commercializing lorcaserin outside of
activities that we believe address the issues raised in
the United States.
the lorcaserin CRL, and we resubmitted the lorcaserin
New Drug Application, or NDA, to the FDA. The FDA
accepted the resubmission for fi ling, and assigned a
new Prescription Drug User Fee Act, or PDUFA, target
date of June 27, 2012, to complete its review.
The lorcaserin NDA resubmission includes the results of
the BLOOM-DM Phase 3 clinical trial, which evaluated
lorcaserin for weight loss in obese and overweight
patients with type 2 diabetes. The BLOOM-DM trial was
completed after we submitted the original lorcaserin
NDA. In this trial, lorcaserin treatment helped an
As we write this letter, we are preparing for a number
related to autoimmune diseases, including multiple
Dominic P. Behan, Ph.D.
of upcoming milestones for lorcaserin:
sclerosis; and
■ The May 10th meeting of the FDA’s Endocrinologic
■ Completing IND-enabling preclinical work for APD371,
Co-Founder, Executive Vice President
and Chief Scientifi c Offi cer
and Metabolic Drugs Advisory Committee,
which provides us the opportunity to present
our data package and discuss the lorcaserin NDA
resubmission with experts who will advise the FDA;
■ The June 27th PDUFA date;
■ The potential for US launch in collaboration with
Eisai upon regulatory approval;
■ Initiating a Phase 1b clinical trial for APD811, an
orally available agonist of the prostacyclin receptor
Jack Lief
Jack Lief
Jack Lief
intended for once-daily treatment of pulmonary
Co-Founder, Chairman, President
arterial hypertension;
and Chief Executive Offi cer
■ Filing an investigational new drug, or IND, application
for APD334, a selective S1P1 receptor agonist
intended for the treatment of a number of conditions
our cannabinoid receptor 2 agonist intended for the
March 31, 2012
treatment of pain.
often diffi cult to treat population achieve statistically
■ Feedback from the EMA regarding our MAA fi ling;
signifi cant weight loss compared to placebo. Patients
and
taking lorcaserin reduced their HbA1c by 0.9% and their
fasting glucose by almost 30 mg/dl. In addition, 50% of
lorcaserin patients achieved the American Diabetes
■ Potential collaborations for commercializing
lorcaserin outside of the United States.
CORPORATE INFORMATION
BOARD OF DIRECTORS
Jack Lief
Chairman, President and Chief Executive Offi cer
Arena Pharmaceuticals, Inc.
Dominic P. Behan, Ph.D.
Director, Executive Vice President and
Chief Scientifi c Offi cer
Arena Pharmaceuticals, Inc.
Donald D. Belcher
Former Chairman and Chief Executive Offi cer
Banta Corporation
Scott H. Bice
Robert C. Packard Professor
University of Southern California Law School
Harry F. Hixson, Jr., Ph.D.
Chairman and Chief Executive Offi cer
Sequenom, Inc.
Tina S. Nova, Ph.D.
President
Genoptix, Inc.
Phillip M. Schneider
Former Senior Vice President and
Chief Financial Offi cer
IDEC Pharmaceuticals Corporation
Christine A. White, M.D.
Biogen Idec Inc.
Randall E. Woods
Managing Director
Eden Woods Investments
EXECUTIVE OFFICERS
Jack Lief
Former Senior Vice President, Global Medical Affairs
President and Chief Executive Offi cer
Dominic P. Behan, Ph.D.
Executive Vice President and Chief Scientifi c Offi cer
Robert E. Hoffman
Vice President, Finance and Chief Financial Offi cer
William R. Shanahan, Jr., M.D., J.D.
Senior Vice President and Chief Medical Offi cer
Steven W. Spector, J.D.
Executive Vice President, General Counsel and Secretary
CORPORATE HEADQUARTERS
Arena Pharmaceuticals, Inc.
6166 Nancy Ridge Drive
San Diego, California 92121
Telephone: 858.453.7200
Facsimile: 858.677.0065
ANNUAL MEETING
The Annual Meeting of Stockholders
will be held on Friday, June 15, 2012,
at 9:00 a.m. Pacifi c Time, at
6154 Nancy Ridge Drive
San Diego, California 92121.
For further information, call Investor Relations
Stockholder inquiries should be directed to:
at 858.453.7200.
INVESTOR RELATIONS
Investor Relations
Arena Pharmaceuticals, Inc.
6166 Nancy Ridge Drive
San Diego, California 92121
Telephone: 858.453.7200
Facsimile: 858.677.0065
invest@arenapharm.com
Arena will provide stockholders without charge, upon written request, a copy of its
Annual Report on Form 10-K, including the fi nancial statements, schedules and list of
exhibits. Arena will furnish stockholders a copy of any exhibit to such report upon writ-
ten request and payment of its reasonable expenses in furnishing such exhibit. Requests
should be sent to Investor Relations at Arena’s corporate headquarters.
In addition, Arena’s Annual Report on Form 10-K, other fi lings with the Securities and
Exchange Commission, and press releases, along with general information on Arena’s
business and technology are available through Arena’s home page on the Internet at the
following address: www.arenapharm.com.
TRANSFER AGENT AND REGISTRAR
Computershare Investor Services
P.O. Box 43070
Providence, Rhode Island 02940-3070
Telephone: 800.962.4284 Facsimile: 303.262.0700
Arena’s common stock trades on the NASDAQ Global Select Market®
STOCK LISTING
under the symbol ARNA.
INDEPENDENT AUDITORS
KPMG LLP
4747 Executive Drive, Suite 600
San Diego, California 92121
SERVICE MARKS
service marks of Arena.
Telephone: 858.750.7100 Facsimile: 858.750.7101
Arena Pharmaceuticals®, Arena® and our corporate logo are registered
INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report are forward-looking statements that involve a
number of risks and uncertainties. Such forward-looking statements include statements
about our vision, outlook, strategy, technologies, internal and collaborative programs, ability
to develop compounds and commercialize drugs, and our future activities and achievements.
These forward-looking statements also involve other statements that are not historical facts,
including statements that are preceded by the words “may,” “will,” “intend,” “plan,” “believe,”
“anticipate,” “expect,” “estimate,” “predict,” “potential,” “continue,” “likely,” or “opportunity,”
similar words or the negative of these words. For such statements, we claim the protection
of the Private Securities Litigation Reform Act of 1995. Actual events or results may differ
materially from our expectations. Factors that could cause actual results to differ materially
from the forward-looking statements include, but are not limited to: data and other information
related to our research and development programs may not meet safety, effi cacy or other
regulatory requirements or otherwise be suffi cient for regulatory review or approval; the timing
of regulatory review is uncertain and our applications for regulatory approval of lorcaserin
may not be reviewed when or as anticipated; the occurrence, timing and results of FDA
advisory committee meetings relating to lorcaserin and other drug candidates; nonclinical
and clinical data is voluminous and detailed, and regulatory agencies may interpret or
weigh the importance of data differently and reach different conclusions than us or others,
request additional information, have additional recommendations or change their guidance
or requirements before or after approval; unexpected or unfavorable new data; risks related
to commercializing new products; our ability to obtain and defend our patents; the timing,
success and cost of our research and development programs; results of clinical trials and other
studies are subject to different interpretations and may not be predictive of future results;
clinical trials and other studies may not proceed at the time or in the manner expected or at
all; having adequate funds; risks related to relying on collaborative agreements; the timing and
receipt of payments and fees, if any, from collaborators; and satisfactory resolution of litigation
or other disagreements with others. Additional factors that could cause actual results to differ
materially from those stated or implied by our forward-looking statements are disclosed in
our fi lings with the Securities and Exchange Commission. These forward-looking statements
represent our judgment as of the earlier of when dated or released. We disclaim any intent or
obligation to update these forward-looking statements, other than as may be required under
applicable law.
Annual Report Design: AldenMC, San Diego / www.aldenmc.com
Co-Founders
Jack Lief and
Dominic P. Behan, Ph.D.
“As we progress through 2012, we look forward
to our upcoming lorcaserin milestones and selectively
advancing our earlier-stage programs.”
DEAR STOCKHOLDERS,
Substantial evidence shows that being overweight
Association’s goal of having an HbA1c of less than 7%,
With the upcoming lorcaserin PDUFA date and the
As we progress through 2012, we look forward to
or obese can have dire human health consequences
and many concurrently reduced their use of diabetes
ongoing review process with the EMA, we are focused
our upcoming lorcaserin milestones and selectively
coupled with tremendous economic burden. To help
medications. We believe that the weight loss effi cacy,
on the potential to provide a new treatment for
advancing our earlier-stage programs. We would like
address the need for additional treatment options, we
safety profi le and the additional benefi t for glycemic
physicians to help patients lose weight and improve
to thank our employees, our colleagues at Eisai and
are currently seeking marketing approval of lorcaserin
control shown in BLOOM-DM improve the overall
their overall cardiometabolic health.
our consultants for their continued dedication to
from regulatory agencies in the United States and
benefi t-risk profi le from that presented in our original
Beyond lorcaserin, our pipeline includes earlier-stage
our efforts.
In addition to our US regulatory activities for lorcaserin,
discovery efforts. We intend to advance these programs
our stockholders. Thank you for believing in our vision.
drug candidates that are the result of our internal
Lastly, we would like to extend a sincere thanks to you,
earlier this month we fi led through the centralized
independently or with collaborators. In 2012, we plan to
procedure a Marketing Authorization Application, or
focus our resources on selectively advancing our earlier-
Sincerely,
MAA, with the European Medicines Agency, or EMA,
stage drug candidates by:
and the EMA accepted our fi ling to begin its review.
We look forward to working with the EMA and our
Rapporteur and Co-rapporteur during this process, and
to the potential approval of lorcaserin in the European
Union. We are also continuing to explore collaborative
■ Initiating a Phase 1b clinical trial for APD811, an
orally available agonist of the prostacyclin receptor
Jack Lief
intended for once-daily treatment of pulmonary
Co-Founder, Chairman, President
arterial hypertension;
and Chief Executive Offi cer
■ Filing an investigational new drug, or IND, application
for APD334, a selective S1P1 receptor agonist
intended for the treatment of a number of conditions
As we write this letter, we are preparing for a number
related to autoimmune diseases, including multiple
Dominic P. Behan, Ph.D.
of upcoming milestones for lorcaserin:
sclerosis; and
■ The May 10th meeting of the FDA’s Endocrinologic
■ Completing IND-enabling preclinical work for APD371,
Co-Founder, Executive Vice President
and Chief Scientifi c Offi cer
our cannabinoid receptor 2 agonist intended for the
March 31, 2012
treatment of pain.
Last year, we completed studies, analyses and other
opportunities for commercializing lorcaserin outside of
activities that we believe address the issues raised in
the United States.
European Union. We also plan to seek marketing
lorcaserin NDA.
approval of lorcaserin in other regions in the future.
In 2011, we focused resources and activities on
submitting a robust response to the US Food and Drug
Administration’s, or FDA, complete response letter,
or CRL, for lorcaserin and preparing our application
for European approval of lorcaserin. We also
selectively advanced other programs in our pipeline,
while maintaining our core research, development and
manufacturing capabilities.
the lorcaserin CRL, and we resubmitted the lorcaserin
New Drug Application, or NDA, to the FDA. The FDA
accepted the resubmission for fi ling, and assigned a
new Prescription Drug User Fee Act, or PDUFA, target
date of June 27, 2012, to complete its review.
The lorcaserin NDA resubmission includes the results of
the BLOOM-DM Phase 3 clinical trial, which evaluated
lorcaserin for weight loss in obese and overweight
patients with type 2 diabetes. The BLOOM-DM trial was
completed after we submitted the original lorcaserin
NDA. In this trial, lorcaserin treatment helped an
and Metabolic Drugs Advisory Committee,
which provides us the opportunity to present
our data package and discuss the lorcaserin NDA
resubmission with experts who will advise the FDA;
■ The June 27th PDUFA date;
■ The potential for US launch in collaboration with
Eisai upon regulatory approval;
often diffi cult to treat population achieve statistically
■ Feedback from the EMA regarding our MAA fi ling;
signifi cant weight loss compared to placebo. Patients
and
taking lorcaserin reduced their HbA1c by 0.9% and their
fasting glucose by almost 30 mg/dl. In addition, 50% of
lorcaserin patients achieved the American Diabetes
■ Potential collaborations for commercializing
lorcaserin outside of the United States.
CORPORATE INFORMATION
BOARD OF DIRECTORS
Jack Lief
Chairman, President and Chief Executive Offi cer
Arena Pharmaceuticals, Inc.
Dominic P. Behan, Ph.D.
Director, Executive Vice President and
Chief Scientifi c Offi cer
Arena Pharmaceuticals, Inc.
Donald D. Belcher
Former Chairman and Chief Executive Offi cer
Banta Corporation
Scott H. Bice
Robert C. Packard Professor
University of Southern California Law School
Harry F. Hixson, Jr., Ph.D.
Chairman and Chief Executive Offi cer
Sequenom, Inc.
Tina S. Nova, Ph.D.
President
Genoptix, Inc.
Phillip M. Schneider
Former Senior Vice President and
Chief Financial Offi cer
IDEC Pharmaceuticals Corporation
Christine A. White, M.D.
Biogen Idec Inc.
Randall E. Woods
Managing Director
Eden Woods Investments
EXECUTIVE OFFICERS
Jack Lief
Former Senior Vice President, Global Medical Affairs
President and Chief Executive Offi cer
Dominic P. Behan, Ph.D.
Executive Vice President and Chief Scientifi c Offi cer
Robert E. Hoffman
Vice President, Finance and Chief Financial Offi cer
William R. Shanahan, Jr., M.D., J.D.
Senior Vice President and Chief Medical Offi cer
Steven W. Spector, J.D.
Executive Vice President, General Counsel and Secretary
CORPORATE HEADQUARTERS
Arena Pharmaceuticals, Inc.
6166 Nancy Ridge Drive
San Diego, California 92121
Telephone: 858.453.7200
Facsimile: 858.677.0065
ANNUAL MEETING
The Annual Meeting of Stockholders
will be held on Friday, June 15, 2012,
at 9:00 a.m. Pacifi c Time, at
6154 Nancy Ridge Drive
San Diego, California 92121.
For further information, call Investor Relations
Stockholder inquiries should be directed to:
at 858.453.7200.
INVESTOR RELATIONS
Investor Relations
Arena Pharmaceuticals, Inc.
6166 Nancy Ridge Drive
San Diego, California 92121
Telephone: 858.453.7200
Facsimile: 858.677.0065
invest@arenapharm.com
Arena will provide stockholders without charge, upon written request, a copy of its
Annual Report on Form 10-K, including the fi nancial statements, schedules and list of
exhibits. Arena will furnish stockholders a copy of any exhibit to such report upon writ-
ten request and payment of its reasonable expenses in furnishing such exhibit. Requests
should be sent to Investor Relations at Arena’s corporate headquarters.
In addition, Arena’s Annual Report on Form 10-K, other fi lings with the Securities and
Exchange Commission, and press releases, along with general information on Arena’s
business and technology are available through Arena’s home page on the Internet at the
following address: www.arenapharm.com.
TRANSFER AGENT AND REGISTRAR
Computershare Investor Services
P.O. Box 43070
Providence, Rhode Island 02940-3070
Telephone: 800.962.4284 Facsimile: 303.262.0700
Arena’s common stock trades on the NASDAQ Global Select Market®
STOCK LISTING
under the symbol ARNA.
INDEPENDENT AUDITORS
KPMG LLP
4747 Executive Drive, Suite 600
San Diego, California 92121
SERVICE MARKS
service marks of Arena.
Telephone: 858.750.7100 Facsimile: 858.750.7101
Arena Pharmaceuticals®, Arena® and our corporate logo are registered
INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report are forward-looking statements that involve a
number of risks and uncertainties. Such forward-looking statements include statements
about our vision, outlook, strategy, technologies, internal and collaborative programs, ability
to develop compounds and commercialize drugs, and our future activities and achievements.
These forward-looking statements also involve other statements that are not historical facts,
including statements that are preceded by the words “may,” “will,” “intend,” “plan,” “believe,”
“anticipate,” “expect,” “estimate,” “predict,” “potential,” “continue,” “likely,” or “opportunity,”
similar words or the negative of these words. For such statements, we claim the protection
of the Private Securities Litigation Reform Act of 1995. Actual events or results may differ
materially from our expectations. Factors that could cause actual results to differ materially
from the forward-looking statements include, but are not limited to: data and other information
related to our research and development programs may not meet safety, effi cacy or other
regulatory requirements or otherwise be suffi cient for regulatory review or approval; the timing
of regulatory review is uncertain and our applications for regulatory approval of lorcaserin
may not be reviewed when or as anticipated; the occurrence, timing and results of FDA
advisory committee meetings relating to lorcaserin and other drug candidates; nonclinical
and clinical data is voluminous and detailed, and regulatory agencies may interpret or
weigh the importance of data differently and reach different conclusions than us or others,
request additional information, have additional recommendations or change their guidance
or requirements before or after approval; unexpected or unfavorable new data; risks related
to commercializing new products; our ability to obtain and defend our patents; the timing,
success and cost of our research and development programs; results of clinical trials and other
studies are subject to different interpretations and may not be predictive of future results;
clinical trials and other studies may not proceed at the time or in the manner expected or at
all; having adequate funds; risks related to relying on collaborative agreements; the timing and
receipt of payments and fees, if any, from collaborators; and satisfactory resolution of litigation
or other disagreements with others. Additional factors that could cause actual results to differ
materially from those stated or implied by our forward-looking statements are disclosed in
our fi lings with the Securities and Exchange Commission. These forward-looking statements
represent our judgment as of the earlier of when dated or released. We disclaim any intent or
obligation to update these forward-looking statements, other than as may be required under
applicable law.
Annual Report Design: AldenMC, San Diego / www.aldenmc.com
2 01 1 FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011
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
(State or other jurisdiction of
incorporation or organization)
6166 Nancy Ridge Drive, San Diego, CA
(Address of principal executive offices)
23-2908305
(I.R.S. Employer
Identification No.)
92121
(Zip Code)
858.453.7200
(Registrant’s telephone number, including area code)
Securities registered pursuant to 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, $0.0001 par value
Preferred Stock Purchase Rights
NASDAQ Global Select Market
NASDAQ Global Select Market
Securities registered pursuant to 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes ‘ No È
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes ‘ No È
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes È 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 È No ‘
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. È
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act.
Large accelerated filer ‘
Non-accelerated filer ‘ (Do not check if a smaller reporting company)
Accelerated filer È
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 ‘ No È
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was
approximately $196.9 million as of June 30, 2011, based on the last sale price of the registrant’s common stock as reported on the
NASDAQ Global Market on such date. For purposes of this calculation, shares of the registrant’s common stock held by directors
and executive officers have been excluded. This number is provided only for purposes of this Annual Report on Form 10-K and
does not represent an admission that any particular person or entity is an affiliate of the registrant.
As of March 9, 2012, there were 180,422,401 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part III of this Annual Report on Form 10-K is incorporated by reference from the registrant’s
definitive proxy statement for the annual meeting of stockholders to be held in June 2012, which will be filed with the Securities
and Exchange Commission within 120 days after the close of the registrant’s fiscal year ended December 31, 2011.
ARENA PHARMACEUTICALS, INC.
TABLE OF CONTENTS
PART I
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1.
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Item 3.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure . . . .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . .
Item 14.
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART IV
Item 15. Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
27
52
52
54
54
55
56
57
69
71
103
104
106
107
107
107
108
108
109
i
INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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.
Discussions containing these forward-looking statements may be found, among other places, in “Business” and
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual
Report on Form 10-K. For such statements, we claim the protection of the Private Securities Litigation Reform
Act of 1995. Readers of this Annual Report on Form 10-K are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the time this Annual Report on Form 10-K was filed with the
Securities and Exchange Commission, or SEC. These forward-looking statements are based largely on our
expectations and projections about future events and future trends affecting our business, and are subject to risks
and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking
statements. These risks and uncertainties include, without limitation, those discussed in “Risk Factors” and in
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual
Report on Form 10-K. 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 to
reflect events or circumstances that arise after the filing of this Annual Report on Form 10-K or documents
incorporated by reference herein that include forward-looking statements.
Arena Pharmaceuticals®, Arena® and our corporate logo are registered service marks of Arena. CART™ is
an unregistered service mark of Arena. All other brand names or trademarks appearing in this Annual Report on
Form 10-K are the property of their respective holders.
In this Annual Report on Form 10-K, “Arena Pharmaceuticals,” “Arena,” “we,” “us” and “our” refer to
Arena Pharmaceuticals, Inc., and our wholly owned subsidiaries on a consolidated basis, unless the context
otherwise provides. “APD” is an abbreviation for Arena Pharmaceuticals Development.
1
Item 1.
Business.
Overview
PART I
We are a clinical-stage biopharmaceutical company focused on discovering, developing and
commercializing oral drugs that target G protein-coupled receptors, or GPCRs, an important class of validated
drug targets, in four major therapeutic areas: cardiovascular, central nervous system, inflammatory and metabolic
diseases. We recently submitted regulatory applications for US and EU approval of our most advanced drug
candidate, lorcaserin, which is intended for weight management. We intend to selectively advance certain of our
research and development programs, and also to seek collaborators or other licensing opportunities for our
programs.
In October 2010, the US Food and Drug Administration, or FDA, issued a Complete Response Letter, or
CRL, with respect to the lorcaserin New Drug Application, or NDA, we submitted in December 2009. In the
CRL, the FDA stated that it completed its review of the NDA and determined that it could not approve the
application in its then present form.
After completing various studies, analyses and other activities in response to the lorcaserin CRL, in
December 2011, we resubmitted the lorcaserin NDA. The FDA accepted the resubmission for filing and review
and assigned a new Prescription Drug User Fee Act, or PDUFA, target date of June 27, 2012. The FDA
subsequently notified us that an Endocrinologic and Metabolic Drugs Advisory Committee meeting to discuss
the lorcaserin NDA is tentatively scheduled on May 10, 2012.
We are also seeking regulatory approval for lorcaserin in the European Union. On March 2, 2012, we filed a
marketing authorization application, or MAA, for lorcaserin through the centralized procedure with the European
Medicines Agency, or EMA, and we expect to learn whether our filing has been accepted for review before the
end of March 2012.
Our wholly owned subsidiary, Arena Pharmaceuticals GmbH, or Arena GmbH, has granted Eisai Inc., or
Eisai, exclusive rights to commercialize lorcaserin in the United States and its territories and possessions, subject
to FDA approval of the lorcaserin NDA. Also subject to applicable regulatory approval, we intend to
commercialize lorcaserin in the European Union and in other areas outside of the United States with one or more
collaborators or independently.
Our prioritized earlier-stage programs include APD811, an internally discovered, orally available agonist of
the prostacyclin receptor intended for the treatment of pulmonary arterial hypertension. APD811 completed a
single-dose, Phase 1 clinical trial in 2011, and we plan to initiate a multiple-dose, dose-titration, Phase 1 clinical
trial of APD811 this year. We also plan to file this year an investigational new drug, or IND, application with the
FDA for APD334 (an internally discovered, orally available agonist of the S1P1 receptor intended for the
treatment of a number of conditions related to autoimmune diseases, including multiple sclerosis) and to continue
development of our programs on APD371 (an internally discovered, orally available agonist of the cannabinoid
receptor 2, or CB2, intended for the treatment of pain) and GPR119 agonists (intended for the treatment of type 2
diabetes).
Our internally discovered, oral drug candidates also include temanogrel, which was formerly called
APD791, and nelotanserin, which was formerly called APD125. Temanogrel is an inverse agonist of the
serotonin 2A receptor intended for the treatment of arterial thrombosis and other related conditions and has
completed Phase 1a and Phase 1b clinical trials. Nelotanserin is a serotonin 2A receptor inverse agonist that we
previously studied for insomnia, and has completed Phase 2a and Phase 2b clinical trials. We are not planning to
conduct significant development activities, including any additional clinical trials, for these drug candidates at
this time. We may consider resuming their development in the future with one or more collaborators or
independently, depending on the cost of further development, financial resources and their potential.
2
The headquarters of our operations outside of the United States is in Switzerland at Arena GmbH. Activities
conducted at this location include manufacturing, quality control, quality assurance, development of
manufacturing processes, qualifying suppliers and otherwise managing the global supply chain, regulatory
compliance, distribution of finished products, and European strategic planning and development. Arena GmbH
and its wholly owned subsidiary, API Development LTD, also hold certain intellectual property rights for
lorcaserin.
We have commercial rights for all of our programs and drug candidates, with the exception of Eisai’s right
to commercialize lorcaserin in the United States. We have not received regulatory approval to market or sell any
drugs or generated commercial revenues from selling any drugs, other than in connection with manufacturing
drugs for Siegfried Ltd in our Swiss drug product manufacturing facility. We incorporated in the state of
Delaware in April 1997.
Our Research and Development Programs
We are currently focusing our resources and activities on the following programs:
Program (Indication)
Development Status
Commercial Rights
Lorcaserin (weight management) . . . . . . . . . . . . . . . .
APD811 (pulmonary arterial hypertension) . . . . . . . .
APD334 (autoimmune diseases) . . . . . . . . . . . . . . . . .
APD371 (pain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
GPR119 agonists (type 2 diabetes) . . . . . . . . . . . . . . .
Resubmitted NDA
Phase 1
Preclinical
Preclinical
Research
Arena Ex-US; Eisai US
Arena
Arena
Arena
Arena
Our research and development programs also include temanogrel, nelotanserin and earlier-stage programs,
for which we are not planning to conduct significant development activities, including any additional clinical
trials, at this time. We may consider resuming their development in the future with one or more collaborators or
independently, depending on the cost of further development, financial resources and their potential.
Throughout this Form 10-K, when we use the term “significantly” with regard to the results of our studies or
trials, we generally mean “statistically significantly,” which means that the particular result unlikely occurred by
chance.
Currently Active Programs
Lorcaserin Program
Our most advanced drug candidate, lorcaserin, is intended for weight management, including weight loss
and maintenance of weight loss. According to the Centers for Disease Control and Prevention, more than one-
third of US adults were obese in 2009-2010. Studies have shown that a weight loss of 5% to 10% of body weight
from baseline can result in meaningful improvements in cardiovascular risk factors (e.g., lipids, blood pressure
and blood glucose), quality of life and functional capacity, and a significant reduction in the incidence of type 2
diabetes. There are currently limited pharmaceutical treatment options to help patients lose weight.
Lorcaserin is a new chemical entity that we believe acts as a selective serotonin 2C receptor agonist. The
serotonin 2C receptor is expressed in the brain, including the hypothalamus, which is an area involved in the
control of appetite and metabolism. In in vitro studies, lorcaserin demonstrated greater affinity and activity at the
serotonin 2C receptor than at the serotonin 2A and 2B receptors. Activation of the latter two receptors has been
associated with undesirable effects: Activation of the 2A receptor has been associated with central nervous
system, or CNS, effects, including altered perception, mood and abuse potential; and activation of the 2B
receptor has been associated with cardiac valvulopathy.
We have evaluated the safety, pharmacokinetics and pharmacodynamics of lorcaserin in 19 clinical trials:
seven Phase 1 trials, two Phase 2 trials, three Phase 3 trials, a bioavailability study, a mass balance study, an
3
ECG/QT trial, two drug interaction trials, an abuse potential trial, and a study of energy intake and energy
expenditure. The lorcaserin Phase 3 clinical trial program consisted of three double-blind, randomized, placebo-
controlled trials, BLOOM (Behavioral modification and Lorcaserin for Overweight and Obesity Management),
BLOSSOM (Behavioral modification and LOrcaserin Second Study for Obesity Management) and BLOOM-DM
(Behavioral modification and Lorcaserin for Overweight and Obesity Management in Diabetes Mellitus), and
enrolled approximately 7,800 patients. BLOOM and BLOSSOM evaluated lorcaserin versus placebo in
non-diabetic patients who were obese or patients who were overweight and had at least one weight-related
co-morbid condition other than diabetes: BLOOM evaluated 3,182 patients over a two-year treatment period; and
BLOSSOM evaluated 4,008 patients over a one-year treatment period. BLOOM-DM evaluated 604 obese and
overweight patients with type 2 diabetes over a one-year treatment period.
Lorcaserin Regulatory Activities and Developments.
US Food and Drug Administration
We submitted our original lorcaserin NDA to the FDA in December 2009, which incorporated information
regarding BLOOM and BLOSSOM. In October 2010, the FDA issued a CRL regarding the lorcaserin NDA. In
the CRL, the FDA stated that it completed its review of the NDA and determined that it could not approve the
application in its then present form. The items for which the FDA requested additional data or analyses in the
CRL or subsequent communications can be summarized as follows:
• Diagnostic uncertainty in the classification of mammary masses in female rats;
• Unresolved exposure-response relationship for lorcaserin-emergent mammary adenocarcinoma and
unclear mode of action;
• Unidentified mode of action and unclear safety margin for lorcaserin-emergent brain astrocytoma in
male rats;
•
•
Further assessment of receptor pharmacology to refine estimated margins and more fully characterize
lorcaserin’s functional activity;
Further assessment in rats of abuse potential for labeling and scheduling decisions; and
• Weight-loss efficacy in patients without type 2 diabetes and a request to submit data from
BLOOM-DM.
After completing various studies, analyses and other activities intended to address these items, we
resubmitted the lorcaserin NDA in December 2011. The resubmission includes data and analyses that were not
incorporated in the original NDA, including the results of BLOOM-DM, which was completed after we filed the
original NDA.
In January 2012, the FDA notified us that it accepted the lorcaserin NDA resubmission for filing and
review, and assigned a PDUFA date of June 27, 2012. (A PDUFA date is the target date for the FDA to complete
its review and provide a decision on an application.) The FDA subsequently notified us that an Endocrinologic
and Metabolic Drugs Advisory Committee meeting to discuss the lorcaserin NDA resubmission is tentatively
scheduled on May 10, 2012.
We expect the FDA to conduct a benefit-risk assessment based upon the totality of the new and previously
provided data to determine the approvability of lorcaserin. It is important to note that the FDA may analyze or
weigh the data differently than we or others do. In addition, the analyses we included in the resubmitted
lorcaserin NDA include estimates based on certain assumptions and extrapolations. The FDA may accept our
assumptions and extrapolations or may use different ones in analyzing the data, which could lead the FDA to
reach different conclusions.
4
Following is a summary of the activities performed in response to the lorcaserin CRL and the information
we included in the lorcaserin NDA resubmission:
•
Diagnostic uncertainty in the classification of mammary masses in female rats. The original lorcaserin NDA
included data showing that lorcaserin was not genotoxic in a standard battery of tests, and, in our lorcaserin
clinical trials, the occurrence of mammary and other tumors was infrequent and similar with lorcaserin
treatment as compared to placebo. The original lorcaserin NDA also included the results of two-year
carcinogenicity studies of mice and rats. In mice given lorcaserin, the incidences of tumors were not
increased relative to placebo. In rats given lorcaserin, the incidences of certain tumors, including benign and
malignant tumors of the mammary gland, were increased relative to placebo. In female rats, the specific
diagnoses (i.e., benign or malignant) differed between an initial pathologist’s analysis of the tissues on an
ongoing basis during the study and the final peer-reviewed diagnoses reported in the study report and
included in the original NDA. The FDA recommended that the tissue samples be re-adjudicated to provide
greater certainty for the diagnoses of benign and malignant mammary tumors.
We convened a pathology working group, or PWG, that consisted of five independent veterinary
pathologists to re-adjudicate the female rat mammary tumor diagnoses in the rat carcinogenicity study. The
FDA reviewed and agreed to the PWG membership and procedures. The PWG members independently
reviewed slides of relevant tissues in blinded fashion and recorded their initial diagnoses. When consensus
on a slide was less than unanimous, the group reached a consensus diagnosis by vote while reviewing and
discussing the relevant slide around a multi-headed microscope. The PWG reported that adenocarcinomas
(malignant tumors) were generally “easily distinguished” from fibroadenomas (benign tumors), and
provided initial unanimous diagnoses for 97% of fibroadenomas and 93% of adenocarcinomas. After
completing their adjudication process, the PWG concluded that the incidence of mammary adenocarcinoma
in the high-dose, or 100 mg/kg/day, female group and the increased incidence of mammary fibroadenoma in
each of the low-, mid- and high-dose, or 10, 30, and 100 mg/kg/day, respectively, female groups were
lorcaserin-related. The incidences of adenocarcinoma and fibroadenoma from the initial report and the PWG
report are summarized below.
Dose:
Percent of Female Rats with Mammary
Adenocarcinoma or Fibroadenoma
“Low” Dose -
10 mg/kg/day
Control
“Mid” Dose -
30 mg/kg/day
“High” Dose -
100 mg/kg/day
Number of rats . . . . . . . . . . . . . . . . . . . . . . .
65
65
65
75
Mammary Adenocarcinoma (Malignant)
Initial Report
. . . . . . . . . . . . . . . . . . . . . . . .
PWG Report . . . . . . . . . . . . . . . . . . . . . . . . .
43.1%
40.0%
52.3%
32.3%
Mammary Fibroadenoma (Benign)
Initial Report
. . . . . . . . . . . . . . . . . . . . . . . .
PWG Report . . . . . . . . . . . . . . . . . . . . . . . . .
30.8%
36.9%
72.3%
83.1%
53.9%
36.9%
81.5%
84.6%
80.0%
68.0%
60.0%
68.0%
The PWG also reported mammary adenoma (a benign tumor) in 1.5%, 3.1%, 7.7% and 5.3%, and
mammary carcinosarcoma (a malignant tumor) in 0%, 0%, 0% and 1.3% of the control and lorcaserin low-,
mid- and high-dose groups, respectively. No mammary adenoma was diagnosed by the pathologists who
provided the original study report; the incidence of mammary carcinosarcoma did not change from the
initial report. In experiments described in this Form 10-K, “control” refers to the group or agent being used
for comparison purposes with the treated group or treatment.
•
Unresolved exposure-response relationship for lorcaserin-emergent mammary adenocarcinoma. In addition
to diagnostic uncertainty, the FDA also cited measures of tumor aggressiveness at all three lorcaserin doses
in reaching a conclusion that the exposure response relationship for mammary adenocarcinoma was
unresolved. In other words, the FDA questioned whether these tumors might be treatment related at all
lorcaserin doses. The FDA requested that we demonstrate that the mammary adenocarcinoma observed in
5
rats is reasonably irrelevant to human risk. We included in our NDA resubmission data and analyses
regarding tumor aggressiveness and studies investigating the mechanism for the development of mammary
tumors in rats.
Additional data and analyses of tumor aggressiveness. The PWG considered measures of
aggressiveness for mammary adenocarcinoma, which included time-to-tumor diagnosis, or latency; number
of animals with more than one primary tumor, or multiplicity; and number of animals with mammary
adenocarcinoma metastases in, or spread to, the lung. Latency was significantly shortened from control
when analyzed as a trend across lorcaserin doses; we performed a post hoc analysis of latency for individual
doses that showed only the high dose differed significantly from control. Multiplicity was greater than
control in the high-dose group, but not in the low- or mid-dose groups (10.8%, 9.2%, 9.2% and 22.7% in the
control, low-, mid- and high-dose groups, respectively). Among all of the animals in each dose group, the
incidence of lung metastases from mammary adenocarcinoma was 0%, 1.5%, 7.7% and 6.7% (control, low-,
mid-, and high-dose groups, respectively), and, among only the animals with mammary adenocarcinoma in
each dose group, the incidence of lung metastases from this tumor was 0%, 4.8%, 20.8% and 9.8% (control,
low-, mid-, and high-dose groups, respectively); the PWG described the incidence of lung metastases as low
for all groups, with basically no difference between the control and the low-dose group and an equivocal
increase in the mid- and high-dose groups.
The PWG reached the conclusion that mammary adenocarcinoma was lorcaserin treatment related only
at the high dose.
As an additional potential measure of aggressiveness (which measure was previously evaluated by the
FDA in reviewing the original NDA), we analyzed time to death due to mammary adenocarcinoma using the
updated dataset provided by the PWG. This analysis identified all animals for which the original pathologist
named “mammary tumor” as cause of death. In some cases, the pathologist specifically named mammary
adenocarcinoma as the cause of death; in other cases, animals had both mammary adenocarcinoma and
fibroadenoma and neither was singled out as the cause of death. Therefore, we performed two survival
analyses: The first was based upon death specifically attributed to adenocarcinoma; and the second assumed
deaths due to unspecified mammary tumor in animals with both fibroadenoma and adenocarcinoma were
also caused by adenocarcinoma. Time to death specifically attributed to adenocarcinoma was significantly
accelerated only in the high-dose group. In the second analysis, time to death due to unspecified mammary
tumor was accelerated in the mid-dose group as well, although, as discussed above, the incidence of
adenocarcinoma was not increased over control in the mid-dose group.
We believe the PWG’s re-adjudication and their and our related analyses found that mammary
adenocarcinoma was only lorcaserin treatment related at the high dose, establishing a safety margin of
24-fold between human lorcaserin exposures at the intended therapeutic dose and exposures in rats at the
highest dose not associated with malignant mammary adenocarcinoma.
With respect to fibroadenoma, the PWG re-adjudication did not establish a safety margin for these
benign tumors since they were increased over control at all lorcaserin doses tested. The PWG determined
that, in addition to incidence, tumor multiplicity was increased in all lorcaserin groups, and that tumor
latency was significantly decreased as a trend across all lorcaserin dose groups. A separate analysis we
performed also showed that tumor latency was significantly decreased in each treatment group.
Mechanistic studies. We hypothesized that lorcaserin increased both benign and malignant mammary
tumors through the mechanism of, or by, increasing the effects of the hormone prolactin on the rat
mammary gland. To test this hypothesis, we conducted certain mechanistic studies that can be categorized
as follows:
•
short-term pilot experiments designed to optimize methods for measuring or detecting prolactin in
plasma, the pituitary gland and the mammary gland;
6
•
three-month studies in rats to investigate changes in plasma and tissue prolactin and in the
taking lorcaserin 10 mg BID at steady state. We estimated mean exposure of the human brain to lorcaserin
to be approximately 1.7 times the exposure in human plasma. In contrast, the measured exposure of the male
rat brain to lorcaserin at the dose at which no brain astrocytoma was observed (10 mg/kg/day) was
approximately 24 fold the exposure in rat plasma. Using these data, we calculate an exposure margin of
approximately 70-fold between human brain at lorcaserin 10 mg BID and the male rat brain at the highest
dose with no astrocytoma.
•
Further assessment of receptor pharmacology to refine estimated margins and more fully characterize
lorcaserin’s functional activity. Estimating lorcaserin’s affinity and activity for the serotonin 2C receptor
relative to the related serotonin 2A and 2B receptors may help predict the likelihood of adverse events
associated with activation of the serotonin 2A (associated with altered perception, mood, abuse potential) or
2B (associated with cardiac valvulopathy) receptor.
The receptor pharmacology data we included in the original NDA were generated using cell lines with
generally greater numbers of serotonin receptors than what are typically present under physiological
conditions. For the NDA resubmission, we supplemented the original data by investigating lorcaserin’s
functional activity at the three serotonin subtype 2 receptors in the absence of excess receptors. These
experiments confirmed that lorcaserin has greater potency at the serotonin 2C receptor than at the serotonin
2A or 2B receptor. In these experiments, lorcaserin was 14 times less potent at the serotonin 2A receptors
and 61 times less potent at the serotonin 2B receptors than at serotonin 2C receptors.
In addition, as part of the serotonin 2B receptor analyses, we investigated the potency of lorcaserin
relative to 33 reference compounds with a range of serotonergic activity, including compounds known to
cause valvulopathy and those not known to cause valvulopathy. We believe the results demonstrate that
lorcaserin’s potency is closer to the reference compounds not known to cause valvulopathy than the
reference compounds known to cause valvulopathy.
