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<SEC-DOCUMENT>0000912057-01-007933.txt : 20010322
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ACCESSION NUMBER: 0000912057-01-007933
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 7
CONFORMED PERIOD OF REPORT: 20001231
FILED AS OF DATE: 20010321
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: ARENA PHARMACEUTICALS INC
CENTRAL INDEX KEY: 0001080709
STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834]
IRS NUMBER: 232908305
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT:
SEC FILE NUMBER: 000-31161
FILM NUMBER: 1574489
BUSINESS ADDRESS:
STREET 1: 6166 NANCY RIDGE DR
CITY: SAN DIEGO
STATE: CA
ZIP: 92121
BUSINESS PHONE: 8584537200
MAIL ADDRESS:
STREET 1: 6166 NANCY RIDGE DR
CITY: SAN DIEGO
STATE: CA
ZIP: 92121
</SEC-HEADER>
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<DESCRIPTION>10-K
<TEXT>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
------------------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER 000-31161
ARENA PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 23-2908305
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
6166 Nancy Ridge Drive, San Diego, CA 92121
(ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(858) 453-7200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrant's knowledge, in the
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K [ ]
The approximate aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant was approximately $256,000,000
as of March 1, 2001, based upon the closing price of the Common Stock as
reported on the Nasdaq Stock Market on such date. For purposes of this
calculation, shares of Common Stock held by directors, officers and stockholders
whose ownership in the registrant is known by the registrant to exceed five
percent have been excluded. This number is provided only for purposes of this
report and does not represent an admission by either the registrant or any such
person as to the status of such person.
<PAGE>
As of March 1, 2001 there were 22,696,913 shares of the registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Arena Pharmaceuticals, Inc. Proxy Statement dated March
29, 2001, for the Annual Meeting of Shareholders to be held May 8, 2001 (the
"Proxy Statement"), to be filed no later than 120 days after December 31, 2000,
referred to herein as the "Proxy Statement," are incorporated by reference into
Part III of this Report on Form 10-K.
- --------
ARENA PHARMACEUTICALS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C>
PART I
Item 1. Business 1
Item 2. Properties 23
Item 3. Legal Proceedings 23
Item 4. Submissions of Matters to a Vote of Security Holders 23
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 23
Item 6. Selected Financial Data 25
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations 26
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 31
Item 8. Financial Statements and Supplementary Data 32
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 53
PART III
Item 10. Directors and Executive Officers of the Registrant 53
Item 11. Executive Compensation 53
Item 12. Security Ownership of Certain Beneficial Owners and Management 53
Item 13. Certain Relationships and Related Transactions 53
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 53
</TABLE>
<PAGE>
INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K includes forward-looking statements. These
forward-looking statements are subject to certain risks and uncertainties,
including those identified below, which could cause actual results to differ
materially from such statements. The words "believe," "expect," "anticipate,"
"estimate," "optimistic," "intend," "plan," "project," "target," "aim," "will,"
and similar expressions identify forward-looking statements. Readers of the
annual report on Form 10-K are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date on which they are
made. Arena Pharmaceuticals, Inc. undertakes no obligation to update publicly or
revise any forward-looking statements. Factors that could cause actual results
to differ materially from the forward-looking statements, including the
company's goals referred to in the annual report on Form 10-K, include, but are
not limited to, the inability of Arena Pharmaceuticals, Inc. to achieve future
quarterly or annual financial results, the receipt of milestone payments, if
any, from any collaborator of Arena or its subsidiaries, the timing, success and
cost of preclinical research, out-licensing endeavors and clinical studies, if
any. Additional risk factors that could cause actual results to differ
materially from those in Arena Pharmaceutical, Inc.'s forward looking statements
are disclosed in Arena's SEC reports, including but not limited to Arena's Form
S-1 and most recent quarterly report on Form 10-Q and this annual report on Form
10-K.
PART I
Item 1. Business
OUR COMPANY
We were incorporated on April 14, 1997 in the state of Delaware and
commenced operations in July 1997. We have developed a new technology, which we
call CART-TM- (Constitutively Activated Receptor Technology), that we use to
identify drug-like compounds more efficiently than traditional drug discovery
techniques. CART allows us to develop novel biochemical assays to discover
drug-like compounds that target G protein-coupled receptors, called GPCRs, an
important class of receptors. Additionally, we believe that CART is applicable
to other human receptor classes, such as tyrosine kinase receptors, or TKRs, as
well as to non-human receptors for the discovery of animal therapeutics and
agricultural products.
In the recent past, the pharmaceutical and biotechnology industries
have increasingly focused their drug discovery efforts on receptor-based drug
targets because drugs discovered using these targets have the potential for
increased specificity and reduced side effects. Of the leading 100
pharmaceutical products, based on 1999 revenues, 34 wholly or in part act on
GPCRs. In 1999, these GPCR-based pharmaceutical products represented over $34
billion in sales, and included Claritin(RM) for allergies, Zantac(RM) for
gastric ulcers, Imitrex(RM) for migraines and Cozaar(RM) for hypertension.
1
<PAGE>
We use CART to discover drug-like compounds by genetically altering
receptors to mimic the biological response that occurs when the native ligand
binds to the receptor. We refer to these genetically altered receptors as
CART-activated receptors. We use CART-activated receptors as a screening tool to
identify chemical compounds that alter the biological response of the receptor,
and these compounds form the basis for drug candidates. Using CART technology,
we have discovered drug-like compounds that have demonstrated pharmacological
activity in pre-clinical, or animal, studies through our own internal research
and drug development efforts, as well as through those of our collaborators.
Based upon the success of CART, we have entered into collaborative relationships
with a number of pharmaceutical and biotechnology companies, including Eli Lilly
and Company, Taisho Pharmaceutical Co., Ltd., Fujisawa Pharmaceutical Co., Ltd.
and Lexicon Genetics, Inc.
THE DRUG DISCOVERY PROBLEM
Diseases in humans are caused by the abnormal function of cells. Both
normal and abnormal cellular function is principally the result of communication
between cells. This cellular communication occurs when a ligand is released from
a cell and binds to a receptor on the surface of that cell or another cell. This
binding triggers the initiation of various signals within that cell, resulting
in changes in cellular function. By interacting with the receptor to mimic or
block ligand-receptor binding, drugs affect abnormal cellular function and
thereby regulate the disease process.
Receptors are classified into categories based upon similarities in
their biochemical and structural properties. They are located in various tissues
throughout the body and affect a variety of cellular functions. There are four
principal classes of human receptors: GPCRs; TKRs; ligand-gated ion channel
receptors; and intracellular receptors. We focus on GPCRs because they are the
predominant class of receptors involved in cellular function.
The ligand that naturally binds to a receptor and activates or inhibits
a biological response is referred to as a receptor's native ligand. A receptor
for which the native ligand has been discovered is called a known receptor,
while a receptor for which the native ligand has not been identified is called
an orphan receptor. Genomics researchers believe that GPCRs comprise 2% to 3% of
the human genome (approximately 1,000 GPCRs), the vast majority of which are
orphans.
Advances in genomics research have enabled researchers, including us,
to directly identify the genetic sequence of previously unidentified receptors,
including GPCRs, from basic genetic information. As more GPCRs are made
available, the opportunity to use this information for drug discovery efforts
should increase. Although hundreds of new, orphan GPCRs are being made publicly
available through genomics research, traditional drug discovery techniques to
find new drug candidates cannot be applied to orphan GPCRs until the native
ligands for these orphan GPCRs are identified because these traditional
techniques seek to find drug-like compounds that imitate or inhibit ligand
binding to the receptor.
The process of identifying native ligands is very uncertain, generally
involving many stages of tissue extraction and extensive purification. To our
knowledge, of the hundreds of orphan GPCRs that have been identified, only a
handful of examples exist where a novel native ligand has been discovered by
intentionally targeting an orphan GPCR. Even when successful, identifying the
native ligand typically requires four to five years and costs millions of
dollars per GPCR. For example, a GPCR called GPR 14 was discovered in 1995, but
its native ligand, urotensin II, was not identified until 1999. The process of
identifying native ligands is typically the step that limits the rate at which
drugs are discovered at receptor targets.
OUR SOLUTION - CART TECHNOLOGY
We do not use, and therefore do not need to identify, the receptor's
native ligand for our drug discovery efforts. We use our CART technology to
discover drug-like compounds by CART-activating receptors to mimic the
biological response that occurs when the native ligand binds to the receptor.
Therefore, CART technology avoids a major bottleneck in drug discovery efforts
at orphan receptors.
CART technology can be applied broadly to GPCRs because all GPCRs have
highly similar structural elements, consisting of:
2
<PAGE>
- - three extracellular loops on the outside of the cell
- - three intracellular loops on the inside of the cell
- - seven regions that cross through the cell surface, or membrane, and connect
the extracellular and intracellular loops
When a ligand binds to the extracellular portion of the GPCR, changes
occur to the intracellular portion of the GPCR that permit a signaling molecule
located within the cell, called a G protein, to bind to the intracellular
portion of the GPCR. This leads to further intracellular changes, resulting in a
biological response within the cell.
Under normal physiological conditions, a GPCR exists in equilibrium
between two different states: an inactive state and an active state. When the
GPCR's equilibrium shifts to an active state, the GPCR is able to link to a G
protein, thus producing a biological response. When the GPCR's equilibrium
shifts to an inactive state, the receptor is typically unable to link to a G
protein, and therefore unable to produce a biological response. When a native
ligand binds to the GPCR, the GPCR's equilibrium shifts and the GPCR is
stabilized in the active state.
By altering the genetic structure of a GPCR, our CART technology
stabilizes the GPCR in the active state in the absence of the native ligand.
Drug screening and discovery targeting GPCRs using CART technology is
comprised of four stages:
- - altering the molecular structure of an intracellular loop or intracellular
portion of the GPCR to generate a CART-activated form of the GPCR
- - introducing the CART-activated form of the receptor into mammalian cells,
which, in turn, manufacture the CART-activated form of these receptors at
the cell surface
- - analyzing the cells containing the CART-activated GPCR to detect biological
responses that result from the linking of the CART-activated GPCR to a G
protein
- - screening chemical libraries of small molecule compounds against the cell
membranes containing the CART-activated GPCR to identify compounds that
interact with the GPCR
Screening using CART technology allows us to simultaneously identify
compounds that act as receptor inhibitors to decrease the detected biological
responses, or act as receptor activators to increase the detected responses.
Therefore, our CART technology allows us to discover drugs that either inhibit
or enhance biological activity.
CART technology is also useful for identifying drug-like compounds that
reduce cellular responses resulting from ligand-independent activity of
receptors. These drugs are termed inverse agonists and are the preferred drugs
for treating diseases in which ligand-independent receptor activity may be
important, such as schizophrenia. In general, traditional ligand-based drug
screening techniques can only be used to identify neutral antagonists, which do
not affect the ligand-independent activity of the receptor. We can directly
identify inverse agonists using our CART technology by screening for
ligand-independent receptor activity. We believe the inverse agonists that we
identify will possess improved properties over neutral antagonists because they
inhibit both ligand-induced as well as ligand-independent activity.
In addition, because CART does not require the use of the native
ligand, we are not limited to finding drug-like compounds that bind to a
receptor at the receptor's ligand binding site. Instead, CART technology exposes
the entire receptor surface to drug-like compounds, allowing for the detection
of drug candidates which bind at any point on the receptor surface. We believe
that this feature of CART technology is important not only with respect to
orphan receptors, but known receptors as well, because it provides us with the
ability to discover new drugs with unique mechanisms of action.
3
<PAGE>
In summary, we believe that our platform CART technology offers several
key advantages for drug discovery over other screening techniques. Screening
CART-activated receptors:
- - does not require prior identification of the native ligand for an orphan
receptor
- - enhances the detection of, and simultaneously identifies, both receptor
inhibitor and receptor activator compounds
- - allows for the identification of compounds or drug candidates that inhibit
both ligand-induced and ligand-independent activity
- - provides the ability to discover novel and improved therapeutics at known
receptor targets
OUR STRATEGY
Our strategy is to use CART to become a leader in the discovery of new
drug candidates using orphan and known GPCRs. The major elements of our strategy
are to:
Apply CART to orphan GPCR targets to leverage available genomics
information. The completion of the first draft of the human genome has provided
gene sequence information on an unprecedented number of receptor drug targets,
including numerous previously unidentified GPCRs. CART technology can be applied
to these orphan GPCR targets to discover drug candidates. This can be done more
quickly and efficiently using CART technology than with traditional drug
discovery screening techniques because drug discovery using CART does not
require the identification and characterization of a receptor's native ligand, a
process which typically requires four to five years and costs millions of
dollars per receptor.
Discover new drug candidates that have unique mechanisms of action for
known GPCRs. We believe that CART provides us with the ability to discover new
drug candidates with unique mechanisms of action at known receptor targets,
which may be more effective and may have fewer side effects than existing drugs.
Unlike traditional drug discovery methods, we are not limited to finding drug
candidates that bind to a receptor at the receptor's ligand binding site.
Because CART technology exposes the entire GPCR surface to drug candidates, we
can discover drug-like compounds that act upon any part of the receptor surface.
Develop multiple pharmaceutical product candidates for GPCR targets.
CART technology allows us to identify drug-like compounds that act as receptor
inhibitors to reduce biological activity, or receptor activators to increase
biological activity. Therefore, CART provides the opportunity to simultaneously
discover multiple different drug-like compounds with unique mechanisms of action
for each receptor target, any of which may ultimately become successful
commercial pharmaceutical products.
Enter into strategic collaborations to discover and develop novel drug
candidates. We intend to enter into additional strategic collaborations to
discover and develop novel drug candidates using our CART technology. We believe
that the broad applicability of our CART technology will allow us to enter into
additional collaborations that focus on a variety of diseases and target a large
number of orphan and known GPCRs. We have entered into collaborations with Eli
Lilly, Taisho and Fujisawa under which we CART-activate a significant number of
GPCR targets and may receive additional revenues in the form of development
fees, milestone payments and royalties on products, if any, developed to target
these GPCRs.
Apply CART to other human receptors and non-human receptors for human
therapeutic, agricultural and other applications. We believe CART technology can
also be applied to other types of human receptors, such as TKRs, which are often
implicated as important factors in various diseases, such as breast cancer. We
are also applying our CART technology to non-human receptors for a variety of
applications including plant receptors to discover chemical growth factors,
insect receptors to discover insect control agents and viral receptors to
discover novel anti-viral drug candidates. We have CART-activated a number of
these other types of receptors and intend to pursue opportunities developed from
these receptors.
4
<PAGE>
Continue to protect and expand our intellectual property rights. We
have filed approximately 120 independent patent applications with the United
States Patent and Trademark Office, and are filing some of these patent
applications worldwide. Four United States patents have been issued to us. We
believe that we will be issued additional patents on our CART technology and
patents on our CART-activated receptors because our technology genetically
modifies these receptors and changes their function. We intend to continually
seek ways to vigorously protect and enforce our rights with respect to our
intellectual property.
APPLICATIONS OF CART
Over the past three years, we have obtained the full-length gene
sequences of 330 human GPCRs and made them available for CART-activation and
screening. We also have obtained five non-human receptors, including plant,
viral and insect receptors. Through the use of our proprietary CART technology,
we have successfully identified compounds that inhibit or activate a number of
known and orphan receptor targets.
ORPHAN GPCRS
An important element of our CART technology involves using the gene
sequences of orphan GPCRs to understand and define the tissue and cellular
distribution of these GPCRs. The gene sequences provide us with the necessary
tools to locate the orphan receptors in tissues. Once we have identified the
location of an orphan receptor in tissues, we can determine the normal function
of the orphan receptor and compare that function to the function of the orphan
GPCR in diseased tissues. We then use our CART technology to screen the targeted
receptor for drug-like compounds that can be employed to verify the proposed
receptor function.
We have prioritized and applied our CART technology to orphan GPCRs as
having high potential value as drug discovery targets against specific diseases
or indications, based upon the distribution of the GPCR in specified tissues.
Examples of some of our more advanced CART programs are summarized below.
OBESITY. National Institutes of Health statistics indicate that
approximately 100 million adults in the United States are overweight and that
22% of these are considered clinically obese. The few currently approved drugs
for the treatment of obesity in the United States act either as appetite
suppressants or blockers of fat absorption. However, cardiovascular or
gastrointestinal side effects may limit the long-term effectiveness of these
drugs. Consequently, more effective therapeutics are urgently needed for this
major public health problem.
We have an ongoing program directed towards the development of novel
anti-obesity drugs. We have identified a number of orphan GPCRs on brain cells
related to the control of feeding and metabolism, including the 18F, 19U, 19X
and 19NY GPCRs. For example, we have discovered an over-abundance of the 18F
GPCR in the brain metabolism centers of genetically obese rats. We believe that
this discovery indicates that overactivity of this GPCR may be associated with
obesity.
We are using our CART technology to identify drug-like compounds that
inhibit the activity of the 18F GPCR. Repeated administration of the drug-like
compounds we have identified has resulted in reduced food intake and sustained
weight loss in normal laboratory animals. Similar results were also obtained in
a diet-induced animal model of human obesity. In this diet-induced animal model,
these drug-like compounds also acted to increase fat metabolism and resulted
specifically in a loss of fat mass. We have found that the 18F GPCR is also
located on human fat cells. Therefore, we believe that these drug-like compounds
may provide the basis for a novel approach to the treatment of human obesity by
simultaneously reducing food intake and increasing fat metabolism.
Our anti-obesity drug program demonstrates the advantages of CART
technology for rapid drug candidate discovery. The process of discovering
promising drug candidates took approximately 18 months beginning from our
initial discovery of the over-abundance of the 18F GPCR in genetically obese
animals to the animal testing of the drug-like compounds that we discovered
using our CART technology. In January 2001, we licensed our 18F receptor to
Taisho which is discussed below under the heading "Our GPCR Collaborators."
CANCER. We have identified several orphan GPCRs, including the 18AD,
20WW, 20PO, 19AG and 19Y GPCRs, which we believe represent therapeutic targets
for the treatment of a variety of cancers. These orphan
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GPCRs are attractive therapeutic targets because they have been shown to be
present in abnormally high levels in ovarian, colorectal, gastrointestinal and
uterine cancer cells and cause unwanted proliferation of cells in laboratory
experiments.
CARDIOVASCULAR DISEASE. We have identified several orphan GPCRs,
including the 19L and 20RH GPCRs, that are located within the cardiovascular
system, such as on heart tissues and blood vessel walls. The 19L receptor has
been localized to the smooth muscle cells of blood vessel walls and is regulated
under conditions associated with vessel damage and artherosclerotic damage. The
20RH receptor has been localized to heart myocytes and is regulated both in IN
VITRO and IN VIVO models associated with cardiomyopathy. Using CART technology
we aim to identify small molecule regulators of these receptors which may have
potential to treat diseases related to aberrant cardiovascular function.
DIABETES. One of the orphan GPCRs that we discovered, the 19AJ GPCR, is
specifically located on insulin producing beta cells in the pancreas. Normally,
glucose stimulates the beta cell to produce insulin, but in diabetes the beta
cell often becomes less sensitive to glucose and the ability of the beta cell to
produce insulin is impaired. The 19AJ GPCR appears to make the beta cells more
responsive to glucose concentrations, resulting in enhanced insulin release. By
applying CART technology to the 19AJ GPCR we will seek to discover drug
candidates to treat diabetes, which, according to the National Institutes of
Health, affected approximately 15.7 million people in the United States in 1997.
INFLAMMATION. We have identified several orphan GPCRs, including the
18AF and 19W GPCRs, that may mediate inflammatory responses in various locations
of the body. Our preliminary data suggest that the 18AF GPCR may regulate brain
cells related to inflammation. Based upon its sequence structure, the 18AF GPCR
appears to be related to a group of GPCRs called chemokine receptors. Chemokine
receptors are known to be involved in the inflammation process, and brain
inflammation is involved in a number of neurodegenerative disorders, including
stroke. The number of 19W GPCRs is increased in dying cells during inflammation,
suggesting that the 19W GPCR may be involved in controlling the process of cell
death. We have CART-activated the 19W GPCR and have developed an assay for
screening of chemical compounds against this GPCR. Drug candidates that modulate
the activity of these GPCRs may provide a unique therapeutic approach to the
treatment or mediation of inflammatory responses. According to the National
Institutes of Health, diseases involving inflammation afflict over 25 million
people in the United States.
ALZHEIMER'S DISEASE. Several of our orphan GPCR targets are located on
cells within the central nervous system, including the 18L GPCR. The 18L GPCR is
located on nerve cells in an area of the brain called the hippocampus, which is
responsible for controlling memory function. In Alzheimer's Disease, normal
memory processes in the hippocampus are severely impaired. We believe drugs that
modulate the 18L GPCR could be useful for controlling memory function and for
the treatment of symptoms of Alzheimer's Disease, which, according to the
National Institutes of Health, affects four million people in the United States.
KNOWN GPCRS
Although we focus on orphan GPCRs, we also apply our CART technology to
known GPCRs. We believe that the application of our CART technology to known
GPCRs will identify novel classes of drug candidates that may be more effective
and may have fewer side effects than existing drugs that target known GPCRs.
Our principal advantage in applying CART technology to known GPCRs is
our ability to directly identify drug-like compounds that act as inverse
agonists, which cannot be directly identified using traditional ligand-based
screening techniques. Inverse agonists are particularly relevant in treating
diseases in which ligand-independent GPCR activity, or overactivity, is
implicated.
We have identified drug-like compounds that are capable of inhibiting
both ligand-independent and ligand-dependent activity at selected known GPCR
targets. We are currently developing candidates that target these overactive
known GPCRs to treat the related diseases. Our most advanced program targets the
serotonin 5HT2A GPCR for potential treatment of schizophrenia and other
psychiatric disorders.
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According to the National Institutes of Health, approximately 1% of the
population develops schizophrenia during their lifetime. More than 2 million
Americans suffer from schizophrenia in a given year. We have tested currently
available anti-psychotic drugs and have found that they act as inverse agonists
at a known GPCR, referred to as the 5HT2A GPCR. Using our CART technology, we
have discovered and are developing a number of new candidates that act as
inverse agonists at the 5HT2A GPCR. These candidates displayed activities in
tests involving laboratory animals indicating that they could be useful in
treating psychiatric disorders such as schizophrenia and depression. Moreover,
our CART-identified 5HT2A inverse agonists possess a higher degree of receptor
selectivity than currently marketed anti-psychotics, which suggests our inverse
agonists may be more effective. To date, these candidates exhibit no evidence of
side effects in laboratory animals.
Our anti-psychotic drug program also demonstrates the advantages of
CART technology for rapid drug candidate discovery. The process of discovering
promising drug-like compounds took approximately 18 months beginning from the
application of our CART technology to the 5HT2A GPCR to the animal testing of
the candidates that we discovered using CART technology. We intend to enter into
a collaboration to further expand our anti-psychotic drug program with the goal
of selecting one or more of our novel anti-psychotic drug candidates that target
the 5HT2A GPCR, for future clinical development.
OTHER AREAS OF CART APPLICATION
OLFACTORY AND TASTE GPCRS. A specialized multigene family of GPCRs has
been identified in the nasal membrane and is responsible for the sense of smell.
Another family of GPCRs has recently been discovered in the tongue and is
believed to be responsible for the perception of taste. We are applying our CART
technology to a number of olfactory and taste GPCRs to identify novel compounds
that we believe will be of potential commercial value in the fragrance and food
additive industries.
PLANT GPCRS. Plants respond to a variety of environmental and internal
signals that regulate aspects of their growth and development. GPCRs have
recently been identified in a variety of plants and have been implicated in the
action of a variety of plant hormones. We are presently applying our CART
technology to plant GPCRs in an attempt to identify novel regulators of the life
cycle of plants that may affect crop growth and development.
VIRAL GPCRS. GPCRs are involved in either replication or infection in a
number of viruses. Some herpes viruses, including the Kaposi's
sarcoma-associated virus, have GPCRs within their genome which are important for
replication. Other GPCRs appear necessary for primary infection. For example,
HIV infects cells by binding to a GPCR that transports the virus into cells. A
number of orphan GPCRs have been identified which appear to act in a similar
manner for other viruses. Our goal is to identify novel anti-viral drugs using
CART technology.
INSECT GPCRS. Insect genomes also include GPCRs, and we have begun the
process of applying CART technology to insect GPCRs in an attempt to identify
compounds that may offer the potential for improved and environmentally safer
insect control agents. Our goal is to use CART-activated insect GPCRs to find
compounds that selectively reduce pest reproduction and feeding behavior.
TYROSINE KINASE RECEPTORS. In addition to applying our CART technology
to orphan GPCRs, we are also applying our CART technology to other human
receptor classes, including orphan TKRs. A number of orphan TKRs have been
located on cancerous tissues and may be involved in excessive cell proliferation
and growth. As with GPCRs, our CART technology allows us to activate orphan TKRs
in the absence of native ligands and screen the activated TKRs to identify novel
inhibitors of TKR activity. We are currently evaluating orphan TKRs for drug
screening.
GENETIC "KNOCK-IN" MODELS. We are collaborating with Lexicon Genetics
to develop mice that produce CART-activated GPCRs, or GPCR knock-ins, by using
state-of-the-art molecular genetic techniques. By producing CART-activated
orphan GPCRs in animals, we believe that we will gain valuable insight into the
functionality of individual GPCRs, as well as indications of human disease for
which drugs that target these GPCRs may be useful. In addition, we expect that
these knock-in animals will provide an animal model that can be used to test the
potency of drug-like compounds discovered using CART-activated GPCRs. The first
knock-in GPCR animals developed based upon this collaboration were born in
February 2001.
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OUR GPCR COLLABORATORS
Our success will depend in large part upon our ability to enter into
successful collaborations with other pharmaceutical and biotechnology companies.
We are active in the scientific community and within the industry and regularly
make presentations regarding our research and development programs and the
applications of our CART technology at scientific conferences and industry
conventions. We believe that our participation at these events has led, and will
continue to lead, to contacts with existing and potential collaborators. We have
entered into a number of strategic collaborations in the recent past to discover
novel drug candidates using our CART technology, and we expect to enter into
additional collaborations and expand our existing collaborations in the future.
ELI LILLY
In April 2000, we entered into a research alliance with Eli Lilly, one
of the world's leading pharmaceutical companies. Our collaboration with Eli
Lilly is principally focused on the central nervous system and endocrine
therapeutic fields. We will also focus on the cardiovascular field and may
expand our collaboration to other therapy classes, including cancer.
During our collaboration, we will pursue an agreed upon research plan
with Eli Lilly that has several objectives. During the term of our
collaboration, we will mutually review and select GPCRs that will become subject
to the collaboration. These GPCRs may be provided either by us or by Eli Lilly.
All of our pre-existing CART-activated GPCRs were excluded from the
collaboration. We and Eli Lilly will each share our respective knowledge of the
GPCRs that become subject to the collaboration to validate and CART-activate
selected receptors. We will jointly select a number of proprietary central
nervous system, endocrine and cardiovascular GPCRs for CART-activation, and we
will then provide Eli Lilly with enabled high-throughput screens for use at
their screening facilities. During the term of the agreement, we will continue
to receive research funding from Eli Lilly for our internal resources committed
to the collaboration, which will be augmented by substantial resource
commitments by Eli Lilly. Eli Lilly will be responsible for screening its
chemical compound library using selected CART-activated receptors, for
identifying drug candidates and for the pre-clinical and clinical testing and
development of drug candidates. We may receive up to $1.25 million per receptor
based upon milestone payments in connection with the successful application of
CART to each receptor, and up to an additional $6.0 million based upon clinical
development milestone payments for each drug candidate discovered using CART. We
may also receive additional milestone and royalty payments associated with the
commercialization of drugs discovered using CART, if any.
Once the assay development fee has been paid for a CART-activated GPCR,
Eli Lilly will have exclusive rights to screen chemical libraries, discover drug
candidates that target that GPCR, and to develop, register and sell any
resulting products worldwide. We retain rights to partner or independently
develop GPCRs that do not become subject to the collaboration.
The term of our collaboration agreement with Eli Lilly is five years.
Either Eli Lilly or we can terminate the agreement with or without cause
effective three years after the date of the agreement by giving written notice
prior to the conclusion of the 33rd month after the date of the agreement. In
addition, either party can terminate the agreement at any time if the other
party commits a material breach, and Eli Lilly can terminate the agreement at
any time if, among other reasons, Eli Lilly does not approve suitable
replacements for key employees who leave us. The parties will continue to have
various rights and obligations under the agreement after the agreement is
terminated. The extent of these continuing rights and obligations depends on
many factors, such as when the agreement is terminated, by which party and for
what reason. These continuing obligations may include further research and
development efforts by us and a variety of payments by Eli Lilly.
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Eli Lilly is a significant customer and the loss of such customer would
have a material adverse effect on our business and future revenue stream.
Revenue recognized under the Eli Lilly collaboration was approximately
$5.2 million for the year ended December 31, 2000 consisting of research funding
of approximately $2.9 million, milestone achievements related to the activation
of nine selected GPCRs for approximately $2.2 million, and amortization of an
up-front payment of $75,000.
TAISHO
In May 2000, we entered into a research collaboration with Taisho
to initiate a research collaboration focused on several GPCRs selected by
Taisho in therapeutic areas of interest to Taisho. Under the terms of the
agreement, Taisho will receive exclusive, worldwide rights to the selected
GPCR targets and to any drug candidates discovered using the activated
versions of these receptors. We may receive up to a total of $2.3 million in
revenues per receptor associated with research, development and screening
fees. We may also receive clinical development milestones, regulatory
approval milestones and royalties on drug sales, if any.
Taisho is a significant customer and the loss of such customer would
have a material adverse effect on our business and future revenue stream.
Revenue recognized under the Taisho collaboration was approximately
$2.4 million for the year ended December 31, 2000 consisting of milestone
achievements of approximately $2.3 million related to receptor activation
selection and screening assay fees, and amortization of an up-front payment of
$80,000.
In January 2001, we signed an amendment expanding our original
agreement with Taisho whereby Taisho was granted world-wide rights to our 18F
Program which includes a GPCR that we believe represents an obesity orphan
receptor target and small molecule modulators discovered using this receptor. In
accordance with the amendment, Taisho will make a one-time payment to us for the
18F program based upon work completed by us to date. In addition, the Company
may receive additional milestone and research funding payments and royalties on
drug sales, if any.
FUJISAWA
In January 2000, we entered into a collaborative agreement with
Fujisawa, a leading Japan-based pharmaceutical company with significant drug
discovery research efforts. During the collaboration, we will jointly validate
up to 13 orphan GPCRs as drug screening targets. We will be responsible for
receptor identification, location and regulation, and will apply our CART
technology to GPCRs selected by Fujisawa. We will also seek to validate
screening assays based on the selected GPCRs. Fujisawa will be entitled to
screen selected assays against its chemical compound library to identify drug
candidates. Fujisawa will also be responsible for the pre-clinical and clinical
development of any drug candidates that we or Fujisawa discover. We may also
screen the selected GPCRs using our in-house chemical library. When Fujisawa
selects its first receptor, we will be entitled to receive a one-time initiation
fee of $500,000. If we and Fujisawa then achieve various milestones, we may
receive up to a maximum of $3.5 million per selected receptor for assay
transfer, screening and exclusivity fees, and up to a maximum of $2.0 million
per selected receptor based upon the filing of one or more investigational new
drug applications for each drug candidate discovered using a CART-activated
receptor. We may also receive clinical development milestones, regulatory
approval milestones and royalties on drug sales, if any. We and Fujisawa may
never achieve research, development or commercialization milestones under the
agreement.
Our collaborative agreement with Fujisawa will terminate upon the
expiration of Fujisawa's obligation to make royalty payments under the
agreement, if any. Fujisawa may terminate the agreement at any time by providing
us with written notice of their intention to do so and by returning any
proprietary rights they have acquired under the agreement. Additionally, either
party may terminate the agreement for a material breach of the agreement by the
other party. The termination or expiration of the agreement will not affect any
rights that have accrued to the benefit of either party prior to the termination
or expiration.
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LEXICON GENETICS
In April 2000, we signed a binding letter of intent and memorandum of
agreement with Lexicon Genetics, a genomics company that uses a proprietary
technology to clone mice, enabling large-scale functional genomics. The
agreement establishes a research collaboration with Lexicon Genetics using their
proprietary technology to clone gene-targeted mice whose genomes have been
altered using specified CART-activated orphan GPCRs. Our collaboration with
Lexicon Genetics consists of a feasibility phase to determine both the utility
of this novel approach and the scope of any resulting licensing alliance. If we
proceed beyond the feasibility stage, the agreement establishes a licensing
alliance in which we and Lexicon Genetics will each contribute up to ten unique
GPCRs to clone mice containing CART-activated GPCRs for use as drug discovery
tools, and to discover drug candidates using these GPCRs. We will share equally
in the fees, milestones and royalties generated from any licensing agreement
with a third-party involving GPCRs developed through our licensing alliance.
OTHER AGREEMENTS
The Company's practice is to meet with pharmaceutical and biotechnology
companies on an on-going basis to discuss the possibility of collaborating with
them on projects of mutual interest. At present, the Company is in the early
stages of discussing with other companies the possibility of a number of such
arrangements. There can be no assurance that the Company will be successful in
consummating any such arrangement.
ACQUISITION OF BUNSEN RUSH LABORATORIES
In February 2001, we acquired all of the outstanding capital stock of
Bunsen Rush laboratories, Inc. (Bunsen Rush) through BRL Screening, our
wholly-owned subsidiary, for $15.0 million in cash. Bunsen Rush was a privately
held research-based company that provided receptor screening for the
pharmaceutical and biotechnology industries using its proprietary and patented
Melanophore Technology.
Melanophores are pigment-bearing cells. In response to light and a
range of chemical stimuli, they undergo rapid color change, a change that can be
mediated by GPCRs or receptor tyrosine kinases as a result of changes in second
messenger levels of cyclic AMP or diacylglycerol. During the color change,
pigment granules, referred to as "melanosomes", undergo rapid dispersion
throughout the cell or aggregation to the center of the cell. The reversible
movement of melanosomes along microtubules is driven by molecular motors. In
this new system, there is no new pigment synthesis; the same pigment is simply
redistributed within the cell. Pigment dispersion results in the cells appearing
dark while aggregation causes the cells to appear light, creating what has been
referred to as a "chameleon in a dish". In many cases, the response of the cells
is detectable in minutes using either a microplate reader or video imaging
system. In melanophores, activation of the G protein subtypes referred to as Gs
or Gq results in pigment dispersion, while activation by the G protein subtype
referred to as Gi leads to pigment aggregation. Melanophores are derived from
the neural crest and express a diverse set of G-proteins allowing them to
functionally express GPCRs.
In collaboration with us, Bunsen Rush has secured data that both we and
Bunsen Rush believe indicate that the Melanophore Technology is applicable to
CART-activated GPCRs. The Melanophore technology is the subject of issued U.S.
Patent Nos. 6,051,386 and 5,462,856. Melanophore Technology is a
functional-based screening technology used to identify compounds that interact
with cell surface receptors, including known and orphan GPCRs and receptor
tyrosine kinases. The functional nature of the Melanophore Technology eliminates
the need for radioactive or fluorescent screening techniques and provides a
simple and sensitive means to detect cellular signals generated by activated
GPCRs.
The Melanophore Technology has the potential to be a simple, robust and
widely applicable functional assay technique for the identification of
modulators to GPCRs and thus is complementary to our strategic objectives of
continually enhancing the breadth and applicability of our CART Technology. As
we continue to expand its high-throughput screening capabilities for
CART-activated known and orphan GPCRs, we believe that access to complementary
compound screening and identification techniques will help us streamline the
drug discovery process. We believe that in combination, CART Technology and
Melanophore Technology will provide a powerful means to enhance the discovery of
modulators at GPCRs. CART activation of receptors provides a signal to the
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cell, and the Melanophore Technology provides a complementary, simple and
sensitive signal detection system with advantages for small molecule screening
over other techniques.
CHEMNAVIGATOR.COM
In early 1999, we developed an Internet-based search engine that allows
scientists to search for chemical compounds based primarily on the similarity of
chemical structures. We believe this is important for drug discovery purposes
because chemical similarity can be used as an indicator of biological activity.
ChemNavigator.com was formed in May 1999 and subsequently obtained independent
third-party financing. We licensed the search engine's underlying technology and
related intellectual property to ChemNavigator.com in exchange for stock. We
currently beneficially own approximately 34% of the outstanding common stock of
ChemNavigator.com.
