Notes to Consolidated Financial Statements
1. The Company and Summary of Significant Accounting Policies
The Company
Arena Pharmaceuticals, Inc., or Arena, was incorporated on April 14, 1997, and commenced operations in July 1997. We are a biopharmaceutical company focused on developing novel, small molecule drugs with optimized receptor pharmacology designed to deliver broad clinical utility across multiple therapeutic areas. Our proprietary pipeline includes potentially first or best in class programs for which we own global commercial rights.
Our three most advanced investigational clinical programs are etrasimod (formerly APD334) in Phase 2 evaluation for multiple inflammatory indications, ralinepag (formerly APD811) in Phase 2 evaluation for pulmonary arterial hypertension (PAH), and APD371 entering Phase 2 evaluation for the treatment of pain associated with Crohn's disease.
Additionally, we have collaborations with the following pharmaceutical companies: Eisai Inc. and Eisai Co., Ltd. (collectively, Eisai) (commercial stage), Axovant Sciences Ltd., or Axovant, (Phase 2 candidate), and Boehringer Ingelheim International GmbH, or Boehringer Ingelheim, (preclinical candidate).
We operate in one business segment. Our US operations are located in San Diego, California. Our primary clinical operations are located in Zug, Switzerland, and our commercial manufacturing facility is located in Zofingen, Switzerland.
We internally discovered the drug lorcaserin, which has been commercially sold in a twice-daily formulation under the brand name BELVIQ® in the United States since June 2013 and in South Korea since February 2015. The commercial launch of lorcaserin in a once-daily formulation under the brand name BELVIQ XR® in the United States was announced in October 2016.
On December 28, 2016, we amended and restated the terms of marketing and supply agreement for lorcaserin with Eisai by entering into a new Transaction Agreement and a new Supply Agreement (collectively with the Transaction Agreement, the Eisai Agreement) with Eisai. Under the Eisai Agreement, Eisai acquired global commercialization and manufacturing rights to lorcaserin, including in the territories retained by us under the prior agreement, with control over global development and commercialization decisions. Eisai is responsible for all lorcaserin development expenses going forward. We also assigned to Eisai our rights under the commercial lorcaserin distribution agreements with Ildong Pharmaceutical Co., Ltd., or Ildong, for South Korea; CY Biotech Company Limited, or CYB, for Taiwan; and Teva Pharmaceuticals Ltd.’s Israeli subsidiary, Abic Marketing Limited, or Teva, for Israel.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with the U.S. generally accepted accounting principles, or GAAP, and reflect all of our activities, including those of our wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.
The accompanying consolidated financial statements include the balances and activity of Beacon Discovery, Inc., or Beacon, a variable interest entity in which we have the controlling financial interest (see Note 16). The equity attributable to the noncontrolling interest in Beacon is presented as a separate component from the equity attributable to stockholders of Arena in the equity section of the consolidated balance sheets. The results of operations and comprehensive loss attributable to the noncontrolling interest in Beacon are presented as separate components from the results of operations and comprehensive loss attributable to the stockholders of Arena in the consolidated statements of operations and comprehensive loss.
Liquidity
It will require substantial cash to achieve our objectives of discovering, developing and commercializing drugs, and this process typically takes many years and potentially several hundreds of millions of dollars for an individual drug. We may not have adequate available cash, or assets that could be readily turned into cash, to meet these objectives in the long term. We will need to obtain significant funds under our existing collaborations, under new collaboration, licensing or other commercial agreements for one or more of our drug candidates and programs or patent portfolios, or from other potential sources of liquidity, which may include the sale of equity, issuance of debt or other transactions.
Our prospects are subject to the risks and uncertainties frequently encountered by companies in the early stages of development and commercialization, especially those companies in rapidly evolving and technologically advanced industries such as the biotechnology field. Our future
viability
largely depends on our ability to complete development of new drugs and drug candidates
67
and receive regulatory
approvals
for those drugs. No assurance can be given that our new drugs will be succes
sfully developed, regulatory approvals will be granted, or acceptance of these drugs will be achieved. The development of
novel, small molecule drugs
for specific therapeutic applications is subject to a number of risks, including research, regulatory and
marketing risks. There can be no assurance that our development stage drug candidates will overcome these risks and become commercially viable.
We incurred net losses of $22.9 million, $108.0 million and $60.5 million for the years ended December 31, 2016, 2015, and 2014, respectively. Additionally, we have used net cash of $62.1 million, $98.1 million and $101.4 million to fund our operating activities for years ended December 31, 2016, 2015, and 2014, respectively.
We have had, and we will likely continue to have, an ongoing need to raise additional cash from outside sources to fund our future operations.
We believe our plans to raise additional cash from outside sources and, if necessary, our cost containment efforts are sufficient to allow us to continue operations for the next twelve months. Our plans include pursuing additional cash through strategic corporate partnerships and possibly engaging in future sales of equity or debt. There is no guarantee that adequate funds will be available when needed from equity financing or additional debt, development and commercialization partnerships, increased results of operations, or from other sources, or on terms acceptable to us. If our efforts to obtain sufficient additional funds are not successful, we would be required to delay, scale back, or eliminate some or all of our research or development, manufacturing operations, administrative operations, and clinical or regulatory activities, which could negatively affect our ability to achieve certain corporate goals.
Recent Accounting Pronouncements
Revenue recognition.
In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-09,
Revenue from Contracts with Customers
. ASU No. 2014-09 supersedes most current revenue recognition guidance and establishes a comprehensive revenue recognition model with a broad principle that would require an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this principle, an entity identifies the contract with a customer, identifies the separate performance obligations in the contract, determines the transaction price, allocates the transaction price to the separate performance obligations and recognizes revenue when each separate performance obligation is satisfied. FASB has subsequently issued additional ASUs to clarify certain elements of the new revenue recognition guidance.
The new guidance allows for two methods of adoption: (a) “full retrospective” adoption, meaning the standard is applied to all periods presented, or (b) “modified retrospective” adoption, meaning the cumulative effect of applying the new guidance is recognized as an adjustment to the opening retained earnings balance for the year of implementation. We plan to adopt the new revenue standard effective January 1, 2018, on a modified retrospective method with the cumulative effect of the change reflected in retained earnings as of January 1, 2018, and not restate prior periods.
The Company has continued to monitor FASB activity to assess certain interpretative issues and the associated implementation of the new standard. We are in the process of reviewing our revenue arrangements, which we expect to include product sales, manufacturing support payments, royalty payments, other collaboration payments and toll manufacturing, and are not yet able to estimate the anticipated impact to our consolidated financial statements from the implementation of the new standard as we continue to interpret the principles of the new standard.
Other.
In August 2014, the FASB issued ASU No. 2014-15,
Presentation of Financial Statements – Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.
Under GAAP, continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation becomes imminent. Preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting. If and when an entity’s liquidation becomes imminent, financial statements should be prepared under the liquidation basis of accounting. Even when an entity’s liquidation is not imminent, there may be conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. In those situations, financial statements should continue to be prepared under the going concern basis of accounting, but ASU No. 2014-15 should be followed to determine whether to disclose information about any relevant conditions and events. In accordance with ASU No. 2014-15, we adopted this standard beginning this annual reporting period ended December 31, 2016. The adoption of ASU No. 2014-15 did not have a material impact on our consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
. ASU No. 2016-01 supersedes and amends the guidance to classify equity securities with readily determinable fair values into different categories (that is, trading or available-for-sale) and require equity securities to be measured at fair value with changes in
68
the fair value recognized through net income. The amendments allow equity investments that do not have readily determinable fair values to be remeasured at fair value either upon the occurrence of an observable price change
or upon identification of an impairment. The amendments also require enhanced disclosures about those investments. ASU No. 2016-01 is effective for annual reporting beginning after December 15, 2017, including interim periods within the year of adoption,
and calls for prospective application, with early application permitted. We do not expect the adoption of ASU No. 2016-01 to have a material impact on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
. ASU No. 2016-02 amends the accounting guidance for leases. The amendments contain principles that will require lessees to recognize most leases on the balance sheet by recording a right-of-use asset and a lease liability, unless the lease is a short-term lease that has an accounting lease term of 12 months or less. The amendments also contain other changes to the current lease guidance that may result in changes to how entities determine which contractual arrangements qualify as a lease, the accounting for executory costs (such as property taxes and insurance), as well as which lease origination costs will be capitalizable. The new standard also requires expanded quantitative and qualitative disclosures. ASU No. 2016-02 is effective for annual reporting periods, and interim periods within those periods, beginning after December 15, 2018, with early adoption permitted. ASU No. 2016-02 requires the use of the
modified
retrospective transition method, whereby the new guidance will be applied at the beginning of the earliest period presented in the financial statements of the period of adoption. We are currently evaluating the impact of ASU No. 2016-02 on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09,
Improvements to Employee Share-Based Payment Accounting.
ASU No. 2016-09 modifies certain aspects of the accounting for share-based payment transactions, including income taxes, classification of awards, and classification on the statement of cash flows. Currently, excess tax benefits or deficiencies from our equity awards are recorded as additional paid-in capital on the consolidated balance sheet. Upon adoption, we will record any excess tax benefits or deficiencies from our equity awards on the consolidated statement of operation in the reporting periods in which stock options are exercised. This guidance also requires excess tax benefits and deficiencies to be presented as an operating activity on the statement of cash flows and allows an entity to make an accounting policy election to either estimate expected forfeitures or to account for them as they occur. We will adopt this ASU in the first quarter of 2017. Since we have a full valuation allowance on our deferred tax assets as of December 31, 2016, we do not expect any impact on our accumulated deficit upon adoption nor any impacts to income tax expense when stock options are exercised. We anticipate accounting for forfeitures as they occur upon the adoption of ASU No. 2016-09.
In November 2016, the FASB issued ASU No. 2016-18,
Restricted Cash
. ASU No. 2016-18 requires that restricted cash be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU No. 2016-18 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within the year of adoption, and calls for retrospective application to each period presented. We do not expect the adoption of ASU No. 2016-18 to have a material impact on our consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the reported amounts (including assets, liabilities, revenues and expenses) and related disclosures. The amounts reported could differ under different estimates and assumptions.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments with remaining maturities of three months or less when purchased.
Inventory
Inventory is stated at the lower of cost or market. We determine cost, which includes amounts related to materials, labor and overhead, using a first-in, first-out basis. We evaluate our inventory each period to identify potential obsolete, excess or otherwise non-saleable items. If non-saleable items are observed and there are no alternate uses for the inventory, we will record a write-down to net realizable value in the period that the decline in value is first recognized.
Concentrations of Risk
Financial instruments, which potentially subject us to concentrations of credit risk, consist primarily of cash and cash equivalents. We limit our exposure to credit loss by holding our cash primarily in US dollars or, from time to time, placing our cash and investments in US government, agency or government-sponsored enterprise obligations and in corporate debt instruments that are rated investment grade, in accordance with an investment policy approved by our Board of Directors.
69
BELVIQ h
as been exclusively sold in the United States and South Korea by Eisai and Ildong, respectively, which are the only jurisdictions for which BELVIQ has
been
commercially sold. We also produce drug products for Siegfried AG, or Siegfried, and, to a lesser ex
tent, another third party under toll manufacturing agreements.