•
Further assessment of abuse potential for labeling and scheduling decisions. The FDA requested that we
modify and repeat two studies in rats related to abuse potential to address concerns the FDA had with the
abuse potential of lorcaserin and the studies we submitted with the original NDA.
The studies we included in the original NDA were two short-term, nonclinical studies in rats: a study of
serotonin 2A and 2C receptor associated behaviors and a drug discrimination study. To provide additional
safety information for labeling and scheduling decisions, we modified and repeated these studies pursuant to
the FDA’s request. We believe the results of the modified studies are consistent with the results of the
studies we included in the original NDA submission. We continue to believe that lorcaserin has low abuse
potential.
• Weight-loss efficacy in patients without type 2 diabetes and a request to submit data from BLOOM-DM.
The FDA stated in the lorcaserin CRL that the clinical weight loss efficacy of lorcaserin in overweight and
obese individuals without type 2 diabetes was marginal in BLOOM and BLOSSOM, and asked us to submit
the final study report from BLOOM-DM to allow further evaluation of lorcaserin’s benefit-risk profile.
We incorporated the results of BLOOM-DM into the lorcaserin NDA resubmission. BLOOM-DM
evaluated lorcaserin for weight loss in obese and overweight patients with type 2 diabetes over a one-year
treatment period. We believe that the weight loss efficacy, safety profile and the additional benefit for
glycemic control shown in BLOOM-DM improve the overall benefit-risk profile over that presented in the
original NDA. See “Lorcaserin Phase 3 Clinical Development” below for additional information on the
results of BLOOM-DM.
European Medicines Agency
We are seeking regulatory approval for lorcaserin in the European Union. In 2011, we were assigned the
UK’s Medicines and Healthcare products Regulatory Agency, or MHRA, as our application Rapporteur, and
Sweden’s Medical Products Agency, or MPA, as Co-rapporteur. We also received approval from the Pediatric
9
Development Committee for our pediatric investigation plan application, which defers all pediatric studies until
after EMA approval. On March 2, 2012, we filed an MAA for lorcaserin through the centralized procedure with
the EMA, and we expect to learn whether our filing has been accepted for review before the end of March 2012.
Lorcaserin Phase 3 Clinical Development.
The three trials included in our lorcaserin Phase 3 development program are summarized in the following
table:
Number of patients
Treatment groups
Patient demographics
BLOOM
3,182
BLOSSOM
4,008
BLOOM-DM
604
Placebo, lorcaserin 10 mg
BID
BMI ≥30, or ≥27 with
co-morbid condition(s);
average BMI of 36.2 and
baseline weight of 220
pounds
Placebo, lorcaserin 10
mg once daily, or QD,
lorcaserin 10 mg BID
BMI ≥30, or ≥27 with
co-morbid condition(s);
average BMI of 35.9 and
baseline weight of 220
pounds
Placebo, lorcaserin 10
mg QD, lorcaserin 10 mg
BID
BMI ≥27; type 2 diabetes
mellitus; average BMI of
36 and baseline weight of
228 pounds
Average age 44
Average age 44
Average age 53
84% women
80% women
54% women
Caucasian (67%)
African-American (19%)
Hispanic (12%)
Caucasian (67%)
African-American (20%)
Hispanic (11%)
Caucasian (61%)
African-American (21%)
Hispanic (14%)
Duration
2 years
1 year
1 year
Echocardiographic
monitoring
Screening, every 6 months,
post-baseline
Baseline, every 6 months,
post-baseline
Baseline, every 6 months,
post-baseline
First patient enrolled
November 2006
January 2008
December 2007
Last patient completed
February 2009
July 2009
June 2010
NDA submission
Original NDA 2009
Original NDA 2009
NDA resubmission 2011
Location
U.S.A.
U.S.A.
U.S.A.
The Phase 3 trials shared the same ordered primary efficacy endpoints: the proportion of patients achieving
5% or greater weight loss from baseline at Week 52; mean weight change from baseline at Week 52; and the
proportion of patients achieving 10% or greater weight loss from baseline at Week 52. Secondary endpoints
included changes in physical measures, serum lipids, blood pressure, HbA1c and other indicators of glycemic
control, body compositions (in BLOSSOM and BLOOM-DM), high-sensitivity C-Reactive Protein, or hs-CRP,
(in BLOOM and BLOOM-DM) and quality of life. A standardized program of diet and exercise advice was
included in each of the trials.
In addition to routine safety monitoring, each study included echocardiographic monitoring for valvular
regurgitation and pulmonary artery pressure. Valvular regurgitation, a measure of backflow or leakage of blood
through heart valves due to imperfect valve closing, was scored on a five-point scale (absent, trace, mild,
moderate or severe) for the mitral and aortic valves. The FDA has defined clinically significant regurgitant
valvulopathy as mild or greater aortic valve regurgitation and/or moderate or greater mitral valve regurgitation.
Echocardiographic findings meeting this criterion are sometimes called “FDA-defined valvulopathy.”
10
Among the pooled population enrolled in BLOOM and BLOSSOM, 22% had hypertension, 30% had
dyslipidemia, 25% had impaired fasting glucose and approximately 8% reported a history of depression. In
BLOOM-DM, all patients had type 2 diabetes, 61% had hypertension and approximately 6% reported a history of
depression.
We also evaluated lorcaserin 10 mg QD in BLOSSOM and BLOOM-DM. We are not seeking regulatory
approval for the lorcaserin 10 mg QD. In addition, to expedite enrollment in BLOOM-DM, randomization to the
lorcaserin 10 mg QD dose was discontinued after approximately 300 patients were enrolled in the trial. Patients
in the low dose group were continued in the trial to maintain the blind.
Patient Disposition
BLOOM. The Week 52 completion rate was higher for patients on lorcaserin (54.9%) compared to patients
on placebo (45.1%). Discontinuation rates for adverse events were 7.1% vs. 6.7% in the lorcaserin and placebo
groups, respectively, for Year 1 and approximately 3.0% for each group in Year 2.
BLOSSOM. The Week 52 completion rate was higher for patients on lorcaserin 10 mg BID (57.2%) and 10
mg QD (59.0%) compared to patients on placebo (52.0%). Discontinuation rates for adverse events were 7.2%,
6.2%, and 4.6% in the lorcaserin 10 mg BID, 10 mg QD and placebo groups, respectively.
BLOOM-DM. The Week 52 completion rate was higher for patients on lorcaserin 10 mg BID
(66.0%) compared to patients on placebo (62.1%). Discontinuation rates for adverse events were 8.6% and 4.3%
in the lorcaserin 10 mg BID and placebo groups, respectively.
Lorcaserin Phase 3 Results.
Efficacy
In each of the Phase 3 trials, lorcaserin 10 mg BID was superior to placebo for each of the ordered primary
endpoints using a modified intent-to-treat population with last observation carried forward imputation for
missing values, or ITT-LOCF, analysis, as summarized in the table below. Patients who completed one year of
study participation experienced significantly greater efficacy according to each of the three co-primary endpoints.
BLOOM
BLOSSOM
BLOOM-DM
Lorcaserin
10 BID
Placebo
Lorcaserin
10 BID
Placebo
Lorcaserin
10 BID
Placebo
ITT/LOCF
% Losing ≥5% weight . . . . . . . . . . . . . . . . . . . . .
Mean weight change (%) . . . . . . . . . . . . . . . . . . .
% Losing ≥10% weight . . . . . . . . . . . . . . . . . . . .
20.3% 47.5% 25.0% 47.2% 16.1% 37.5%
1.5%
2.2%
4.5%
5.8%
4.4% 16.3%
7.7% 22.6%
2.8%
5.9%
9.7% 22.6%
Per Protocol/Completers*
% Losing ≥5% weight . . . . . . . . . . . . . . . . . . . . .
Mean weight change (%) . . . . . . . . . . . . . . . . . . .
% Losing ≥10% weight . . . . . . . . . . . . . . . . . . . .
32.1% 66.4% 34.9% 63.2% 17.9% 44.6%
1.7%
3.4%
5.5%
7.9%
5.8% 20.8%
13.6% 36.2% 16.1% 35.1%
3.9%
8.2%
*
These results are reported for the per protocol populations in BLOOM and BLOSSOM, and for the completers population in BLOOM-
DM. The particular statistical analysis reported for each trial was pre-specified in the statistical analysis plan for that trial.
At the end of Year 2 of BLOOM, significantly more patients who took lorcaserin for two years maintained
at least 5% weight loss achieved in Year 1 than did patients who took lorcaserin during Year 1 and were changed
to placebo for Year 2.
The FDA draft guidance document “Developing Products for Weight Management” dated February 2007
provides two alternate benchmarks for the development of drugs for the indication of weight management. The
guidance provides that, in general, a product can be considered effective for weight management if after one year
11
of treatment either of the following occurs: (1) the difference in mean weight loss between the active-product and
placebo-treated groups is at least 5% and the difference is statistically significant, or (2) the proportion of
patients who lose at least 5% of baseline body weight in the active-product group is at least 35%, is
approximately double the proportion in the placebo-treated group, and the difference between groups is
statistically significant. We believe the results of our Phase 3 clinical trials of lorcaserin satisfy the latter of the
two alternate efficacy benchmarks.
Lorcaserin exerted similar effects on secondary efficacy variables in BLOOM and BLOSSOM. A pooled
analysis of changes from baseline to Week 52 showed significant improvements relative to placebo in waist
circumference, BMI, total cholesterol, LDL cholesterol, HDL cholesterol, triglycerides, systolic blood pressure,
diastolic blood pressure and heart rate. In BLOOM, significant improvements relative to placebo were also
observed for hsCRP, fasting insulin and HOMA-IR (a measure of insulin resistance). In BLOSSOM, lorcaserin
significantly decreased body fat content relative to placebo. In BLOOM-DM, which included only patients with
type 2 diabetes, significant improvements relative to placebo occurred in HbA1c (-0.9% and -0.4%, respectively)
and fasting glucose.
At baseline in BLOOM-DM, approximately 90% of patients were taking metformin and approximately 50%
of patients were taking sulfonylureas with or without metformin. Weight loss and reductions in HbA1c and
fasting plasma glucose were greater with lorcaserin treatment compared to placebo whether patients were treated
with metformin or sulfonylureas. Fewer patients on lorcaserin compared to placebo (13.5% vs. 22.2%,
respectively) increased and more patients on lorcaserin compared to placebo (17.1% vs. 11.7%, respectively)
decreased use of anti-diabetic medication during the trial.
Safety and Tolerability Profile
BLOOM and BLOSSOM Pooled Analysis. Under the BLOOM and BLOSSOM pooled analysis, the most
frequent adverse events reported in Year 1 and their incidences for lorcaserin 10 mg BID and placebo patients,
respectively, were as follows: headache (16.8% vs. 10.1%), upper respiratory tract infection (13.7% vs. 12.3%),
nasopharyngitis (13.0% vs. 12.0%), sinusitis (7.4% vs. 7.7%) and nausea (8.3% vs. 5.3%). Adverse events of
depression, anxiety and suicidal ideation were infrequent and were reported by a similar proportion of each
treatment group. The occurrence of mammary and other tumors was similar with lorcaserin treatment as
compared to placebo.
BLOOM-DM. In BLOOM-DM, the most frequent adverse events reported and their incidences for lorcaserin
10 mg BID and placebo patients, respectively, were as follows: hypoglycemia (biochemical, symptomatic or
asymptomatic) (29.3% vs. 21.0%), upper respiratory infection (13.7% vs. 14.7%), nasopharyngitis (11.3% vs.
9.9%), headache (14.5% vs. 7.1%), back pain (11.7% vs. 7.9%) and nausea (9.4% vs. 7.9%). Adverse events of
depression, anxiety and suicidal ideation were infrequent and were reported by a similar proportion of each
treatment group.
Echocardiographic Analysis. Echocardiograms were evaluated to assess whether there was an association
between lorcaserin and valvular insufficiency. Incidences of new FDA-defined valvulopathy were as follows for
lorcaserin 10 mg BID and placebo:
Dose
Week 24 Week 52 Week 104
BLOOM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lorcaserin 10 mg BID
BLOSSOM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lorcaserin 10 mg BID
BLOOM-DM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lorcaserin 10 mg BID
Pooled analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lorcaserin 10 mg BID
Placebo
Placebo
Placebo
Placebo
12
2.6%
2.7%
2.7%
2.1%
2.3%
1.9%
2.0% —
2.3%
2.0% —
1.8%
2.9% —
2.5%
0.5% —
1.9%
2.20% 2.37% —
1.88% 2.04% —
Data from our two large Phase 3 lorcaserin trials of one and two years in duration, BLOOM and
BLOSSOM, including the proportions of patients that developed FDA-defined valvulopathy, were included in
our original lorcaserin NDA. There are different ways of analyzing the valvulopathy data from our trials. The
pre-specified statistical analysis plan for the NDA provided that the risk difference between lorcaserin and
placebo using Baseline and Week 52 echocardiograms would be evaluated using a non-inferiority model that
would rule out a greater than 50% increase over the assumed placebo risk of FDA-defined valvulopathy. The
assumed placebo risk of FDA-defined valvulopathy was derived from the Data Safety Monitoring Board, or
DSMB, interim review of six-month data from BLOOM. Using this analysis, the combined data from BLOOM
and BLOSSOM demonstrated that lorcaserin was non-inferior to placebo. Using a relative risk analysis of the
Baseline and Week 52 data, which the FDA has used previously and may favor over the above analysis, these
trials ruled out an increase of more than 55% in the relative risk for FDA-defined valvulopathy with lorcaserin.
Our other one-year Phase 3 clinical trial, BLOOM-DM, was not designed to include enough patients to be
adequately powered to detect meaningful differences in the incidence of valvulopathy. Rather, we pre-specified a
combined analysis of echocardiographic changes in all three Phase 3 trials. We integrated into our lorcaserin
NDA resubmission the results of BLOOM-DM, which include additional data relating to heart valves and
pulmonary artery pressures. Using the analysis of risk difference that we used for our original NDA, the pooled
data from BLOOM, BLOSSOM and BLOOM-DM would rule out a greater than 50% increase over the assumed
placebo risk of FDA-defined valvulopathy. Using a relative risk analysis, the pooled data from all three trials
ruled out an increase of more than 67% in the relative risk of FDA-defined valvulopathy. Statistical methods that
consider all echocardiograms rather than restricting the analysis to Baseline and Week 52 produced risk ratio or
hazard ratio estimates of 1.08 – 1.09, ruling out a 44% increase in risk of FDA-defined valvulopathy.
Lorcaserin Prior Clinical Development.
Prior to initiating our Phase 3 clinical trial program, we completed multiple Phase 1 and Phase 2 clinical
trials of lorcaserin.
Our Phase 2a clinical trial included 352 obese patients dosed for 28 days, and our Phase 2b clinical trial
included 469 obese patients dosed for 12 weeks. Significant weight loss was observed in both Phase 2 clinical
trials. The most common adverse events occurring in the Phase 2a and Phase 2b clinical trials included headache,
nausea and dizziness.
Our Phase 1 clinical trials included a three-part Phase 1a clinical trial of lorcaserin that established a
maximum tolerated dose for the drug candidate and a multiple-dose Phase 1b clinical trial of lorcaserin in obese
volunteers. There were no severe or serious adverse events reported and no withdrawals due to an adverse event.
The most common adverse events reported in the Phase 1 clinical trials were related to the central nervous
system and the gastrointestinal system. Dose escalation was terminated at the 40 mg dose in the Phase 1a trial, a
dose that resulted in euphoria and other CNS adverse effects. In each of the Phase 1a and b trials, serial
echocardiograms supported further development of lorcaserin.
Lorcaserin Intellectual Property.
As of February 15, 2012, we owned issued patents that cover compositions of matter for lorcaserin and
related compounds and methods of treatment utilizing lorcaserin and related compounds in 69 jurisdictions,
including the United States, Japan, China, Germany, France, the United Kingdom, Italy, Spain and Canada, and
had applications pending in two other jurisdictions, of which the one with the largest pharmaceutical market was
Brazil. Based on sales statistics provided by IMS Health, the jurisdictions where lorcaserin patents have been
issued accounted for more than 94% of global pharmaceutical sales in 2009, while other jurisdictions where
lorcaserin patents remain pending accounted for more than 1% of global pharmaceutical sales in that same year.
The patents on lorcaserin issued by the US Patent and Trademark Office have serial numbers US 6,953,787, US
7,514,422 and US 7,977,329, while the corresponding patent granted by the European Patent Office has serial
number EP 1 411 881 B1. Other of our lorcaserin patent applications, including those directed to the lorcaserin
HCl salt, the hemihydrate of the lorcaserin HCl salt as well as its crystalline forms, synthetic routes and
13
intermediates useful in the manufacturing of lorcaserin and pharmaceutical combinations of lorcaserin and
phentermine, have all been filed in a lesser number of commercially important jurisdictions. The earliest priority
date for the patents on lorcaserin is 2002. The terms of these patents are capable of continuing into 2023 in most
jurisdictions without taking into account any patent term adjustment or extension regimes of any country or any
additional term of exclusivity we might obtain by virtue of the later filed patent applications.
Eisai Collaboration
In July 2010, our wholly owned subsidiary, Arena GmbH, entered into a marketing and supply agreement
with Eisai. Under this agreement, Arena GmbH granted Eisai exclusive rights to commercialize lorcaserin in the
United States and its territories and possessions subject to FDA approval of the lorcaserin NDA. As part of the
agreement, Arena GmbH is obligated to manufacture lorcaserin at our facility in Switzerland, and Eisai is
obligated to purchase all of its requirements of lorcaserin from Arena GmbH. Under the agreement, Eisai and we
will share equally the development expenses for the additional development work required by the FDA prior to
approval of our NDA for lorcaserin. If the FDA requires development work following US approval of lorcaserin,
Eisai will bear 90% and we will bear 10% of such expenses, except that Eisai and we will share equally the costs
of certain pediatric or adolescent studies.
We received a non-refundable, upfront payment of $50.0 million from Eisai, and, following US regulatory
approval of lorcaserin and upon the delivery of product supply for launch, will receive $40.0 million or $60.0
million, depending on the approved drug label. We are obligated to sell lorcaserin to Eisai for a purchase price
starting at 31.5% of Eisai’s annual net product sales, and the purchase price will increase on a tiered basis to
36.5% on the portion of annual net product sales exceeding $750.0 million, subject to reduction in the event of
generic competition and certain other circumstances. We are also eligible to receive up to an aggregate of $1.19
billion in purchase price adjustment payments based on Eisai’s annual net sales of lorcaserin, with the first and
last amounts payable with annual net sales of $250.0 million and $2.5 billion, respectively. Of these purchase
price adjustment payments, Eisai is obligated to pay us a total of $330.0 million for annual net sales of up to $1.0
billion. We are also eligible to receive up to an additional $70.0 million in regulatory and development milestone
payments.
Eisai and we have agreed to not commercialize outside of our marketing and supply agreement any product
that competes with lorcaserin in the United States. Our marketing and supply agreement includes a stand-still
provision limiting Eisai’s ability to acquire our securities and assets.
Unless terminated earlier, our marketing and supply agreement will continue in effect until terminated by
Eisai following the later of the expiration of all issued lorcaserin patents for the United States and 12 years after
the first commercial sale of lorcaserin in the United States. Either party has the right to terminate this agreement
early in certain circumstances, including (i) if the other party is in material breach, (ii) for certain
commercialization concerns and (iii) for certain intellectual property infringement. Eisai also has the right to
terminate this agreement early in certain circumstances, including (a) if sales of generic equivalents of lorcaserin
in the United States exceed sales of lorcaserin in the United States (based on volume) and (b) if Eisai is acquired
by a company that has a product that competes with lorcaserin.
APD811 Program
APD811, an orally available agonist of the prostacyclin receptor, is intended for the treatment of pulmonary
arterial hypertension, or PAH.
PAH is a progressive, life-threatening disorder characterized by increased pressure in the arteries that carry
blood from the heart to the lungs. The increased pressure strains the heart, which can lead to limited physical
activity and a reduced life expectancy. Over time, the heart weakens, can no longer pump blood efficiently and
may eventually fail. Data from the National Institutes of Health Registry indicate that without treatment, patients
in the United States with PAH have a median survival time of approximately three years from diagnosis.
14
atherosclerotic plaque. The injury to the blood vessel activates platelets, which then aggregate and adhere to one
another as they start to release certain factors, including serotonin, that facilitate thrombosis. Thrombi that form
in diseased atherosclerotic arteries of the heart may cause acute coronary syndrome or myocardial infarction, and
thrombi that form in the vessels of the brain may cause stroke. The American Heart Association estimates that in
the United States 14.9 million people alive in 2008 had survived either a myocardial infarction or a stroke. To
reduce the risk of future events, many patients receive daily anti-thrombotic therapy.
Serotonin activation of the serotonin 2A receptor on platelets and vascular smooth muscle is thought to play
an important role in the events leading to thrombosis, and elevated serotonin levels have been associated with
increased cardiovascular risk. Normally, when a platelet is activated by one of a number of factors such as
thrombin or collagen, the platelet releases serotonin, which promotes platelet aggregation, vasoconstriction and
intimal hyperplasia in preclinical models. By blocking activation of the serotonin 2A receptor on platelets and in
other cardiovascular tissues, temanogrel may curb platelet aggregation, vasoconstriction and intimal hyperplasia
in the clinical setting, thereby reducing or preventing thrombosis.
Temanogrel demonstrated improved coronary artery flow in the Folts model, an established animal model of
acute coronary syndrome. In other preclinical studies, blocking activation of the serotonin 2A receptor on
platelets was associated with an improved separation, relative to existing therapies, of the dose needed for
inhibition of thrombosis versus the dose that increased bleeding. These data suggest that temanogrel has the
potential for improved safety relative to existing therapies. We believe these results are consistent with blocking
the role of serotonin in the thrombotic process.
Development
In July 2007, we initiated a randomized, double-blind, placebo-controlled, single-ascending dose Phase 1a
clinical trial evaluating temanogrel in 90 healthy male and female volunteers. Doses originally intended for study
ranged from 1 mg to 160 mg, but due to favorable tolerability the maximum dose was increased to 320 mg. In
this trial, a maximum tolerated dose could not be defined despite achieving high concentrations in blood.
Temanogrel was rapidly absorbed, and exposures were generally related to dose. Terminal half-life (t1/2) of parent
plus active metabolites was also related to dose, reaching approximately 11 hours at the higher doses. Dose-
dependent inhibition of serotonin-mediated amplification of platelet aggregation was demonstrated, supporting
the preclinical data generated around temanogrel and establishing initial clinical validation for temanogrel’s
novel mechanism of action.
The Phase 1b trial, initiated in January 2008, was a randomized, double-blind, placebo-controlled, multiple-
ascending dose trial in 50 healthy male and female volunteers. This trial evaluated safety, tolerability,
pharmacokinetics and pharmacodynamics of multiple-ascending doses of temanogrel over a period of one week.
Total daily doses ranged from 15 mg to 80 mg. Temanogrel was rapidly absorbed and exposures were related to
dose. The most frequently reported adverse event was headache, which was more common in the placebo group
than in any temanogrel dose group. None of the adverse events occurred in a dose-related fashion with the
exception of epistaxis (nose bleed), which occurred in two of the volunteers who received the 80 mg dose, a dose
above the anticipated therapeutic range. Dose-dependent inhibition of serotonin-mediated amplification of
platelet aggregation was demonstrated starting at the 15 mg dose and may permit the identification of exposure
ranges that produce minimal, moderate and near-complete inhibition of serotonin-amplified platelet aggregation.
Due to the cost of Phase 2 and Phase 3 clinical trials for temanogrel, we are not currently planning further
development of this drug candidate, but may consider proceeding in the future with one or more collaborators or
independently.
Nelotanserin Program
In December 2008, we announced preliminary data from a Phase 2b clinical trial of nelotanserin, an
internally discovered drug candidate that was being evaluated for the treatment of insomnia. The trial measured
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subjective endpoints in patients with primary insomnia. There were no reports of serious adverse events and no
emerging safety findings as compared to placebo in the trial. However, nelotanserin did not meet the trial’s
primary or secondary endpoints, and we are not currently planning any further clinical development of
nelotanserin. In the future, we may consider clinical development for other indications, but do not have definitive
plans to do so at this time.
Other Earlier-stage Development and Research Programs
We are continuing our efforts to discover and develop additional oral drugs that target GPCRs in four major
therapeutic areas: cardiovascular, central nervous system, inflammatory and metabolic diseases. The extent of
our earlier-stage research and developments efforts will depend on our available resources and prioritization
decisions.
Our GPCR Focus, Technologies and Programs
Our drug candidates have resulted from our GPCR-focused drug discovery and development approach,
specialized expertise and technologies, including Constitutively Activated Receptor Technology, or CART, and
our Melanophore technology. GPCRs are categorized as “known” when their naturally occurring, or native,
ligands have been identified. Scientists have used molecular cloning in combination with the sequencing of the
human genome to identify both additional receptor subtypes of known GPCRs as well as hundreds of
novel GPCRs. GPCRs are categorized as “orphan” GPCRs when their native ligands have not been identified.
We believe both orphan and known GPCRs offer significant promise for the development of novel GPCR-based
therapeutics.
Our drug discovery approach, specialized expertise and technologies allow us to identify drug leads that act
as receptor activators, or agonists, which increase the detected biological response, or act as receptor inhibitors,
which decrease the detected response. We can also identify inverse agonists, which inhibit ligand-independent, as
well as ligand-dependent, receptor activity.
We believe that our drug discovery approach, specialized expertise and technologies offer several
advantages for drug discovery, including:
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eliminating the need to identify the native ligand for an orphan receptor;
enhancing the detection of, and allowing us to simultaneously identify, both receptor inhibitor and
receptor activator drug leads;
allowing for the identification of drug leads that inhibit both ligand-independent and ligand-dependent
activity; and
providing the ability to discover novel and improved therapeutics directed at known receptors.
Our Strategy
The key elements of our general strategy are as follows:
• Focus on lorcaserin. We intend to focus our efforts on seeking approval for lorcaserin in the United
States, the European Union and other select markets outside of the United States. Pending regulatory
approvals, we intend to commercialize lorcaserin in the United States under our marketing and supply
agreement with Eisai and in other markets with one or more collaborators or independently.
•
Selectively advance our other lead candidates. We intend to selectively advance our pipeline of drug
candidates independently or through licensing, collaborations or other opportunities.
• Maintain research and development capabilities to advance our pipeline. Our technologies, our drug
discovery infrastructure and the integrated approach to research used by our scientists have allowed us
to identify and develop a number of GPCR targets and novel compounds, and our development
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infrastructure has allowed us to develop compounds through NDA filing. We expect that our research
and development capabilities will continue to play an important role in the support of the further
development and potential commercialization of lorcaserin. We intend to maintain our research and
development capabilities to selectively advance our programs and to discover additional drug
candidates.
Intellectual Property
Our success depends in large part on our ability to protect our proprietary technologies, compounds and
information, and to operate without infringing the proprietary rights of third parties. We rely on a combination of
patent, trade secret, copyright, and trademark laws, as well as confidentiality, licensing and other agreements, to
establish and protect our proprietary rights. We seek patent protection for our key inventions, including drug
candidates we identify, routes for chemical synthesis, pharmaceutical formulations and drug screening
technologies.
We regularly review our patent portfolio taking into consideration factors such as the cost of prosecuting
and maintaining patents and our assessment of their potential value. Late in 2011 and early in 2012, we
abandoned many patent applications and issued patents that were directed to pharmaceutical compounds or other
technologies based on our assessment of the therapeutic or market potential of the compounds or programs to
which these patent applications and patents relate as compared to those of other compounds and programs in our
pipeline. This has resulted in a reduction in the numbers of our patent applications and issued patents, and will
allow us to reduce costs and focus our efforts and resources on protecting intellectual property that we have
determined to be potentially the most valuable.
As of February 15, 2012, we owned, in part or in whole, or had exclusively licensed the following patents:
56 in the United States, 14 in Japan, 6 in China, 18 in Germany, 18 in France, 18 in the United Kingdom, 15 in
Italy, 15 in Spain, 7 in Canada, and approximately 491 in other jurisdictions. In addition, as of February 15,
2012, we had approximately 517 patent applications before the US Patent and Trademark Office, foreign patent
offices and international patent authorities. These patents and patent applications are divided into 89 distinct
families of related patents that are directed to chemical compositions of matter, methods of treatment using
chemical compositions, research on GPCR genes, CART, Melanophore technology, other novel screening
methods or pharmaceutical manufacturing processes. One of our patent families was exclusively in-licensed and
contains a single issued patent. Eighty-six of our patent families, which include a total of approximately 643
patents and 494 patent applications, were invented solely by our employees. The remaining two of our patent
families, which include a total of approximately 14 patents and 23 patent applications, were the subject of joint
inventions by our employees and the employees of other entities.
There is no assurance that any of our patent applications will issue, or that any of the patents will be
enforceable or will cover a drug or other commercially significant product or method. As part of our efforts to
conserve our financial resources, we are reviewing our patent portfolio to identify patents and patent applications
that we deem to have relatively low value to our ongoing business operations. To the extent we identify such
patents and patent applications and abandon them, the number of patents and patent applications reported above
will be reduced in the future. There is also no assurance that we will correctly identify which of our patents and
patent applications should be maintained and which should be abandoned. Except for the US patents relating to
our Melanophore technology, the term of most of our other current patents commenced, and most of our future
patents, if any, will commence, on the date of issuance and terminate 20 years from the earliest effective filing
date of the patent application. Since our US Melanophore patents were issued under now superseded rules that
provided a patent term of 17 years from the date of issuance, the term of these patents is scheduled to end in
2012. Because the time from filing a patent application relating to our business to the issuance, if ever, of the
patent is often more than three years and because any marketing and regulatory approval for a drug often occurs
several years after the related patent application is filed, the resulting market exclusivity afforded by any patent
on our drug candidates and technologies will likely be substantially less than 20 years. In the United States, the
European Union and some other jurisdictions, patent term extensions are available for certain delays in either
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patent office proceedings or marketing and regulatory approval processes. However, due to the specific
requirements for obtaining these extensions, there is no assurance that our patents will be afforded extensions
even if we encounter significant delays in patent office proceedings or marketing and regulatory approval.
In addition to patent protection, we rely on trade secrets, proprietary know-how, and continuing
technological advances to develop and maintain our competitive position. To maintain the confidentiality of our
trade secrets and proprietary information, all of our employees are required to enter into and adhere to an
employee confidentiality and invention assignment agreement, laboratory notebook policy, and invention
disclosure procedures as a condition of employment. Additionally, our employee confidentiality and invention
assignment agreements require that our employees not bring to us, or use without proper authorization, any third-
party proprietary technology. We also require our consultants and collaborators that have access to proprietary
property and information to execute confidentiality and invention rights agreements in our favor before
beginning their relationship with us. While such arrangements are intended to enable us to better control the use
and disclosure of our proprietary property and provide for our ownership of proprietary technology developed on
our behalf, they may not provide us with meaningful protection for such property and technology in the event of
unauthorized use or disclosure.
Competition
The biotechnology and pharmaceutical industries are highly competitive and are subject to rapid and
significant change. We face significant competition from organizations that are pursuing the same or similar
technologies. We also face significant competition from organizations that are pursuing drugs that would
compete with the drug candidates we are developing. We may not be able to compete successfully against these
organizations, which include many large, well-financed and experienced pharmaceutical and biotechnology
companies, as well as academic and research institutions and government agencies.
The focus of our scientific and business strategy is on GPCRs. We believe that many pharmaceutical and
biotechnology companies and other organizations also have internal drug discovery programs focused
on GPCRs. In addition, other companies have attempted to overcome the problems associated with traditional
drug screening by embarking on a variety of alternative strategies. Developments by others may render our drug
candidates or technologies obsolete or noncompetitive.
Our present competitors with respect to lorcaserin include Hoffmann-La Roche Inc., the US prescription
drug unit of the Roche Group, which markets orlistat under the brand name Xenical, and GlaxoSmithKline
Consumer Healthcare which markets an over-the-counter low-dose version of orlistat in the United States under
the brand name alli. Another competitor is phentermine, which is a generic drug sold by a number of companies.
In addition to currently marketed obesity drugs, there are potentially competing obesity drug candidates that
are in development at various pharmaceutical and biotechnology companies, including drug candidates in similar
stages of development as lorcaserin. Some programs in discovery, preclinical or other stages of development may
include serotonin 2C programs.
In October 2010, the FDA issued a CRL with respect to VIVUS Inc.’s original NDA for a drug candidate
for the treatment of obesity that is a combination of phentermine and topiramate. In October 2011, VIVUS
resubmitted the NDA to the FDA, and the FDA assigned a PDUFA data of April 17, 2012. On February 22,
2012, the FDA’s Endocrinologic and Metabolic Drugs Advisory Committee met to review VIVUS’ NDA
resubmission, and, among other discussion, the committee voted 20 to 2 that, considering all the available data
included in the resubmission and their discussion, the overall benefit-risk assessment of VIVUS’ drug candidate
supports its approval for the treatment of obesity.
In January 2011, the FDA issued a CRL with respect to Orexigen Therapeutics, Inc.’s NDA for a drug
candidate for the treatment of obesity that is a combination of bupropion and naltrexone. According to Orexigen,
it is planning to conduct a cardiovascular outcomes trial in response to the CRL, and the objective of the trial is
to demonstrate that its drug candidate does not unacceptably increase the risk of major adverse cardiovascular
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events, or MACE. Orexigen has also stated that it has reached agreement with the FDA on a Special Protocol
Assessment, or SPA, and an interim analysis and NDA resubmission is planned once approximately 87 MACE
events have occurred.
Many of our existing and potential competitors have substantially greater drug development capabilities and
financial, scientific and marketing resources than we do. Additional consolidation in the pharmaceutical industry
may result in even more resources being concentrated with our competitors. As a result, our competitors may be
able to devote greater resources than we can to the research, development, marketing and promotion of
therapeutic products or drug discovery techniques, or to adapt more readily to technological advances than we
can. Accordingly, our competitors may succeed in obtaining patent protection, receiving FDA approval or
commercializing drugs before we do.
We expect to encounter significant competition in the therapeutic areas targeted by our principal drug
candidates. Companies that complete clinical trials, obtain regulatory approvals and commence commercial sales
of their drug candidates before us may achieve a significant competitive advantage. Furthermore, we may be
competing against companies with substantially greater manufacturing, marketing, distribution and selling
capabilities, and any drug candidate that we successfully develop may compete with existing therapies that have
long histories of safe and effective use.
We may rely on collaborators for support of development programs and for the manufacturing and
marketing of drug candidates. Such collaborators may be conducting multiple drug development efforts within
the same disease areas that are the subject of their agreements with us, which may negatively impact the
development of drugs that are subject to our agreements. In addition, we face and will continue to face intense
competition from other companies for such collaborative arrangements, and technological and other
developments by others may make it more difficult for us to establish such relationships.
Government Regulation
The FDA and comparable regulatory agencies in state and local jurisdictions and in foreign countries
impose substantial requirements upon the preclinical and clinical development, pre-market approval,
manufacture, marketing and distribution of pharmaceutical products. These agencies and other regulatory
agencies regulate research and development activities and the testing, approval, manufacture, quality control,
safety, effectiveness, labeling, storage, recordkeeping, advertising and promotion of drug candidates. Failure to
comply with applicable FDA or other requirements may result in notices on Form 483, Warning Letters, civil or
criminal penalties, suspension or delays in clinical development, recall or seizure of products, partial or total
suspension of production, withdrawal of a product from the market or other negative consequences.
In the United States. In the United States, the FDA regulates drug products under the Federal Food, Drug,
and Cosmetic Act, or FFDCA, and its implementing regulations. The process required by the FDA before drug
candidates may be marketed in the United States generally involves the following:
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completion of extensive preclinical laboratory tests and preclinical animal studies, many of which are
required to be performed in accordance with the FDA’s Good Laboratory Practice, or GLP,
regulations;
submission to the FDA of an IND, which must become effective before human clinical trials may begin
and be updated annually;
performance of adequate and well-controlled human clinical trials to establish the safety and efficacy
of the drug candidate for each proposed indication;
submission to the FDA of an NDA after completion of all pivotal clinical trials;
a determination by the FDA within 60 days of its receipt of the NDA to file the NDA for review;
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•
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satisfactory completion of an FDA pre-approval inspection, or PAI, of the manufacturing facilities at
which the active pharmaceutical ingredient, or API, and finished drug product, or FDP, are produced
and tested to assess compliance with Current Good Manufacturing Practices, or CGMPs, regulations;
and
FDA review and approval of the NDA prior to any commercial marketing or sale of the drug in the
United States. Prior to commercialization, centrally acting drugs are generally subject to review and
potential scheduling by the Drug Enforcement Administration of the US Department of Justice, or
DEA.
The development and approval process requires substantial time, effort and financial resources, and we
cannot be certain that any approvals for our drug candidates will be granted on a timely basis, if at all.
The results of preclinical tests (which include laboratory evaluation as well as GLP studies to evaluate
toxicity in animals) for a particular drug candidate, together with related manufacturing information and
analytical data, are submitted as part of an IND to the FDA. The IND automatically becomes effective 30 days
after receipt by the FDA, unless the FDA, within the 30-day time period, raises concerns or questions about the
conduct of the clinical trial, including concerns that human research subjects will be exposed to unreasonable
health risks. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the
clinical trial can begin. IND submissions may not result in FDA authorization to commence a clinical trial. A
separate submission to an existing IND must also be made for each successive clinical trial conducted during
product development. Further, an independent institutional review board, or IRB, for each medical center
proposing to conduct the clinical trial must review and approve the plan for any clinical trial before it commences
at that center and it must monitor the study until completed. The FDA, the IRB or the sponsor may suspend a
clinical trial at any time on various grounds, including a finding that the subjects or patients are being exposed to
an unacceptable health risk. Clinical testing also must satisfy extensive Good Clinical Practice, or GCP,
regulations and regulations for informed consent and privacy of individually identifiable information.
Clinical Trials. For purposes of NDA submission and approval, clinical trials are typically conducted in the
following sequential phases, which may overlap:
• Phase 1 Clinical Trials. Studies are initially conducted in a limited population to test the drug
candidate for safety, dose tolerance, absorption, metabolism, distribution and excretion, typically in
healthy humans, but in some cases in patients.
• Phase 2 Clinical Trials. Studies are generally conducted in a limited patient population to identify
possible adverse effects and safety risks, explore the initial efficacy of the product for specific targeted
indications and to determine dose range or pharmacodynamics. Multiple Phase 2 clinical trials may be
conducted by the sponsor to obtain information prior to beginning larger and more expensive Phase 3
clinical trials.
• Phase 3 Clinical Trials. These are commonly referred to as pivotal studies. When Phase 2 evaluations
demonstrate that a dose range of the product is effective and has an acceptable safety profile, Phase 3
clinical trials are undertaken in large patient populations to further evaluate dosage, provide substantial
evidence of clinical efficacy and further test for safety in an expanded and diverse patient population at
multiple, geographically dispersed clinical trial centers.
• Phase 4 Clinical Trials. The FDA may approve an NDA for a drug candidate, but require that the
sponsor conduct additional clinical trials to further assess the drug after NDA approval under a post-
approval commitment. In addition, a sponsor may decide to conduct additional clinical trials after the
FDA has approved an NDA. Post-approval trials are typically referred to as Phase 4 clinical trials.