ARESSA PHARMACEUTICALS
In August 1999, the Company formed Aressa Pharmaceuticals, Inc. as a
wholly-owned subsidiary to take advantage of opportunities to in-license and
develop niche products from other pharmaceutical or biotechnology companies. In
November 1999, Aressa entered into a licensing agreement with respect to a
patented anti-fungal compound. In October 2000, Aressa received gross proceeds
of $1 million whereby Aressa is no longer a wholly- owned subsidiary of the
Company, but rather a separately funded company. We currently beneficially own
approximately 83% of the outstanding common stock of Aressa.
T-82
We in-licensed T-82 from SSP Co., Ltd. in 1998 as a novel drug
candidate to treat Alzheimer's Disease. Our Phase I safety studies of this
compound began in 1999. We have completed four Phase I studies of T-82 through
2000 and have been assessing the data in conjunction with SSP. We were not
required to make milestone payments to SSP following completion of these
studies. We are required to make milestone payments to SSP upon the successful
completion of Phase II clinical studies, after successful completion of Phase
III clinical studies and, if applicable, after receiving marketing approval by
the FDA and European regulatory agencies, up to an aggregate maximum of $5.0
million. The four Phase I safety-based studies of T-82 evidenced results that we
believe establish the safety of T-82 in the tested parameters. However, our
analysis of all of the data for T-82, in conjunction with the extensive costs
associated with conducting Phase II and Phase III clinical studies of T-82, the
types and number of potential new treatments for Alzheimer's Disease that are in
more advanced stages of clinical testing, as well as the impact that these
factors may have on our ability to successfully out-license T-82 to a third
party have prompted us to consider if continuation of the T-82 program by us is
warranted. We therefore cannot assure you that we will continue development of
T-82 until we have completed the assessment of all data and information related
to this program.
INTELLECTUAL PROPERTY
Our success depends in large part on our ability to protect our
proprietary technology and information, and operate without infringing on the
proprietary rights of third parties. We rely on a combination of patent, trade
secret, copyright and trademark laws, as well as confidentiality agreements,
licensing agreements and other agreements, to establish and protect our
proprietary rights. Since our inception, we have filed approximately 120 patent
applications in the United States regarding our:
- - CART technology
- - orphan receptors and CART-activated orphan receptors
- - CART-activated known receptors
- - small molecule chemical compounds
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- - acetylcholine enhancers
- - web-based search engine technologies
The term of all of our patents, if any are issued, will commence on the
date of issuance and terminate 20 years from the earliest effective filing date
of the patent application. Because the time from filing to issuance of
biotechnology patent applications is often more than three years, our patent
protection, if any, on our products and technologies may be substantially less
than 20 years.
We seek patent protection for all of our key inventions, including our
CART technology, new receptors that we discover, genetically-altered receptors,
and drug candidates identified by our CART technology. It has been possible to
obtain broad, composition-of-matter patents on novel chemical compounds, such as
the drug candidates, if any, that we identify using our CART technology. It has
also been possible to obtain broad method patents for techniques and procedures
for screening and drug-identification technologies, such as those embodied by
our CART technology. It has generally not been possible to obtain broad
composition-of-matter patents for nucleic acid and amino acid sequences.
However, it has been possible to obtain patents that protect specific sequences
and functional equivalents of those sequences. Furthermore, intellectual
property law allows for separate and distinct patents for altered genetic
sequences over previously disclosed sequences. We believe that we can obtain
patents on our CART-activated receptor sequences because they are not functional
equivalents of the natural version of the receptor. We have filed and will
continue to file patent applications on these types of technologies. We believe
that our CART technology does not infringe on third-party claims related to any
aspect of our proprietary technology.
As a general matter, obtaining patents in the biotechnology and
pharmaceutical fields is highly uncertain and involves complex legal, scientific
and factual matters. Obtaining a patent in the United States in the
biotechnology and pharmaceutical fields can be expensive and can, and often
does, require several years to complete. Failure to receive patents pursuant to
the applications referred to herein and any future applications could have a
material adverse effect on the Company. Our patent filings in the United States
may be subject to interference or reexamination proceedings. The defense and
prosecution of interference and reexamination proceedings and related legal and
administrative proceedings in the United States involve complex legal and
factual questions. We also file patent applications outside of the United
States. The laws of some foreign countries may not protect our proprietary
rights to the same extent as do the laws of the United States. Third parties may
attempt to oppose the issuance of our patents in foreign countries by way of
opposition proceedings. Additionally, if an opposition proceeding is initiated
against any of our patent filings in a foreign country, that proceeding could
have an adverse effect on the corresponding patents that are issued or pending
in the United States. If we become involved in any interference, reexamination,
opposition or litigation proceedings in the United States or foreign countries
regarding patent or other proprietary rights, those proceedings may result in
substantial cost to us, regardless of the outcome, and may have a material
adverse affect on our ability to develop, manufacture, market or license our
technologies or products, or to maintain or form strategic alliances.
Although we plan to aggressively prosecute our patent applications and
defend our patents against third-party infringement, we cannot assure you that
any of our patent applications will result in the issuance of patents or that,
if issued, such patents will not be challenged, invalidated or circumvented.
Moreover, we cannot assure you that our patents, if any, will provide us
protection against competitors with other technologies. Our technologies and
potential products may conflict with patents that have been or may be granted to
competitors, universities or others. As the biotechnology industry expands and
more patents are issued, the risk increases that our technologies and potential
products may give rise to claims that they infringe the patents of others. Third
parties claiming infringement of their proprietary rights could bring legal
actions against us claiming damages and seeking to enjoin our use or
commercialization of a product or our use of a technology. In particular, patent
applications or patents for innovative and broadly applicable technologies, such
as our CART technology, are sometimes challenged by third parties as obvious, or
as obvious extensions of technologies previously developed by those third
parties. We cannot assure you that such claims will not be brought against us in
the future. If any actions based on these claims are successful, in addition to
any potential liability for damages, we could be required to obtain a license in
order to continue to use a technology or to manufacture or market a product, or
could be required to cease using those products or technologies. Any claim, with
or without merit, could result in costly litigation and divert the efforts and
attention of our scientific and management personnel. We cannot assure you that
we would prevail in any
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action or that any license required under any patent would be made available or
would be made available on acceptable terms.
In addition to patent protection, we rely upon 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 employment-confidentiality and invention-assignment
agreement, laboratory notebook policy, and invention disclosure protocol, as a
condition of employment. Additionally, our employment-confidentiality and
invention-assignment agreement requires that our employees do not bring to
Arena, or use without proper authorization, any third-party proprietary
technology. We also require all of our consultants and collaborators that have
access to proprietary property 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.
We have entered into a research agreement with the University of
Glasgow to jointly develop screening strategies using our CART-activated GPCRs,
combined with techniques claimed in a patent application owned by the
University. Under this agreement, we have an option to take an exclusive license
to this patent application, as well as techniques that are developed during the
course of the research agreement. Although we are currently not in default under
this agreement, we cannot assure you that we will not default under this
agreement in the future.
COMPETITION
A major focus of our scientific and business strategy for our CART
technology involves orphan GPCRs. Most major pharmaceutical companies, as well
as several biotechnology companies, have drug discovery programs based upon
GPCRs, including orphan GPCRs. In addition, other companies have attempted to
overcome the problems associated with traditional drug screening by embarking
upon a variety of alternative strategies. Although some of these approaches are
indicated as being based upon ligand-independent strategies, like CART, we
believe that all of these approaches have relied upon indirect measures of
receptor activity, which we believe provide a limited possibility of assessing
receptor-drug interaction and increase the possibility of false positive
results.
Several of our existing and potential competitors have substantially
greater product development capabilities and financial, scientific and marketing
resources than we do. As a result, they may be able to adapt more readily to
technological advances than we can, or to devote greater resources than we can
to the research, development, marketing and promotion of drug discovery
techniques or therapeutic products. Additionally, the technologies being
developed by these companies may be more readily accepted or widely used than
our CART technology. Our future success will depend in large part on our ability
to maintain our competitive position. The biotechnology field is undergoing
rapid and significant change and we may not be able to compete successfully with
newly emerging technologies.
We will rely on our collaborators for support of our development
programs for our drug candidates and intend to rely on our collaborators for the
manufacturing and marketing of these products. Our collaborators may be
conducting multiple product development efforts within the same disease areas
that are the subjects of their agreements with us. Generally, our agreements
with our collaborators do not preclude them from pursuing development efforts
using a different approach from that which is the subject of our agreement with
them. Any of our drug candidates therefore, may be subject to competition with a
drug candidate under development by a collaborator.
GOVERNMENT REGULATION
Our and our collaborators' ongoing drug development activities are
subject to the laws and regulations of governmental authorities in the United
States and other countries in which these products may be marketed.
Specifically, in the United States, the Food and Drug Administration (FDA) and
comparable regulatory agencies in state and local jurisdictions impose
substantial requirements on new product research and the clinical development,
manufacture and marketing of pharmaceutical products, including testing and
clinical trials to establish the safety
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and effectiveness of these products. Our and our collaborators' drug products
will require regulatory approval before commercialization. Governments in other
countries have similar requirements for testing, approval and marketing. In the
United States, in addition to meeting FDA regulations, we are also subject to
other federal, state and local environmental and safety laws and regulations,
including regulation of the use and care of laboratory animals.
We do not plan to commercialize most of our drug candidates by
ourselves, but intend to rely on our collaborators to develop and commercialize
our drug candidates or those that our collaborators discover through the use of
our technology. Before marketing in the United States, any pharmaceutical or
therapeutic products developed by us or our collaborators must undergo rigorous
pre-clinical testing and clinical trials and an extensive regulatory approval
process implemented by the FDA under the federal Food, Drug and Cosmetic Act.
The FDA regulates, among other things, the development, testing, manufacture,
safety and effectiveness standards, record keeping, labeling, storage, approval,
advertising, promotion, sale and distribution of pharmaceutical products. The
regulatory review and approval process, which includes pre-clinical testing and
clinical trials of each product candidate is lengthy, and uncertain. Securing
FDA approval requires the submission of extensive pre-clinical and clinical data
and supporting information to the FDA for each indication to establish a product
candidate's safety and effectiveness. Additional animal studies, other
pre-clinical tests or clinical trials may be requested by the FDA which may
delay marketing approval. The approval process takes many years, requires the
expenditure of substantial resources and may involve ongoing requirements for
post-marketing studies.
Before commencing clinical investigations in humans, we or our
collaborators must submit an Investigational New Drug application, or IND, to
the FDA. We generally intend to rely on our collaborators to file IND
applications and direct the regulatory approval process for the products they
develop using our CART technology. Clinical trials are typically conducted in
three sequential phases, although the phases may overlap or be combined. Phase I
represents the initial administration of the drug to a small group of humans,
either healthy volunteers or patients, to test for safety, dosage tolerance,
absorption, metabolism, excretion and clinical pharmacology. Phase II involves
studies in a relatively small number of patients to assess the effectiveness of
the product, to ascertain dose tolerance and the optimal dose range and to
gather additional data relating to safety and potential adverse effects. Once a
drug is found to have some effectiveness and an acceptable safety profile in the
targeted patient population, Phase III studies are initiated to establish safety
and effectiveness in an expanded patient population and multiple clinical study
sites. The FDA may require further post-marketing studies, referred to as Phase
IV studies. The FDA reviews both the clinical plans and the results of the
trials and may require that we discontinue the trials at any time if the FDA
identifies any significant safety issues. Clinical testing must meet
requirements for institutional review board oversight, informed consent, good
clinical practices and FDA oversight.
The length of time necessary to complete clinical trials varies
significantly and is difficult to predict. Clinical results are frequently
susceptible to varying interpretations that may delay, limit or prevent
regulatory approvals. Additional factors that can cause delay or termination of
our clinical trials, or those of our collaborators, or may increase the cost of
those trials, include, among other factors:
- - lack of effectiveness of the product being tested
- - adverse medical effects or side effects in treated patients
- - slow patient enrollment in the clinical trial
- - inadequately trained or insufficient personnel at the study site to assist
in overseeing and monitoring the clinical trial
- - delays in approval from a study site's review board
- - longer treatment time required to demonstrate effectiveness or determine
the appropriate product dose
- - lack of sufficient supplies of the product candidate
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If pre-clinical and clinical studies are successful, the results,
together with other information about the product and its manufacture, are
submitted to the FDA in the form of an New Drug Application (NDA) to request
marketing approval. Before receiving FDA approval to market a product, we or our
collaborators must demonstrate that the product is safe and effective through
clinical trials on the patient population that will be treated. The approval
process is likely to require substantial time and effort and there can be no
assurance that any approval will be granted on a timely basis, if at all.
Additional animal studies or clinical trials may be requested during the FDA
review period that may delay marketing approval. As part of the approval
process, each manufacturing facility must be inspected by the FDA. Among the
conditions of approval is the requirement that a manufacturer's quality control
and manufacturing procedures conform with federally mandated current good
manufacturing practices, or GMPs. Manufacturers must expend time, money and
effort to ensure compliance with current GMPs and the FDA conducts periodic
inspections to certify compliance. Violations may result in restrictions on the
product or manufacturer, including costly recalls or withdrawal of the product
from the market.
If regulatory approval of a product is granted by the FDA, this
approval will be limited to those specific conditions for which the product is
useful, as demonstrated through clinical studies. After FDA approval for the
initial indications, further clinical trials will be necessary to gain approval
for the use of the product for additional indications. Marketing or promoting a
drug for an unapproved indication is prohibited. The FDA requires that adverse
effects be reported to the FDA and may also require post-marketing testing to
monitor for adverse effects, which can involve significant expense. Even after
FDA approvals are obtained, a marketed product is subject to continual review.
Later discovery of previously unknown problems or failure to comply with the
applicable regulatory requirements may result in restriction on the marketing of
a product or withdrawal of the product from the market as well as possible civil
or criminal sanctions. Furthermore, failure to obtain reimbursement coverage
from governmental or third party insurers may adversely impact successful
commercialization.
Our access to and use of human or other tissue samples in our research
and development efforts are subject to government regulation, both in the United
States and abroad. United States and foreign government agencies may also impose
restrictions on the use of data derived from human or other tissue samples. If
our access to or use of human tissue samples, or our collaborator's use of data
derived from such samples, is restricted, our business could suffer.
Additionally, if we continue to develop our plant or insect programs, we may
become subject to different government regulations relating to agricultural and
industrial biotechnology products.
In addition to regulations enforced by the FDA, we are also subject to
regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act, the Controlled Substances Act and other present and potential
future federal, state or local regulations. Our research and development
programs involve the controlled use of hazardous materials, chemicals,
biological materials and various radioactive compounds. Although we believe that
our safety procedures for handling and disposing of such materials comply with
the standards prescribed by state and federal regulations, the risk of
accidental contamination or injury from these materials cannot be completely
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.
RESEARCH
Research activities are important to our business. Research expenses
related to the development of our technology and services and the improvement of
our existing technology totaled approximately $12.1 million, $8.3 million and
$2.6 million for the years ending December 31, 2000, 1999 and 1998,
respectively. In the year ended December 31, 2000, the amount of research and
development activities sponsored by our collaborators totaled approximately $2.9
million and was recorded as revenue.
COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
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We believe that our operations comply in all material respects with the
applicable environmental laws and regulations. Our compliance with these
requirements did not and is not expected to have a material effect upon our
capital expenditures, earnings or competitive position.
SOURCES AND AVAILABILITY OF RAW MATERIALS
In general, we purchase raw materials and supplies on the open market.
Substantially all such materials are obtainable from a number of sources so that
the loss of any one source of supply would not have a material adverse effect
upon us.
OUR DATABASE
We have developed a web-based database that can be used to access
relevant information and data generated from our research and development
programs. Our database has a number of characteristics which we believe are
unique. Our database allows individual users to obtain information on specific
GPCR targets, including gene sequence information, data developed by us from
GPCR tissue and cellular distribution studies, the results of drug screening and
the results of our animal studies. In developing this database, we focused on
the magnitude of data that we would generate based upon the number of GPCRs
available to us, and the number of chemical compounds that would be screened in
our assays. Our database, which is the subject of a pending patent application
that we own, has a number of proprietary features that allow us to efficiently
organize, store and access these data and information. Using this database, we
and our collaborators can search for compounds by structure and assay results,
and can search for genes by sequence and tissue or disease expression. One of
our collaborators is currently using our database, and we believe our database
will be a resource for collaborators who have a specific interest in diseases
that affect certain tissues.
EMPLOYEES
As of March 1, 2001, we employed 122 people, including 102 in research
and development and 20 in administration. Thirty-one of our employees hold
doctoral degrees and an additional 17 hold other advanced degrees. None of our
employees is covered by collective bargaining agreements. We consider our
relationship with our employees to be good.
RISK FACTORS
WE ARE AT AN EARLY STAGE OF DEVELOPMENT AND HAVE A HISTORY OF LOSSES AND LIMITED
REVENUES.
We were formed in April 1997 and are a early stage company with a
limited operating history. To date, we have generated only limited revenues. Due
in large part to the significant research and development expenditures required
to identify and validate new drug targets and new drug candidates, we have
generated losses each year since our inception. As of December 31, 2000, we had
accumulated losses of approximately $20.7 million. We will generate revenues in
the foreseeable future, if at all, solely from our collaboration and license
agreements, and our losses may continue even if we or our collaborators
successfully identify potential drug targets and drug candidates. If the time
required to generate revenues and to achieve sustained profitability is longer
than we anticipate, or if we are unable to obtain necessary funds, we may never
achieve sustained profitability and may have to discontinue our operations.
MOST OF OUR EXPECTED FUTURE REVENUES ARE CONTINGENT UPON COLLABORATIVE AND
LICENSE AGREEMENTS AND WE MAY NOT RECEIVE SUFFICIENT REVENUES FROM THESE
AGREEMENTS TO SUSTAIN PROFITABILITY.
Our strategy is to use CART to generate meaningful revenues from our
collaborative and license agreements. Our ability to generate revenues depends
on our ability to enter into additional collaborative and license agreements
with third parties and to maintain the agreements we currently have in place. We
will receive little or no revenues under our agreements if our or our
collaborators' research, development or marketing efforts are
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unsuccessful, or if our agreements are terminated early. Additionally, if we do
not enter into new collaborative agreements, we will not receive future revenues
from new sources.
Our future receipt of revenues from collaborative arrangements will be
significantly affected by the amount of time and effort expended by our
collaborators, the timing of the identification of useful drug targets and the
timing of the discovery and development of drug candidates. Under our existing
agreements, we may not earn significant milestone payments until our
collaborators have advanced products into clinical testing, which may not occur
for many years, if at all. We do not control the amount and timing of resources
that our collaborators devote to our collaborative programs, potential products
or product rights. Furthermore, we lack sales and marketing experience and will
depend on our collaborators to market any drugs that we develop with them.
Conflicts may arise between us and our collaborators, such as conflicts
concerning ownership rights to particular drug candidates. While our existing
collaborative agreements typically provide that we receive milestone and royalty
payments with respect to drugs developed from our collaborative programs,
disputes may arise over the application of payment provisions to these drugs and
any royalty payments may be at reduced rates. If any of our collaborators were
to breach, terminate or fail to renew their collaborative agreements with us,
the pre-clinical or clinical development or commercialization of the affected
drug candidates or research programs could be delayed or terminated. Our
collaborative agreements generally allow either party to terminate the
agreements with advance written notice of that party's intent to terminate. In
addition, our collaborators have the right to terminate the collaborative
agreements under some circumstances in which we do not. In certain situations
our collaborators can continue to use our technology after our agreements are
terminated. You should read the section entitled "Business - Our GPCR
Collaborators" for further information on the termination and other provisions
of our material collaborative agreements.
Our collaborators may choose to use alternative technologies or develop
alternative drugs either on their own or with other collaborators, including our
competitors, in order to treat diseases that are targeted by collaborative
arrangements with us. Our collaborative agreements typically do not prohibit
these activities.
Consolidation in the pharmaceutical or biotechnology industry could
have an adverse effect on us by reducing the number of potential collaborators
or jeopardizing our existing relationships. We may not be able to enter into any
new collaborative agreements.
IF PROBLEMS ARISE IN THE TESTING AND APPROVAL PROCESS, CART MAY NOT LEAD TO
SUCCESSFUL DRUG DEVELOPMENT EFFORTS AND WE WILL NOT RECEIVE REVENUES.
We developed CART to identify drug candidates that may possess
therapeutic potential and have entered into collaborative arrangements to
discover and develop promising drug candidates. In order to receive milestone
payments under our collaborative agreements, we or our collaborators must
successfully complete pre-clinical and clinical trials of drug candidates
discovered using CART. To date, we have identified only a few candidates, all of
which are in the very early stages of development and none of which have
completed the development process.
Developing drug candidates is highly uncertain and subject to a number
of significant risks. Our access to and use of some human or other tissue
samples in our research and development efforts is subject to government
regulation, both in the United States and abroad. United States and foreign
government agencies may also impose restrictions on the use of data derived from
human or other tissue samples. Our collaborators will rely on third-party
clinical investigators at medical institutions to conduct our clinical trials,
and we may rely on other third-party organizations to perform data collection
and analysis. As a result, we may face delays outside of our control. It may
take us or our collaborators many years to complete any pre-clinical or clinical
trials, and failure can occur at any stage of testing. Interim results of trials
do not necessarily predict final results, and acceptable results in early trials
may not be repeated in later trials. Moreover, if and when our programs reach
clinical trials, we or our collaborators may decide to discontinue development
of any or all of these projects at any time for commercial, scientific or other
reasons.
In order to receive royalty payments from our collaborators, we or our
collaborators must receive approval from regulatory agencies to market drugs
discovered using CART. A new drug may not be sold until the FDA has approved a
new drug application, or an NDA. If a product receives an approved NDA, this
approval will be limited
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to those disease states and conditions for which the product is demonstrated
through clinical trials to be safe and effective. Drug candidates developed by
us or our collaborators may not prove to be safe and effective in clinical
trials and may not meet all of the applicable regulatory requirements necessary
to receive marketing approval. We do not expect any drugs resulting from our
collaborators' research to be commercially available for many years, if at all.
DRUG DISCOVERY AND DEVELOPMENT IS AN INTENSELY COMPETITIVE PROCESS IN THE UNITED
STATES AND ELSEWHERE AND THIS COMPETITIVE PROCESS COULD RENDER CART OBSOLETE OR
NONCOMPETITIVE.
An important focus of our efforts is on GPCRs, particularly orphan
GPCRs. Because GPCRs are an important target class for drug discovery efforts,
we believe that most pharmaceutical companies, several biotechnology companies,
and other organizations have internal drug discovery programs focused on drug
discovery using GPCRs. Because the vast majority of GPCRs are orphan GPCRs, we
believe that it is likely that many of these companies and organizations are
focusing, or ultimately will focus, their drug discovery efforts on these orphan
receptors. Another company or organization may have, or may develop, a
technology using GPCRs, and in particular, orphan receptors, to discover and
develop drug candidates more effectively, more quickly or at a lower cost than
our technology. Such a technology could render CART obsolete or noncompetitive.
Many of the drugs that we or our collaborators are attempting to
discover using CART would compete with existing therapies. In addition, many
companies are pursuing the development of pharmaceuticals that target the same
diseases and conditions that we are targeting such as cancer, obesity,
cardiovascular disease, diabetes and Alzheimer's Disease. Our competitors may
use discovery technologies and techniques or partner with collaborators in order
to develop products more rapidly or successfully, or with less cost, than we or
our collaborators are able to do. Many of our competitors, particularly large
pharmaceutical companies, have substantially greater product development
capabilities and greater financial, scientific and human resources than we do.
Companies that complete clinical trials, obtain required regulatory agency
approvals and commence commercial sale of their drugs before we do may achieve a
significant competitive advantage, including certain patent and United States
Food and Drug Administration, or FDA, marketing exclusivity rights. So far, we
have not achieved any of these competitive advantages. Any results from our
research and development efforts, or from our joint efforts with our existing or
any future collaborators, might not compete successfully with existing products
or therapies.
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 in large part on our own and, to some extent,
on our collaborators' abilities to obtain, secure and defend patents. We have
numerous patent applications pending for our technology, including patent
applications on drug candidate discovery techniques using CART, genetically
altered GPCRs, GPCRs that we have discovered and compounds discovered using
CART. Currently, four patents have been issued to us. The procedures for
obtaining an issued 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 legal issues. We believe CART represents an
entirely new way to discover drug candidates. Because of this, we expect that
the analysis of our patent applications will be complex and time-consuming.
Therefore, our patent position is very uncertain and we do not know when, or if,
we will obtain additional issued patents for our technology.
When we activate a receptor, we change the way that the receptor would
otherwise naturally function. We believe that our activated receptors are
patentable. A third party may obtain an issued patent on a natural version of a
receptor that we activate. We believe that an activated version of the natural
receptor should not infringe a patent on the natural receptor. However, a third
party who owns a patent on a natural version of a receptor may not agree with
our position. We could be sued for patent infringement, and we do not know how a
court would rule in such a case.
No consistent policy regarding the breadth of claims allowed in
biotechnology patents has emerged to date. For example, on January 5, 2001 the
United States Patent Office issued finalized Utility Examination Guidelines to
its patent examiners that focus on what can be patented under United States
patent law. These guidelines are expected to primarily impact the procedures
that are used in determining the types of inventions that can be patented in the
fields of biotechnology and chemistry. We do not know how, if at all, these
guidelines may affect our patent
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applications on CART, genetically altered GPCRs, GPCRs that we have discovered
or chemical compounds that we discover as drug candidates using CART.
We also rely on trade secrets to protect our technology. However, trade
secrets are difficult to protect. We require all of our employees to agree not
to improperly use our trade secrets or disclose them to others, but we may be
unable to determine if our employees have conformed or will conform with their
legal obligations under these agreements. We also require collaborators and
consultants to enter into confidentiality agreements, but 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 our
consultants may currently be, parties to confidentiality agreements with other
pharmaceutical and biotechnology companies, and the use of our technology could
violate these agreements. In addition, third parties may independently discover
our trade secrets or proprietary information.
Technology licensed to us by others, or in-licensed technology, is
important to some aspects of our business. We generally do not control the
patent prosecution, maintenance or enforcement of in-licensed technology.
Accordingly, we are unable to exercise the same degree of control over this
intellectual property as we do over our internally developed technology.
Moreover, some of our academic institution licensors, research collaborators and
scientific advisors have rights to publish data and information to which we have
rights. If we cannot maintain the confidentiality of our technology and other
confidential information in connection with our collaborations, then our ability
to receive patent protection or protect our proprietary information will be
impaired.
A DISPUTE REGARDING THE INFRINGEMENT OR MISAPPROPRIATION OF OUR PROPRIETARY
RIGHTS OR THE PROPRIETARY RIGHTS OF OTHERS COULD BE COSTLY AND RESULT IN DELAYS
IN OUR RESEARCH AND DEVELOPMENT ACTIVITIES.
Our success depends, in part, on our ability to operate without
infringing on or misappropriating the proprietary rights of others. There are
many issued patents and patent applications filed by third parties relating to
products or processes that could be determined to be similar or identical to
ours or our licensors, and others may be filed in the future. Our activities, or
those of our licensors or collaborators, may infringe patents owned by others.
Although the government sponsored project to sequence the human genome has made
genomics information freely available to the public, other organizations and
companies are seeking proprietary positions on genomics information that overlap
with the government sponsored project. 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 and companies consider to be proprietary.
We believe that there may be significant litigation in the industry
regarding patent and other intellectual property rights. Any legal action
against us, or our collaborators, claiming damages or seeking to enjoin
commercial activities relating to the affected products or our methods or
processes could:
- - require us, or our collaborators, to obtain a license to continue to use,
manufacture or market the affected products, methods or processes, which
may not be available on commercially reasonable terms, if at all
- - prevent us from making, using or selling the subject matter claimed in
patents held by others and subject us to potential liability for damages
- - consume a substantial portion of our managerial and financial resources
- - result in litigation or administrative proceedings that may be costly,
whether we win or lose
In addition, third parties may infringe on or misappropriate our
proprietary rights, and we may have to institute costly legal action against
them to protect our intellectual property rights. We may not be able to afford
the costs of enforcing our intellectual property rights against third parties.
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WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS OUTSIDE THE
UNITED STATES.
Patent law outside the United States is uncertain and in many countries
is currently undergoing review and revision. The laws of some countries do not
protect our intellectual property rights to the same extent as United States
laws. It may be necessary or useful for us to participate in proceedings to
determine the validity of our, or our competitors', foreign patents, which could
result in substantial cost and divert our efforts and attention from other
aspects of our business.
One of our United States patent applications relating to some aspects
of our technology that we filed internationally was not timely filed in the
designated foreign countries. We have taken remedial actions in an attempt to
file the patent application in a number of these foreign countries. We cannot
assure you that any of these remedial actions will be successful, or that
patents based upon this patent application will be issued to us in any of these
foreign countries. In particular, we failed to timely file this patent
application in Japan and, as a result, no patent will be issued to us in Japan
based upon this particular patent application. Based upon other patent
applications that relate to CART that we have filed in the United States and
internationally, we believe that there will be no material adverse effect on our
business or operating results if we fail to obtain a patent based on the subject
matter of this particular patent application.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE AND MAY CAUSE OUR STOCK PRICE TO
DECLINE.
Our revenues and results of operations may fluctuate significantly from
quarter to quarter, depending on a variety of factors, including:
- - variations in milestone and royalty payments
- - the timing of discovery and development of drug candidates, if any
- - changes in the research and development budgets of our existing
collaborators or potential collaborators
- - others introducing new drug discovery techniques or new drugs that target
the same diseases and conditions that we and our collaborators target
- - regulatory actions
- - expenses related to, and the results of, litigation and other proceedings
relating to intellectual property rights or other matters
We will not be able to control many of these factors and we believe
that period-to-period comparisons of our financial results will not necessarily
be indicative of our future performance. If our revenues in a particular period
do not meet expectations, we may not be able to adjust our expenditures in that
period, which could cause our operating results to suffer. If our operating
results in any future period fall below the expectations of securities analysts
or investors, our stock price may fall by a significant amount.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE TO SUFFICIENTLY FUND OUR OPERATIONS
AND RESEARCH, AND IF NEEDED, WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL CAPITAL ON
TERMS FAVORABLE TO US.
We have consumed substantial amounts of capital to date and we expect
to increase our operating expenses over the next several years as we expand our
facilities, infrastructure and research and development activities. Based upon
our current and our anticipated activities, we believe that our current funds
will be sufficient to support our current operating plan through at least the
next two years. However, if this plan changes, we may require additional
financing sooner. For example, we may use a portion of our funds to acquire
complementary businesses or technologies. Financing may not be available or may
not be available on terms favorable to us. To the extent that we raise
additional funds through collaboration and licensing arrangements, we may be
required to relinquish some rights to our technologies or drug candidates, or
grant licenses on terms that are unfavorable to us. We may also
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raise additional funds through the incurrence of debt, and the holders of any
debt we may issue could have rights superior to your rights. If adequate funds
are not available, we will not be able to continue our development.
OUR RESEARCH AND DEVELOPMENT EFFORTS WILL BE SERIOUSLY JEOPARDIZED IF WE ARE
UNABLE TO ATTRACT AND RETAIN KEY EMPLOYEES.
We are a small company with less than 125 employees. Our success
depends, in part, on the continued contributions of our principal management and
scientific personnel, and we face intense competition for such personnel. In
particular, our research programs depend on our ability to attract and retain
highly skilled scientists. If we lose the services of any of our key personnel,
in particular Jack Lief, Dominic P. Behan or Derek T. Chalmers, as well as other
principal members of our scientific or management staff, our research and
development or management efforts could be interrupted or significantly delayed.
For example, Eli Lilly has the right to terminate our collaboration agreement if
they do not approve suitable replacements for key employees who leave us.
Although we have not experienced problems retaining key employees, our employees
can terminate their employment with us at any time. We may also encounter
increasing difficulty in attracting enough qualified personnel as our operations
expand and the demand for these professionals increases, and this difficulty
could impede the attainment of our research and development objectives.
OUR BUSINESS MAY BE ADVERSELY AFFECTED BY HIGHER ENERGY COSTS AND INTERRUPTED
POWER SUPPLIES RESULTING FROM THE ELECTRICAL POWER SHORTAGES CURRENTLY AFFECTING
THE STATE OF CALIFORNIA.
Our corporate headquarters and laboratories are located in San
Diego, California. Electrical power is vital to our operations and we rely on a
continuous power supply to conduct our operations. California is in the midst of
a power crisis and has recently experienced significant power shortages. In the
event of an acute power shortage, California has on some occasions implemented,
and may in the future continue to implement, rolling blackouts throughout
California.
For this type of contingency, we have acquired a stand-by electrical
generator to provide power to our laboratories and offices. However, the
stand-by generator is not yet fully installed. If blackouts interrupt our power
supply frequently or for more than a few days we, most likely, would have to
reduce or temporarily discontinue our normal operations. In addition, the cost
of our research and development efforts may increase because of the disruption
to our operations. Any such reduction or disruption of our operations at our
facilities could negatively impact our revenues and results of operations
significantly. In addition, this could cause our stock price to fall by a
significant amount.
IF WE USE BIOLOGICAL AND HAZARDOUS MATERIALS IN A MANNER THAT CAUSES INJURY OR
VIOLATES LAWS, OUR BUSINESS AND OPERATIONS MAY SUFFER.
Our research and development activities involve the controlled use of
potentially harmful biological materials as well as hazardous materials,
chemicals and various radioactive compounds. For example, we use radioactive
phosphorous-32 on a daily basis and sodium cyanide on a regular basis. We cannot
completely eliminate the risk of accidental contamination, which could cause:
- - an interruption of our research and development efforts
- - injury to our employees resulting in the payment of damages
- - liabilities under federal, state and local laws and regulations governing
the use, storage, handling and disposal of these materials and specified
waste products
CONTINUATION OF OUR DEVELOPMENT PLANS FOR T-82 IS UNCERTAIN
We have completed four Phase I studies of T-82 through 2000 and have
been assessing the data in conjunction with SSP. These four Phase I safety-based
studies evidenced results that we believe establish the safety
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of T-82 in the tested parameters. However, our analysis of all of the data for
T-82, in conjunction with the extensive costs associated with conducting Phase
II and Phase III clinical studies of T-82, the types and number of potential new
treatments for Alzheimer's Disease that are in more advanced stages of clinical
testing and regulatory review, as well as the impact that these factors may have
on our ability to receive regulatory approval for commercialization of T-82 or
successfully out-license T-82 to a third party have prompted us to consider if
continuation of the T-82 program by us is warranted. Although a final decision
has not yet been made, we cannot assure you that we will continue development of
T-82 until we have completed the assessment of all data and information related
to this program. In the event that we decide to continue with our T-82
development program, and based upon the foregoing considerations, we may be
unable to out-license T-82 to another party as we had originally intended, or we
may be unable to secure regulatory approval for the commercialization of T-82.
ANTI-TAKEOVER PROVISIONS IN OUR CERTIFICATE OF INCORPORATION AND DELAWARE LAW
COULD PREVENT A POTENTIAL ACQUIROR FROM BUYING YOUR STOCK.
Provisions of our certificate of incorporation and Delaware law could
make it more difficult for a third party to acquire us, even if the acquisition
would be beneficial to our stockholders. Our amended and restated certificate of
incorporation gives our board of directors the authority to issue up to
7,500,000 shares of preferred stock and to determine the price, rights,
preferences and privileges and restrictions, including voting rights, of those
shares without any further vote or action by our stockholders. Some of the
rights of the holders of common stock may be subject to, and may be harmed by,
the rights of the holders of any shares of preferred stock that may be issued in
the future. The issuance of preferred stock could potentially prevent us from
consummating a merger, reorganization, sale of substantially all of our assets,
liquidation or other extraordinary corporate transaction without the approval of
the holders of the outstanding shares of preferred stock. These provisions could
prevent the consummation of a transaction in which our stockholders could
receive a substantial premium over the current market price for their shares.
OUR EQUITY INTEREST IN CHEMNAVIGATOR.COM MAY HAVE NO VALUE.
We have licensed certain Internet-related technologies to
ChemNavigator.com in exchange for shares of ChemNavigator.com stock. We
currently have a 34% equity interest in ChemNavigator.com. Since it was formed
in May 1999, ChemNavigator.com has incurred net operating losses and negative
cash flows from operating activities, and we expect ChemNavigator.com to incur
increasing net operating losses and negative cash flows for the foreseeable
future. ChemNavigator.com has received only limited revenues to date, and it may
not be able to generate sufficient revenues or obtain financing to offset its
losses. We are currently not attributing any book value to our equity interest
in ChemNavigator.com.