Percentages of our total revenues are as follows:
|
|
Years ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Eisai Agreement (see Note 9)
|
|
|
79.8
|
%
|
|
|
61.9
|
%
|
|
|
93.6
|
%
|
Ildong Agreement (see Note 9)
|
|
|
9.2
|
%
|
|
|
23.2
|
%
|
|
|
1.0
|
%
|
Toll manufacturing agreements
|
|
|
3.3
|
%
|
|
|
11.1
|
%
|
|
|
4.0
|
%
|
Other collaboration agreements
|
|
|
7.7
|
%
|
|
|
3.8
|
%
|
|
|
1.4
|
%
|
Total percentage of revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Percentages of our total accounts receivable are as follows:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Eisai Agreement (see Note 9)
|
|
|
93.1
|
%
|
|
|
77.5
|
%
|
|
|
93.1
|
%
|
Toll manufacturing agreements
|
|
|
2.1
|
%
|
|
|
9.6
|
%
|
|
|
0.0
|
%
|
Ildong Agreement (see Note 9)
|
|
|
2.0
|
%
|
|
|
1.3
|
%
|
|
|
0.4
|
%
|
Other collaboration agreements
|
|
|
2.8
|
%
|
|
|
11.6
|
%
|
|
|
6.5
|
%
|
Total percentage of accounts receivable
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
We purchase raw materials, starting materials, intermediates, API, excipients and other materials from commercial sources. To decrease the risk of an interruption to our supply, when we believe it is reasonable for us to do so, we source these materials from multiple suppliers so that, in general, the loss of any one source of supply would not have a material adverse effect on commercial production. However, currently we have only one or a limited number of suppliers for some of these materials. The loss of a primary source of supply would potentially delay our production. Our facility in Zofingen, Switzerland is currently the only manufacturer of finished drug product for BELVIQ. Eisai maintains a safety stock of BELVIQ to help mitigate risks related to having only one manufacturer of finished drug product.
Property and Equipment
Property and equipment are stated at cost and depreciated over the estimated useful lives of the assets (generally 3 to 15 years) using the straight-line method. Buildings are stated at cost and depreciated over an estimated useful life of approximately 20 years using the straight-line method. Leasehold improvements are stated at cost and amortized over the shorter of the estimated useful lives of the assets or the lease term using the straight-line method. Capital improvements are stated at cost and amortized over the estimated useful lives of the underlying assets using the straight-line method. On December 31, 2016, for the property and equipment located at our Zofingen, Switzerland facility, we recorded an impairment charge of $17.2 million, changed our estimate of the useful life for these assets to be two remaining years and expect to depreciate the remaining carrying value of these assets using the straight-line method over this period pursuant to the Eisai Agreement (see Note 9).
Intangibles
Intangible assets consist of our manufacturing facility production licenses we acquired from Siegfried in January 2008. Through December 2016, we amortized these assets using the straight-line method over their estimated useful life of 20 years. On December 31, 2016, we recorded an impairment charge of $4.6 million for these assets, changed our estimate of the useful life for these assets to be two remaining years and expect to amortize the remaining carrying value of these assets using the straight-line method over this period pursuant to the Eisai Agreement (see Note 9).
Long-lived Assets
If indicators of impairment exist, we assess the recoverability of the affected long-lived assets by determining whether the carrying value of such assets can be recovered through undiscounted cash flows. If impairment is indicated, we measure the impairment loss by comparing the fair value to the carrying value of the asset.
70
Def
erred Rent
For financial reporting purposes, rent expense is recognized on a straight-line basis over the term of the lease. The difference between rent expense and amounts paid under lease agreements is recorded as deferred rent in the liability section of our consolidated balance sheets.
Derivative Liabilities
We account for warrants and other derivative financial instruments as either equity or liabilities based upon the characteristics and provisions of each instrument. Warrants classified as equity are recorded as additional paid-in capital on our consolidated balance sheets and no further adjustments to their valuation are made. Warrants classified as derivative liabilities and other derivative financial instruments that require separate accounting as liabilities are recorded on our consolidated balance sheets at their fair value on the date of issuance and are revalued on each balance sheet date until such instruments are exercised or expire, with changes in the fair value between reporting periods recorded as other income or expense. There were no warrants classified as derivative liabilities as of December 31, 2016, and 2015.
Foreign Currency
The functional currency of our wholly owned subsidiaries in Switzerland, Arena GmbH and Arena Pharmaceuticals Development GmbH is the Swiss franc. Accordingly, all assets and liabilities of these subsidiaries are translated to US dollars based on the applicable exchange rate on the balance sheet date. Revenue and expense components are translated to US dollars at weighted-average exchange rates in effect during the period. Gains and losses resulting from foreign currency translation are reported as a separate component of accumulated other comprehensive income or loss in the equity section of our consolidated balance sheets.
Foreign currency transaction gains and losses, which are primarily the result of remeasuring US dollar-denominated receivables and payables at Arena GmbH, are recorded in the interest and other income (expense) section of our consolidated statements of operations and comprehensive loss. For the year ended December 31, 2016, we recognized foreign currency transaction gains, net of $0.9 million. For the year ended December 31, 2015, we recognized foreign currency transaction gains, net of $2.0 million. For the year ended December 31, 2014, we recognized foreign currency transaction losses, net of $2.2 million.
Share-based Compensation
Our share-based awards are measured at fair value and recognized over the requisite service or performance period. The fair value of each stock option is estimated on the date of grant using the Black-Scholes option pricing model, based on the market price of the underlying common stock, expected life, expected stock price volatility and expected risk-free interest rate. Expected volatility is computed using a combination of historical volatility for a period equal to the expected term and implied volatilities from traded options to buy our common stock, with historical volatility being weighted at 75%. The expected life of options is determined based on historical experience of similar awards, giving consideration to the contractual terms of the share-based awards, vesting schedules and post-vesting terminations. The risk-free interest rates are based on the US Treasury yield curve, with a remaining term approximately equal to the expected term used in the option pricing model. The fair value of each restricted stock unit award is estimated based on the market price of the underlying common stock on the date of the grant. The fair value of restricted stock unit awards that include market-based performance conditions is estimated on the date of grant using a Monte Carlo simulation model, based on the market price of the underlying common stock, expected performance measurement period, expected stock price volatility and expected risk-free interest rate. We estimate forfeitures at the time of grant and revise our estimate in subsequent periods if actual forfeitures differ from those estimates.
Revenue Recognition
Our revenues to date have been generated primarily through collaboration agreements and, to a lesser extent, toll manufacturing agreements. Our collaboration agreements may contain multiple elements including commercialization rights, services (joint steering committee and research and development services) and manufactured products. Consideration we receive under these arrangements may include upfront payments, research and development funding, cost reimbursements, milestone payments, payments for product sales and royalty payments. We recognize revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred and title has passed, (iii) the price is fixed or determinable and (iv) collectability is reasonably assured. Any advance payments we receive in excess of amounts earned are classified as deferred revenues. We previously deferred recognition of product sales and the related costs at the time we sold BELVIQ to our collaborators because we did not have the ability to estimate the amount of product that could have been returned to us and, as such, recognized revenues and the related costs from net product sales when our collaborators shipped BELVIQ to their distributors. In December 2016, primarily pursuant to a change in the terms of the Eisai Agreement (see Note 9), we determined that we now have the ability to reasonably estimate the amount of returns and thus now
71
recognize revenue and the related cost from product sales when we ship BELVIQ to our collaborators. In December 2016, we recogniz
ed revenues and the related costs on net product sales which had been previously deferred.
We evaluate deliverables in a multiple-element arrangement to determine whether each deliverable represents a separate unit of accounting. A deliverable constitutes a separate unit of accounting when it has standalone value to the customer. If the delivered element does not have standalone value without one of the undelivered elements in the arrangement, we combine such elements and account for them as a single unit of accounting. We allocate the consideration to each unit of accounting at the inception of the arrangement based on the relative selling price.
To determine the selling price of a separate deliverable, we use the hierarchy as prescribed in Accounting Standards Codification Topic 605-25 based on vendor-specific objective evidence, or VSOE, third-party evidence, or TPE, or best estimate of selling price, or BESP. VSOE is based on the price charged when the element is sold separately and is the price actually charged for that deliverable. TPE is determined based on third-party evidence for a similar deliverable when sold separately. BESP is the estimated selling price at which we would transact a sale if the elements of collaboration and license arrangements were sold on a stand-alone basis to the buyer.
Non-refundable upfront payments received under our collaboration agreements for commercialization rights have been deferred as such rights have not been deemed to have standalone value without the ongoing services required under the agreement. Such amounts are recognized as revenues on a straight-line basis over the period in which we expect to perform the services. In December 2016, we recognized a portion of the previously unrecognized non-refundable upfront payments received from Eisai as revenues in the amount of arrangement consideration allocated to the unit of accounting delivered to Eisai under the Eisai Agreement (see Note 9).
Amounts we receive as reimbursement for our research and development expenditures are recognized as revenue as the services are performed.
Under the milestone method, we recognize revenue that is contingent upon the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. A milestone is an event (i) that can be achieved in whole or in part on either our performance or on the occurrence of a specific outcome resulting from our performance, (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved and (iii) that would result in additional payments being due us. A milestone payment is considered substantive when the consideration payable to us for each milestone (a) is consistent with our performance necessary to achieve the milestone or the increase in value to the collaboration resulting from our performance, (b) relates solely to our past performance and (c) is reasonable relative to all of the other deliverables and payments under the arrangement. In making this assessment, we consider all facts and circumstances relevant to the arrangement, including factors such as the scientific, regulatory, commercial and other risks that must be overcome to achieve the respective milestone, the level of effort and investment required to achieve the respective milestone and whether any portion of the milestone consideration is related to future performance or deliverables. Other contingent-based payments received are recognized when earned.
We also manufacture drug products under toll manufacturing agreements. Upon the customer’s acceptance of drug products manufactured by us under these agreements, we recognize toll manufacturing revenues.
Research and Development Expenses
Research and development expenses, which consist primarily of salaries and other personnel costs, clinical trial costs and preclinical study fees, manufacturing costs for non-commercial products, and the development of earlier-stage programs and technologies, are expensed as incurred when these expenditures have no alternative future uses.
We accrue clinical trial expenses based on work performed. In determining the amount to accrue, we rely on estimates of total costs incurred based on enrollment, the completion of trials and other events. We follow this method because we believe reasonably dependable estimates of the costs applicable to various stages of a clinical trial can be made. However, the actual costs and timing of clinical trials are highly uncertain, subject to risks and may change depending on a number of factors. Differences between the actual clinical trial costs and the estimated clinical trial costs that we have accrued in any prior period are recognized in the subsequent period in which the actual costs become known. Historically, these differences have not been material; however, material differences could occur in the future. Payments made to reimburse collaborators for our share of their research and development activities are recorded as research and development expenses, and are recognized as the work is performed.
72
Comprehensive Loss
Comprehensive loss is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. We report components of comprehensive loss in the period in which they are recognized. For the years ended December 31, 2016, 2015, and 2014, comprehensive loss consisted of net loss and foreign currency translation gains and losses.