New Drug Applications. The results of drug development, preclinical studies and clinical trials are submitted
to the FDA as part of an NDA. NDAs also must contain extensive manufacturing and control information. An
NDA must be accompanied by a significant user fee, which is waived for the first NDA submitted by a
qualifying small business. Once the submission has been accepted for filing, the FDA’s goal is to review
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applications within 10 months of submission or, if the application relates to an unmet medical need in a serious
or life-threatening indication, 6 months from submission. The review process is often significantly extended by
FDA requests for additional information or clarification. The FDA may refer the application to an advisory
committee for review, evaluation and recommendation as to whether the application should be approved. The
FDA is not bound by the recommendation of an advisory committee. The FDA may deny approval of an NDA by
issuing a CRL if the applicable regulatory criteria are not satisfied. A CRL may require additional clinical data
and/or an additional pivotal Phase 3 clinical trial(s), and/or other significant, expensive and time-consuming
requirements related to clinical trials, preclinical studies or manufacturing. Data are not always conclusive and
the FDA may interpret data differently than we or our collaborators interpret data. Approval may occur with Risk
Evaluation and Mitigation Strategies, or REMS, that may limit the labeling, distribution or promotion of a drug
product. Once issued, the FDA may withdraw product approval if ongoing regulatory requirements are not met or
if safety problems occur after the product reaches the market. In addition, the FDA may require testing, including
Phase 4 clinical trials, and surveillance programs to monitor the safety effects of approved products which have
been commercialized, and the FDA has the power to prevent or limit further marketing of a product based on the
results of these post-marketing programs or other information.
Other US Regulatory Requirements. Products manufactured or distributed pursuant to FDA approvals are
subject to continuing regulation by the FDA, including recordkeeping, annual product quality review and
reporting requirements. Adverse event experience with the product must be reported to the FDA in a timely
fashion and pharmacovigilance programs to proactively look for these adverse events are mandated by the FDA.
Drug manufacturers and their subcontractors are required to register their establishments with the FDA and
certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies
for compliance with ongoing regulatory requirements, including CGMPs, which impose certain procedural and
documentation requirements upon us and our third-party manufacturers. Following such inspections, the FDA
may issue notices on Form 483 and Warning Letters that could cause us to modify certain activities. A Form 483
notice, if issued at the conclusion of an FDA inspection, can list conditions the FDA investigators believe may
have violated CGMP or other FDA regulations or guidelines. FDA guidelines specify that a Warning Letter be
issued only for violations of “regulatory significance,” also known as Official Action Indicated, or OAI. Failure
to adequately and promptly correct the observation(s) can result in regulatory action. In addition to Form 483
notices and Warning Letters, failure to comply with the statutory and regulatory requirements can subject a
manufacturer to possible legal or regulatory action, such as suspension of manufacturing, seizure of product,
injunctive action or possible civil penalties. We cannot be certain that we or our present or future third-party
manufacturers or suppliers will be able to comply with the CGMP regulations and other ongoing FDA regulatory
requirements. If we or our present or future third-party manufacturers or suppliers are not able to comply with
these requirements, the FDA may halt our clinical trials, require us to recall a drug from distribution or withdraw
approval of the NDA for that drug.
The FDA closely regulates the post-approval marketing and promotion of drugs, including standards and
regulations for direct-to-consumer advertising, dissemination of off-label information, industry-sponsored
scientific and educational activities and promotional activities involving the Internet. Drugs may be marketed
only for the approved indications and in accordance with the provisions of the approved label. Further, if there
are any modifications to the drug, including changes in indications, labeling, or manufacturing processes or
facilities, we may be required to submit and obtain FDA approval of a new or supplemental NDA, which may
require us to develop additional data or conduct additional preclinical studies and clinical trials. Failure to
comply with these requirements can result in adverse publicity, Warning Letters, corrective advertising and
potential civil and criminal penalties.
Physicians may prescribe legally available drugs for uses that are not described in the product’s labeling and
that differ from those tested by us and approved by the FDA. Such off-label uses are common across medical
specialties. Physicians may believe that such off-label uses are the best treatment for many patients in varied
circumstances. The FDA does not regulate the behavior of physicians in their choice of treatments. The FDA
does, however, impose stringent restrictions on manufacturers’ communications regarding off-label use.
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DEA Regulation. The DEA regulates drugs that are controlled substances. Controlled substances are those
drugs that appear on one of the five schedules promulgated and administered by the DEA under the Controlled
Substances Act, or CSA. The CSA governs, among other things, the inventory, distribution, recordkeeping,
handling, security and disposal of controlled substances. Any drug that acts on the central nervous system has the
potential to become a controlled substance, and scheduling by the DEA is an independent process that may delay
the commercial launch of a drug even after FDA approval of the NDA. If our drug candidates are scheduled by
the DEA as controlled substances, we will be subject to periodic and ongoing inspections by the DEA and similar
state drug enforcement authorities to assess our ongoing compliance with the DEA’s regulations. Any failure to
comply with these regulations could lead to a variety of sanctions, including the revocation, or a denial of
renewal of any DEA registration, injunctions, or civil or criminal penalties.
Outside of the United States. Outside of the United States, the ability to market a product is contingent upon
obtaining marketing authorization from the appropriate regulatory authorities. The requirements governing
marketing authorization, pricing and reimbursement vary widely from country to country.
In the European Economic Area, or EEA (which is comprised of the 27 Member States of the European
Union, plus Norway, Iceland and Liechtenstein), medicinal products can only be commercialized after obtaining
a Marketing Authorization, or MA. There are two types of marketing authorizations:
• The Community MA, which is issued by the European Commission through the centralized procedure,
based on the opinion of the Committee for Medicinal Products for Human Use, or CHMP, of the EMA,
and which is valid throughout the entire territory of the EEA. The centralized procedure is mandatory
for certain types of products, such as biotechnology medicinal products, orphan medicinal products,
and medicinal products containing a new active substance indicated for the treatment of AIDS, cancer,
neurodegenerative disorders, diabetes, autoimmune and viral diseases. The centralized procedure is
optional for products containing a new active substance not yet authorized in the EEA, or for products
that constitute a significant therapeutic, scientific or technical innovation or which are in the interest of
public health in the European Union.
• National MAs, which are issued by the competent authorities of the Member States of the EEA and
only cover their respective territory, are available for products not falling within the mandatory scope
of the centralized procedure. Where a product has already been authorized for marketing in a Member
State of the EEA, this National MA can be recognized in another Member States through the Mutual
Recognition Procedure. If the product has not received a National MA in any Member State at the time
of application, it can be approved simultaneously in various Member States through the Decentralized
Procedure. Under the Decentralized Procedure an identical dossier is submitted to the competent
authorities of each of the Member States in which the MA is sought, one of which is selected by the
applicant as the Reference Member State. The competent authority of the Reference Member State
prepares a draft assessment report, a draft summary of the product characteristics, or SPC, and a draft
of the labeling and package leaflet, which are sent to the other Member States (referred to as the
Member States Concerned) for their approval. If the Member States Concerned raise no objections,
based on a potential serious risk to public health, to the assessment, SPC, labeling, or packaging
proposed by the Reference Member State, the product is subsequently granted a national MA in all the
Member States (i.e. in the Reference Member State and the Member States Concerned).
Under the procedures described above, before granting the MA, the EMA or the competent authorities of the
Member States of the EEA make an assessment of the risk-benefit balance of the product on the basis of
scientific criteria concerning its quality, safety and efficacy.
Under Regulation (EC) No 726/2004/EC and Directive 2001/83/EC (each as amended), the European Union
has adopted a harmonized approach to data and marketing exclusivity (known as the 8 + 2 + 1 formula). The
approach permits eight years of data exclusivity and 10 years of marketing exclusivity. An additional
non-cumulative one-year period of marketing exclusivity is possible if during the data exclusivity period (the
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first eight years of the 10-year marketing exclusivity period), the MA holder obtains an authorization for one or
more new therapeutic indications that are deemed to bring a significant clinical benefit compared to existing
therapies.
The data exclusivity period begins on the date of the product’s first MA in the European Union and prevents
generics from relying on the marketing authorization holder’s pharmacological, toxicological and clinical data
for a period of eight years. After eight years, a generic product application may be submitted and generic
companies may rely on the marketing authorization holder’s data. However, a generic cannot launch until two
years later (or a total of 10 years after the first MA in the European Union of the innovator product), or three
years later (or a total of 11 years after the first MA in the European Union of the innovator product) if the MA
holder obtains marketing authorization for a new indication with significant clinical benefit within the eight-year
data exclusivity period.
The 8 + 2 + 1 exclusivity scheme applies to products that have been authorized in the European Union by
either the EMA through the centralized procedure or the competent authorities of the Member States of the EEA
(under the Decentralized or Mutual Recognition procedures).
The holder of a Community MA or National MA is subject to various obligations under applicable EEA
regulations, such as pharmacovigilance obligations, requiring it to, among other things, report and maintain
detailed records of adverse reactions, and to submit periodic safety update reports to the competent authorities.
The holder must also ensure that the manufacturing and batch release of its product is in compliance with the
applicable requirements. The MA holder is further obligated to ensure that the advertising and promotion of its
products complies with applicable laws, which can differ from Member State to Member State of the EEA.
Drug Product Manufacturing. In Zofingen, Switzerland, our Swiss subsidiary, Arena GmbH operates a drug
product manufacturing facility. Swissmedic, a public service organization of the Swiss federal government, is the
central Swiss agency for the authorization and supervision of therapeutic products. Our Swiss manufacturing
facility has been inspected by the competent regional authorities (Regionales Heilmittelinspektorat der
Nordostschweiz, Basel, Switzerland), acting on behalf of Swissmedic, which issued GMP and production
licenses to Arena GmbH for the production of drugs. The production license is valid until July 2012, and we
expect it will be renewed. The FDA conducted a PAI of this facility in July 2010, which resulted in No Actions
Indicated, and classified this facility as acceptable. We expect this facility will be re-inspected by the FDA prior
to approval of our lorcaserin NDA.
Manufacturing and Sources and Availability of Raw Materials, Intermediates and Clinical Supplies
In January 2008, Arena GmbH acquired from Siegfried certain drug product facility assets, including
manufacturing facility production licenses, fixtures, equipment, other personal property and real estate assets in
Zofingen, Switzerland. This facility is generating revenue from the manufacture of certain drug products for
Siegfried. We have also used this facility to produce and package lorcaserin tablets for registration and
validation. If lorcaserin is approved, we plan to use this facility for the commercial production and packaging of
lorcaserin. We also plan to use this facility for producing and packaging tablets and capsules for other programs.
All of our manufacturing services revenues are attributable to Siegfried, which is our only customer for such
services. Our revenues of $12.7 million for the year ended December 31, 2011, included $5.3 million, or 41.9%,
of our total revenues, from Siegfried. Our revenues of $16.6 million for the year ended December 31, 2010,
included $7.1 million, or 42.5% of our total revenues, from Siegfried. Our revenues of $10.4 million for the year
ended December 31, 2009, included $6.6 million, or 63.3% of our total revenues, from Siegfried.
We purchase raw materials and intermediates when necessary from commercial sources. To decrease the
risk of an interruption to our supply, when reasonably possible for us to do so, we source these materials from
multiple suppliers so that, in general, the loss of any one source of supply would not have a material adverse
effect on project timelines or inventory of clinical supplies for use in human trials. However, currently we have a
primary source of supply for some key intermediates, API excipients, components and drug products for our lead
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development projects. The loss of a primary source of supply would potentially delay our lead development
projects and commercialization efforts, including for lorcaserin, and potentially those of current or future
collaborators. Our facility in Zofingen is also currently the only manufacturer of finished drug product for
lorcaserin. In addition, as a result of our receipt of the CRL for lorcaserin, commercial production has been
delayed and the modification to the supply chain could result in scheduling conflicts at multiple suppliers, which
may result in product delay.
Compliance with Environmental Regulations
Our research and development programs involve the controlled use of hazardous materials, chemicals,
biological materials and various radioactive compounds. In the United States, we are subject to regulation under
the Occupational Safety and Health Act, the Environmental Protection Act, US Environmental Protection
Agency, California Environmental Protection Agency, the Toxic Substances Control Act, the Resource
Conservation and Recovery Act, the Controlled Substances Act and other federal, state or local regulations.
With regard to Arena GmbH’s drug product manufacturing facility, 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. Arena GmbH is
subject to regulation under the Environmental Protection Act (Umweltschutzgesetz, USG), the Chemicals Act
(Chemikaliengesetz, ChemG), and the Federal Act on the Protection of Waters (Gewässerschutzgesetz, GSchG),
which refer to several ordinances such as the Ordinance on Air Pollution Control (Luftreinhalteverordnung, LRV),
the Ordinance on Incentive Taxes on Volatile Organic Compounds (Verordnung über die Lenkungsabgabe auf
flüchtigen organischen Verbindungen, VOCV), the Water Protection Ordinance (Gewässerschutzverordnung,
GSchV), the Ordinance of the Handling of Wastes (Verordnung über den Verkehr mit Abfällen, VeVA), the
Chemicals Ordinance (Chemikalienverordnung, ChemV), the Ordinance on Chemical Risk Reduction
(Chemikalien-Risikoreduktions-Verordnung, ChemRRV) and the Ordinance on Protection against Major Accidents
(Störfallverordnung, StFV). The competent authorities in Switzerland for the implementation of environmental
regulations are BAFU (Bundesamt für Umwelt / Federal Office for the Environment), which is the Swiss federal
agency for the environment, and the respective authorities of the Canton of Aargau (Abteilung für Umwelt, AfU).
Furthermore, the BAFU and the BAG (Bundesamt für Gesundheit / Federal Office of Public Health) share
authorities with regard to the implementation and, together with the respective authority of the Canton of Aargau
(Amt für Verbraucherschutz), the supervision of compliance with the laws and regulations related to chemicals.
Occupational health and safety is regulated, in particular, by the EKAS (Eidgenössische Koordinationskommission
für Arbeitssicherheit) guideline No. 6508 (ASA), governing the evaluation of worker safety and the reporting to the
relevant authorities. The competent authority for the implementation of occupational health and safety regulations is
the Canton of Aargau (Amt für Wirtschaft und Arbeit), whereby exposure limits are set by SUVA (Schweizerische
Unfallversicherungsanstalt), which is the Swiss Accident Insurance Fund.
The Registration, Evaluation, Authorization and Restriction of Chemicals Regulation (EC) No 1907/2006,
commonly referred to as “REACH,” is Europe’s broad chemicals legislation, which is directly applicable in all
EU Member States. REACH creates a new system for gathering information, assessing risks to human health and
the environment, and authorizing or restricting the marketing and use of chemicals produced or supplied in the
European Union. It applies to EU producers, importers and distributors/retailers of products, and users of
chemicals in the course of industrial or professional activities. In compliance with REACH, we have registered
relevant materials that could be imported into the European Union by us or our third-party manufactures for the
production of lorcaserin and select components of other of our more advanced drug candidates.
We may be subject to further such regulations in the future. Although we believe that our operations comply
in all material respects with the applicable environmental laws and regulations, the risk of accidental
contamination or injury from these materials cannot be eliminated. In the event of such an accident, we could be
held liable for any damages that result, and the extent of that liability could exceed our resources. Our
compliance with these laws and regulations has not had, and is not expected to have, a material effect upon our
capital expenditures, results of operations or competitive position.
26
Research and Development Expenses
Research and development activities are the primary source of our expenses. Our research and development
expenses include personnel costs, research supplies, facility and equipment costs, clinical and preclinical study
fees and manufacturing costs. Such expenses totaled $58.7 million for the year ended December 31, 2011, $75.5
million for the year ended December 31, 2010, and $110.2 million for the year ended December 31, 2009. We
include research and development sponsored by collaborators in our total research and development expenses.
We estimate that such expenses totaled $3.3 million in 2011. Our collaborators did not fund any of our research
and development expenses in 2010 or 2009.
Employees
As of February 29, 2012, we had a total of 266 employees, including 219 in research, development and
manufacturing and 47 in administration, which includes finance, legal, facilities, information technology and
other general support areas.
Available Information
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934, or the Exchange Act, are available free of charge on our website (www.arenapharm.com) as soon as
reasonably practicable after they are electronically filed with, or furnished to, the SEC.
Item 1A. Risk Factors.
Investment in our stock involves a high degree of risk. You should consider carefully the risks described
below, together with other information in this Annual Report on Form 10-K and 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.
Risks Relating to Our Business
We will need additional funds to conduct our planned research, development and commercialization
efforts; we may not be able to obtain additional funds, your ownership may be substantially diluted if we
do obtain additional funds, and you may not agree with the manner we allocate our available resources;
and we 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 and operating expenses will continue to
be substantial, even if we are successful in advancing our most advanced drug candidate, lorcaserin, including
under our marketing and supply agreement with Eisai Inc., or Eisai, or our other compounds and drug candidates,
with one or more collaborators or independently.
We do not have any commercially available drugs, and may not have adequate funds 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.
Our wholly owned subsidiary, Arena Pharmaceuticals GmbH, or Arena GmbH, has entered into a marketing
and supply agreement with Eisai for the commercialization of lorcaserin in the United States and its territories
27
and possessions, subject to approval by the US Food and Drug Administration, or FDA, of our resubmitted
lorcaserin New Drug Application, or NDA. Even if the FDA approves our NDA and Eisai commences
commercialization of lorcaserin under our marketing and supply agreement, we cannot assure you that any
additional payments we receive under such agreement will be sufficient to fund our planned research and
development and other activities or to result in profitability. In addition, we are also seeking regulatory approval
for lorcaserin in the European Union, and, on March 2, 2012, we filed a marketing authorization application, or
MAA, for lorcaserin through the centralized procedure with the European Medicines Agency, or EMA. We also
plan to seek approval for lorcaserin in other countries outside of the United States. We will need additional funds
or a collaborative or other agreement with a pharmaceutical company or companies to commercialize lorcaserin
outside of the United States, and we may not be able to secure adequate funding or find a pharmaceutical
company to commercialize lorcaserin outside of the United States at all or on terms we or others believe are
favorable. We also believe that it may be difficult for us to obtain additional financing or enter into strategic
relationships on terms that we or third parties, including investors, analysts or potential collaborators, view as
favorable, if at all.
We may allocate our resources in ways that do not improve our results of operations or enhance the value of
our common stock. Our stockholders and others may also not agree with the manner in which we choose to
allocate our resources. Our failure to apply our resources effectively could have a material adverse effect on our
business or the development of our product candidates and cause the price of our common stock to decline.
In addition, if we experience a significant setback or delay, including with regard to our lorcaserin NDA, or
adequate funding is not available, we may eliminate or postpone or scale back some or all of our research or
development programs or delay the advancement of one or more of such programs, including in ways with which
our stockholders or others may not agree. Any such 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 opportunities for success and result in a decline in the market price of our common stock.
We will continue to be opportunistic in our efforts to obtain cash, and expect to evaluate various financing
alternatives on an ongoing basis. If we do obtain additional funding through equity sales, your ownership may be
substantially diluted and it may result in a decline in the market price of our common stock.
We are focusing a significant portion of our activities and resources on lorcaserin and depend on its
marketing approval and commercial success.
We are focusing a significant portion of our activities and resources on lorcaserin, and we believe a
significant portion of the value of our company relates to our ability to obtain marketing approval for, and
commercialize, this drug candidate. The marketing approval and successful commercialization of lorcaserin is
subject to many risks, including the risks discussed in other risk factors, and lorcaserin may not receive
marketing approval from any regulatory agency. If the results of clinical trials and preclinical studies of
lorcaserin, actions and decisions related to lorcaserin, the regulatory process, 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. For example,
in October 2010, the FDA issued a Complete Response Letter, or CRL, regarding our lorcaserin NDA. In the
CRL, the FDA stated that it completed its review of the NDA and determined that it could not approve the
application in its then present form.
After completing various studies, analyses and other activities, we resubmitted the lorcaserin NDA in
December 2011. In 2012, we may learn the results of the FDA’s Endocrinologic and Metabolic Drugs Advisory
Committee meeting to discuss the lorcaserin NDA, whether and when the FDA will approve lorcaserin or issue
another CRL and, if approved, the labeling and any FDA or other restrictions on the commercialization of
lorcaserin, including whether the Drug Enforcement Administration of the US Department of Justice, or DEA,
will schedule lorcaserin as a controlled substance and, if so, the level of scheduling.
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The lorcaserin NDA resubmission may not be satisfactory to the FDA, or its advisory committee, including
with regard to demonstrating adequate safety and efficacy for regulatory approval. We made assumptions,
estimations, calculations and decisions as part of our analysis of data and our response to the CRL, and the FDA,
or its advisory committee, may not accept or agree with our assumptions, estimations, calculations, decisions or
analyses or may interpret or weigh the importance of data differently. For example, we believe that our prolactin
studies of both three months and shorter duration and related analyses will be sufficient to demonstrate that
lorcaserin causes mammary tumors in rats by increasing prolactin effects on the mammary gland, and we did not
include in the lorcaserin NDA resubmission a 12-month study in female rats the FDA asked us to consider. The
FDA has expressed concern that the three-month duration may not be adequate to address issues it identified,
which may necessitate longer duration studies. In addition, the FDA may request additional information or have
additional recommendations prior to approval of our lorcaserin NDA resubmission, and lorcaserin may never
receive marketing approval from the FDA.
We are also seeking regulatory approval for lorcaserin in the European Union, and plan to seek approval for
lorcaserin in other countries outside of the United States. The review and potential approval of lorcaserin for
regulatory approval outside of the United States carries similar risks and uncertainties as our lorcaserin NDA
resubmission with the FDA, as well as new risks and uncertainties.
Our ability to generate significant revenues, for at least the short term, depends upon the regulatory
approval of lorcaserin, the commercialization of lorcaserin, activities and payments under the marketing
and supply agreement with Eisai and our entry into new collaborations.
We expect that, for at least the short term, our ability to generate significant revenues will depend on the
regulatory approval of lorcaserin, the success of Eisai in commercializing lorcaserin, if approved, in the United
States, and our ability to enter into new collaborations. Future revenues under our marketing and supply
agreement with Eisai will depend on the achievement of milestones under the agreement and Eisai’s
commercialization of lorcaserin, and, other than possible reimbursement for pre-approval development work, we
may receive no additional revenues from Eisai if our lorcaserin NDA resubmission is not approved by the FDA.
In addition, we intend to commercialize lorcaserin outside of the United States with one or more collaborators or
independently. Lorcaserin may not be approved for sale outside of the United States, and, even if it is approved,
we or any collaborator may not be successful in commercializing lorcaserin outside of the United States.
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 or product sales. In addition, our marketing and supply agreement with Eisai may be terminated early
in certain circumstances, in which case we may not receive milestone or other payments under the agreement.
Moreover, our ability to enter into new collaborations may depend 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 enter into agreements 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, approval or successful
commercialization, if at all. With respect to lorcaserin, our ability to enter into additional collaborative
agreements may also depend on the FDA’s approval of our resubmitted NDA for lorcaserin as well as our
interactions with, and decisions by, regulatory agencies outside of the United States.
Our development and commercialization of lorcaserin may be adversely impacted by cardiovascular side
effects previously associated with fenfluramine and dexfenfluramine.
We developed lorcaserin to more selectively stimulate the serotonin 2C receptor than did fenfluramine or
dexfenfluramine 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
29
pulmonary hypertension associated with their usage. In in vitro studies examining affinity, activity and serotonin
receptor subtype specificity, lorcaserin demonstrated affinity for, and activity at, serotonin 2A, 2B and 2C
receptors, but demonstrated greater affinity, activity and selectivity for the serotonin 2C receptor than for the
serotonin 2A and 2B receptors. Activation of the latter two receptors has been associated with undesirable
effects. Activation of the 2A receptor has been associated with central nervous system, or CNS, effects, including
altered perception, mood and abuse potential, and activation of the 2B receptor has been associated with cardiac
valvulopathy.
We may not be correct in our belief that more 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.
Lorcaserin’s selectivity profile and the potential relationship between the activity of lorcaserin and the activity of
fenfluramine and dexfenfluramine may result in increased FDA regulatory scrutiny of the safety of lorcaserin and
may raise potential adverse publicity, which could affect enrollment of any future clinical trials or sales if
lorcaserin is approved for commercialization.
Our two large Phase 3 lorcaserin trials of one and two years in duration, BLOOM (Behavioral modification
and Lorcaserin for Overweight and Obesity Management) and BLOSSOM (Behavioral modification and
LOrcaserin Second Study for Obesity Management) supported our original NDA submission for lorcaserin. Data
from these two trials, including the proportions of patients that developed FDA-defined valvulopathy, were
included in the original NDA. There are different ways of analyzing the valvulopathy data from our trials. The
pre-specified statistical analysis plan for the NDA provided that the risk difference between lorcaserin and
placebo using Baseline and Week 52 echocardiograms would be evaluated using a non-inferiority model that
would rule out a greater than 50% increase over the assumed placebo risk of FDA-defined valvulopathy. The
assumed placebo risk of FDA-defined valvulopathy was derived from the Data Safety Monitoring Board, or
DSMB, interim review of six-month data from BLOOM. Using this analysis, the combined data from BLOOM
and BLOSSOM demonstrated that lorcaserin was non-inferior to placebo. Using a relative risk analysis of the
Baseline and Week 52 data, which the FDA has used previously and may favor over the above analysis, these
trials ruled out an increase of more than 55% in the relative risk for FDA-defined valvulopathy with lorcaserin.
Our other one-year Phase 3 clinical trial, BLOOM-DM (Behavioral modification and Lorcaserin for Overweight
and Obesity Management in Diabetes Mellitus), was not designed to include enough patients to be adequately
powered to detect meaningful differences in the incidence of valvulopathy. Rather, we pre-specified a combined
analysis of echocardiographic changes in all three Phase 3 trials. We integrated into our lorcaserin NDA
resubmission the results of BLOOM-DM, which include additional data relating to heart valves and pulmonary
artery pressures. Using the analysis of risk difference that we used for our original NDA, the pooled data from
BLOOM, BLOSSOM and BLOOM-DM would rule out a greater than 50% increase over the assumed placebo
risk of FDA-defined valvulopathy. Using a relative risk analysis, the pooled data from all three trials ruled out an
increase of more than 67% in the relative risk of FDA-defined valvulopathy. Statistical methods that consider all
echocardiograms rather than restricting the analysis to Baseline and Week 52 produced risk ratio or hazard ratio
estimates of 1.08 – 1.09, ruling out a 44% increase in risk of FDA-defined valvulopathy. Our Phase 3 trials were
not designed to rule out a risk for pulmonary hypertension, which, due to the rarity of this event, would require a
very large database.
We cannot guarantee that the FDA will find the data relating to heart valves and pulmonary artery pressures
supportive of approval. In addition, at the FDA’s recommendation, we included in the lorcaserin NDA
resubmission receptor pharmacology studies to more fully characterize lorcaserin’s activity at the serotonin 2A,
2B and 2C receptors. The FDA may not find our data favorable, may request additional data or other information
or analyses, may decline to approve our NDA for lorcaserin, or may impose post-approval requirements that
adversely impact the commercialization of lorcaserin. For example, the FDA could require additional preclinical
studies or clinical trials pre- or post-approval to continue to assess risks relating to cardiac or other side effects,
or the FDA could require screening or follow-up echocardiograms for patients being prescribed lorcaserin.
30
We are dependent on the marketing and supply agreement with Eisai to commercialize lorcaserin in the
United States and, if applicable, to further develop lorcaserin, and the failure to maintain such agreement,
or poor performance under such agreement, could negatively impact our business.
Following regulatory approval of lorcaserin in the United States, if ever, Eisai has primary responsibility for
the marketing and sale of lorcaserin in the United States and responsibility for compliance with certain US
regulatory requirements, and we have limited control over the amount and timing of resources that Eisai will
dedicate to the commercialization of lorcaserin.
We are subject to a number of other risks associated with our dependence on our marketing and supply
agreement, including:
• Eisai may not comply with applicable regulatory guidelines with respect to commercializing lorcaserin,
which could adversely impact sales or any development of lorcaserin;
•
there could be disagreements regarding the agreement or the development of lorcaserin that delay or
terminate the research, development or commercialization of lorcaserin, delay or eliminate potential
payments under the agreement or increase our costs under the agreement; or
• Eisai may not perform as expected, including with regard to making research, development, milestone
or other payments under the agreement, and such agreement may not provide adequate protection or
may not be effectively enforced.
Eisai and we each have the right to terminate the agreement in certain circumstances. Eisai and we could
also agree to amend the terms of the agreement, and we or others, including investors and analysts, may not view
the amendments as favorable. If the agreement is terminated early, we may not be able to find another company
to further develop and commercialize lorcaserin in the United States on acceptable terms, if at all, and even if we
elected to pursue further development or commercialization of lorcaserin on our own, we might not have the
funds, or otherwise be able, to do so successfully.
We may enter into additional agreements for the commercialization of lorcaserin or other of our drug
candidates, and may be similarly dependent on the performance of third parties with similar risk.
Negative US and global economic conditions may pose challenges to our business strategy, which relies on
access to capital from the markets or collaborators, and creates other financial risks for us.
Negative conditions in the United States or global economy, including credit markets and the financial
services industry, 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
vendors or our distributors, licensees and collaborators, which we sometimes refer to generally as our
collaborators. If negative economic conditions persist or worsen, we may be unable to secure additional funding
to sustain our operations or to find suitable collaborators to advance our internal programs, even if we achieve
positive results from our research and development or business development efforts.
From time to time, we may maintain a portfolio of investments in marketable debt securities, which are
recorded at fair value. Although we have established investment guidelines relative to diversification and
maturity with the objectives of maintaining safety of principal and liquidity, we rely on credit rating agencies to
help evaluate the riskiness of investments, and such agencies may not accurately predict such risk. In addition,
such agencies may reduce the credit quality of our individual holdings, which could adversely affect their value.
Lower credit quality and other market events, such as changes in interest rates and further deterioration in the
credit markets, may have an adverse effect on the fair value of our investment holdings and cash position.
31
We and certain of our current and former employees and directors have been named as defendants in
litigation that could result in substantial costs and divert management’s attention.
Beginning in September 2010, a number of lawsuits were filed against us and certain of our employees and
directors on behalf of certain purchasers of our common stock. The lawsuits in general include allegations that
we and certain of our employees and directors violated laws by making materially false and misleading
statements regarding our lorcaserin trials, thereby artificially inflating the price of our common stock. The
plaintiffs are seeking unspecified monetary damages and other relief.
There is no guarantee that we will be successful in defending these lawsuits. Also, our insurance coverage
may be insufficient, our assets may be insufficient to cover any amounts that exceed our insurance coverage, and
we may have to pay damage awards or otherwise may enter into settlement arrangements in connection with such
claims. A settlement of any of these lawsuits could involve the issuance of common stock or other equity, which
may dilute your ownership interest. Any payments or settlement arrangements could have material adverse
effects on our business, operating results, financial condition or your ownership interest. Even if the plaintiffs’
claims are not successful, this litigation could result in substantial costs and significantly and adversely impact
our reputation and divert management’s attention and resources, which could have a material adverse effect on
our business, operating results or financial condition. In addition, such lawsuits may make it more difficult to
finance our operations, obtain certain types of insurance (including directors and officers liability insurance), and
attract and retain qualified executive officers, other employees and directors.
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.
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, which are sometimes referred to as nonclinical 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, current or potential collaborators, the academic and medical
communities, 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. Stock prices of companies in our industry have declined significantly when such results
and decisions were unfavorable or perceived negatively or when a drug candidate did not otherwise meet
expectations.
From time to time we have drug programs 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 drug candidates and
those under collaborative agreements.
For example, we conducted long-term carcinogenicity preclinical studies of lorcaserin. In the CRL for
lorcaserin, the FDA identified issues related to such studies. We provided in the lorcaserin NDA resubmission
data and other information to support our view related to such issues, but the FDA may disagree with our view or
impose conditions that could significantly delay or preclude approval of our lorcaserin NDA resubmission or
limit the commercialization of lorcaserin.
32
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 may report top-line data from time to time, which is based on a preliminary analysis of then-available
efficacy and safety data, and such findings and conclusions are subject to change following a more
comprehensive review of the data related to the particular study or trial. In addition, we make assumptions,
estimations and calculations as part of our analysis of data, and others, including regulatory agencies, may not
accept or agree with our assumptions, estimations, calculations or analysis or may interpret or weigh the
importance of data differently, which could impact the value of the particular program, the approvability of the
particular drug candidate and our company in general.
We have significant indebtedness and other contractual obligations, which may adversely affect our cash
flow, cash position and stock price.
In July 2009, we received under a facility agreement, or the Facility Agreement, a loan from 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, which substantially increased our total debt and debt service
obligations. This loan matures on June 17, 2013, and the outstanding principal, which is $17.3 million, accrues
interest at a rate of 7.75% per annum on the stated principal balance, payable quarterly in arrears. Unless paid
earlier, we are required to repay the outstanding principal at maturity and, under certain circumstances, we may
be required to repay the outstanding debt earlier. For example, we are required to repay the loan upon certain
changes of control. The Facility Agreement also places certain restrictions on our business, including our ability
to incur additional indebtedness and to undertake certain business transactions. In addition, we have long term
leases on real properties and other contractual obligations.
In the future, if we are unable to generate cash from operations sufficient to meet our debt and other contractual
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 further restrict certain business activities or our ability
to incur additional 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 our debt and other contractual obligations, or we need to use existing cash to fund our debt and
contractual 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 debt and other contractual
obligations 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 with Deerfield, including in certain circumstances
under the warrants issued in connection with the loan, the lenders may declare the outstanding principal balance
and accrued but unpaid interest owed to them 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 secured loan, and we are unable to repay the lenders, the lenders could seek to enforce
their rights under their security interests in our assets. If this were to happen, we may lose or be forced to sell
some or all of our assets to satisfy our debt, which could cause our business to fail.
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If we do not commercialize lorcaserin outside of the United States with one or more pharmaceutical
companies or raise additional funds, we may have to commercialize lorcaserin outside of the United States
on our own.
We expect to commercialize lorcaserin outside of the United States, following regulatory approval, with one
or more collaborators or independently. We may not be able to enter into agreements to commercialize lorcaserin
outside of the United States on acceptable terms, if at all. If we are unable to enter into such agreements, and we
develop our own capabilities to commercialize lorcaserin outside of the United States, we may require additional
capital to develop such capabilities and the marketing and sale of lorcaserin outside of the United States may be
delayed or otherwise impeded by our lack of resources. We may not be successful in developing the requisite
capabilities to commercialize lorcaserin outside of the United States. Even if we were able to do so, we have not
previously commercialized a drug, and our limited experience may make us less effective at commercial
planning, marketing and selling than a pharmaceutical company. Our lack of corporate experience and adequate
resources may impede our efforts to successfully commercialize lorcaserin.
We face competition in our search for pharmaceutical companies to commercialize lorcaserin outside of the
United States. In addition, if our competitors are able to establish commercialization arrangements with
companies who have substantially greater resources than we have (or, with respect to commercializing lorcaserin
in the United States, Eisai has), our competitors may be more successful in marketing and selling their drugs, and
our ability to successfully commercialize lorcaserin will be limited.
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 preclinical, 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. We are subject to periodic unannounced inspections by the FDA, the DEA, and other regulatory
agencies, and are also subject to inspections at Arena GmbH by the FDA, Swissmedic and other regulatory
agencies. Swissmedic, a public service organization of the Swiss federal government, is the central Swiss agency
for the authorization and supervision of therapeutic products. 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 that may delay the advancement or potential approval of our drug
candidates or otherwise negatively impact our business. Regulatory agencies have in the past inspected certain
aspects of our business in the United States and Switzerland, and we were provided with observations of
objectionable conditions or practices with respect to our business in the United States. We believe we
satisfactorily addressed such observations, but there is no assurance that regulatory agencies will not provide us
with observations in future inspections or that we satisfactorily addressed observations provided to us in past
inspections.
Neither collaborators nor we are permitted to market a drug candidate in the United States until the
particular drug candidate is approved for marketing by the FDA. 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. None of our drug candidates has received marketing approval. To market a
new drug in the United States, we must submit to the FDA and obtain FDA approval of an 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. Following its
review of an NDA or a response to a CRL, the FDA may approve the NDA or issue a CRL.
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 FDA’s review goals are subject to change, and it is unknown whether any
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particular FDA review will be completed within the FDA’s review goals or will be delayed. Moreover, the
duration of the FDA’s review may depend on the number and types of other submissions with the FDA around
the same time period. The review of such other submissions, such as VIVUS’ NDA resubmission for a drug
candidate for the treatment of obesity, may impact the regulatory review of our submissions related to lorcaserin.
Furthermore, any drug that acts on the CNS, such as lorcaserin, has the potential to be scheduled as a controlled
substance by the DEA. DEA scheduling is an independent process that can delay drug launch beyond an NDA
approval date. DEA scheduling ranges from I to V, with I being the most tightly controlled category. The FDA
has expressed concern over the abuse potential of lorcaserin and the data included in our original NDA related to
such potential. Pursuant to the FDA’s recommendation, we modified and repeated two nonclinical studies to
provide additional safety information for labeling and scheduling decisions, and included data from such studies
in our resubmitted lorcaserin NDA. If lorcaserin were to be scheduled in a tightly controlled category, such
scheduling could negatively impact the ability or willingness to prescribe or dispense lorcaserin, the likelihood
that patients will use it and other aspects of our and Eisai’s ability to commercialize it.
Regulatory approval of an NDA or NDA supplement is not guaranteed. The number and types of preclinical
studies and clinical trials that will be required for FDA approval varies depending on the drug candidate, the
disease or condition that the drug candidate is designed to target and the regulations applicable to any particular
drug candidate. Despite the time and expense exerted in preclinical and clinical studies, failure can occur at any
stage, and we could encounter problems that cause us to abandon clinical trials or to repeat or perform additional
preclinical studies and clinical trials. The FDA can delay, limit or deny approval of a drug candidate for many
reasons, including:
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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’s interpretation and our interpretation of data from preclinical studies and clinical trials may
differ significantly;
our or our contractors’ or collaborators’ failure to comply with applicable FDA and other regulatory
requirements, including those identified in other risk factors;
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 an NDA or other submission due to, among other reasons, the content or
formatting of the submission.
With respect to lorcaserin, the FDA draft guidance document “Developing Products for Weight
Management” dated February 2007 provides two alternate benchmarks for the development of drugs for the
indication of weight management. The guidance provides that, in general, a product can be considered effective
for weight management if after one year of treatment either of the following occurs: (1) the difference in mean
weight loss between the active-product and placebo-treated groups is at least 5% and the difference is statistically
significant, or (2) the proportion of patients who lose at least 5% of baseline body weight in the active-product
group is at least 35%, is approximately double the proportion in the placebo-treated group, and the difference
between groups is statistically significant. While we believe the results of our Phase 3 clinical trials of lorcaserin
satisfy the latter of the two alternate efficacy benchmarks, the FDA may disagree with our view, not follow its
draft guidance or impose other approval conditions that could delay or preclude approval of our lorcaserin NDA.
For example, the FDA stated in the CRL for lorcaserin that the weight loss efficacy of lorcaserin in obese and
overweight individuals without type 2 diabetes is marginal and recommended that we submit the final study
report of BLOOM-DM. The FDA also stated in the CRL that in the event evidence cannot be provided to
alleviate the FDA’s concern regarding the clinical relevance of certain tumor findings in rats, additional clinical
studies may be required to obtain a more robust assessment of lorcaserin’s benefit-to-risk profile. In addition, the
FDA may revise its guidance document on obesity drugs and any new guidance may include recommendations or
requirements that make it cost-prohibitive or otherwise difficult or impossible for us to continue seeking
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regulatory approval for lorcaserin in the United States. 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, restricted distribution methods or other limitations, such as those required by a Risk Evaluation
and Mitigation Strategies, or REMS.
With the exception of our regulatory submissions for lorcaserin, we have not previously submitted an
application for marketing approval in the United States or any other jurisdiction or a response to a CRL. This
lack of corporate experience may impede our ability to obtain regulatory approval in a timely manner, if at all,
for lorcaserin or our other drug candidates for which development and commercialization are our responsibility.
Our preclinical and clinical data, other information and procedures relating to a drug candidate may not be
sufficient to support approval by the FDA or any other US or foreign regulatory authority, or regulatory
interpretation of these data and procedures may be unfavorable. 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
or our collaborators develop.