ChemNavigator.com also faces intense competition from established
companies that provide Internet-based products to the same customers as
ChemNavigator.com. Some of these companies have greater financial, technical and
human resources than ChemNavigator.com has, have a longer operating history and
are more well-known to ChemNavigator.com's target customers. If
ChemNavigator.com is not able to compete successfully, it will not achieve
profitability and may have to discontinue operations.
OUR EQUITY INTEREST IN ARESSA PHARMACEUTICALS MAY HAVE NO VALUE.
We currently have an 83% equity interest in Aressa. Since it was formed
in August 1999, Aressa has incurred net operating losses and negative cash flows
from operating activities, and we expect Aressa to incur increasing net
operating losses and negative cash flows for the foreseeable future. Aressa has
not received any revenues to date, and it may never generate any revenues or
obtain financing to offset its losses and may have to discontinue operations. We
are currently not attributing any book value to our equity interest in Aressa.
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OUR RECENT ACQUISITION OF BUNSEN RUSH LABORATORIES, INC. PRESENTS NEW CHALLENGES
THAT MAY NEGATIVELY AFFECT OUR BUSINESS.
We recently acquired Bunsen Rush Laboratories, Inc. ("Bunsen Rush")
through our wholly owned subsidiary BRL Screening, Inc. Bunsen Rush was a
privately held research-based company that provided receptor screening for the
pharmaceutical and biotechnology industries using its proprietary and patented
Melanophore Technology. It may turn out the costs associated with using the
Melanophore Technology with Arena's CART Technology may exceed our original
assumptions or that the advantages of combining the Melanophore Technology with
CART Technology may be limited. Moreover, there is no assurance that Bunsen
Rush's operations can be successfully integrated into Arena's operations or that
all of the benefits expected from such integration will be realized.
Furthermore, there can be no assurance that our operations, management and
personnel will be compatible with those former employees of Bunsen Rush who have
become employees of our wholly owned subsidiary. As a result of any of these
factors, our stock price could decline significantly.
WE MAY ENGAGE IN STRATEGIC TRANSACTIONS, WHICH COULD ADVERSELY AFFECT OUR
BUSINESS.
From time to time we consider strategic transactions and alternatives
with the goal of maximizing stockholder value. For example, in February 2001 we
completed the acquisition of Bunsen Rush Laboratories, Inc. through our
wholly-owned subsidiary BRL Screening, Inc. We will continue to evaluate other
potential strategic transactions and alternatives which we believe may enhance
stockholder value. These additional potential transactions may include a variety
of different business arrangements, including spin-offs, acquisitions, strategic
partnerships, joint ventures, restructurings, divestitures, business
combinations and investments. We cannot assure you that any such transactions
will be consummated on favorable terms or at all, will in fact enhance
stockholder value, or will not adversely affect our business or the trading
price of our stock. Any such transaction may require us to incur non-recurring
or other charges and may pose significant integration challenges and/or
management and business disruptions, any of which could materially and adversely
affect our business and financial results.
ITEM 2. PROPERTIES
Our facilities consist of approximately 63,000 square feet of research
and office space located at 6150 and 6166 Nancy Ridge Drive, San Diego,
California. At our 6166 Nancy Ridge Drive facility, we currently lease
approximately 37,000 square feet of space, of which 23,000 square feet is
laboratory space and 14,000 square feet is office space. In 2000, the Company
began leasing additional facilities located at 6150 Nancy Ridge Drive consisting
of approximately 26,000 square feet. In January 2001, we purchased the 6150
Nancy Ridge Drive facility as well as the adjoining facility at 6138 Nancy Ridge
Drive. The 6138 Nancy Ridge Drive facility, consisting of approximately 26,000
square feet, is currently occupied by a tenant whose lease expires on August 31,
2001. After the lease expires, we will use the additional space primarily for
additional laboratory and office space. We believe these facilities will be
adequate to meet our near-term space requirements. In addition, we believe that
the space needed to accommodate our growth through 2002 is available.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
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Our common stock has traded on the Nasdaq National Market under the
symbol "ARNA" since July 28, 2000. The following table sets forth, for the
period indicated, the high and low bid quotations for the common stock as
reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
Third Quarter (Commencing July 28, 2000) $47.00 $18.00
Fourth Quarter $44.00 $13.625
</TABLE>
On March 1, 2001, the last reported sale price on the Nasdaq National
Market for our common stock was $23.00 per share.
HOLDERS
As of March 1, 2001 there were approximately 4,170 stockholders of
record of the Company's common stock.
DIVIDENDS
Dividends may be paid on common stock of Arena as are declared by the
Board of Directors from funds that the law allows to be used for dividends.
Under Delaware law, dividends may only be paid from surplus or from net profits
for the year and/or the preceding year. Since the Company has neither surplus
nor net profits from the current year or the preceding year, the Company is
prevented from paying dividends until such conditions change. The Company has
not paid dividends on its common stock, and currently does not plan to pay any
cash dividends in the foreseeable future.
USE OF PROCEEDS FROM THE SALE OF REGISTERED SECURITIES
On July 28, 2000 we completed our initial public offering of 6,000,000
shares of our common stock at an initial public offering price of $18.00 per
share for gross proceeds of $108.0 million and estimated net proceeds of
approximately $98.8 million. We paid a total of approximately $7.6 million in
underwriting discounts and commissions and other costs and expenses, other than
underwriting discounts and commissions, totaled approximately $1.6 million in
connection with the offering. The managing underwriters in the offering were ING
Barings, Prudential Vector Healthcare and SG Cowen. The shares of common stock
sold in the offering were registered under the Securities Act of 1933 in a
Registration Statement on Form S-1, as amended (No. 333-35944). The Securities
and Exchange Commission declared the Registration Statement effective on July
27, 2000.
Furthermore, on August 10, 2000 the underwriters exercised an
over-allotment option for an additional 900,000 shares of our common stock at
the initial public offering price of $18.00 per share for gross proceeds of
$16.2 million and net proceeds of approximately $15.1 million. The shares sold
to underwriters in the over-allotment option were also registered on Form S-1.
We paid a total of approximately $1.1 million in underwriting discounts and
commissions in connection with the exercise of the over-allotment option.
Our total net proceeds from the initial public offering were
approximately $113.9 million. No expenses were paid or payments made to our
directors, officers or affiliates or 10% owners of any class of our equity
securities. From the date of our IPO through December 31, 2000, all of the net
proceeds remain in working capital, held as temporary investments in short-term
money funds. In January 2001, we used cash proceeds of $5.4 million to acquire
facilities at 6138-6150 Nancy Ridge Drive in San Diego, California. In February
2001, we used cash of $15.0 million to acquire all of the outstanding stock of
Bunsen Rush, a privately held company. The acquisition was completed through a
merger into our wholly-owned subsidiary, BRL Screening, Inc. We intend to use
the balance of the net proceeds from the offering for general corporate
purposes, including working capital, drug candidate discovery, development and
clinical testing using non-partnered GPCR targets, and other research and
development and clinical testing activities. The amounts and timing of our
actual expenditures for each purpose may vary significantly depending upon
numerous factors. In addition, we may use a portion of the net proceeds to
acquire other complementary businesses or technologies.
24
<PAGE>
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 elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------
Period from April 14,
1997 (inception)
through December
2000 1999 1998 31,1997
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Total revenues $ 7,683,396 $ -- $ -- $ --
EXPENSES
Research and development 12,080,204 8,336,483 2,615,526 447,038
General and administrative 2,678,980 1,814,023 728,806 234,614
Amortization of deferred compensation 4,342,896 378,109 -- --
---------------------------------------------------------------------
Total operating expenses 19,102,080 10,528,615 3,344,332 681,652
Interest and other, net 5,056,714 290,665 (51,986) (13,113)
---------------------------------------------------------------------
Net loss (6,361,970) (10,237,950) (3,396,318) (694,765)
Non-cash preferred stock charge (22,391,068) -- -- --
---------------------------------------------------------------------
Net loss applicable to common stockholders $ (28,753,038) $(10,237,950) $(3,396,318) $(694,765)
=====================================================================
Historical net loss per share, basic and diluted $ (2.84) $ (10.05) $ (3.51) $ (0.73)
=====================================================================
Shares used in calculating historical net loss
per share, basic and diluted 10,139,755 1,018,359 966,799 955,000
=====================================================================
Pro forma net loss per share $ (1.65) $ (1.29)
====================================
Shares used in calculating pro forma net
loss per share 17,411,028 7,926,952
====================================
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------------------------------------
2000 1999 1998 1997
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents $ 144,413,176 $ 5,401,508 $ 194,243 $1,553,422
Total assets 152,711,929 8,525,840 1,653,090 2,421,603
Long-term debt, net of current portion 960,517 2,158,784 970,785 790,863
Redeemable convertible preferred stock -- 18,251,949 2,598,643 2,193,356
Deferred compensation (7,899,970) (625,955) -- --
Accumulated deficit (20,691,003) (14,329,033) (4,091,083) (694,765)
Total stockholder's equity (deficit) 148,784,325 (13,899,549) (4,068,283) (694,665)
</TABLE>
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 elsewhere in
this Annual Report on 10-K.
Since our inception in April 1997, we have devoted substantially all of
our resources to the research and development of CART. We have incurred
significant operating losses since our inception and, as of December 31, 2000,
we had an accumulated deficit of $20.7 million. Our prospects should be
considered in light of the risks, expenses and difficulties encountered by
companies in the early stages of development, particularly those companies in
the rapidly changing pharmaceutical and biotechnology industries.
In April 2000, we entered into a significant collaborative agreement
with Eli Lilly, one of the world's leading pharmaceutical companies. This
collaboration focuses principally on diseases of the central nervous system and
endocrine system, as well as cardiovascular diseases, and may be expanded to
other diseases, including cancer. We activate mutually selected G
protein-coupled receptors and will provide Eli Lilly with biochemical assays for
use in their screening facilities. We have received, and will continue to
receive, research funding from Eli Lilly for our internal resources committed to
these tasks, which will be augmented by substantial resource commitments by Eli
Lilly. We may receive up to $1.25 million per receptor based upon milestone
payments in connection with the successful application of CART to each receptor,
and up to an additional $6.0 million based upon clinical development milestone
payments for each drug candidate discovered using CART. We may also receive
additional milestone and royalty payments associated with the commercialization
of drugs discovered using CART, if any. In addition, we have entered into other
collaborative agreements, including with Taisho and Fujisawa, regarding the
application of CART to G protein-coupled receptors. We have recognized revenues
of approximately $5.2 million from our collaboration with Eli Lilly and
approximately $2.4 million from our collaboration with Taisho.
In February 2001, the Company, through its wholly-owned subsidiary BRL
Screening, Inc., acquired for $15.0 million in cash all of the outstanding
capital stock of Bunsen Rush Laboratories, Inc. (Bunsen Rush), a privately held
research based company that provides receptor screening for the pharmaceutical
and biotechnology industries using its proprietary and patented Melanophore
Technology. Melanophore Technology is a functional-based screening technology
used to identify compounds that interact with cell surface receptors, including
known and orphan GPCRs and receptor tyrosine kinases. The functional nature of
Melanophore Technology eliminates the need for radioactive or fluorescent
screening techniques and provides a simple and sensitive means to detect
cellular signals generated by activated GPCRs.
We plan to pursue several specific objectives during the remainder of
2001, namely:
- - establishing additional collaborations with pharmaceutical and
biotechnology companies based on using CART
- - expanding the number of receptors available for activation by CART through
internal research efforts and, potentially, external licensing agreements
26
<PAGE>
- - increasing our internally funded drug discovery efforts, including
expansion of our chemistry and screening efforts
- - We intend to map the GPCRs to all of the major body systems
Our ability to achieve our identified goals or objectives is dependent
upon many factors, some of which are out of our control, and we may not achieve
our identified goals or objectives.
Our quarterly operating results will depend upon many factors,
including expiration of research contracts with our collaborators, the size of
future collaborations, the success rate of our technology collaborations leading
to milestones and royalties, and general and industry-specific economic
conditions which may affect research and development expenditures. As a
consequence, our revenues in future periods are likely to fluctuate
significantly from period to period.
Our research and development expenses consist primarily of salaries and
related personnel expenses. As of December 31, 2000, all research and
development costs have been expensed as incurred. We believe that continued
investment in research and development is critical to attaining our strategic
objectives and we expect these expenses to continue and to increase. General and
administrative expenses consist primarily of salaries and related personnel
expenses for executive, finance and administrative personnel, professional fees,
and other general corporate expenses. As we add personnel and incur additional
costs related to the growth of our business, general and administrative expenses
will also increase.
DEFERRED COMPENSATION
Deferred compensation for stock options granted by us to our employees
and directors has been determined as the difference between the estimated market
value of our common stock on the date the options were granted, and the exercise
price of the options. Deferred compensation is initially recorded as a component
of stockholders' equity and is amortized using a graded vesting method as
charges to operations over the vesting period of the options. In connection with
the grant of stock options to our employees, consultants and directors, we
recorded deferred compensation of approximately $11.6 million in the year ended
December 31, 2000 and $1.0 million in the year ended December 31, 1999. As of
December 31, 2000, the total charges to be recognized in future periods from
amortization of deferred stock compensation are anticipated to be approximately
$4.1 million, $2.6 million, $1.1 million, and $99,000 for the years ending
December 31, 2001, 2002, 2003 and 2004, respectively. Deferred compensation for
stock options granted by us to our consultants has been determined in accordance
with Statement of Financial Accounting Standards No. 123 and Emerging Issues
Task Force 96-18 as the fair value of the equity instruments issued. Deferred
compensation for stock options that we grant to consultants is periodically
remeasured as the underlying options vest. Our stock options generally vest over
four years from the date of grant.
RESULTS OF OPERATIONS
Year ended December 31, 2000 compared to the year ended December 31, 1999
Revenues. We recorded revenues of $7.7 million for the year ended
December 31, 2000 as compared to no revenue for the year ended December 31,
1999. The revenues for the year ended December 31, 2000 were primarily
attributable to our collaborations with Eli Lilly and Taisho, which included
research funding, milestone achievements, and technology access and development
fees. Research funding is recognized as revenue when the services are rendered.
Revenue from technology access and development fees is recognized ratably over
the term of the collaboration. Revenue from milestones is recognized when the
milestone is achieved. If our collaborators pay us before we recognize the
revenue, we will defer revenue recognition of these payments until earned. As of
December 31, 2000 we had current and non-current deferred revenues totaling
approximately $705,000.
Research and development expenses. Our research and development
expenses increased $3.8 million to $12.1 million for the year ended December 31,
2000, from $8.3 million for the year ended December 31, 1999. This increase was
primarily due to increased personnel related expenses of $3.5 million and lab
supplies costing $1.4 million in order to expand the application of our
technology. The increase was offset by reduced expenses of $1.1
27
<PAGE>
million related to the development of T-82 for which we initiated our first
Phase I clinical trial in early 1999, and which was completed in late 1999.
General and administrative expenses. Our general and administrative
expenses increased $900,000 to $2.7 million for the year ended December 31,
2000, from $1.8 million for the year ended December 31, 1999. This increase was
primarily due to increased personnel expenses related to additional personnel
hired in the accounting, legal and general administration departments. This
increased staffing was necessary to manage and support our continued growth as
well as to accommodate the demands associated with operating as a public
company.
Amortization of deferred compensation. We recorded amortization of
deferred compensation of approximately $4.3 million for the year ended December
31, 2000 as compared to $378,000 for the year ended December 31, 1999.
Interest income. Interest income increased $4.2 million to $4.6 million
for the year ended December 31, 2000, from $447,000 for the year ended December
31, 1999. The increase was primarily attributable to higher average levels of
cash and cash equivalents in the year ended December 31, 2000.
Interest expense. Interest expense increased $54,000 to $220,000 for
the year ended December 31, 2000 from $166,000 for the year ended December 31,
1999. This increase represents interest incurred on our equipment leases.
Gain on investment. For the year ended December 31, 2000 we recorded a
gain on the sale of liquid short-term investments in the amount of $576,000.
Other income. Other income increased $48,000 to $57,000 for the year
ended December 31, 2000 from $9,000 for the year ended December 31, 1999. This
increase represents rental income received from subleasing office space.
Net loss. Net loss decreased $3.8 million to $6.4 million for the year
ended December 31, 2000 compared to $10.2 million for the year ended December
31, 1999. The decrease reflects revenues of $7.7 million in the year ended
December 31,2000 reduced by increases in research and development and general
and administrative expenses as well as amortization of deferred compensation.
Non-cash preferred stock charge. We recorded a non-cash preferred stock
charge of $22.4 million for the year ended December 31, 2000. This non-cash
preferred stock charge relates to the issuance of our Series E preferred stock
in January 2000, our Series F preferred stock in March 2000 and our Series G
preferred stock in April 2000, which were converted into shares of our common
stock upon the closing of our initial public offering. We recorded the non-cash
preferred stock charge at the dates of issuance by increasing the net loss
applicable to common stockholders, without any effect on total stockholders'
equity. The amount increased our basic net loss per share for the year ended
December 31, 2000.
Year ended December 31, 1999 compared to the year ended December 31, 1998
Research and development expenses. Our research and development
expenses increased $5.7 million to $8.3 million for the year ended December 31,
1999, from $2.6 million for the year ended December 31, 1998. This increase was
primarily due to increased personnel related expenses of $2.5 million and lab
supplies costing $1.3 million in order to expand the application of our
technology, expenses of $1.5 million associated with our first Phase I clinical
trial of T-82 which were initiated in early 1999, and facility related expenses
of $358,000 as a result of our facility expansion.
General and administrative expenses. Our general and administrative
expenses increased $1.1 million to $1.8 million for the year ended December 31,
1999, from $729,000 for the year ended December 31, 1998. This increase was
primarily related to five additional personnel hired during 1999 to help support
the growing responsibilities of the accounting, legal and general administration
departments.
28
<PAGE>
Amortization of deferred compensation. We recorded amortization of
deferred compensation of approximately $378,000 for the year ended December 31,
1999. There was no amortization of deferred compensation in the year ended
December 31, 1998.
Interest income. Interest income increased $405,000 to $447,000 for the
year ended December 31, 1999, from $42,000 for the year ended December 31, 1998.
The increase was primarily attributable to higher levels of cash and cash
equivalents in 1999 from the proceeds of the sale of our Series D convertible
preferred stock in January 1999.
Interest expense. Interest expense increased $72,000 to $166,000 for
the year ended December 31, 1999 from $94,000 for the year ended December 31,
1998. This increase represents interest incurred on our equipment leases as well
as interest accrued on our other debt.
Net loss. Net loss increased $6.8 million to $10.2 million for the year
ended December 31, 1999 compared to $3.4 million for the year ended December 31,
1998. The increase reflects increases in research and development and general
and administrative expenses, offset in part by the increase in interest income.
Year ended December 31, 1998 compared to the period from April 14, 1997
(inception) through December 31, 1997
Research and development expenses. Our research and development
expenses increased $2.2 million to $2.6 million for the year ended December 31,
1998, from $447,000 for the period from April 14, 1997 through December 31,
1997. This increase was primarily due to increased personnel expenses of $1.3
million and lab supplies costing $538,000 in order to expand the application of
our technology, and facility related expenses of $348,000 as a result of our
facility expansion.
General and administrative expenses. Our general and administrative
expenses increased $494,000 to $729,000 for the year ended December 31, 1998,
from $235,000 for the period from April 14, 1997 through December 31, 1997. This
increase was primarily due to increased personnel related expenses of $400,000
in order to establish and support the growing responsibilities of the
accounting, legal and general administration departments and facility-related
expenses of $76,000 as a result of our facility expansion.
Interest income. Interest income increased $19,000 to $42,000 for the
year ended December 31, 1998, from $23,000 for the period from April 14, 1997
through December 31, 1997. The increase was primarily attributable to higher
average cash levels in 1998.
Interest expense. Interest expense increased $58,000 to $94,000 for the
year ended December 31, 1998 from $36,000 for the period from April 14, 1997
through December 31, 1997. The increase represents interest incurred on our
equipment lease as well as interest accrued on our other debt for a full year.
Net loss. Net loss increased $2.7 million to $3.4 million for the year
ended December 31, 1998 compared to $695,000 for the period from April 14, 1997
through December 31, 1997. The increase reflects increases in research and
development and general and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
We have experienced net losses and negative cash flow from operations
since our inception. At December 31, 2000, we had an accumulated deficit of
$20.7 million and since our inception, we had used cash from operations of $15.8
million. Our net losses have resulted primarily from expenses incurred in
connection with our research and development activities and general and
administrative expenses. As of December 31, 2000, we had $144.4 million in cash
and cash equivalents compared to $5.4 million in cash and cash equivalents as of
December 31, 1999.
Net cash used in operating activities was approximately $4.1 million
during the year ended December 31, 2000, approximately $8.7 million during the
year ended December 31, 1999 and was approximately $2.4 million during the year
ended December 31, 1998. The primary use of cash was to fund our net losses for
these periods,
29
<PAGE>
adjusted for non-cash expenses, including $4.3 million in non-cash amortization
of deferred compensation during the year ended December 31, 2000, and changes in
operating assets and liabilities.
Net cash used in investing activities was approximately $2.2 million
during the year ended December 31, 2000 and was approximately $2.1 million
during the year ended December 31, 1999. Net cash used in investing activities
was approximately $593,000 during the year ended December 31, 1998. Net cash
used in investing activities was primarily the result of the acquisition of
laboratory and computer equipment, leasehold improvements and furniture and
fixtures.
Net cash proceeds from financing activities was approximately $145.3
million, $16.0 million and $1.7 million during the years ended December 31,
2000, 1999 and 1998, respectively. The net cash proceeds from financing
activities during the year ended December 31, 2000 was primarily from net
proceeds of $113.9 million from our initial public offering in July 2000 as well
as $30.1 million from the issuance of preferred stock. The net cash proceeds
from financing activities for the years ended December 31, 1999 and 1998 were
primarily from the issuance of preferred stock.
We lease a corporate research and development facility under a lease
which expires on April 30, 2013. The lease provides us with options to extend
for two additional five-year periods. We have also entered into capital lease
agreements for various lab and office equipment. The terms of these capital
lease agreements range from 48 to 60 months. Current total minimum annual
payments under these capital leases are approximately $614,000 in 2001, $614,000
in 2002, $480,000 in 2003 and $45,000 in 2004.
In January 2001, we purchased a facility we were previously leasing as
well as the adjoining building at 6138-6150 Nancy Ridge Drive in San Diego for
cash of $5.4 million. Of the 52,000 square foot facility, 26,000 square feet is
subleased to a tenant until August of 2001.
In February 2001, the Company, through its wholly-owned subsidiary BRL
Screening, Inc., acquired all of the outstanding capital stock of Bunsen Rush, a
privately held research based company, for cash of $15.0 million.
The amount and timing of future losses are highly uncertain. Our
ability to achieve and thereafter sustain profitability will be dependent upon,
among other things, obtaining additional strategic alliances as well as
establishing additional collaborative or licensing arrangements.
Based on the research collaborations we already have in place and our
current internal business plan, we expect to hire an additional 40 to 50
employees, primarily scientists, by the end of 2001. While we believe that our
current capital resources and anticipated cash flows from licensing activities,
will be sufficient to meet our capital requirements for at least the next two
years, we cannot assure you that we will not require additional financing before
such time. Our funding requirements may change at any time due to technological
advances or competition from other companies. Our future capital requirements
will also depend on numerous other factors, including scientific progress in our
research and development programs, additional personnel costs, progress in
pre-clinical testing, the time and cost related to proposed regulatory
approvals, if any, and the costs of filing and prosecution of patent
applications and enforcing patent claims. We cannot assure you that adequate
funding will be available to us or, if available, that such funding will be
available on acceptable terms. Any shortfall in funding could result in the
curtailment of our research and development efforts.
INCOME TAXES
As of December 31, 2000, we had approximately $12.2 million of net
operating loss carryforwards and $1.6 million of research and development tax
credit carryforwards for federal income tax purposes. These carryforwards expire
on various dates beginning in 2012. These amounts reflect different treatment of
expenses for tax reporting than are used for financial reporting. United States
tax law contains provisions that may limit our ability to use net operating loss
and tax credit carryforwards in any year, or if there has been a significant
ownership change. Any future significant ownership change may limit the use of
net operating loss and tax credit carryforwards.
30
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates
primarily to our cash equivalents and short-term investments. We do not use
derivative financial instruments in our investment portfolio. Our cash and
investment policy emphasizes liquidity and preservation of principal over other
portfolio considerations. We select investments that maximize interest income to
the extent possible within these guidelines. If market interest rates were to
decrease by 1% from December 31, 2000, we would expect future interest income
from our portfolio to decline annually by less than $1.4 million. The modeling
technique used measures the change in fair values arising from an immediate
hypothetical shift in market interest rates and assumes ending fair values
include principal plus earned interest.
31
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ARENA PHARMACEUTICALS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors....................................................... 33
Balance Sheets.......................................................................................... 34
Statements of Operations................................................................................ 35
Statements of Stockholders' Equity (Deficit)............................................................ 36
Statements of Cash Flows................................................................................ 37
Notes to Financial Statements........................................................................... 38
</TABLE>
32
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Arena Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of Arena
Pharmaceuticals, Inc. as of December 31, 2000 and 1999, and the related
statements of operations, stockholders' equity (deficit) and cash flows for each
of the three years in the period ended December 31, 2000. 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 audits.
We conducted our audits in accordance with auditing standards generally
accepted in the 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 financial statements referred to above present
fairly, in all material respects, the financial position of Arena
Pharmaceuticals, Inc. at December 31, 2000 and 1999 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
/s/ ERNST & YOUNG LLP
San Diego, California
January 15, 2001
33
<PAGE>
ARENA PHARMACEUTICALS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $144,413,176 $ 5,401,508
Accounts receivable 2,116,146 -
Prepaid expenses 1,685,122 172,052
------------ ------------
Total current assets 148,214,444 5,573,560
Property and equipment, net 4,265,260 2,773,382
Deposits and restricted cash 88,016 178,898
Other assets 144,209 -
------------ ------------
Total assets $152,711,929 $ 8,525,840
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 915,540 $ 866,414
Current portion of deferred revenues 220,000 -
Current portion of obligations under capital leases 480,538 355,119
------------ ------------
Total current liabilities 1,616,078 1,221,533
Convertible note payable to related party, less current
portion - 934,312
Obligations under capital leases, less current portion 960,517 1,224,472
Deferred rent 866,009 793,123
Deferred revenues 485,000 -
Commitments
Redeemable convertible preferred stock, $.0001 par value:
7,500,000 shares authorized at December 31, 2000, 7,792,533
shares authorized at December 31, 1999; no shares issued
and outstanding at December 31, 2000; 6,908,593 shares
issued and outstanding at December 31, 1999 - 18,251,949
Stockholders' equity (deficit):
Common stock, $.0001 par value: 67,500,000 and 25,000,000
shares authorized at December 31, 2000 and 1999,
respectively; 22,688,313 and 1,116,375 shares issued and
outstanding at December 31, 2000 and December 31, 1999,
respectively 2,268 111
Additional paid-in capital 177,373,030 1,055,328
Deferred compensation (7,899,970) (625,955)
Accumulated deficit (20,691,003) (14,329,033)
------------ ------------
Total stockholders' equity (deficit) 148,784,325 (13,899,549)
------------ ------------
Total liabilities and stockholders' equity (deficit) $152,711,929 $ 8,525,840
============ ============
</TABLE>
See accompanying notes.
34
<PAGE>
ARENA PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
2000 1999 1998
------------ ------------ -----------
<S> <C> <C> <C>
Revenues $ 7,683,396 $ -- $ --
Operating expenses:
Research and development 12,080,204 8,336,483 2,615,526
General and administrative 2,678,980 1,814,023 728,806
Amortization of deferred compensation
($3,018,623 and $264,419 related to research and
development expenses and $1,324,273 and $113,690
related to general and administrative expenses for
the year ended December 31, 2000 and 1999,
respectively) 4,342,896 378,109 --
------------ ------------ -----------
Total operating expenses 19,102,080 10,528,615 3,344,332
Interest income 4,644,471 446,848 42,266
Interest expense (220,483) (165,603) (94,252)
Gain on sale of investment 575,855 -- --
Other income 56,871 9,420 --
------------ ------------ -----------
Net loss (6,361,970) (10,237,950) (3,396,318)
Non-cash preferred stock charge (22,391,068) -- --
Net loss applicable to common stockholders $(28,753,038) $(10,237,950) $(3,396,318)
============ ============ ===========
Net loss per share, basic and diluted $ (2.84) $ (10.05) $ (3.51)
============ ============ ===========
Shares used in calculating net loss per
share, basic and diluted 10,139,755 1,018,359 966,799
============ ============ ===========
</TABLE>
See accompanying notes.
35
<PAGE>
ARENA PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDERS'
--------------------- PAID-IN DEFERRED ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT (DEFICIT)
---------- ------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 1,000,000 $ 100 $ -- $ -- $ (694,765) $ (694,665)
Issuance of common stock warrants
in connection with technology
agreement -- -- 14,000 -- -- 14,000
Issuance of common stock upon
exercise of options 43,500 4 8,696 -- -- 8,700
Net loss -- -- -- -- (3,396,318) (3,396,318)
---------- ------- ------------ ----------- ------------ ------------
Balance at December 31, 1998 1,043,500 104 22,696 -- (4,091,083) (4,068,283)
Issuance of common stock upon
exercise of options 72,875 7 28,568 -- -- 28,575
Deferred compensation related to
stock options -- -- 1,004,064 (1,004,064) -- --
Amortization of deferred
compensation -- -- -- 378,109 -- 378,109
Net loss -- -- -- -- (10,237,950) (10,237,950)
---------- ------- ------------ ----------- ------------ ------------
Balance at December 31, 1999 1,116,375 111 1,055,328 (625,955) (14,329,033) (13,899,549)
Issuance of common stock upon
exercise of options, net of
repurchases 808,300 81 360,044 -- -- 360,125
Issuance of common stock upon
exercise of warrants 410,060 41 1,123,925 -- -- 1,123,966
Conversion of convertible note into
common stock 755,000 75 975,499 -- -- 975,574
Issuance of common stock in initial
public offering, net of offering
costs of $10,274,000 6,900,000 690 113,925,310 -- -- 113,926,000
Conversion of preferred stock to
common stock upon closing of
initial public offering 12,698,578 1,270 48,316,013 -- -- 48,317,283
Deferred compensation related to
stock options -- -- 11,616,911 (11,616,911) -- --
Amortization of deferred
compensation -- -- -- 4,342,896 -- 4,342,896
Net loss -- -- -- -- (6,361,970) (6,361,970)
---------- ------- ------------ ----------- ------------ ------------
Balance at December 31, 2000 22,688,313 $ 2,268 $177,373,030 $(7,899,970) $(20,691,003) $148,784,325
========== ======= ============ =========== ============ ============
</TABLE>
See accompanying notes.
36
<PAGE>
ARENA PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
------------- ------------ -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (6,361,970) $(10,237,950) $(3,396,318)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 787,829 399,278 171,942
Amortization of deferred compensation 4,342,896 378,109 --
Interest accrued on notes payable to related party 41,262 80,635 83,896
Warrants issued in connection with technology agreement -- -- 14,000
Deferred rent 72,886 45,699 747,424
Deferred financing costs -- 150,711 (150,711)
Change in operating assets and liabilities:
Accounts receivable (2,116,146) -- --
Prepaid expenses and other assets (1,657,279) (110,071) (18,793)
Deferred revenues 705,000 -- --
Accounts payable and accrued expenses 49,126 624,195 110,170
------------- ------------ -----------
Net cash used in operating activities (4,136,396) (8,669,394) (2,438,390)
INVESTING ACTIVITIES
Purchases of property and equipment (2,279,707) (2,007,020) (558,933)
Deposits and restricted cash 90,882 (98,383) (34,171)
------------- ------------ -----------
Net cash used in investing activities (2,188,825) (2,105,403) (593,104)
FINANCING ACTIVITIES
Advances under capital lease obligations 377,015 1,562,690 148,299
Principal payments on capital leases (515,551) (116,427) (14,971)
Proceeds from issuance of redeemable preferred stock 30,065,334 14,132,224 405,287
Proceeds from issuance of common stock 115,410,091 28,575 8,700
Proceeds from convertible note payable to related party -- 375,000 1,125,000
------------- ------------ -----------
Net cash provided by financing activities 145,336,889 15,982,062 1,672,315
------------- ------------ -----------
Net increase (decrease) in cash and cash equivalents 139,011,668 5,207,265 (1,359,179)
Cash and cash equivalents at beginning of period 5,401,508 194,243 1,553,422
------------- ------------ -----------
Cash and cash equivalents at end of period $ 144,413,176 $ 5,401,508 $ 194,243
============= ============ ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Interest paid $ 179,221 $ 84,968 $ 10,356
============= ============ ===========
Conversion of convertible note to related party into
common stock $ 975,574 $ -- $ --
============= ============ ===========
Conversion of convertible note to related party into
redeemable preferred stock $ -- $ 1,521,082 $ --
============= ============ ===========
</TABLE>
See accompanying notes.
37
<PAGE>
ARENA PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Arena Pharmaceuticals, Inc. (the "Company") was incorporated on April
14, 1997 and commenced operations in July 1997. The Company operates in one
business segment and has developed a broadly applicable technology that is used
to identify drug candidates in a more efficient manner than traditional drug
discovery approaches.
PRINCIPLES OF CONSOLIDATION
The financial statements do not include the accounts of its majority
owned subsidiary, Aressa Pharmaceuticals, Inc. ("Aressa"). Management believes
that majority ownership and control of Aressa is temporary in accordance with
Statement of Financial Accounting Standards ("SFAS 94") "Consolidation of All
Majority Owned Subsidiaries," has therefore not consolidated Aressa's activity.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires 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. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and investments with original
maturities of less than three months when purchased.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments, including cash and cash equivalents, accounts
payable and accrued expenses, are carried at cost. Management believes these
recorded amounts approximate fair value because of the short-term maturity of
these instruments.
CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash and cash equivalents.
The Company limits its exposure to credit loss by placing its cash with high
credit quality financial institutions.
Two collaborative partners individually accounted for 67.6% and 31.0%
of total revenues during the year ended December 31, 2000.
38
<PAGE>
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated over the
estimated useful lives of the assets (generally three to seven years) using the
straight-line method. Amortization of leasehold improvements is computed over
the shorter of the lease term or the estimated useful life of the related
assets.
LONG-LIVED ASSETS
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," if indicators of
impairment exist, the Company assesses the recoverability of the affected
long-lived assets by determining whether the carrying value of such assets can
be recovered through the undiscounted future operating cash flows. If impairment
is indicated, the Company measures the amount of such impairment by comparing
the carrying value of the asset to the present value of the expected future cash
flows associated with the use of the asset. While the Company's current and
historical operating and cash flow losses are indicators of impairment, the
Company believes the future cash flows to be received from the long-lived assets
will exceed the assets' carrying value, and accordingly the Company has not
recognized any impairment losses through December 31, 2000.
DEFERRED RENT
Rent expense is recorded on a straight-line basis over the term of the
lease. The difference between rent expense and amounts paid under the lease
agreements is recorded as deferred rent in the accompanying balance sheets.
STOCK OPTIONS
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes
the use of the fair value based method of accounting for stock-based
compensation arrangements, under which compensation cost is determined using the
fair value of stock-based compensation determined as of the grant date, and is
recognized over the periods in which the related services are rendered. SFAS No.
123 also permits companies to elect to continue using the current intrinsic
value accounting method specified in Accounting Principles Board (APB) Opinion
No. 25 to account for stock-based compensation. The Company has elected to
retain the intrinsic value based method, and has disclosed the pro forma effect
of using the fair value based method to account for its stock-based compensation
(Note 8).
Options and warrants issued to non-employees are recorded fair value as
prescribed by SFAS No. 123 and EITF 96-18 and periodically remeasured and
expensed over the period services are provided.
REVENUES
Up-front fees under the Company's collaborations will be deferred and
recognized over the period the related services are provided. Amounts received
for research funding for a specified number of full time researchers are
recognized as revenue as the services are provided, as long as the amounts
received are not refundable regardless of the research project. Assay
development fees will be recognized upon completion of the screen and acceptance
by the collaborators. Milestone and royalty payments will be recognized upon
completion of specified milestones pursuant to the collaborative agreements.