Net Loss Per Share
We calculate basic and diluted net loss per share using the weighted-average number of shares of common stock outstanding during the period.
Since we are in a net loss position, in addition to excluding potentially dilutive out-of-the money securities, we have excluded from our calculation of diluted net loss per share all potentially dilutive in-the-money (i) stock options, (ii) restricted stock unit awards, or RSUs, (iii) Total Stockholder Return, or TSR, performance restricted stock unit, or PRSU, awards, (iv) unvested restricted stock in our deferred compensation plan and (v) our previously outstanding warrants, and our diluted net loss per share is the same as our basic net loss per share. The table below presents the weighted-average number of potentially dilutive securities that were excluded from our calculation of diluted net loss per share for the years presented, in thousands.
|
|
Years ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Stock options
|
|
|
24,947
|
|
|
|
17,030
|
|
|
|
15,530
|
|
Warrants
|
|
|
—
|
|
|
|
19
|
|
|
|
370
|
|
RSUs and unvested restricted stock
|
|
|
210
|
|
|
|
547
|
|
|
|
476
|
|
Total
|
|
|
25,157
|
|
|
|
17,596
|
|
|
|
16,376
|
|
Because the market condition for the PRSUs was not satisfied at December 31, 2016, 2015, and 2014, such securities are excluded from the table above.
Income Taxes
We use the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Our deferred tax assets and liabilities are determined using the enacted tax rates expected to be in effect for the years in which those tax assets are expected to be realized.
The realization of our deferred tax assets is dependent upon our ability to generate sufficient future taxable income. We establish a valuation allowance when it is more-likely-than-not the future realization of all or some of the deferred tax assets will not be achieved. The evaluation of the need for a valuation allowance is performed on a jurisdiction-by-jurisdiction basis, and includes a review of all available evidence, both positive and negative.
The impact of an uncertain income tax position is recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.
2. Fair Value Disclosures
We measure our financial assets and liabilities at fair value, which is defined as the exit price, or the amount that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
73
We use the following three-level valuation hierarchy that maximizes the use
of observable inputs and minimizes the use of unobservable inputs to value our financial assets and liabilities:
Level 1
|
|
-
|
|
Observable inputs such as unadjusted quoted prices in active markets for identical instruments.
|
Level 2
|
|
-
|
|
Quoted prices for similar instruments in active markets or inputs that are observable for the asset or liability, either directly or indirectly.
|
Level 3
|
|
-
|
|
Significant unobservable inputs based on our assumptions.
|
The following tables present our valuation hierarchy for our financial assets and liabilities that are measured at fair value on a recurring basis, in thousands:
|
|
Fair Value Measurements at December 31, 2016
|
|
|
|
Balance
|
|
|
Quoted Prices in
Active Markets
(Level 1)
|
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
1
|
|
$
|
46,371
|
|
|
$
|
46,371
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
Fair Value Measurements at December 31, 2015
|
|
|
|
Balance
|
|
|
Quoted Prices in
Active Markets
(Level 1)
|
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
1
|
|
$
|
113,080
|
|
|
$
|
113,080
|
|
|
$
|
—
|
|
|
$
|
—
|
|
(1)
|
Included in cash and cash equivalents on our consolidated balance sheets.
|
3. Short-term Investments and Available-for-Sale Securities
We held an investment in TaiGen Biotechnology Co., Ltd., or TaiGen, that, from December 31, 2011, to January 17, 2014, had a cost basis of zero due to prior impairment charges. On January 17, 2014, TaiGen completed an initial public offering and its common stock began to trade on the GreTai Securities Listed Market, under the name “TaiGen Biopharmaceuticals Holding Limited.” Such market is deemed to be comparable to a US over-the-counter market such that the fair value of our former investment in TaiGen, which previously had been accounted for as a cost method investment with a cost basis of zero, became readily determinable. Accordingly, on January 17, 2014, we recorded our former investment in TaiGen of 29.6 million shares based on its fair value of approximately $49.1 million. We began recording our former investment in TaiGen at fair value based on the trading price of TaiGen’s common stock, and the remaining former investment was revalued on each balance sheet date.
Gains and losses on the sale of available-for-sale securities are determined using the specific-identification method. During the year ended December 31, 2014, we sold all of our shares of TaiGen and recorded a realized gain of $49.6 million.
4. Balance Sheet Details
Inventory consisted of the following, in thousands:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Raw materials
|
|
$
|
2,553
|
|
|
$
|
2,487
|
|
Work in process
|
|
|
3,943
|
|
|
|
2,781
|
|
Finished goods at Arena GmbH
|
|
|
212
|
|
|
|
165
|
|
Finished goods at Eisai
|
|
|
—
|
|
|
|
3,309
|
|
Finished goods at Ildong
|
|
|
—
|
|
|
|
760
|
|
Total inventory
|
|
$
|
6,708
|
|
|
$
|
9,502
|
|
The carrying value of finished goods at Eisai and Ildong at December 31, 2015, represented inventory sold to Eisai and Ildong, respectively, which had not yet been sold through to their distributors at December 31, 2015. We previously deferred recognition of
74
revenue and the related costs at the time we sold BELVIQ to our collaborators because we did not have the ability to estim
ate the amount of product that could have been returned to us and, as such, recognized revenues and the related costs from net product sales when our collaborators shipped BELVIQ to their distributors. In December 2016, we determined that we now have the a
bility to reasonably estimate the amount of returns and thus now recognize revenue and the related cost from product sales when we ship BELVIQ to our collaborators. In December 2016, we recognized revenues and the related costs on net product sales which h
ad been previously deferred.
Land, property and equipment, net consisted of the following, in thousands:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Land
|
|
$
|
7,809
|
|
|
$
|
8,131
|
|
Building and capital improvements
|
|
|
58,609
|
|
|
|
74,663
|
|
Leasehold improvements
|
|
|
17,769
|
|
|
|
18,025
|
|
Machinery and equipment
|
|
|
16,801
|
|
|
|
53,790
|
|
Computers and software
|
|
|
5,737
|
|
|
|
15,893
|
|
Furniture and office equipment
|
|
|
1,631
|
|
|
|
2,227
|
|
|
|
|
108,356
|
|
|
|
172,729
|
|
Less accumulated depreciation and amortization
|
|
|
(64,528
|
)
|
|
|
(100,901
|
)
|
Land, property and equipment, net
|
|
$
|
43,828
|
|
|
$
|
71,828
|
|
Intangibles consisted of the following, in thousands:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Acquired manufacturing production licenses – gross
|
|
$
|
2,357
|
|
|
$
|
12,958
|
|
Acquired manufacturing production licenses – accumulated amortization
|
|
|
—
|
|
|
|
(5,183
|
)
|
Intangibles, net
|
|
$
|
2,357
|
|
|
$
|
7,775
|
|
The Eisai Agreement entered on December 28, 2016, results in a significant change in our expected use of our Zofingen facility. We have agreed to manufacture and supply all of Eisai’s requirements (or specified minimum quantities if such quantities are greater than Eisai’s requirements), subject to certain exceptions, for BELVIQ for an initial two-year period. Eisai may extend this initial period for an additional six months upon payment of an exercise fee. Eisai will pay us agreed-upon prices to deliver BELVIQ during this period. Based on our estimate of future cash flows that are directly associated with our Zofingen facility, we determined that long-lived assets with a carrying amount of $32.9 million were no longer recoverable and were in fact impaired and wrote them down to their estimated fair value of $11.1 million. Fair value was based on an estimate of the net proceeds we would receive upon disposition of the asset group to a market participant. This estimate is a Level 3 input under Accounting Standards Codification Topic 820,
Fair Value Measurement
. It is reasonably possible that our estimate of fair value for these assets may change in the near term resulting in the need to record an additional impairment loss. See Note 9 for further details on the Eisai Agreement.
Following the impairment write-down, the carrying value of long-lived assets located in the United States and Switzerland were $35.1 million and $11.1 million, respectively, at December 31, 2016. The carrying value of long-lived assets located in the United States and Switzerland were $41.5 million and $38.1 million, respectively, at December 31, 2015.
We capitalize into inventory amortization expense related to the manufacturing of BELVIQ. Such amortization will subsequently be recognized as cost of product sales when the related inventory is sold. Using the exchange rate in effect on December 31, 2016, we expect to record amortization of $1.2 million per year through 2018 for our manufacturing facility production licenses.
Accounts payable and other accrued liabilities consisted of the following, in thousands:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Accounts payable
|
|
$
|
5,977
|
|
|
$
|
2,078
|
|
Accrued compensation
|
|
|
4,820
|
|
|
|
5,118
|
|
Accrued workforce reduction expense
|
|
|
62
|
|
|
|
1,793
|
|
Other accrued liabilities
|
|
|
1,257
|
|
|
|
1,138
|
|
Total accounts payable and other accrued liabilities
|
|
$
|
12,116
|
|
|
$
|
10,127
|
|
75
5. Agreements with Siegfried
In January 2008, we acquired from Siegfried certain drug product facility assets, including manufacturing facility production licenses, fixtures, equipment, other personal property and real estate assets in Zofingen, Switzerland, under an asset purchase agreement. These assets are being used to manufacture and package lorcaserin as well as certain drug products for Siegfried. From time to time, we may also use this facility to manufacture and package tablets and capsules for other of our programs or for other entities.
In connection with this transaction, we also entered into a long-term supply agreement for the active pharmaceutical ingredient of lorcaserin, a toll manufacturing agreement and a technical services agreement with Siegfried. For the years ended December 31, 2016, 2015, and 2014, we recognized expenses of $1.4 million, $1.3 million, and $2.5 million, respectively, for services incurred under the technical services agreement. The technical services agreement provides us with administrative and other services to operate the facility.
The real estate assets we acquired in January 2008 pursuant to the asset purchase agreement consisted of approximately 67,000 square feet of space in a building that consists of approximately 134,000 square feet of space along with an option to purchase the remaining Siegfried-occupied portion of the building along with the underlying land at a price of CHF 15.0 million, plus an inflation adjustment. Siegfried also had the option to sell us such remaining portion of the building with the underlying land at a price of CHF 8.0 million, plus an inflation adjustment. In July 2014, Siegfried provided us notice of its exercise of the option to sell us the remaining Siegfried-occupied portion of the building with the underlying land. In December 2014, we took title of the remaining portion of the building with the underlying land, and in July 2015 we paid the purchase price of CHF 8.2 million to Siegfried. In connection with the exercise of the option, we lease this building space back to Siegfried for an annual base rent amount of CHF 0.4 million. Siegfried has the right to partially or fully terminate this lease with six months’ notice. Siegfried has an annual option to extend the lease for an additional year with the last extension term ending on December 31, 2019. At any time during the extension terms, we have the right to partially or fully terminate this lease with six months’ notice, but with a termination date no earlier than December 31, 2017.
6. Derivative Liabilities
In June 2006 and August 2008, we issued seven-year warrants, which we refer to as the Series B Warrants, to purchase 829,856 and 1,106,344 shares of our common stock, respectively, at an exercise price of $15.49 and $7.71 per share, respectively. As a result of the warrants’ anti-dilution provision and certain of our subsequent equity issuances, the number of shares issuable upon exercise of the warrants increased and the exercise price decreased.