To market any drugs outside of the United States, we and our current or future collaborators must comply
with numerous and varying regulatory requirements of other countries. Approval procedures vary among
countries and can involve additional product testing and additional administrative review periods. The time
required to obtain approval in other countries might differ from that required to obtain FDA approval. The
regulatory approval process in other countries may include all of the risks associated with FDA approval as well
as additional risks, some of which may be unanticipated.
On March 2, 2012, we filed an application for EU approval of lorcaserin, and we expect to learn whether
our filing has been accepted for review before the end of March 2012. The EU regulatory authorities could
determine that our application is not sufficient to allow for review, which would prevent or delay the review of
our application and negatively impact our business. In addition, even if our application is accepted for review, the
data from our lorcaserin studies and trials may not be sufficient for EU approval. The approval requirements in
the European Union are different than in the United States. For example, the EMA guidelines provide that
clinical trials assessing drug candidates intended for weight control should subject patients to a weight reducing
diet run-in period, and our Phase 3 clinical trials did not include a run-in period. Such EMA guidelines also
provide primary and alternative primary efficacy criteria for weight loss drug candidates. We believe lorcaserin
will satisfy the EMA’s alternative primary efficacy criterion, which is the proportion of responders achieving
more than 10% weight loss at the end of a 12-month period. However, we do not believe lorcaserin meets the
more stringent EMA primary efficacy criterion, which requires demonstrating weight loss of at least 10% of
baseline weight that is also at least 5% greater than that associated with placebo. We do not know whether the
EMA will find our lorcaserin Phase 3 clinical trials or program, including with regard to lorcaserin’s efficacy or
safety, to be sufficient for approval.
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 a country, any delay or setback in obtaining such approval, or our regulatory
strategy or decisions could adversely affect the regulatory approval or commercialization of our drug candidates
in other countries, including that our drug candidates may not be approved for all indications requested, that such
approval may be subject to limitations on the indicated uses for which the drug may be marketed, and with regard
to the pricing or reimbursement of our approved drugs, if any.
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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 collaborators receive regulatory approval for our drug candidates in the United States or other
jurisdictions, we and our collaborators will be subject to ongoing obligations and continued regulatory review
from the FDA and other applicable regulatory agencies, such as continued adverse event reporting requirements.
There may also be additional FDA post-marketing obligations, all of which may result in significant expense and
limit the ability to commercialize such drugs in the United States or other jurisdictions.
If any of our drug candidates receives US regulatory approval or approval in other jurisdictions, the FDA or
other regulatory agencies may also require that the sponsor of the NDA conduct additional clinical trials to
further assess the drug after NDA approval under a post-approval commitment. Such additional studies may be
costly and may impact the commercialization of the drug. The FDA or other regulatory agencies may also
impose significant restrictions on the indicated uses for which such drug may be marketed.
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 Current Good
Manufacturing Practices, or CGMPs, regulations, which include requirements relating to quality control and
quality assurance as well as the corresponding maintenance of records and documentation. Further, regulatory
agencies must approve these manufacturing facilities before they can be used to manufacture our products, and
these facilities are subject to ongoing regulatory inspections. In addition, regulatory agencies subject a drug, its
manufacturer and the manufacturer’s facilities to continual review and inspections. The subsequent discovery of
previously unknown problems with a drug, including adverse events of unanticipated severity or frequency, or
problems with the facility where the drug is manufactured, may result in restrictions on the marketing of that
drug, up to and including withdrawal of the drug from the market. In the United States, the DEA and comparable
state-level agencies also heavily regulate the manufacturing, holding, processing, security, recordkeeping and
distribution of drugs that are considered controlled substances. If any of our drug candidates are scheduled by the
DEA as controlled substances, we will also become subject to the DEA’s regulations. The FDA has expressed
concern over the abuse potential of lorcaserin and the data included in our original NDA related to such potential,
and, pursuant to its recommendation, we, as part of our response to the CRL for lorcaserin, modified and
repeated two nonclinical studies to provide additional safety information for labeling and scheduling decisions. If
lorcaserin were to be scheduled in a tightly controlled category, such scheduling could negatively impact the
ability or willingness to prescribe or dispense lorcaserin, the likelihood that patients will use it and other aspects
of our and Eisai’s ability to commercialize it. 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, such noncompliance 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:
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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 collaborators;
refusals to permit drugs to be imported into or exported from the United States;
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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 or our collaborators 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:
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timing of market introduction of our drugs and competitive drugs;
actual and perceived efficacy and safety of our drug candidates;
incidence and severity of any side effects;
potential or perceived advantages or disadvantages as compared to 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.
If our approved drugs, if any, fail to achieve market acceptance, we may not be able to generate significant
revenues to achieve or sustain profitability.
In addition, 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 to be scheduled
in a tightly controlled category, such scheduling could negatively impact the ability or willingness to prescribe or
dispense lorcaserin, the likelihood that patients will use it, and other aspects of our ability to commercialize it and
generate revenues.
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 and studies
are expensive and uncertain processes that may take years to complete. Failure can occur at any stage of the
process, and successful early preclinical studies or clinical trials do not ensure that later studies or trials will be
successful. In addition, the commencement or completion of our planned preclinical studies or clinical trials
could be substantially delayed or prevented by several factors, including the following:
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animals to conduct our preclinical studies;
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limited number of, and competition for, suitable sites to conduct our clinical trials or preclinical
studies;
delay or failure to obtain FDA approval or agreement to commence a clinical trial or FDA approval of
a study protocol;
delay or failure to obtain sufficient supplies of our drug candidates or other drugs or materials for the
trial or study;
delay or failure to reach agreement on acceptable agreement terms or protocols; 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 collaborators, may take significantly longer than
expected to complete. In addition, the FDA, other regulatory authorities, collaborators, or we may suspend, delay
or terminate our development programs at any time for various reasons, including:
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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;
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;
lack of sufficient funding to continue clinical trials and preclinical studies; or
changes in business priorities or perceptions of the value of the program.
There is typically a high rate of attrition from the failure of drug candidates proceeding through clinical
trials, and many companies have experienced significant setbacks in advanced development programs even after
promising results in earlier studies or trials. We have experienced setbacks in our internal and partnered
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
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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 we or others believe are favorable, and our stock price would
likely decrease significantly.
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. Favorable results in 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. 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. For example, in the CRL for lorcaserin, the FDA identified
issues that indicate that the FDA disagreed with our interpretation of certain of the data from our clinical trials
and preclinical studies. Negative or inconclusive results or adverse medical events during a clinical trial could
cause a clinical trial to be delayed, repeated or terminated, or a clinical program to be abandoned.
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 sufficient therapeutic potential, and any of our preclinical compounds 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.
We may participate in new 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 collaborations, 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.
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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.
Many of the drugs we or our collaborators are or may attempt to discover and develop may 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. For example, with regard to lorcaserin, VIVUS Inc. and Orexigen
Therapeutics, Inc., are seeking regulatory approval for drug candidates for the treatment of obesity. 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,
and we may not realize the full commercial potential of our drug candidates.
We may have conflicts with our prospective, current or past collaborators, such as conflicts concerning the
interpretation of preclinical or clinical data, the achievement of milestone or other payments, the ownership of
intellectual property, or research and development or commercialization strategy. Collaborators may stop
supporting our drug candidates or drugs if they develop or obtain rights to competing drug candidates or drugs. In
addition, collaborators may fail to effectively develop or commercialize our drug candidates, which may result in
us not realizing the full commercial potential of our drug candidates. If any conflicts arise with Eisai 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 drug candidates, and in turn prevent us from generating
revenues:
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unwillingness on the part of a collaborator to pay us research funding, milestone payments, royalties or
other payments 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 research, development or commercialization efforts with
respect to our drug candidates; or
litigation or arbitration.
Setbacks, including those relating to drugs and drug candidates intended for weight management, and
consolidation in the pharmaceutical and biotechnology industries and inadequate third-party coverage
and reimbursement could make entering into agreements with pharmaceutical companies to collaborate
or commercialize our drugs more difficult and diminish our revenues.
Setbacks in the pharmaceutical and biotechnology industries, such as those caused by safety concerns
relating to drugs like Meridia, Avandia, Vioxx and Celebrex, or drug candidates, as well as competition from
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generic drugs, litigation, and industry consolidation, may have an adverse effect on us. For example, the FDA
may be more cautious in approving our drug candidates based on safety concerns relating to these or other drugs
or drug candidates, or pharmaceutical companies may be less willing to enter into new collaborations or continue
existing collaborations if they are integrating a new operation as a result of a merger or acquisition or if their
therapeutic areas of focus change following a merger.
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. In addition, in March 2010, the Patient Protection and Affordable Care
Act, as amended by the Health Care and Education Reconciliation Act, or collectively, PPACA, was passed,
which will significantly affect the pharmaceutical industry. In addition to extending coverage to patients
otherwise uninsured, PPACA includes, among several other provisions relating to pharmaceuticals, measures that
impose a new nondeductible fee on certain branded drugs based on market share in government health care
programs, increases in rebates for government programs such as Medicaid, and the creation of a new Patient-
Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical
effectiveness research, along with funding for such research. Many of the details regarding the implementation of
PPACA are yet to be determined, and we cannot predict with certainty whether or to what extent such
implementation or adoption of reforms may impair our business. In addition, legal challenges to the PPACA are
being made, and the ultimate outcome of such challenges and the impact on our business are unknown. Given the
continuing discussion regarding the cost of healthcare, managed care, universal healthcare coverage and other
healthcare issues, we also 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. PPACA and any
additional legislation or regulations 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 other companies, including third-party manufacturers, and we or such other companies 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 own, lease or operate manufacturing
facilities that can produce sufficient quantities of active pharmaceutical ingredient, or API, and finished drug
product 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 regulatory 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, lot release, 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 applicable regulatory authority 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
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uninterrupted and efficient operation of the manufacturing facilities, which is impacted by many manufacturing
variables including:
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availability or contamination of raw materials and components used in the manufacturing process,
particularly those for which we have no other source or supplier;
capacity of our facilities or those of our contract manufacturers;
facility contamination by microorganisms or viruses or cross contamination;
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 complex, and involves
sourcing from a number of different companies and foreign countries. 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 CGMP 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, Arena GmbH has contracted with Siegfried Ltd, or 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.
We rely on third parties to conduct our clinical trials and many of our preclinical studies. If those parties
do not comply with regulatory and contractual requirements, successfully carry out their contractual
duties or meet expected deadlines, our drug candidates may not advance in a timely manner or at all.
In the course of our discovery, preclinical testing and clinical trials, we rely on third parties, including
laboratories, investigators, clinical research organizations and manufacturers, to perform critical services for us.
For example, we rely on third parties to conduct our clinical trials and many of our preclinical studies. Clinical
research organizations are responsible for many aspects of the trials, including finding and enrolling subjects for
testing and administering the trials. 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
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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 preclinical studies or clinical trials may be
extended, delayed or terminated. These independent third parties may also have relationships with other
commercial entities, some of which may compete with us. In addition, if such third parties fail to perform their
obligations in compliance with regulatory requirements and our protocols, our preclinical studies or clinical trials
may not meet regulatory requirements or may need to be repeated. As a result of our dependence on third parties,
we may face delays or failures outside of our direct control. These risks also apply to the development activities
of collaborators, and we do not control their research and development, clinical trial or regulatory activities.
Our efforts will be seriously jeopardized if we are unable to retain and attract key and other employees.
Our success depends on the continued contributions of our principal management, development and
scientific personnel, and the ability to hire and retain key and other personnel. We face competition for such
personnel, and we believe that risks and uncertainties related to our regulatory filings, our available cash
resources, pending and possible future litigation involving us, and our relatively low stock price may impact our
ability to hire and retain key and other personnel. The loss of services of any principal member of our
management or scientific staff or other personnel, particularly Jack Lief, our Chairman, President and Chief
Executive Officer, and Dominic P. Behan, Ph.D., our Executive Vice President and Chief Scientific Officer, or a
combination of different key employees, 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 for any product liability claims or otherwise as a drug product
manufacturer.
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. In addition, under our marketing and supply agreement with Eisai, Arena
GmbH has agreed to indemnify Eisai for certain losses resulting from product liability claims, except to the
extent caused by Eisai’s negligence, willful misconduct, or violation of law or Eisai’s breach of such agreement.
Whether or not we are ultimately successful in any product liability or related litigation, such litigation
would consume substantial amounts of our financial and managerial resources, and might result in adverse
publicity, all of which would impair our business. In addition, damages awarded in a product liability action
could be substantial and could have a negative impact on our financial condition.
An individual may bring a liability claim against us if one of our drug candidates or drugs causes, or merely
appears to have caused, an injury. Regardless of merit or eventual outcome, liability claims may result in:
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decreased demand for our drug;
injury to our reputation;
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costs of related litigation;
substantial monetary awards to subjects or other claimants;
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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. 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, which could have an adverse effect on our
capital sources and financial condition.
Arena GmbH manufactures drug products for Siegfried and will manufacture lorcaserin for Eisai if
lorcaserin is approved. In addition to product liability, Arena GmbH is subject to liability for non-performance,
product recalls and breaches of the agreements with Siegfried and Eisai.
We may be subject, directly or indirectly, to federal and state healthcare fraud and abuse and false claims
laws and regulations. Prosecutions under such laws have increased in recent years and we may become
subject to such litigation. If we are unable to comply, or have not fully complied, with such laws, we could
face substantial penalties.
If we obtain FDA approval to commercialize any of our drug candidates in the United States, our operations
may be directly or indirectly subject to various state and federal fraud and abuse laws, including, without
limitation, the federal Anti-Kickback Statute and federal False Claims Act. These laws may impact, among other
things, the sales, marketing and education programs for our drugs.
The federal Anti-Kickback Statute prohibits persons from knowingly and willingly soliciting, offering,
receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an
individual, or the furnishing or arranging for a good or service, for which payment may be made under a federal
healthcare program such as the Medicare and Medicaid programs. Several courts have interpreted the statute’s
intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce
referrals of federal healthcare covered business, the statute has been violated. The Anti-Kickback Statute is broad
and, despite a series of narrow safe harbors, prohibits many arrangements and practices that are lawful in
businesses outside of the healthcare industry. Penalties for violations of the federal Anti-Kickback Statute
include criminal penalties and civil sanctions such as fines, imprisonment and possible exclusion from Medicare,
Medicaid and other federal healthcare programs. Many states have also adopted laws similar to the federal Anti-
Kickback Statute, some of which apply to the referral of patients for healthcare items or services reimbursed by
any source, not only the Medicare and Medicaid programs.
The federal False Claims Act prohibits persons from knowingly filing, or causing to be filed, a false claim
to, or the knowing use of false statements to obtain payment from the federal government. Suits filed under the
False Claims Act, known as “qui tam” actions, can be brought by any individual on behalf of the government and
such individuals, commonly known as “whistleblowers,” may share in any amounts paid by the entity to the
government in fines or settlement. The filing of qui tam actions has caused a number of pharmaceutical, medical
device and other healthcare companies to have to defend a False Claims Act action. When an entity is determined
to have violated the False Claims Act, it may be required to pay up to three times the actual damages sustained
by the government, plus civil penalties for each separate false claim. Various states have also enacted laws
modeled after the federal False Claims Act.
We are unable to predict whether we could be subject to actions under any of these or other fraud and abuse
laws, or the impact of such actions. If we are found to be in violation of any of the laws described above and
other applicable state and federal fraud and abuse laws, we may be subject to penalties, including civil and
criminal penalties, damages, fines, exclusion from government healthcare reimbursement programs and the
curtailment or restructuring of our operations, all of which could have a material adverse effect on our business
and results of operations.
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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.
The headquarters of our operations outside of the United States is in Switzerland. Activities conducted at
this location include manufacturing, quality control, quality assurance, development of manufacturing processes,
qualifying suppliers and otherwise managing the global supply chain, regulatory compliance, distribution of
finished products, and European strategic planning and development. There are significant risks associated with
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, foreign currency exchange rates and the impact of shifts in the United States and local
economies on those rates, and integration of our policies and procedures, including disclosure controls and
procedures and internal control over financial reporting, with our international operations.
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:
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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 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 in Zofingen, Switzerland, and we expect
that, at least for the foreseeable future, this facility will be the sole location for the manufacturing of lorcaserin
finished drug product. We depend on our facilities and on collaborators, contractors and vendors for the
continued operation of our business, some of whom are located in Europe and Asia. Natural disasters or other
catastrophic events, including interruptions in the supply of natural resources, political and governmental
changes, severe weather conditions, wildfires and other fires, explosions, actions of animal rights activists,
terrorist attacks, 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
and adversely affect, which may include stopping, our commercial production.
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Our executive officers and directors may sell shares of their stock, 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. Our executive officers and directors may sell stock in the future,
either as part, or outside, of trading plans under SEC Rule 10b5-1.
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 agreements 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 rules adopted by the SEC and by NASDAQ, 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 directors and officers liability insurance, and we may be forced to accept reduced policy
limits and coverage or incur substantially higher costs to obtain the same or similar coverage. 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 current or future 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 US 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.
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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 collaborators from
disclosing scientific discoveries before we have the opportunity to file patent applications on such discoveries. In
some of our collaborations, we do not control our collaborators’ ability to disclose their own discoveries under
the collaboration and in some of our academic 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.
We believe that the United States is by far the largest single market for pharmaceuticals in the world.
Because of the critical nature of patent rights to our industry, changes in US patent laws could have a profound
effect on our future profits, if any. It is unknown which, if any, patent laws will change, how changes to the
patent laws will ultimately be enforced by the courts and the impact on our business. For example, in September
2011 the America Invents Act was signed into US law, which changes include, among others, the awarding of a
patent to the first inventor to file a patent as opposed to the first inventor to make an invention and the creation of
new administrative procedures for challenging US patents. It may be several years before the impact of the
America Invents Act on patent law is understood, and we cannot predict with certainty whether or to what extent
the changes may impair our business.
A dispute regarding the infringement or misappropriation of our proprietary rights or the proprietary
rights of others could be costly and result in delays or termination of our future research, development,
manufacturing and sales activities.
Our commercial success depends upon our ability to develop and manufacture our 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 G protein-coupled receptors, or 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
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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.
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:
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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.
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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, 2010, to March 9, 2012, the market price of our
stock was as low as $1.21 per share and as high as $8.00 per share.
Very few drug candidates being tested will ultimately receive regulatory approval, and companies in our
industry sometimes experience a significant drop in stock price. Our stock price may fluctuate significantly
depending on a variety of factors, including:
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legislation or regulatory actions or decisions affecting lorcaserin or other drug candidates or drugs;
discussions or recommendations affecting lorcaserin or other drug candidates or drugs by FDA
advisory committees or other reviewers of preclinical or clinical data or other information related to
lorcaserin or other drug candidates or drugs;
the success or failure of our clinical-stage development programs or other results or decisions affecting
the development of our drug candidates;
the timing of the discovery of drug leads and the development of our drug candidates;
the 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 or other 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, development or withdrawal of drug candidates or drugs by others that target the same
diseases and conditions that we or our collaborators target or the introduction of new drug discovery
techniques;
the success, failure or setbacks of our or a perceived competitor’s drug candidate or drug;
expenses related to, and the results of, litigation, other disputes and other proceedings;
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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 180,422,401 shares of our common stock outstanding as of March 9, 2012. We also had
outstanding as of March 9, 2012, a seven-year warrant issued in June 2006 to purchase 1,467,405 shares of our
common stock at an exercise price of $8.76 per share and a seven-year warrant issued in August 2008 to
purchase 1,965,418 shares of our common stock at an exercise price of $4.34 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.
As of March 9, 2012, we had outstanding warrants we issued to Deerfield to purchase an aggregate of
23,000,000 shares of our common stock with a weighted-average exercise price of $1.70 per share and an
expiration date of June 17, 2015.
Along with our outstanding warrants, as of March 9, 2012, there were (i) options to purchase 9,978,884
shares of our common stock outstanding under our equity incentive plans at a weighted-average exercise price of
$5.41 per share, (ii) 5,997,721 additional shares of common stock remaining issuable under our 2009 Long-Term
Incentive Plan, (iii) 545,921 shares of common stock remaining issuable under our 2009 Employee Stock
Purchase Plan, and (iv) 79,169 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 primarily financed our operations, and we expect to continue to finance our operations, 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 funding, 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. For
example, in July 2009 we issued debt to Deerfield that is secured by our assets, and Deerfield’s right to
repayment would be senior to your rights to receive any proceeds from a liquidation in bankruptcy or otherwise.
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The holders of our common stock and other securities may take actions that are contrary to your interests,
including selling their stock.
A small number of our stockholders hold or have rights to acquire a significant amount of our outstanding
stock. These stockholders may support competing transactions and have interests that are different from yours. In
addition, sales of a large number of shares of our stock by these large stockholders or other stockholders within a
short period of time could adversely affect our stock price.
We may also be involved with 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 1B. Unresolved Staff Comments.
None.
Item 2.
Properties.
As set forth in the below table, the principal facilities that we occupy include approximately 345,000 square
feet of research, development, warehouse and office space located at various addresses in the same business park
in San Diego, California and approximately 81,000 square feet of laboratory, manufacturing, warehouse and
office space located in the same business park in Zofingen, Switzerland.
52
Location
Own/ Lease
Description
6114 Nancy Ridge Drive
Lease with option
to purchase
This chemical development facility consists of approximately
40,000 square feet (which includes approximately 18,000 of
internal square feet and approximately 22,000 square feet of
integrated external space), of which approximately 5,000 square
feet is office space. The remaining approximately 35,000 square
feet of space is dedicated to process research and scale-up
chemistry, the production of intermediates and other
compounds for research and development purposes, and the
production of active pharmaceutical ingredients to support our
clinical trials. We commenced CGMP operations in this facility
in 2004.
6118 Nancy Ridge Drive
Lease with option
to purchase
This facility of approximately 30,000 square feet consists of
approximately 50% laboratory space and 50% office space.
6122-6124-6126 Nancy
Ridge Drive
Lease; option to
purchase
assigned
6138-6150 Nancy Ridge
Drive
Lease with option
to purchase
The portion of this facility we lease consists of approximately
40,000 square feet, of which approximately 24,000 square feet
is laboratory space and 16,000 square feet is office space. In
May 2007, we assigned our option to purchase the entire
facility, which includes approximately 68,000 square feet. We
expect that the assigned option will be exercised in the near
term, and that we will thereafter lease this facility from the
assignor and have an option to purchase the facility.
This facility of approximately 55,000 square feet consists of
approximately 33,000 square feet of laboratory space and
22,000 square feet of office space.
6154 Nancy Ridge Drive
Lease with option
to purchase
This facility of approximately 143,000 square feet consists of
approximately 131,000 square feet of office space and 12,000
square feet of warehouse space.
6162 Nancy Ridge Drive
Own
6166 Nancy Ridge Drive
Lease
Zofingen, Switzerland
Own
Zofingen, Switzerland
Lease
This facility includes approximately 20,000 square feet of
warehouse and office space, all of which is presently
unoccupied.
This facility of approximately 37,000 square feet consists of
approximately 23,000 square feet of laboratory space and
14,000 square feet of office space.
The portion of this facility we own consists of approximately
67,000 square feet, including approximately 39,000 square feet
of manufacturing space, 21,000 square feet of warehouse space
and 7,000 square feet of office space.
We lease from Siegfried a total of approximately 14,000 square
feet, consisting of approximately 6,000 square feet of
warehouse space, 5,000 square feet of office space and 3,000
square feet of laboratory space, in various facilities.
We expect these facilities to be sufficient for our needs for at least the near term. We have more space in
San Diego than we expect to need for the foreseeable future, and are exploring subleasing some of our space and
other options to reduce our expenses.
53
Item 3.
Legal Proceedings.
Beginning on September 20, 2010, a number of complaints were filed in the US District Court for the
Southern District of California against us and certain of our current and former employees and directors on
behalf of certain purchasers of our common stock. The complaints have been brought as purported stockholder
class actions, and, in general, include allegations that we and certain of our current and former employees and
directors violated federal securities laws by making materially false and misleading statements regarding our
lorcaserin program, thereby artificially inflating the price of our common stock. The plaintiffs are seeking
unspecified monetary damages and other relief. On November 19, 2010, eight prospective lead plaintiffs filed
motions to consolidate, appoint a lead plaintiff, and appoint lead counsel. The Court took the motions to
consolidate under submission on January 14, 2011. On August 8, 2011, the Court consolidated the actions and
appointed a lead plaintiff and lead counsel. On November 1, 2011, the lead plaintiff filed a consolidated amended
complaint. On December 30, 2011, we filed a motion to dismiss the consolidated amended complaint, and a
hearing on the motion to dismiss has been scheduled for April 13, 2012. In addition to the class actions, a
complaint involving similar legal and factual issues has been brought by at least one individual stockholder and
is pending in federal court. On December 30, 2011, we filed a motion to dismiss the stockholder’s complaint, and
a hearing on the motion to dismiss has been scheduled for April 13, 2012. We intend to defend against the claims
advanced and to seek dismissal of these complaints. Due to the early stage of these proceedings, we are not able
to predict or reasonably estimate the ultimate outcome or possible losses relating to these claims.
On September 24, 2010, a stockholder derivative complaint was filed in the Superior Court of California for
the County of San Diego against certain of our current and former employees and directors, and other
stockholder derivative complaints were subsequently filed in state court. On October 19, 2010, the Superior
Court ordered that the pending state derivative actions be consolidated. The Superior Court also ordered that later
filed, related state derivative actions be consolidated as well. We refer to the consolidated state derivative actions
as the State Derivative Action. In November 2010, plaintiffs in the State Derivative Action filed a consolidated
stockholder derivative complaint. We filed a demurrer to the consolidated stockholder derivative complaint on
February 15, 2011. On October 6, 2010, a stockholder derivative complaint was filed in the US District Court for
the Southern District of California. Thereafter, a number of other stockholder derivative complaints were also
filed in federal court. On March 3, 2011, the federal court ordered that the pending federal derivative actions be
consolidated. The federal court also ordered that later filed, related federal derivative actions be consolidated as
well. We refer to the consolidated federal derivative actions as the Federal Derivative Action. We refer to the
State Derivative Action and the Federal Derivative Action collectively as the Derivative Actions. The Derivative
Actions allege breaches of fiduciary duties by the defendants and other violations of law. In general, the
Derivative Actions allege that certain of our current and former employees and directors caused or allowed for
the dissemination of materially false and misleading statements regarding our lorcaserin program, thereby
artificially inflating the price of our common stock. On September 9, 2011, we and lead counsel for the plaintiffs
in the Derivative Actions entered into a stipulation of settlement to resolve the Derivative Actions. The current
and former employees and directors named as individual defendants in the Derivative Actions have also entered
into the stipulation of settlement. On October 19, 2011, the Superior Court of California entered an order
preliminarily approving the proposed settlement. On December 16, 2011, the Superior Court of California issued
its final order and judgment approving the settlement and dismissing the State Derivative Action with prejudice.
On December 29, 2011, the US District Court issued an order dismissing the Federal Derivative Action with
prejudice. In accordance with the terms of the settlement, and in exchange for a release of all claims by the
plaintiffs, among others, we have agreed to adopt certain corporate governance measures and cause our insurers
to pay the plaintiffs’ attorneys a total of $1.1 million.
Item 4. Mine Safety Disclosures.
Not applicable.
54
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
Market information
Our common stock is listed on the NASDAQ Global Select Market under the symbol “ARNA.” The
following table sets forth, for the periods indicated, the high and low sale prices for our common stock as
reported by the NASDAQ Global Select Market.
Year ended December 31, 2010
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
First Quarter
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3.85
$3.48
$8.00
$2.38
$2.89
$2.70
$1.51
$1.26
High
Low
Year ended December 31, 2011
First Quarter
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2.23
$1.68
$1.75
$2.62
$1.37
$1.21
$1.24
$1.23
High
Low
Holders
As of March 9, 2012, there were approximately 132 stockholders of record of our common stock, one of
which is Cede & Co., a nominee for Depository Trust Company, or DTC. Shares of common stock that are held
by financial institutions as nominees for beneficial owners are deposited into participant accounts at DTC, and
are considered to be held of record by Cede & Co. as one stockholder.
Dividends
We have never paid cash dividends on our capital stock, and we are prohibited from doing so under the
Facility Agreement, dated June 17, 2009, as amended, between us 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. We anticipate that we
will retain earnings, if any, to support operations and finance the growth and development of our business and,
therefore, do not expect to pay cash dividends in the foreseeable future.
55
Item 6.
Selected Financial Data.
The following Selected Financial Data should be read in conjunction with “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements
and Supplementary Data” included below in this Annual Report on Form 10-K.
Years ended December 31,
2011
2010
2009
2008
2007
(In thousands, except share and per share data)
Revenues
Manufacturing services . . . . . . . . . . . . . . . $
Collaborative agreements . . . . . . . . . . . . .
5,338 $
7,381
7,057 $
9,556
6,579 $
3,808
Total revenues . . . . . . . . . . . . . . . . . .
12,719
16,613
10,387
7,434 $
2,375
9,809
Operating Expenses
Cost of manufacturing services . . . . . . . . .
Research and development
. . . . . . . . . . . .
General and administrative . . . . . . . . . . . .
Restructuring charges . . . . . . . . . . . . . . . .
Amortization of acquired technology and
other intangibles . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . .
Interest and other income (expense),
8,100
58,706
24,248
3,467
997
95,518
0
19,332
19,332
0
149,524
26,571
0
7,414
75,459
27,936
0
6,536
110,159
25,247
3,324
8,515
204,374
30,535
0
2,159
3,508
2,314
1,537
112,968
148,774
245,738
177,632
net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(26,425)
(28,179)
(14,817)
(1,644)
15,134
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deemed dividends related to beneficial
conversion feature of convertible
preferred stock . . . . . . . . . . . . . . . . . . . .
Dividends on redeemable convertible
preferred stock . . . . . . . . . . . . . . . . . . . .
Net loss allocable to common
(109,224)
(124,534)
(153,204)
(237,573)
(143,166)
(2,260)
0
0
0
0
0
0
0
(1,912)
(2,114)
stockholders . . . . . . . . . . . . . . . . . . . . . . $
(111,484) $
(124,534) $ (153,204) $ (239,485) $ (145,280)
Net loss per share allocable to common
stockholders, basic and diluted . . . . . . . $
(0.80) $
(1.14) $
(1.82) $
(3.24) $
(2.31)
Shares used in calculating net loss per
share allocable to common
stockholders, basic and diluted . . . . . . .
Balance Sheet Data:
Cash and cash equivalents . . . . . . . . . . . . . $
Short-term investments,
available-for-sale . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred revenues . . . . . . . . . . . . . . .
Total lease financing obligations . . . . . . .
Total derivative liabilities . . . . . . . . . . . . .
Total notes payable . . . . . . . . . . . . . . . . . .
Redeemable convertible preferred
stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . .
Accumulated deficit
Total stockholders’ equity . . . . . . . . . . . . .
139,170,725
109,573,177
84,341,362
73,840,716
62,782,850
2011
2010
2009
2008
2007
As of December 31,
(In thousands)
57,632 $
150,669 $
94,733 $
73,329 $
386,989
0
157,129
44,682
75,771
1,617
14,698
0
266,362
48,077
76,769
2,271
48,138
20,716
236,278
4,086
77,486
6,642
57,049
36,800
241,331
4,049
63,067
0
8,567
11,196
487,506
4,049
62,307
0
0
0
(1,079,751)
10,562
0
(970,527)
80,015
0
(845,993)
74,567
0
(700,342)
117,632
53,922
(479,451)
336,377
56
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis in conjunction with “Item 8. Financial Statements
and Supplementary Data” included below in this Annual Report on Form 10-K, or Annual Report. Operating
results are not necessarily indicative of results that may occur in future periods.
This discussion and analysis contains forward-looking statements that involve a number of risks,
uncertainties and assumptions. Actual events or results may differ materially from our expectations. Important
factors that could cause actual results to differ materially from those stated or implied by our forward-looking
statements include, but are not limited to, those set forth in “Item 1A. Risk Factors” in this Annual Report. All
forward-looking statements included in this Annual Report are based on information available to us as of the
time we file this Annual Report and, except as required by law, we undertake no obligation to update publicly or
revise any forward-looking statements.
OVERVIEW AND RECENT DEVELOPMENTS
We have incurred net losses of $1.1 billion from our inception in April 1997 through December 31, 2011,
and expect to incur significant net losses in the future as we seek regulatory approval of our most advanced drug
candidate, lorcaserin, and advance certain research and development programs. Arena Pharmaceuticals GmbH, or
Arena GmbH, our wholly owned subsidiary, has granted Eisai Inc., or Eisai, exclusive rights to market and
distribute lorcaserin in the United States and its territories and possessions subject to US Food and Drug
Administration, or FDA, approval of our New Drug Application, or NDA, for lorcaserin.
We have obtained cash and funded our operations to date primarily through the sale of common and
preferred stock, the issuance of debt and related financial instruments, payments from collaborators and sale
leaseback transactions. From our inception through December 31, 2011, we have generated $1.5 billion in cash
from these sources, of which $1.1 billion was through sales of equity, $232.7 million was through payments from
collaborators, $96.9 million was through the issuance of debt and related financial instruments to certain
Deerfield entities and $77.1 million was from sale and leaseback transactions. At December 31, 2011, we had
$57.6 million in cash and cash equivalents. Subsequent to December 31, 2011, we raised net proceeds totaling
$52.6 million from two equity financings. We will continue to be opportunistic in our efforts to obtain cash, and
expect to evaluate various financing alternatives on an ongoing basis.
Recent and 2011 highlights include:
•
•
•
In March 2012, filed a marketing authorization application for lorcaserin through the centralized
procedure with the European Medicines Agency, or EMA. We were previously assigned the UK’s
Medicines and Healthcare products Regulatory Agency, or MHRA, as our application Rapporteur, and
Sweden’s Medical Products Agency, or MPA, as Co-rapporteur. We expect the EMA will accept the
MAA later this month and confirm the filing is sufficient to permit a substantive review.
In December 2011, resubmitted the lorcaserin NDA with the FDA. The FDA has accepted the
resubmission for filing and review, assigned a new Prescription Drug User Fee Act, or PDUFA, target
date of June 27, 2012, and notified us that an Endocrinologic and Metabolic Drugs Advisory
Committee meeting to discuss the resubmission is tentatively scheduled on May 10, 2012. The
resubmission includes data and analyses that were not incorporated in the original NDA, including the
results of our Phase 3 BLOOM-DM (Behavioral modification and Lorcaserin for Overweight and
Obesity Management in Diabetes Mellitus) clinical trial, which evaluated lorcaserin for weight loss in
patients with type 2 diabetes and was completed after we filed the original NDA. The new information
also includes data and analyses from activities intended to address tumors observed in a two-year
lorcaserin rat carcinogenicity study, as well as cell culture experiments intended to further refine
serotonin subtype 2 receptor activity and rat studies designed to further assess abuse potential.
In July 2011, announced results from a Phase 1 clinical trial of APD811, an orally available agonist of
the prostacyclin receptor that is intended for the treatment of pulmonary arterial hypertension. The
randomized, double-blind and placebo-controlled trial evaluated the safety, tolerability and
pharmacokinetics of single doses of APD811.
57
We refer you to our previously filed SEC reports for a more complete discussion of these and related
developments.
The drug development and approval process is long, uncertain and expensive, and our ability to achieve our
goals, including obtaining regulatory approval for lorcaserin and other of our drug candidates, depends on
numerous factors, many of which we do not control. We will continue to seek to balance the high costs of
research, development and manufacturing against the need to sustain our operations long enough to
commercialize the results of our efforts. To date, we have not generated any revenues from the sale of any of our
drug candidates. We do not expect any of our drug candidates to be commercially available until at least late in
2012, if ever. We expect to continue to incur substantial losses, and do not expect to generate positive operating
cash flows, for at least the short term. Accordingly, we will need to raise additional funds through equity, debt or
other financing transactions or receive additional funds under our marketing and supply agreement with Eisai or
under future collaborative agreements for one or more of our drug candidates or programs. We will continue to
use substantial cash as we seek regulatory approval of lorcaserin, continue advancing certain earlier-stage
research and development programs, continue maintaining our manufacturing capabilities and continue incurring
general and administrative expenses.
SUMMARY OF REVENUES AND EXPENSES
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 dollar values in the
following tables are in millions.
Revenues
Source of revenue
Years ended December 31,
2011
2010
2009
% change from
2010 to 2011
% change from
2009 to 2010
Manufacturing services agreement
. . . . . . . . . . . . . . . .
Collaborative agreements . . . . . . . . . . . . . . . . . . . . . . .
$ 5.3
7.4
$ 7.1
9.5
$ 6.6
3.8
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$12.7
$16.6
$10.4
(24.4)%
(22.8)%
(23.5)%
7.3%
151.0%
60.0%
Research and development expenses
Type of expense
Salary and other personnel costs (excluding non-cash
share-based compensation) . . . . . . . . . . . . . . . . . . . . .
Facility and equipment costs . . . . . . . . . . . . . . . . . . . . . .
Internal research and development manufacturing costs
for Swiss facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
External clinical and preclinical study fees and
expenses, including external manufacturing costs . . . .
Research supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash share-based compensation . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years ended December 31,
2011
2010
2009
% change from
2010 to 2011
% change from
2009 to 2010
$24.9
12.0
$33.5
14.2
$ 35.5
15.4
(25.7)%
(15.4)%
(5.4)%
(7.5)%
5.4
4.3
34.3%
24.3%
7.2
6.6
3.5
1.9
2.6
10.6
3.9
3.4
4.5
41.4
4.6
4.1
4.9
(38.0)%
(11.7)%
(42.5)%
(42.0)%
(22.2)%
(74.4)%
(15.1)%
(16.6)%
(9.6)%
(31.5)%
Total research and development expenses . . . . . . . .
$58.7
$75.5
$110.2
58
General and administrative expenses
Type of expense
Years ended December 31,
2011
2010
2009
% change from
2010 to 2011
% change from
2009 to 2010
Salary and other personnel costs (excluding non-cash
share-based compensation) . . . . . . . . . . . . . . . . . . . .
Legal, accounting and other professional fees . . . . . . . .
Facility and equipment costs . . . . . . . . . . . . . . . . . . . . .
Non-cash share-based compensation . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
$ 9.1
7.6
4.2
1.7
1.6
$ 9.9
9.7
3.8
2.1
2.4
Total general and administrative expenses . . . . . .
$24.2
$27.9
$ 9.1
7.9
3.5
2.8
1.9
$25.2
(8.4)%
(21.6)%
12.1%
(19.1)%
(33.5)%
(13.2)%
9.0%
21.7%
6.5%
(24.0)%
30.6%
10.7%
YEAR ENDED DECEMBER 31, 2011, COMPARED TO YEAR ENDED DECEMBER 31, 2010
Revenues. We recognized revenues of $12.7 million for the year ended December 31, 2011, compared to
$16.6 million for the year ended December 31, 2010. Our revenues for the year ended December 31, 2011,
included (i) $5.3 million under our amended manufacturing services agreement with Siegfried Ltd, or Siegfried,
(ii) $3.5 million from amortization of the $50.0 million non-refundable, upfront payment we received in July
2010 from Eisai, (iii) $3.3 million under our marketing and supply agreement with Eisai in reimbursements for
additional lorcaserin development work and (iv) $0.5 million, primarily for patent activities, related to our former
collaboration with Ortho-McNeil-Janssen Pharmaceuticals, Inc., or Ortho-McNeil-Janssen, which was terminated
effective December 28, 2010. Our revenues for the year ended December 31, 2010, included (i) $7.1 million
under our manufacturing services agreement with Siegfried, (ii) $4.0 million of deferred non-cash revenues
recognized from our license agreement with TaiGen Biotechnology Co., Ltd., or TaiGen, (iii) $3.2 million for
patent activities, primarily related to our former collaboration with Ortho-McNeil-Janssen, (iv) $1.9 million from
amortization of the $50.0 million non-refundable, upfront payment we received from Eisai and (v) $0.4 million
related to a license agreement with GlaxoSmithKline LLC and GlaxoSmithKline Research & Development
Limited, or collectively GSK, for their use of our Melanophore screening technology. The $1.8 million decrease
in manufacturing services revenues comparing 2011 to 2010 is comprised of $1.4 million related to reductions in
sales prices agreed to in the amended agreements with Siegfried, with the balance related to changes in volume
and product mix.