39
<PAGE>
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT COSTS
Costs incurred in connection with the development of new products and
changes to existing products are charged to operations as incurred.
PATENT COSTS
Costs related to filing and pursuing patent applications are expensed
as incurred as recoverability of such expenditures is uncertain.
COMPUTER SOFTWARE COSTS
In May 2000, the Emerging Issues Task Force ("EITF") released Issue No.
00-2, "Accounting for Web Site Development Costs." EITF Issue No. 00-2
establishes standards for determining the capitalization or expensing of
incurred costs relating to the development of Internet web sites based upon the
respective stage of development. The Issue is effective for fiscal quarters
beginning after June 30, 2000 (including costs incurred for projects in process
at the beginning of the quarter of adoption). The adoption of EITF No. 00-2 did
not affect the Company's financial results.
INCOME TAXES
In accordance with SFAS No. 109, "Accounting for Income Taxes," a
deferred tax asset or liability is determined based on the difference between
the financial statement and tax basis of assets and liabilities as measured by
the enacted tax rates which will be in effect when these differences reverse.
The Company provides a valuation allowance against net deferred tax assets
unless, based upon the available evidence, it is more likely than not that the
deferred tax assets will be realized.
COMPREHENSIVE LOSS
In accordance with SFAS No. 130, "Reporting Comprehensive Loss," all
components of comprehensive loss, including net loss, are reported in the
financial statements in the period in which they are recognized. Comprehensive
loss is defined as the change in equity during a period from transactions and
other events and circumstances from non-owner sources. Net loss and other
comprehensive loss, including unrealized gains and losses on investments, is
reported net of their related tax effect, to arrive at comprehensive loss. For
the years ended December 31, 2000, 1999 and 1998, comprehensive loss equals the
net loss as reported.
40
<PAGE>
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE
Basic and diluted net loss per common share are presented in conformity
with SFAS No. 128, "Earnings per Share" for all periods presented. Under the
provisions of SAB 98, common stock and convertible preferred stock that has been
issued or granted for nominal consideration prior to the anticipated effective
date of the initial public offering must be included in the calculation of basic
and diluted net loss per common share as if these shares had been outstanding
for all periods presented. To date, the Company has not issued or granted shares
for nominal consideration.
In accordance with SFAS No. 128, basic and diluted net loss per share
has been computed using the weighted-average number of shares of common stock
outstanding during the period, less shares subject to repurchase. Pro forma
basic and diluted net loss per common share, as presented in the statements of
operations, has been computed for the year ended December 31, 2000 and 1999 as
described above, and also gives effect to the conversion of preferred stock upon
closing of the initial public offering.
The following table presents the calculation of net loss per share:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
2000 1999 1998
------------- ------------- -------------
<S> <C> <C> <C>
Net loss $ (28,753,038) $ (10,237,950) $ (3,396,318)
============= ============= =============
Basic and diluted net loss per
share $ (2.84) $ (10.05) $ (3.51)
============= ============= =============
Weighted-average shares used in
computing net loss per share,
basic and diluted 10,139,755 1,018,359 966,799
============= ============= =============
Pro forma net loss per share,
basic and diluted $ (1.65) $ (1.29)
============= =============
Shares used above 10,139,755 1,018,359
Pro forma adjustment to
reflect assumed
weighted-average effect of
conversion of preferred
stock 7,271,273 6,908,593
------------- -------------
Shares used in computing pro
forma net loss per share,
basic and diluted 17,411,028 7,926,952
============= =============
</TABLE>
The Company has excluded all outstanding stock options and warrants,
and shares subject to repurchase from the calculation of diluted loss per common
share because all such securities are antidilutive for all periods presented.
The total number of shares excluded from the calculation of diluted net loss per
share, prior to application of the treasury stock method for stock options, was
509,850, 81,000 and 61,625 for the years ended December 31, 2000, 1999 and 1998,
respectively. Such securities, had they been dilutive, would have been included
in the computation of diluted net loss per share.
SEGMENT REPORTING
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," requires the use of a management approach in identifying segments
of an enterprise. Management has determined that the Company operates in one
business segment.
41
<PAGE>
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EFFECT OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which will
be effective January 1, 2001. SFAS No. 133 establishes accounting and reporting
standards requiring that every derivative instrument, including certain
derivative instruments imbedded in other contracts, be recorded in the balance
sheet as either an asset or liability measured at its fair value. The statement
also requires that changes in the derivative's fair value be recognized in
earnings unless specified hedge accounting criteria are met. Management believes
the adoption of SFAS No. 133 will not have an effect on the financial
statements, as the Company does not engage in the activities covered by SFAS No.
133.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, Revenue Recognition ("SAB 101"). SAB 101
provides the SEC Staff's views in applying generally accepted accounting
principles to various revenue recognition issues and specifically addresses
revenue recognition for upfront, non-refundable fees earned in connection with
research collaboration arrangements. It is the SEC's position that such fees
should generally be recognized over the term of the agreement. The Company
expects to apply this accounting to its future collaborations. The Company
believes its revenue recognition policy is in compliance with SAB 101.
2. INVESTMENT IN CHEMNAVIGATOR.COM
In January 1999, the Company began development of an Internet-based
search engine that allows scientists to search for compounds based primarily on
the similarity of chemical structures. In May 1999, ChemNavigator.com was
incorporated and in June 1999, the Company licensed to ChemNavigator.com a
website, the trademark ChemNavigator and goodwill associated with the trademark,
intellectual property related to the search engine, as well as technology needed
to perform chemical similarity searches. In return, the Company received
2,625,000 shares of preferred stock in ChemNavigator.com valued at $2,625,000
based on independent investors' participation in ChemNavigator.com's Series A
preferred round of financing. However, the Company's historical cost basis in
the licensed technology was zero and the Company therefore recorded its
investment in ChemNavigator.com at zero in accordance with SAB 48, which calls
for predecessor cost accounting to account for the exchange of non-monetary
assets for stock. As of December 31, 2000, the Company equity ownership
represented approximately 34% of the outstanding voting equity securities of
ChemNavigator.com. ChemNavigator.com has an accumulated deficit and since the
Company is under no obligation to reimburse the other ChemNavigator.com
stockholders for its share of ChemNavigator.com's losses, the Company has not
included any equity in the net loss of ChemNavigator.com in the Company's
Statements of Operations.
The Company subleases office space to ChemNavigator.com. The current
sublease payment of $5,592 per month can be adjusted monthly based upon changes
in the number of ChemNavigator.com employees.
Jack Lief, the Company's President and Chief Executive Officer, is also
the Chairman of the Board of ChemNavigator.com. Richard P. Burgoon, Jr., the
Company's Senior Vice President, Operations, General Counsel and Secretary, is
also the Secretary of ChemNavigator.com and a member of its board of directors.
42
<PAGE>
3. INVESTMENT IN ARESSA PHARMACEUTICALS, INC.
In August 1999, the Company formed Aressa Pharmaceuticals, Inc. to take
advantage of opportunities to in-license and develop niche products from other
pharmaceutical or biotechnology companies. In October 2000, the Company received
shares of preferred stock in Aressa valued at $5.0 million based on the
participation of independent investors in Aressa's Series A preferred round of
financing raising gross proceeds of $1.0 million. As of December 31, 2000, the
Company owned approximately 83% of the outstanding voting equity securities of
Aressa. Management believes that majority ownership and control is temporary and
in accordance with FAS 94, has therefore not consolidated Aressa's activity.
Jack Lief, the Company's President and Chief Executive Officer, is also
the Chief Executive Officer and President of Aressa. Richard P. Burgoon, Jr.,
the Company's Senior Vice President, Operations, General Counsel and Secretary,
is also the Chief Operating Officer and Secretary of Aressa. Joyce Williams, the
Company's Vice President, Drug Development is also the Vice President,
Regulatory and Clinical Affairs of Aressa.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Laboratory and computer equipment $ 3,659,632 $ 2,641,072
Furniture and fixtures 267,841 185,220
Leasehold improvements 1,714,622 536,096
----------- -----------
5,642,095 3,362,388
----------- -----------
Less accumulated depreciation and amortization (1,376,835) (589,006)
----------- -----------
$ 4,265,260 $ 2,773,382
=========== ===========
</TABLE>
Cost and accumulated amortization of equipment under capital leases totaled
$2,331,000 and $810,000, and $1,931,000 and $331,000 at December 31, 2000 and
1999, respectively.
5. CONVERTIBLE NOTES PAYABLE TO RELATED PARTY
In 1997, the Company issued a convertible note payable to Tripos, Inc.
("Tripos"), a significant stockholder, for the principal amount of $755,000 at
an annual interest rate of 9.5%. In 2000, upon the closing of the Company's
initial public offering, all outstanding principal and accrued interest under
this convertible note was converted into 755,000 shares of common stock.
Interest expense for the years ended December 31, 2000, 1999 and 1998 was
approximately $41,000, $72,000 and $72,000, respectively.
In 1998, the Company issued a convertible note payable to Tripos, for a
principal amount of up to $1,500,000 at an annual interest rate of 9.5%. The
Company received proceeds of $1,125,000 on this note payable in 1998, and
$375,000 in 1999. In 1999, all outstanding principal and accrued interest under
this convertible note payable was converted into 435,840 shares of Series D
redeemable convertible preferred stock. Upon the closing of the Company's
initial public offering, these shares converted into common stock of the
Company.
At the date each note was entered into, the note was convertible into
stock at the then-current fair value of such stock, and therefore there is no
beneficial conversion feature associated with the notes.
43
<PAGE>
6. COMMITMENTS
LEASES
In 1997, the Company leased its facilities located at 6166 Nancy Ridge
Drive in San Diego, California under an operating lease that had an expiration
date in 2004. The Company had an option to buy the facilities during the first
12 months of the lease term for $2,141,309. In 1998, the Company assigned the
option to a publicly traded Real Estate Investment Trust ("REIT") in exchange
for $733,322 in cash. The $733,322 in cash is being recognized on a
straight-line basis as a reduction in the rent expense on the underlying lease.
In addition, the Company signed a new lease with the REIT, which expires in
2013. The lease provides the Company with an option to extend the lease term via
two five-year options. Under the terms of the new lease, effective April 30,
1998, monthly rental payments will be increased on April 30, 2000 and annually
thereafter by 2.75%. In accordance with the terms of the new lease, the Company
is required to maintain restricted cash balances totaling $79,955 on behalf of
the landlord as rent deposits throughout the term of the lease.
In 2000, the Company leased additional facilities located at 6150 Nancy
Ridge Drive in San Diego, California under an operating lease which expires in
2013. In January 2001, the Company purchased this facility for approximately
$5.4 million in cash.
Rent expense was $728,369, $598,903 and $366,505 for the years ended
December 31, 2000, 1999 and 1998, respectively.
Annual future minimum lease obligations as of December 31, 2000 are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, OPERATING LEASES CAPITAL LEASES
------------------------ ---------------- --------------
<S> <C> <C>
2001 $ 663,017 $ 613,883
2002 678,528 613,883
2003 694,465 480,289
2004 611,866 44,875
2005 628,691 --
Thereafter 5,693,571 --
---------------- --------------
Total minimum lease payments $ 8,970,138 1,752,930
================
Less amount representing interest (311,875)
--------------
Present value of minimum lease obligations 1,441,055
Less current portion (480,538)
--------------
Long-term portion of capital lease obligations $ 960,517
==============
</TABLE>
The table above representing annual future minimum operating lease
obligations is exclusive of the 6150 Nancy Ridge Drive facility which we
purchased in January 2001.
Future minimum rentals to be received under non-cancelable subleases as
of December 31, 2000 totaled approximately $36,000.
44
<PAGE>
7. COLLABORATIONS
COLLABORATIVE AGREEMENT WITH ELI LILLY
In April 2000, the Company entered into a research alliance with Eli
Lilly. The collaboration with Eli Lilly will principally focus on the central
nervous system and endocrine therapeutic fields. The collaboration will also
focus on the cardiovascular field and may expand into other therapy classes,
including cancer.
During the collaboration, the Company will pursue an agreed upon
research plan with Eli Lilly that has several objectives. During the term of the
collaboration, the Company will mutually review and select G-Protein Coupled
Receptors (GPCRs) that will become subject to the collaboration. These GPCRs may
be provided either by the Company or by Eli Lilly. All of the Company's existing
CART-activated GPCRs are excluded from the collaboration. The Company and Eli
Lilly will each share their respective knowledge of the GPCRs that become
subject to the collaboration to validate and CART-activate selected receptors.
The Company and Eli Lilly will jointly select a number of proprietary central
nervous system, endocrine and cardiovascular GPCRs for CART-activation, and the
Company will then provide Eli Lilly with enabled high-throughput screens for use
at their screening facilities. During the term of the agreement, the Company
will continue to receive research funding from Eli Lilly for internal resources
committed to the collaboration, which will be augmented by substantial resource
commitments by Eli Lilly. Eli Lilly will be responsible for screening its
chemical compound library using selected CART-activated receptors, for
identifying drug candidates and for the pre-clinical and clinical testing and
development of drug candidates. The Company may receive $1.25 million per
receptor based upon milestone payments in connection with the successful
application of CART to each receptor, and up to an additional $6.0 million based
upon clinical development milestone payments for each drug candidate discovered
using CART. The Company may also receive additional milestone and royalty
payments associated with the commercialization of drugs discovered using CART,
if any. The Company and Eli Lilly may never achieve the discovery, development
or commercialization milestones.
Once the assay development fee has been paid for a CART-activated GPCR,
Eli Lilly will have exclusive rights to screen chemical libraries, discover drug
candidates that target that GPCR, and to develop, register and sell any
resulting products worldwide. The Company retains rights to partner or
independently develop GPCRs that do not become subject to the collaboration.
The term of the collaboration agreement with Eli Lilly is five years.
Either Eli Lilly or the Company can terminate the agreement with or without
cause effective three years after the date of the agreement by giving written
notice prior to the conclusion of the 33rd month after the date of the
agreement. In addition, either party can terminate the agreement at any time if
the other party commits a material breach, and Eli Lilly can terminate the
agreement at any time if, among other reasons, Eli Lilly does not approve
suitable replacements for key employees who leave the Company. The parties will
continue to have various rights and obligations under the agreement after the
agreement is terminated. The extent of these continuing rights and obligations
depends on many factors, such as when the agreement is terminated, by which
party and for what reason. These continuing obligations may include further
research and development efforts by the Company and a variety of payments by Eli
Lilly.
Revenues recognized under the Eli Lilly collaboration was approximately
$5.2 million for the year ended December 31, 2000 consisting of research funding
of approximately $2.9 million, milestone achievements of approximately $2.2
million, and amortization of the up-front payment of $75,000.
45
<PAGE>
7. COLLABORATIONS (CONTINUED)
COLLABORATIVE AGREEMENT WITH TAISHO
In May 2000, the Company entered into an agreement with Taisho to
initiate a research collaboration focused on several GPCRs selected by Taisho in
therapeutic areas of interest to Taisho. Under the terms of the agreement,
Taisho will receive exclusive, worldwide rights to the selected GPCR targets and
to any drug candidates discovered using the activated versions of these
receptors. The Company may receive up to a total of $2.3 million in revenues per
receptor associated with research, development and screening fees. The Company
may also receive clinical development milestones, regulatory approval milestones
and royalties on drug sales, if any.
Revenues recognized under the Taisho collaboration was approximately
$2.4 million for the year ended December 31, 2000 consisting of milestone
achievements of approximately $2.3 million and amortization of the up-front
payment of $80,000.
COLLABORATIVE AGREEMENT WITH FUJISAWA
In January 2000, the Company entered into a collaborative agreement
with Fujisawa, a leading Japan-based pharmaceutical company with significant
drug discovery research efforts. During the collaboration, the Company will
jointly validate up to 13 orphan GPCRs as drug screening targets. The Company
will be responsible for receptor identification, location and regulation, and
will apply its CART technology to GPCRs selected by Fujisawa. The Company will
also seek to validate screening assays based on the selected GPCRs. Fujisawa
will be entitled to screen selected assays against its chemical compound library
to identify drug candidates. Fujisawa will also be responsible for the
pre-clinical and clinical development of any drug candidates that the Company or
Fujisawa discover. The Company may also screen the selected GPCRs using its
in-house chemical library. When Fujisawa selects its first receptor, the Company
will be entitled to receive a one-time initiation fee of $500,000. If the
Company and Fujisawa then achieve various milestones, the Company may receive up
to a maximum of $3.5 million per selected receptor in assay transfer, screening
and exclusivity fees, and up to a maximum of $2.0 million per selected receptor
based upon the filing of one or more investigational new drug applications for
each drug candidate discovered using a CART-activated receptor. The Company may
also receive clinical development milestones, regulatory approval milestones and
royalties on drug sales, if any. The Company and Fujisawa may never achieve
research, development or commercialization milestones under the agreement. The
Company's collaborative agreement with Fujisawa will terminate upon the
expiration of Fujisawa's obligation to make royalty payments under the
agreement, if any. Fujisawa may terminate the agreement at any time by providing
the Company with written notice of their intention to do so and by returning any
proprietary rights they have acquired under the agreement. Additionally, either
party may terminate the agreement for a material breach of the agreement by the
other party. The termination or expiration of the agreement will not affect any
rights that have accrued to the benefit of either party prior to the termination
or expiration.
8. STOCKHOLDERS' EQUITY
PREFERRED STOCK
Concurrent with the closing of the Company's initial public offering in July
2000, all outstanding shares of the Company's preferred stock converted into
12,698,578 shares of common stock.
46
<PAGE>
COMMON STOCK
In June 1997, a total of 1,000,000 shares of common stock were issued
to the founders of the Company at a price of $.0001 per share under founder
stock purchase agreements. The Company issued 50,000 of these shares to an
outside founder, which vest ratably over 50 months. Unvested shares are subject
to repurchase by the Company, at the original purchase price, if the
relationship between the Company and the outside founder terminates. In 1999,
17,500 shares were repurchased.
WARRANTS
During the year ended December 31, 2000, all outstanding warrants were
converted into 410,060 shares of common stock of the Company. At December 31,
2000, no warrants are outstanding.
INCENTIVE STOCK PLANS
The Company's Amended and Restated 1998 Equity Compensation Plan (the
"1998 Plan") provides designated employees of the Company, certain consultants
and advisors who perform services for the Company, and non-employee members of
the Company's Board of Directors with the opportunity to receive grants of
incentive stock options, nonqualified stock options and restricted stock. The
options and restricted stock generally vest 25% a year for four years and are
immediately exercisable up to ten years from the date of grant. At December 31,
2000, 1,500,000 shares of common stock were authorized for issuance under the
1998 Plan.
In 2000, the board of directors adopted and stockholders approved the
2000 Equity Compensation Plan (the "2000 Plan") which provides designated
employees of the Company, certain consultants and advisors who perform services
for the Company, and non-employee members of the Company's Board of Directors
with the opportunity to receive grants of incentive stock options, nonqualified
stock options and restricted stock. The options and restricted stock generally
vest 25% a year for four years and are immediately exercisable up to ten years
from the date of grant. At December 31, 2000, 2,000,000 shares of common stock
were authorized for issuance under the 2000 Plan.
Unvested shares issued to our employees, consultants, advisors and
non-employee members of the Company's Board of Directors pursuant to the
exercise of options are subject to repurchase, at the original purchase price,
in the event of termination of employment or engagement. In the event the
Company elects not to buy back any such unvested shares, the unvested options
will be expensed at their fair value at that point in time. At December 31,
2000, 509,850 shares of common stock issued pursuant to the exercise of options
were subject to repurchase by the Company. In accordance with FAS 128, the
Company has excluded unvested common stock arising from exercised options in its
basic loss per share calculations.
47
<PAGE>
8. STOCKHOLDERS' EQUITY (CONTINUED)
Following is a summary of stock option activity:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
OPTIONS EXERCISE PRICE
------------------------- ------------------
<S> <C> <C>
Balance at December 31, 1997 91,000 $ 0.20
Granted 360,000 $ 0.20
Exercised (43,500) $ 0.20
Balance at December 31, 1998 407,500 $ 0.20
Granted 373,100 $ 0.60
Exercised (90,375) $ 0.33
Canceled (5,625) $ 0.47
-------------------------
Balance at December 31, 1999 684,600 $ 0.40
Granted 1,215,175 $ 11.07
Exercised (809,425) $ 0.46
Canceled (25,875) $ 1.66
-------------------------
Balance at December 31, 2000 1,064,475 $ 12.44
</TABLE>
At December 31, 2000, 1999 and 1998, options to purchase 53,625,
159,500, and 67,000 shares were vested. The weighted-average remaining
contractual life of options outstanding at December 31, 2000, 1999 and 1998 was
9.22, 8.50 and 8.75 years, respectively. At December 31, 2000, 1999 and 1998,
509,850, 63,500 and 32,625 shares of common stock issued upon the exercise of
options were subject to repurchase at the original purchase price at a
weighted-average price of $.51, $.23 and $.20, respectively. At December 31,
2000, 1,483,750 shares were available for future grant. The 1,064,475 options
not exercised at December 31, 2000 have exercise prices ranging from $.20 to
$36.88 and can be exercised at any time; however, unvested shares are subject to
repurchase at the original purchase price if a grantee terminates prior to
vesting. In 2000, the Company granted 516,250 stock options to employees at less
than the market price of the stock on the date of grant. The weighted-average
exercise price was $24.96 and the weighted-average market value on the date of
grant was $29.36.
Pro forma information regarding net income is required by SFAS No. 123
and has been determined as if the Company had accounted for its employee stock
options under the fair value method of that Statement. For options granted
through July 27, 2000, the fair value of options granted were estimated at the
date of grant using the minimum value pricing model with the following
weighted-average assumptions: risk free interest rate of 6.5%, dividend yield of
0%, and weighted-average expected life of the option of five years. For options
granted from July 28, 2000 to December 31, 2000 the fair value of the options
was estimated at the date of grant using the Black-Scholes method for option
pricing with the following weighted-average assumptions: risk free interest rate
of 6.5%, dividend yield of 0%, expected volatility of 90% and weighted-average
expected life of the option of five years.
48
<PAGE>
8. STOCKHOLDERS' EQUITY (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
adjusted pro forma information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2000 1999 1998
------------ ------------ -----------
<S> <C> <C> <C>
Adjusted pro forma net loss $(29,889,840) $(10,250,000) $(3,398,000)
Adjusted pro forma basic net loss per
share $ (2.95) $ (10.07) $ (3.51)
</TABLE>
The effects of applying SFAS No. 123 for providing pro forma
disclosures are not likely to be representative of the effect on reported net
income for future years.
During the years ended December 31, 2000 and 1999, in connection with
the grant of various stock options to employees, the Company recorded deferred
stock compensation totaling approximately $11.6 million and $1.0 million,
respectively, representing the difference between the exercise price and the
estimated market value of the Company's common stock as determined by the
Company's management on the date such stock options were granted. Deferred
compensation is included as a reduction of stockholders' equity and is being
amortized to expense over the vesting period of the options in accordance with
FASB Interpretation No. 28, which permits an accelerated amortization
methodology. During the years ended December 31, 2000 and 1999, the Company
recorded amortization of deferred compensation expense of approximately $4.3
million and $378,000, respectively. At December 31, 2000, total charges to be
recognized in future periods from amortization of deferred stock compensation
are anticipated to be approximately $4.1 million, $2.6 million, $1.1 million and
$99,000 for the years ending December 31, 2001, 2002, 2003 and 2004,
respectively.
During the year ended December 31, 2000, in connection with the grant
of stock options to consultants, the Company recorded deferred stock
compensation totaling approximately $449,000. Deferred compensation for stock
options granted to consultants is periodically remeasured as the underlying
options vest. For the year ended December 31, 2000 the Company recorded
approximately $323,000 in compensation expense relating to options granted to
consultants. At December 31, 2000, total charges to be recognized in future
periods from amortization of deferred stock compensation relating to options
granted to consultants are anticipated to be approximately $126,000.
COMMON SHARES RESERVED FOR ISSUANCE
At December 31, 2000, 1,064,475 shares of common stock are reserved for
issuance upon exercise of common stock options.
9. EMPLOYEE BENEFIT PLAN
The Company established a defined contribution employee retirement plan
(the "401(k) Plan") effective January 1, 1998, conforming to Section 401(k) of
the Internal Revenue Code ("IRC"). All eligible employees may elect to have a
portion of their salary deducted and contributed to the 401(k) Plan up to the
maximum allowable limitations of the IRC. Through March 31, 1999, the Company
matched 50% of each participant's contribution up to the first 6% of annual
compensation.
Effective April 1, 1999, the Company amended the 401(k) Plan,
increasing the Company match to 100% of each participant's contribution up to
the first 6% of annual compensation for all contributions made after April 1,
1999. The Company's matching portion, which totaled $281,595, $148,784 and
$27,065 for the years ended December 31, 2000, 1999 and 1998, respectively,
vests over a five-year period.
49
<PAGE>
10. INCOME TAXES
At December 31, 2000, the Company had federal and California tax net
operating loss carryforwards of approximately $12,158,000 and $12,791,000,
respectively.
Significant components of the Company's deferred tax assets at December
31, 2000 and 1999 are shown below. A valuation allowance of $7,509,000 and
$5,713,000 has been recognized to offset the deferred tax assets as of December
31, 2000 and 1999, respectively, as realization of such assets is uncertain.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 4,991,000 $ 4,787,000
Research and development credits 2,089,000 928,000
Other, net 597,000 129,000
----------- -----------
Net deferred tax assets 7,677,000 5,844,000
Valuation allowance for deferred tax assets (7,509,000) (5,713,000)
----------- -----------
Total deferred tax assets 168,000 131,000
Deferred tax liabilities:
Depreciation (168,000) (131,000)
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
</TABLE>
The federal and California tax net operating loss carryforwards will
begin to expire in 2012 and 2005, respectively, unless previously utilized. The
Company also has federal and California research tax credit carryforwards of
approximately $1,560,000 and $529,000, respectively, which will begin to expire
in 2012 unless previously utilized.
Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual
use of the Company's net operating loss and credit carryforwards could be
limited in the event of cumulative changes in ownership of more than 50%. Such a
change occurred in prior years. However, the Company does not believe such
limitation will have a material effect upon the Company's ability to utilize the
carryforwards.
50
<PAGE>
11. SUBSEQUENT EVENTS
BUILDING PURCHASE
In January 2001, the Company purchased a facility it was leasing along
with an adjoining building that is currently leased to a tenant at 6138-6150
Nancy Ridge Drive in San Diego, California. The Company paid cash of $5.4
million and will amortize the cost over the building's useful life, estimated to
be 20 years. The Company assumed the lease with the tenant, of which the term of
the lease runs through August 31, 2001. The tenant has paid all rents through
the expiration of the lease.
AMENDMENT TO COLLABORATIVE AGREEMENT WITH TAISHO
In January 2001, the Company signed an amendment expanding its original May 2000
agreement with Taisho whereby Taisho was granted world-wide rights to the
Company's 18-F Program, an obesity orphan receptor target and small molecule
modulators. In accordance with the amendment, Taisho will make a one-time
payment in 2001 to the Company for the 18-F Program based upon work already
completed by the Company. In addition, the Company may receive additional
milestone and research funding payments and royalties on drug sales, if any.
ACQUISITION
In December 2000, the Company signed a binding letter of intent and
memorandum of agreement to acquire all of the outstanding capital stock of
Bunsen Rush Laboratories, Inc. (Bunsen Rush), a privately held research-based
company that provides receptor screening for the pharmaceutical and
biotechnology industries using its proprietary and patented Melanophore
Technology. The purchase price was $15.0 million in cash. On February 15, 2001
the Company completed its acquisition of Bunsen Rush pursuant to an Agreement
and Plan of Merger dated February 15, 2001. The acquisition was effected in the
form of a merger of Bunsen Rush into BRL Screening, Inc., a newly formed
wholly-owned subsidiary of the Company.
51
<PAGE>
SUPPLEMENTARY FINANCIAL DATA
FINANCIAL INFORMATION BY QUARTER (UNAUDITED)
<TABLE>
<CAPTION>
2000 for quarter ended Dec. 31 Sept 30 June 30 March 31 Year
- ------------------------------------- ---------------- --------------- ---------------- -------------- -------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 4,079,999 $ 2,314,126 $ 1,289,271 $ -- $ 7,683,396
Amortization of non-cash deferred
compensation 1,390,494 1,123,358 1,419,565 409,479 4,342,896
Net income (loss) 1,064,906 (1,418,594) (2,886,082) (3,122,200) (6,361,970)
Non-cash preferred stock charge -- -- (8,203,505) (14,187,563) (22,391,068)
Net income (loss) applicable to
common stockholders 1,064,906 (1,418,594) (11,089,587) (17,309,763) (28,753,038)
Basic and diluted earnings (loss)
per share 0.05 (0.09) (8.47) (15.92) (2.84)
Pro forma earnings (loss) per share
(0.07) (0.81) (1.76) (1.65)
2000 for quarter ended Dec. 31 Sept 30 June 30 March 31 Year
- ------------------------------------- ---------------- --------------- ---------------- -------------- -------------------
Revenues $ -- $ -- $ -- $ -- $ --
Amortization of non-cash deferred 101,095 97,628 179,386 -- 378,109
compensation
Net loss (2,979,060) (2,734,105) (2,526,550) (1,998,235) (10,237,950)
Non-cash preferred stock charge
-- -- -- -- --
Net loss applicable to common
stockholders (2,979,060) (2,734,105) (2,526,550) (1,998,235) (10,237,950)
Basic and diluted loss per share (2.84) (2.65) (2.48) (2.03) (10.05)
Pro forma loss per share (0.37) (0.34) (0.32) (0.31) (1.29)
</TABLE>
52
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is incorporated herein by
reference from the information under the caption "Election of Directors" on
pages 2 through 4 and the caption "Compensation And Other Information
Concerning Officers, Directors And Certain Stockholders" on pages 9 and 10
and the caption "Section 16(a) Beneficial Ownership Reporting Compliance" on
pages 18 and 19 contained in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated herein by
reference from the information under the caption "Compensation And Other
Information Concerning Officers, Directors And Certain Stockholders" on pages
9 through 13 and on page 19 under the caption "Compensation Committee
Interlocks and Insider Participation" contained in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated herein by
reference from the information under the caption "Security Ownership Of Certain
Beneficial Owners And Management" on pages 17 and 18 contained in the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated herein by
reference from the information under the caption "Compensation And Other
Information Concerning Officers, Directors And Certain Stockholders"
specifically under the subheading "Certain Relationships and Related
Transactions" on pages 19 and 20 contained in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(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 notes
to the Financial Statements included in this Report on Form 10-K.
3. Exhibits
3.1+++ Fourth Amended and Restated Certificate of Incorporation of the
Company, filed August 1, 2000.
3.2+ + By-laws of the Company.
53
<PAGE>
4.1+ + Form of common stock certificates.
10.1+ # Arena Pharmaceuticals, Inc. 1998 Equity Compensation Plan.
10.2+ # Arena Pharmaceuticals, Inc. 2000 Equity Compensation Plan.
10.3+ # Services Agreement, dated May 26, 1999, by and between
ChemNavigator.com, Inc. and Jack Lief.
10.4+ # Services Agreement, dated May 26, 1999, by and between
ChemNavigator.com, Inc. and Richard P. Burgoon, Jr.
10.5+ # Services Agreement, dated May 26, 1999, by and between
ChemNavigator.com, Inc. and Robert Hoffman.
10.6+ Lease, dated as of April 30, 1998, by and between ARE - 6166 Nancy
Ridge, LLC and Arena Pharmaceuticals, Inc.; as amended by First
Amendment to Lease dated as of June 30, 1998.
10.7*** Agreement, effective May 29, 2000, by and between Arena
Pharmaceuticals, Inc. and Taisho Pharmaceutical Co., Ltd.
10.8*** First Amendment effective January 24, 2001 by and between Arena
Pharmaceuticals, Inc. and Taisho Pharmaceuticals, Co., Ltd.
10.9=** License Agreement, effective as of January 23, 1998 by and between
Arena Pharmaceuticals, Inc. and SSP Co., Ltd., as amended by Addendum
No. 1, dated April 5, 1999.
10.10**++ Research Collaboration and License Agreement, effective as of April
14, 2000, by and between Arena Pharmaceuticals, Inc. and Eli Lilly and
Company.
10.11**++ Agreement, effective as of January 24, 2000, by and between Arena
Pharmaceuticals, Inc. and Fujisawa Pharmaceutical Co., Ltd.
10.12+ Binding Letter of Intent & Memorandum of Agreement, dated as of April
3, 2000, between Lexicon Genetics, Inc. and Arena Pharmaceuticals,
Inc.
10.13++ Agreement, effective as of September 15, 1999, by and between Arena
Pharmaceuticals, Inc. and Neurocrine Biosciences, Inc.
10.14 Purchase and Sale Agreement effective December 1, 2000 by and between
Limar Realty Corp. #13 and Arena Pharmaceuticals, Inc.
10.15* Agreement and Plan of Merger, dated February 15, 2001 by and among
Arena Pharmaceuticals, Inc., BRL Screening, Inc., Bunsen Rush
Laboratories, Inc., and Ethan A. Lerner, Michael R. Lerner, Peter M.
Lerner, David Unett and Alison Roby-Shemkovitz.
21.1 Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney
* Incorporated by reference to the Company's Form 8-K filed on February 20,
2001.
** Confidential treatment has been granted for portions of this document.
54
<PAGE>
*** Confidential treatment has been requested for portions of this document.
= Incorporated by reference to the Company's Registration Statement on Form
S-1, filed April 28, 2000; SEC File No. 333-35944.
+ Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended filed June 22, 2000; SEC File No. 333-35944.
++ Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended filed July 19, 2000; SEC File No. 333-35944.
+++ Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended filed July 25, 2000; SEC File No. 333-35944.
# Indicates management contract or compensatory plan.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three months
ended December 31, 2000.
(c) Exhibits
See item 14(a) above.
(d) Financial Statement Schedules
See Item 14 (a) (2) above
55
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on March
15, 2001.
Arena Pharmaceuticals, Inc.
A Delaware Corporation
By: /s/ Jack Lief
--------------
Jack Lief
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 indicated on March 15, 2001.
<TABLE>
<CAPTION>
Signatures Title
- ---------- -----
<S> <C>
By: /s/ Jack Lief President, Chief Executive Officer
------------------------------- and Director
Jack Lief
By: /s/ Robert Hoffman Vice President, Finance, Principal
------------------------------- Financial Officer and Principal Accounting Officer
Robert Hoffman
By: /s/ Dominic P. Behan Vice President, Research and
------------------------------- Director
Dominic P. Behan, Ph.D.
By: /s/ Derek T. Chalmers Vice President, Research and
------------------------------- Director
Derek T. Chalmers, Ph.D.
By: /s/ John P. McAlister, III
-------------------------------
John P. McAlister, III, Ph.D. Director
By: /s/ Michael Steinmetz
-------------------------------
Michael Steinmetz, Ph.D. Director
By: /s/ Stefan Ryser
-------------------------------
Stefan Ryser, Ph.D. Director
</TABLE>
56
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
3.1+ + + Fourth Amended and Restated Certificate of
Incorporation of the Company, filed August 1, 2000
3.2+ + By-laws of the Company
4.1+ + Form of common stock certificates
10.1+ # Arena Pharmaceuticals, Inc. 1998 Equity Compensation
Plan
10.2+ # Arena Pharmaceuticals, Inc. 2000 Equity Compensation
Plan
10.3+ # Services Agreement, dated May 26, 1999, by and
between ChemNavigator.com, Inc. and Jack Lief
10.4+ # Services Agreement, dated May 26, 1999, by and
between ChemNavigator.com, Inc. and Richard P.
Burgoon, Jr.
10.5+ # Services Agreement, dated May 26, 1999, by and
between ChemNavigator.com, Inc. and Robert Hoffman
10.6+ Lease, dated as of April 30, 1998, by and between ARE
- 6166 Nancy Ridge, LLC and Arena Pharmaceuticals,
Inc. as amended by First Amendment to Lease dated as
of June 30, 1998
10.7*** Agreement, effective May 29, 2000, by and between
Arena Pharmaceuticals, Inc. and Taisho Pharmaceutical
Co., Ltd.
10.8*** First Amendment effective January 24, 2001 by and
between Arena Pharmaceuticals, Inc. and Taisho
Pharmaceutical, Co., Ltd.