In August 2015, the August 2008 Series B Warrant, which was recorded as a current derivative liability of $0.5 million on our consolidated balance sheet at December 31, 2014, expired pursuant to its terms. Therefore, we recorded a gain in our consolidated statement of operations and comprehensive loss for the year ended December 31, 2015.
The warrants were revalued on each balance sheet date, with changes in the fair value between reporting periods recorded in the interest and other income (expense) section of our consolidated statements of operations and comprehensive loss.
7. Commitments
We occupy four properties in California under sale and leaseback agreements. The terms of these leases stipulate annual increases in monthly rental payments of 2.5%. We accounted for our sale and leaseback transactions using the financing method. Under the financing method, the book value of the properties and related accumulated depreciation remain on our balance sheet and no sale is recognized. The sales price of the properties is recorded as a financing obligation, and a portion of each lease payment is recorded as interest expense. We recorded interest expense of $6.4 million, $6.7 million, and $6.9 million for the years ended December 31, 2016, 2015, and 2014, respectively, related to these leases. We expect interest expense related to our facilities to total $37.5 million from December 31, 2016, through the remaining terms of the leases in fiscal year 2027. At December 31, 2016, the total financing obligation for these facilities was $65.3 million. The aggregate residual value of the facilities at the end of the lease terms is $10.0 million.
We lease an additional property in California under an operating lease, which expires in May 2027, and contains a purchase option and stipulates annual increases in monthly rental payments of 2.5%. We further lease commercial space in various facilities in Zofingen, Switzerland that can be terminated with 12-month written notice under an agreement that expires in 2032. We also lease a separate office space in Zofingen under an operating lease which expires in August 2020 and another office space in Zug, Switzerland under and operating lease which expires in September 2020.
76
In accordance with the lease terms for certain of our properties, we are required to maintain deposits for the
benefit of the landlord throughout the term of the leases. A total of $0.9 million and $0.8 million were recorded in other non-current assets on our consolidated balance sheets at December 31, 2016, and 2015, respectively, related to such leases.
We recognize rent expense on a straight-line basis over the term of each lease. Rent expense of $1.2 million, $1.1 million and $1.1 million was recognized for the years ended December 31, 2016, 2015, and 2014, respectively.
At December 31, 2016, the future minimum lease payments under our existing financing and operating lease obligation are as follows, in thousands:
Year ending December 31,
|
|
Financing
Obligations
|
|
|
Operating
Leases
|
|
2017
|
|
$
|
8,712
|
|
|
$
|
1,259
|
|
2018
|
|
|
9,731
|
|
|
|
1,353
|
|
2019
|
|
|
8,053
|
|
|
|
1,376
|
|
2020
|
|
|
8,254
|
|
|
|
1,266
|
|
2021
|
|
|
8,461
|
|
|
|
976
|
|
Thereafter
|
|
|
49,613
|
|
|
|
5,723
|
|
Total minimum lease payments
|
|
|
92,824
|
|
|
$
|
11,953
|
|
Less amounts representing interest
|
|
|
(37,548
|
)
|
|
|
|
|
Add amounts representing residual value
|
|
|
9,990
|
|
|
|
|
|
Lease financing obligations
|
|
|
65,266
|
|
|
|
|
|
Less current portion
|
|
|
(3,518
|
)
|
|
|
|
|
|
|
$
|
61,748
|
|
|
|
|
|
In May 2016, we entered into an agreement to sublease one of our US properties to a third party, which commenced in August 2016 and expires in May 2027. The terms of the sublease stipulate annual increases in monthly rental payments of 3.19%. We recognize rent income on a straight-line basis over the term of the sublease.
Expected minimum rental payments to be received under the sublease are as follows:
Year ending December 31,
|
|
|
|
|
2017
|
|
$
|
714
|
|
2018
|
|
|
737
|
|
2019
|
|
|
760
|
|
2020
|
|
|
784
|
|
2021
|
|
|
809
|
|
Thereafter
|
|
|
4,846
|
|
Total
|
|
$
|
8,650
|
|
8. Stockholders’ Equity
Equity Compensation Plans.
On June 10, 2013, our stockholders approved our 2013 Long-Term Incentive Plan, or 2013 LTIP. Upon such approval, our 2012 Long-Term Incentive Plan, or 2012 LTIP, was terminated. However, notwithstanding such termination or the previous termination of our 2009 Long-Term Incentive Plan, 2006 Long-Term Incentive Plan, as amended, 2002 Equity Compensation Plan, Amended and Restated 2000 Equity Compensation Plan, and Amended and Restated 1998 Equity Compensation Plan (together with the 2012 LTIP, the “Prior Plans”), all outstanding awards under the Prior Plans will continue to be governed under the terms of the Prior Plans. The number of shares of common stock authorized for issuance under the 2013 LTIP may be increased by the number of shares subject to any stock awards under the Prior Plans that are forfeited, expire or otherwise terminate without the issuance of such shares and would otherwise be returned to the share reserve under the Prior Plans but for their termination and as otherwise provided in the 2013 LTIP.
The 2013 LTIP provides for the grant of a total of 30 million shares of our common stock (subject to adjustment for certain corporate events), as (i) decreased for grants made under the Prior Plans between December 31, 2012, and the approval of the 2013 LTIP and (ii) increased by the number of shares subject to any stock awards under the Prior Plans that, between December 31, 2012, and the approval of the 2013 LTIP, are forfeited, expire or settled for cash and as otherwise provided in the 2013 LTIP.
77
Shares under the 2013 LTIP may be granted as incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards and performance awards. Subje
ct to certain limited exceptions, stock options and stock appreciation rights granted under the 2013 LTIP reduce the available number of shares by one share for every share issued while awards other than stock options and stock appreciation rights granted
under the 2013 LTIP reduce the available number of shares by 1.25 shares for every share issued. In addition, shares that are released from awards granted under the Prior Plans or the 2013 LTIP because the awards expire, are forfeited or are settled for ca
sh will increase the number of shares available under the 2013 LTIP by one share for each share released from a stock option or stock appreciation right and by 1.25 shares for each share released from awards other than stock options and stock appreciation
rights.
Stock options granted under the 2013 LTIP generally vest 25% a year for 4 years and are exercisable for up to 7 years from the date of grant. The recipient of a restricted stock award has all rights of a stockholder at the date of grant, subject to certain restrictions on transferability and a risk of forfeiture. Restricted stock unit awards generally vest over one or 4 years from the date of grant. The minimum performance period under a performance award is 12 months. Neither the exercise price of an option nor the grant price of a stock appreciation right may be less than 100% of the fair market value of the common stock on the date such equity award is granted, except in specified situations. The 2013 LTIP prohibits option and stock appreciation right repricings (other than to reflect stock splits, spin-offs or certain other corporate events) without stockholder approval.
In 2003, we set up a deferred compensation plan for our executive officers, whereby executive officers elected to contribute their shares of restricted stock into the plan. There were 62,501 and 79,169 shares of restricted stock in the plan at December 31, 2016, and 2015, respectively.
The following table summarizes our stock option activity under the Prior Plans and the 2013 LTIP, or collectively, our Equity Compensation Plans, for the year ended December 31, 2016, in thousands (except per share data):
|
|
Options
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Weighted-Average
Remaining
Contractual
Term (in years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2015
|
|
|
16,407
|
|
|
$
|
5.01
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
17,899
|
|
|
$
|
1.61
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(116
|
)
|
|
$
|
1.55
|
|
|
|
|
|
|
|
|
|
Forfeited/cancelled/expired
|
|
|
(8,990
|
)
|
|
$
|
3.83
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
25,200
|
|
|
$
|
3.03
|
|
|
|
4.28
|
|
|
$
|
40
|
|
Vested and expected to vest at December 31, 2016
|
|
|
23,945
|
|
|
$
|
3.10
|
|
|
|
4.17
|
|
|
$
|
40
|
|
Vested and exercisable at December 31, 2016
|
|
|
12,808
|
|
|
$
|
4.15
|
|
|
|
2.37
|
|
|
$
|
40
|
|
The aggregate intrinsic value in the above table is calculated as the difference between the closing price of our common stock at December 31, 2016, of $1.42 per share and the exercise price of stock options that had strike prices below the closing price. The intrinsic value of all stock options exercised during the years ended December 31, 2016, 2015, and 2014, was less than $0.1 million, $2.2 million, and $2.7 million, respectively. During the year ended December 31, 2016, cash of $0.2 million was received from stock option exercises and cash of $0.2 million was received from stock purchases under the employee stock purchase plans. There is no tax impact related to share-based compensation or stock option exercises because we are in a net operating loss position with a full valuation allowance on our deferred tax assets. Subsequent to the year end, we granted an additional 14.0 million stock options to our employees and directors under the 2013 LTIP.
The following table summarizes activity with respect to our time-based RSUs under our Equity Compensation Plans for the year ended December 31, 2016, in thousands (except per share data):
|
|
RSUs
|
|
|
Weighted-Average
Grant-Date Fair
Value
|
|
|
Aggregate
Intrinsic
Value
|
|
Unvested at December 31, 2015
|
|
|
273
|
|
|
$
|
4.67
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(233
|
)
|
|
$
|
4.75
|
|
|
|
|
|
Forfeited/cancelled
|
|
|
(15
|
)
|
|
$
|
4.23
|
|
|
|
|
|
Unvested at December 31, 2016
|
|
|
25
|
|
|
$
|
4.26
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
539
|
|
|
$
|
5.05
|
|
|
$
|
2,723
|
|
78
The total fair value of RSUs vested during the years ended December 31, 2016, 2015, and 2014, was $1.1 million, $2.1 million, and $1.8 million, respectively. The weight
ed-average estimated grant-date fair value of RSUs granted during the years ended December 31, 2015, and 2014, was $4.11 and $5.23, respectively. No RSUs were granted in 2016.
In March 2015, March 2014 and March 2013, we granted our executive officers PRSU awards. The PRSUs may be earned and converted into outstanding shares of our common stock based on the TSR of our common stock relative to the TSR over a three-year performance period beginning March 1 of the year granted of the NASDAQ Biotechnology Index. In the aggregate, the target number of shares of common stock that could be earned under the PRSUs granted in March 2015, March 2014 and March 2013 were originally 745,000, 695,000 and 780,000, respectively; however, the actual number of shares that could be earned ranges from 0% to 200% of such amounts. In addition, there is a cap on the number of shares that could be earned under the PRSUs equal to six times the grant-date fair value of each award, and funding is capped at 100% if the absolute 3-year TSR is negative even if performance is above the median. As these awards contain a market condition, we used a Monte Carlo simulation model to estimate the grant-date fair value, which totaled $3.4 million, $5.0 million and $5.9 million for the March 2015, 2014 and March 2013 grants, respectively. The grant-date fair value is recognized as compensation expense over the performance period as service is provided; no compensation expense is recognized for service not provided in case of separation from the Company. There is no adjustment of compensation expense recognized for service performed regardless of the number of PRSUs, if any, that ultimately vest.