When collaborators pay us before revenues are earned, we record such payments as deferred revenues until
earned. As of December 31, 2011, we had a total of $44.7 million in deferred revenues. All of our deferred
revenues are attributable to our marketing and supply agreement with Eisai and are being recognized as revenue
ratably over the period in which we expect to have significant involvement. At inception of this agreement, we
estimated the period of significant involvement at 13 years and, in 2011, based on revised expectations of the
timing of regulatory approval for lorcaserin, if ever, we re-assessed such period to be 14.5 years. Absent any new
collaborations, we expect our 2012 revenues will primarily consist of amortization of the $50.0 million
non-refundable, upfront payment we received from Eisai and manufacturing services revenue from Siegfried. We
expect the revenues we recognize in 2012 under this manufacturing services agreement will be lower than in
2011 due to further pricing discounts and decreased units of drug product manufactured under the amended
agreements with Siegfried. If lorcaserin is approved for US marketing, and upon the delivery of product supply
for launch, we will also receive a milestone payment from Eisai of $40.0 million or $60.0 million, depending on
the approved drug label. In addition, if the FDA requires any development work following US approval of
lorcaserin, Eisai will reimburse us for 90% of such expenses, which will be recognized as revenues.
Revenues 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 for at least the short
term will depend on whether and when we enter into any agreements to commercialize lorcaserin outside of the
United States, collaborate on or license any of our other drug candidates or intellectual property, and receive US
marketing approval for lorcaserin, as well as revenues under our manufacturing services agreement with Siegfried.
59
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. We recognized cost of manufacturing services
of $8.1 million and $7.4 million for the years ended December 31, 2011, and 2010, respectively. The amount
recognized in 2011 included $1.2 million representing the estimated contract loss provision for services expected
to be rendered in 2012 under the amended manufacturing services agreement with Siegfried.
Research and development expenses. Research and development expenses, which account for the majority
of our expenses, consist primarily of salaries and other personnel costs, clinical trial costs (including payments to
contract research organizations, or CROs), preclinical study fees, manufacturing costs for non-commercial
products, costs for the development of our earlier-stage programs and technologies, research supply costs and
facility and equipment costs. We expense research and development costs as they are incurred when these
expenditures have no alternative future uses. We generally do not track our earlier-stage, internal research and
development expenses by project; rather, we track such expenses by the type of cost incurred.
Research and development expenses decreased by $16.8 million to $58.7 million for the year ended
December 31, 2011, from $75.5 million for the year ended December 31, 2010. This was primarily due to
decreases of (i) $8.6 million in salary and other personnel costs as a result of a 2011 reduction of our US
workforce of approximately 25%, or 65 employees, which we refer to as our 2011 workforce reduction,
(ii) $4.0 million in external clinical and preclinical study fees and expenses, including manufacturing costs,
primarily due to completing our Phase 3 clinical trials for lorcaserin and (iii) $2.2 million in facility and
equipment costs, primarily due to lower depreciation expense. These decreases were partially offset by a $1.8
million increase in internal research and development manufacturing costs at our Swiss drug product
manufacturing facility, due to decreased units of drug product manufactured under the amended agreements with
Siegfried that resulted in an increase in the unused manufacturing capacity. Our internal research and
development manufacturing costs were primarily comprised of unused manufacturing capacity and, to a lesser
extent, costs related to lorcaserin activities. We expect to continue to incur substantial research and development
expenses in 2012. We also expect to incur manufacturing costs for lorcaserin and that such costs will be
substantial if the FDA approves our NDA for lorcaserin. However, if the NDA for lorcaserin is approved, we will
begin to record our lorcaserin manufacturing costs as cost of goods sold as the related inventory is sold, instead
of as part of our research and development expenses. Pre-launch inventory manufactured is being charged to
expense until we believe that the likelihood of approval is such that we should begin recording the production
costs related to the inventory produced as an asset.
Included in the $6.6 million total external clinical and preclinical study fees and expenses noted in the table
above for the year ended December 31, 2011, was $3.6 million related to our lorcaserin program, $1.7 million
related to our APD811 program for the potential treatment of pulmonary arterial hypertension, $0.7 million
related to our APD334 program for the potential treatment of autoimmune diseases, and $0.2 million related to
our GPR119 program for the potential treatment of type 2 diabetes. Included in the $10.6 million total external
clinical and preclinical study fees and expenses noted in the table above for the year ended December 31, 2010,
was $7.5 million related to our lorcaserin program, $1.4 million related to our APD811 program, $1.1 million
related to our APD334 program and $0.5 million related to APD916 (which we formerly studied for the potential
treatment of narcolepsy with cataplexy and have since abandoned).
Cumulatively through December 31, 2011, we have recognized external clinical and preclinical study fees
and other related expenses of $258.4 million for lorcaserin, $43.7 million for nelotanserin (formerly APD125),
$7.3 million for temanogrel (formerly APD791), $4.5 million for APD811, $2.8 million for APD916 and
$1.7 million for APD334. We previously studied nelotanserin for insomnia and temanogrel for the potential
treatment of arterial thrombosis and other related conditions. While expenditures on current and future clinical
development programs are expected to be substantial, they are subject to many uncertainties, including whether
we have adequate funds and develop our drug candidates with one or more collaborators or independently. As a
result of such uncertainties, we cannot predict with any significant degree of certainty the duration and
60
completion costs of our research and development projects or whether, when and to what extent we will generate
revenues from the commercialization and sale of any of our drug candidates. The duration and cost of clinical
trials may vary significantly over the life of a project as a result of unanticipated events arising during clinical
development and a variety of factors, including:
•
•
•
•
•
•
•
the nature and number of trials and studies in a clinical program;
the number of patients who participate in the trials;
the number of sites included in the trials;
the rates of patient recruitment and enrollment;
the duration of patient treatment and follow-up;
the costs of manufacturing drug candidates; and
the costs, requirements, timing of, and the ability to secure regulatory approvals.
General and administrative expenses. General and administrative expenses decreased by $3.7 million to
$24.2 million for the year ended December 31, 2011, from $27.9 million for the year ended December 31, 2010.
This was primarily due to decreases of (i) $2.1 million in legal fees, including litigation and patent legal fees,
(ii) $0.8 million in salary and other personnel costs and (iii) $0.7 million in marketing research expenses. We
expect that our 2012 general and administrative expenses will be lower than in 2011, primarily as a result of
lower salary and personnel costs and patent legal fees.
Restructuring charges. We recognized $3.5 million of restructuring charges for the year ended
December 31, 2011, in connection with one-time employee termination costs, including severance and other
benefits related to our 2011 workforce reduction, compared to no restructuring charges in the year ended
December 31, 2010.
Amortization of acquired technology and other intangibles. We recognized $1.0 million for amortization
of acquired technology and other intangibles for the year ended December 31, 2011, compared to $2.2 million for
the year ended December 31, 2010. This $1.2 million decrease was primarily due to reaching the end of the
10-year estimated useful life of the Melanophore screening technology in the first quarter of 2011. The remaining
amortization expense relates to the manufacturing facility production licenses we acquired in January 2008,
which are being amortized over their estimated useful life of 20 years. Using the exchange rate in effect on
December 31, 2011, we expect to record amortization expense of $0.7 million per year through 2027 for the
manufacturing facility production licenses.
Interest and other expense, net. Interest and other expense, net, decreased by $1.8 million to $26.4 million
for the year ended December 31, 2011, from $28.2 million for the year ended December 31, 2010. This was
primarily due to (i) a $7.4 million decrease in interest expense primarily related to the Deerfield loan as a result
of principal repayments totaling $67.7 million that we made in 2010 and early 2011 and (ii) a $1.8 million
reduction in the non-cash loss on extinguishment of debt. These decreases were partially offset by a (i) $4.3
million reduction in the non-cash gain from revaluation of our derivative liabilities and (ii) a $2.0 million write-
down of the balance of our investment in TaiGen. The interest expense recognized in 2010 included the non-cash
correction of prior period errors which resulted in a $3.0 million decrease to interest expense.
We recognized interest expense of $6.6 million related to the Deerfield loan for the year ended
December 31, 2011, which included $2.3 million we paid Deerfield in cash. For the year ended December 31,
2010, we recognized interest expense of $14.0 million on the Deerfield loan, which included $6.1 million we
paid Deerfield in cash. Although the debt prepayments we made have reduced our future interest payments, we
expect that our interest expense will continue to be substantial due to both the remaining principal balance and
accretion on the Deerfield loan, as well as payments on our lease financing obligations. At December 31, 2011,
we expect interest expense of $2.6 million to be paid in cash over the remaining term of the Deerfield loan.
61
Deemed dividend related to beneficial conversion feature of convertible preferred stock. We recorded
a deemed dividend of $2.3 million for the year ended December 31, 2011, upon the issuance of our then-
outstanding Series C Convertible Preferred Stock, or Series C Preferred, related to the beneficial conversion
feature of the Series C Preferred. We did not record any such dividends for the year ended December 31, 2010.
YEAR ENDED DECEMBER 31, 2010, COMPARED TO YEAR ENDED DECEMBER 31, 2009
Revenues. We recognized revenues of $16.6 million for the year ended December 31, 2010, compared to
$10.4 million for the year ended December 31, 2009. Our revenues for the year ended December 31, 2010, included
(i) $7.1 million under our manufacturing services agreement with Siegfried, (ii) $4.0 million of deferred non-cash
revenues recognized from our license agreement with TaiGen, (iii) $3.2 million for patent activities, primarily
related to our former collaboration with Ortho-McNeil-Janssen, (iv) $1.9 million from amortization of the $50.0
million non-refundable, upfront payment we received from Eisai and (v) $0.4 million related to a technology license
agreement with GSK. Our revenues for the year ended December 31, 2009, included $6.6 million under our
manufacturing services agreement with Siegfried and $3.8 million for patent activities and additional sponsored
research from our former collaborations with Ortho-McNeil-Janssen and Merck & Co., Inc., or Merck.
Cost of manufacturing services. We recognized cost of manufacturing services of $7.4 million and $6.5
million for the years ended December 31, 2010, and 2009, respectively.
Research and development expenses. Research and development expenses decreased by $34.7 million to
$75.5 million for the year ended December 31, 2010, from $110.2 million for the year ended December 31, 2009.
This difference was primarily due to decreases of (i) $30.8 million in external clinical and preclinical study fees
and expenses, including manufacturing costs, primarily due to completing our lorcaserin Phase 3 clinical trials,
(ii) $2.0 million in salary and other personnel costs as a result of a 2009 reduction of our US workforce of
approximately 31%, or 130 employees, which we refer to as our 2009 workforce reduction, and (iii) $1.2 million
in facility and equipment costs. Included in the $10.6 million total external clinical and preclinical study fees and
expenses noted in the table above for the year ended December 31, 2010, was $7.5 million related to our
lorcaserin program, $1.4 million related to our APD811 program, $1.1 million related to our APD334 program
and $0.5 million related to APD916. Included in the $41.4 million total external clinical and preclinical study
fees and expenses noted in the table above for the year ended December 31, 2009, was $38.9 million related to
our lorcaserin program, $1.3 million related to our APD811 program and $0.5 million related to nelotanserin.
General and administrative expenses. General and administrative expenses increased by $2.7 million to
$27.9 million for the year ended December 31, 2010, from $25.2 million for the year ended December 31, 2009.
This was primarily due to increases of (i) $1.7 million in legal fees, including litigation and patent legal fees,
(ii) $0.8 million in salary and other personnel costs and (iii) $0.7 million in non-cash share-based compensation.
Restructuring charges. We recognized no restructuring charge for the year ended December 31, 2010,
compared to $3.3 million for the year ended December 31, 2009, which was in connection with our 2009
workforce reduction.
Amortization of acquired technology and other intangibles. We recognized $2.2 million for amortization
of acquired technology and other intangibles for the year ended December 31, 2010, compared to $3.5 million for
the year ended December 31, 2009. This decrease was primarily due to the workforce we acquired from Siegfried
in January 2008, which was amortized over its estimated benefit of two years through the end of 2009.
Interest and other expense, net. Interest and other expense, net, increased by $13.4 million to
$28.2 million for the year ended December 31, 2010, from $14.8 million for the year ended December 31, 2009.
This increase was primarily due to increases of (i) $9.9 million in non-cash loss on extinguishment of debt and
(ii) $3.0 million in interest expense related to the loan we received from Deerfield in July 2009. This increase
was partially offset by (i) a $1.0 million decrease in the non-cash gain from revaluation of our derivative
liabilities and (ii) a $0.9 million gain on investments.
62
LIQUIDITY AND CAPITAL RESOURCES
We have accumulated a large deficit since inception that has primarily resulted from the significant research
and development expenditures we have made in seeking to identify and validate new drug targets and develop
compounds that could become marketed drugs. We expect that our losses and operating expenses will continue to
be substantial, even if we are successful in advancing our most advanced drug candidate, lorcaserin, including
under our marketing and supply agreement with Eisai, or our other compounds and drug candidates, with one or
more collaborators or independently.
Short term
As of December 31, 2011, we had $57.6 million in cash and cash equivalents. In March 2012, we received
net proceeds of $24.7 million from the sale of common shares under an equity line of credit agreement with
Azimuth Opportunity, L.P. In January 2012, we received net proceeds of $27.9 million from the sale of common
and preferred shares and a warrant exchange with certain Deerfield entities, after deducting the $5.0 million of
loan principal, originally scheduled to be repaid in June 2013, we prepaid to Deerfield. We believe our cash and
cash equivalents will be sufficient to fund our operations for at least the next 12 months. Other potential sources
of liquidity in the short term include (i) entering into new collaborative, licensing or commercial agreements for
one or more of our drug candidates or programs or our patent portfolios, (ii) equity, debt or other financing,
(iii) the sale of facilities or other assets we own and (iv) payments from current collaborators.
To date, we have obtained cash and funded our operations primarily through equity financings, the issuance
of debt and related financial instruments, payments from collaborators and sale leaseback transactions. We will
continue to be opportunistic in our efforts to obtain cash, and expect to evaluate various funding alternatives on
an ongoing basis. There is no guarantee that additional funding will be available or that, if available, such
funding will be adequate or available on terms that we or our stockholders view as favorable.
In December 2011, we resubmitted the NDA for lorcaserin, and the FDA has assigned a new PDUFA target
date of June 27, 2012, for review of the application. Our marketing and supply agreement with Eisai provides
that Eisai and we will share equally the cost of certain additional development work required by the FDA prior to
US approval of lorcaserin and that Eisai will pay 90% of any required post-approval development work. We are
also seeking regulatory approval for lorcaserin in the European Union. We expect to continue to incur expenses
for lorcaserin development activities in 2012. If we receive regulatory approval of lorcaserin in the United States,
and upon the delivery of product supply for launch, we will receive a milestone payment from Eisai of $40.0
million or $60.0 million, depending on the approved drug label.
In January 2008, Arena GmbH acquired from Siegfried certain drug product manufacturing assets under an
asset purchase agreement, and, in connection with such purchase, also entered into a manufacturing services
agreement and a technical services agreement with Siegfried. In October 2011, Arena GmbH paid Siegfried the
final payment under the asset purchase agreement, as amended. Under the agreements, as amended, Siegfried
agreed (i) to use its reasonable commercial effort to order from Arena GmbH 200 million units of drug product
for manufacture by Arena GmbH from January 1, 2012, to June 30, 2012, (ii) to order 80% of its requirements of
certain drug products from Arena GmbH for the calendar year 2012 at agreed upon sales prices, which are
generally below Arena GmbH’s cost and reduced from prior years and (iii) to reduce its fees for providing Arena
GmbH with certain technical and business services. We expect the cash we receive from Siegfried in 2012 will
be lower than in previous years due to decreases in drug product prices and units manufactured.
We are continuing to fund activities in support of obtaining regulatory approval of lorcaserin, and, at the
same time, selectively advancing certain of our research and development programs. If our NDA is approved on
or near the PDUFA target date of June 27, 2012, we expect that our research and development expenditures will
be higher in 2012 than in 2011 as we continue to selectively advance certain of our research and development
programs, as well as incur other development expenses for lorcaserin. If our NDA is not approved on or near the
PDUFA date, we expect to postpone or reduce our research, development, manufacturing or other expenses.
63
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, the results and progress in our lorcaserin and earlier-stage programs,
the time and costs related to clinical trials, nonclinical studies and regulatory decisions, as well as the US and
global economic environment.
Long term
We will need substantial cash to achieve our objectives of discovering, developing and commercializing
drugs, which typically take many years and potentially several hundreds of millions of dollars to develop. We do
not have adequate internal liquidity to meet these objectives in the long term. To do so, we will need to obtain
significant funds under our marketing and supply agreement with Eisai, under new collaborative, licensing or
commercial agreements for our drug candidates and programs and patent portfolios, or from other potential
sources of liquidity, which may include the public and private financial markets.
With respect to lorcaserin, we expect to continue to incur substantial costs, including manufacturing costs,
prior to and after we receive marketing approval for lorcaserin, if ever. If lorcaserin is approved for marketing in
the United States, we expect Eisai to commercialize lorcaserin under our marketing and supply agreement. With
respect to commercializing lorcaserin outside of the United States, we will need additional funds or a
collaborative or other agreement with one or more pharmaceutical companies.
In addition to the public and private financial markets, potential sources of liquidity in the long term include
revenues based on Eisai’s annual net sales of lorcaserin and milestone and other payments under our marketing
and supply agreement, if we receive marketing approval, as well as milestone and royalty payments from future
collaborators or licensees and revenues from sales of any drugs we commercialize on our own. The length of
time that our current cash and cash equivalents and any available borrowings will sustain our operations will be
based on, among other things, our prioritization decisions regarding funding for our programs, progress in our
clinical and earlier-stage programs, the time and costs related to current and future clinical trials, nonclinical
studies and regulatory decisions, our research, development, manufacturing and commercialization costs
(including personnel costs), our progress in any programs under collaborations, costs associated with intellectual
property, our capital expenditures, and costs associated with securing any in-licensing opportunities. Any
significant shortfall in funding may result in us further reducing our development and/or research activities,
which, in turn, would affect our development pipeline and ability to obtain cash in the future. If we determine it
is advisable to raise additional funds, we do not know whether adequate funding will be available to us or, if
available, that such funding will be available on acceptable terms.
Although our December 31, 2011, condensed consolidated balance sheet reflects a total balance of $14.7
million for our note payable to Deerfield due to the requirement to separately value the components of the note,
warrants and related financial instruments, the principal balance outstanding on this loan was $22.3 million at
December 31, 2011. As part of our January 2012 equity financing with Deerfield, we prepaid $5.0 million of the
loan principal, resulting in a remaining principal balance of $17.3 million that is due in June 2013. At any time
we may prepay any or all of the outstanding principal at par.
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.
Sources and Uses of Our Cash
Net cash used in operating activities increased by $26.0 million to $78.3 million in 2011. This was primarily
due to changes in our operating assets and liabilities. Net cash used in operating activities decreased by
$103.6 million in 2010 to $52.3 million. This decrease resulted from our lower net loss from 2009 to 2010,
primarily due to completing our BLOOM (Behavioral modification and Lorcaserin for Overweight and Obesity
64
Management) and BLOSSOM (Behavioral modification and LOrcaserin Second Study for Obesity Management)
Phase 3 clinical trials for lorcaserin in 2009, as well as changes in our operating assets and liabilities, primarily
receipt of the $50.0 million payment from Eisai. Net cash used in operating activities decreased by $35.5 million
to $155.9 million in 2009. This decrease resulted from our lower net loss from 2008 to 2009, primarily due to
completing BLOOM and BLOSSOM in 2009, offset by changes in our operating assets and liabilities.
Net cash of $0.7 million was used in investing activities in 2011, primarily for purchases of equipment and
improvements to our facilities. Net cash of $16.3 million was provided by investing activities in 2010, and was
primarily attributable to net proceeds of $20.4 million from our short-term investments, which were partially
offset by $4.2 million used for equipment and improvements to our facilities, primarily for our manufacturing
facility in Switzerland. Net cash of $11.4 million was provided by investing activities in 2009, and was primarily
attributable to net proceeds of $16.3 million from our short-term investments, which were partially offset by $5.3
million used for equipment and improvements to our facilities. We expect that our 2012 capital expenditures will
increase over the 2011 amount due to deferments of capital spending in previous years.
Net cash of $14.2 million was used in financing activities in 2011, primarily due to principal repayments to
Deerfield of $20.0 million and $17.7 million in January 2011 and March 2011, respectively, and $11.1 million
paid to Siegfried in 2011. These repayments were partially offset by net proceeds of $35.3 million from the sale
of 12,150,000 shares of common stock and 12,150 shares of then-outstanding Series C Preferred to Deerfield in
March 2011. Net cash of $89.7 million was provided by financing activities in 2010, primarily due to net
proceeds of $35.5 million from the sale of 11.0 million shares of common stock and the exchange of warrants to
Deerfield, net proceeds of $30.0 million, after the $30.0 million principal prepayment, from the sale of
approximately 9.0 million shares of common stock to Deerfield, and net proceeds of $24.2 million from the sale
of approximately 8.3 million shares of common stock under an equity financing commitment we had with
Azimuth Opportunity Ltd., or Azimuth Ltd. Net cash of $166.7 million was provided by financing activities in
2009, and was primarily attributable to net financing proceeds of $96.9 million from the issuance of a note,
warrants and related financial instruments to Deerfield, net proceeds of $49.7 million from the sale of
12.5 million shares of common stock, $15.0 million in reimbursements for improvements made to one of our
leased facilities and net proceeds of $14.7 million from the sale of approximately 5.7 million shares of common
stock under the equity financing commitment we had with Azimuth Ltd. Such proceeds were partially offset by
the $10.0 million of principal we repaid to Deerfield in 2009.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations as of December 31, 2011, in thousands:
Contractual Obligations
Financing obligations . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note payable to Deerfield . . . . . . . . . . . . . . . . . . . . . . .
Purchase obligations . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments due by period
Less than 1
year
1-3
years
3-5
years
More than 5
years
$ 7,700
1,796
4,535
882
$17,417
23,050
9
256
$18,298
0
0
0
$93,606
0
0
0
Total
$137,021
24,846
4,544
1,138
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$167,549
$14,913
$40,732
$18,298
$93,606
In December 2003, we completed the sale and leaseback of one of our properties for total consideration of
$13.0 million, and, in May 2007, we completed the sale and leaseback of three of our properties and assigned an
option to purchase a fourth property for total consideration of $50.1 million. Our option to repurchase these
properties in the future is considered continued involvement under the applicable accounting rules and, therefore,
we have applied the financing method which requires that the book value of the properties and related
accumulated depreciation remain on our balance sheet with no sale 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
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expense. As of December 31, 2011, we expect interest expense over the term of these leases to total
$71.2 million. We have included our lease obligations related to these properties in the above table as “financing
obligations.” The aggregate residual value of the facilities at the end of the lease terms is $10.0 million.
In July 2009, we received net proceeds of $95.6 million from the issuance of a note, warrants and related
financial instruments to Deerfield. At December 31, 2011, the outstanding principal balance on the Deerfield
loan was $22.3 million. In January 2012, as part of a registered direct public offering to Deerfield, we prepaid
$5.0 million of the loan principal that was originally scheduled to be repaid in June 2013, resulting in a
remaining outstanding principal balance on the Deerfield loan of $17.3 million, which is due on June 17, 2013.
At any time we may prepay any or all of the outstanding principal at par, and we may be required to make the
remaining repayment earlier in connection with certain changes of control. Our consolidated balance sheet at
December 31, 2011, reflects a balance of $14.7 million for our note payable to Deerfield due to the requirement
to separately value the components of the note, warrants and related financial instruments. As of December 31,
2011, we expect interest expense of $2.6 million to be paid in cash over the remaining term of the loan. After
deducting the $5.0 million of principal we prepaid in January 2012, the interest expense expected to be paid to
Deerfield in cash over the remaining term of the loan decreased to $2.0 million.
Off-Balance Sheet Arrangements
We do not have, and did not have as of December 31, 2011, any off-balance sheet arrangements that have or
are reasonably likely to have a current or future material effect on our financial condition, results of operations,
liquidity, capital expenditures or capital resources.
COLLABORATIONS
Eisai Inc.
In July 2010, our wholly owned subsidiary, Arena GmbH, entered into a marketing and supply agreement
with Eisai. Under this agreement, Arena GmbH granted Eisai exclusive rights to commercialize lorcaserin in the
United States and its territories and possessions subject to FDA approval of the lorcaserin NDA. As part of the
agreement, Arena GmbH is obligated to manufacture lorcaserin at our facility in Switzerland, and Eisai is
obligated to purchase all of its requirements of lorcaserin from Arena GmbH. Under this agreement, Eisai and we
will share equally the development expenses for certain additional development work required by the FDA prior
to approval of our NDA for lorcaserin. If the FDA requires development work following approval of lorcaserin,
Eisai will bear 90% and we will bear 10% of such expenses, except that Eisai and we will share equally the costs
of certain pediatric or adolescent studies.
We received a non-refundable, upfront payment of $50.0 million from Eisai, and, following US regulatory
approval of lorcaserin and upon the delivery of product supply for launch, will receive an additional $40.0
million or $60.0 million, depending on the approved drug label. We recorded the $50.0 million upfront payment
as deferred revenues and were originally recognizing it as revenue ratably over 13 years, which represented the
period in which we expected to have significant involvement. In 2011, based on revised expectations of the
timing of regulatory approval for lorcaserin, if ever, we re-assessed such period and are now recognizing this
revenue ratably over 14.5 years. Accordingly, at December 31, 2011, our consolidated balance sheet included
$3.5 million and $41.2 million for the current and non-current portion, respectively, of such deferred revenues.
From the inception of the Eisai collaboration through December 31, 2011, we have recognized revenues of
$5.4 million from amortization of the $50.0 million upfront payment we received in 2010 and $3.3 million for
reimbursement of additional development expenses. In 2011, we recognized revenues totaling $6.8 million, of
which $3.5 million was from amortization of the upfront payment and $3.3 million was for reimbursement of
additional development expenses. In 2010, we recognized revenues of $1.9 million, all of which was from
amortization of the upfront payment.
66
We are obligated to sell lorcaserin to Eisai for a purchase price starting at 31.5% of Eisai’s annual net
product sales, and the purchase price will increase on a tiered basis to 36.5% on the portion of annual net product
sales exceeding $750.0 million, subject to reduction in the event of generic competition and certain other
circumstances. We are also eligible to receive up to an aggregate of $1.19 billion in purchase price adjustment
payments based on Eisai’s annual net sales of lorcaserin, with the first and last amounts payable with annual net
sales of $250.0 million and $2.5 billion, respectively. Of these purchase price adjustment payments, Eisai is
obligated to pay us a total of $330.0 million for annual net sales of up to $1.0 billion. We are also eligible to
receive up to an additional $70.0 million in regulatory and development milestone payments.
Eisai and we have agreed to not commercialize outside of our marketing and supply agreement any product
that competes with lorcaserin in the United States. Our marketing and supply agreement includes a stand-still
provision limiting Eisai’s ability to acquire our securities and assets.
Unless terminated earlier, our marketing and supply agreement will continue in effect until terminated by
Eisai following the later of the expiration of all issued lorcaserin patents for the United States and 12 years after
the first commercial sale of lorcaserin in the United States. Either party has the right to terminate this agreement
early in certain circumstances, including (i) if the other party is in material breach, (ii) for certain
commercialization concerns and (iii) for certain intellectual property infringement. Eisai also has the right to
terminate this agreement early in certain circumstances, including (a) if sales of generic equivalents of lorcaserin
in the United States exceed sales of lorcaserin in the United States (based on volume) and (b) if Eisai is acquired
by a company that has a product that competes with lorcaserin.
Ortho-McNeil-Janssen Pharmaceuticals, Inc.
Our collaboration and license agreement with Ortho-McNeil-Janssen terminated in December 2010. Upon
termination, all rights to the compounds developed under the collaboration, and related intellectual property and
other information (including the investigational new drug, or IND, application relating to APD597) reverted to
us. We entered into the collaboration in December 2004 to further develop compounds for the potential treatment
of type 2 diabetes and other disorders. Under the collaboration, Ortho-McNeil-Janssen advanced APD668 and
APD597, first and second generation GPR119 agonists for the treatment of type 2 diabetes, respectively, into
clinical trials.
From the inception of this collaboration through December 31, 2011, we received $27.5 million from Ortho-
McNeil-Janssen in upfront and milestone payments, $7.2 million in research funding and $21.0 million for patent
activities and additional sponsored research. In 2011, we recognized revenues of $0.5 million under this
agreement, primarily for patent activities. In 2010, we recognized $3.2 million of revenues, all of which was
reimbursement for patent activities. In 2009, we recognized revenues of $3.8 million, of which $3.7 million was
reimbursement for patent activities and $0.1 million was for additional sponsored research.
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.
67
While our significant accounting policies are described in more detail in Note 1 to our consolidated financial
statements, we believe the following accounting policies are critical in the preparation of our financial statements:
Revenue recognition. Our revenues to date have been generated primarily through collaborative
agreements and a manufacturing services agreement. Our collaborative agreements can include multiple elements
including licenses, research services and manufacturing. Consideration we receive under these arrangements may
include upfront payments, research funding and milestone payments. For our multiple element transactions, if
fair value exists for the undelivered and delivered elements whereby such elements have stand-alone value, we
allocate the consideration to the elements based on their relative fair values. In cases where fair value exists for
the undelivered elements but does not exist for the delivered elements, we use the residual method to allocate the
arrangement consideration. In cases where fair value does not exist for the undelivered elements in an
arrangement, we account for the transaction as a single unit of accounting. We typically defer non-refundable
upfront payments 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. Revenue from a milestone payment 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 payment is recognized over the
remaining minimum period of our performance obligations under the agreement. Any 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 statement of operations.
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 recognized in the subsequent period in which the actual costs become known. Historically, these
differences have not been material; however, material differences could occur in the future.
Derivative liabilities. We account for our warrants and other derivative financial instruments as either
equity or liabilities based upon the characteristics and provisions of each instrument. Warrants classified as
equity are recorded as additional paid-in capital on our consolidated balance sheet and no further adjustments to
their valuation are made. Some of our warrants were determined to be ineligible for equity classification because
of provisions that may result in an adjustment to their exercise price. Warrants classified as derivative liabilities
and other derivative financial instruments that require separate accounting as liabilities are recorded on our
consolidated balance sheet at their fair value on the date of issuance and will be revalued on each subsequent
balance sheet date until such instruments are exercised or expire, with any changes in the fair value between
reporting periods recorded as other income or expense. We estimate the fair value of these liabilities using option
pricing models that are based on the individual characteristics of the warrants or instruments on the valuation
date, as well as assumptions for expected volatility, expected life and risk-free interest rate. Changes in the
assumptions used could have a material impact on the resulting fair value.
68
Share-based compensation. We recognize compensation expense for all of our share-based awards based
on the grant-date fair value. We determine the grant-date fair value of share-based awards by using the Black-
Scholes option pricing model, which is affected by our stock price on the date of grant, as well as assumptions
regarding other subjective variables. These assumptions include, but are not limited to, our expected stock price
volatility over the term of the awards, the risk-free interest rate and the expected term of awards. Changes in the
assumptions used could have a material impact on the compensation expense we recognize.
Share-based compensation expense recognized is based on awards ultimately expected to vest, and,
therefore, is reduced by expected forfeitures. We estimate forfeitures based upon historical forfeiture rates, and
will adjust our estimate of forfeitures if actual forfeitures differ, or are expected to differ, from such estimates.
Changes in estimated forfeitures will be recognized through a cumulative adjustment in the period of the change
and will also impact the amount of stock-based compensation expense in future periods.
The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases,
the accounting treatment of a particular transaction is specifically dictated by GAAP. See our audited
consolidated financial statements and notes thereto included elsewhere in this Annual Report, which contain
additional accounting policies and other disclosures required by GAAP.
NEW ACCOUNTING GUIDANCE
In June 2011, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or
ASU, No. 2011-05, “Presentation of Comprehensive Income,” which amends the presentation requirements for
comprehensive income. Under ASU 2011-05, we will have the option to present the components of net income
and comprehensive income as one single continuous statement or in two separate but consecutive statements. The
current option to present other comprehensive income in the statement of stockholders’ equity has been
eliminated. ASU 2011-05 does not change the items that must be reported in comprehensive income. In
December 2011, the FASB issued ASU 2011-12, “Presentation of Comprehensive Income,” which defers the
requirement to present reclassification adjustments on the face of the financial statements for items that are
reclassified from other comprehensive income to net income in the statement(s) where the components of net
income and the components of other comprehensive income are presented. These amendments are effective for
us in the first quarter of 2012, and the impact will be presentation only.
In September 2011, the FASB issued ASU No. 2011-09, “Disclosures about an Employer’s Participation in
a Multiemployer Plan,” which requires additional disclosures about an employer’s participation in a
multiemployer pension plan. ASU 2011-09 does not change the current measurement and recognition guidance.
This guidance is effective for us for the year ended December 31, 2011. The adoption of ASU 2011-09 did not
have a material impact on our consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Our primary market risk exposure as it affects our cash equivalents is interest rate risk. Our management
establishes and oversees the implementation of a board-approved policy covering our investments. We manage
our interest rate risk in accordance with our investment guidelines which (i) emphasize preservation of principal
over other portfolio considerations, (ii) require our investments to be placed in US government, agency and
government-sponsored enterprise obligations and in corporate debt instruments that are rated investment grade,
(iii) establish parameters for diversification in our investment portfolio, and (iv) require investments to be placed
with maturities that maintain safety and liquidity. We target our portfolio to have an average duration of no more
than two years, however, due to our financial condition and the current interest rate environment, our average
duration is significantly shorter than two years. We do not invest in derivative instruments or auction rate
securities, or any financial instruments for trading purposes. We monitor our interest rate risk on a periodic basis
and we ensure that our cash equivalents and short-term investments are invested in accordance with our
investments guidelines. We also monitor credit ratings and the duration of our financial investments, which we
believe enhances the preservation of our capital.
69
We model interest rate exposure by a sensitivity analysis that assumes a hypothetical parallel shift
downward in the US Treasury yield curve of 100 basis points. Under these assumptions, if the yield curve were
to shift lower by 100 basis points from the level existing at December 31, 2011, we would expect future interest
income from our portfolio to decline by approximately $0.6 million over the next 12 months. As of December 31,
2010, this same hypothetical reduction in interest rates would have resulted in a $1.5 million decline in interest
income over the following 12 months. The model we use is not intended to forecast actual losses in interest
income, but is used as a risk estimation and investment management tool. These hypothetical changes and
assumptions are likely to be different from what actually occurs in the future. Furthermore, such computations do
not incorporate any actions our management may take if the hypothetical interest rate changes actually occur. As
a result, the impact on actual earnings may differ from those quantified herein.
Our note payable to Deerfield is not subject to market risk due to its fixed interest rate.
We have a wholly owned subsidiary in Switzerland, which exposes us to foreign currency exchange risk.
The functional currency of our subsidiary in Switzerland is the Swiss franc. Accordingly, all assets and liabilities
of our subsidiary are translated to US dollars based on the applicable exchange rate on the balance sheet date.
Revenue and expense components are translated to US dollars at weighted-average exchange rates in effect
during the period. Gains and losses resulting from foreign currency translation are reported as a separate
component of accumulated other comprehensive gain or loss in the stockholders’ equity section of our
consolidated balance sheets. Foreign currency transaction gains and losses, which have not been material for us
to date, are included in our results of operations. We have not hedged exposures denominated in foreign
currencies, but may do so in the future.
70
Item 8.
Financial Statements and Supplementary Data.
ARENA PHARMACEUTICALS, INC.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm—KPMG LLP . . . . . . . . . . . . . . . . . . . . . . . . . . .
Report of Independent Registered Public Accounting Firm—Ernst & Young LLP . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders’ Equity and Comprehensive Loss . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
72
73
74
75
76
78
79
71
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Arena Pharmaceuticals, Inc.:
We have audited the accompanying consolidated balance sheets of Arena Pharmaceuticals, Inc. and
subsidiaries (the Company) as of December 31, 2011 and 2010, and the related consolidated statements of
operations, stockholders’ equity and comprehensive loss, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the financial position of Arena Pharmaceuticals, Inc. and subsidiaries as of December 31, 2011 and 2010, and the
results of their operations and their cash flows for the years then ended, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), Arena Pharmaceuticals, Inc.’s internal control over financial reporting as of December 31, 2011,
based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated March 15, 2012, expressed an
unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
San Diego, California
March 15, 2012
72
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Arena Pharmaceuticals, Inc.
We have audited the accompanying consolidated statements of operations, stockholders’ equity and
comprehensive loss, and cash flows of Arena Pharmaceuticals, Inc. for the year ended December 31, 2009. These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
consolidated results of Arena Pharmaceuticals, Inc.’s operations and its cash flows for the year ended
December 31, 2009, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
San Diego, California
March 16, 2010
73
ARENA PHARMACEUTICALS, INC.
Consolidated Balance Sheets
(In thousands, except share and per share data)
December 31,
2011
December 31,
2010
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land, property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquired technology and other intangibles, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
57,632
607
2,021
60,260
82,066
11,032
3,771
$ 150,669
3,499
2,638
156,806
91,533
12,031
5,992
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
157,129
$ 266,362
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued clinical and preclinical study fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of deferred revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of note payable to Siegfried . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of note payable to Deerfield 1 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of lease financing obligations . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenues, less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative liabilities, less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note payable to Siegfried, less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note payable to Deerfield, less current portion 1
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease financing obligations, less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments and contingencies and subsequent events
Stockholders’ equity:
Series A preferred stock, $.0001 par value: 350,000 shares authorized at
December 31, 2011, and 2010; no shares issued and outstanding at
December 31, 2011, and 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock, $.0001 par value: 242,500,000 shares authorized at
December 31, 2011, and 2010; 146,092,819 and 121,515,805 shares issued
and outstanding at December 31, 2011, and 2010, respectively . . . . . . . . . . . .
Additional paid-in capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, at cost—3,000,000 shares at December 31, 2011, and 2010 . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deficit
$
4,864
4,280
430
3,473
0
0
0
1,313
14,360
225
41,209
1,617
0
14,698
74,458
5,017
4,427
1,236
3,846
607
3,560
17,175
998
36,866
412
44,231
1,664
6,801
20,602
75,771
0
0
15
1,108,625
(23,070)
4,743
(1,079,751)
12
1,068,634
(23,070)
4,966
(970,527)
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,562
80,015
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
157,129
$ 266,362
1
The outstanding principal balance of the note payable to Deerfield was $22.3 million and $60.0 million at
December 31, 2011, and 2010, respectively. See Note 7.
See accompanying notes to consolidated financial statements.
74
ARENA PHARMACEUTICALS, INC.
Consolidated Statements of Operations
(In thousands, except share and per share data)
Revenues:
Manufacturing services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collaborative agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating Expenses:
Cost of manufacturing services . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of acquired technology and other intangibles . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years ended December 31,
2010
2011
2009
$
5,338
7,381
12,719
8,100
58,706
24,248
3,467
997
95,518
$
7,057
9,556
16,613
7,414
75,459
27,936
0
2,159
112,968
6,579
3,808
10,387
6,536
110,159
25,247
3,324
3,508
148,774
Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(82,799)
(96,355)
(138,387)
Interest and Other Income (Expense):
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain from valuation of derivative liabilities . . . . . . . . . . . . . . . . . .