10.9=** License Agreement, effective as of January 23, 1998
by and between Arena Pharmaceuticals, Inc. and SSP
Co., Ltd., as amended by Addendum No. 1, dated April
5, 1999
10.10**++ Research Collaboration and License Agreement,
effective as of April 14, 2000, by and between Arena
Pharmaceuticals, Inc. and Eli Lilly and Company
10.11**++ Agreement, effective as of January 24, 2000, by and
between Arena Pharmaceuticals, Inc. and Fujisawa
Pharmaceutical Co., Ltd.
10.12+ Binding Letter of Intent & Memorandum of Agreement,
dated as of April 3, 2000, between Lexicon Genetics,
Inc. and Arena Pharmaceuticals, Inc.
10.13++ Agreement, effective as of September 15, 1999, by and
between Arena Pharmaceuticals, Inc. and Neurocrine
Biosciences, Inc.
10.14 Purchase and Sale Agreement effective December 1,
2000 by and between Limar Realty Corp. #13 and Arena
Pharmaceuticals, Inc.
10.15* Agreement and Plan of Merger, dated February 15, 2001
by and among Arena Pharmaceuticals, Inc., BRL
Screening, Inc., Bunsen Rush Laboratories, Inc., and
Ethan A. Lerner, Michael R. Lerner, Peter M. Lerner,
David Unett and Alison Roby-Shemkovitz.
<PAGE>
21.1 Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney
* Incorporated by reference to the Company's Form 8-K filed on February 20,
2001.
** Confidential treatment has been granted for portions of this document.
*** Confidential treatment has been requested for portions of this document.
= Incorporated by reference to the Company's Registration Statement on Form
S-1, filed April 28, 2000; SEC File No. 333-35944.
+ Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended filed June 22, 2000; SEC File No. 333-35944.
++ Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended filed July 19, 2000; SEC File No. 333-35944.
+++ Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended filed July 25, 2000; SEC File No. 333-35944.
# Indicates management contract or compensatory plan.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.7
<SEQUENCE>2
<FILENAME>a2041581zex-10_7.txt
<DESCRIPTION>EXHIBIT 10.7
<TEXT>
<PAGE>
EXHIBIT 10.7
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED
FOR THE PORTIONS MARKED [***]
AGREEMENT BY AND BETWEEN
ARENA PHARMACEUTICALS, INC.
AND
TAISHO PHARMACEUTICAL CO., LTD.
TABLE OF CONTENTS
PAGE
Article I. Definitions 1
Article II. GPCR Selection By Taisho; Technology Access Fee 5
Article III. Arena Activities 6
Article IV. Research and Development Fees 7
Article V. License Grant 8
Article VI. Screening By Arena 9
Article VII. Clinical Development of CART-TM- Identified Compound 10
Article VIII. Marketing Authorization 12
Article IX. Clinical Development of Subsequent Compounds 13
Article X. Royalty Payments 15
Article XI. Payment Arrangement 16
Article XII. Confidentiality 16
Article XIII. Patent Infringement And Enforcement 17
Article XIV. Representations And Warranties 18
Article XV. Indemnity 18
Article XVI. Termination 19
Article XVII. Relationship of the Parties 20
Article XVIII. Miscellaneous Provisions 20
Signature Blocks 23
--PLEASE NOTE--
Provisions Within This Agreement Are Deemed "CONFIDENTIAL" In Accordance
With The Terms of Article XII.
Reviewers are advised to confirm with their attorney
as to any obligations and/or requirements regarding
review of this Agreement
<PAGE>
AGREEMENT
This Agreement ("Agreement") is effective as of May 29, 2000
("Effective Date") by and between ARENA PHARMACEUTICALS, INC., having a place of
business at 6166 Nancy Ridge Drive, San Diego, California, 92121 USA ("Arena"),
and TAISHO PHARMACEUTICAL CO., LTD., having a place of business at 24-1, Takata
3-Chome, Toshimaku, Tokyo 170-8633, JAPAN ("Taisho").
WHEREAS, Taisho is a pharmaceutical company focused on contributing to
the maintenance and improvement of consumer's health by creating and providing
quality drugs, related healthcare products and information services that satisfy
consumers with various lifestyles;
WHEREAS, Arena is a biopharmaceutical organization focused on the
discovery and development of innovative therapeutics;
WHEREAS, Arena and Taisho each desire to enter into this Agreement on
the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, Arena and Taisho hereby agree as follows:
ARTICLE I
DEFINITIONS
Unless otherwise specifically provided herein, the following terms
shall have the following meanings:
"AFFILIATE" when used with reference to a specified person or entity, means any
person or entity directly or indirectly controlling, controlled by or under
common control with the specified person or entity, while "control" in this
context means the direct or indirect ownership of at least 50% of the
outstanding voting securities of a person or entity.
"ANNUAL" means the period between January 1 and December 31, inclusive.
"ARENA ACTIVATION TECHNOLOGY" means an Arena proprietary approach, referred to
by Arena as "CART Technology", to identifying, selecting and altering a
region(s) within a G Protein Coupled Receptor that, when altered, leads to or
enhances ligand-independent constitutive activation of the altered receptor.
"ARENA LIBRARY COMPOUNDS" means approximately 80,000 Library Compounds
synthesized by Arena prior to the Effective Date or during the term of this
Agreement, or obtained by Arena from a Third Party prior to the Effective Date
or during the term of this Agreement, excluding: (i) any compound(s) licensed by
Arena to any Third Party prior to Screening of any Taisho Activated Receptor,
and/or (ii) any compound(s) that is the subject of any negotiation between Arena
and a Third Party prior to Screening of any Taisho Activated Receptor.
"ARENA PATENT RIGHTS" means all present and/or future patents (including
inventor's certificates) and all present and/or future applications (including
provisional applications) therefor throughout the world as the case may be, and
substitutions, extensions, reissues,
1
CONFIDENTIAL
<PAGE>
renewals, divisions, continuations, or continuation-in-part thereof or therefor,
owned or controlled (either fully or partially) by Arena, or under which Arena
may grant licenses or sublicenses, to the extent they are directed to (1) Arena
Activation Technology applied to Taisho Selected GPCR(s) and/or (2) Taisho
Activated Receptor(s) and/or (3) CART Identified Compound(s) and/or (4) Drug
Product(s) and/or (5) Screening Assay(s).
"ARENA SCREENING" has the same meaning as set forth in Section 6.2(a) of this
Agreement.
"BACK-UP COMPOUND" means, as to EACH Taisho Activated Receptor, a subsequent
CART Identified Compound developed by Taisho and/or Taisho's Licensee(s)
subsequently to the preceding CART Identified Compound precedingly developed for
the same or similar therapeutic indication as the preceding CART Identified
Compound, that is developed after the discontinuation of the development of the
preceding CART Identified Compound or that is reserved at the lower stage of the
development than that of the preceding CART Identified Compound or that is
simultaneously developed with the preceding CART Identified Compound with the
intent to commercialize the subsequent CART Identified Compound only in the
event the development of the preceding CART Identified Compound is discontinued.
For the purpose of determination of such intent, a subsequent CART Identified
Compound shall be deemed Subsequent Compound but not Back-Up Compound if Phase 3
Clinical Study thereof is started prior to the discontinuation of the
development of the preceding CART Identified Compound.
"BEST REASONABLE COMMERCIAL EFFORTS" means efforts to achieve a designated
objective, which efforts are based upon reasonably prudent business factors and
considerations.
"CART IDENTIFIED COMPOUND(S)" means a compound, and/or a Derivative of a CART
Identified Compound, that has been identified as a modulator of a Taisho
Activated Receptor by Taisho or Taisho's Licensee(s) during the term of this
Agreement or by Arena Screening.
"CONTINUING UTILIZATION FEE" has the same meaning as set forth in Section 5.5 of
this Agreement.
"DERIVATIVE" of a first compound means a compound having the same core structure
as the first compound, that has been synthesized or conceived, and then
subsequently reduced to practice by Taisho, Taisho's Licensee(s) or Arena during
the term of this Agreement.
"DRUG PRODUCT" means a therapeutic product comprising a CART Identified
Compound.
"DRUG PRODUCT REVENUE" [**************************************************
******************************************************************************]
2
CONFIDENTIAL
<PAGE>
"EFFECTIVE DATE" means the date first above written in this Agreement.
"ENDOGENOUS" means naturally occurring.
"EUROPEAN COUNTRY" means any of the following countries: United Kingdom,
Germany, France, Italy, and Spain.
"FDA" means the United States Food and Drug Administration.
"G PROTEIN COUPLED RECEPTOR" and "GPCR" means an Endogenous cell-surface
receptor defined by having three (3) intracellular loops, three (3)
extracellular loops, an amino terminus and a carboxy terminus.
"INFORMATION" has the same meaning as set forth in Section 12.1 of this
Agreement.
"IND" has the same meaning as set forth in 21 C.F.R. Section 312.20, including
any and all amendments, modifications or changes as may be made thereto in the
future, or the equivalent thereof in any applicable country within the
Territory.
"LIBRARY COMPOUNDS" means chemical compounds.
"MARKETING AUTHORIZATION" means the granting or authorization, by an appropriate
governmental agency, to commercialize a pharmaceutical product; by way of
example, the FDA is an appropriate governmental agency.
"MEASURED RESPONSE" when used in reference to the phrase "Taisho Activated
Receptor" means a signal measured based upon an assay end-point used to assess
the signal.
"NOTICE" has the same meaning as set forth in Section 18.11 of this Agreement.
"PHASE 2 CLINICAL STUDY" has the same meaning as set forth in 21 C.F.R.
Section 312.21(b), including any and all amendments, modifications or changes
thereto as may be made thereto in the future, or the equivalent thereof, in any
applicable country within the Territory.
"PHASE 3 CLINICAL STUDY" has the same meaning as set forth in 21 C.F.R.
Section 312.21(c), including any and all amendments, modifications or
changes thereto as may be made thereto in the future, or the equivalent
thereof, in any applicable country within the Territory.
"PARTY" means either Arena or Taisho, as the case may be; "Parties" means both
Arena and Taisho.
"REGULATORY AGENCY" includes, but is not be limited to, FDA, or similar
regulatory bodies in the Territory.
"SCREENING" means the process of contacting a chemical compound with a Taisho
Activated Receptor.
"SCREENING ASSAY" means an Arena assay approach for Screening that has been
validated based upon Successful Screening of a Taisho Activated Receptor.
"SCREENING ASSAY NOTICE" has the same meaning as set forth in Section 3.2 of
this Agreement.
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"SCREENING REQUEST" has the same meaning as set forth in Section 6.1 of this
Agreement.
"SUBSEQUENT COMPOUND" means, as to EACH Taisho Activated Receptor, a subsequent
CART Identified Compound developed by Taisho and/or Taisho's Licensee(s)
subsequently to the preceding CART Identified Compound preceedingly developed
for thesame or similar therapeutic indication as the preceding CART Identified
Compound, that is developed after the receipt of Marketing Authorization for the
preceding CART Identified Compound or that is simultaneously developed with the
preceding CART Identified Compound with the intent to commercialize both
Compounds. For the purpose of determination of such intent, a subsequent CART
Identified Compound shall be deemed Subsequent Compound if Phase 3 Clinical
Study thereof is started prior to the launch of the preceding CART Identified
Compound.
"SUCCESSFUL SCREENING" when used in conjunction with the phrase "Taisho
Activated Receptor" means that the results of the Screening has been positive
whereby at least one molecule that has been contacted with the Taisho Activated
Receptor reduces the Measured Response of the Taisho Activated Receptor by at
least two (2) standard deviations from the mean response of a screening plate
that includes that compound.
"TAISHO ACTIVATED RECEPTOR" means a Taisho Selected GPCR to which the Arena
Activation Technology has been applied.
"TAISHO ACTIVATED RECEPTOR NOTICE" has the same meaning as set forth in
Section 3.1 of this Agreement.
"TAISHO DEVELOPMENT" as applied to the phrase "CART Identified Compound", means
that Taisho management has approved research and development of a CART
Identified Compound with the intent of developing data based upon such CART
Identified Compound for inclusion within an IND.
"TAISHO'S LICENSEE(S)" means any person or entity, inclusive of Taisho's
Affiliates, to which Taisho has granted sublicenses as referred to in Article V.
"TAISHO SELECTED GPCR" has the same meaning as set forth in Section 2.1 of this
Agreement.
"TECHNICAL INFORMATION" means all information, trade secrets, know-how, methods
of manufacture, processes, documents and materials related to Taisho Activated
Receptor(s) and/or Screening Assay(s), and other proprietary information,
whether patentable or unpatentable, related to Taisho Activated Receptor(s)
and/or Screening Assay(s), including but not limited to, improvements, that are
owned, possessed by, or licensed to Arena, whether now existing or hereafter
developed or acquired during the term of this Agreement.
"TECHNOLOGY" means Arena Patent Rights and Technical Information.
"TERRITORY" means the world.
"THIRD PARTY" means any person or entity other than Taisho, Taisho's Licensee(s)
and Arena.
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ARTICLE II
GPCR SELECTION BY TAISHO;
TECHNOLOGY ACCESS FEE
2.1 Subject to the terms and conditions of this Agreement, Taisho shall
be entitled to select up to a maximum of [**** (**)] GPCRs for inclusion in this
Agreement (each GPCR a "Taisho Selected GPCR"). The selection of any particular
GPCR for designation as a Taisho Selected GPCR shall be made exclusively by
Taisho, subject to the following:
(a) the selection by Taisho of up to [**** (**)] GPCRs, each
for designation as a Taisho Selected GPCR, shall be completed prior to the
expiration of the [*****] anniversary of the Effective Date; and
(b) during the selection period set forth above, when Taisho
requests information from Arena regarding GPCRs of possible interest to Taisho,
Arena shall provide Taisho with supportive information for Taisho's selection of
GPCRs and, in the event such GPCR(s) that have been activated by Arena
Activation Technology or that are intended to be activated by Arena Activation
Technology are available for Taisho's selection, Arena shall inform Taisho of
such GPCR(s) as candidates for Taisho Selected GPCR; and
(c) in the event that Taisho selects a GPCR that, as of the
date of such selection by Taisho, is the subject of another agreement or
obligation between Arena and a Third Party, such GPCR shall not be designated as
a Taisho Selected GPCR, and Arena shall provide Notice to Taisho that the
proposed GPCR can not be designated as a Taisho Selected GPCR.
2.2 Taisho Selected GPCRs shall be attached hereto as APPENDIX A, which
shall be updated when Taisho has selected a GPCR that is designated as a Taisho
Selected GPCR. As of the Effective Date, Taisho has selected [**** (**)] GPCR
for designation as a Taisho Selected GPCR. Accordingly, Taisho shall be
permitted to select up to [**** (**)] additional GPCRs for designation as Taisho
Selected GPCRs prior to the expiration of the [******] anniversary of the
Effective Date.
2.3 In consideration of the rights granted under this Article II,
within thirty (30) days of the Effective Date, Taisho shall provide to Arena a
one-time, non-refundable, non-creditable fee of
[*************************** (*******)].
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ARTICLE III
ARENA ACTIVITIES
3.1 DEVELOPMENT OF TAISHO ACTIVATED RECEPTOR. Subject to the terms and
conditions of this Agreement, Arena agrees to use Best Reasonable Commercial
Efforts to apply Arena Activation Technology to EACH Taisho Selected GPCR to
establish a Taisho Activated Receptor. Upon creation of EACH Taisho Activated
Receptor, Arena shall provide Notice to Taisho ("Taisho Activated Receptor
Notice"), and such Taisho Activated Receptor Notice shall include data developed
by Arena evidencing that the Taisho Activated Receptor is constitutively active.
3.2 DEVELOPMENT OF SCREENING ASSAY. Subject to the terms and conditions
of this Agreement, Arena agrees to use Best Reasonable Commercial Efforts to
develop a Screening Assay incorporating EACH Taisho Activated Receptor. Upon
development of each Screening Assay, Arena shall provide Notice to Taisho
("Screening Assay Notice").
3.3 TRANSFER OF TAISHO ACTIVATED RECEPTOR AND TECHNICAL INFORMATION.
Subject to the terms and conditions of this Agreement, within thirty (30) days
of each Screening Assay Notice, Arena shall transfer to Taisho the applicable
Taisho Activated Receptor in the form and quantity agreed to in advance by the
Parties and a copy of all additional Technical Information owned or possessed by
Arena then applicable to such Taisho Activated Receptor and Screening Assay
incorporating such Taisho Activated Receptor. In the event the Successful
Screening using the Taisho Activated Receptor cannot be measured by Taisho in
accordance with the procedures and protocols used by Arena and provided to
Taisho as part of the applicable Technical Information, Arena shall cooperate
with Taisho in studying the cause and, if any defect in the Taisho Activated
Receptor or the Screening Assay transferred by Arena to Taisho is detected and
determined to have been caused by or effected by the activities of Arena, Arena
shall at its costs and expenses repair the defect or transfer a substitute
Taisho Activated Receptor and Screening Assay incorporating such substituted
Taisho Activated Receptor to Taisho.
3.4 ADDITIONAL SUPPLY. When requested by Taisho in writing, Arena shall
use its Best Reasonable Commercial Efforts to supply additional quantity of the
Taisho Activated Receptor within the time period requested by Taisho. If so
agreed by the Parties in writing, Arena shall supply additional Technical
Information owned or possessed by Arena to enable Taisho to reproduce and/or
increase the Taisho Activated Receptor for the purpose of the Screening.
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ARTICLE IV
RESEARCH AND DEVELOPMENT FEES
4.1 RESEARCH AND DEVELOPMENT FEES. Taisho shall pay to Arena as follows
as research and development fees for Arena's activities set forth in Article
III.
(a) Within thirty (30) days after receipt of EACH Taisho
Activated Receptor Notice, Taisho shall provide Arena with a research and
development fee of [*************************** (*******)]. The Parties
acknowledge and agree that the maximum amount that Taisho would be required to
pay to Arena under this Section 4.1 (a) is
[****************************************** (**********)] in the event that
Taisho selects up to [****] (**)]GPCRs for designation as Taisho Selected GPCRs
prior to the second anniversary of the Effective Date, and each Taisho Selected
GPCR is the subject of an Activation Receptor Notice. As to [******** (**)
Taisho Selected GPCR selected as of the Effective Date, Taisho Activated
Receptor thereof has been established as of the Effective Date and the payment
under this Section 4.1 (a) shall be due and payable within thirty (30) days of
the Effective Date.
(b) Within thirty (30) days after receipt of EACH Taisho
Activated Receptor and Screening Assay, Taisho shall provide Arena with a
research and development fee of [*************************** (*******)]. The
Parties acknowledge and agree that the maximum amount that Taisho would be
required to pay to Arena under this Section 4.1 (b) is
[*********************************** (*******)] in the event that Taisho selects
[***** (**)] GPCRs for designation as Taisho Selected GPCRs prior to the
[*******] anniversary of the Effective Date, and each Taisho Selected GPCR is
the subject of a Screening Assay Notice.
(c) As to EACH Taisho Activated Receptor, within thirty (30)
days after the earlier of (i) completion of the Screening by Taisho of
approximately [*****] Library Compounds or (ii) completion of the Arena
Screening, Taisho shall provide Arena with a research and development fee of
[*************************** (*******)]. The Parties acknowledge and agree that
the maximum amount that Taisho would be required to pay to Arena under this
Section 4.1 (c) is [*************************** (*******)] in the event that
Taisho selects [**** (**)] GPCRs for designation as Taisho Selected GPCRs prior
to the [*****] anniversary of the Effective Date, and each Taisho Selected GPCR
is the subject of a Screening Assay Notice, and each Taisho Activated Receptor
is the subject of the Screening by Taisho of approximately [****] Library
Compounds or the Arena Screening.
4.2 PAYMENT UNDERSTANDING. Taisho acknowledges and agrees that any
payment due under this Article IV shall be made as required and that once made,
such payment shall be non-refundable and non-creditable. Within 30 days of the
receipt by Arena of each payment, Arena shall provide to Taisho a statement with
supportive documents sufficiently verifying the costs and expenses incurred by
Arena regarding the corresponding research and development activities.
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ARTICLE V
LICENSE GRANT
5.1 ARENA LICENSE. Arena hereby grants to Taisho the following with
respect ONLY to the Taisho Activated Receptor that is the subject of the
Screening Assay Notice:
(a) an exclusive right and license under the Technology,
exclusive even as to Arena but subject to the provisions of Section 5.5 and
Article VI, to use, have used, sell, have sold, import, have imported, further
develop, improve and otherwise exploit in any manner the Taisho Activated
Receptor, for the purpose of identification of CART Identified Compound(s) in
the Territory including the right to sublicense the rights granted to Taisho by
Arena hereunder, and
(b) an exclusive right and license under the Technology,
exclusive even as to Arena, to develop, manufacture, have manufactured, promote,
market, sell and distribute CART Identified Compound(s) and/or Drug Product(s)
in the Territory including the right to sublicense the rights granted to Taisho
by Arena hereunder.
5.2 SUBLICENSE. In the event that Taisho sublicenses any right granted
by Arena hereunder, Taisho warrants that it shall notify Arena within one (1)
month of the effective date of any such sublicense agreement; at all times
during the term of this Agreement, Taisho shall have an affirmative obligation
to make any such payments to Arena that Taisho would be required to make to
Arena hereunder, irrespective of the financial situation of any such Taisho's
Licensee(s).
5.3 IMPROVEMENTS.
(a) Taisho shall notify Arena, in writing, of any improvement
discovered or developed by Taisho and/or Taisho's Licensee(s) related to the
Technology.
(b) Arena shall notify Taisho, in writing, of any improvement
discovered or developed by Arena related to the Technology within one (1) month
of the discovery or development of such improvement.
(c) The obligations of Sections 5.3(a) and (b) of this
Agreement shall be continuing throughout the term of this Agreement. During the
term of this Agreement, Taisho shall be entitled to use any such improvement in
accordance with the provisions of Sections 5.1 and 5.2 of this Agreement.
(d) Subject to Section 5.1 and except as specifically provided
for in Section 5.3(e) hereof, Arena shall have a royalty-free, non-exclusive
right and license to use all improvements of Taisho and/or Taisho's Licensee(s)
referred to in Section 5.3(a) hereof and to disclose and sublicense the same to
its licensees, if any.
(e) Both Parties acknowledge and agree that Arena has
exclusive ownership of the Technology existing as of the Effective Date and any
improvement thereof hereafter discovered or developed by Arena and that Taisho
has exclusive ownership of or control over any improvement of the Technology
hereafter discovered or developed by Taisho and/or Taisho's Licensee(s).
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5.4 NO WARRANTY. NEITHER PARTY MAKES ANY REPRESENTATION THAT ANY TAISHO
SELECTED GPCR OR TAISHO ACTIVATED RECEPTOR OR SCREENING ASSAY TRANSFERRED BY
ARENA TO TAISHO, OR USED BY ARENA ON BEHALF OF TAISHO IN ACCORDANCE WITH THIS
AGREEMENT, WILL NOT INFRINGE ANY PATENT, COPYRIGHT, TRADEMARK OR OTHER
PROPRIETARY RIGHT OF ANY OTHER PERSON. NEITHER PARTY MAKES ANY WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR ANY OTHER WARRANTY,
EXPRESS OR IMPLIED, WITH RESPECT TO ANY TAISHO SELECTED GPCR OR TAISHO ACTIVATED
RECEPTOR OR SCREENING ASSAY, AS THE CASE MAY BE.
5.5 CONTINUING UTILIZATION FEE.
(a) For EACH Taisho Activated Receptor, Taisho shall retain
exclusive rights, for a period Taisho continues the identification and/or
development of CART Identified Compound(s) with its Best Reasonable Commercial
Efforts, in and to such Taisho Activated Receptor when Taisho provides Arena
with a Continuing Utilization Fee of [*************************** (*******)]
before the expiration of [**************** (*******)] days from the date of
transfer of such Taisho Activated Receptor to Taisho ("Transfer Anniversary
Date").
(b) The Parties acknowledge and understand that once made,
EACH Continuing Utilization Fee shall be non-refundable and non-creditable, and
that the maximum amount that Taisho would be required to pay to Arena under this
Section 5.5 is [********************************************* (*******)] in the
event that (i) Taisho selects [****** (***)] GPCRs for designation as Taisho
Selected GPCRs prior to the [******] anniversary of the Effective Date, whereby
each Taisho Selected GPCR is the subject of a Screening Assay Notice, and (ii)
Taisho provides a Continuing Utilization Fee for each Taisho Activated Receptor,
and that, when Taisho does not provide a Continuing Utilization Fee for a Taisho
Activated Receptor, the right and license granted to Taisho under Section 5.1(a)
shall be converted to non-exclusive right and license after the Transfer
Anniversary Date.
ARTICLE VI
SCREENING BY ARENA
6.1 TAISHO SCREENING REQUEST. During the term of this Agreement, Taisho
is entitled to provide Notice to Arena requesting that Arena conduct Screening
efforts for Taisho using a Taisho Activated Receptor, Screening Assay and Arena
Library Compounds ("Screening Request").
6.2 SCREENING FEE. With EACH Screening Request made by Taisho under
Section 6.1 of this Agreement, Taisho shall simultaneously provide to Arena a
Screening Fee of [*************************** (*******)]. Upon receipt of such
Screening Fee, the following shall apply:
(a) For EACH Taisho Activated Receptor and its corresponding
Screening Assay, Arena, using Best Reasonable Commercial Efforts, shall utilize
the Taisho Activated Receptor and the Screening Assay for Screening using Arena
Library Compounds ("Arena Screening").
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(b) For EACH Taisho Activated Receptor subject to Arena
Screening, Arena shall use Best Reasonable Commercial Efforts to identify at
least [*** (**)] CART Identified Compound.
(c) The Parties acknowledge and understand that once made,
EACH Screening Fee shall be non-refundable and non-creditable, and that the
maximum amount that Taisho would be required to pay to Arena under this Section
6.2 is [************************ (*******)] in the event that Taisho provides
[**** (**)] Screening Requests to Arena.
6.3 TAISHO SCREENING. In the event that Taisho does not provide a
Screening Request to Arena for any, or all, Taisho Activated Receptor(s), Taisho
shall use Best Reasonable Commercial Efforts to conduct Screening of
approximately [****] Library Compounds obtained by Taisho using the Taisho
Activated Receptor. When requested by Taisho in writing, Arena shall use its
Best Reasonable Commercial Efforts to assist Taisho in setting-up the Screening
Assays at Taisho's facility within the time period(s) requested by Taisho.
Taisho agrees to reimburse Arena for the reasonable out-of-pocket costs
associated with the assistance of Taisho with its Screening.
ARTICLE VII
CLINICAL DEVELOPMENT
OF CART IDENTIFIED COMPOUND
7.1 For each Taisho Activated Receptor, Taisho shall use Best
Reasonable Commercial Efforts to develop into clinical development stage at
least [*** (**)] CART Identified Compound. Arena acknowledges and agrees that
Taisho shall have sole discretion to: (i) determine which CART Identified
Compound to develop as a first Drug Product, Back-Up Compound or Subsequent
Compound; and (ii) whether or not to continue development of any CART Identified
Compound or Drug Product.
7.2 In consideration of the right and license granted to Taisho
hereunder with respect to each Taisho Activated Receptor, Taisho agrees to pay
to Arena the following clinical milestone fees for each CART Identified Compound
as long as this Agreement is in full force and effect. For a CART Identified
Compound, the payment shall be made only at the first occurrence, if any, of a
milestone set forth below as to the Drug Product first applicable to such
milestone that incorporate the CART Identified Compound, regardless of
formulation and/or indication of the Drug Product. Provided, however, the
Parties agree that (i) as long as the development of preceding CART Identified
Compound is being continued, Taisho shall be exempted from the payments of
milestone fees for Back-Up Compound and (ii) any milestone payment made by
Taisho to Arena for the preceding CART Identified Compound may be fully credited
by Taisho against milestone payments for Back-Up Compound that shall become due
by Taisho when: (i) the development of the preceding CART Identified Compound is
discontinued by Taisho and (ii) Back-Up Compound replaces the withdrawn
preceding CART Identified Compound (such replacement shall be notified in
writing to Arena by Taisho).
(a) ONE TIME IND DECISION FEE. Taisho shall provide Notice to
Arena of its decision to implement Taisho Development of a CART Identified
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Compound. Within thirty (30) days of the date of such Notice, Taisho shall
provide to Arena a One Time IND Decision Fee of [***************************
(*******)].
(b) ONE TIME IND MILESTONE. Upon the filing of the first IND
in the Territory for a CART Identified Compound, Taisho shall provide to Arena a
One Time IND Milestone of [********************* (*******)] within thirty (30)
days of such filing.
(c) PHASE 2 CLINICAL STUDY MILESTONE. Within thirty (30) days
of the dosing of the first human in a Phase 2 Clinical Study in the Territory of
a Drug Product, Taisho shall provide to Arena a Phase 2 Clinical Study Milestone
of [*************************** (*******)].
(d) PHASE 3 CLINICAL STUDY MILESTONE. Within thirty (30) days
of the dosing of the first human in a Phase 3 Clinical Study in the Territory of
a Drug Product, Taisho shall provide to Arena a Phase 3 Clinical Study Milestone
of [*************************** (*******)].
7.3 The Parties acknowledge and agree that the maximum amount that
Taisho would be required to pay to Arena under the provisions of Article VII of
this Agreement as to each CART Identified Compound (inclusive of Back-Up
Compound(s) thereof) would be [*************************** (*******)].
7.4 Notwithstanding anything to the contrary herein contained, payments
of milestone fees for the Subsequent Compound shall only be subject to the
provisions of Article IX of this Agreement, provided, that the provisions of
Article IX of this Agreement shall only apply when, and to the extent that,
Taisho has made all applicable payments for the preceding CART Identified
Compound under Article VII of this Agreement.
7.5 NEITHER PARTY MAKES ANY REPRESENTATION TO THE OTHER THAT ANY CART
IDENTIFIED COMPOUND OR ANY DRUG PRODUCT WILL NOT INFRINGE ANY PATENT, COPYRIGHT,
TRADEMARK OR OTHER PROPRIETARY RIGHT OF ANY OTHER PERSON. NEITHER PARTY MAKES
ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR ANY OTHER
WARRANTY, EXPRESS OR IMPLIED, TO THE OTHER WITH RESPECT TO ANY CART IDENTIFIED
COMPOUND OR ANY DRUG PRODUCT.
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ARTICLE VIII
MARKETING AUTHORIZATION
8.1 Taisho shall use Best Reasonable Commercial Efforts to seek
Marketing Authorization for a Drug Product developed using a Taisho Activated
Receptor in the United States, Japan and European County.
8.2 In consideration of the right and license granted to Taisho
hereunder, Taisho agrees to pay to Arena the following marketing milestone fees
for each CART Identified Compound as long as this Agreement is in full force and
effect. As long as Taisho is using Taisho Activated Receptor, Screening Assay,
CART Identified Compound and/or Drug Candidate, then all such payments shall be
made by Taisho to Arena, even if this Agreement is not in full force and effect
at the time that such payment is due. For a CART Identified Compound, the
payment shall be made only at the first occurrence, if any, of a milestone set
forth below as to the Drug Product first applicable to such milestone that
incorporate the CART Identified Compound, regardless of formulation and/or
indication of the Drug Product.
(a) UNITED STATES. For the first Drug Product that has received
Marketing Authorization in the United States, Taisho shall provide Arena with an
approval fee of [******************** (*******)] within thirty (30) days of
receipt of notification of such Marketing Authorization.
(b) JAPAN. For the first Drug Product that has received
Marketing Authorization in Japan, Taisho shall provide Arena with an approval
fee of [**************** (*******)] within thirty (30) days of receipt of
notification of such Marketing Authorization.
(c) EUROPEAN COUNTRY. For the first Drug Product that has
received Marketing Authorization in the first European Country, Taisho shall
provide Arena with an approval fee of [******************* (*******)] within
thirty (30) days of receipt of notification of such Marketing Authorization.
8.3 The Parties acknowledge and agree that the maximum amount that
Taisho would be required to pay to Arena under the provisions of Article VIII of
this Agreement as to each CART Identified Compound would be
[*************************** (*******)].
8.4 Notwithstanding anything to the contrary herein contained, payments
of marketing milestone fees for the Subsequent Compound shall only be subject to
the provisions of Article IX of this Agreement, provided, that the provisions of
Article IX of this Agreement shall only apply when, and to the extent that,
Taisho has made all applicable payments under Article VIII of this Agreement.
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8.5 DRUG MASTER FILE. Taisho shall be responsible for the preparation
and submission of a drug master file with FDA (as set forth in 21 C.F.R
Section 314.420(b)), or any similar file required by any Regulatory Agency.
Arena shall, upon request by Taisho, give all reasonable assistance to Taisho
to enable Taisho to develop, and obtain Marketing Authorization for Drug
Product(s).
ARTICLE IX
CLINICAL DEVELOPMENT
OF SUBSEQUENT COMPOUNDS
9.1 Arena acknowledges and agrees that Taisho shall have sole
discretion to determine whether or not Taisho shall: (i) develop any Subsequent
Compound, and (ii) to continue development of any Subsequent Compound.
9.2 In consideration of the right and license granted to Taisho
hereunder with respect to each Taisho Activated Receptor, Taisho agrees to pay
to Arena the following clinical and marketing milestone fees for each Subsequent
Compound as long as this Agreement is in full force and effect. As long as
Taisho is using Taisho Activated Receptor, Screening Assay, CART Identified
Compound and/or Drug Candidate, then all such payments shall be made by Taisho
to Arena, even if this Agreement is not in full force and effect at the time
that such payment is due. For a Subsequent Compound, the payment shall be made
only at the first occurrence, if any, of a milestone set forth below as to the
Drug Product first applicable to such milestone that incorporate the Subsequent
Compound, regardless of formulation and/or indication of the Drug Product.
Provided, however, the Parties agree that Taisho shall be exempted from the
payments of the following milestone fees until the earlier of (i) Taisho obtains
the Marketing Authorization of the preceding CART Identified Compound or (ii)
Taisho express its intent to commercialize both the preceding CART Identified
Compound and the Subsequent Compound or (iii) the subsequent CART Identified
Compound is deemed the Subsequent Compound but not the Back-Up Compound
according to the definitions thereof, and that if any milestone(s) set forth
below occur during such exemption period, the corresponding milestone fee(s)
shall be paid in a lump sum within thirty (30) days of the end of such exemption
period.
(a) REDUCED IND DECISION FEE. Taisho shall provide Notice to
Arena of its decision to implement Taisho Development of a Subsequent Compound.
Within thirty (30) days of the date of such Notice, Taisho shall provide to
Arena a Reduced IND Decision Fee of [*************************** (*******)].
(b) REDUCED IND MILESTONE. Upon the filing of an IND in the
Territory for a Subsequent Compound, Taisho shall provide to Arena a Reduced IND
Milestone of [*************************** (*******)] within thirty (30) days of
such filing.
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(c) REDUCED PHASE 2 CLINICAL STUDY MILESTONE. Within thirty
(30) days of the dosing of the first human in a Phase 2 Clinical Study in the
Territory of a Drug Product comprising a Subsequent Compound, Taisho shall
provide to Arena with a Reduced Phase 2 Clinical Study Milestone of
[*********************** (*******)].
(d) REDUCED PHASE 3 CLINICAL STUDY MILESTONE. Within thirty
(30) days of the dosing of the first human in a Phase 3 Clinical Study in the
Territory of a Drug Product comprising a Subsequent Compound, Taisho shall
provide to Arena with a Reduced Phase 3 Clinical Study Milestone of
[*************************** (*******)].
(e) UNITED STATES. For a Drug Product comprising a Subsequent
Compound that has received Marketing Authorization in the United States, Taisho
shall provide Arena with an approval fee of [******************* (*******)]
within thirty (30) days of receipt of notification of such Marketing
Authorization.
(f) JAPAN. For a Drug Product comprising a Subsequent Compound
that has received Marketing Authorization in Japan, Taisho shall provide Arena
with an approval fee of [******************* (*******)] within thirty (30) days
of receipt of notification of such Marketing Authorization.
(g) EUROPEAN COUNTRY. For a Drug Product comprising a
Subsequent Compound that has received Marketing Authorization in the first
European Country, Taisho shall provide Arena with an approval fee of
[******************** (*******)] within thirty (30) days of receipt of
notification of such Marketing Authorization.
9.3 The Parties acknowledge and agree that the maximum amount that
Taisho would be required to pay to Arena under the provisions of Section 9.2 of
this Agreement as to each Subsequent Compound would be
[*************************** (*******)].