In February 2016, the remaining PRSUs granted in March 2013 were forfeited without any earnout based on the TSR of our common stock relative to the TSR of the NASDAQ Biotechnology Index over the three-year performance period that began on March 1, 2013. In February 2017, the remaining PRSUs granted in March 2014 were forfeited without any earnout based on the TSR of our common stock relative to the TSR NASDAQ Biotechnology Index over the three-year performance period that began on March 1, 2014.
Of the target number of shares of 745,000 for the March 2015 grants, 355,556 have been cancelled due to management changes during the years ended December 31, 2016, and 2015 (see Note 13). All the other PRSUs granted in March 2015 were outstanding and unvested at December 31, 2016.
Employee Stock Purchase Plan.
In June 2015, our stockholders approved our 2009 Employee Stock Purchase Plan, as amended, or 2009 ESPP. Under the 2009 ESPP substantially all employees can choose to have up to 15% of their annual compensation withheld to purchase up to 625 shares of common stock per purchase period, subject to certain limitations. The shares of common stock may be purchased over an offering period with a maximum duration of 24 months and at a price of not less than 85% of the lesser of the fair market value of the common stock on (i) the first trading day of the applicable offering period or (ii) the last trading day of the applicable three-month purchase period. Under applicable accounting guidance, the 2009 ESPP is considered a compensatory plan. At December 31, 2016, a total of 1,115,188 shares of common stock were available for issuance under the 2009 ESPP.
During the years ended December 31, 2016, 2015, and 2014, 141,397, 327,950, and 304,085 shares, respectively, were purchased under the 2009 ESPP.
Share-based Compensation.
We estimate the grant-date fair value of all of our share-based awards in determining our share-based compensation expense. Our share-based awards include (i) stock options, (ii) options to purchase stock granted under our employee stock purchase plan, (iii) RSUs, and (iv) PRSU awards.
The table below sets forth the weighted-average assumptions and estimated fair value of stock options we granted under our Equity Compensation Plans during the years presented:
|
|
Years ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Risk-free interest rate
|
|
|
1.4
|
%
|
|
|
1.8
|
%
|
|
|
1.8
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
79
|
%
|
|
|
80
|
%
|
|
|
81
|
%
|
Expected life (years)
|
|
4.81
|
|
|
6.08
|
|
|
|
6.17
|
|
Weighted-average estimated fair value per share of stock options granted
|
|
$
|
1.02
|
|
|
$
|
2.55
|
|
|
$
|
4.37
|
|
79
The table below sets forth the assumptions and estimated fair value of the options to purchase stock granted under our employee stock purchase plan for multiple offering periods during the years presented:
|
|
Years ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Risk-free interest rate
|
|
0.2% - 1.2%
|
|
|
0.0% - 1.0%
|
|
|
0.0% - 0.6%
|
|
Dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
|
|
0%
|
|
Expected volatility
|
|
75% - 82%
|
|
|
52% - 78%
|
|
|
53% - 81%
|
|
Expected life (years)
|
|
.25 - 2.0
|
|
|
.25 - 2.0
|
|
|
.25 - 2.0
|
|
Range of fair value per share of options granted under employee stock purchase plan
|
|
$0.78 to $0.92
|
|
|
$0.78 to $2.94
|
|
|
$1.37 to $4.22
|
|
The table below sets forth the assumptions and estimated fair value of PRSU awards granted during the years presented:
|
|
Years ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Risk-free interest rate
|
|
|
—
|
|
|
|
1.1
|
%
|
|
|
0.7
|
%
|
Dividend yield
|
|
|
—
|
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
—
|
|
|
|
75
|
%
|
|
|
78
|
%
|
Performance period (years)
|
|
|
—
|
|
|
|
2.97
|
|
|
|
2.99
|
|
Estimated fair value per share of PRSUs granted
|
|
|
—
|
|
|
$
|
4.50
|
|
|
$
|
7.16
|
|
We recognized share-based compensation expense as follows for the years presented, in thousands, except per share data:
|
|
Years ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Cost of product sales
|
|
$
|
45
|
|
|
$
|
29
|
|
|
$
|
—
|
|
Research and development
|
|
|
5,615
|
|
|
|
7,582
|
|
|
|
7,118
|
|
General and administrative
|
|
|
4,425
|
|
|
|
6,710
|
|
|
|
6,391
|
|
Restructuring charges
|
|
|
1,032
|
|
|
|
142
|
|
|
|
—
|
|
Total share-based compensation expense and impact on net loss
|
|
$
|
11,117
|
|
|
$
|
14,463
|
|
|
$
|
13,509
|
|
Impact on net loss per share, basic and diluted
|
|
$
|
0.05
|
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
Total share-based compensation capitalized into inventory
|
|
$
|
170
|
|
|
$
|
173
|
|
|
$
|
81
|
|
We capitalize into inventory share-based compensation related to awards granted to employees involved with the manufacturing of BELVIQ. Such compensation will subsequently be recognized as cost of product sales when the related inventory is sold.
The table below sets forth our total unrecognized estimated compensation expense at December 31, 2016, by type of award and the weighted-average remaining requisite service period over which such expense is expected to be recognized:
|
|
Unrecognized
Expense (in
thousands)
|
|
|
Remaining
Weighted-Average
Recognition
Period (in years)
|
|
Unvested stock options
|
|
$
|
10,381
|
|
|
|
3.14
|
|
RSUs
|
|
|
85
|
|
|
|
1.66
|
|
PRSUs
|
|
|
289
|
|
|
|
0.60
|
|
Common Stock Reserved for Future Issuance.
The following shares of our common stock are reserved for future issuance at December 31, 2016, in thousands:
Equity Compensation Plans
|
|
45,515
|
|
2009 ESPP
|
|
1,115
|
|
Deferred compensation plan
|
|
63
|
|
Total
|
|
46,693
|
|
80
9. Collaborations
Lorcaserin collaborations.
Eisai.
In July 2010, we granted Eisai exclusive commercialization rights for lorcaserin solely in the United States and its territories and possessions. In May 2012, we and Eisai entered into the first amended and restated agreement, which expanded Eisai’s exclusive commercialization rights to include most of North and South America. In November 2013, we and Eisai entered into the second amended and restated agreement, or Second Amended Agreement, which expanded Eisai’s exclusive commercialization rights for lorcaserin to all of the countries in the world, except for South Korea, Taiwan, Australia, New Zealand and Israel.
On December 28, 2016, we and Eisai amended and restated the terms of the Second Amended Agreement by entering into the Eisai Agreement, which was determined to be a material modification of the Second Amended Agreement. Under the Eisai Agreement, we identified the following significant deliverables to Eisai which each qualify as a separate unit of accounting:
|
•
|
An exclusive royalty-bearing license or transfer of intellectual property, or License, to commercialize lorcaserin world-wide relating to certain patents, regulatory approvals, samples, records, know-how related to lorcaserin, trademarks and domain names related to the lorcaserin brand names. We also assigned to Eisai our rights under the commercial lorcaserin distribution agreements with Ildong for South Korea, CYB for Taiwan and Teva for Israel. This is collectively referred to as the License Deliverable.
|
|
•
|
Bulk inventory and precursor material for manufacturing lorcaserin, or Inventory Deliverable.
|
|
•
|
A manufacturing and supply commitment for two years commencing December 28, 2016, or Manufacturing and Supply Commitment Deliverable.
|
The following table summarizes the revenues we recognized under our collaboration with Eisai for the periods presented, in thousands:
|
|
Years ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Net product sales
|
|
$
|
19,196
|
|
|
$
|
14,236
|
|
|
$
|
15,983
|
|
Amortization of upfront payments
|
|
|
66,014
|
|
|
|
7,541
|
|
|
|
7,630
|
|
Milestone payments
|
|
|
12,000
|
|
|
|
—
|
|
|
|
500
|
|
Reimbursement of development expenses
|
|
|
1,295
|
|
|
|
1,538
|
|
|
|
10,037
|
|
Reimbursement of patent and trademark expenses
|
|
|
392
|
|
|
|
426
|
|
|
|
444
|
|
Subtotal other Eisai collaboration revenue
|
|
|
79,701
|
|
|
|
9,505
|
|
|
|
18,611
|
|
Total
|
|
$
|
98,897
|
|
|
$
|
23,741
|
|
|
$
|
34,594
|
|
Royalty payments.
Pursuant to the Eisai Agreement, we are eligible to receive royalty payments from Eisai based on the global net sales of lorcaserin. The royalty rates are as follows:
|
•
|
9.5% on annual net sales less than or equal to $175.0 million
|
|
•
|
13.5% on annual net sales greater than $175.0 million but less than or equal to $500.0 million
|
|
•
|
18.5% of annual net sales greater than $500.0 million
|
We did not earn or recognize any revenue from these royalty payments in the year ended December 31, 2016. We expect to record revenues from those royalty payments in the period in which the net sales upon which the royalties are calculated occur as reported to us by Eisai.
Upfront payments.
Prior to the Eisai Agreement, we received from Eisai total upfront payments of $115.0 million under prior agreements. Revenues from these upfront payments were previously deferred, as we determined that the exclusive rights did not have standalone value without our ongoing development and regulatory activities. Accordingly, these payments were recognized ratably as revenue over the periods in which we expected the services to be rendered. The Eisai Agreement effectively eliminated our obligation to continue performing the development and regulatory activities required in the Second Amended Agreement. Therefore, on December
81
28, 2016, $58.5 million of deferred revenues from these upfront payments was allocated to the value of the License provided to Eisai and recognized as revenue in 2016. The remaining portion, $20.9 million, was deferred as
of December 31, 2016.
Milestone payments.
In July 2016, the US Food and Drug Administration, or FDA, approved the New Drug Application for BELVIQ XR. We earned from Eisai a $10.0 million substantive milestone payment from this achievement. In October 2016, Eisai announced the commercial launch of BELVIQ XR in the United States.
In July 2016, the Federal Commission for the Protection Against Sanitary Risk approved the Marketing Authorization Application in Mexico for our twice-daily formulation of lorcaserin for chronic weight management. The product will be sold under the brand name VENESPRI. We earned from Eisai a $1.0 million substantive milestone payment from this achievement.
In December 2016, the Brazilian Health Surveillance Agency provided regulatory approval in Brazil for BELVIQ. We earned from Eisai a $1.0 million substantive milestone payment from this achievement.
In addition to the $12.0 million in milestones mentioned above and the other $86.5 million in milestones previously achieved since we entered the original agreement in 2010, we are eligible to receive a substantive commercial milestone of $25.0 million upon the achievement of global net sales of lorcaserin for a calendar year first exceeding $250.0 million.
Product purchase price and inventory purchase.
We manufacture lorcaserin at our facility in Zofingen, Switzerland. Under the Eisai Agreement, we have agreed to manufacture and supply, and Eisai has agreed to purchase from us, all of Eisai’s requirements (or specified minimum quantities if such quantities are greater than Eisai’s requirements), subject to certain exceptions, for lorcaserin for development and commercial use for an initial two-year period. The initial period may be extended by Eisai for an additional six months upon payment of an extension fee of CHF 2.0 million. Eisai will pay us agreed upon prices to deliver finished drug product during this time. Additionally, Eisai has agreed to pay up to CHF 13.0 million in manufacturing support payments during the initial two-year period supply period, and pay up to CHF 6.0 million in manufacturing support payments during the six-month extension period, if the extension option is exercised by Eisai.