Loss on extinguishment of debt
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest and other expense, net . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deemed dividend related to beneficial conversion feature of
117
(14,309)
47
(10,514)
(1,766)
(26,425)
469
(21,681)
4,371
(12,354)
1,016
(28,179)
689
(18,718)
5,418
(2,479)
273
(14,817)
(109,224)
(124,534)
(153,204)
convertible preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2,260)
0
0
Net loss allocable to common stockholders . . . . . . . . . . . . . . . . . .
$
(111,484) $
(124,534) $ (153,204)
Net loss per share allocable to common stockholders:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares used in calculating net loss per share allocable to common
stockholders:
$
$
(0.80) $
(0.80) $
(1.14) $
(1.14) $
(1.82)
(1.82)
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
139,170,725
109,573,177
84,341,362
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
139,170,725
109,573,177
84,341,362
See accompanying notes to consolidated financial statements.
75
ARENA PHARMACEUTICALS, INC.
Consolidated Statements of Stockholders’ Equity and Comprehensive Loss
(In thousands, except share data)
Balance at December 31,
2008 . . . . . . . . . . . . . . . . . . .
Cumulative effect of adoption
of new accounting
standard . . . . . . . . . . . . . . . . .
Issuance of common stock upon
exercise of options . . . . . . . .
Issuance of common stock
under employee stock
purchase plans . . . . . . . . . . . .
Issuance of common stock
under equity line of credit . . .
Issuance of common stock in
public offering, net of
offering costs of $2,400 . . . .
Issuance of warrants to
Deerfield . . . . . . . . . . . . . . . .
Share-based compensation
expense, net of forfeitures . . .
Restricted shares released from
deferred compensation
plan . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . .
Net unrealized gain on
available-for-sale securities
and investments . . . . . . . . . .
Translation gain . . . . . . . . . . . .
Net comprehensive loss . . . . . .
Balance at December 31,
2009 . . . . . . . . . . . . . . . . . . .
Issuance of common stock upon
exercise of options . . . . . . . .
Issuance of common stock
under employee stock
purchase plan . . . . . . . . . . . .
Issuance of common stock
under equity line of credit . . .
Issuance of common stock to
Deerfield . . . . . . . . . . . . . . . .
Share-based compensation
expense, net of forfeitures . . .
Restricted shares released from
deferred compensation
plan . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . .
Net unrealized loss on
available-for-sale securities
and investments . . . . . . . . . .
Translation gain . . . . . . . . . . . .
Net comprehensive loss . . . . . .
Balance at December 31,
2010 . . . . . . . . . . . . . . . . . . .
Convertible Preferred
Stock
Common Stock
Shares
Amount
Shares
Amount
Additional
Paid-In
Capital
Treasury
Stock
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
Total
Stockholders’
Equity
$
0
74,134,462
$ 8
$ 840,780 $(23,070)
$ 256
$(700,342)
$ 117,632
(9,671)
38
949
14,654
49,724
39,052
7,149
63,500
364,096
5,745,591
12,500,000
1
1
6,250
7,553
(2,118)
38
949
14,655
49,725
39,052
7,149
(153,204)
(153,204)
155
534
155
534
(152,515)
92,813,899
10
942,675
(23,070)
945
(845,993)
74,567
51,655
399,095
8,278,432
55
766
24,211
19,955,224
2
95,432
5,495
17,500
55
766
24,211
95,434
5,495
(124,534)
(124,534)
(283)
4,304
(283)
4,304
(120,513)
121,515,805
12
1,068,634
(23,070)
4,966
(970,527)
80,015
76
ARENA PHARMACEUTICALS, INC.
Consolidated Statements of Stockholders’ Equity and Comprehensive Loss
(In thousands, except share data)—Continued
Convertible Preferred
Stock
Common Stock
Shares
Amount
Shares
Amount
Additional
Paid-In
Capital
Treasury
Stock
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
Total
Stockholders’
Equity
Issuance of common stock
under employee stock
purchase plan . . . . . . . . . . . . .
Issuance of common stock to
Deerfield . . . . . . . . . . . . . . . .
Issuance of Series C preferred
stock to Deerfield . . . . . . . . .
12,150
1
272,014
12,150,000
1
1
(12,150)
(1)
12,150,000
1
Issuance of common stock to
Deerfield upon conversion of
Series C preferred stock . . . .
Beneficial conversion feature of
Series C preferred stock . . . .
Deemed dividend related to
beneficial conversion feature
of Series C preferred stock . .
Exchange of Deerfield
warrants . . . . . . . . . . . . . . . . .
Share-based compensation
expense, net of forfeitures . . .
Restricted shares released from
deferred compensation
plan . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . .
Translation loss . . . . . . . . . . . . .
Net comprehensive loss . . . . . . .
Balance at December 31,
2011 . . . . . . . . . . . . . . . . . . . .
314
15,412
15,412
2,260
(2,260)
5,105
3,748
315
15,413
15,413
2,260
(2,260)
5,105
3,748
5,000
(109,224)
(223)
(109,224)
(223)
(109,447)
$ 0
146,092,819
$15
$1,108,625 $(23,070)
$4,743
$(1,079,751)
$ 10,562
See accompanying notes to consolidated financial statements.
77
ARENA PHARMACEUTICALS, INC.
Consolidated Statements of Cash Flows
(In thousands)
Operating Activities
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of acquired technology and other intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain from valuation of derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of short-term investment premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prepaid financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion of note payable to Deerfield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion of note payable to Siegfried . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment write-down . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on extinguishment of debt
(Gain)/Loss on disposal or sale of equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in assets and liabilities: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years ended December 31,
2011
2010
2009
$(109,224) $(124,534) $(153,204)
10,127
997
3,748
0
(47)
0
438
4,146
345
1,963
10,514
18
2,878
539
(1,117)
(3,395)
(187)
10,393
2,159
5,495
0
(4,371)
0
545
7,517
269
0
12,354
(14)
(1,931)
1,608
(5,644)
43,991
(152)
11,018
3,508
7,149
(627)
(5,418)
69
338
7,555
251
0
2,479
313
430
(929)
(28,765)
37
(129)
Net cash used in operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(78,257)
(52,315)
(155,925)
Investing Activities
Purchases of short-term investments, available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales/maturities of short-term investments, available-for-sale . . . . . . . . . . . . . . . . .
Purchases of land, property and equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing Activities
Principal payments on lease financing obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from lease financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of note payable and related financial instruments to Deerfield . . . . . . . . .
Principal payments on note payable to Deerfield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments on note payable to Siegfried . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0
0
(619)
33
(86)
(672)
(998)
0
0
(37,739)
(11,060)
17,977
17,662
(14,158)
50
(93,037)
150,669
(1,231)
21,664
(4,211)
47
48
16,317
(717)
0
0
(30,000)
0
120,466
0
89,749
2,185
55,936
94,733
(20,433)
36,696
(5,331)
263
170
11,365
(581)
15,000
96,865
(10,000)
0
65,368
0
166,652
(688)
21,404
73,329
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 57,632
$ 150,669
$ 94,733
Supplemental Disclosure Of Cash Flow Information:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain on short-term investments, available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplemental Disclosure Of Non-Cash Investing and Financing Information:
Conversion of preferred stock into common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deemed dividend related to beneficial conversion feature of convertible preferred stock . . . . . . . . . . . .
Purchases of land, property and equipment included in accounts payable and accrued liabilities . . . . . .
$
$
0
$ 15,413
$
$
2,260
46
9,492
$ 13,434
$ 10,297
$
$
$
$
0
0
0
12
$
$
$
$
248
0
0
79
See accompanying notes to consolidated financial statements.
78
ARENA PHARMACEUTICALS, INC.
Notes to Consolidated Financial Statements
(1) The Company and Summary of Significant Accounting Policies
The Company
Arena Pharmaceuticals, Inc., or Arena, was incorporated on April 14, 1997, and commenced operations in July
1997. We are a clinical-stage biopharmaceutical company with a pipeline of internally discovered small molecule
drug candidates that target G protein-coupled receptors, and are being developed internally or with a collaborator.
We operate in one business segment. In October 2010, the US Food and Drug Administration, or FDA, issued a
Complete Response Letter, or CRL, regarding our New Drug Application, or NDA, for our most advanced drug
candidate, lorcaserin, which is intended for weight management. In the CRL, the FDA stated that it completed its
review of the NDA and determined that it could not approve the application in its then present form. In December
2011, we resubmitted the lorcaserin NDA, and the FDA has confirmed its acceptance of the resubmission for filing
and review and assigned a new Prescription Drug User Fee Act target date of June 27, 2012.
Basis of Presentation
The accompanying consolidated financial statements reflect all of our activities, including those of our
wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated in
consolidation.
During the first quarter of 2011, we identified an error in our consolidated financial statements for the years
ended December 31, 2003, through December 31, 2008, related to the dividends and accretion of discount on our
Series B Convertible Preferred Stock, which is no longer outstanding. The error relates to dividends that were
recorded to our accumulated deficit rather than to additional paid-in capital. To correct the error, we recorded a
non-cash cumulative adjustment as of December 31, 2008, to reduce both our accumulated deficit and additional
paid-in capital by $18.6 million. This adjustment is reflected on the accompanying consolidated balance sheets
and consolidated statements of stockholders’ equity and comprehensive loss. We determined that this adjustment
was not material to our financial position for any previously reported period, and it had no impact on our results
of operations and cash flows.
We have accumulated a large deficit since inception, and we expect that our losses will continue to be
substantial for at least the short term. As of December 31, 2011, we had $57.6 million in cash and cash
equivalents, which, with the additional cash we raised in January and March 2012 (see Note 17), we believe will
be sufficient to fund our operations for at least the next 12 months.
Financial Statement Preparation
The preparation of financial statements in conformity with US generally accepted accounting principles, or
GAAP, requires our management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. We use estimates for certain accruals including
clinical and preclinical study fees and expenses, share-based compensation, and valuations of derivative liabilities,
long-lived assets and contingencies, among others. Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments with remaining maturities of three
months or less when purchased.
79
Fair Value of Financial Instruments
Cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable
and accrued liabilities are carried at cost, which we believe approximates fair value due to the short-term
maturity of these instruments. Short-term investments and derivative liabilities are carried at fair value. Based on
borrowing rates currently available to us for loans with similar terms, we estimate the fair value of the lease
financing obligations and note payable to Deerfield to be $55.5 million and $20.4 million, respectively, at
December 31, 2011. As of December 31, 2010, we estimated the fair value of the lease financing obligations,
note payable to Siegfried and note payable to Deerfield to be $55.9 million, $9.3 million and $54.2 million,
respectively.
Concentration of Credit Risk and Major Customers
Financial instruments, which potentially subject us to concentrations of credit risk, consist primarily of cash,
cash equivalents and short-term investments. We limit our exposure to credit loss by holding our cash in US
dollars or placing our cash and investments in US government, agency and government-sponsored enterprise
obligations and in corporate debt instruments that are rated investment grade, in accordance with our board-
approved investment policy.
We manufacture drug products for Siegfried Ltd, or Siegfried, under a manufacturing services agreement,
and all of our manufacturing services revenues are attributable to Siegfried.
Percentages of our total revenues derived from our manufacturing services agreement and from our most
significant collaborators for the years presented are as follows:
Collaboration with Eisai Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Manufacturing services agreement with Siegfried . . . . . . . . . . . . . . . . . . . . .
Former collaboration with Ortho-McNeil-Janssen Pharmaceuticals, Inc. . . .
Collaboration with TaiGen Biotechnology Co., Ltd. . . . . . . . . . . . . . . . . . . .
Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2011
2010
2009
53.2% 11.6%
0.0%
41.9% 42.5% 63.3%
4.3% 19.1% 36.2%
0.0% 24.4%
0%
0.5%
2.4%
0.6%
Total percentage of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100.0% 100.0% 100.0%
Percentages of our total accounts receivable for the years presented are as follows:
Collaboration with Eisai Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Manufacturing services agreement with Siegfried . . . . . . . . . . . . . . . . . . . . .
Former collaboration with Ortho-McNeil-Janssen Pharmaceuticals, Inc. . . .
Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
91.3%
0.0%
0.0%
8.0% 64.5% 64.7%
0.0% 35.4% 34.7%
0.6%
0.1%
0.7%
Total percentage of accounts receivable . . . . . . . . . . . . . . . . . . . . . . . .
100.0% 100.0% 100.0%
December 31,
2011
2010
2009
Property and Equipment
Property and equipment are stated at cost and depreciated over the estimated useful lives of the assets
(generally three to 15 years) using the straight-line method. Buildings are stated at cost and depreciated over an
estimated useful life of approximately 20 years using the straight-line method. Leasehold improvements are
stated at cost and amortized over the shorter of the estimated useful lives of the assets or the lease term. Capital
improvements are stated at cost and amortized over the estimated useful lives of the underlying assets.
80
Acquired Technology and Other Intangibles
We have intangible assets in connection with certain assets we acquired from Siegfried in January 2008,
including manufacturing facility production licenses and an assembled workforce, as well as our February 2001
acquisition of Bunsen Rush Laboratories, Inc., or Bunsen Rush, and its Melanophore technology. These assets
are measured based on their fair value at acquisition. The useful life of our intangible assets is determined based
on the period over which the asset is expected to contribute directly or indirectly to our future cash flows. We
amortize our intangible assets using the straight-line method over estimated useful lives ranging from two to 20
years.
Long-lived Assets
If indicators of impairment exist, we assess the recoverability of the affected long-lived assets by
determining whether the carrying value of such assets can be recovered through undiscounted cash flow
projections. If impairment is indicated, we measure the impairment loss by comparing the fair value of the asset,
estimated using discounted cash flows expected to be generated from the asset, to the carrying value.
Deferred Rent
For financial reporting purposes, rent expense is recognized on a straight-line basis over the term of the
lease. The difference between rent expense and amounts paid under lease agreements is recorded as deferred rent
in the liability section of our consolidated balance sheets.
Derivative Liabilities
We account for our warrants and other derivative financial instruments as either equity or liabilities based
upon the characteristics and provisions of each instrument. Warrants classified as equity are recorded as
additional paid-in capital on our consolidated balance sheet and no further adjustments to their valuation are
made. Some of our warrants were determined to be ineligible for equity classification because of provisions that
may result in an adjustment to their exercise price. Warrants classified as derivative liabilities and other
derivative financial instruments that require separate accounting as liabilities are recorded on our consolidated
balance sheet at their fair value on the date of issuance and are revalued on each balance sheet date until such
instruments are exercised or expire, with any changes in the fair value between reporting periods recorded as
other income or expense. We estimate the fair value of these liabilities using option pricing models that are based
on the individual characteristics of the warrants or instruments on the valuation date, as well as assumptions for
expected volatility, expected life and risk-free interest rate.
Foreign Currency Translation
The functional currency of our wholly owned subsidiary in Switzerland is the Swiss franc. Accordingly, all
assets and liabilities of this subsidiary are translated to US dollars based on the applicable exchange rate on the
balance sheet date. Revenue and expense components are translated to US dollars at weighted-average exchange
rates in effect during the period. Gains and losses resulting from foreign currency translation are reported as a
separate component of accumulated other comprehensive income or loss in the stockholders’ equity section of
our consolidated balance sheets. Foreign currency transaction gains and losses are included in our results of
operations and, to date, have not been material.
Share-based Compensation
Compensation expense for all share-based awards, which we recognize on a straight-line basis over the
vesting period, is estimated based on the grant-date fair value using the Black-Scholes option pricing model. We
estimate forfeitures at the time of grant and revise our estimate in subsequent periods if actual forfeitures differ
from those estimates. Such compensation expense is included in the applicable expense line item on our
consolidated statements of operations.
81
We recognized total share-based compensation expense for all share-based awards of $3.7 million,
$5.5 million and $7.1 million during the years ended December 31, 2011, 2010 and 2009, respectively.
Revenue Recognition
Our revenues to date have been generated primarily through collaborative agreements and a manufacturing
services agreement. Our collaborative agreements can include multiple elements including licenses, research
services and manufacturing. Consideration we receive under these arrangements may include upfront payments,
research funding and milestone payments. For our multiple element transactions, if fair value exists for the
undelivered and delivered elements whereby such elements have stand-alone value, we allocate the consideration to
the elements based on their relative fair values. In cases where fair value exists for the undelivered elements but
does not exist for the delivered elements, we use the residual method to allocate the arrangement consideration. In
cases where fair value does not exist for the undelivered elements in an arrangement, we account for the transaction
as a single unit of accounting. We typically defer non-refundable upfront payments 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. Revenue from a milestone payment 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
payment is recognized over the remaining minimum period of our performance obligations under the agreement.
Any 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 sales 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. 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.
Research and Development Costs
Research and development expenses, which consist primarily of salaries and other personnel costs, costs
associated with external clinical and preclinical study fees, manufacturing costs for non-commercial products and
other related expenses, and the development of earlier-stage programs and technologies, are expensed as incurred
when these expenditures have no alternative future uses.
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 recognized in the
subsequent period in which the actual costs become known. Historically, these differences have not been
material; however, material differences could occur in the future.
Patent Costs
We record costs related to filing and prosecuting patent applications in general and administrative expenses
as incurred, as recoverability of such expenditures is uncertain.
82
Comprehensive Income (Loss)
We report all components of comprehensive income (loss), including foreign currency translation gain and
loss and unrealized gains and losses on investment securities, 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.
Net Loss Per Share
We calculate basic and diluted net loss per share allocable to common stockholders using the weighted-
average number of shares of common stock outstanding during the period, less any shares subject to repurchase
or forfeiture. There were no shares of our common stock subject to repurchase or forfeiture for the years ended
December 31, 2011, 2010 or 2009.
Because we are in a net loss position, we have excluded outstanding unvested performance-based restricted
stock unit awards, which are subject to forfeiture, warrants and stock options, as well as unvested restricted stock
in our deferred compensation plan, from our calculation of diluted net loss per share because including these
securities in the calculation would be antidilutive for all years presented. The table below presents our securities
that would otherwise be included in our calculation of diluted net loss per share allocable to common
stockholders at December 31, 2011, 2010 and 2009.
December 31,
2011
2010
2009
Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Performance-based restricted stock unit awards . . . . . . . . .
Unvested restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . .
30,868,111
10,309,972
1,171,250
79,169
30,445,127
8,358,594
1,666,650
84,169
30,138,263
7,226,824
1,714,350
101,669
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
42,428,502
40,554,540
39,181,106
New Accounting Guidance
In June 2011, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or
ASU, No. 2011-05, “Presentation of Comprehensive Income,” which amends the presentation requirements for
comprehensive income. Under ASU 2011-05, we will have the option to present the components of net income
and comprehensive income as one single continuous statement or in two separate but consecutive statements. The
current option to present other comprehensive income in the statement of stockholders’ equity has been
eliminated. ASU 2011-05 does not change the items that must be reported in comprehensive income. In
December 2011, the FASB issued ASU 2011-12, “Presentation of Comprehensive Income,” which defers the
requirement to present reclassification adjustments on the face of the financial statements for items that are
reclassified from other comprehensive income to net income in the statement(s) where the components of net
income and the components of other comprehensive income are presented. These amendments are effective for
us in the first quarter of 2012, and the impact will be presentation only.
In September 2011, the FASB issued ASU No. 2011-09, “Disclosures about an Employer’s Participation in
a Multiemployer Plan,” which requires additional disclosures about an employer’s participation in a
multiemployer pension plan. ASU 2011-09 does not change the current measurement and recognition guidance.
This guidance is effective for us for the year ended December 31, 2011. The adoption of ASU 2011-09 did not
have a material impact on our consolidated financial statements (see Note 13).
(2) Fair Value Disclosures
We measure our financial assets and liabilities at fair value, which is defined as the exit price, or the amount
that would be received from selling an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date.
83
We use the following three-level valuation hierarchy that maximizes the use of observable inputs and
minimizes the use of unobservable inputs to value our financial assets and liabilities:
Level 1— Observable inputs such as unadjusted quoted prices in active markets for identical
instruments.
Level 2— Quoted prices for similar instruments in active markets or inputs that are observable for the
asset or liability, either directly or indirectly.
Level 3— Significant unobservable inputs based on our assumptions.
The following table presents our valuation hierarchy for our financial assets and liabilities that are measured
at fair value on a recurring basis as of December 31, 2011, in thousands:
Fair Value Measurements at December 31, 2011
Balance at
December 31,
2011
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)
. . . . . . . . . . . . . . . . . . . . .
$35,307
$35,307
Liabilities:
Warrants and other derivative
instruments . . . . . . . . . . . . . . . . . . . . . . .
$ 1,617
$
0
(1)
Included in cash and cash equivalents on our consolidated balance sheets.
$0
$0
$
0
$1,617
The following table presents our valuation hierarchy for our financial assets and liabilities that are measured
at fair value on a recurring basis as of December 31, 2010, in thousands:
Fair Value Measurements at December 31, 2010
Balance at
December 31,
2010
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)
. . . . . . . . . . . . . . . . . . . . .
$138,195
$138,195
Liabilities:
Warrants and other derivative
instruments . . . . . . . . . . . . . . . . . . . . . . .
$
2,271
$
0
(1)
Included in cash and cash equivalents on our consolidated balance sheets.
$0
$0
$
0
$2,271
The following table presents the activity for our derivative liabilities, which are classified as Level 3 in our
valuation hierarchy, during the years ended December 31, 2011, 2010 and 2009, in thousands:
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of Deerfield derivative liabilities . . . . . . . . . . . . . . . . . . . . . .
Termination of Deerfield Additional Loan Election (see Note 7) . . . . .
Gain from valuation of derivative liabilities . . . . . . . . . . . . . . . . . . . . .
$2,271
0
(607)
(47)
$ 6,642
0
0
(4,371)
$ 2,118
9,942
0
(5,418)
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,617
$ 2,271
$ 6,642
December 31,
2011
2010
2009
84
(3) Land, Property and Equipment
Land, property and equipment consisted of the following, in thousands:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Building and capital improvements . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computers and software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and office equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less accumulated depreciation and amortization . . . . . . . . . . . . . . .
December 31,
2011
2010
$ 10,854
67,081
19,092
48,906
9,276
2,121
$ 10,854
67,086
19,272
49,278
9,187
2,573
157,330
(75,264)
158,250
(66,717)
Land, property and equipment, net . . . . . . . . . . . . . . . . . . . . . .
$ 82,066
$ 91,533
Depreciation and amortization expense for our land, property and equipment totaled $10.1 million,
$10.4 million and $11.0 million for the years ended December 31, 2011, 2010 and 2009, respectively.
(4) Acquired Technology and Other Intangibles
In February 2001, we acquired Bunsen Rush for $15.0 million in cash and assumed $0.4 million in
liabilities. We allocated $15.4 million to the patented Melanophore screening technology acquired in such
transaction. We amortized this technology over its estimated useful life of 10 years.
In January 2008, we acquired from Siegfried certain drug product facility assets, including manufacturing
facility production licenses and an assembled workforce originally valued at $12.1 million and $1.6 million,
respectively. We amortized the acquired workforce over its estimated benefit of two years, and we are amortizing
the manufacturing facility production licenses, which are necessary for us to produce and package tablets and
other dosage forms in such facility, over their estimated useful life of 20 years.
Acquired technology and other intangibles, net, consisted of the following at December 31, 2011, and 2010,
in thousands:
December 31, 2011
Acquired Melanophore screening technology . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquired manufacturing facility production licenses . . . . . . . . . . . . . . . . . . . .
Acquired workforce . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross
Carrying
Amount
$15,378
13,789
1,786
Accumulated
Amortization
$(15,378)
(2,757)
(1,786)
Net
$
0
11,032
0
Total acquired technology and other intangibles, net
. . . . . . . . . . . . . . . .
$30,953
$(19,921)
$11,032
December 31, 2010
Acquired Melanophore screening technology . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquired manufacturing facility production licenses . . . . . . . . . . . . . . . . . . . .
Acquired workforce . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross
Carrying
Amount
$15,378
13,844
1,793
Accumulated
Amortization
$(15,114)
(2,077)
(1,793)
Net
$
264
11,767
0
Total acquired technology and other intangibles, net
. . . . . . . . . . . . . . . .
$31,015
$(18,984)
$12,031
We recognized amortization expense of $0.3 million in the year ended December 31, 2011, and $1.5 million
in both of the years ended December 31, 2010, and 2009 for the acquired Melanophore technology, $0.7 million,
85
$0.6 million and $1.2 million in the years ended December 31, 2011, 2010 and 2009, respectively, for the
manufacturing facility production licenses, and $0.8 million in the year ended December 31, 2009, for the
acquired workforce. Using the exchange rate in effect on December 31, 2011, we expect to record amortization
expense of $0.7 million per year through 2027 for the manufacturing facility production licenses.
(5) Accounts Payable and Other Accrued Liabilities
Accounts payable and other accrued liabilities consisted of the following, in thousands:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued restructuring (see Note 12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss provision (see Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2011
2010
$2,363
1,046
17
1,203
235
$3,274
1,384
0
0
359
Total accounts payable and other accrued liabilities . . . . . . . . . . . . .
$4,864
$5,017
(6) Note Payable to Siegfried and Related Agreements
In January 2008, Arena Pharmaceuticals GmbH, or Arena GmbH, our wholly owned subsidiary, acquired
from Siegfried certain drug product facility assets, including manufacturing facility production licenses, fixtures,
equipment, other personal property and real estate assets in Zofingen, Switzerland, under an asset purchase
agreement between Siegfried and Arena GmbH. These assets are being used to manufacture lorcaserin and
certain drug products for Siegfried. In connection with this transaction, Arena GmbH and Siegfried also entered
into a long-term supply agreement for the active pharmaceutical ingredient of lorcaserin, a manufacturing
services agreement and a technical services agreement. The purchase price under the asset purchase agreement
was CHF 31.8 million in cash and 1,488,482 shares of our common stock valued at $8.0 million, which we
issued to Siegfried in January 2008. We paid CHF 21.8 million, or $19.6 million, of the cash purchase price in
January 2008 and paid the remaining CHF 10.0 million, or $11.1 million, in three separate installments during
2011.
In March 2011, Arena GmbH amended its agreements with Siegfried, effective January 1, 2011, whereby,
among other changes, we agreed to pay Siegfried the last two CHF 3.3 million installments that were due in
January 2012 and January 2013 in June 2011 and October 2011. Also under these amended agreements, Siegfried
agreed (i) to order from Arena GmbH 400 million units of drug product for manufacture by Arena GmbH in
2011, (ii) to use its reasonable commercial effort to order from Arena GmbH 200 million units of drug product
for manufacture by Arena GmbH from January 1, 2012, to June 30, 2012, and (iii) to reduce its fees for providing
Arena GmbH with certain technical and business services. In exchange, Arena GmbH agreed to reduce its sales
prices for the manufacturing services provided to Siegfried. The sales prices under this amended manufacturing
services agreement are generally below Arena GmbH’s cost to provide such services and are reduced from prior
years.
In December 2011, Arena GmbH further amended its agreement with Siegfried related to the manufacture
of drug product whereby Siegfried agreed to order 80% of its requirements of certain drug products from Arena
GmbH for the calendar year 2012 at agreed upon sales prices in exchange for Arena GmbH providing further
reductions to the sales prices for certain of the manufacturing services provided to Siegfried.
We recognized a total loss of $2.6 million in 2011 since our costs under the amended manufacturing
services agreement will exceed the related revenues. Of this amount, $1.4 million related to services rendered in
2011 and $1.2 million relates to services expected to be rendered in 2012. This $1.2 million loss provision for the
86
remaining services expected to be rendered through December 31, 2012, is recorded as part of our cost of
manufacturing services on our consolidated statements of operations and in accounts payable and other accrued
liabilities on our consolidated balance sheet.
Pursuant to the manufacturing services agreement, we recognized revenue of $5.3 million, $7.1 million and
$6.6 million in the years ended December 31, 2011, 2010 and 2009, respectively, for manufacturing drug
products for Siegfried. The revenue recognized in 2011 reflects the $1.4 million reduction related to the loss
incurred for services rendered under the amended manufacturing services agreement. Upon Siegfried’s
acceptance of drug products manufactured by us, we recognize manufacturing services revenues at agreed upon
sales prices for such drug products. The related cost to manufacture the drug products was $8.1 million, $7.4
million and $6.5 million in the years ended December 31, 2011, 2010 and 2009, respectively. The cost of
manufacturing services recognized in 2011 included $1.2 million representing the estimated contract loss
provision for services expected to be rendered through December 31, 2012, under the amended manufacturing
services agreement.
We also recognized expenses of $3.0 million, $2.5 million and $2.3 million for services incurred under the
technical services agreement in the years ended December 31, 2011, 2010 and 2009, respectively. The technical
services agreement provides us with administrative and other services to operate the facility.
(7) Note Payable to Deerfield
In July 2009, pursuant to a Facility Agreement we entered into in June 2009, or the 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, Deerfield provided us with a $100.0 million secured loan. We
received net proceeds of $95.6 million from this loan. In connection with the loan, we issued Deerfield warrants
to purchase an aggregate of 28,000,000 shares of our common stock at an exercise price of $5.42 per share. We
refer to these warrants as the $5.42 Warrants. Deerfield has the right to require us to accelerate principal
payments under the loan under certain circumstances, including upon certain changes of control, and at any time
we may prepay any or all of the outstanding principal at par.
Deerfield previously had the right to make a one-time election, which we refer to as the Deerfield
Additional Loan Election, to loan us up to an additional $20.0 million under the Facility Agreement, with the
additional loan maturing on the same date as the original loan, June 17, 2013. For each additional $1.0 million
that Deerfield loaned us under the Facility Agreement, we would have been required to issue Deerfield warrants
for 280,000 shares of our common stock at an exercise price of $5.42 per share. In addition, Deerfield previously
had an additional right to require us to accelerate payments under the loan in connection with certain equity
issuances. Each of these rights was terminated in March 2011 as described below.
In accordance with relevant guidance, we separately valued four components under the Facility Agreement
as of the date of the initial loan. Since that date, as discussed below in this note, we have amended the terms of
the Facility Agreement, repaid certain of the debt, and exchanged certain of the warrants, which affects how we
value and account for the Facility Agreement. The four components under the Facility Agreement were
previously valued as of July 6, 2009 as follows:
(1) The $100.0 million loan was valued at $47.9 million on a relative fair value basis, and was recorded as
a long-term liability on our consolidated balance sheet.
(2) The 2009 Warrants to purchase an aggregate of 28,000,000 shares of our common stock, net of
issuance costs, were valued at $39.1 million on a relative fair value basis. The relative fair value of the
warrants was recorded as additional paid-in capital on our consolidated balance sheet, and the resulting
debt discount is being accreted to interest expense over the term of the loan or until paid using the
effective interest rate method. These warrants were valued at their date of issuance using an option
87
pricing model and the following assumptions: expected life of 3.95 years, risk-free interest rate of
2.0%, expected volatility of 66% and no dividend yield. Because these warrants are eligible for equity
classification, no adjustments to the recorded value will be made on an ongoing basis.
(3) The Deerfield Additional Loan Election was valued at $9.5 million. The Deerfield Additional Loan
Election was classified as a liability on our consolidated balance sheet and, accordingly, was revalued
on each subsequent balance sheet date until it was terminated, with any changes in the fair value
between reporting periods recorded in the interest and other income (expense) section of our
consolidated statements of operations (see Note 8). Until the Deerfield Additional Loan Election was
terminated in 2011, we accreted the additional debt discount that resulted from the allocation of
proceeds under the Facility Agreement to interest expense using the effective interest rate method.
(4) Deerfield’s ability to accelerate principal payments under the loan under certain circumstances,
including upon certain changes of control, was valued at $0.5 million. The acceleration right was
classified as a liability on our consolidated balance sheet and, accordingly, will be revalued on each
subsequent balance sheet date until it is exercised or expires, with any changes in the fair value
between reporting periods recorded in the interest and other income (expense) section of our
consolidated statements of operations (see Note 8). This allocation of proceeds under the Facility
Agreement resulted in additional debt discount that is being accreted to interest expense over the term
of the loan or until paid using the effective interest rate method.
As a result of the closing of our public offering of common stock in July 2009, which occurred after we
entered into the Facility Agreement, we were required to repay Deerfield $10.0 million that was originally
scheduled to be repaid in July 2010. In connection with this $10.0 million repayment, we retired a proportional
share of the debt discount and issuance costs directly related to the repaid debt and recognized a non-cash loss on
extinguishment of debt of $2.5 million in 2009.
In June 2010, we entered into a Purchase and Exchange Agreement, or the 2010 Purchase Agreement, with
Deerfield, pursuant to which we sold Deerfield 11,000,000 shares of our common stock at a price of $3.23 per
share, resulting in net proceeds to us of $35.5 million. Also pursuant to the 2010 Purchase Agreement, we
exchanged a portion of the $5.42 Warrants to purchase an aggregate of 16,200,000 shares of our common stock
at an exercise price of $5.42 per share for new warrants, which we refer to as the $3.45 Warrants, to purchase a
like number of shares of our common stock at an exercise price of $3.45 per share. The outstanding $3.45
Warrants are exercisable until June 17, 2013. Other than the exercise price and certain provisions related to
cashless exercise and early termination of the warrants, the $3.45 Warrants contain substantially the same terms
as the $5.42 Warrants.
We valued the $3.45 Warrants at their June 2010 issuance date using an option pricing model and the
following assumptions: expected life of 3.03 years, risk-free interest rate of 1.2%, expected volatility of 72% and
no dividend yield. We determined that the incremental value of the $3.45 Warrants was $5.5 million, which was
recorded as a component of the stock issuance and warrant exchange under the 2010 Purchase Agreement in the
stockholders’ equity section of our consolidated balance sheet. Because the $3.45 Warrants are eligible for equity
classification, no adjustments to the recorded value will be made on an ongoing basis.
In August 2010, we sold 8,955,224 shares of our common stock at a price of $6.70 per share in a registered
direct public offering to Deerfield. As part of this transaction, we entered into an amendment to the Facility
Agreement, pursuant to which $30.0 million of the proceeds from this transaction was used to prepay the portion
of the principal amount that was originally scheduled to be repaid in July 2012. Net proceeds to us from this
transaction, after prepayment of the $30.0 million, were approximately $30.0 million. In connection with this
$30.0 million prepayment, we retired a proportional share of the debt discount and issuance costs directly related
to the repaid debt and recognized a non-cash loss on extinguishment of debt of $12.4 million in 2010.
88
To reduce our interest payments, in January 2011, we prepaid $20.0 million of the principal amount that was
originally scheduled to be repaid to Deerfield in July 2011. In connection with this $20.0 million prepayment, we
retired a proportional share of the debt discount and issuance costs directly related to the repaid debt and
recognized a non-cash loss on extinguishment of debt of $2.5 million.
In March 2011, we and Deerfield entered into (i) an Exchange Agreement, (ii) a Securities Purchase
Agreement and (iii) a Second Amendment to the Facility Agreement, or the Second Amendment.
Under the Exchange Agreement, we agreed to exchange 14,368,590 of the $3.45 Warrants for new warrants,
which we refer to as the $1.68 Warrants, to purchase a like number of shares of our common stock at an exercise
price of $1.68 per share. The $1.68 Warrants are exercisable until June 17, 2015. Other than the exercise period,
the exercise price and certain provisions related to cashless exercise and early termination of the warrants, the
$5.42 Warrants, the $3.45 Warrants and the $1.68 Warrants each contain substantially the same terms.
Under the Securities Purchase Agreement, Deerfield purchased 12,150,000 shares of our common stock for
a purchase price of $1.46 per share and 12,150 shares of our Series C Convertible Preferred Stock, or Series C
Preferred, for a purchase price of $1,460.00 per share. Each share of Series C Preferred was convertible into
1,000 shares of our common stock at any time at the option of the holder, subject to certain limitations. In April
2011, Deerfield converted all of the Series C Preferred into a total of 12,150,000 shares of common stock. The
fair value of the common stock into which the Series C Preferred was convertible on the date of issuance
exceeded the proceeds allocated to the Series C Preferred on a relative fair value basis by $2.3 million, resulting
in a beneficial conversion feature that we recognized as a decrease to additional paid-in capital and a deemed
dividend to the Series C Preferred stockholders.
Under the Second Amendment, we prepaid $17.7 million of the principal amount that was originally
scheduled to be repaid to Deerfield in June 2013. After deducting such prepayment, net proceeds to us under the
Securities Purchase Agreement were approximately $17.6 million. In connection with this $17.7 million
prepayment, we retired a proportional share of the debt discount and issuance costs directly related to the repaid
debt and recognized a non-cash loss on extinguishment of debt of $8.0 million.
The Second Amendment also eliminated the Deerfield Additional Loan Election and our obligation to
accelerate payments under the loan in connection with certain equity issuances.
We valued the $1.68 Warrants at their March 2011 issuance date using an option pricing model and the
following assumptions: expected life of 4.21 years, risk-free interest rate of 1.9%, expected volatility of 82% and
no dividend yield. We determined that the incremental value of the $1.68 Warrants was $6.0 million, which was
recorded as a component of the stock issuance and warrant exchange in the stockholders’ equity section of our
consolidated balance sheet. Because the $1.68 Warrants are eligible for equity classification, no adjustments to
the recorded value will be made on an ongoing basis.
At December 31, 2011, the outstanding principal balance on the Deerfield loan, which is due on
June 17, 2013, was $22.3 million. See Note 17 regarding the principal prepayment made subsequent to
December 31, 2011. The difference between the $14.7 million recorded value and the $22.3 million outstanding
principal balance of the loan as of December 31, 2011, represents the remaining debt discount, which we will
accrete over the term of the loan or until paid. The outstanding principal accrues interest at the contractual rate of
7.75% per annum on the stated principal balance, payable quarterly in arrears. Total interest expense of
$6.6 million, $14.0 million and $11.2 million, including accretion of the debt discount attributable to the warrants
and the other derivative financial instruments and amortization of capitalized issuance costs, was recognized in
connection with this loan in the years ended December 31, 2011, 2010 and 2009, respectively. In the year ended
December 31, 2010, a non-cash correction of prior period errors resulted in a $3.0 million decrease to interest
expense. The current effective annual interest rate on the loan is 38.4%.
89
(8) Derivative Liabilities
In June 2006 and August 2008, we issued seven-year warrants, which we refer to as the Series B Warrants,
to purchase 829,856 and 1,106,344 shares of our common stock, respectively, at an exercise price of $15.49 and
$7.71 per share, respectively. The Series B Warrants are related to our Series B Convertible Preferred Stock,
which we redeemed in 2008 and is no longer outstanding. These warrants contain an anti-dilution provision and,
as a result of subsequent equity issuances at prices below the adjustment price of $6.72 defined in the warrants,
as of December 31, 2011, the number of shares issuable upon exercise of the outstanding June 2006 and August
2008 Series B Warrants was increased to 1,227,743 and 1,640,368, respectively, at an exercise price of $10.47
and $5.20 per share, respectively. See Note 17 regarding further adjustments made to the number of shares
issuable upon exercise and the exercise prices subsequent to December 31, 2011. The Series B Warrants are
classified as a liability on our consolidated balance sheets.
In accordance with relevant guidance, we have revalued these warrants on each subsequent balance sheet
date, and will continue to do so until they are exercised or expire, with any changes in the fair value between
reporting periods recorded as other income or expense. The June 2006 and August 2008 Series B Warrants were
valued at December 31, 2011, and 2010 using an option pricing model and the following assumptions:
December 31, 2011
December 31, 2010
June 2006
Series B
Warrants
August 2008
Series B
Warrants
June 2006
Series B
Warrants
August 2008
Series B
Warrants
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . .
Expected life (years) . . . . . . . . . . . . . . . . . . . . . .