9.4 Arena acknowledges and agrees that in the event that Taisho
discontinues development of a Subsequent Compound prior to the Market
Authorization of the preceding CART Identified Compound, then any milestone
payments otherwise due by Taisho for such Subsequent Compound under this
Agreement shall not be required to be made by Taisho.
9.5 NEITHER PARTY MAKES ANY REPRESENTATION TO THE OTHER THAT SUBSEQUENT
COMPOUND WILL NOT INFRINGE ANY PATENT, COPYRIGHT, TRADEMARK OR OTHER PROPRIETARY
RIGHT OF ANY OTHER PERSON. NEITHER PARTY MAKES ANY WARRANTY OF MERCHANTABILITY
OR FITNESS FOR A PARTICULAR PURPOSE OR ANY OTHER WARRANTY, EXPRESS OR IMPLIED,
TO THE OTHER WITH RESPECT TO ANY SUBSEQUENT COMPOUND.
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<PAGE>
ARTICLE X
ROYALTY PAYMENTS
10.1 ROYALTY PAYMENT. In consideration of the right and license granted
to Taisho hereunder with respect to each Taisho Activated Receptor, for EACH
Drug Product that has received Marketing Authorization, Taisho shall provide
Arena with a royalty payment based on Annual Drug Product Revenue as set forth
below for a period ending upon the expiration of [***** (***)] years from the
Effective Date; such royalty payment shall be made within three (3) months of
December 31 for the Annual period to which the Annual Drug Product Revenue
applies:
(a) [***** (***)] of the portion of Annual Drug Product
Revenue between [*************** ] and [********************]; and
(b) [***** (***)] of the portion of Annual Drug Product
Revenue between [*************** ] and [********************]; and
(c) [***** (***)] of the portion of Annual Drug Product
Revenue between [*************** ] and [********************]; and
(d) [***** (***)] of the portion of Annual Drug Product
Revenue above [*************** ].
(e) By way of example and not limitation, in the event that
Annual Drug Product Revenue for a Drug Product is [**************], Taisho shall
provide a royalty payment to Arena of [***********], based upon an aggregate of:
[******] (Section 10.1(a) component); [******] (Section 10.1(b) component);
[*********] (Section 10.1(c) component); and [********] (Section 10.1(d)
component).
10.2 AUDIT. In order to verify the completeness and correctness of Drug
Product Revenue, Taisho shall maintain up to date books and records and Arena
shall have the right to conduct, through independent certified public
accountants, at its own cost and at any reasonable time during business hours,
not more often than once each Annual period for not more than three (3) previous
years, and upon reasonable prior notice, an audit of the accounting procedures
and records of Taisho in computing and calculating royalty payment for Annual
Drug Product Revenue due hereunder. The auditor shall make available to Taisho
and Arena a report enumerating the period covered by the audit of Drug Product
Revenue computed and calculated by the auditor. The costs of such audit shall be
borne by Taisho in the event that a discrepancy of more than five per cent (5%)
is discovered through such audit.
[THE REST OF THIS PAGE IS INTENTIONALLY BLANK]
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ARTICLE XI
PAYMENT ARRANGEMENT
The Parties acknowledge and agree that any and all payments to be made
by Taisho to Arena under this Agreement are to be (i) in United States Dollars
and (ii) in full as indicated; provided, however, that any income or other tax
which Taisho is required to pay or withhold on behalf of Arena with respect to
payments payable to Arena hereunder shall be deducted from the amounts of such
payments. Taisho agrees to reasonably cooperate with Arena in obtaining a
foreign tax credit in the U.S. with respect to such payment due to Arena.
ARTICLE XII
CONFIDENTIALITY
12.1 Each party shall neither disclose to any Third Party any and all
of the information ("Information") disclosed by the other Party hereunder and
under the Mutual Non-Disclosure Agreement of August 31, 1999 between Arena and
Taisho, nor permit any such Third Party to have access to such Information, nor
use such Information for any purpose other than for purpose of this Agreement,
without the prior written consent of the other Party.
12.2 The receiving Party's obligations under Article 12.1 hereof shall
not apply, with respect to any of such Information to the extent that the
receiving Party can establish by competent proof that such Information:
(a) is published, known publicly, or is already in the public
domain at the time of receipt of it by the receiving Party;
(b) is published, becomes known publicly or becomes a part of
the public domain by publication or otherwise after the time of receipt of it by
the receiving Party, except by breach of this Agreement by the receiving Party;
(c) is obtained from a Third Party after the receipt of it by
the receiving Party, provided, however, that said Third Party has not obtained
it directly or indirectly from the disclosing Party;
(d) is in the receiving Party's possession on the date of the
receipt of it and was not acquired directly or indirectly from the disclosing
Party; or
(e) is subsequently developed by the receiving Party
independent of the information received hereunder, as evidenced by competent
written records established by the receiving Party.
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<PAGE>
12.3 Notwithstanding anything to the contrary in this Agreement, the
receiving Party shall be entitled to disclose such Information (i) to the extent
required by applicable law or court order provided that the receiving Party
furnishes the disclosing Party with written notice of such request, in advance
of any such disclosure of the Information or (ii) to a government agency,
regulatory authority, clinical research organization, clinical investigator or
other Third Party to whom disclosure is necessary for development of the CART
Identified Compound in connection with drug development, approval or
registration of the CART Identified Compound and/or Drug Product.
The foregoing obligations of confidentiality shall survive for five (5) years
after any termination or expiration of this Agreement.
ARTICLE XIII
PATENT INFRINGEMENT AND ENFORCEMENT
13.1 NOTIFICATION OF INFRINGEMENT. Each Party shall promptly provide
Notice to the other of any infringement (of which it becomes aware) of the
intellectual property rights including patent rights on any Taisho Activated
Receptor(s) and/or Screening Assay(s) and/or CART Identified Compound(s) and/or
Drug Product(s) by any Third Party and shall provide the other with any
available evidence of such infringement of which the Party is aware.
13.2 SUIT FOR INFRINGEMENT.
(a) During the term of this Agreement, Arena shall be
responsible for enforcement of the Arena Patent Rights including, but not
limited to, the bringing of an action for patent infringement, selection of the
forum for such action, and counsel, settlement of any such action, and the costs
devoted to such action. Taisho agree to provide reasonable assistance except for
financial assistance to Arena in the enforcement of Arena Patent Rights and
Taisho may join such action as initiated by Arena with counsel at its own
expense and seek its own damages and other relief. If, within ninety (90) days
of Taisho's giving notice to Arena of a Third Party infringement in the
Territory, Arena fails to institute the infringement suit that Taisho reasonably
feels is required, Taisho may institute such infringement proceedings against
said Third Party at its expense and Taisho shall have the right to receive all
the amounts payable by said Third Party as a result of such proceedings.
(b) In the event a claim of patent infringement is made
against Taisho by a Third Party in the Territory by reasons of Taisho's
commercial activities hereunder, Taisho and Arena shall meet to analyze the
infringement claim and avoidance of the same. If it is necessary to obtain an
appropriate license from such a Third Party, the Parties shall, in negotiating
such a license, make every efforts to minimize the amount of license fees and/or
royalties payable to such Third Party and (i) in case that such license is
related to Arena Activation Technology, Arena shall be responsible for such
license fees and/or royalties, (ii) in case that such license is related to
Taisho Selected GPCR and/or Taisho Activated Receptor and/or Screening Assay,
and/or CART Identified Compound, and/or Drug Product, Taisho shall be
responsible for such license fees and/or royalties,
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<PAGE>
ARTICLE XIV
REPRESENTATION AND WARRANTIES
14.1 REPRESENTATIONS AND WARRANTIES OF TAISHO. Taisho represents and
warrants to Arena as follows:
(a) The execution and delivery of this Agreement have been
duly and validly authorized, and all necessary action has been taken to make
this Agreement a legal, valid and binding obligation of Taisho enforceable in
accordance with its terms.
(b) The execution and delivery of this Agreement and the
performance by Taisho of its obligations hereunder will not contravene or result
in the breach of the Certificate of Incorporation or Bylaws of Taisho or result
in any material breach or violation of or material default under any material
agreement, indenture, license, instrument or understanding or, to the best of
its knowledge, result in breach of any law, rule, regulation, statute, order or
decree, to which Taisho is a party or of which it or any of its property is
subject.
14.2 REPRESENTATIONS AND WARRANTIES OF ARENA. Arena represents and
warrants to Taisho as follows:
(a) The execution and delivery of this Agreement have been
duly and validly authorized, and all necessary action has been taken to make
this Agreement a legal, valid and binding obligation of Arena enforceable in
accordance with its terms.
(b) The execution and delivery of this Agreement and the
performance by Arena of its obligations hereunder will not contravene or result
in the breach of the Certificate of Incorporation or Bylaws of Arena or result
in any material breach or violation of or material default under any material
agreement, indenture, license, instrument or understanding or, to the best of
its knowledge, result in breach of any law, rule, regulation, statute, order or
decree, to which Arena is a party or of which it or any of its property is
subject.
ARTICLE XV
INDEMNITY
15.1 INDEMNIFICATION BY TAISHO. Taisho will indemnify and hold harmless
Arena and its Affiliates, employees, officers, directors, shareholders and
agents (an "Arena Indemnified Party") from and against all liability, loss,
damages, costs and expenses (including reasonable attorneys' fees) which Arena
Indemnified Party may incur, suffer or be required to pay resulting from or
arising in connection with (i) the breach by Taisho of any agreement, covenant,
representation or warranty of Taisho obtained in this Agreement, or (ii)
negligence or omission of Taisho.
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15.2 INDEMNIFICATION BY ARENA. Arena will indemnify and hold harmless
Taisho and its Affiliates, Taisho's Licensees, employees, officers, directors,
shareholders and agents (an "Taisho Indemnified Party") from and against all
liability, loss, damages, costs and expenses (including reasonable attorneys'
fees) which Taisho Indemnified Party may incur, suffer or be required to pay
resulting from or arising in connection with (i) the breach by Arena of any
agreement, covenant, representation or warranty of Arena obtained in this
Agreement, or (ii) negligence or omission of Arena.
15.3 CONDITIONS TO INDEMNIFICATION. The obligations of the indemnifying
Party under Sections 15.1 and 15.2 of this Agreement are conditioned upon the
prompt Notice to the indemnifying Party of any of the aforementioned suits or
claims in writing within fifteen (15) days after receipt of notice by the
indemnified Party of such suit or claim. The indemnifying Party shall have the
right to assume the defense of any such suit or claim unless, in the reasoned
judgment of the indemnified Party, such suit or claim involves an issue or
matter which could have a materially adverse effect on the business, operations
or assets of the indemnified Party, in which event the indemnified Party may
participate in the defense of such suit or claim at its sole cost and expense.
The provision for indemnification shall be void and there shall be no liability
against a indemnified Party as to any suit or claim for which settlement or
compromise or an offer of settlement or compromise is made without the prior
consent of the indemnifying Party.
ARTICLE XVI
TERMINATION
16.1 BREACH. Failure by either Party to comply with any of its material
obligations contained in this Agreement shall entitle the other Party to give
Notice to the Party in default specifying the nature of the default and
requiring it to cure such default. If such default is not cured within two (2)
months after receipt of such Notice, the notifying Party shall be entitled,
without prejudice to any of its other rights conferred on it by this Agreement,
to terminate this Agreement and the licenses granted to the breaching Party
hereunder with immediate effect by giving notice to such termination. The right
of either Party to terminate this Agreement as herein provided shall not be
affected in any way by its waiver of, or failure to take action with respect to,
any previous default.
16.2 DURATION OF THIS AGREEMENT.
(a) This Agreement shall become effective from the Effective
Date and continue to be in effect until expiration of Taisho's obligation of
royalty payment hereunder, if any; such obligation of royalty payment shall be
twenty (20) years from the Effective Date. Thereafter, all licenses or
sublicenses granted hereunder shall become fully paid-up irrecoverable license.
(b) Either Party shall be entitled to terminate this
Agreement in the event of
(1) insolvency of the other Party or
commencement of bankruptcy proceedings by
such Party; or
(2) dissolution of the other Party by that
Party, or liquidation of such Party by that
Party.
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<PAGE>
(c) The Parties agree that in the event that Taisho
sublicenses any of the rights granted to it under this Agreement to a Third
Party, such sublicense shall include provisions whereby if such sublicensee(s)
becomes insolvent, commences bankruptcy proceedings, dissolves, and/or
liquidates its assets, any and all rights granted by Taisho to such
sublicensee(s) shall automatically revert back to Taisho.
16.3 ACCRUED RIGHTS; SURVIVING OBLIGATIONS. Termination or expiration
of this Agreement for any reason shall be without prejudice to any rights which
shall have accrued to the benefit of either Party prior to such termination or
expiration, nor shall such termination or expiration relieve either Party from
obligations which are expressly indicated to survive termination or expiration
of this Agreement.
ARTICLE XVII
RELATIONSHIP OF THE PARTIES
Nothing in this Agreement is intended or shall be deemed to constitute
a partnership, agency, employer-employee, or joint venture relationship between
the Parties. All activities by each Party hereunder shall be provided as an
independent contractor. No Party shall incur any debts or make any commitments
for the other, except to the extent, if at all, specifically provided herein.
ARTICLE XVIII
MISCELLANEOUS PROVISIONS
18.1 LIMITATIONS ON ASSIGNMENT. Neither this Agreement nor any interest
hereunder shall be assignable or transferable by Arena or Taisho without the
prior written consent of the other Party.
18.2 FURTHER ACTS AND INSTRUMENTS. Each Party hereto agrees to execute,
acknowledge and deliver such further instruments and to do all such other acts
as may be necessary or appropriate to carry out the purpose and intent of this
Agreement.
18.3 ENTIRE AGREEMENT. This Agreement constitutes and contains the
entire agreement of the Parties and supersedes any and all prior negotiations,
correspondence, understandings, Letters of Intent and agreements between the
Parties respecting the subject matter hereof. This Agreement may be amended or
modified or one or more provisions hereof waived only by a written instrument
signed by the Parties.
18.4 SEVERABILITY. If one or more provisions of this Agreement are held
to be unenforceable under applicable law, such provision shall be excluded from
this Agreement and the balance of this Agreement shall be interpreted as if such
provision were so excluded.
18.5 CAPTIONS. The captions to this Agreement are for convenience only
and are to be of no force or effect in construing and interpreting the
provisions of this Agreement.
18.6 FORCE MAJEURE. Neither Party shall be liable to the other for loss
or damages, or have any right to terminate this Agreement for any default or
delay, attributable to any act of God, flood, fire, explosion, breakdown or
plant strike, lockout,
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<PAGE>
labor dispute, casualty, accident, war, revolution, civil commotion, act of a
public enemy, blockage, embargo, injunction, law, order, proclamation,
regulation, ordinance, demand or requirement of any government or subdivision,
authority or representative of any government, or any other cause beyond the
reasonable control of such Party.
18.7 NO TRADE NAME OR TRADEMARK LICENSE.
(a) No right, express or implied, is granted by this Agreement
to Taisho, Taisho collaborators or Taisho's Licensees to use in any manner the
name "Arena," "Arena Pharmaceuticals," "CART" or any trade name or trademark of
Arena in any business dealing which is not directly connected with the
performance of this Agreement; provided, however, that Taisho shall have the
right to use or disclose the name Arena only to the extent and the manner as may
be required by law.
(b) No right, express or implied, is granted by this Agreement
to Arena, Arena collaborators or Arena licensees to use in any manner the name
"Taisho" or any trade name or trademark of Taisho in any business dealing which
is not directly connected with the performance of this Agreement; provided,
however, that Arena shall have the right to use or disclose the name Taisho only
to the extent and the manner as may be required by law.
(c) During the term of this Agreement, the Parties may issue a
press release regarding the acceptance of this Agreement by the Parties with
prior written consent of the other Party on the contents of such release, which
consent shall not be unreasonably withheld (it is not necessary to obtain the
consent of the other Party for disclosing the information regarding this
Agreement which a Party is required by law to disclose).
18.8 GOVERNING LAW; CONSENT TO JURISDICTION. This Agreement shall be
governed by and construed under applicable federal law of the United States of
America and the laws of the State of California, excluding any conflict of law
provisions. Each Party hereto hereby voluntarily and irrevocably waives trial by
jury in any action or proceeding brought in connection with this Agreement, any
of the other transaction documents or any of the transactions contemplated
hereby or thereby. Each Party hereby expressly waives any and all rights to
bring any suit, action or other proceeding in or before any court or tribunal
other than arbitration court of the International Chamber of Commerce and
covenants that it shall not seek in any manner to resolve any dispute other than
as set forth in this Section 18.8 or to challenge or set aside any decision,
award or judgment obtained in accordance with the provisions hereof. Each Party
hereby expressly waives any and all objections it may have to venue, including,
without limitation, the inconvenience of such forum, in any of such courts. In
addition, the service of process regarding the arbitration shall be subject to
the rules of arbitration of the International Chamber of Commerce or applicable
laws. The Parties further agree that any dispute resolution initiated by Taisho
under this Section 18.8 shall take place in San Diego, California (U.S.A.) and
that any dispute resolution initiated by Arena under this Section 18.8 shall
take place in Tokyo, JAPAN
18.9 EXPENSES. Except as otherwise provided herein, each Party hereto
shall bear its legal and other expenses incurred in connection with the
negotiation, execution, delivery and performance of this Agreement.
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18.10 COUNTERPARTS. This Agreement shall be executed in two
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
18.11 NOTICE. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the Party to be notified or upon
deposit with the registered or certified mail in the country of residence of the
Party giving the notice, postage prepaid, or upon deposit with an
internationally recognized express courier with proof of delivery, postage
prepaid and addressed to the Party to be notified at the address or addresses
indicated below, or upon the date of fax transmission of such notice (with proof
of such fax transmission established by the sender's fax receipt) using the fax
numbers listed below, or at such other address or fax number as such Party may
designate by ten (10) days' advance written notice to the other Party with
copies to be provided as follows:
IF TO ARENA, ADDRESSED TO:
Arena Pharmaceuticals, Inc.
6166 Nancy Ridge Drive
San Diego, CA 92121 USA
Attention: Jack Lief
President & CEO
Fax: (858) 453-7210
IF TO TAISHO, ADDRESSED TO:
Taisho Pharmaceutical Co., Ltd.
24-1, Takata 3-chome,
Toshimaku
Tokyo 170-8633, JAPAN
Attention: Tetsuya Yamamoto
Group Manager, Business Development Group
Ethical Business Strategy Division,
Fax: 03-3985-0716
18.12 SURVIVING RIGHTS AND OBLIGATIONS. The following Articles and
Sections shall survive any termination or expiration of this Agreement: Article
I (Definitions); Article XI (Payment Arrangement); Article XII
(Confidentiality); Article XIII (Patent Infringement and Enforcement); Article
XIV (Representations and Warranties); Article XV (Indemnity); and Sections
5.3(d), 5.4, 18.8 and any payment otherwise subsequently or otherwise due under
Articles VII, VIII, IX and/or X. Upon expiration of Taisho royalty obligation
under this Agreement, all licenses and rights granted to Taisho hereunder shall
become fully paid-up irrecoverable license.
[Signature page on next page]
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<PAGE>
WHEREUPON, the Parties have caused this Agreement to be executed by
their duly authorized agents, as of the dates listed below.
ARENA PHARMACEUTICALS, INC. TAISHO PHARMACEUTICAL CO., LTD.
By: /s/Jack Lief By: /s/Akira Uehara
----------------------------- ----------------------------
Name: Jack Lief Name: Akira Uehara
Title: President & CEO Title: President
Date: August 7, 2000 Date: September 18, 2000
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<PAGE>
APPENDIX A
TAISHO SELECTED GPCRS
1. [*******************************], ALSO REFERRED TO AS "[*********]."
SELECTED BY TAISHO AS OF THE EFFECTIVE DATE.
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</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.8
<SEQUENCE>3
<FILENAME>a2041581zex-10_8.txt
<DESCRIPTION>EXHIBIT 10.8
<TEXT>
<PAGE>
Exhibit 10.8
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED
FOR THE PORTIONS MARKED [***]
FIRST AMENDMENT TO THE AGREEMENT
BY AND BETWEEN
ARENA PHARMACEUTICALS, INC.
AND
TAISHO PHARMACEUTICAL CO., LTD.
This First Amendment ("Amendment") to the Agreement dated May 29, 2000
by and between the Parties hereto ("Agreement") is effective as of JANUARY 24,
2001 ("Effective Date") by and between ARENA PHARMACEUTICALS, INC., having a
place of business at 6166 Nancy Ridge Drive, San Diego, California, 92121 USA
("Arena"), and TAISHO PHARMACEUTICAL CO., LTD., having a place of business at
24-1, Takata 3-Chome, Toshimaku, Tokyo 170-8633, JAPAN ("Taisho").
RECITALS
WHEREAS, Arena and Taisho entered into the Agreement, and pursuant to
the Agreement, Taisho has selected 18F Receptor (defined below) as second Taisho
Selected GPCR.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, Arena and Taisho hereby agree as follows:
ARTICLE I
DEFINITIONS
Unless otherwise specifically provided herein, any capitalized term
used in this Amendment shall have the same meaning as defined in the Agreement,
and the following terms shall have the following meanings:
"EFFECTIVE DATE" for purposes of this Amendment means JANUARY 24, 2001.
"SECOND SELECTION DATE" means DECEMBER 25, 2000.
"18F COMPOUNDS" has the same meaning as set forth in Section 2.2 of this
Amendment.
"18F RECEPTOR" has the same meaning as set forth in Section 2.1 of this
Amendment.
ARTICLE II
18F RECEPTOR
2.1 According to Section 2.2 of the Agreement, Taisho has selected
18F Receptor as a Taisho Selected GPCR and the following clause shall be added
to the APPENDIX A to the Agreement.
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2.18F RECEPTOR, ALSO REFERRED TO AS "[ ]".
SELECTED BY TAISHO AS OF THE SECOND SELECTION DATE.
2.2 As of the Second Selection Date, Arena has applied Arena
Activation Technology to 18F Receptor, established constitutively active Taisho
Activated Receptor of 18F Receptor as of the Second Selection Date, developed
the Screening Assay incorporating 18F Receptor, made Screening Assay Notice to
Taisho, completed the Arena Screening for 18F Receptor, and identified as CART
Identified Compounds the 18F Compounds which include the compound coded "[ ]"
and derivatives thereof covered by the Arena Patent Rights included in US serial
number [ ], filed with the US Patent & Trademark Office on [ ] and named "Small
Molecule Modulators of [ ]".
2.3 In consideration of the rights granted under Article V of the
Agreement with respect to 18F Receptor and the 18F Compounds and further
consideration of Arena's activities described in Section 2.2 of this Amendment:
(i) within thirty (30) days of the Effective Date, Taisho
shall provide Arena with a one-time, non-refundable,
non-creditable fee of [ ], with respect to the rights
exercisable in Japan, and
(ii) within thirty (30) days of the Effective Date, Taisho
shall provide to Arena with a one-time,
non-refundable, non-creditable fee of [ ] with
respect to the rights exercisable in the world except
Japan.
In addition, within thirty (30) days of the Effective Date, Taisho shall provide
Arena with a Continuing Utilization Fee of [ ] for 18F Receptor, and Taisho
shall have the right set forth in Section 5.5 of the Agreement with respect to
18F Receptor. The Parties agree that the total amount to be paid by Taisho to
Arena under this Section 2.3 of the Amendment is [ ].
ARTICLE III
RESEARCH
3.1 TRANSFER OF RECEPTOR, COMPOUNDS AND TECHNICAL INFORMATION.
Subject to the provisions of Article III of the Agreement, Arena shall transfer
to Taisho 18F Receptor and Technical Information thereon within thirty (30) days
of the Effective Date. In addition, Arena shall transfer to Taisho samples of
the 18F Compounds in the form and quantity agreed to in advance by the Parties
and Technical Information regarding the 18F Compounds within thirty (30) days of
the Effective Date.
3.2 ADDITIONAL SUPPLY OF COMPOUNDS. When requested by Taisho in
writing, Arena shall use its Best Reasonable Commercial Efforts to supply
additional quantity of the 18F Compounds within the time period requested by
Taisho. If so agreed by the Parties in writing, Arena shall supply additional
Technical Information owned or possessed by Arena to enable Taisho to synthesis
the 18F Compounds for the purpose of the Screening and Optimization defined in
Section 3.3 below.
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3.3 OPTIMIZATION. Taisho has requested Arena to perform contract
research for Taisho, and Arena has agreed to perform such contract research for
Taisho, directed to optimization of the 18F Compounds for the purpose of
identifying the most suitable compound for Taisho Development ("Optimization")
in accordance with a mutually agreed upon plan for the Optimization, which shall
be attached to this Amendment, when completed, as AMENDMENT APPENDIX A. Such
compound(s) identified under the Optimization shall be deemed to be CART
Identified Compound, regardless of the definition of CART Identified Compound(s)
set forth in the Agreement. Any and all results obtained under the Optimization
and intellectual property rights thereon shall be solely owned by Taisho.
3.4 RESEARCH FEE. As described in Section 2.2 in this Amendment,
Arena has finished its Screening Assay development and its Screening activities
for 18F Receptor under the Agreement as of the Second Selection Date, and Taisho
shall reimburse the research and development fee for such activities of [ ]
within sixty (60) days of the Second Selection Date. This fee shall include the
research and development fees of each [ ] under Sections 4.1 (a) through (c) of
Article IV of the Agreement and the Screening Fee of [ ] under Section 6.2 of
the Agreement.
3.5 FEE FOR OPTIMIZATION. Taisho shall pay contract research fee
for the Optimization at a rate of [ ] per Arena's full time equivalent equal to
[ ] hours ("FTE") per year. Within the mutually agreed upon plan for the
Optimization, the number of Arena's FTEs may be increased or decreased yearly
upon mutual agreement by Arena and Taisho, but shall in no event Arena's FTEs
exceed [ ] FTEs per year.
3.6 PAYMENT UNDERSTANDING. Taisho acknowledges and agrees that any
payment due under Sections 3.4 and 3.5 above shall be made as required and that
once made, such payment shall be non-refundable and non-creditable. Within 30
days of the receipt by Arena of each payment, Arena shall provide to Taisho a
statement with supportive documents sufficiently verifying the costs and
expenses incurred by Arena regarding the corresponding research and development
activities.
ARTICLE IV
NO OTHER AMENDMENT
Unless otherwise specifically stated herein, terms and conditions of
the Agreement shall remain in full force and effect.
[THE REST OF THIS PAGE IS INTENTIONALLY BLANK]
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WHEREUPON, the Parties have caused this Amendment to be executed by
their duly authorized agents, as of the dates listed below.
ARENA PHARMACEUTICALS, INC. TAISHO PHARMACEUTICAL CO., LTD.
By: /s/ Jack Lief By: /s/ Akira Uehara
------------------------------- ----------------------------------
Name: Jack Lief Name: Akira Uehara
Title: President & CEO Title: President
Date: January 17, 2001 Date: January 23, 2001
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</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.14
<SEQUENCE>4
<FILENAME>a2041581zex-10_14.txt
<DESCRIPTION>EXHIBIT 10.14
<TEXT>
<PAGE>
Exhibit 10.14
PURCHASE AND SALE AGREEMENT
By and Between
LIMAR REALTY CORP. #13
("SELLER")
and
ARENA PHARMACEUTICALS, INC.
("BUYER")
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
1. PURCHASE AND SALE....................................................1
2. PURCHASE PRICE.......................................................2
3. TITLE................................................................3
4. ESCROW...............................................................4
5. CLOSING..............................................................4
6. DUE DILIGENCE........................................................5
7. CONDITIONS TO CLOSING...............................................10
8. DELIVERIES INTO ESCROW..............................................11
9. PRORATIONS; CLOSING COSTS; CREDITS..................................13
10. OPERATION OF PROPERTY PENDING THE CLOSING. ........................15
11. REPRESENTATIONS AND WARRANTIES......................................16
12. INDEMNIFICATION.....................................................18
13. CASUALTY OR CONDEMNATION............................................19
14. COMMISSIONS.........................................................20
15. NOTICES.............................................................20
16. LIMITATIONS ON REPRESENTATIONS AND WARRANTIES.......................21
17. MISCELLANEOUS.......................................................23
18. DEFAULT.............................................................26
19. DEFINITIONS. ......................................................27
</TABLE>
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PURCHASE AND SALE AGREEMENT
THIS PURCHASE AND SALE AGREEMENT ("AGREEMENT") is made and entered into
as of December 1, 2000 (the "EFFECTIVE DATE") by and between Limar Realty Corp.
#13, a California corporation ("SELLER"), and Arena Pharmaceuticals, Inc., a
Delaware corporation ("BUYER").
R E C I T A L S
This Agreement is made with respect to the following facts and
circumstances:
A. Seller represents and warrants that it owns certain real
property commonly known as the Arena Pharmaceuticals Building, 6138 and 6150
Nancy Ridge Drive, San Diego, CA, which real property, together with certain
personal property is collectively referred to in this Agreement as the
"Property" and is more particularly defined below.
B. Subject to the terms and conditions herein, Seller desires to
sell and Buyer desires to purchase the Property.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, Seller and Buyer agree as follows:
1. PURCHASE AND SALE.
1.1 PROPERTY. Subject to the terms and conditions hereof,
Seller hereby agrees to sell, convey and assign to Buyer, and Buyer hereby
agrees to purchase and accept from Seller on the Closing Date (as defined below)
the following (collectively, the "PROPERTY"):
1.1.1 That certain tract or parcel of land
situated in the City of San Diego, County of San Diego, California which is
legally described on EXHIBIT 1.1.1 attached hereto, together with any and all
rights, privileges and easements appurtenant thereto, which are owned by Seller
(collectively, the "LAND");
1.1.2 All buildings, structures, fixtures and
other improvements of every kind and description affixed to or located in, on,
over, or under the Land (excluding fixtures owned by tenants) (all of which are
collectively referred to as the "IMPROVEMENTS"); and
1.1.3 All right, title and interest of Seller in
and to all tangible personal property of any type located upon the Land or
within the Improvements and used exclusively in connection with the operation of
the Land and Improvements (collectively, the "PERSONAL PROPERTY").
1.2 REAL PROPERTY. The Land and Improvements are
collectively referred to as the "REAL PROPERTY".
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1.3 ASSIGNMENT. In addition, Seller shall convey and
assign to Buyer all of the right, title and interest of Seller, if any, in and
to (i) the lease(s) scheduled on EXHIBIT 1.3 (i) attached hereto (the
"LEASE(S)") and all lease(s) approved by Buyer subject to Section 10.3 below,
together with any and all security deposits in Seller's possession in connection
therewith; (ii) all assignable service contracts and other agreements, if any,
relating to the Real Property or Personal Property to be assumed by Buyer as
described on EXHIBIT 1.3 (ii) attached hereto (collectively the "SERVICE
CONTRACTS"); (iii) all assignable current licenses, permits, certificates of
occupancy, approvals and entitlements issued or granted in connection with the
Real Property as well as any and all assignable development rights and any other
intangible rights, interests or privileges relating to or used in connection
with the Real Property; (iv) any assignable right to use the current names of
the Real Property, logos, trademarks, tradenames and symbols and promotional
materials; and (v) all transferrable warranties, guarantees or sureties relating
to the Real Property or the Personal Property. Such assignment shall be made
pursuant to the Assignment and Assumption Agreement in the form described in
Section 8.1.3 below ("ASSIGNMENT"). All of the above interests as described in
clauses (iii), (iv) and (v) of this Section 1.3 shall sometimes be referred to
collectively as the "INTANGIBLE PROPERTY".
1.4 EXCLUDED PROPERTY. Notwithstanding anything to the
contrary set forth herein, the Property being conveyed pursuant to this
Agreement does not include (and Seller expressly reserves all rights with
respect thereto) any existing claims or causes of action with respect to the
Property to the extent attributable to the period prior to the Closing Date
including, without limitation, any tax rebates attributable to the period prior
to the Closing and claims against existing tenants with respect to matters
accruing prior to the Closing Date or previous tenants. The provisions of this
Section 1.4 shall not be construed, however, to restrict the ability of Buyer
following the Closing Date to deal with any existing tenants of the Real
Property or to restrict the Buyer following the Closing Date from pursuing any
and all remedies in connection with existing hazardous materials on, in or about
the Real Property.
2. PURCHASE PRICE. Buyer shall pay as the total purchase price
for the Property ("PURCHASE PRICE") the sum of Five Million Four Hundred
Thousand Dollars ($5,400,000). The Purchase Price shall be paid as follows:
2.1 DEPOSIT. On or before one (1) business day following
the Effective Date, Buyer shall cause One Hundred Thousand Dollars ($100,000)
(the "DEPOSIT #1") in immediately available funds to be delivered into Escrow
(as defined below). On or before one (1) business day following the Due
Diligence Date (as defined below) provided that Buyer has given the Approval
Notice (as defined below), Buyer shall cause an additional One Hundred Thousand
Dollars ($100,000) (the "DEPOSIT #2") in immediately available funds to be
delivered into Escrow. The "DEPOSIT" shall refer to the sum of the Deposit #1
and Deposit #2 as each of said amounts are received by Escrow. The failure of
Buyer to timely deliver any of the respective Deposits shall be a material
default, and shall entitle Seller, at Seller's sole option, to terminate this
Agreement immediately by giving written notice of such termination to Buyer and
the Title Company (as defined below);
2.2 INTEREST ON DEPOSIT. The Deposit shall be held by the
Title Company as an earnest money deposit towards the Purchase Price. The
Deposit shall be held in Escrow in accordance with the provisions of this
Agreement in a federally insured interest bearing account or other investment
suitable for daily investment reasonably acceptable to Seller and Buyer (and in
any
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event with any risk of loss for the account of Buyer) with any interest accruing
thereon to be paid or credited, except as otherwise provided in this Agreement,
to Buyer. The term "Deposit" shall include any and all interest then accrued;
2.3 DISPOSITION OF DEPOSIT. At the Closing (as defined
below) the Deposit shall be applied and credited toward the payment of the
Purchase Price. If Escrow does not close, and this Agreement is terminated in a
manner governed by Sections 7.3 or 13, the Deposit will be disbursed to Buyer as
provided in such Sections. If the Escrow does not close and neither Section 7.3
nor Section 13 applies, the Deposit shall be returned to Buyer unless the
provisions of Section 18.1 are applicable, in which case the disposition of the
Deposit shall be governed by the provisions of Section 18.1; and
2.4 CASH BALANCE. On or before the Closing, Buyer shall
deliver into Escrow in immediately available funds the balance of the Purchase
Price. The Purchase Price, net of any prorations and closing costs to be paid by
Seller as provided in this Agreement, shall be paid by the Title Company to
Seller on the Closing Date by federal wire transfer of immediately available
funds to a bank account(s) designated by Seller in a written notice to the Title
Company given prior to the Closing.
3. TITLE.
3.1 VESTING OF TITLE. At Closing, Seller shall convey fee
simple title to the Real Property to Buyer by execution and delivery of the Deed
(as defined below). Issuance by the Title Company (or an unconditional
commitment to issue) as of the Closing of the Buyer's Title Policy (as defined
below) shall constitute evidence of delivery of title by Seller.
3.2 BUYER'S TITLE INSURANCE. At Closing, the Title
Company shall issue to Buyer a CLTA standard coverage owner's form of title
insurance policy in the amount of the Purchase Price insuring that fee simple
title to the Real Property is vested in Buyer subject only to the Permitted
Exceptions (as defined below) ("BUYER'S TITLE POLICY"). Buyer shall be entitled
to request that the Title Company provide an ALTA title insurance policy and/or
such endorsements to the Buyer's Title Policy as Buyer may reasonably require,
provided that such ALTA policy and/or endorsements shall be at no cost or
additional liability to Seller and the Closing shall not be delayed as a result
of Buyer's request.
3.3 PERMITTED EXCEPTIONS. As a condition precedent of
Buyer's obligations as provided in Section 7.2.4 but not as a covenant of
Seller, Seller shall convey the Property and Buyer shall accept the Property
subject to the following matters, which are collectively referred to as the
"PERMITTED EXCEPTIONS":
3.3.1 all exceptions to title shown in the Title
Report (as defined below) as it may be amended and on the Survey (as defined
below) that are approved or deemed approved by Buyer as provided in Section 6.3
hereof;
3.3.2 the lien of non-delinquent real and personal
property taxes and assessments;
3.3.3 the rights of the tenant(s) under the
Lease(s);
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3.3.4 the Service Contracts, if any, to be assumed
by Buyer;
3.3.5 local, state and federal laws, ordinances or
governmental regulations, including but not limited to, building and zoning
laws, ordinances and regulations, now existing or hereafter in effect with
respect to the Real Property;
3.3.6 matters affecting the condition of title
created by or with the written consent of Buyer;
3.3.7 water rights, and claims of title to water,
whether or not shown by the public records;
3.3.8 unless Buyer elects to obtain an ALTA policy
of title insurance, discrepancies, conflicts in boundary lines, shortages in
area, encroachments, and any state of facts which inspection of the Real
Property would disclose and which are not shown by the public records; and
3.3.9 standard printed exclusions generally
included in a CLTA owner's policy (or ALTA owner's policy, as the case may be).