On December 28, 2016, Eisai paid us $10.0 million to acquire our entire inventory of bulk lorcaserin and the precursor materials for manufacturing lorcaserin. This payment was included in the arrangement consideration allocated to the units of accounting under the Eisai Agreement. We expect this inventory will remain at our Zofingen, Switzerland facility for us to use to manufacture finished drug product in order to meet Eisai’s requirements during the initial two-year period and, if applicable, the six-month extension period. The inventory that is not expected to be used to manufacture finished drug product will be physically transferred to Eisai upon the earlier of Eisai’s request to transfer or the end of the manufacturing and supply commitment period.
Under the Second Amended Agreement, we sold lorcaserin to Eisai for Eisai’s commercialization in the United States for a purchase price of 31.5% of Eisai’s aggregate annual net product sales (which are the gross invoiced sales less certain deductions described in the Second Amended Agreement), or the Product Purchase Price. The amount that Eisai paid us for lorcaserin product supply was based on Eisai’s estimated price at the time the order was shipped, which was Eisai’s estimate of the Eisai Product Purchase Price, and was subject to change on April 1 and October 1 of each year. The Eisai Product Purchase Price for the product Eisai sold under the Second Amended Agreement was lower than the estimated price that Eisai paid us for such product, primarily due to an increase in deductions from savings cards and returns, partially offset by a decrease in vouchers. At the end of Eisai’s fiscal year (March 31), the estimated price paid to us for product that Eisai sold to its distributors was compared to the Eisai Product Purchase Price of such product, and the difference was refunded back to Eisai for the overpayments. The $9.1 million classified as Payable to Eisai on our consolidated balance sheet at December 31, 2016, relates to product sold by Eisai to its distributors from April 1, 2015, through March 31, 2016. Under the Eisai Agreement, we will not refund to Eisai any net overpayment which would have been otherwise due to Eisai under the Second Amended Agreement for product we sold to Eisai under the Second Amended Agreement which Eisai did not sell to its distributors on or before March 31, 2016. For product which Eisai sold to its distributors from April 1, 2016, through December 28, 2016, we recognized the net overpayment which would have been otherwise due to Eisai under the Second Amended Agreement of $2.0 million as revenues and included this amount in net product sales for the year ended December 31, 2016.
We previously deferred recognition of revenue and the related cost at the time we sold lorcaserin to Eisai because we did not have the ability to estimate the amount of product that could have been returned to us and thus recognized revenues and the related costs from net product sales when Eisai shipped BELVIQ to its distributors. Pursuant to a change in the terms of the Eisai Agreement, we determined that we now have the ability to reasonably estimate the amount of returns and thus will now recognize revenue and the related cost from product sales when we ship BELVIQ to Eisai. On December 28, 2016, we recognized revenues of $6.7 million and costs of $1.9 million on net product sales which had been previously deferred.
82
Allocation of Eisai Agreement arrangement consideration to the units of accounting.
The total arrangement consideration of $115.6 million primarily consists of (i) the December 28, 2016, balances of deferred revenues from the upfront payments received under the prior Eisai agreements and the distribution agreements with Ildong, CYB and Teva; (ii) the $10.0 million payment received from Eisai on December 28, 2016; and (iii) the product purchase payments and manufacturing support payments we expect to receive from Eisai for the initial two-year manufacturing and supply commitment period.
All of the deliverables were determined to have standalone value and to meet the criteria to be accounted for as separate units of accounting. Factors considered in the determination included, among other things, for the license, the manufacturing experience and capabilities of Eisai and their sublicense rights, and for the remaining deliverables the fact that they are not proprietary and can be provided by other vendors. The total arrangement consideration was allocated to the units of accounting on the basis of their relative estimated selling prices as follows:
|
•
|
$64.0 million was allocated to the License Deliverable. As the License Deliverable was delivered on December 28, 2016, this amount was recognized as other Eisai collaboration revenue for the year ended December 31, 2016.
|
|
•
|
$30.8 million was allocated to the Inventory Deliverable. Title to this entire inventory passed to Eisai on December 28, 2016. However, none of this inventory was physically transferred from the manufacturing facility, and there is no fixed schedule for delivery given some will be delivered on a continuous basis as we perform under the manufacturing commitment while the rest will be physically transferred to Eisai upon request by Eisai or upon the end of the manufacturing and supply commitment period. Also, the risks of ownership for this inventory have not been fully passed to Eisai as we will continue to have financial responsibility for any loss, damage or destruction which occurs while in our possession. Therefore, none of the arrangement consideration allocated to this deliverable was recognized as revenue and none of the carrying value of this inventory was recognized as cost of product sales for the year ended December 31, 2016.
|
|
•
|
$20.8 million was allocated to the Manufacturing and Supply Commitment Deliverable. This deliverable will be provided over 2017 and 2018 as product is shipped to Eisai. Therefore, none of the arrangement consideration allocated to this deliverable was recognized as revenue for the year ended December 31, 2016.
|
The consolidated balance sheet at December 31, 2016, includes deferred revenues of $30.8 million (primarily comprised of the deferred portion of the previously received upfront payments and the $10.0 million payment received from Eisai on December 28, 2016), and inventory of $4.4 million, which is the carrying value of the product under the Inventory Deliverable. These balances are expected to be recognized in subsequent periods as this inventory is used in the manufacture and supply of lorcaserin to Eisai over the commitment period.
The estimated selling price represents the price at which we would contract if the deliverable was sold regularly on a standalone basis. The estimated selling price for each unit of accounting was determined as follows:
|
•
|
The estimated selling price for the License Deliverable was determined using an income approach that estimates the net present value of royalties Eisai is expected to earn under the Eisai Agreement as compared to the Second Amended Agreement, net of the development costs we are no longer obligated to spend. This model includes several assumptions, including the potential market for lorcaserin in each relevant jurisdiction, probabilities of obtaining regulatory approval in additional jurisdictions, the impact of competition, the potential impact of Eisai’s ongoing development and regulatory activities related to lorcaserin, and the appropriate discount rate.
|
|
•
|
The estimated selling price for the Inventory Deliverable was determined by considering the historical cost of the precursor materials, adjusted for any changes in market condition and supplier relationships. We believe that the Eisai Agreement pricing represents pricing that would be charged if it were sold on a standalone basis.
|
|
•
|
The estimated selling price for the Manufacturing and Supply Commitment Deliverable was determined to be the aggregate product purchase payments we expect to receive from Eisai for the initial two-year manufacturing and supply commitment period. As noted above, we believe that the Eisai Agreement pricing represents pricing that would be charged if it were sold on a standalone basis.
|
Development payments.
As part of the US approval of BELVIQ, the FDA, is requiring the evaluation of the effect of long-term treatment with BELVIQ on the incidence of major adverse cardiovascular events, or MACE, in overweight and obese patients with cardiovascular disease or multiple cardiovascular risk factors (which is the FDA-required portion of the cardiovascular outcomes trial), as well as the conduct of postmarketing studies to assess the safety and efficacy of BELVIQ for weight management in obese pediatric and adolescent patients. Under the Second Amended Agreement, Eisai and we were responsible for 90% and 10%, respectively, of the cost for the FDA-
83
required portion of the cardiovascular outcomes trial, or CVOT, 50% and 50%, respectively, of the non-FDA portion of the studies and
we were also obligated to share the cost of FDA-required studies in obese pediatric patients and for additional clinical studies in other territories.
Under the Eisai Agreement, Eisai is solely responsible for all costs and expenses in connection with further development of lorcaserin from and after July 1, 2016, and we were relieved of any obligations under the Second Amended Agreement to pay our share of future development costs of lorcaserin. Accordingly, on December 28, 2016, we recorded a reduction of research and development expenses which would have been otherwise due to Eisai under the Second Amended Agreement of $3.7 million for the period from July 1, 2016, through December 28, 2016.
For the years ended December 31, 2016, 2015, and 2014, we recognized expenses of $7.3 million (net of the aforementioned $3.7 million reduction), $16.2 million and $35.3 million, respectively, for external clinical study fees related to lorcaserin and internal non-commercial manufacturing costs primarily related to lorcaserin.
Certain other terms.
Eisai and we will each bear 50% of all future expenses and losses arising from any potential product liability claims during a specified period after the date of the Eisai Agreement. Thereafter, we and Eisai will each bear 50% of all expenses and losses arising from any alleged defective manufacturing of lorcaserin by Arena GmbH under the Eisai Agreement, and Eisai will be solely responsible for any expenses and losses associated with other product liability claims.
We may terminate the Transaction Agreement with respect to the United States, the European Union, China and Japan, (collectively, the Major Markets) if Eisai permanently ceases development and commercialization of lorcaserin products in such Major Market, or in its entirety if Eisai permanently ceases development and commercialization of lorcaserin products. We may also terminate the Transaction Agreement if Eisai challenges any patent currently controlled by us related to lorcaserin, if Eisai is debarred under the United States Federal Food, Drug, and Cosmetic Act, or if Eisai is in material breach of the standstill provisions.
Eisai may terminate the Transaction Agreement if, as a result of its change of control, it would be in breach of certain competition restrictions.
In the event the Transaction Agreement is terminated by us due to Eisai’s failure to develop and commercialize lorcaserin products, Eisai’s challenging of any of the licensed patents or Eisai’s debarment or material breach of the standstill provisions, or by Eisai after a change of control that would result in Eisai being in breach of certain competition restrictions, Eisai will grant us an exclusive, royalty-free license to certain patent rights and know-how necessary or useful for the development and commercialization of lorcaserin products, re-assign the assets purchased by Eisai under the Eisai Agreement, and provide certain other transition assistance.
Ildong Pharmaceutical Co., Ltd.
In November 2012, we and Ildong entered into the Marketing and Supply Agreement, or Ildong Agreement. Under this agreement, we granted Ildong exclusive rights to commercialize BELVIQ in South Korea for weight loss or weight management in obese and overweight patients. We also provided certain services and manufacture and sold BELVIQ to Ildong. As noted above, the Ildong Agreement was assigned to Eisai pursuant to the Eisai Agreement on December 28, 2016.
In connection with entering into the Ildong Agreement, we received from Ildong an upfront payment of $5.0 million, less withholding taxes. Revenues from this upfront payment were deferred, as we determined that the exclusive rights did not have standalone value without our ongoing development and regulatory activities. Accordingly, this payment was recognized ratably as revenue over the period in which we expected the services to be rendered. The assignment of the Ildong Agreement pursuant to the Eisai Agreement effectively eliminated our obligation to continue performing the development and regulatory activities required in the Ildong Agreement. Therefore, on December 28, 2016, the $3.5 million of deferred revenues from this upfront payment was allocated to the value of the License provided to Eisai and recognized as revenue in 2016.
In February 2015, we earned a substantive milestone payment of $3.0 million upon the approval of BELVIQ for marketing in South Korea for weight management. We received the payment, less withholding taxes, in March 2015.