0.2%
0%
90%
1.50
0.6%
0%
99%
3.62
0.8%
0%
96%
2.50
1.8%
0%
83%
4.62
As of the July 2009 issuance date of the Deerfield loan, we separately valued the Deerfield Additional Loan
Election, including the 5,600,000 contingently issuable warrants to purchase up to 5,600,000 shares of our
common stock. Because the Deerfield Additional Loan Election was classified as a liability on our consolidated
balance sheet until this right was terminated in March 2011 (see Note 7), it was revalued on each subsequent
balance sheet date, with any changes in the fair value between reporting periods recorded as other income or
expense. Upon its termination in March 2011, the $0.6 million value recorded for the Deerfield Additional Loan
Election was recorded as a component of the stock issuance and warrant exchange in the stockholders’ equity
section of our consolidated balance sheet.
We also separately valued Deerfield’s right to require us to accelerate payments under the loan under certain
circumstances, including upon certain changes of control, at $0.5 million as of the July 2009 issuance date of the
Deerfield loan (see Note 7). The value of this acceleration right is classified as a liability on our consolidated
balance sheet and, accordingly, will be revalued on each subsequent balance sheet date until it is exercised or
expires, with any changes in the fair value between reporting periods recorded as other income or expense. At
each reporting date, this acceleration right was valued using a discounted cash flow model.
Our derivative liabilities consisted of the following, as of December 31, 2011, and 2010, in thousands:
Deerfield Additional Loan Election . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total current derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Series B Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deerfield acceleration right . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total long-term derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . . .
December 31
2011
2010
0
0
1,562
55
1,617
$ 607
607
1,234
430
1,664
Total derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,617
$2,271
90
The change in the fair value of our derivative liabilities is recorded in the interest and other income
(expense) section of our consolidated statements of operations. The following table presents the gain (loss) we
recognized in the years ended December 31, 2011, 2010 and 2009, in thousands:
Series B Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deerfield acceleration right . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deerfield Additional Loan Election . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2010
$1,152
(5)
3,224
2009
$ (268)
34
5,652
2011
$(328)
375
0
Total gain from valuation of derivative liabilities . . . . . . . . . . . . . . .
$ 47
$4,371
$5,418
(9) Commitments
We lease one of our US properties under an operating lease that expires in 2013 with two five-year options
to extend the lease term beyond 2013. The terms of this lease stipulate annual increases in monthly rental
payments of 2.75%. We lease space in various facilities in Switzerland that can be terminated with 12 months
written notice under an agreement that expires in 2032. The agreement stipulates that the annual rental payments
are indexed to the Swiss Consumer Price Index. We also have four other US properties that we occupy under sale
and leaseback agreements that allow us the option to repurchase these properties at various dates between 2012
and 2027 and, in some cases, include renewal options. We have also assigned an option to purchase one of our
leased US properties under these sale and leaseback agreements. The terms of these leases stipulate annual
increases in monthly rental payments of 2.0% to 2.5%. We account for our sale and leaseback transactions using
the required financing method because our options to repurchase these properties in the future are considered
continued involvement. 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
recorded interest expense of $7.3 million, $7.4 million and $7.3 million in the years ended December 31, 2011,
2010 and 2009, respectively, related to these leases. We expect interest expense related to our facilities to total
$71.2 million from December 31, 2011, through the terms of the leases. As of December 31, 2011, the total
financing obligation for these facilities was $75.8 million. The aggregate residual value of the facilities at the end
of the lease terms is $10.0 million.
In accordance with the lease terms for certain of our US properties, we are required to maintain deposits for
the benefit of the landlord throughout the term of the leases. A total of $1.4 million was recorded in other
non-current assets on our consolidated balance sheets as of December 31, 2011, and 2010 related to such leases.
We recognize rent expense on a straight-line basis over the term of each lease. Rent expense of $1.2 million
was recognized in each of the years ended December 31, 2011, 2010 and 2009.
91
Annual future obligations as of December 31, 2011, are as follows, in thousands:
Year ending December 31,
Financing
Obligations
Operating
Leases
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
7,700
8,601
8,816
9,036
9,262
93,606
Total minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
137,021
$ 882
256
0
0
0
0
$1,138
Less amounts representing interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add amounts representing residual value . . . . . . . . . . . . . . . . . . . . . . . . .
Lease financing obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(71,240)
9,990
75,771
(1,313)
$ 74,458
(10) Stockholders’ Equity
Preferred Stock
In October 2002, and in conjunction with the stockholders’ rights plan (see “Stockholders’ Rights Plan” below
in this note), our board of directors created a series of preferred stock, consisting of 350,000 shares with a par value
of $.0001 per share, designated as Series A Junior Participating Preferred Stock, or the Series A Preferred Stock.
Such number of shares may be increased or decreased by our board of directors, provided that no decrease shall
reduce the number of shares of Series A Preferred Stock to a number less than the number of shares then
outstanding, plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or
warrants or upon the conversion of any of our outstanding securities convertible into Series A Preferred Stock. As
of December 31, 2011, and 2010, no shares of Series A Preferred Stock were issued or outstanding.
Treasury Stock
In October 2003, Biotechnology Value Fund, L.P., and certain of its affiliates accepted our offer of
$23.1 million to purchase from them 3,000,000 shares of our common stock at a cash price of $7.69 per share,
which shares are recorded on our consolidated balance sheets as treasury stock.
Warrants
In July 2009, we issued to Deerfield the $5.42 Warrants to purchase an aggregate of 28,000,000 shares of
our common stock at an exercise price of $5.42 per share in connection with our receipt of a $100.0 million loan.
We valued the $5.42 Warrants, which are recorded as additional paid-in capital on our consolidated balance
sheet, at $39.1 million on a relative fair value basis as of the July 6, 2009 issuance date, net of allocated issuance
costs (see Note 7).
As part of our June 2010 sale of common stock to Deerfield (see Note 7), we exchanged 16,200,000 of the
$5.42 Warrants for the $3.45 Warrants to purchase a like number of shares of our common stock. We valued the
incremental value of the $3.45 Warrants at $5.5 million as of their issuance date.
As part of our March 2011 sale of common and preferred stock to Deerfield (see Note 7), we exchanged
14,368,590 of the $3.45 Warrants for the $1.68 Warrants to purchase a like number of shares of our common
stock, and extended the expiration date of these warrants to June 17, 2015. We valued the incremental value of
the $1.68 Warrants at $6.0 million as of their issuance date.
92
In June 2006 and August 2008, we issued our Series B Warrants (see Note 8). These warrants contain an
anti-dilution provision and, as a result of subsequent equity issuances at prices below the adjustment price of
$6.72 defined in the warrants, as of December 31, 2011, the outstanding June 2006 and August 2008 Series B
Warrants were exercisable for 1,227,743 and 1,640,368 shares, respectively, at exercise prices of $10.47 and
$5.20 per share, respectively.
The following table summarizes our outstanding warrants as of December 31, 2011:
Balance Sheet
Classification
Number of
Warrants
Exercise
Price
Expiration
Date
Deerfield $1.68 Warrants . . . . . . . . . . . . . . . . . . . . . . . . .
Deerfield $5.42 Warrants . . . . . . . . . . . . . . . . . . . . . . . . .
Deerfield $3.45 Warrants . . . . . . . . . . . . . . . . . . . . . . . . .
August 2008 Series B Warrants . . . . . . . . . . . . . . . . . . . .
June 2006 Series B Warrants . . . . . . . . . . . . . . . . . . . . . .
Equity
Equity
Equity
Liability
Liability
Total number of warrants outstanding . . . . . . . . . . .
14,368,590
11,800,000
1,831,410
1,640,368
1,227,743
30,868,111
June 17, 2015
$ 1.68
June 17, 2013
$ 5.42
June 17, 2013
$ 3.45
$ 5.20 August 14, 2015
June 30, 2013
$10.47
See Note 17 regarding the warrant exchange and related adjustments made subsequent to December 31,
2011.
Equity Compensation Plans
In June 2009, our stockholders approved our 2009 Long-Term Incentive Plan, or 2009 LTIP. When our
2006 Long-Term Incentive Plan, as amended, or 2006 LTIP, was adopted, our 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.
There were 6,488,112 shares available for issuance under the 2009 LTIP as of the date of stockholder
approval in June 2009, and 4,144,008 shares were available for issuance at December 31, 2011. Such shares 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 over 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 or stock appreciation right 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.
93
In 2003, we set up a deferred compensation plan for our executive officers, whereby executive officers
elected to contribute their shares of restricted stock into the plan. At December 31, 2011, 2010 and 2009, there
were 79,169, 84,169 and 101,669 shares, respectively, of restricted stock in the plan.
The following table summarizes our stock option activity under the Prior Plans and the 2009 LTIP, or
collectively, our Equity Compensation Plans, for the year ended December 31, 2011:
Outstanding at December 31, 2010 . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited/cancelled/expired . . . . . . . . . . . . . . . . . . . . .
Options
8,358,594
3,549,062
0
(1,597,684)
Outstanding at December 31, 2011 . . . . . . . . . . . . . . .
10,309,972
Vested and expected to vest at December 31, 2011 . .
9,952,135
Vested and exercisable at December 31, 2011 . . . . . .
5,974,887
Weighted-
Average
Exercise Price
Weighted-Average
Remaining
Contractual
Term (in years)
Aggregate
Intrinsic
Value (in
thousands)
$7.63
1.46
6.85
$5.63
$5.77
$8.11
6.22
6.12
4.36
$1,372
$1,258
$ 166
The aggregate intrinsic value in the above table is calculated as the difference between the closing price of our
common stock at December 31, 2011, of $1.87 per share and the exercise price of stock options that had strike
prices below the closing price. There were no stock options exercised in 2011, and the intrinsic value of all stock
options exercised during the years ended December 31, 2010 and 2009 was $55,000 and $38,000, respectively.
We granted 1,690,500 and 371,800 performance-based restricted stock unit awards under the 2006 LTIP in
February 2007 and March 2008, respectively. The awards provide employees until February 26, 2012, to achieve
four specific drug development and strategic performance goals. A fixed number of awards will be earned for
each goal that is successfully achieved. Once earned, the awards will remain unvested until the performance
period is complete. Any awards that have been earned at February 26, 2012, will vest and be settled in shares of
our common stock, with the holder receiving one share of common stock for each award earned and vested.
Termination of employment prior to vesting will result in the forfeiture of any earned (as well as unearned)
awards, except in limited circumstances such as termination due to death, disability or a change in control. No
compensation expense has been recognized to date related to these awards as achievement of the performance
goals has not been deemed probable. The following table summarizes activity with respect to such awards during
the year ended December 31, 2011:
Outstanding at December 31, 2010 . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited/cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Performance
Units
1,666,650
0
0
(495,400)
Outstanding at December 31, 2011 . . . . . . . . . . . . . . . . . . .
1,171,250
Vested at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . .
0
Weighted-Average
Grant-Date Fair
Value
$12.50
12.22
$12.62
Employee Stock Purchase Plans
In June 2009, our stockholders approved our 2009 Employee Stock Purchase Plan, or 2009 ESPP, which
provides for the issuance of up to 1,500,000 shares of our common stock and qualifies under Section 423 of the
Internal Revenue Code. As of December 31, 2011, a total of 945,367 shares had been issued under the 2009
ESPP, and 554,633 shares of common stock were available for issuance under the 2009 ESPP.
94
Under the 2009 ESPP, substantially all of our employees can choose to have up to 15% of their
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.
During the years ended December 31, 2011, 2010 and 2009, 272,014, 399,095 and 364,096 shares,
respectively, were purchased under our employee stock purchase plans.
Share-based Compensation
We use the Black-Scholes option pricing model to estimate the grant-date fair value of share-based awards
in determining our share-based compensation expense. The table below sets forth the weighted-average
assumptions and estimated fair value of stock options we granted under our Equity Compensation Plans during
the years ended December 31, 2011, 2010 and 2009:
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected life (years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average estimated fair value per share of stock options
December 31,
2011
2010
2009
2.2%
0%
86%
2.4%
0%
73%
2.0%
0%
86%
5.86
5.76
5.72
granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1.06
$2.03
$2.87
The table below sets forth the assumptions and estimated fair value of the options to purchase stock granted
under our employee stock purchase plans for multiple offering periods during the years ended December 31,
2011, 2010 and 2009:
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . .
Expected life (years)
. . . . . . . . . . . . . . . . . . . . . .
Range of fair value per share of options granted
2011
0.0% - 1.1%
0%
71% - 106%
0.25 - 2.0
December 31,
2010
0.1% - 1.6%
0%
71% - 85%
0.25 - 2.0
2009
0.1% - 3.3%
0%
53% - 82%
0.25 - 2.0
under our employee stock purchase plans . . . .
$0.56 to $3.28
$0.74 to $3.28
$1.45 to $2.85
Expected volatility 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 historically low volume of traded options on our common stock. The expected life of
options is determined based on historical experience of similar awards, giving consideration to the contractual
terms of the share-based awards, vesting schedules and post-vesting terminations. The risk-free interest rates are
based on the US Treasury yield curve, with a remaining term approximately equal to the expected term used in
the option pricing model.
Forfeitures are 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 6.3% and 7.0% for the years ended December 31, 2011, and 2010. Forfeitures were estimated to
be 6.4% in the first quarter of 2009 and 8.5% for the balance of 2009. As a result, we recorded additional share-
based compensation expense of $0.3 million and $0.4 million for the years ended December 31, 2011, and 2010,
95
respectively, and we reduced our share-based compensation expense by $0.5 million for the year ended
December 31, 2009. If actual forfeitures vary from estimates, we will recognize the difference in compensation
expense in the period the actual forfeitures occur or when stock options vest.
We recognized share-based compensation expense as follows, in thousands, except per share data:
December 31,
2011
2010
2009
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,958
1,696
94
$3,404
2,091
0
$4,078
2,765
306
Total share-based compensation expense and impact on net loss allocable to common
stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,748
$5,495
$7,149
Impact on net loss per share allocable to common stockholders, basic and diluted . . .
$ 0.03
$ 0.05
$ 0.08
At December 31, 2011, total unrecognized estimated compensation cost, including estimated forfeitures,
related to unvested stock options was $3.5 million, which is expected to be recognized over a weighted-average
remaining requisite service period of 2.69 years.
There were no stock options exercised during the year ended December 31, 2011. Cash of $0.3 million was
received from stock purchases under the employee stock purchase plans during the year ended December 31,
2011. There is no tax impact related to share-based compensation or stock option exercises because we are in a
net operating loss position with a full valuation allowance.
Common Shares Reserved for Future Issuance
The following shares of our common stock are reserved for future issuance at December 31, 2011:
Outstanding warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity Compensation Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 ESPP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred compensation plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30,868,111
15,625,230
554,633
79,169
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
47,127,143
Stockholders’ Rights Plan
In October 2002, our board of directors adopted a stockholders’ rights plan, or the Rights Agreement, under
which all stockholders of record as of November 13, 2002, received rights to purchase shares of the Series A
Preferred Stock, or the Rights. Each Right entitles the registered holder to purchase from us one one-hundredth of
a share of the Series A Preferred Stock at an initial exercise price of $36.00 per share, subject to adjustment. The
Rights are not exercisable until the 10th day after such time as a person or group acquires beneficial ownership of
10% or more, or announces a tender offer for 10% or more, of our common stock. At such time, all holders of the
Rights, other than the acquiror, will be entitled to purchase shares of our common stock at a 50% discount to the
then current market price.
The Rights will trade with our common stock, unless and until they are separated due to a person or group
acquiring beneficial ownership of 10% or more, or announcing a tender offer for 10% or more, of our common
stock. Our board of directors may terminate the Rights Agreement at any time or redeem the Rights prior to the
time a person acquires 10% or more of the common stock.
96
In November 2006, the Rights Agreement was amended to provide, among other things, that the triggering
percentage for when a Beneficial Owner (as defined in the Rights Agreement) of our common stock would be an
Acquiring Person (as further defined in the Amendment) increased from 10% to 15%.
(11) Collaborations
Eisai Inc.
In July 2010, our wholly owned subsidiary, Arena GmbH, entered into a marketing and supply agreement
with Eisai. Under this agreement, Arena GmbH granted Eisai exclusive rights to commercialize lorcaserin in the
United States and its territories and possessions subject to FDA approval of the lorcaserin NDA. As part of the
agreement, Arena GmbH is obligated to manufacture lorcaserin at our facility in Switzerland, and Eisai is
obligated to purchase all of its requirements of lorcaserin from Arena GmbH. Under this agreement, Eisai and we
will share equally the development expenses for certain additional development work required by the FDA prior
to approval of our NDA for lorcaserin. If the FDA requires development work following approval of lorcaserin,
Eisai will bear 90% and we will bear 10% of such expenses, except that Eisai and we will share equally the costs
of certain pediatric or adolescent studies.
We received a non-refundable, upfront payment of $50.0 million from Eisai, and, following US regulatory
approval of lorcaserin and upon the delivery of product supply for launch, will receive an additional $40.0
million or $60.0 million, depending on the approved drug label. We recorded the $50.0 million upfront payment
as deferred revenues and were originally recognizing it as revenue ratably over 13 years, which represented the
period in which we expected to have significant involvement. In 2011, based on revised expectations of the
timing of regulatory approval for lorcaserin, if ever, we re-assessed such period and are now recognizing this
revenue ratably over 14.5 years. Accordingly, at December 31, 2011, our consolidated balance sheet included
$3.5 million and $41.2 million for the current and non-current portion, respectively, of such deferred revenues.
From the inception of the Eisai collaboration through December 31, 2011, we have recognized revenues of
$5.4 million from amortization of the $50.0 million upfront payment we received in 2010 and $3.3 million for
reimbursement of additional development expenses. In 2011, we recognized revenues totaling $6.8 million, of
which $3.5 million was from amortization of the upfront payment and $3.3 million was for reimbursement of
additional development expenses. In 2010, we recognized revenues of $1.9 million, all of which was from
amortization of the upfront payment.
We are obligated to sell lorcaserin to Eisai for a purchase price starting at 31.5% of Eisai’s annual net
product sales, and the purchase price will increase on a tiered basis to 36.5% on the portion of annual net product
sales exceeding $750.0 million, subject to reduction in the event of generic competition and certain other
circumstances. We are also eligible to receive up to an aggregate of $1.19 billion in purchase price adjustment
payments based on Eisai’s annual net sales of lorcaserin, with the first and last amounts payable with annual net
sales of $250.0 million and $2.5 billion, respectively. Of these purchase price adjustment payments, Eisai is
obligated to pay us a total of $330.0 million for annual net sales of up to $1.0 billion. We are also eligible to
receive up to an additional $70.0 million in regulatory and development milestone payments.
Eisai and we have agreed to not commercialize outside of our marketing and supply agreement any product
that competes with lorcaserin in the United States. Our marketing and supply agreement includes a stand-still
provision limiting Eisai’s ability to acquire our securities and assets.
Unless terminated earlier, our marketing and supply agreement will continue in effect until terminated by
Eisai following the later of the expiration of all issued lorcaserin patents for the United States and 12 years after
the first commercial sale of lorcaserin in the United States. Either party has the right to terminate this agreement
early in certain circumstances, including (i) if the other party is in material breach, (ii) for certain
commercialization concerns and (iii) for certain intellectual property infringement. Eisai also has the right to
97
terminate this agreement early in certain circumstances, including (a) if sales of generic equivalents of lorcaserin
in the United States exceed sales of lorcaserin in the United States (based on volume) and (b) if Eisai is acquired
by a company that has a product that competes with lorcaserin.
Ortho-McNeil-Janssen Pharmaceuticals, Inc.
Our collaboration and license agreement with Ortho-McNeil-Janssen Pharmaceuticals, Inc., or Ortho-
McNeil-Janssen, terminated in December 2010. Upon termination, all rights to the compounds developed under
the collaboration, and related intellectual property and other information (including the investigational new drug,
or IND, application relating to APD597) reverted to us. We entered into the collaboration in December 2004 to
further develop compounds for the potential treatment of type 2 diabetes and other disorders. Under the
collaboration, Ortho-McNeil-Janssen advanced APD668 and APD597, first and second generation GPR119
agonists for the treatment of type 2 diabetes, respectively, into clinical trials.
From the inception of this collaboration through December 31, 2011, we received $27.5 million from Ortho-
McNeil-Janssen in upfront and milestone payments, $7.2 million in research funding and $21.0 million for patent
activities and additional sponsored research. For the year ended December 31, 2011, we recognized revenues of
$0.5 million under this agreement, primarily for patent activities. For the year ended December 31, 2010, we
recognized $3.2 million of revenues under this agreement, all of which was reimbursement for patent activities.
For the year ended December 31, 2009, we recognized revenues of $3.8 million, of which $3.7 million was
reimbursement for patent activities and $0.1 million was for additional sponsored research.
(12) Restructuring Charges
In March 2011, we completed a reduction of our US workforce of approximately 25%, or a total of 65
employees, that was announced in January 2011. We accounted for our restructuring activities in accordance with
relevant guidance that requires a liability for costs associated with an exit or disposal activity to be recognized
when the liability is incurred. As a result of this restructuring, we recorded a charge of $3.5 million during the
first quarter of 2011, including non-cash, share-based compensation charges of $0.1 million, which is reflected as
a separate line item in the accompanying consolidated statements of operations. As of December 31, 2011,
$17,000 remains accrued and will be paid in the first quarter of 2012.
(13) Employee Benefit Plans
401(k) Plan
All of our US employees are eligible to participate in our defined contribution retirement plan that complies
with Section 401(k) of the Internal Revenue Code. We match 100% of each participant’s voluntary contributions,
subject to a maximum of 6% of the participant’s eligible compensation. Our matching portion, which totaled
$1.2 million, $1.6 million and $1.8 million in the years ended December 31, 2011, 2010 and 2009, respectively,
vests over a five-year period from the date of hire.
Pension Plan
Our wholly owned subsidiary in Switzerland, Arena GmbH, contributes to a multiemployer defined benefit
pension plan, established under an affiliated group of employers, for the purpose of providing mandatory
occupational pension benefits for its employees. The risks of participating in a multiemployer plan are different
from a single-employer plan in that (i) assets contributed to the multiemployer plan by one employer may be
used to provide benefits to employees of other participating employers, (ii) if a participating employer stops
contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating
employers, (iii) if Arena GmbH elects to stop participating in the multiemployer plan, Arena GmbH may be
required to pay the plan an amount based on the underfunded status of the plan, referred to as a withdrawal
liability, and (iv) Arena GmbH has no involvement in the management of the multiemployer plan’s investments.
We currently have no intention of withdrawing from the multiemployer plan.
98
Arena GmbH’s contributions to the multiemployer plan were $0.6 million in the year ended December 31,
2011, and $0.5 million in both of the years ended December 31, 2010 and 2009.
(14) Income Taxes
Our loss before provision (benefit) for income taxes is summarized by region as follows, in thousands:
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (75,209)
(34,015)
$ (85,471)
(39,063)
$ (97,754)
(56,145)
Total loss before income taxes . . . . . . . . . . . . . . . . . . . . . . . . .
$(109,224)
$(124,534)
$(153,899)
December 31,
2011
2010
2009
Our provision (benefit) for income taxes, which is included in the interest and other income (expense)
section of our consolidated statements of operations, consists of the following, in thousands:
December 31,
2011
2010
2009
Current:
Federal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$0
$0
$ (68)
Deferred:
Federal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred provision (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0
0
0
0
0
0
0
0
(84)
(9)
(534)
(627)
Total provision (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$0
$0
$(695)
The tax benefit in 2009 was due to a change in accounting treatment of an intangible asset from being
considered an indefinite lived asset to a definite lived asset. The initial recognition of the indefinite lived
intangible asset resulted in the recognition of a deferred tax expense, as the deferred tax liability was not
available to offset deferred tax assets. Upon the change to a definite lived asset in 2009, the related deferred tax
liability became available to offset deferred tax assets, and the previously recognized tax expense was reversed.
For the year ended December 31, 2009, we were required to allocate our total income tax benefit of $0.6
million between continuing operations and other comprehensive income in our consolidated financial statements.
Accordingly, we charged $0.1 million directly to other comprehensive income and recorded a tax benefit of $0.7
million in continuing operations in 2009.
99
Our provision (benefit) for income taxes differs from the statutory Federal rate of 34% at December 31,
2011, 2010 and 2009, due to the following, in thousands:
December 31,
2011
2010
2009
Provision (benefit) for income taxes at statutory Federal rate . . . . . . . . . . . . . .
State income tax, net of Federal benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Permanent items and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign losses at lower effective rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revaluation of deferred tax assets due to state rate changes . . . . . . . . . . . . . . .
Unrecognized net operating losses, or NOLs, and research and development
credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Addition of Federal NOLs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Indefinite life intangible amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(37,136) $ (42,342) $(52,330)
(3,530)
(488)
1,969
18,162
(5,430)
7,989
(3,954)
(3,366)
1,346
12,155
(3,512)
0
(3,857)
(1,284)
822
8,509
(1,955)
0
7,086
0
0
28,354
(539)
14,947
(170,399)
0
192,287
2,838
32,696
0
(534)
(1,964)
2,765
Provision (benefit) for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
0
$
0
$
(695)
The components of our deferred tax assets are as follows, in thousands:
Deferred tax assets:
Foreign NOL carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal NOL carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized research and development (state) . . . . . . . . . . . . . . . . . . . .
Deferred revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2011
2010
$
6,835
191,826
169
20,421
6,640
4,967
6,860
237,718
(1,575)
236,143
(236,143)
$
3,915
170,399
375
21,942
5,375
4,378
2,706
209,090
(1,300)
207,790
(207,790)
Net deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
0
$
0
A valuation allowance has been established against all of our deferred tax assets, as realization of such assets is
not more-likely-than-not. The valuation allowance increased by $28.4 million in 2011 compared to 2010.
At December 31, 2011, we had Federal NOL carryforwards of $568.8 million that will begin to expire in
2023 unless previously utilized. At the same date, we had California NOL carryforwards of $675.1 million,
which will begin to expire in 2014, and foreign NOL carryforwards of $6.8 million, which will begin to expire in
2012. At December 31, 2011, we had $4.6 million of both Federal and California NOL carryforwards related to
stock option exercises, which will result in an increase to additional paid-in capital and a decrease in income
taxes payable at the time when the tax loss carryforwards are utilized. We also had Federal and California
research and development tax credit carryforwards of $39.5 million and $26.1 million, respectively. The Federal
research and development credit carryforwards will begin to expire in 2025 unless previously utilized. The
California research and development credit carryforwards carry forward indefinitely.
100
Sections 382 and 383 of the Internal Revenue Code limit the utilization of tax carryforwards that arise prior
to certain cumulative changes in a corporation’s ownership. The Section 382/383 analysis for Federal NOLs with
respect to potential ownership changes was completed in 2010 and, accordingly, the Federal NOLs that are
available to be utilized are included in our deferred tax asset schedule. We have reviewed our changes in
ownership for Federal NOLs through December 31, 2011, and have not identified any additional changes. We
have yet to complete a Section 382/383 analysis for our California NOL deferred tax assets of $39.4 million or
our Federal and California research and development credits of $56.8 million and, accordingly, such amounts
have been excluded from our deferred tax asset schedule.
In accordance with authoritative guidance, the impact of an uncertain income tax position on the income tax
return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the
relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50%
likelihood of being sustained.
Our practice is to recognize interest and/or penalties related to income tax matters in income tax expense.
We did not have any uncertain income tax positions or accrued interest or penalties included in our consolidated
balance sheets at December 31, 2011, or 2010, and did not recognize any interest and/or penalties in our
consolidated statements of operations during the years ended December 31, 2011, 2010 or 2009.
We are subject to income taxation in the United States at the Federal and state levels. Our tax years for 1997
and later are subject to examination by US and California tax authorities due to the carryforward of unutilized
NOL and research and development credits. We are also subject to foreign income taxes in the countries in which
we operate. To our knowledge, we are not currently under examination by any taxing authorities.
Our Swiss subsidiary, Arena GmbH, has been granted a conditional incentive tax holiday for its operations
in Switzerland that is expected to exempt it from a majority of the potential Swiss income taxes. Should this tax
holiday come into effect, it would continue for a period of up to 10 years, not to extend beyond December 31,
2022.
(15) Legal Proceedings
Beginning on September 20, 2010, a number of complaints were filed in the US District Court for the
Southern District of California against us and certain of our current and former employees and directors on
behalf of certain purchasers of our common stock. The complaints have been brought as purported stockholder
class actions, and, in general, include allegations that we and certain of our current and former employees and
directors violated federal securities laws by making materially false and misleading statements regarding our
lorcaserin program, thereby artificially inflating the price of our common stock. The plaintiffs are seeking
unspecified monetary damages and other relief. On November 19, 2010, eight prospective lead plaintiffs filed
motions to consolidate, appoint a lead plaintiff, and appoint lead counsel. The Court took the motions to
consolidate under submission on January 14, 2011. On August 8, 2011, the Court consolidated the actions and
appointed a lead plaintiff and lead counsel. On November 1, 2011, the lead plaintiff filed a consolidated amended
complaint. On December 30, 2011, we filed a motion to dismiss the consolidated amended complaint, and a
hearing on the motion to dismiss has been scheduled for April 13, 2012. In addition to the class actions, a
complaint involving similar legal and factual issues has been brought by at least one individual stockholder and
is pending in federal court. On December 30, 2011, we filed a motion to dismiss the stockholder’s complaint, and
a hearing on the motion to dismiss has been scheduled for April 13, 2012. We intend to defend against the claims
advanced and to seek dismissal of these complaints. Due to the early stage of these proceedings, we are not able
to predict or reasonably estimate the ultimate outcome or possible losses relating to these claims.
On September 24, 2010, a stockholder derivative complaint was filed in the Superior Court of California for
the County of San Diego against certain of our current and former employees and directors, and other
stockholder derivative complaints were subsequently filed in state court. On October 19, 2010, the Superior
Court ordered that the pending state derivative actions be consolidated. The Superior Court also ordered that later
101
filed, related state derivative actions be consolidated as well. We refer to the consolidated state derivative actions
as the State Derivative Action. In November 2010, plaintiffs in the State Derivative Action filed a consolidated
stockholder derivative complaint. We filed a demurrer to the consolidated stockholder derivative complaint on
February 15, 2011. On October 6, 2010, a stockholder derivative complaint was filed in the US District Court for
the Southern District of California. Thereafter, a number of other stockholder derivative complaints were also
filed in federal court. On March 3, 2011, the federal court ordered that the pending federal derivative actions be
consolidated. The federal court also ordered that later filed, related federal derivative actions be consolidated as
well. We refer to the consolidated federal derivative actions as the Federal Derivative Action. We refer to the
State Derivative Action and the Federal Derivative Action collectively as the Derivative Actions. The Derivative
Actions allege breaches of fiduciary duties by the defendants and other violations of law. In general, the
Derivative Actions allege that certain of our current and former employees and directors caused or allowed for
the dissemination of materially false and misleading statements regarding our lorcaserin program, thereby
artificially inflating the price of our common stock. On September 9, 2011, we and lead counsel for the plaintiffs
in the Derivative Actions entered into a stipulation of settlement to resolve the Derivative Actions. The current
and former employees and directors named as individual defendants in the Derivative Actions have also entered
into the stipulation of settlement. On October 19, 2011, the Superior Court of California entered an order
preliminarily approving the proposed settlement. On December 16, 2011, the Superior Court of California issued
its final order and judgment approving the settlement and dismissing the State Derivative Action with prejudice.
On December 29, 2011, the US District Court issued an order dismissing the Federal Derivative Action with
prejudice. In accordance with the terms of the settlement, and in exchange for a release of all claims by the
plaintiffs, among others, we have agreed to adopt certain corporate governance measures and cause our insurers
to pay the plaintiffs’ attorneys a total of $1.1 million.
(16) Quarterly Financial Data (Unaudited)
The following tables present quarterly data for the years ended December 31, 2011, and 2010, in thousands,
except per share data:
2011
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss allocable to common
Quarter ended
December 31
Quarter ended
September 30
Quarter ended
June 30
Quarter ended
March 31
Year ended
December 31
$ 2,076
$ 3,459
$ 3,259
$ 3,925
$ 12,719
stockholders . . . . . . . . . . . . . . . . . . . . . . . .
$(23,682)
$(22,736)
$(22,908)
$(42,158)
$(111,484)
Net loss per share allocable to common
stockholders, basic and diluted . . . . . . . . .
$
(0.16)
$
(0.16)
$
(0.16)
$
(0.35)
$
(0.80)
2010
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss allocable to common
Quarter ended
December 31
Quarter ended
September 30
Quarter ended
June 30
Quarter ended
March 31
Year ended
December 31
$ 4,012
$ 7,629
$ 2,459
$ 2,513
$ 16,613
stockholders . . . . . . . . . . . . . . . . . . . . . . . .
$(28,241)
$(36,266)
$(28,757)
$(31,270)
$(124,534)
Net loss per share allocable to common
stockholders, basic and diluted . . . . . . . . .
$
(0.23)
$
(0.31)
$
(0.28)
$
(0.33)
$
(1.14)
(17) Subsequent Events
We have evaluated subsequent events after the balance sheet date of December 31, 2011, and up to the date
we filed this report.
Deerfield Equity Purchase, Loan Prepayment and Warrant Exchange
In January 2012, we and Deerfield entered into (i) a Securities Purchase Agreement, (ii) an Exchange
Agreement and (iii) a Third Amendment to the Facility Agreement, or the Third Amendment.
102
Under the Securities Purchase Agreement, Deerfield purchased 9,953,250 shares of our common stock for a
purchase price of $1.65775 per share and approximately 9,953 shares of our Series D Convertible Preferred
Stock, or Series D Preferred, for a purchase price of $1,657.75 per share. Each share of Series D Preferred was
convertible into 1,000 shares of our common stock at any time at the option of the holder, subject to certain
limitations. The fair value of the common stock into which the Series D Preferred was convertible on the date of
issuance exceeded the proceeds allocated to the Series D Preferred on a relative fair value basis by $2.8 million,
resulting in a beneficial conversion feature that we will recognize as a decrease to additional paid-in capital and a
deemed dividend to the Series D Preferred stockholders during the quarter ending March 31, 2012.
Under the Exchange Agreement, we issued warrants to purchase 8,631,410 shares of our common stock at
an exercise price of $1.745 per share in exchange for the cancellation of 11,800,000 outstanding warrants at an
exercise price of $5.42 per share and 1,831,410 outstanding warrants at an exercise price of $3.45 per share.
These new warrants will be exercisable until June 17, 2015. Other than the exercise period, the exercise price and
certain provisions related to cashless exercise and early termination of the warrants, these new warrants contain
substantially the same terms as the cancelled warrants. We determined that the incremental value of the $1.745
Warrants was $4.5 million, which will be recorded as a component of the stock issuance and warrant exchange in
the stockholders’ equity section of our consolidated balance sheet.
Under the Third Amendment, we prepaid $5.0 million of the principal amount that was originally scheduled
to be repaid to Deerfield in June 2013. After deducting such prepayment, net proceeds to us under the Securities
Purchase Agreement were approximately $27.9 million. In connection with this $5.0 million prepayment, we
retired a proportional share of the debt discount and issuance costs directly related to the repaid debt and will
recognize a non-cash loss on extinguishment of debt of $1.7 million during the quarter ending March 31, 2012.
Under the terms of our outstanding Series B Warrants, subsequent equity issuances at prices below $6.72
result in an adjustment to the number of common shares issuable under the warrants and the per share exercise
price such that, upon the completion of this transaction, the number of shares issuable upon exercise of the
outstanding June 2006 and August 2008 Series B Warrants was increased to 1,379,235 and 1,846,301,
respectively, at an exercise price of $9.32 and $4.62 per share, respectively.
Deerfield Conversion of Preferred Stock
In February 2012, Deerfield converted all of its shares of our Series D Preferred into 9,953,250 shares of our
common stock. After this conversion, which has no cash impact, we have no shares of Series D Preferred
outstanding.
Equity Financing
In March 2012, we received aggregate net proceeds of $24.7 million (which is net of $0.3 million in
estimated costs) from the sale of 14,414,370 shares of common stock under our equity line of credit with
Azimuth Opportunity, L.P., or Azimuth.
Under the terms of our outstanding Series B Warrants, subsequent equity issuances at prices below $6.72
result in an adjustment to the number of common shares issuable under the warrants and the per share exercise
price. Upon the issuance of shares to Azimuth under the equity financing commitment, the number of shares
issuable upon exercise of the outstanding June 2006 and August 2008 Series B Warrants increased to 1,467,405
and 1,965,418, respectively, at an exercise price of $8.76 and $4.34 per share, respectively.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
103
Item 9A. Controls and Procedures.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive
officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as
such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended,
or the Exchange Act. Based on this evaluation, our principal executive officer and our principal financial officer
concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the
end of the period covered by this Annual Report on Form 10-K.
Our management does not expect that our disclosure controls and procedures or our internal control over
financial reporting will prevent all potential errors and fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are
met. Because of the inherent limitations in all control systems, no system of controls can provide absolute
assurance that all control issues and instances of fraud, if any, or misstatements due to error, if any, within the
company have been detected. While we believe that our disclosure controls and procedures and internal control
over financial reporting are and have been effective at the reasonable assurance level, we intend to continue to
examine and refine our disclosure controls and procedures and internal control over financial reporting and to
monitor ongoing developments in these areas.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining for us adequate internal control over
financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the
participation of our management, including our President and Chief Executive Officer and our Vice President,
Finance and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in
Internal Control—Integrated Framework, our management concluded that our internal control over financial
reporting was effective as of December 31, 2011.
The registered public accounting firm that audited our financial statements as of and for the year ended
December 31, 2011, included in this Annual Report on Form 10-K has issued an attestation report on our internal
control over financial reporting, and such report is included below.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting during the fourth quarter of the period
covered by this Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
104
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Arena Pharmaceuticals, Inc.:
We have audited Arena Pharmaceuticals, Inc.’s internal control over financial reporting as of December 31,
2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Arena Pharmaceuticals, Inc.’s management is
responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on
Internal Control Over Financial Reporting. Our responsibility is to express an opinion on Arena Pharmaceutical
Inc.’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audit also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with U.S. generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use,
or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, Arena Pharmaceuticals, Inc. maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2011, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of Arena Pharmaceuticals, Inc. and subsidiaries as of
December 31, 2011 and 2010, and the related consolidated statements of operations, stockholders’ equity and
comprehensive loss, and cash flows for the years then ended, and our report dated March 15, 2012 expressed an
unqualified opinion on those consolidated financial statements.
San Diego, California
March 15, 2012
/s/ KPMG LLP
105
Item 9B. Other Information.
Not applicable.
106
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
We have adopted a Code of Business Conduct and Ethics that applies to our directors and employees
(including our principal executive officer, principal financial officer, principal accounting officer and controller),
and have posted the text of the policy on our website (www.arenapharm.com) in connection with “Investor”
materials. In addition, we intend to promptly disclose (i) the date and nature of any amendment to the policy that
applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or
persons performing similar functions and (ii) the nature of any waiver, including an implicit waiver, from a
provision of the policy that is granted to one of these specified individuals that relates to one or more of the
elements of the code of ethics definition enumerated in Item 406(b) of Regulation S-K, the name of such person
who is granted the waiver and the date of the waiver on our website in the future.
The other information required by this item is incorporated herein by reference from the information under
the captions “Election of Directors,” “Compensation and Other Information Concerning Executive Officers,
Directors and Certain Stockholders” and “Section 16(a) Beneficial Ownership Reporting Compliance” contained
in our proxy statement for the annual meeting of stockholders to be held in June 2012, or the Proxy Statement.
Item 11. Executive Compensation.
The information required by this item is incorporated herein by reference from the information under the
captions “Compensation and Other Information Concerning Executive Officers, Directors and Certain
Stockholders” and “Compensation Committee Interlocks and Insider Participation” contained in the Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
The following table summarizes our compensation plans under which our equity securities are authorized
for issuance as of December 31, 2011:
Plan category
Equity compensation plans
approved by security
holders* . . . . . . . . . . . . . . . . . .