4. ESCROW.
4.1 OPENING OF ESCROW. Seller shall deliver a copy of a
fully executed counterpart of this Agreement into escrow ("ESCROW") to be
established at Chicago Title Company, 388 Market Street, Suite 1350, San
Francisco, California 94111, Attention: Nicole Carr ("TITLE COMPANY") on or
before three (3) days following the Effective Date.
4.2 INSTRUCTIONS TO TITLE COMPANY. Seller and Buyer shall
each be entitled to submit escrow instructions to the Title Company in
connection with the Closing of the Escrow. Seller and Buyer shall in addition
execute such further escrow instructions as the Title Company may reasonably
require in connection with the Closing so long as such instructions are
consistent with the provisions of this Agreement and the escrow instructions of
Seller and Buyer. In the event of any conflict between the terms and conditions
of this Agreement and the provisions of any escrow instructions prepared by
Seller, Buyer or the Title Company, the terms and conditions of this Agreement
shall control.
5. CLOSING.
5.1 CLOSING. The purchase and sale of the Property as
contemplated by this Agreement, including but not limited to the recordation of
the Deed and the completion of the other matters required by this Agreement to
be done contemporaneously (the "CLOSING") shall occur on a date selected by
Seller (with written notice to Buyer no less than three (3) business days prior
to the selected date), but shall occur no sooner than Monday, December 11, 2000
and no later than Wednesday, January 3, 2001. The date on which the Closing
actually occurs shall be referred to as the "CLOSING DATE".
5.2 FAILURE TO CLOSE. If the Closing does not occur on or
before the date set forth in Section 5.1 above (as such date may be extended
pursuant to the express provisions of this Agreement), then in the absence of a
written agreement between the parties to extend the Closing
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Date, either party hereto (so long as such party is not then in default pursuant
to this Agreement), without waiving any rights it may otherwise have pursuant to
the Agreement, may elect to terminate this Agreement by giving written notice of
such termination to the other and to the Title Company.
6. DUE DILIGENCE.
6.1 DUE DILIGENCE PERIOD. The period commencing as of the
Effective Date and continuing through 5:00 p.m. PST, Friday, December 8, 2000
(the "DUE DILIGENCE DATE") shall be referred to as the "DUE DILIGENCE PERIOD".
6.2 AVAILABLE INFORMATION. Seller shall make available to
Buyer the following documents and materials (collectively, the "DUE DILIGENCE
MATERIALS").
6.2.1 DELIVERED MATERIALS. Within two (2) days
following the Effective Date, Seller will deliver or cause to be delivered to
Buyer copies of all of the documents and materials relating to the Property
listed on EXHIBIT 6.2.1 attached hereto provided that the same is not
confidential or proprietary in nature. Seller has not undertaken any independent
investigation as to the truth or accuracy of the documents and materials to be
delivered and is providing same solely as an accommodation to Buyer.
6.2.2 PROPERTY FILES. Seller shall make available
to Buyer and Buyer's agents and representatives, upon reasonable notice and
during normal business hours, all files in the possession of Seller, or in
possession of Seller's property manager, if any, relating to the ownership,
operation, construction, use or occupancy of the Property, or any portion of the
Property. Buyer, at its expense, may make photocopies of such material relative
to the Property as Buyer may determine.
6.2.3 RESTRICTED INFORMATION. Notwithstanding any
provision to the contrary, "Due Diligence Materials" shall not include, and
Seller shall have no obligation to furnish or otherwise make available to Buyer,
any of the following documents: (i) any internally or externally prepared
reports or analysis concerning the valuation or economic performance of the
Property; (ii) any information received from or concerning any other potential
purchaser of the Property; (iii) any federal or state income tax returns; (iv)
any documents, instruments or agreements evidencing, securing or relating to any
mortgage loan currently encumbering the Real Property; (v) any correspondence or
analyses regarding past, pending or proposed real property tax appeals; or (vi)
any information or documentation that is privileged or otherwise legally
protected from disclosure under applicable law.
6.2.4 CONFIDENTIALITY. Buyer and its
representatives shall hold in strictest confidence all data and information
obtained with respect to Seller or the Property whether obtained before or after
the execution and delivery of this Agreement, and shall not disclose the same to
others; provided, however, that it is understood and agreed that Buyer may
disclose such data and information to the employees, lenders, consultants,
accountants and attorneys of Buyer provided that such persons agree to treat
such data and information confidentially. In the event this Agreement is
terminated or Buyer fails to perform hereunder, Buyer shall promptly return to
Seller any statements, documents, schedules, exhibits and other written
information obtained from Seller in connection with this Agreement or the
transaction contemplated herein. It is understood and agreed that, with respect
to any provision of this Agreement which refers to the termination of this
Agreement and the
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return of the Deposit to Buyer, Twenty-Five Thousand Dollars ($25,000.00) of the
Deposit shall not be returned to Buyer unless and until Buyer has fulfilled its
obligation to return to Seller the materials described in the preceding sentence
and the Buyer's Reports in accordance with Section 6.5. The provisions of this
Section 6.2.4 shall survive Closing or any termination of this Agreement.
6.3 TITLE REVIEW. The period commencing as of the
Effective Date and continuing through the date which is ten (10) days following
the Effective Date shall be referred to as the "TITLE REVIEW PERIOD".
6.3.1 TITLE MATERIAL. Promptly following the
Effective Date, Seller will obtain and deliver to Buyer a current preliminary
title report ("TITLE REPORT") for the Real Property prepared by the Title
Company, together with a copy of the documents listed as exceptions therein.
Buyer, at its election, may obtain a survey ("SURVEY") of the Real Property
prepared by a licensed engineer which Survey shall be sufficient to provide the
basis for an ALTA owner's policy of title insurance. The Survey shall be
obtained by Buyer, if at all, prior to the expiration of the Title Review Period
and, if obtained, Buyer shall promptly deliver a copy of the Survey to Seller
and the Title Company. It is acknowledged that Buyer will not be entitled to
obtain an ALTA title insurance policy with respect to the Real Property if Buyer
elects not to timely obtain a Survey with respect to such Real Property.
6.3.2 REVIEW OF TITLE. Buyer shall notify Seller
in writing (the "TITLE NOTICE") prior to the expiration of the Title Review
Period which exceptions to title as shown on the Title Report and Survey, if
any, will not be accepted by Buyer. If Buyer fails to notify Seller in writing
of its disapproval of any exceptions to title by the expiration of the Title
Review Period, Buyer shall be deemed to have approved the condition of title to
the Real Property. If Buyer notifies Seller in writing that Buyer objects to any
exceptions to title, Seller shall have one (1) business day after receipt of the
Title Notice to notify Buyer (a) that Seller will remove such objectionable
exceptions from title on or before the Closing, provided that Seller may extend
the Closing for such period as shall be required to effect such cure, but not
beyond ten (10) days; or (b) that Seller elects not to cause such exceptions to
be removed. If Seller fails to timely give such notice to Buyer, the Seller
shall be deemed to have given notice to Buyer under clause (b). Seller shall
have no obligation to remove any title exceptions to which Buyer objects
provided, however, that Seller shall remove, as of the Closing, all liens
evidencing any deed of trust (and related documents) securing financing. The
procurement by Seller of a commitment for the issuance of the Buyer's Title
Policy (as defined in Section 3.2 hereof) or an endorsement thereto insuring
Buyer against any title exception which was disapproved pursuant to this Section
6.3.2 shall be deemed a cure by Seller of such disapproval. If Seller gives or
is deemed to have given Buyer notice under clause (b) above, Buyer shall have
one (1) business day from the date on which such notice to Buyer is given in
which to notify Seller that Buyer will nevertheless proceed with the purchase
and take title to the Property subject to such exceptions, or that Buyer will
terminate this Agreement. If Buyer fails to timely give such notice, Buyer will
be deemed to have elected to proceed with the purchase and take title to the
Property subject to such exceptions. If this Agreement is terminated pursuant to
the foregoing provisions of this Section 6.3.2, then neither party shall have
any further rights or obligations hereunder (except with respect to those
matters expressly stated to survive such termination), the Deposit shall be
returned to Buyer and each party shall bear its own costs incurred hereunder.
6.3.3 SUBSEQUENT TITLE DEFECTS. Buyer may, at or
prior to Closing, notify Seller in writing (the "SUBSEQUENT TITLE DEFECTS
NOTICE") of any objection(s) to title exceptions (a)
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raised by the Title Company between the expiration of the Title Review Period
and the Closing and (b) not disclosed by the Title Company or the Survey or
otherwise known to Buyer prior to the expiration of the Title Review Period,
provided that Buyer must notify Seller of such objection(s) to title within two
(2) business days of being made aware of the existence of such exception. If
Buyer gives a Subsequent Title Defects Notice to Seller, Seller shall have two
(2) business days after receipt of the Subsequent Title Defects Notice to notify
Buyer (a) that Seller will remove such objectionable exceptions from title on or
before the Closing, provided that Seller may extend the Closing for such period
as shall be required to effect such cure, but not beyond ten (10) days; or (b)
that Seller elects not to cause such exceptions to be removed. If Seller fails
to timely give such notice to Buyer, Seller shall have been deemed to have given
notice to Buyer under clause (b). Seller shall have no obligation to remove any
title exceptions to which Buyer objects, provided however, that Seller shall
remove, as of the Closing, all liens evidencing any deed of trust (and related
documents) securing financing. The procurement by Seller of a commitment of the
Title Company for Buyer's Title Policy or an endorsement thereto insuring Buyer
against any title exception which was disapproved pursuant to this Section 6.3.3
shall be deemed a cure by Seller of such disapproval. If Seller gives or is
deemed to have given notice under clause (b) above, Buyer shall have two (2)
business days from the date on which such notice to Buyer is given in which to
notify Seller that Buyer will nevertheless proceed with the purchase and take
title to the Property subject to such exceptions or that Buyer will terminate
this Agreement. If Buyer fails to timely give such notice, Buyer shall be deemed
to have elected to proceed with the purchase and take title to the Property
subject to such exceptions. If this Agreement is terminated pursuant to the
foregoing provisions of this Section 6.3.3 then neither party shall have any
further rights or obligations hereunder (except with respect to those matters
expressly set forth to survive such termination), the Deposit shall be returned
to Buyer and each party shall bear its own costs incurred hereunder.
6.4 INSPECTION; RIGHT OF ENTRY. Buyer and Buyer's agents,
contractors, engineers, consultants, employees and other representatives
(collectively, "BUYER'S REPRESENTATIVES") shall have the right, during the Due
Diligence Period and subject to the terms and conditions of Section 6.6 below,
(i) to enter the Real Property to inspect the same (including the performance of
environmental audits of the Real Property in accordance with the terms of
Section 6.4.1 and 6.4.2 below), upon reasonable notice to Seller, provided that
Buyer does not unreasonably disturb any business of Seller in connection with
the Property or any tenant of the Real Property and provided that Seller shall
be afforded the opportunity to participate in such visitations and (ii) to
contact representatives of third parties who have executed Service Contracts
with Seller or Seller's representatives regarding the Real Property. Buyer shall
keep the Property free and clear of any mechanics' liens, materialmen's liens or
claims arising out of any of Buyer's activities or those of Buyer's
Representatives on or with respect to the Real Property. All entries onto the
Real Property by Buyer and all inspections and examinations thereof shall be at
Buyer's sole cost and expense, shall be done in a workmanlike manner in
accordance with all applicable codes, statutes, ordinances, rules, regulations
and laws and shall not disturb in any way the quiet occupancy or enjoyment of
any tenant or other occupant of the Real Property. Buyer shall not perform any
test or inspection or carry out any activity at the Real Property which damages
the Real Property in any way or which is physically intrusive into the
Improvements or soil of the Real Property without the prior written consent of
Seller, which Seller may withhold in its sole and absolute discretion. After
each entry onto any portion of the Real Property, Buyer, at its sole cost and
expense shall repair (which shall include replacement where necessary) any
damage to the Real Property arising from such entry. In connection with any
inspections of the Real Property, Buyer and Buyer's Representatives will carry
liability insurance adequate in Seller's reasonable judgement and, upon the
request of Seller, will
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provide Seller with written evidence of same. Buyer will give Seller reasonable
prior notice of its intention to conduct any inspections or tests with respect
to the Real Property and Seller reserves the right to have a representative
present.
6.4.1 PHASE I ENVIRONMENTAL AUDIT. During the Due
Diligence Period, Buyer may conduct (or have conducted on its behalf by an
environmental auditor) a Phase I environmental audit of the Real Property,
subject to the terms and conditions of Sections 6.4.2 and 6.6 below.
6.4.2 ENVIRONMENTAL CONDITIONS. In the event that
Buyer shall enter the Real Property for purposes of conducting a Phase I
environmental audit of the Real Property, Buyer shall provide Seller with at
least forty-eight (48) hours' prior written notice of its intent thereof. Buyer
shall not conduct a Phase II environmental audit of the Real Property without
the prior written consent of Seller which consent may be withheld or granted in
the sole and absolute discretion of Seller. Buyer shall not disclose to any
third party, other than Buyer's consultants, agents and attorneys associated
with any environmental investigation of the Real Property and other than as may
be required by applicable law, the results of any of Buyer's inspections or
testing of the Real Property. Prior to performing any environmental inspections
or testing of the Real Property, Buyer shall obtain any required permits and
authorizations and shall pay all applicable fees required by any public body or
agency in connection therewith.
6.5 BUYER'S REPORTS. If the Escrow fails to close for any
reason other than Seller's material breach of this Agreement, then all studies,
surveys (including, without limitation the Survey), if any, reports, test
results and analyses concerning the Real Property prepared by, for or on behalf
of Buyer in connection with the Real Property (collectively, "BUYER'S REPORTS")
shall at the option of Seller, immediately be delivered and assigned to Seller
free and clear of all claims and at no cost, expense or liability to Seller.
Buyer shall not be required to deliver to Seller internally prepared reports or
analyses concerning the valuation or potential performance of the Real Property.
Any Buyer's Reports delivered to Seller at Seller's request pursuant to this
Section 6.5 shall be delivered without representation or warranty, nor shall
Seller assert any warranty or rights against the consultants of Buyer who have
prepared such Buyer's Reports.
6.6 INDEMNITY. Buyer shall indemnify, defend by counsel
reasonably acceptable to Seller, and hold Seller harmless from and against any
and all costs, expenses, claims, demands or liens, (including, without
limitation, mechanics' liens) including reasonable attorneys' fees, arising from
or in any fashion related to the entry by Buyer or Buyer's Representatives on
the Real Property or the performance by Buyer or Buyer's Representatives of any
testing or investigations of the Real Property except with respect to any loss
or liability incurred by Seller resulting from the mere discovery by Buyer or
Buyer's Representatives of the presence of hazardous materials at the Property
or the existence of other defects with respect to the Property. Without limiting
the scope or generality of the foregoing indemnity, Buyer shall not permit any
mechanics', materialman's, or other lien against all or any part of the Real
Property to exist as the result of any activity by Buyer or Buyer's
Representatives undertaken in connection with the Real Property. If any such
lien shall be filed against the Real Property or any portion of the Real
Property, Buyer shall cause the lien to be discharged within five (5) business
days after the filing thereof. The provisions of this Section 6.6 shall survive
the Closing and delivery of the Deed and shall further survive any earlier
termination of this Agreement.
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6.7 APPROVAL BY BUYER. Buyer shall have the right to
review and approve, in its sole, absolute and subjective discretion, during the
Due Diligence Period all aspects of the Property, including but not limited to,
(i) the Due Diligence Materials, (ii) the physical and environmental condition
of the Real Property, including, without limitation, the condition of the
Improvements, the condition of the soil at the Real Property, the condition of
the ground water at the Real Property, and the presence or absence of any
hazardous materials at the Real Property, (iii) the financial condition of the
Property, including, without limitation, the feasibility, convertibility,
desirability and suitability of the Property for Buyer's intended use and
purposes, (iv) the legal condition of the Property, including, without
limitation, the Property's compliance or non-compliance with all statutes,
ordinances, codes, regulations, decrees, orders and laws applicable to the
Property, (v) the Lease(s), (vi) the Service Contracts, if any, being assumed by
Buyer, (vii) the existence or non-existence of any governmental or
quasi-governmental entitlements, if any, affecting the Property or any portion
of the Property, (viii) any dimensions or specifications of the Real Property or
any part thereof, (ix) the zoning, building and land use restrictions applicable
to the Real Property or any portion thereof, and (x) all other matters which
Buyer deems relevant to its purchase of the Property. It is acknowledged that
Buyer is the tenant of the Property and by reason of such existing relationship,
is generally familiar with matters relating to the Property. In the event that
Buyer elects to approve all of the matters as summarized in this Section 6.7
with respect to the Property, Buyer shall give written notice of such approval
to Seller ("APPROVAL NOTICE") on or before the Due Diligence Date. The Approval
Notice, if given by Buyer must be in the form of EXHIBIT 6.7 attached hereto. If
Buyer fails to timely give the Approval Notice to Seller, Buyer shall
conclusively be deemed to have disapproved the Property and more particularly
the matters set forth in this Section 6.7 in which case this Agreement shall
terminate, all rights and obligations hereunder of each party shall be at an end
(except those matters which are specifically stated in this Agreement to survive
the termination), the Deposit shall be promptly returned to Buyer and each party
shall bear its own costs incurred hereunder. If Buyer timely gives the Approval
Notice to Seller, then Buyer shall be considered to have elected to proceed with
the purchase of the Property in accordance with the provisions of this
Agreement, Buyer shall have no further rights with respect to this Section 6.7,
the condition for the benefit of Buyer as set forth in Section 7.2.5 shall be
considered to have been satisfied and Buyer shall have no further rights to
assert the conditions set forth in such Sections.
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7. CONDITIONS TO CLOSING.
7.1 SELLER'S CONDITIONS. The obligation of Seller to sell
and convey the Property pursuant to this Agreement is subject to the
satisfaction on or before the Closing Date (or such earlier date as is
specifically set forth in this Agreement) of all of the following conditions
precedent, which conditions are for the benefit of Seller only and the
satisfaction of which may be waived only in writing by Seller:
7.1.1 BUYER'S DELIVERIES. Delivery and execution
by Buyer of all monies, items and instruments required to be delivered by Buyer
pursuant to this Agreement;
7.1.2 BUYER'S REPRESENTATIONS. Buyer's warranties
and representations set forth herein shall be true and correct in all material
respects as of the Closing Date;
7.1.3 BUYER'S PERFORMANCE. Buyer shall have
performed each and every agreement to be performed by Buyer pursuant to this
Agreement; and
7.1.4 APPROVAL NOTICE. Buyer shall have timely
given the Approval Notice to Seller in accordance with the provisions of Section
6.7.
7.2 BUYER'S CONDITIONS. The obligation of Buyer to
acquire the Property pursuant to this Agreement is subject to the satisfaction
on or before the Closing Date (or such earlier date as is specifically set forth
in this Agreement) of all of the following conditions precedent which conditions
are for the benefit of Buyer only and the satisfaction of which may be waived
only in writing by Buyer:
7.2.1 SELLER'S DELIVERIES. Delivery and execution
by Seller of all instruments and other items required to be delivered by Seller
pursuant to this Agreement;
7.2.2 SELLER'S REPRESENTATIONS. Seller's
warranties and representations set forth herein shall be true and correct in all
material respects as of the Closing Date;
7.2.3 SELLER'S PERFORMANCE. Seller shall have
performed each and every agreement to be performed by Seller pursuant to this
Agreement;
7.2.4 BUYER'S TITLE POLICY. As of the Closing, the
Title Company shall have issued or shall have committed to issue, upon the sole
condition of the payment of its regularly scheduled premium, the Buyer's Title
Policy; and
7.2.5 BUYER'S APPROVAL. On or before the Due
Diligence Date, Buyer shall have given the Approval Notice to Seller in
accordance with the provisions of Section 6.7.
7.3 FAILURE OF CONDITIONS. If any of the conditions set
forth in Sections 7.1 or 7.2 are not timely satisfied or waived, for any reason
other that the default of Buyer or Seller under this Agreement, then this
Agreement and the rights and obligations of Buyer and Seller shall terminate and
be of no further force or effect except as to those matters as specifically
stated in this Agreement to survive termination, in which case the Title Company
is hereby instructed to return promptly to
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the party which placed such items into Escrow all funds (including the
Deposit which is to be promptly returned to Buyer) and documents which are
held by the Title Company on the date of termination.
7.4 SATISFACTION OF CONDITIONS. The occurrence of the
Closing shall constitute satisfaction of conditions set forth in Sections 7.1
and 7.2 not otherwise specifically satisfied or waived by Buyer or Seller.
8. DELIVERIES INTO ESCROW.
8.1 DELIVERIES BY SELLER. On or before the Closing,
Seller shall deliver or cause to be delivered into Escrow the following
documents duly executed and acknowledged where appropriate:
8.1.1 DEED. A grant deed (the "DEED") in the form
attached hereto as EXHIBIT 8.1.1 conveying the Real Property to Buyer as
provided in this Agreement which Deed is to be duly executed and acknowledged by
Seller;
8.1.2 BILL OF SALE. Bill of sale ("BILL OF SALE")
in the form attached hereto as EXHIBIT 8.1.2 conveying the Personal Property to
Buyer which Bill of Sale is to be duly executed by Seller;
8.1.3 ASSIGNMENT. An Assignment in the form
attached hereto as EXHIBIT 8.1.3 which is to be duly executed by Seller and
Buyer;
8.1.4 FIRPTA. A certificate of non-foreign status
to confirm that Buyer is not required to withhold part of the Purchase Price
pursuant to Section 1445 of the Internal Revenue Code of 1986, as amended which
is to be duly executed by Seller;
8.1.5 FORM 590. Franchise Tax Board Form (590)
which is to be duly executed by Seller;
8.1.6 SELLER'S AUTHORITY. Such proof of Seller's
authority and authorization to enter into this Agreement and consummate the
transaction contemplated hereby and such proof of the power and authority of the
individual(s) executing and/or delivering any instruments, documents or
certificates on behalf of Seller to act for and bind Seller as may be reasonably
required by Title Company; and
8.1.7 OTHER DOCUMENTS. Such other documents as may
be reasonably necessary and appropriate to complete the Closing of the
transaction contemplated herein.
8.2 DELIVERIES BY BUYER. On or before the Closing, Buyer
shall deliver or cause to be delivered into Escrow the following funds (in cash)
and documents duly executed and acknowledged where appropriate:
8.2.1 CASH. The Purchase Price and such additional
sums as are necessary to pay the Buyer's share of closing costs, prorations and
any fees as more particularly set forth in Section 9 below;
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8.2.2 ASSIGNMENT. An Assignment which is to be
duly executed by Seller and Buyer;
8.2.3 BUYER'S AFFIDAVIT. Buyer's Affidavit in the
form attached hereto as EXHIBIT 8.2.3 which is to be duly executed by Buyer;
8.2.4 BUYER'S AUTHORITY. Such proof of Buyer's
authority and authorization to enter into this Agreement and consummate the
transaction contemplated by this Agreement, and such proof of the power and
authority of the individual(s) executing and/or delivering any instruments,
documents or certificates on behalf of Buyer to act for and bind Buyer as may be
reasonably required by Title Company or Seller; and
8.2.5 OTHER DOCUMENTS. Such other documents as may
be reasonably necessary and appropriate to complete the Closing of the
transaction contemplated herein.
8.3 DELIVERY TO BUYER UPON CLOSING. Seller shall deliver
possession of the Property to Buyer upon the Closing subject to the rights of
possession of the tenants pursuant to the Leases.
8.4 DELIVERY FOLLOWING CLOSING. Promptly following the
Closing, Seller shall deliver to Buyer: (i) the original of the Lease(s); (ii)
the originals of the Service Contracts, if any; (iii) all building plans and
specifications with respect to the Real Property which are in the possession of
Seller or reasonably accessible to Seller or its property manager; (iv) all
structural reviews, architectural drawings, engineering, soils, seismic,
geologic and architectural reports in the possession of Seller or reasonably
accessible to Seller or its property manager; and (v) such other matters and
documents in the possession of Seller or reasonably accessible to Seller or to
its property manager as Buyer may reasonably request which relate to the
Property and are not confidential and/or proprietary.
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9. PRORATIONS; CLOSING COSTS; CREDITS.
9.1 PRORATIONS.
9.1.1 RENT. Rents, revenues and other income from
the Property, actually collected as of the Closing, shall be prorated through
Escrow as of 12:01 a.m. on the Closing Date with Seller entitled to the prorated
portion of such items attributable to the period prior to such date and time and
Buyer entitled to the prorated portion of such items following such date and
time. Any prepaid rent paid by a tenant of the Property shall be credited to
Buyer. If any rent or other payments under the Lease(s) are in arrears as of the
Closing Date, Buyer shall use reasonable efforts following the Closing to
collect such rent or other payments provided that in no event shall Buyer be
obligated to commence litigation to effect collection. Nothing in this Section
9.1.1 shall restrict Seller's right to collect delinquent rents directly from a
tenant by any legal means. Notwithstanding any provision of this Agreement to
the contrary in the event that the lease with Buyer terminates by merger as of
the Closing, in no event shall such termination limit Seller's right to collect
delinquent rent, if any, or to otherwise enforce the provisions of the lease
described on Exhibit 1.3(i). Delinquent rent collected by Seller subsequent to
the Closing shall be promptly paid to Buyer to the extent that Buyer is entitled
to such rent in connection with the period on and after the Closing Date, and
delinquent rent collected by Buyer subsequent to the Closing shall be promptly
paid to Seller to the extent that Seller is entitled to such rent pursuant to
the provisions of this Agreement relating to the period prior to the Closing
Date. Seller and Buyer agree that all rent received by Seller or Buyer following
Closing shall be applied first to any current rent then due Seller, if any, and
then to delinquent rent, if any, due Buyer.
9.1.2 TAXES AND ASSESSMENTS. Except to the extent
that real estate taxes are paid directly by the tenant(s), all nondelinquent
real estate taxes on the Property shall be prorated through Escrow based on the
actual current tax bill as of 12:01 a.m. on the Closing Date with Seller
responsible for all such taxes attributable to the period prior to such date and
time and Buyer responsible for all such taxes attributable to the period
following such date and time. If after the Closing, supplemental real estate
taxes are assessed against the Property by reason of any event occurring prior
to the Closing Date, Buyer and Seller shall adjust the proration of the real
estate taxes following the Closing. Any delinquent taxes on the Property shall
be paid at the Closing from funds accruing to Seller. Any current installments
with respect to assessments on the Real Property shall be prorated through
Escrow as of 12:01 a.m. on the Closing Date and Seller shall have no obligation
to pay any amount with respect to any such assessments other than the prorated
current installment. Any refund in connection with real estate taxes relating to
the Property attributable to the period prior to the Closing Date shall be paid
to Seller.
9.1.3 OPERATING EXPENSES. Operating expenses
payable by the owner of the Real Property and all other customary charges or
costs incident to the ownership of the Property (not otherwise payable directly
by the tenants) shall be prorated through Escrow as of 12:01 a.m. on the Closing
Date. Seller shall be responsible for all operating expenses accruing and
attributable to the Property through the day prior to the Closing Date and Buyer
shall be responsible for all operating expenses accruing and attributable to the
Property commencing as of the Closing Date. Seller, as landlord under the
Lease(s), may be currently collecting from tenants under the Lease(s) additional
rent to cover taxes, insurance, utilities (to the extent not paid directly by
tenants), common area maintenance and other operating costs and expenses
(collectively, "OPERATING COSTS") in connection
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with the ownership, operation, maintenance and management of the Property.
Seller and Buyer shall each receive a debit or credit, as the case may be, for
the difference between the aggregate tenants' current account balances for
Operating Costs and the amount of Operating Costs reimbursable to Seller.
Operating Costs for Seller's period of ownership shall be reasonably estimated
by the parties if final bills are not available. Seller shall not assign to
Buyer any deposits which Seller has with any utility companies servicing the
Property. Buyer shall arrange with such companies to have accounts open in
Buyer's name beginning at 12:01 a.m. on the Closing Date. To the extent
possible, Seller and Buyer shall obtain billings and meter readings as of the
Closing Date and all operating expenses shall be prorated based upon the
information then available. Seller and Buyer shall make any adjustments required
to be made subsequent to the Closing in the event the information available at
the Closing is incorrect.
9.1.4 SERVICE CONTRACTS. The amounts payable under
the Service Contracts which shall be assumed pursuant to the provisions of the
Assignment, shall be prorated through Escrow on an accrual basis as of 12:01
a.m. on the Closing Date. Seller shall pay all amounts due thereunder which
accrue prior to the Closing Date and Buyer shall pay all amounts accruing on the
Closing Date and thereafter. Buyer shall have no responsibility for Service
Contracts not specifically being assumed by Buyer pursuant to this Agreement.
Those Service Contracts which Buyer elects during the Due Diligence Period not
to assume by giving written notice of such election to Seller shall be
terminated by Seller as of the Closing, provided, however that with respect to
those Service Contracts which require a termination notice longer than that
allowed by reason of the date of the Closing (which in all events shall be no
greater than thirty (30) days notice) provided that Seller has given notice of
termination on or prior to the Closing Date, Buyer shall be responsible for the
obligations that relate to such terminated Service Contracts for the period from
and after the Closing Date and Seller shall be responsible for the obligations
that relate to the period prior to the Closing Date. Buyer shall have no
responsibility for Service Contracts which Buyer has elected not to assume for
any period in excess of thirty (30) days following the Closing Date. Seller
shall not be obligated to terminate the Service Contracts which Buyer has
elected not to assume prior to the Closing Date.
9.1.5 CALCULATION OF PRORATIONS. All prorations
shall be made on the basis of the actual number of days of the month which have
elapsed as of 12:01 a.m. on the Closing Date provided that the cash portion of
the Purchase Price is received by Seller's depository bank in time to credit to
Seller's account on the Closing Date. If the cash portion of the Purchase Price
is not so received by Seller's depository bank on the Closing Date, then the day
of Closing shall belong to Seller and such proration shall be made as of the end
of the day that is the Closing Date.
9.1.6 PROFORMA CLOSING STATEMENT. Buyer and Seller
shall reasonably cooperate to produce at least one business day prior to the
Closing Date, a schedule of prorations in accordance with the provisions of this
Agreement which is as complete and accurate as is then reasonably possible. All
prorations which can be reasonably estimated as of the Closing Date shall be
made in Escrow on the Closing Date. All other prorations and any adjustments to
the initial estimated prorations, shall be made by Buyer and Seller within
thirty (30) days following the Closing or such later time as may be reasonably
required, in the exercise of due diligence to obtain the necessary information.
Any net credit due one party from the other as the result of such post-Closing
prorations and adjustments shall be paid to the other in cash immediately upon
the parties' written agreement to a final schedule of post-Closing adjustments
and prorations. The provisions of Section 9.1 shall survive the Closing and the
recordation of the Deed.
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9.2 CLOSING COSTS.
9.2.1 SELLER'S COSTS. Seller shall pay (i) the
premium for the standard coverage CLTA portion of the Buyer's Title Policy; (ii)
fifty percent (50%) of all documentary and transfer taxes; (iii) fifty percent
(50%) of all escrow fees, costs and recording costs; (iv) fifty percent (50%) of
the cost of the Survey, if applicable; and (v) its own attorneys' fees.
9.2.2 BUYER'S COSTS. Buyer shall pay (i) fifty
percent (50%) of all escrow fees, costs and recording costs; (ii) the
incremental premium for the ALTA portion of Buyer's Title Policy, if applicable,
and the premium for any endorsements; (iii) the premium for the Buyer's lender's
title policy, if any; (iv) fifty percent (50%) of all documentary and transfer
taxes; (v) fifty percent (50%) of the cost of the Survey, if applicable; and
(vi) its own attorneys' fees.
9.3 CREDITS. Buyer shall be credited and Seller shall be
debited in an amount equal to all security deposits in Seller's possession paid
under the Lease(s), except to the extent that Seller was entitled to and did
apply any part of such deposits to tenant obligations under the Lease(s).
9.4 OTHER EXPENSES. Buyer and Seller shall each pay all
legal and professional fees and fees of other consultants incurred by Buyer and
Seller, respectively.
10. OPERATION OF PROPERTY PENDING THE CLOSING. Following the
Effective Date and pending the Closing, the Seller shall operate the Property in
accordance with the following:
10.1 NORMAL COURSE OF BUSINESS. Seller shall use
commercially reasonable efforts to continue to operate, manage and maintain the
Property in such condition so that the Property shall be in substantially the
same condition as of the Closing Date as it is as of the Due Diligence Date,
reasonable wear and tear and casualty excepted, provided however, Seller shall
not be required to perform any capital repairs or improvements. Seller shall
maintain all existing insurance policies in connection with the Property and
shall keep in effect and renew without material modification all licenses,
permits and entitlements applicable to the Property. Seller's existing liability
and property insurance pertaining to the Property may be canceled by Seller as
of the Closing Date. After the expiration of the Due Diligence Period, except as
may be required by the Lease(s), Seller shall not make any material alterations
to the Property or remove any Personal Property without the prior written
approval of Buyer, which approval shall not be unreasonably withheld or delayed;
10.2 FURTHER ENCUMBRANCES. Seller shall not execute any
documents or otherwise take any action which will have the result of further
encumbering the Property in any fashion;
10.3 LEASING. Following the Due Diligence Date, the Seller
shall not terminate, amend or otherwise modify the Lease(s), or enter into any
new lease without the prior consent of Buyer, which consent shall not be
unreasonably withheld or delayed; and
10.4 NEW OBLIGATIONS. Without the prior written consent of
Buyer, which consent shall not be unreasonably withheld or delayed, Seller shall
not enter into any maintenance contract, service contract or any other contract
affecting or relating to the Property or any portion thereof which cannot be
canceled upon thirty (30) days (or less) prior written notice. Notwithstanding
the above sentence, Seller shall be entitled to enter into any obligations
required to be undertaken by
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Seller pursuant to the provisions of the Lease(s) without the prior consent of
Buyer provided that Seller shall give Buyer prior written notice of the entry of
Seller into any such obligations.
11. REPRESENTATIONS AND WARRANTIES.
11.1 NO REPRESENTATIONS OR WARRANTIES BY SELLER. Except as
expressly set forth in this Agreement, Seller has not made any warranty or
representation, express or implied, written or oral, concerning the Property.
11.2 SELLER'S REPRESENTATIONS AND WARRANTIES. Seller
represents and warrants to Buyer that:
11.2.1 AUTHORITY. This Agreement constitutes the
valid and binding obligation of Seller and is enforceable against Seller in
accordance with its terms, subject to bankruptcy, insolvency and similar laws
affecting the enforcement of creditors' rights generally and general equitable
principles. Seller is a corporation, validly formed, duly organized and in good
standing under the laws of the State of California. Seller has full power, right
and authority to enter into and perform this Agreement. The execution and
delivery of this Agreement, delivery of money and all required documents,
Seller's performance of this Agreement and the transaction contemplated hereby
have been duly authorized by the requisite action on the part of Seller. Neither
the execution and delivery of this Agreement, nor the transaction contemplated
by this Agreement will conflict in any material respect or constitute a breach
under any agreement or instrument by which Seller or the Property is bound;
11.2.2 SERVICE CONTRACTS. To Seller's knowledge,
the Service Contracts listed on EXHIBIT 1.3 are all of the agreements concerning
the operation and maintenance of the Property entered into by Seller and
affecting the Property, except those operating agreements that are not
assignable and except any agreement with Seller's property manager, which shall
be terminated by Seller as of the Closing;
11.2.3 CONDEMNATION. To Seller's knowledge, Seller
has received no written notice of any pending condemnation proceedings relating
to the Real Property;
11.2.4 LITIGATION. To Seller's knowledge, Seller
has not received written notice of any litigation which has been filed against
Seller that arises out of the ownership of the Property and would materially
affect the Property or use thereof, or Seller's ability to perform hereunder;
11.2.5 VIOLATIONS. To Seller's knowledge, Seller
has not received written notice of any uncured violation of any federal, state
or local law relating to the use or operation of the Property which would
materially adversely affect the Property or use thereof, or Seller's ability to
perform hereunder. To Seller's knowledge, Seller has not received written notice
of any alleged building code violations, health and safety code violations,
federal, state or local agency actions regarding environmental matters or zoning
violations currently affecting the Real Property which remain uncured;
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11.2.6 ACCESS. To the best of Seller's knowledge,
no fact or condition exists which may result in the termination or reduction of
the current access from the Real Property to existing roads and highways;
11.2.7 FOREIGN PERSON. Seller is not a "foreign
person" as defined in Section 1445 of the Internal Revenue Code of 1986, as
amended, and the income tax regulations issued thereunder;
11.2.8 LEASE(S). To Seller's knowledge, except as
disclosed in writing to Buyer, Seller has not received notice of any claimed
default by Seller under the Lease(s) and there are no unperformed obligations of
Seller pursuant to the Lease(s); and
11.2.9 LEASING COMMISSIONS. As of the Effective
Date, there are no leasing commissions required to be paid in connection with
the Lease(s) except as may be related to future renewals, expansions or
extensions.