On December 15, 2016, we earned a substantive milestone payment of $0.3 million upon the parties agreeing to include BELVIQ XR as an additional product under the Ildong Agreement. We recognized the milestone revenue in December 2016 and received the payment, less withholding taxes, in February 2017. We will pay 50% of this milestone to Eisai pursuant to the Eisai Agreement.
84
Under the Ildong Agreement, we manufactured BELVIQ at our facility in Zofingen, Switzerland, and sold BELVIQ to Ildong for a purchase price starting at the higher of the defined minimum amount or 35% o
f Ildong’s annual net product sales (which are the gross invoiced sales less certain deductions described in the Ildong Agreement), or the Ildong Product Purchase Price. The Ildong Product Purchase Price increased on a tiered basis up to the higher of the
defined minimum amount or 45% on the portion of annual net product sales exceeding $15.0 million. Since the inception of commercial sales of BELVIQ in South Korea in 2015, the Ildong Product Purchase Price equaled the defined minimum amount (which exceeded
the amounts calculated using the applicable percentages for the applicable tiers of Ildong’s annual net product sales).
We previously deferred recognition of revenue and the related cost at the time we sold BELVIQ to Ildong because we did not have the ability to estimate the amount of product that could have been returned to us and thus recognized revenues and the related costs from net product sales when Ildong shipped BELVIQ to its distributors. In December 2016, we determined that we now have the ability to reasonably estimate returns under the Ildong Agreement. Accordingly, we recognized revenues of $2.0 million and costs of $0.7 million in December 2016 on net product sales which had been previously deferred.
For the years ended December 31, 2016, 2015, and 2014, we recognized revenues of $11.4 million, $8.9 million and $0.4 million, respectively, under the Ildong agreement.
CY Biotech Company Limited.
In July 2013, we entered into the CYB Agreement. Under this agreement, we granted CYB exclusive rights to commercialize BELVIQ in Taiwan for weight loss or weight management in obese and overweight patients, subject to regulatory approval of BELVIQ by the Taiwan Food and Drug Administration, or TFDA. The CYB Agreement provided for us to perform certain services and to manufacture and sell BELVIQ to CYB. As noted above, the CYB Agreement was assigned to Eisai pursuant to the Eisai Agreement on December 28, 2016.
In connection with entering into the CYB agreement, we received from CYB an upfront payment of $2.0 million, less withholding taxes. Revenues from this upfront payment were deferred, as we determined that the exclusive rights did not have standalone value without our ongoing development and regulatory activities. Accordingly, this payment was recognized ratably as revenue over the period in which we expected the services to be rendered. The assignment of the CYB Agreement pursuant to the Eisai Agreement effectively eliminated our obligation to continue performing the development and regulatory activities required in the CYB Agreement. Therefore, on December 28, 2016, the $1.7 million of deferred revenues from this upfront payment was allocated to the value of the License provided to Eisai and recognized as revenue in 2016.
For the years ended December 31, 2016, 2015, and 2014, we recognized revenues of $1.8 million, $0.2 million, and $0.2 million, respectively, under this agreement.
Abic Marketing Limited (Teva).
In July 2014, we entered into the Teva Agreement. Under this agreement, we granted Teva exclusive rights to commercialize BELVIQ in Israel for weight loss or weight management in obese and overweight patients, subject to regulatory approval of BELVIQ by the Israeli Ministry of Health, or MOH. The Teva Agreement provided for us to perform certain services and to manufacture and sell BELVIQ to Teva. As noted above, the Teva Agreement was assigned to Eisai pursuant to the Eisai Agreement on December 28, 2016.
We received from Teva an upfront payment of $0.5 million and a milestone payment of $0.3 million earned upon its application for regulatory approval of BELVIQ in Israel. Revenues from the upfront payment were deferred, as we determined that the exclusive rights did not have standalone value without our ongoing development and regulatory activities. Accordingly, this payment was recognized ratably as revenue over the period in which we expected the services to be rendered. The assignment of the Teva Agreement pursuant to the Eisai Agreement effectively eliminated our obligation to continue performing the development and regulatory activities required in the Teva Agreement. Therefore, on December 28, 2016, the $0.4 million of deferred revenues from this upfront payment was allocated to the value of the License provided to Eisai and recognized as revenue in 2016.
For the years ended December 31, 2016, 2015, and 2014, we recognized revenues of $0.4 million, $0.1 million and $0.3 million, respectively, under the Teva Agreement.
85
Other collaborations
Nelotanserin - Axovant Sciences Ltd.
In May 2015, we entered into the Axovant Agreement. In October 2015, Roivant Sciences, Ltd., or Roivant, assigned the exclusive rights to develop and commercialize nelotanserin to its subsidiary, Axovant. Under this agreement, Axovant has exclusive worldwide rights to develop and commercialize nelotanserin, subject to regulatory approval. We also provide certain services and will manufacture and sell nelotanserin to Axovant.
We received an upfront payment of $4.0 million, which was recorded as deferred revenues and is being recognized as revenue ratably over approximately five years, which is the period in which we expect to provide services under the arrangement. We will receive payments from sales of nelotanserin under the Axovant Agreement and are eligible to receive purchase price adjustment payments based on Axovant’s annual net product sales. We are eligible to receive up to an aggregate of $41.5 million in success milestones in case of full development and regulatory success of nelotanserin. Of these payments, two development milestones totaling $4.0 million are substantive and four regulatory milestones totaling $37.5 million are substantive.
For the years ended December 31, 2016, and 2015, we recognized revenues of $2.1 million and $1.1 million, respectively, under this agreement.
Orphan GPCR - Boehringer Ingelheim International GmbH.
In December 2015, we and Boehringer Ingelheim entered into an exclusive agreement, or Boehringer Ingelheim Agreement, to conduct joint research to identify drug candidates targeting an undisclosed G protein-coupled receptor, or GPCR, that belongs to the group of orphan central nervous system, or CNS, receptors. Under this agreement, we granted Boehringer Ingelheim exclusive rights to our internally discovered, novel compounds and intellectual property for an orphan CNS receptor. We will jointly conduct research with Boehringer Ingelheim to identify additional drug candidates that are suitable for continued research and development as therapeutic compounds for various disease indications, with the initial focus expected to be psychiatric diseases such as schizophrenia. The agreement grants Boehringer Ingelheim exclusive worldwide rights to develop, manufacture and commercialize products resulting from the collaboration.
In part consideration of the rights to our intellectual property necessary or useful to conduct the joint research under the Boehringer Ingelheim Agreement, we received from Boehringer Ingelheim an upfront payment of $7.5 million in January 2016, less $1.2 million of withholding taxes which was refunded to us in October 2016. Revenues from this upfront payment were deferred, as we determined that the exclusive rights did not have standalone value without our ongoing participation in the joint research, and are being recognized ratably as revenues over the period in which we expect the services to be rendered, which is approximately two years.
We are also eligible to receive up to an aggregate of $251.0 million in success milestones in case of full commercial success of multiple drug products. Of these payments, three development milestones totaling $7.0 million are substantive, three development milestones totaling $30.0 million are non-substantive, nine regulatory milestones totaling $84.0 million are non-substantive and four commercial milestones totaling $130.0 million are non-substantive.
For the year ended December 31, 2016, we recognized revenues of $5.1 million under this agreement.
10. Employee Benefit Plans
401(k) Plan.
All of our US employees are eligible to participate in our defined contribution retirement plan that complies with Section 401(k) of the Internal Revenue Code, or IRC. We match 100% of each participant’s voluntary contributions, subject to a maximum of 6% of the participant’s eligible compensation. Our matching portion, which totaled $1.3 million, $1.9 million, and $1.6 million for the years ended December 31, 2016, 2015, and 2014, respectively, vests over a five-year period from the date of hire.
Pension Plan.
Arena GmbH contributes to a multiemployer defined benefit pension plan, established under an affiliated group of employers, for the purpose of providing mandatory occupational pension benefits for its employees. The risks of participating in a multiemployer plan are different from a single-employer plan in that (i) assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers, (ii) if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers, (iii) if Arena GmbH elects to stop participating in the multiemployer plan, Arena GmbH may be required to pay the plan an amount based on the underfunded status of
86
the plan, referred to as a withdrawal liability, and (iv) Arena GmbH has no involvement in the management of the multiemployer plan’s investments. We currently have no intention of withdrawing from the multiemployer plan.
Our contributions to the multiemployer plan were $0.8 million, $0.7 million and $0.7 million for the years ended December 31, 2016, 2015, and 2014, respectively.
11. Income Taxes
The following table summarizes our loss attributable to stockholders of Arena before benefit for income taxes by region for the years presented, in thousands:
|
|
Years ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
United States
|
|
$
|
(10,268
|
)
|
|
$
|
(64,109
|
)
|
|
$
|
(16,607
|
)
|
Foreign
|
|
|
(12,248
|
)
|
|
|
(43,870
|
)
|
|
|
(43,901
|
)
|
Total loss attributable to stockholders of Arena before income taxes
|
|
$
|
(22,516
|
)
|
|
$
|
(107,979
|
)
|
|
$
|
(60,508
|
)
|
We have not recorded a benefit for income taxes for the years ended December 31, 2016, 2015, and 2014, because we have a full valuation allowance.
Our effective income tax rate differs from the statutory federal rate of 34% for the years presented due to the following, in thousands:
|
|
Years ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Benefit for income taxes at statutory federal rate
|
|
$
|
(7,655
|
)
|
|
$
|
(36,713
|
)
|
|
$
|
(20,573
|
)
|
Change in federal and foreign valuation allowance
|
|
|
9,080
|
|
|
|
21,310
|
|
|
|
9,436
|
|
Permanent differences and other
|
|
|
(5,931
|
)
|
|
|
2,370
|
|
|
|
721
|
|
Share-based compensation expense
|
|
|
4,000
|
|
|
|
1,820
|
|
|
|
1,597
|
|
Foreign losses at lower effective rates
|
|
|
3,943
|
|
|
|
15,041
|
|
|
|
13,318
|
|
Research and development and Orphan Drug credits
|
|
|
(3,437
|
)
|
|
|
(3,666
|
)
|
|
|
(2,992
|
)
|
State income tax, net of federal benefit and valuation allowance
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Gain from valuation of derivative liabilities
|
|
|
—
|
|
|
|
(162
|
)
|
|
|
(1,507
|
)
|
Benefit for income taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The components of our net deferred tax assets are as follows, in thousands:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Federal and California NOL carryforwards
|
|
$
|
255,317
|
|
|
$
|
236,334
|
|
Federal and California research and development credit carryforwards
|
|
|
53,059
|
|
|
|
48,768
|
|
Share-based compensation expense
|
|
|
10,395
|
|
|
|
10,737
|
|
Deferred revenues
|
|
|
9,357
|
|
|
|
33,548
|
|
Depreciation
|
|
|
5,441
|
|
|
|
4,475
|
|
Foreign NOL carryforwards
|
|
|
5,108
|
|
|
|
7,060
|
|
Other, net
|
|
|
5,164
|
|
|
|
3,578
|
|
Total deferred tax assets
|
|
|
343,841
|
|
|
|
344,500
|
|
Deferred tax liabilities
|
|
|
(228
|
)
|
|
|
(660
|
)
|
Net deferred tax assets
|
|
|
343,613
|
|
|
|
343,840
|
|
Valuation allowance
|
|
|
(343,613
|
)
|
|
|
(343,840
|
)
|
Net deferred tax liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
A valuation allowance is recorded against all of our deferred tax assets, as realization of such assets is not more-likely-than-not. The realization of our deferred tax assets is dependent upon future taxable income. Our ability to generate taxable income is analyzed regularly on a jurisdiction-by-jurisdiction basis. At such time as it is more-likely-than-not that we will generate taxable income in a
87
jurisdiction, we will reduce or remove the valuation allowance. The valuation allowance decreased by $0.2 mi
llion from December 31, 2015, to December 31, 2016.