Equity compensation plans not
approved by security
holders . . . . . . . . . . . . . . . . . . .
Number of securities to be
issued upon exercise of
outstanding options, warrants
and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of securities remaining
available for future issuance
under equity compensation plans
(excluding securities reflected in
column (a))
(a)
(b)
(c)
11,481,222
$5.06
4,698,641**
0
0
Total* . . . . . . . . . . . . . . . . . . . . .
11,481,222
$5.06
4,698,641**
*
**
Includes stock options with a per share weighted-average exercise price of $5.63 and performance-based
restricted stock unit awards which have no per share weighted-average exercise price.
Includes 554,633 shares of common stock available for future issuance under our 2009 Employee Stock
Purchase Plan.
In 2003, we set up a deferred compensation plan for our executive officers, whereby they may elect to defer
their shares of restricted stock. At December 31, 2011, a total of 79,169 shares of restricted stock were in the
plan. All of the shares contributed to this plan were previously granted to such officers under an equity
compensation plan approved by our stockholders.
107
The other information required by this item is incorporated herein by reference from the information under
the caption “Security Ownership of Certain Beneficial Owners and Management” contained in the Proxy
Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this item is incorporated herein by reference from the information under the
captions “Certain Relationships and Related Transactions” and “Election of Directors” contained in the Proxy
Statement.
Item 14. Principal Accountant Fees and Services.
The information required by this item is incorporated herein by reference from the information under the
captions “Independent Auditors’ Fees” and “Pre-approval Policies and Procedures” contained in the Proxy
Statement.
108
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) 1. FINANCIAL STATEMENTS.
Reference is made to the Index to Financial Statements under Item 8, Part II hereof.
2. FINANCIAL STATEMENT SCHEDULES.
The Financial Statement Schedules have been omitted either because they are not required or because the
information has been included in the financial statements or the notes thereto included in this annual
report.
3. EXHIBITS
EXHIBIT
NO.
2.1*
3.1
3.2
3.3
3.4
3.5
3.6
3.7
DESCRIPTION
Agreement of Purchase and Sale, dated as of March 21, 2007, by and between Arena and BMR-
6114-6154 Nancy Ridge Drive LLP (as assignee of BioMed Realty, L.P.) (incorporated by
reference to Exhibit 2.1 to Arena’s report on Form 8-K filed with the Securities and Exchange
Commission on May 8, 2007, Commission File No. 000-31161)
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)
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)
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)
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)
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)
Certificate of Designations of Series B-1 Convertible Preferred Stock and Series B-2 Convertible
Preferred Stock of Arena, dated December 24, 2003 (incorporated by reference to Exhibit 3.1 to
Arena’s report on Form 8-K filed with the Securities and Exchange Commission on December 30,
2003, Commission File No. 000-31161)
Certificate of Designations of Series C Convertible Preferred Stock, dated March 30, 2011
(incorporated by reference to Exhibit 3.7 to Arena’s quarterly report on Form 10-Q for the quarter
ended March 31, 2011, filed with the Securities and Exchange Commission on May 10, 2011,
Commission File No. 000-31161)
3.8
Certificate of Designations of Series D Convertible Preferred Stock, dated January 12, 2012
109
EXHIBIT
NO.
DESCRIPTION
4.1
4.2
4.3
4.4
10.1**
10.2**
10.3**
10.4
10.5
10.6
10.7
10.8
10.9
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)
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)
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)
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)
1998 Equity Compensation Plan (incorporated by reference to Exhibit 10.1 to Arena’s registration
statement on Form S-1, as amended, filed with the Securities and Exchange Commission on
June 22, 2000, Commission File No. 333-3594)
Amended and Restated 2000 Equity Compensation Plan (incorporated by reference to Exhibit 10.2
to Arena’s annual report on Form 10-K for the year ended December 31, 2001, filed with the
Securities and Exchange Commission on March 15, 2002, Commission File No. 000-31161)
2002 Equity Compensation Plan (incorporated by reference to Exhibit A to Arena’s proxy
statement regarding Arena’s June 11, 2002, Annual Stockholders Meeting, filed with the Securities
and Exchange Commission on April 23, 2002, Commission File No. 000-31161)
Registration Rights Agreement dated December 24, 2003, among Arena and the investor signatories
thereto (incorporated by reference to Exhibit 10.2 to Arena’s report on Form 8-K filed with the
Securities and Exchange Commission on December 30, 2003, Commission File No. 000-31161)
Form of Warrant dated December 24, 2003 (incorporated by reference to Exhibit 10.3 to Arena’s
report on Form 8-K filed with the Securities and Exchange Securities and Exchange Commission
on December 30, 2003, Commission File No. 000-31161)
Settlement Agreement and Release, dated as of June 30, 2006, between Arena and Smithfield
Fiduciary LLC. (incorporated by reference to Exhibit 10.1 to Arena’s report on Form 8-K filed with
the Securities and Exchange Commission on July 6, 2006, Commission File No. 000-31161)
Amendment to Registration Rights Agreement, dated as of June 30, 2006, between Arena and
Smithfield Fiduciary LLC. (incorporated by reference to Exhibit 10.2 to Arena’s report on
Form 8-K filed with the Securities and Exchange Commission on July 6, 2006, Commission File
No. 000-31161)
Amendment to Registration Rights Agreement, dated as of June 30, 2006, between Arena and
Mainfield Enterprises, Inc. (incorporated by reference to Exhibit 10.3 to Arena’s report on
Form 8-K filed with the Securities and Exchange Commission on July 6, 2006, Commission File
No. 000-31161)
Purchase and Sale Agreement and Joint Escrow Instructions, dated December 22, 2003, between
Arena and ARE—Nancy Ridge No. 3, LLC (incorporated by reference to Exhibit 10.1 to Arena’s
report on Form 8-K filed with the Securities and Exchange Securities and Exchange Commission
on January 6, 2004, Commission File No. 000-31161)
110
EXHIBIT
NO.
10.10
10.11**
10.12+
10.13**
10.14**
10.15**
10.16**
10.17**
10.18**
10.19**
10.20
10.21**
DESCRIPTION
Lease Agreement, dated December 30, 2003, between Arena and ARE—Nancy Ridge No. 3, LLC
(incorporated by reference to Exhibit 10.2 to Arena’s report on Form 8-K filed with the Securities
and Exchange Commission on January 6, 2004, Commission File No. 000-31161)
Arena’s Deferred Compensation Plan, effective November 11, 2003, between Arena and
participating executive officers (incorporated by reference to Exhibit 10.29 to Arena’s annual report
on Form 10-K for the year ended December 31, 2003, filed with the Securities and Exchange
Commission on March 1, 2004, Commission File No. 000-31161)
Collaboration and License Agreement, dated as of December 20, 2004, by and between Arena and
Ortho-McNeil-Janssen Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.20 to Arena’s
annual report on Form 10-K for the year ended December 31, 2004, filed with the Securities and
Exchange Commission on March 2, 2005, Commission File No. 000-31161)
Form of stock option grant for non-employee directors under Arena’s 2002 Equity Incentive Plan
(incorporated by reference to Exhibit 10.1 to Arena’s report on Form 8-K filed with the Securities
and Exchange Commission on January 21, 2005, Commission File No. 000-31161)
2006 Long-Term Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 to Arena’s
report on Form 8-K filed with the Securities and Exchange Commission on April 13, 2007,
Commission File No. 000-31161)
Form of Stock Option Grant Agreement under the Arena 2006 Long-Term Incentive Plan, as
amended (incorporated by reference to Exhibit 10.1 to Arena’s report on Form 8-K filed with the
Securities and Exchange Commission on August 1, 2006, Commission File No. 000-31161)
Form of Stock Option Grant Agreement—Director under the Arena 2006 Long-Term Incentive
Plan, as amended (incorporated by reference to Exhibit 10.2 to Arena’s report on Form 8-K filed
with the Securities and Exchange Commission on August 1, 2006, Commission File No. 000-
31161)
Form of Incentive Stock Option Grant Agreement under the Arena 2006 Long-Term Incentive Plan,
as amended (incorporated by reference to Exhibit 10.3 to Arena’s report on Form 8-K filed with the
Securities and Exchange Commission on August 1, 2006, Commission File No. 000-31161)
Form of Restricted Stock Grant Agreement under the Arena 2006 Long-Term Incentive Plan, as
amended (incorporated by reference to Exhibit 10.4 to Arena’s report on Form 8-K filed with the
Securities and Exchange Commission on August 1, 2006, Commission File No. 000-31161)
Form of Restricted Stock Unit Grant Agreement under the Arena 2006 Long-Term Incentive Plan,
as amended (incorporated by reference to Exhibit 10.5 to Arena’s report on Form 8-K filed with the
Securities and Exchange Commission on August 1, 2006, Commission File No. 000-31161)
Form of Performance-Based Restricted Stock Grant Agreement for non-executive employees under
the Arena 2006 Long-Term Incentive Plan, as amended (incorporated by reference to Exhibit 10.1
to Arena’s report on Form 8-K filed with the Securities and Exchange Commission on March 1,
2007, Commission File No. 000-31161)
Form of Performance-Based Restricted Stock Grant Agreement for executive officers under the
Arena 2006 Long-Term Incentive Plan, as amended (incorporated by reference to Exhibit 10.2 to
Arena’s report on Form 8-K filed with the Securities and Exchange Commission on March 1, 2007,
Commission File No. 000-31161)
10.22**
Form of Indemnification Agreement between Arena and its directors (incorporated by reference to
Exhibit 10.1 to Arena’s report on Form 8-K filed with the Securities and Exchange Commission on
June 18, 2007, Commission File No. 000-31161)
111
EXHIBIT
NO.
10.23**
10.24**
10.25
10.26
10.27
10.28
10.29*
10.30
10.31*
10.32
10.33
DESCRIPTION
Form of Indemnification Agreement between Arena and its executive officers (incorporated by
reference to Exhibit 10.2 to Arena’s report on Form 8-K filed with the Securities and Exchange
Commission on June 18, 2007, Commission File No. 000-31161)
Form of Indemnification Agreement between Arena and individuals serving as its directors and
executive officers (incorporated by reference to Exhibit 10.3 to Arena’s report on Form 8-K filed
with the Securities and Exchange Commission on June 18, 2007, Commission File No. 000-31161)
Lease agreement between BMR-6114-6154 Nancy Ridge Drive LLC and Arena for 6114 Nancy
Ridge Drive, San Diego, California (incorporated by reference to Exhibit 10.5 to Arena’s quarterly
report on Form 10-Q for the quarter ended June 30, 2007, filed with the Securities and Exchange
Commission on August 9, 2007, Commission File No. 000-31161)
Lease agreement between BMR-6114-6154 Nancy Ridge Drive LLC and Arena for 6118 Nancy
Ridge Drive, San Diego, California (incorporated by reference to Exhibit 10.6 to Arena’s quarterly
report on Form 10-Q for the quarter ended June 30, 2007, filed with the Securities and Exchange
Commission on August 9, 2007, Commission File No. 000-31161)
Lease agreement between BMR-6114-6154 Nancy Ridge Drive LLC and Arena for 6122, 6124 and
6126 Nancy Ridge Drive, San Diego, California (incorporated by reference to Exhibit 10.7 to
Arena’s quarterly report on Form 10-Q for the quarter ended June 30, 2007, filed with the Securities
and Exchange Commission on August 9, 2007, Commission File No. 000-31161)
Lease agreement between BMR-6114-6154 Nancy Ridge Drive LLC and Arena for 6154 Nancy
Ridge Drive, San Diego, California (incorporated by reference to Exhibit 10.8 to Arena’s quarterly
report on Form 10-Q for the quarter ended June 30, 2007, filed with the Securities and Exchange
Commission on August 9, 2007, Commission File No. 000-31161)
Asset Purchase Agreement, dated as of December 18, 2007, by and between Arena
Pharmaceuticals GmbH and Siegfried Ltd (incorporated by reference to Exhibit 10.38 to Arena’s
annual report on Form 10-K for the year ended December 31, 2007, filed with the Securities and
Exchange Commission on March 5, 2008, Commission File No. 000-31161)
Amendment No. 1 to the Asset Purchase Agreement, dated effective as of January 1, 2011, by and
between Arena Pharmaceuticals GmbH and Siegfried Ltd (incorporated by reference to
Exhibit 10.2 to Arena’s quarterly report on Form 10-Q for the quarter ended March 31, 2011, filed
with the Securities and Exchange Commission on May 10, 2011, Commission File No. 000-31161)
Toll Manufacturing Agreement, dated as of January 7, 2008, by and between Arena
Pharmaceuticals GmbH and Siegfried Ltd (incorporated by reference to Exhibit 10.39 to Arena’s
annual report on Form 10-K for the year ended December 31, 2007, filed with the Securities and
Exchange Commission on March 5, 2008, Commission File No. 000-31161)
Amendment No. 1 to Toll Manufacturing Agreement, dated December 18, 2008, by and between
Arena Pharmaceuticals GmbH and Siegfried Ltd (incorporated by reference to Exhibit 10.36 to
Arena’s annual report on Form 10-K for the year ended December 31, 2008, filed with the
Securities and Exchange Commission on March 16, 2009, Commission File No. 000-31161)
Amendment No. 2 to Toll Manufacturing Agreement, dated September 17, 2009, by and between
Arena Pharmaceuticals GmbH and Siegfried Ltd (incorporated by reference to Exhibit 10.36 to
Arena’s annual report on Form 10-K for the year ended December 31, 2009, filed with the
Securities and Exchange Commission on March 16, 2010, Commission File No. 000-31161)
112
EXHIBIT
NO.
10.34
10.35
10.36
10.37
10.38**
10.39**
10.40**
10.41
10.42
10.43
10.44
DESCRIPTION
Amendment No. 3 to the Toll Manufacturing Agreement, dated effective as of January 1, 2011, by
and between Arena Pharmaceuticals GmbH and Siegfried Ltd (incorporated by reference to
Exhibit 10.3 to Arena’s quarterly report on Form 10-Q for the quarter ended March 31, 2011, filed
with the Securities and Exchange Commission on May 10, 2011, Commission File No. 000-31161)
Amendment No. 4 to the Toll Manufacturing Agreement, dated effective as of January 1, 2011, by
and between Arena Pharmaceuticals GmbH and Siegfried Ltd (incorporated by reference to
Exhibit 10.2 to Arena’s quarterly report on Form 10-Q for the quarter ended June 30, 2011, filed
with the Securities and Exchange Commission on August 9, 2011, Commission File No. 000-
31161)
Amendment No. 5 to the Toll Manufacturing Agreement, dated effective as of November 23, 2011,
by and between Arena Pharmaceuticals GmbH and Siegfried Ltd
Exchange Agreement, dated as of August 14, 2008, between Arena and Mainfield Enterprises, Inc.
(incorporated by reference to Exhibit 10.1 to Arena’s report on Form 8-K filed with the Securities
and Exchange Commission on August 15, 2008, Commission File No. 000-31161)
Amended and Restated Severance Benefit Plan, dated effective December 30, 2008, and providing
benefits for Messrs. Lief, Hoffman and Spector and Drs. Behan and Shanahan (incorporated by
reference to Exhibit 10.1 to Arena’s Form 8-K filed with the Securities and Exchange Commission
on December 31, 2008, Commission File No. 000-31161)
Amendment No. 1 to Amended and Restated Severance Benefit Plan, dated as of February 10, 2012
(incorporated by reference to Exhibit 10.1 to Arena’s Form 8-K filed with the Securities and
Exchange Commission on February 14, 2012, Commission File No. 000-31161)
Form of Amended and Restated Termination Protection Agreement, dated December 30, 2008, by
and among Arena and Messrs. Lief and Spector and Dr. Behan (incorporated by reference to
Exhibit 10.2 to Arena’s Form 8-K filed with the Securities and Exchange Commission on
December 31, 2008, Commission File No. 000-31161)
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)
Amendment to Facility Agreement, dated August 5, 2010, by and between Arena and Deerfield
(incorporated by reference to Exhibit 99.2 to Arena’s current report on Form 8-K filed with the
Securities and Exchange Commission on August 6, 2010, Commission File No. 000-31161)
Second Amendment to Facility Agreement, dated March 28, 2011, 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 99.2 to Arena’s current
report on Form 8-K filed with the Securities and Exchange Commission on March 29, 2011,
Commission File No. 000-31161)
Third Amendment to Facility Agreement, dated January 10, 2012, 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 99.2 to Arena’s current
report on Form 8-K filed with the Securities and Exchange Commission on January 11, 2012,
Commission File No. 000-31161)
113
EXHIBIT
NO.
10.45
10.46
DESCRIPTION
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)
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)
10.47+
Form of 2009 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
October 21, 2009, Commission File No. 000-31161)
10.48
10.49
10.50
10.51
10.52**
10.53**
10.54**
10.55**
Form of 2010 Warrant to Purchase Common Stock of Arena (incorporated by reference to Exhibit
10.3 to Arena’s report on Form 8-K filed with the Securities and Exchange Commission on June 8,
2010, Commission File No. 000-31161)
Form of 2011 Warrant to Purchase Common Stock of Arena (incorporated by reference to Exhibit
99.4 to Arena’s current report on Form 8-K filed with the Securities and Exchange Commission on
March 29, 2011, Commission File No. 000-31161)
Form of 2012 Warrant to Purchase Common Stock of Arena (incorporated by reference to Exhibit
99.4 to Arena’s current report on Form 8-K filed with the Securities and Exchange Commission on
January 11, 2012, Commission File No. 000-31161)
Registration Rights Agreement, dated June 2, 2010, 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 report on
Form 8-K filed with the Securities and Exchange Commission on June 8, 2010, Commission File
No. 000-31161)
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)
Form of Incentive Stock Option Grant Agreement for Employees under the Arena 2009 Long-Term
Incentive Plan (incorporated by reference to Exhibit 10.7 to Arena’s quarterly report on Form 10-Q
for the quarter ended June 30, 2009, filed with the Securities and Exchange Commission on August
7, 2009, Commission File No. 000-31161)
Form of Stock Option Grant Agreement for Employees or Consultants under the Arena 2009 Long-
Term Incentive Plan (incorporated by reference to Exhibit 10.8 to Arena’s quarterly report on
Form 10-Q for the quarter ended June 30, 2009, filed with the Securities and Exchange
Commission on August 7, 2009, Commission File No. 000-31161)
Form of Stock Option Grant Agreement for Non-Employee Directors under the Arena 2009 Long-
Term Incentive Plan (incorporated by reference to Exhibit 10.9 to Arena’s quarterly report on
Form 10-Q for the quarter ended June 30, 2009, filed with the Securities and Exchange
Commission on August 7, 2009, Commission File No. 000-31161)
114
EXHIBIT
NO.
10.56**
10.57**
10.58+
10.59**
10.60**
10.61
DESCRIPTION
Form of Restricted Stock Grant Agreement under the Arena 2009 Long-Term Incentive Plan
(incorporated by reference to Exhibit 10.10 to Arena’s quarterly report on Form 10-Q for the
quarter ended June 30, 2009, filed with the Securities and Exchange Commission on August 7,
2009, Commission File No. 000-31161)
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)
Marketing and Supply Agreement, dated July 1, 2010, by and between Arena Pharmaceuticals
GmbH and Eisai Inc. (incorporated by reference to Exhibit 10.1 to Arena’s quarterly report on
Form 10-Q for the quarter ended September 30, 2010, filed with the Securities and Exchange
Commission on November 9, 2010, Commission File No. 000-31161)
Summary of compensation for non-employee directors (incorporated by reference to Exhibit 10.1
to Arena’s quarterly report on Form 10-Q for the quarter ended June 30, 2011, filed with the
Securities and Exchange Commission on August 9, 2011, Commission File No. 000-31161)
Employment offer letter with Robert E. Hoffman, dated August 1, 2011 (incorporated by reference
to Exhibit 10.1 to Arena’s quarterly report on Form 10-Q for the quarter ended September 30,
2011, filed with the Securities and Exchange Commission on November 9, 2011, Commission File
No. 000-31161)
Common Stock Purchase Agreement between the Company and Azimuth Opportunity, L.P., dated
November 8, 2011 (incorporated by reference to Exhibit 10.1 to Arena’s current report on
Form 8-K filed with the Securities and Exchange Commission on November 8, 2011, Commission
File No. 000-31161)
10.62**
Annual Incentive Plan for Arena’s executive officers (incorporated by reference to Exhibit 10.1 to
Arena’s report on Form 8-K filed with the Securities and Exchange Commission on January 26,
2012, Commission File No. 000-31161)
21.1
23.1
23.2
31.1
31.2
32.1
Subsidiaries of the registrant
Consent of Independent Registered Public Accounting Firm
Consent of Independent Registered Public Accounting Firm
Certification of Chief Executive Officer pursuant to Rule 13a-14(A) promulgated under the
Securities Exchange Act of 1934
Certification of Chief Financial Officer pursuant to Rule 13a-14(A) promulgated under the
Securities Exchange Act of 1934
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
101.INS*** XBRL Instance Document
101.SCH*** XBRL Taxonomy Extension Schema Document
101.CAL*** XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*** XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*** XBRL Taxonomy Extension Label Linkbase Document
101.PRE*** XBRL Taxonomy Extension Presentation Linkbase Document
115
+
*
Confidential treatment has been granted for portions of this document.
Exhibits and schedules to this agreement have been omitted pursuant to the rules of the Securities and
Exchange Commission. We will submit copies of such exhibits and schedules to the Securities and
Exchange Commission upon request.
** Management contract or compensatory plan or arrangement.
*** Furnished herewith.
(b) EXHIBITS
See Item 15(a)(3) above.
(c) FINANCIAL STATEMENT SCHEDULES
See Item 15(a)(2) above.
116
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 15, 2012
Arena Pharmaceuticals, Inc.,
a Delaware corporation
By:
/s/
JACK LIEF
Jack Lief
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By:
By:
By:
By:
By:
By:
By:
By:
By:
By:
By:
Signatures
/s/
JACK LIEF
Jack Lief
/s/ ROBERT E. HOFFMAN
Robert E. Hoffman
/s/
JENNIFER K. BIELASZ
Jennifer K. Bielasz
/s/ DOMINIC P. BEHAN
Dominic P. Behan, Ph.D.
/s/ DONALD D. BELCHER
Donald D. Belcher
/s/ SCOTT H. BICE
Scott H. Bice
/s/ HARRY F. HIXSON, JR.
Harry F. Hixson, Jr., Ph.D.
/s/ TINA S. NOVA
Tina S. Nova, Ph.D.
/s/ PHILLIP M. SCHNEIDER
Phillip M. Schneider
/s/ CHRISTINE A. WHITE
Christine A. White, M.D.
/s/ RANDALL E. WOODS
Randall E. Woods
Title
Date
Chairman, President and Chief Executive
Officer
March 15, 2012
Vice President, Finance and Chief
Financial Officer (principal financial
officer)
March 15, 2012
Senior Director of Accounting and
Controller (principal accounting officer)
March 15, 2012
March 15, 2012
March 15, 2012
March 15, 2012
March 15, 2012
March 15, 2012
March 15, 2012
March 15, 2012
March 15, 2012
Director
Director
Director
Director
Director
Director
Director
Director
117
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Performance Graph
The graph below compares the cumulative five-year total return on our common stock from December 31,
2006, through December 31, 2011, to the cumulative total return over such period for (i) the NASDAQ
Composite Index and (ii) the NASDAQ Biotechnology Index. The graph assumes the investment of $100 on
December 31, 2006, with the reinvestment of dividends, although dividends have not been declared on our
common stock, and is calculated according to the Securities and Exchange Commission’s methodology. We
caution that the stock price performance shown in the graph may not be indicative of future stock price
performance. The graph, including each of the graph lines, was provided by Research Data Group, Inc.
This information, including the graph below, is not deemed to be “soliciting material” or to be “filed” with
the Securities and Exchange Commission, or subject to the Securities and Exchange Commission’s proxy rules,
other than as provided in such rules, or to the liabilities of Section 18 of the Exchange Act of 1934, and shall not
be deemed incorporated by reference into any prior or subsequent filing by us under the Securities Act of 1933 or
the Exchange Act of 1934, except to the extent that we specifically incorporate it by reference into any such
filing.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
Among Arena Pharmaceuticals, Inc., the NASDAQ Composite Index
and the NASDAQ Biotechnology Index
$140
$120
$100
$80
$60
$40
$20
$0
12/06
6/07
12/07
6/08
12/08
6/09
12/09
6/10
12/10
6/11
12/11
Arena Pharmaceuticals, Inc.
NASDAQ Composite
NASDAQ Biotechnology
Co-Founders
Jack Lief and
Dominic P. Behan, Ph.D.
“As we progress through 2012, we look forward
to our upcoming lorcaserin milestones and selectively
advancing our earlier-stage programs.”
DEAR STOCKHOLDERS,
Substantial evidence shows that being overweight
Association’s goal of having an HbA1c of less than 7%,
With the upcoming lorcaserin PDUFA date and the
As we progress through 2012, we look forward to
or obese can have dire human health consequences
and many concurrently reduced their use of diabetes
ongoing review process with the EMA, we are focused
our upcoming lorcaserin milestones and selectively
coupled with tremendous economic burden. To help
medications. We believe that the weight loss effi cacy,
on the potential to provide a new treatment for
advancing our earlier-stage programs. We would like
address the need for additional treatment options, we
safety profi le and the additional benefi t for glycemic
physicians to help patients lose weight and improve
to thank our employees, our colleagues at Eisai and
are currently seeking marketing approval of lorcaserin
control shown in BLOOM-DM improve the overall
their overall cardiometabolic health.
our consultants for their continued dedication to
from regulatory agencies in the United States and
benefi t-risk profi le from that presented in our original
Beyond lorcaserin, our pipeline includes earlier-stage
our efforts.
European Union. We also plan to seek marketing
lorcaserin NDA.
drug candidates that are the result of our internal
Lastly, we would like to extend a sincere thanks to you,
In addition to our US regulatory activities for lorcaserin,
discovery efforts. We intend to advance these programs
our stockholders. Thank you for believing in our vision.
earlier this month we fi led through the centralized
independently or with collaborators. In 2012, we plan to
procedure a Marketing Authorization Application, or
focus our resources on selectively advancing our earlier-
Sincerely,
MAA, with the European Medicines Agency, or EMA,
stage drug candidates by:
and the EMA accepted our fi ling to begin its review.
We look forward to working with the EMA and our
Rapporteur and Co-rapporteur during this process, and
to the potential approval of lorcaserin in the European
Union. We are also continuing to explore collaborative
■ Initiating a Phase 1b clinical trial for APD811, an
orally available agonist of the prostacyclin receptor
Jack Lief
intended for once-daily treatment of pulmonary
Co-Founder, Chairman, President
arterial hypertension;
and Chief Executive Offi cer
■ Filing an investigational new drug, or IND, application
for APD334, a selective S1P1 receptor agonist
intended for the treatment of a number of conditions
As we write this letter, we are preparing for a number
related to autoimmune diseases, including multiple
Dominic P. Behan, Ph.D.
of upcoming milestones for lorcaserin:
sclerosis; and
■ The May 10th meeting of the FDA’s Endocrinologic
■ Completing IND-enabling preclinical work for APD371,
Co-Founder, Executive Vice President
and Chief Scientifi c Offi cer
our cannabinoid receptor 2 agonist intended for the
March 31, 2012
treatment of pain.
Last year, we completed studies, analyses and other
opportunities for commercializing lorcaserin outside of
activities that we believe address the issues raised in
the United States.
approval of lorcaserin in other regions in the future.
In 2011, we focused resources and activities on
submitting a robust response to the US Food and Drug
Administration’s, or FDA, complete response letter,
or CRL, for lorcaserin and preparing our application
for European approval of lorcaserin. We also
selectively advanced other programs in our pipeline,
while maintaining our core research, development and
manufacturing capabilities.
the lorcaserin CRL, and we resubmitted the lorcaserin
New Drug Application, or NDA, to the FDA. The FDA
accepted the resubmission for fi ling, and assigned a
new Prescription Drug User Fee Act, or PDUFA, target
date of June 27, 2012, to complete its review.
The lorcaserin NDA resubmission includes the results of
the BLOOM-DM Phase 3 clinical trial, which evaluated
lorcaserin for weight loss in obese and overweight
patients with type 2 diabetes. The BLOOM-DM trial was
completed after we submitted the original lorcaserin
NDA. In this trial, lorcaserin treatment helped an
and Metabolic Drugs Advisory Committee,
which provides us the opportunity to present
our data package and discuss the lorcaserin NDA
resubmission with experts who will advise the FDA;
■ The June 27th PDUFA date;
■ The potential for US launch in collaboration with
Eisai upon regulatory approval;
often diffi cult to treat population achieve statistically
■ Feedback from the EMA regarding our MAA fi ling;
signifi cant weight loss compared to placebo. Patients
and
taking lorcaserin reduced their HbA1c by 0.9% and their
fasting glucose by almost 30 mg/dl. In addition, 50% of
lorcaserin patients achieved the American Diabetes
■ Potential collaborations for commercializing
lorcaserin outside of the United States.
CORPORATE INFORMATION
BOARD OF DIRECTORS
Jack Lief
Chairman, President and Chief Executive Offi cer
Arena Pharmaceuticals, Inc.
Dominic P. Behan, Ph.D.
Director, Executive Vice President and
Chief Scientifi c Offi cer
Arena Pharmaceuticals, Inc.
Donald D. Belcher
Former Chairman and Chief Executive Offi cer
Banta Corporation
Scott H. Bice
Robert C. Packard Professor
University of Southern California Law School
Harry F. Hixson, Jr., Ph.D.
Chairman and Chief Executive Offi cer
Sequenom, Inc.
Tina S. Nova, Ph.D.
President
Genoptix, Inc.
Phillip M. Schneider
Former Senior Vice President and
Chief Financial Offi cer
IDEC Pharmaceuticals Corporation
Christine A. White, M.D.
Former Senior Vice President, Global Medical Affairs
Biogen Idec Inc.
Randall E. Woods
Managing Director
Eden Woods Investments
EXECUTIVE OFFICERS
Jack Lief
President and Chief Executive Offi cer
Dominic P. Behan, Ph.D.
Executive Vice President and Chief Scientifi c Offi cer
Robert E. Hoffman
Vice President, Finance and Chief Financial Offi cer
William R. Shanahan, Jr., M.D., J.D.
Senior Vice President and Chief Medical Offi cer
Steven W. Spector, J.D.
Executive Vice President, General Counsel and Secretary
CORPORATE HEADQUARTERS
Arena Pharmaceuticals, Inc.
6166 Nancy Ridge Drive
San Diego, California 92121
Telephone: 858.453.7200
Facsimile: 858.677.0065
ANNUAL MEETING
The Annual Meeting of Stockholders
will be held on Friday, June 15, 2012,
at 9:00 a.m. Pacifi c Time, at
6154 Nancy Ridge Drive
San Diego, California 92121.
For further information, call Investor Relations
at 858.453.7200.
INVESTOR RELATIONS
Stockholder inquiries should be directed to:
Investor Relations
Arena Pharmaceuticals, Inc.
6166 Nancy Ridge Drive
San Diego, California 92121
Telephone: 858.453.7200
Facsimile: 858.677.0065
invest@arenapharm.com
Arena will provide stockholders without charge, upon written request, a copy of its
Annual Report on Form 10-K, including the fi nancial statements, schedules and list of
exhibits. Arena will furnish stockholders a copy of any exhibit to such report upon writ-
ten request and payment of its reasonable expenses in furnishing such exhibit. Requests
should be sent to Investor Relations at Arena’s corporate headquarters.
In addition, Arena’s Annual Report on Form 10-K, other fi lings with the Securities and
Exchange Commission, and press releases, along with general information on Arena’s
business and technology are available through Arena’s home page on the Internet at the
following address: www.arenapharm.com.
TRANSFER AGENT AND REGISTRAR
Computershare Investor Services
P.O. Box 43070
Providence, Rhode Island 02940-3070
Telephone: 800.962.4284 Facsimile: 303.262.0700
STOCK LISTING
Arena’s common stock trades on the NASDAQ Global Select Market®
under the symbol ARNA.
INDEPENDENT AUDITORS
KPMG LLP
4747 Executive Drive, Suite 600
San Diego, California 92121
Telephone: 858.750.7100 Facsimile: 858.750.7101
SERVICE MARKS
Arena Pharmaceuticals®, Arena® and our corporate logo are registered
service marks of Arena.
INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report are forward-looking statements that involve a
number of risks and uncertainties. Such forward-looking statements include statements
about our vision, outlook, strategy, technologies, internal and collaborative programs, ability
to develop compounds and commercialize drugs, and our future activities and achievements.
These forward-looking statements also involve other statements that are not historical facts,
including statements that are preceded by the words “may,” “will,” “intend,” “plan,” “believe,”
“anticipate,” “expect,” “estimate,” “predict,” “potential,” “continue,” “likely,” or “opportunity,”
similar words or the negative of these words. For such statements, we claim the protection
of the Private Securities Litigation Reform Act of 1995. Actual events or results may differ
materially from our expectations. Factors that could cause actual results to differ materially
from the forward-looking statements include, but are not limited to: data and other information
related to our research and development programs may not meet safety, effi cacy or other
regulatory requirements or otherwise be suffi cient for regulatory review or approval; the timing
of regulatory review is uncertain and our applications for regulatory approval of lorcaserin
may not be reviewed when or as anticipated; the occurrence, timing and results of FDA
advisory committee meetings relating to lorcaserin and other drug candidates; nonclinical
and clinical data is voluminous and detailed, and regulatory agencies may interpret or
weigh the importance of data differently and reach different conclusions than us or others,
request additional information, have additional recommendations or change their guidance
or requirements before or after approval; unexpected or unfavorable new data; risks related
to commercializing new products; our ability to obtain and defend our patents; the timing,
success and cost of our research and development programs; results of clinical trials and other
studies are subject to different interpretations and may not be predictive of future results;
clinical trials and other studies may not proceed at the time or in the manner expected or at
all; having adequate funds; risks related to relying on collaborative agreements; the timing and
receipt of payments and fees, if any, from collaborators; and satisfactory resolution of litigation
or other disagreements with others. Additional factors that could cause actual results to differ
materially from those stated or implied by our forward-looking statements are disclosed in
our fi lings with the Securities and Exchange Commission. These forward-looking statements
represent our judgment as of the earlier of when dated or released. We disclaim any intent or
obligation to update these forward-looking statements, other than as may be required under
applicable law.
Annual Report Design: AldenMC, San Diego / www.aldenmc.com
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Arena Pharmaceuticals, Inc. | 6166 Nancy Ridge Drive | San Diego, California 92121
www.arenapharm.com
ARENA
2 0 1 1
LORCASERIN FOR WEIGHT MANAGEMENT
PHARMACEUTICALS, INC.
ANNUAL REPORT
Our most advanced drug candidate, lorcaserin, is
The lorcaserin Phase 3 clinical trial program (comprised
intended for weight management, including weight loss
of the BLOOM, BLOSSOM and BLOOM-DM trials)
and maintenance of weight loss, in
enrolled approximately 7,800 patients. Following one
obese patients and in
year of treatment, lorcaserin patients achieved statisti-
overweight patients with
cally signifi cant weight loss and favorable changes over
at least one weight-related
placebo in a variety of parameters associated with
co-morbid condition, such as
cardiovascular and metabolic risk. The most frequent
hypertension, dyslipidemia, cardiovascular disease
adverse events were headache, nausea, dizziness,
and impaired fasting glucose. More than one-third of
fatigue and dry mouth, with headache being the only
US adults were obese in 2009-2010, and studies have
adverse event increased over placebo by greater than 5%.
shown that a weight loss of 5% to 10% of body weight
from baseline can result in meaningful improvements in
cardiovascular risk factors, quality of life and functional
capacity, and a signifi cant reduction in the incidence of
type 2 diabetes. There are currently limited pharmaceu-
tical treatment options to help patients lose weight.
We believe lorcaserin has the potential to be an
important option for physicians to address the medical
management of obesity, and we are focused on
obtaining marketing approval of lorcaserin in the
United States, the European Union and ultimately
in other regions.
PHASE 3 PROGRAM RESULTS: SIGNIFICANT WEIGHT LOSS
(cid:48)(cid:58)(cid:61)(cid:61)(cid:59)
(cid:48)(cid:58)(cid:61)(cid:65)(cid:65)(cid:61)(cid:59)
(cid:48)(cid:58)(cid:61)(cid:61)(cid:59)(cid:27)(cid:50)(cid:59)
(cid:24)
(cid:24)
(cid:97)
(cid:98)
(cid:92)
(cid:83)
(cid:87)
(cid:98)
(cid:79)
(cid:62)
(cid:14)
(cid:84)
(cid:93)
(cid:14)
(cid:19)
(cid:38)(cid:30)
(cid:36)(cid:30)
(cid:34)(cid:30)
(cid:32)(cid:30)
(cid:30)
(cid:24)
(cid:24)
ARENA PIPELINE
(cid:24)
(cid:24)
(cid:24)
(cid:24)
(cid:24)
(cid:24)
(cid:24)
(cid:24)
(cid:58)(cid:93)(cid:96)(cid:81)(cid:79)(cid:97)(cid:83)(cid:96)(cid:87)(cid:92)(cid:26)(cid:14)(cid:59)(cid:55)(cid:66)(cid:66)(cid:29)(cid:58)(cid:61)(cid:49)(cid:52)
(cid:62)(cid:90)(cid:79)(cid:81)(cid:83)(cid:80)(cid:93)(cid:26)(cid:14)(cid:59)(cid:55)(cid:66)(cid:66)(cid:29)(cid:58)(cid:61)(cid:49)(cid:52)
(cid:58)(cid:93)(cid:96)(cid:81)(cid:79)(cid:97)(cid:83)(cid:96)(cid:87)(cid:92)(cid:26)(cid:14)(cid:49)(cid:93)(cid:91)(cid:94)(cid:90)(cid:83)(cid:98)(cid:83)(cid:96)(cid:97)
(cid:62)(cid:90)(cid:79)(cid:81)(cid:83)(cid:80)(cid:93)(cid:26)(cid:14)(cid:49)(cid:93)(cid:91)(cid:94)(cid:90)(cid:83)(cid:98)(cid:83)(cid:96)(cid:97)
(cid:114)(cid:0)(cid:35)(cid:19)
(cid:114)(cid:0)(cid:31)(cid:30)(cid:19)
(cid:114)(cid:0)(cid:35)(cid:19)
(cid:114)(cid:0)(cid:31)(cid:30)(cid:19)
(cid:114)(cid:0)(cid:35)(cid:19)
(cid:114)(cid:0)(cid:31)(cid:30)(cid:19)
(cid:24)(cid:14)(cid:94)(cid:42)(cid:30)(cid:28)(cid:30)(cid:30)(cid:31)(cid:14)(cid:100)(cid:97)(cid:28)(cid:14)(cid:81)(cid:93)(cid:96)(cid:96)(cid:83)(cid:97)(cid:94)(cid:93)(cid:92)(cid:82)(cid:87)(cid:92)(cid:85)(cid:14)(cid:94)(cid:90)(cid:79)(cid:81)(cid:83)(cid:80)(cid:93)
APD811 for Pulmonary Arterial Hypertension (PAH)
APD334 for Autoimmune Diseases
■ Internally discovered, orally available agonist
■ Internally discovered, orally available agonist
of the prostacyclin receptor intended for
of the S1P1 receptor intended for the treatment
once-daily treatment of PAH
of a number of conditions related to autoimmune
■ Completed single-dose, Phase 1
diseases, including multiple sclerosis
clinical trial in 2011
■ Plan to fi le an IND application this year
■ Plan to initiate multiple-
APD371 for Pain
dose, Phase 1 clinical
trial this year
■ Internally discovered, orally available agonist
of the cannabinoid receptor 2 intended for the
treatment of pain
■ Plan to complete IND-enabling preclinical
work this year