11.3 BUYER'S REPRESENTATIONS AND WARRANTIES. Buyer
represents and warrants to Seller that:
11.3.1 AUTHORITY TO EXECUTE; ORGANIZATION. This
Agreement constitutes the valid and binding obligation of Buyer and is
enforceable against Buyer in accordance with its terms, subject to bankruptcy,
insolvency and similar laws affecting the enforcement of creditors' rights
generally and general equitable principles. Buyer represents that it is a
corporation, is validly formed and duly organized in good standing under the
laws of the State of New Jersey and the execution of this Agreement, delivery of
money and all required documents, Buyer's performance of this Agreement and the
transaction contemplated hereby have been duly authorized by the requisite
action on the part of Buyer;
11.3.2 NO ENCUMBRANCE. Prior to Closing, Buyer
shall neither encumber nor cause any liens to be created against the Property in
any way, nor shall Buyer, at any time, record this Agreement or a memorandum
thereof; and
11.3.3 PRINCIPAL; FINANCIAL RESOURCES. Buyer is
acting as a principal in connection with the transaction as contemplated by this
Agreement and presently possesses, and will possess as of the Closing, the
financial resources to timely consummate the purchase and sale transaction
contemplated by this Agreement.
11.4 KNOWLEDGE DEFINED. References to the "knowledge" of
Seller and phrases of similar import shall refer only to the current actual (not
constructive) knowledge of Theodore H. Kruttschnitt, and shall not be construed,
by imputation or otherwise, to refer to the knowledge of any affiliate of
Seller, to any property manager, or to any other officer, agent, manager,
representative or employee of Seller or any affiliate thereof or to impose upon
such person any duty to investigate the matter to which such actual knowledge,
or the absence thereof, pertains. Seller represents that Theodore H.
Kruttschnitt is the President of Seller and is active in the management of the
Property.
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12. INDEMNIFICATION.
12.1 INDEMNIFICATION OF BUYER. Seller hereby agrees to
indemnify Buyer against, and to hold Buyer harmless from, all losses, damages,
costs and expenses whatsoever including without limitation reasonable legal fees
and disbursements, incurred by Buyer relating to the Property which arise,
result from or relate to (i) acts, occurrences or matters that took place prior
to the Closing to the extent that any such claim described in this clause (i) is
covered by the commercial general liability insurance policy maintained by
Seller or otherwise covered pursuant to applicable insurance coverage maintained
by Seller and in this connection Seller represents and warrants that Seller has
during the period of its ownership maintained and continues to maintain
commercial general liability insurance coverage; or (ii) any material breach of
any of the representations or warranties of Seller set forth in Section 11.2 of
this Agreement subject, however, to the limitations of Section 16.4.
12.2 DEFENSE OF CLAIMS AGAINST BUYER. With respect to any
claim for which Buyer has requested indemnification under Section 12.1, Seller
shall be entitled to assume the defense of any related litigation, arbitration
or other proceeding, provided that Buyer may at its election and expense,
participate in such defense, and provided further that if there is any
difference of opinion or strategy with respect to the defense of such action or
the assertion of counterclaims to be brought with respect thereto, Seller's
counsel will, after consultation with Buyer's counsel, determine the actual
strategy, defense or counterclaim to be employed. At Seller's reasonable
request, Buyer will cooperate with Seller in the preparation of any defense for
any such claim and Seller will reimburse Buyer for any reasonable expenses
incurred in connection with such request. If Seller does not elect to assume the
defense of any such matter and such matter is defended by Buyer, Seller shall
have the right, at its sole expense, to employ separate counsel acceptable to
Buyer and participate in such defense, provided that if there is any difference
of opinion or strategy with respect to the defense of such action or the
assertion of counterclaims to be brought with respect thereto, Buyer's counsel
will, after consultation with Seller's counsel, determine the actual strategy,
defense and/or counterclaim to be employed.
12.3 INDEMNIFICATION OF SELLER. Buyer hereby agrees to
indemnify Seller against, and to hold Seller harmless from, all losses, damages,
costs and expenses whatsoever including without limitation reasonable legal fees
and disbursements, incurred by Seller relating to the Property which arise,
result from or relate to (i) acts, occurrences or matters that take place
subsequent to the Closing to the extent that any such claim described in this
clause (i) is covered by the commercial general liability insurance policy
maintained by Buyer or otherwise covered pursuant to applicable insurance
coverage maintained by Buyer and in this connection Buyer represents and
warrants that Buyer will during the period of its ownership maintain commercial
general liability insurance coverage; or (ii) any material breach of any of the
representations or warranties of Buyer set forth in Section 11.3 of this
Agreement.
12.4 DEFENSE OF CLAIMS AGAINST SELLER. With respect to any
claim for which Seller has requested indemnification under Section 12.3, Buyer
shall be entitled to assume the defense of any related litigation, arbitration
or other proceeding, provided that Seller may at its election and expense,
participate in such defense, and provided further that if there is any
difference of opinion or strategy with respect to the defense of such action or
the assertion of counterclaims to be brought with respect thereto, Buyer's
counsel will, after consultation with Seller's counsel, determine the actual
strategy, defense or counterclaim to be employed. At Buyer's reasonable request,
Seller will cooperate with Buyer in the preparation of any defense for any such
claim and Buyer will reimburse Seller for any reasonable expenses incurred in
connection with such request. If Buyer does not elect
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to assume the defense of any such matter, and such matter is defended by Seller,
Buyer shall have the right, at its sole expense, to employ separate counsel
acceptable to Seller and participate in such defense, provided that if there is
any difference of opinion or strategy with respect to the defense of such action
or the assertion of counterclaims to be brought with respect thereto, Seller's
counsel will, after consultation with Buyer's counsel, determine the actual
strategy, defense and/or counterclaim to be employed.
13. CASUALTY OR CONDEMNATION.
13.1 CASUALTY. Prior to the Closing, and notwithstanding
the pendency of this Agreement, the entire risk of loss or damage by earthquake,
flood, landslide, fire or other casualty shall be borne and assumed by Seller,
except as otherwise provided in this Section 13.1. If, prior to the Closing, any
part of the Real Property is damaged or destroyed by earthquake, flood,
landslide, fire or other casualty, Seller shall immediately notify Buyer of such
fact. If such damage or destruction is "material", Buyer shall have the option
to terminate this Agreement upon notice to Seller given not later than ten (10)
days after receipt of Seller's notice. For purposes of this Section 13.1,
"material" shall be deemed to be any damage or destruction (i) where the costs
of repair or replacement is estimated to be One Hundred Thousand Dollars
($100,000.00), or more, or (ii) which Seller reasonably estimates shall take
more than ninety (90) days to repair. If Buyer does not exercise this option to
terminate this Agreement, or the casualty is not material, neither party shall
have the right to terminate this Agreement, but Seller shall assign and turn
over to Buyer, and Buyer shall be entitled to receive and keep all insurance
proceeds payable to it with respect to such destruction (but not in excess of
the Purchase Price) and the parties shall proceed to the Closing pursuant to the
terms hereof without modification of the terms of this Agreement and without any
reduction in the Purchase Price. If Buyer does not elect to terminate this
Agreement by reason of any casualty, Buyer shall have the right to participate
in any adjustment in the insurance claim. If Buyer does terminate this Agreement
pursuant to this Section 13.1, this Agreement shall terminate, all rights and
obligations hereunder of each party shall be at an end (except those matters
which are specifically stated in this Agreement to survive the termination) and
the Title Company is hereby instructed to return promptly to the party which
placed such items into Escrow all funds (including the Deposit which is to be
promptly returned to Buyer) and documents which are held by the Title Company on
the date of termination.
13.2 CONDEMNATION. In the event that all or any
substantial portion of the Real Property shall be taken in condemnation or under
the right of eminent domain after the Effective Date and before the Closing,
Buyer may, at its option either (a) terminate this Agreement by written notice
thereof to Seller and receive an immediate refund of the Deposit, together with
any interest earned thereon, or (b) proceed to close the transaction
contemplated herein pursuant to the terms hereof in which event Seller shall
assign and turn over to Buyer, and Buyer shall be entitled to receive and keep
all awards for the taking by eminent domain which accrue to Seller and there
shall be no reduction in the Purchase Price. For purposes of this provision, a
"substantial portion" of the Real Property shall mean (i) any material portion
of the Real Property is taken; (ii) the access to the Real Property or available
parking area therefor is materially reduced or restricted; or (iii) any of the
rentable square footage of the Improvements is taken. In the event that a
portion of the Real Property less than a substantial portion is taken, or Buyer
elects not to terminate this Agreement, Buyer shall proceed to close the
transaction contemplated herein and there shall be no reduction in the Purchase
Price and Seller shall assign and turn over to Buyer and Buyer shall be entitled
to receive and keep all awards for the taking by eminent domain which accrue to
Seller.
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14. COMMISSIONS.
14.1 PAYMENT OF THE SALES COMMISSION. Seller and Buyer
represent to each other that no real estate broker or agent has been authorized
to act on their behalf in the contemplated transaction. Buyer and Seller each
indemnifies the other party and agrees to defend and hold the other party
harmless from any and all demands or claims which now or hereafter may be
asserted against the other party for any brokerage fees, commissions or similar
types of compensation which may be claimed by any broker as a result of the
indemnifying party's acts in connection with this transaction.
14.2 LEASING COMMISSIONS AND LANDLORD TENANT IMPROVEMENTS.
Subject to the provisions of Section 10.3 above, Buyer shall pay all leasing
commissions and landlord tenant improvement costs relative to any lease(s) made
on or after the Effective Date.
15. NOTICES.
All notices, requests or demands to a party hereunder shall be
in writing and shall be given or served upon the other party by personal
service, by certified return receipt requested or registered mail, postage
prepaid, or by Federal Express or other nationally recognized commercial
courier, charges prepaid, addressed as set forth below. Any such notice, demand,
request or other communication shall be deemed to have been given upon the
earlier of personal delivery thereof, three (3) business days after having been
mailed as provided above, or one (1) business day after delivery through a
commercial courier, as the case may be. Notices may be given by facsimile and
shall be effective upon the transmission of such facsimile notice provided that
the facsimile notice is transmitted on a business day and a copy of the
facsimile notice together with evidence of its successful transmission
indicating the date and time of transmission is sent on the day of transmission
by recognized overnight carrier for delivery on the immediately succeeding
business day. Each party shall be entitled to modify its address by notice given
in accordance with this Section 15.
If to Seller: Limar Realty Corp. #13
c/o Limar Realty Group
1730 South El Camino Real, Suite 400
San Mateo, California 94402
Attention: Theodore H. Kruttschnitt
Fax: (650) 525-9345
With a copy to: Kay & Merkle
100 The Embarcadero, Penthouse
San Francisco, CA 94105
Attn: Walter F. Merkle, Esq.
Fax: (415) 512-9277
20
<PAGE>
If to Buyer: Jack Lief
President & CEO
Arena Pharmaceuticals, Inc.
6166 Nancy Ridge Drive
San Diego, CA 92121
Fax: (858) 453-7210
With a copy to: General Counsel
Arena Pharmaceuticals, Inc.
6166 Nancy Ridge Drive
San Diego, CA 92121
Fax: (858) 453-7210
16. LIMITATIONS ON REPRESENTATIONS AND WARRANTIES.
16.1 NO RELIANCE ON DOCUMENTS. Except as expressly stated
herein, Seller makes no representation or warranty as to the truth, accuracy or
completeness of any materials, data or information delivered by Seller or its
agents to Buyer in connection with the transaction contemplated hereby. Buyer
acknowledges and agrees that all materials, data and information delivered by
Seller to Buyer in connection with the transaction contemplated hereby are
provided to Buyer as a convenience only and that any reliance on or use of such
materials, data or information by Buyer shall be at the sole risk of Buyer.
Neither Seller, nor any affiliate of Seller, nor the person or entity which
prepared any report or reports delivered by Seller to Buyer shall have any
liability to Buyer for any inaccuracy in or omission from any such reports.
16.2 AS-IS SALE: DISCLAIMERS. EXCEPT AS EXPRESSLY SET
FORTH IN THIS AGREEMENT, IT IS UNDERSTOOD AND AGREED THAT SELLER IS NOT MAKING
AND HAS NOT AT ANY TIME MADE ANY WARRANTIES OR REPRESENTATIONS OF ANY KIND OR
CHARACTER, EXPRESS OR IMPLIED, WITH RESPECT TO THE PROPERTY, INCLUDING, BUT NOT
LIMITED TO, ANY WARRANTIES OR REPRESENTATIONS AS TO HABITABILITY,
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
BUYER ACKNOWLEDGES AND AGREES THAT UPON CLOSING SELLER SHALL SELL AND
CONVEY TO BUYER AND BUYER SHALL ACCEPT THE PROPERTY "AS IS, WHERE IS, WITH ALL
FAULTS", EXCEPT TO THE EXTENT EXPRESSLY PROVIDED OTHERWISE IN THIS AGREEMENT.
BUYER HAS NOT RELIED AND WILL NOT RELY ON, AND SELLER IS NOT LIABLE FOR OR BOUND
BY, ANY EXPRESS OR IMPLIED WARRANTIES, GUARANTIES, STATEMENTS, REPRESENTATIONS
OR INFORMATION PERTAINING TO THE PROPERTY OR RELATING THERETO (INCLUDING
SPECIFICALLY, WITHOUT LIMITATION, OFFERING PACKAGES DISTRIBUTED WITH RESPECT TO
THE PROPERTY) MADE OR FURNISHED BY SELLER, THE MANAGER OF THE PROPERTY, OR ANY
EMPLOYEES OR AGENTS REPRESENTING OR PURPORTING TO REPRESENT SELLER, TO WHOMEVER
MADE OR GIVEN, DIRECTLY OR INDIRECTLY, ORALLY OR IN WRITING, UNLESS SPECIFICALLY
SET FORTH IN THIS AGREEMENT. BUYER ALSO ACKNOWLEDGES THAT THE PURCHASE PRICE
REFLECTS AND TAKES INTO ACCOUNT THAT THE PROPERTY IS BEING SOLD "AS-IS."
21
<PAGE>
BUYER REPRESENTS TO SELLER THAT BUYER HAS CONDUCTED, OR WILL CONDUCT
PRIOR TO CLOSING, SUCH INVESTIGATIONS OF THE PROPERTY, INCLUDING BUT NOT LIMITED
TO, THE PHYSICAL AND ENVIRONMENTAL CONDITIONS THEREOF, AS BUYER DEEMS NECESSARY
OR DESIRABLE TO SATISFY ITSELF AS TO THE CONDITION OF THE PROPERTY AND THE
EXISTENCE OR NONEXISTENCE OR CURATIVE ACTION TO BE TAKEN WITH RESPECT TO ANY
HAZARDOUS OR TOXIC SUBSTANCES ON OR DISCHARGED FROM THE PROPERTY, AND WILL RELY
SOLELY UPON SAME AND NOT UPON ANY INFORMATION PROVIDED BY OR ON BEHALF OF SELLER
OR ITS AGENTS OR EMPLOYEES WITH RESPECT THERETO, OTHER THAN SUCH
REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLER AS ARE EXPRESSLY SET FORTH
IN THIS AGREEMENT. UPON CLOSING, BUYER SHALL ASSUME THE RISK THAT ADVERSE
MATTERS, INCLUDING BUT NOT LIMITED TO, CONSTRUCTION DEFECTS AND ADVERSE PHYSICAL
AND ENVIRONMENTAL CONDITIONS, MAY NOT HAVE BEEN REVEALED BY BUYER'S
INVESTIGATIONS, AND BUYER, UPON CLOSING (EXCEPT WITH RESPECT TO THE EXPRESS
REPRESENTATIONS AND WARRANTIES OF SELLER SET FORTH IN THIS AGREEMENT), SHALL BE
DEEMED TO HAVE WAIVED, RELINQUISHED AND RELEASED SELLER (AND SELLER'S OFFICERS,
DIRECTORS, SHAREHOLDERS, EMPLOYEES AND AGENTS) FROM AND AGAINST ANY AND ALL
CLAIMS, DEMANDS, CAUSES OF ACTION (INCLUDING CAUSES OF ACTION IN TORT), LOSSES,
DAMAGES, LIABILITIES, COSTS AND EXPENSES (INCLUDING REASONABLE ATTORNEYS' FEES)
OF ANY AND EVERY KIND OR CHARACTER, KNOWN OR UNKNOWN, WHICH BUYER MIGHT HAVE
ASSERTED OR ALLEGED AGAINST SELLER (AND SELLER'S OFFICERS, DIRECTORS,
SHAREHOLDERS, EMPLOYEES AND AGENTS) AT ANY TIME BY REASON OF OR ARISING OUT OF
ANY LATENT OR PATENT CONSTRUCTION DEFECTS OR PHYSICAL CONDITIONS, VIOLATIONS OF
ANY APPLICABLE LAWS AND ANY AND ALL OTHER ACTS, OMISSIONS, EVENTS, CIRCUMSTANCES
OR MATTERS REGARDING THE PROPERTY. BUYER HEREBY WAIVES THE PROVISIONS OF
CALIFORNIA CIVIL CODE SECTION 1542 WHICH PROVIDES THAT:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES
NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR."
--------------------------- -------------------------
RPB THK
--------------------------- -------------------------
BUYER'S INITIALS SELLER'S INITIALS
--------------------------- -------------------------
16.3 MATERIAL CHANGE. Seller shall promptly notify Buyer
of any change in any condition with respect to the Property or any event or
circumstance which makes any representation or warranty of Seller as set forth
in Section 11.2 of this Agreement materially untrue or misleading or any
covenant of Seller under this Agreement incapable of being performed. In no
event shall Seller be liable to Buyer for, or be deemed to be in default
pursuant to this Agreement by reason of any inaccuracy of a representation or
warranty which results from any change that (i) occurs between the Effective
Date and the Closing Date; and (ii) is expressly permitted under the terms of
this
22
<PAGE>
Agreement or is beyond the reasonable control of Seller to prevent; provided,
however, that the occurrence of a material change which is not permitted
hereunder shall constitute the non-fulfillment of the condition set forth in
Section 7.2.2 hereof. If, in spite of such nonfulfillment of the conditions set
forth in such Section 7.2.2 the Closing occurs, Seller's representations and
warranties set forth in this Agreement shall be deemed to have been modified by
all statements made in any notice or notices of modification as given by Seller
to Buyer pursuant to this Section 16.3 prior to the Closing.
16.4 SURVIVAL OF SELLER'S REPRESENTATIONS AND WARRANTIES.
The representations and warranties of Seller set forth in Section 11.2 hereof
(as such may have been updated as of the Closing in accordance with Section
16.3) in accordance with the terms of this Agreement, shall survive Closing for
a period of twelve (12) months. No claim for a breach of any representation or
warranty of Seller shall be actionable or payable if the breach in question
results from or is based on a condition, state of facts or other matter which
was known to Buyer prior to Closing. Seller shall have no liability to Buyer for
a breach of any representation or warranty (a) unless the valid claims for all
such breaches collectively aggregate more than One Hundred Thousand Dollars
($100,000.00), in which event the amount of such valid claims in excess of One
Hundred Thousand Dollars ($100,000.00) shall be actionable, up to the Maximum
(as defined in this Section), and (b) unless written notice containing a
description of the specific nature of such breach shall have been given by Buyer
to Seller prior to the expiration of said twelve (12) month period and any
action shall have been commenced by Buyer against Seller within fourteen (14)
months of Closing. Buyer agrees to first seek recovery under any insurance
policies, Service Contracts and the Lease(s) prior to seeking recovery from
Seller, and Seller shall not be liable to Buyer if Buyer's remaining claim after
recovery from such insurance policies, Service Contracts and/or Lease(s) is less
than One Hundred Thousand Dollars ($100,000.00). As used herein, the term
"MAXIMUM" shall mean the total aggregate amount of Five Hundred Thousand Dollars
($500,000.00).
16.5 SURVIVAL OF LIMITATIONS. The provisions of this
Article 16 shall survive Closing or any termination of this Agreement.
17. MISCELLANEOUS.
17.1 TIME. Time is of the essence in the performance of
each party's obligations hereunder; however, if the final date of any period
which is set out in any provision of this Agreement falls on a Saturday, Sunday
or legal holiday under the laws of the United States or the State in which the
Property is located, then, in such event, the time of such period shall be
extended to the next day which is not a Saturday, Sunday or legal holiday.
17.2 ATTORNEYS' FEES. If any legal action, arbitration or
other proceeding is commenced to enforce or interpret any provision of this
Agreement, the prevailing party shall be entitled to seek an award of its
attorneys' fees and expenses. The phrase "prevailing party" shall include a
party who receives substantially the relief desired whether by dismissal,
summary judgment, judgment or otherwise.
17.3 NO WAIVER. No waiver by any party of the performance
or satisfaction of any covenant or condition shall be valid unless in writing
and shall not be considered to be a waiver by such party of any other covenant
or condition hereunder.
23
<PAGE>
17.4 ENTIRE AGREEMENT. This Agreement contains the entire
agreement between the parties regarding the Property and supersedes all prior
agreements, whether written or oral, between the parties regarding the same
subject. This Agreement may only be modified in writing.
17.5 SURVIVAL. The provisions of this Agreement shall not
merge with the delivery of the Deed but shall, except as otherwise provided in
this Agreement, survive the Closing.
17.6 SUCCESSORS AND ASSIGNS. This Agreement shall be
binding upon and inure to the benefit of the heirs, executors, administrators
and successors and assigns of Seller and Buyer; provided, however, that Buyer
shall not assign Buyer's rights and obligations pursuant to this Agreement to
any party without the prior written consent of Seller which consent may be
withheld in its sole and absolute discretion.
17.7 SEVERABILITY. In the case that any one or more of the
provisions contained in this Agreement are for any reason held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision hereof, and this Agreement
shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein.
17.8 CAPTIONS. Paragraph titles or captions contained in
this Agreement are inserted as a matter of convenience only and for reference,
and in no way define, limit, extend or describe the scope of this Agreement.
17.9 EXHIBITS. All exhibits attached hereto shall be
incorporated herein by reference as if set out herein in full.
17.10 RELATIONSHIP OF THE PARTIES. The parties acknowledge
that neither party is an agent for the other party, and that neither party shall
or can bind or enter into agreements for the other party.
17.11 GOVERNING LAW. This Agreement and the legal relations
between the parties hereto shall be governed by and be construed in accordance
with the laws of the State of California.
17.12 REVIEW BY COUNSEL. The parties acknowledge that each
party and its counsel have reviewed and approved this Agreement, and the parties
hereby agree that the normal rule of construction to the effect that any
ambiguities are to be resolved against the drafting party shall not be employed
in the interpretation of this Agreement or any amendments or exhibits hereto.
17.13 NON-DISCLOSURE. The parties hereto shall not disclose
any of the material terms of this Agreement (except to the extent as may be
required by law or as required by the Title Company or to the officers,
directors, partners and employees of the parties hereto in the ordinary course
of business) without the prior written consent of the other party except that
each party may make disclosure to its respective lawyers, accountants, advisors
and shareholders.
17.14 COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall constitute an original. This Agreement shall
only be effective if a counterpart is signed by both Seller and Buyer.
24
<PAGE>
17.15 FILING OF REPORTS. The Title Company shall be solely
responsible for the timely filing of any reports or returns required pursuant to
the provisions of Section 6045(e) of the Internal Revenue Code of 1986 as
amended (and any similar reports or returns required under any state or local
laws) in connection with the Closing.
17.16 1031 EXCHANGE. In connection with the transactions
contemplated by this Agreement, Seller may wish to engage in a tax deferred
exchange pursuant to Section 1031 of the Internal Revenue Code of 1986 as
amended. Buyer agrees to reasonably cooperate with Seller in connection with
such exchange, provided, however, that (i) notwithstanding any other provision
of this Agreement to the contrary, Seller can elect to delay the Closing for a
period of up to thirty (30) business days; (ii) Buyer will not be required to
take title to any other real property; (iii) Buyer shall not incur any
additional liability by reason of such exchange; (iv) Seller will indemnify and
hold Buyer harmless for, from and against any claim, demand, cause of action,
liability or expense (including attorney's fees) in connection therewith,
including, without limitation, any increase in escrow fees or charges resulting
from such exchange; and (v) Seller acknowledges and agrees and that Buyer has
not made and will not make any representation or warranty as to the
effectiveness for tax purposes of any such exchange. Seller must notify Buyer at
least five (5) days before the contemplated date of Closing if Seller intends to
proceed pursuant to this Section 17.16.
17.17 LICENSED REAL ESTATE BROKERS. Buyer hereby
acknowledges that (a) Limar Financial Corporation ("LFC"), an affiliate of
Seller, is a licensed real estate broker under the laws of the State of
California, (b) Thomas Numainville, Timothy J. Castello and James R. Thomson,
officers of LFC and Seller, are similarly so licensed and (c) no agency
relationship has been created between Seller and Buyer (or between LFC or Thomas
Numainville or Timothy J. Castello or James R. Thomson and Buyer) with respect
to the transactions subject to this Agreement.
17.18 THIRD PARTY BENEFICIARIES. This Agreement is for the
benefit of Buyer and Seller and their respective agents, employees,
shareholders, officers, directors, partners and successors and no third party
shall be entitled to the benefit of any of the provisions of this Agreement.
17.19 FACSIMILE SIGNATURES. Seller and Buyer each (a) has
agreed to permit the use from time to time, where appropriate, of telecopy
signatures in order to expedite the transaction contemplated by this Agreement,
(b) intends to be bound by its respective telecopy signature, (c) is aware that
the other will rely on the telecopied signature, and (d) acknowledges such
reliance and waives any defenses to the enforcement of this Agreement and the
documents affecting the transaction contemplated by this Agreement based on the
fact that a signature was sent by telecopy only.
25
<PAGE>
18. DEFAULT.
18.1 LIQUIDATED DAMAGES. FROM AND AFTER THE EXPIRATION OF
THE DUE DILIGENCE PERIOD, IN THE EVENT THE SALE OF THE PROPERTY AS CONTEMPLATED
HEREUNDER IS NOT CONSUMMATED DUE TO A DEFAULT OF BUYER, THE DEPOSIT (INCLUDING
ALL INTEREST EARNED FROM THE INVESTMENT THEREOF) SHALL BE PAID TO AND RETAINED
BY SELLER AS LIQUIDATED DAMAGES. THE PARTIES ACKNOWLEDGE THAT SELLER'S ACTUAL
DAMAGES IN THE EVENT THAT THE SALE IS NOT CONSUMMATED WOULD BE EXTREMELY
DIFFICULT OR IMPRACTICABLE TO DETERMINE. THEREFORE, BY SEPARATELY EXECUTING THIS
SECTION 18.1 BELOW, THE PARTIES ACKNOWLEDGE THAT THE NONREFUNDABLE DEPOSIT HAS
BEEN AGREED UPON, AFTER NEGOTIATION, AS THE PARTIES' REASONABLE ESTIMATE OF
SELLER'S DAMAGES AND AS SELLER'S EXCLUSIVE REMEDY AGAINST BUYER IN THE EVENT THE
CLOSING DOES NOT OCCUR AND AS SELLER'S SOLE AND EXCLUSIVE REMEDY AGAINST BUYER
ARISING FROM SUCH FAILURE OF THE SALE TO CLOSE. IN ADDITION, BUYER SHALL PAY ALL
TITLE, SURVEY AND ESCROW CANCELLATION CHARGES. NOTWITHSTANDING THE FOREGOING, IN
NO EVENT SHALL THIS SECTION 18.1 LIMIT THE DAMAGES RECOVERABLE BY EITHER PARTY
AGAINST THE OTHER PARTY DUE TO (A) THE OTHER PARTY'S OBLIGATION TO INDEMNIFY
SUCH PARTY IN ACCORDANCE WITH THIS AGREEMENT, OR (B) THIRD PARTY CLAIMS. BY
THEIR SEPARATELY EXECUTING THIS SECTION 18.1 BELOW, BUYER AND SELLER ACKNOWLEDGE
THAT THEY HAVE READ AND UNDERSTOOD THE ABOVE PROVISION COVERING LIQUIDATED
DAMAGES, AND THAT EACH PARTY WAS REPRESENTED BY COUNSEL WHO EXPLAINED THE
CONSEQUENCES OF THIS LIQUIDATED DAMAGES PROVISION AT THE TIME THIS AGREEMENT WAS
EXECUTED.
26
<PAGE>
--------------------------- -------------------------
RPB THK
--------------------------- -------------------------
BUYER'S INITIALS SELLER'S INITIALS
--------------------------- -------------------------
18.2 DEFAULT BY SELLER. In the event the sale of the
Property as contemplated hereunder is not consummated due to Seller's default
hereunder, Buyer shall be entitled, as its sole remedy, either (a) to receive
the return of the Deposit, which return shall operate to terminate this
Agreement and release Seller from any and all liability hereunder, or (b) to
enforce specific performance of Seller's obligation to convey the Property to
Buyer in accordance with the terms of this Agreement, it being understood and
agreed that the remedy of specific performance shall not be available to enforce
any other obligation of Seller hereunder. Buyer expressly waives its rights to
seek damages in the event of Seller's default hereunder. Buyer shall be deemed
to have elected to terminate this Agreement and receive back the Deposit if
Buyer fails to file suit for specific performance against Seller in a court
having jurisdiction in the county and state in which the Real Property is
located, on or before thirty (30) days following the date upon which Closing was
to have occurred.
19. DEFINITIONS. For ease of reference, the defined terms as
employed in this Agreement and as listed below are defined in the designated
sections:
19.1 "Agreement" as defined in the first paragraph.
19.2 "Approval Notice" as defined in Section 6.7
19.3 "Assignment" as defined in Section 1.3
19.4 "Bill of Sale" as defined in Section 8.1.2
19.5 "Buyer" as defined in the first paragraph.
19.6 "Buyer's Reports" as defined in Section 6.5
19.7 "Buyer's Representatives" as defined in Section 6.4
19.8 "Buyer's Title Policy" as defined in Section 3.2
19.9 "Closing" as defined in Section 5.1
19.10 "Closing Date" as defined in Section 5.1
19.11 "Deed" as defined in Section 8.1.1
19.12 "Deposit" as defined in Section 2.1
19.13 "Deposit #1" as defined in Section 2.1
19.14 "Deposit #2" as defined in Section 2.1
19.15 "Due Diligence Date" as defined in Section 6.1
19.16 "Due Diligence Materials" as defined in Section 6.2
19.17 "Due Diligence Period" as defined in Section 6.1
19.18 "Effective Date" as defined in the first paragraph.
19.19 "Escrow" as defined in Section 4.1
19.20 "Future Commission Obligations" as defined in
Section 14.2
19.21 "Improvements" as defined in Section 1.1.2
19.22 "Intangible Property" as defined in Section 1.3
19.23 "LFC" as defined in Section 17.17
19.24 "Land" as defined in Section 1.1.1
19.25 "Lease(s)" as defined in Section 1.3
19.26 "Maximum" as defined in Section 16.4
27
<PAGE>
19.27 "Permitted Exceptions" as defined in Section 3.3
19.28 "Personal Property" as defined in Section 1.1.3
19.29 "Property" as defined in Section 1.1
19.30 "Purchase Price" as defined in Section 2
19.31 "Real Property"" as defined in Section 1.2
19.32 "Seller" as defined in the first paragraph.
19.33 "Service Contracts" as defined in Section 1.3
19.34 "Subsequent Title Defects Notice" as defined in
Section 6.3.3
19.35 "Survey" as defined in Section 6.3.1
19.36 "Title Company" as defined in Section 4.1
19.37 "Title Notice" as defined in Section 6.3.2
19.38 "Title Report" as defined in Section 6.3.1
19.39 "Title Review Period" as defined in Section 6.3
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the day and year first above written.
SELLER: BUYER:
Limar Realty Corp. #13, Arena Pharmaceuticals, Inc.
a California corporation a Delaware corporation
By: /s/ Theodore H. Kruttschnitt By: /s/ Richard P. Burgoon, Jr.
--------------------------------- ---------------------------------
Name: Theodore H. Kruttschnitt Name: Richard P. Burgoon, Jr.
------------------------ Its: Sr. Vice President, Operations
Its: President General Counsel & Secretary
---------
28
<PAGE>
LIST OF EXHIBITS
Exhibit 1.1.1 - Legal Description of Land
Exhibit 1.3 (i) - Schedule of Lease(s)
Exhibit 1.3 (ii) - Schedule of Service Contracts
Exhibit 6.2.1 - Delivered Materials
Exhibit 6.7 - Form of Approval Notice
Exhibit 8.1.1 - Form of Grant Deed
Exhibit 8.1.2 - Form of Bill of Sale
Exhibit 8.1.3 - Form of Assignment and Assumption Agreement
Exhibit 8.2.3 - Form of Buyer's Affidavit
29
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21.1
<SEQUENCE>5
<FILENAME>a2041581zex-21_1.txt
<DESCRIPTION>EXHIBIT 21.1
<TEXT>
<PAGE>
Exhibit 21.1
List of Subsidiaries of Arena Pharmaceuticals, Inc.
1. Aressa Pharmaceuticals, Inc. a Delaware corporation, doing business as
Aressa Pharmaceuticals.
2. BRL Screening, Inc., a Delaware corporation, doing business as BRL
Screening, Inc.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>6
<FILENAME>a2041581zex-23_1.txt
<DESCRIPTION>EXHBIT 23.1
<TEXT>
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8) pertaining to the Amended and Restated 1998 Equity Compensation
Plan and the 2000 Equity Compensation Plan of Arena Pharmaceuticals, Inc., of
our report dated January 15, 2001, with respect to the financial statements
of Arena Pharmaceuticals, Inc., included in the Annual Report (Form 10-K) for
the year ended December 31, 2000.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
San Diego, California
March 20, 2001
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-24.1
<SEQUENCE>7
<FILENAME>a2041581zex-24_1.txt
<DESCRIPTION>EXHIBIT 24.1
<TEXT>
<PAGE>
Exhibit 24.1
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the persons whose signatures
appear below have made, constituted and appointed, and by this instrument do
make, constitute and appoint Jack Lief and Richard P. Burgoon, Jr., or either
one of them, his true and lawful attorney-in-fact and agent, with full powers of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Report and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as they might or could
do in person, hereby ratifying and confirming all which said attorneys-in-fact
and agent, or any of them, or their substitute or substitutes, may lawfully do,
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, this Power of Attorney has been signed at San Diego,
California, this 15th day of March, 2001.
<TABLE>
<CAPTION>
Signatures Title
- ---------- -----
<S> <C>
By: /s/ Jack Lief President, Chief Executive Officer
--------------------------------- and Director
Jack Lief
By: /s/ Robert Hoffman Vice President, Finance, Principal
--------------------------------- Financial Officer and Principal Accounting Officer
Robert Hoffman
By: /s/ Dominic P. Behan Vice President, Research and
--------------------------------- Director
Dominic P. Behan, Ph.D.
By: /s/ Derek T. Chalmers Vice President, Research and
--------------------------------- Director
Derek T. Chalmers, Ph.D.
By: /s/ John P. Mcalister
---------------------------------
John P. McAlister, III, Ph.D. Director
By: /s/ Michael Steinmetz
---------------------------------
Michael Steinmetz, Ph.D. Director
By: /s/ Stefan Ryser
---------------------------------
Stefan Ryser, Ph.D. Director
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----