At December 31, 2016, we had federal NOL carryforwards of $670.7 million that will begin to expire in 2023 unless previously utilized. At the same date, we had California NOL carryforwards of $528.3 million, which begin expiring in 2017 and foreign NOL carryforwards of $62.2 million, which begin expiring in 2017. At December 31, 2016, approximately $8.9 million of the federal and California NOL carryforwards related to stock option exercise windfalls, which will result in an increase to additional paid-in capital and a decrease in income taxes payable at the time such carryforwards are utilized. At December 31, 2016, we also had federal and California research and development tax credit carryforwards, net of reserves, of $31.4 million and $23.7 million, respectively. At December 31, 2016, we had a Federal Orphan Drug Credit carryforward of $6.0 million. Federal credit carryforwards will begin to expire after 2026 unless previously utilized. The California research and development credit carries forward indefinitely.
Sections 382 and 383 of the IRC limit the utilization of tax attribute carryforwards that arise prior to certain cumulative changes in a corporation’s ownership. We have completed an IRC Section 382/383 analysis through 2015 and identified ownership changes that limit our utilization of tax attribute carryforwards. We reduced deferred tax assets associated with such tax attribute carryforwards to remove deferred tax assets that will expire prior to utilization. Pursuant to IRC Section 382 and 383, use of the Company’s net operating loss and research and development income tax credit carryforwards may be limited in the event of a future cumulative change in ownership of more than 50% within a three-year period.
In accordance with authoritative guidance, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.
The following table reconciles the beginning and ending amount of unrecognized tax benefits for the years presented, in thousands:
|
|
Years ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Gross unrecognized tax benefits at the beginning of the year
|
|
$
|
5,619
|
|
|
$
|
5,214
|
|
|
$
|
4,629
|
|
Additions from tax positions taken in the current year
|
|
|
287
|
|
|
|
405
|
|
|
|
585
|
|
Additions from tax positions taken in prior years
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Reductions from tax positions taken in prior years
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Tax settlements
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Gross unrecognized tax benefits at end of the year
|
|
$
|
5,906
|
|
|
$
|
5,619
|
|
|
$
|
5,214
|
|
Of our total unrecognized tax benefits at December 31, 2016, $4.5 million will impact our effective tax rate in the event the valuation allowance is removed. We do not anticipate that there will be a substantial change in unrecognized tax benefits within the next 12 months.
Our practice is to recognize interest and/or penalties related to income tax matters in income tax expense. Because we have incurred net losses since our inception, we did not have any accrued interest or penalties included in our consolidated balance sheets at December 31, 2016, or 2015, and did not recognize any interest and/or penalties in our consolidated statements of operations and comprehensive loss for the years ended December 31, 2016, 2015, and 2014.
We have elected the “with and without method – direct effects only”, prescribed in accordance with authoritative guidance, with respect to recognition of stock option windfall tax benefits within APIC and will utilize general NOLs to offset taxable income before utilization of NOLs attributable to windfall tax benefits.
We are subject to income taxation in the United States at the Federal and state levels. All tax years are subject to examination by US and California tax authorities due to the carryforward of unutilized NOLs and tax credits. We are also subject to foreign income taxes in the countries in which we operate. To our knowledge, we are not currently under examination by any taxing authorities.
At December 31, 2016, no foreign subsidiaries have accumulated earnings and, as such, there are no unrepatriated earnings.
Our Swiss subsidiary, Arena GmbH, has been granted a conditional incentive tax holiday by the Canton of Aargau for its operations in Switzerland. Without a tax holiday or other tax incentives, the standard effective tax rate of a company located in Aargau is approximately 19%. As a result of the tax holiday and other tax incentives, we expect the effective tax rate for Arena GmbH to be approximately half of such rate. The tax holiday came into effect on January 1, 2013, and will continue for a period of up to 10 years,
88
not to extend beyond December 31, 2022. As a result of foreign losses and a full valuation allowance, no net tax benefit was derived for the years ended December 31, 2016, 2
015, and 2014, as a result of the tax holiday.
12. Legal Proceedings
Beginning on September 20, 2010, a number of complaints were filed in the US District Court for the Southern District of California, or District Court, against us and certain of our current and former employees and directors on behalf of certain purchasers of our common stock. The complaints were brought as purported stockholder class actions, and, in general, include allegations that we and certain of our current and former employees and directors violated federal securities laws by making materially false and misleading statements regarding our BELVIQ program, thereby artificially inflating the price of our common stock. The plaintiffs sought unspecified monetary damages and other relief. On August 8, 2011, the District Court consolidated the actions and appointed a lead plaintiff and lead counsel. On November 1, 2011, the lead plaintiff filed a consolidated amended complaint. On March 28, 2013, the District Court dismissed the consolidated amended complaint without prejudice. On May 13, 2013, the lead plaintiff filed a second consolidated amended complaint. On November 5, 2013, the District Court dismissed the second consolidated amended complaint without prejudice as to all parties except for Robert E. Hoffman, who was dismissed from the action with prejudice. On November 27, 2013, the lead plaintiff filed a motion for leave to amend the second consolidated amended complaint. On March 20, 2014, the District Court denied plaintiff’s motion and dismissed the second consolidated amended complaint with prejudice. On April 18, 2014, the lead plaintiff filed a notice of appeal, and on August 27, 2014, the lead plaintiff filed his appellate brief in the US Court of Appeals for the Ninth Circuit, or Ninth Circuit. On October 24, 2014, we filed our answering brief in response to the lead plaintiff’s appeal. On December 5, 2014, the lead plaintiff filed his reply brief.
A panel of the Ninth Circuit heard oral argument on the appeal on May 4, 2016. On October 26, 2016, the Ninth Circuit panel reversed the District Court’s dismissal of the second consolidated amended complaint and remanded the case back to the District Court for further proceedings. On January 25, 2017, the District Court permitted us to submit a renewed motion to dismiss the second consolidated amended complaint. On February 2, 2017, we filed the renewed motion to dismiss. On February 23, 2017, the lead plaintiff filed his opposition, and on March 2, 2017, we filed our reply.
Due to the stage of these proceedings, we are not able to predict or reasonably estimate the ultimate outcome or possible losses relating to these claims.
On September 30, 2016, we and Eisai Inc. filed a patent infringement lawsuit against Lupin Limited and Lupin Pharmaceuticals, Inc. (collectively, Lupin) in the U.S. District Court for the District of Delaware. The lawsuit relates to a “Paragraph IV certification” notification that we and Eisai Inc. received regarding an abbreviated new drug application, or ANDA, submitted to the FDA by Lupin requesting approval to engage in the commercial manufacture, use, importation, offer for sale or sale of a generic version of BELVIQ
®
(lorcaserin hydrochloride tablets, 10 mg). In its notification, Lupin alleged that no valid, enforceable claim of any of the patents that are listed in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations, or Orange Book, for BELVIQ
®
will be infringed by Lupin’s manufacture, importation, use, sale or offer for sale of the product described in its ANDA. The lawsuit claims infringement of U.S. Patent Nos. 6,953,787; 7,514,422; 7,977,329; 8,207,158; 8,273,734; 8,546,379; 8,575,149; 8,999,970 and 9,169,213. In accordance with the Hatch-
Waxman
Act, as a result of filing a patent infringement lawsuit within 45 days of receipt of Lupin’s notification, the FDA cannot approve the ANDA any earlier than 7.5 years from NDA approval unless a District Court finds that all of the asserted claims of the patents-in-suit are invalid, unenforceable or not infringed. On January 11, 2017, Lupin filed an answer, defenses and counterclaims to the September 30, 2016 complaint. We and Eisai Inc. filed an answer to Lupin’s counterclaims on February 1, 2017. We and Eisai Inc. are seeking a determination from the court that, among other things, Lupin has infringed our patents, Lupin’s ANDA should not be approved until the expiration date of our patents, and Lupin should be enjoined from commercializing a product that infringes our patents. Trial is currently scheduled for April 15, 2019. The parties are currently in the fact discovery phase of the case. We cannot predict the ultimate outcome of any proceeding.
On March 6, 2017, we and Eisai Inc. filed a patent infringement lawsuit against Teva Pharmaceuticals USA, Inc. and Teva Pharmaceutical Industries Ltd. (collectively, Teva) in the U.S. District Court for the District of Delaware. The lawsuit also relates to a “Paragraph IV certification” notification that we and Eisai Inc. received regarding an ANDA submitted to the FDA by Teva requesting approval to engage in the commercial manufacture, use, importation, offer for sale or sale of a generic version of BELVIQ XR
®
(lorcaserin hydrochloride extended-
release
tablets, 20 mg). In its notification, Teva alleged that no valid, enforceable claim of any of the patents that are listed in the Orange Book for BELVIQ XR
®
will be infringed by Teva’s manufacture, importation, use, sale or offer for sale of the product described in its ANDA. The lawsuit claims infringement of U.S. Patent Nos. 6,953,787; 7,514,422; 7,977,329; 8,207,158; 8,273,734; 8,546,379; 8,575,149; 8,999,970 and 9,169,213. In accordance with the Hatch-Waxman Act, as a result of filing a patent infringement lawsuit within 45 days of receipt of Teva’s notification, the FDA cannot approve the ANDA any earlier than 7.5 years from NDA approval unless a District Court finds that all of the asserted claims of the patents-in-suit are invalid, unenforceable or not infringed. Teva has not yet filed an answer to the March 6, 2017 complaint. We and Eisai Inc. are seeking a determination from the court that, among other things, Teva has infringed our patents, Teva’s ANDA should not be approved until the expiration date of our patents, and Teva should be enjoined from commercializing a product that infringes our patents. We cannot predict the ultimate outcome of any proceeding
.
89
13. Management Changes
Appointment of President and Chief Executive Officer.
In May 2016, our Board of Directors appointed Amit Munshi as our President and Chief Executive Officer, and he joined our Board of Directors in June 2016 following our 2016 Annual Stockholders’ Meeting. Harry F. Hixson, Jr., Ph.D., who served as our interim Chief Executive Officer from October 2015 to May 2016, continues to serve on our Board of Directors.
In connection with Mr. Munshi’s appointment as an officer, our Board of Directors’ Compensation Committee approved an inducement stock option grant to Mr. Munshi to purchase 3,800,000 shares of our common stock under our 2013 Long-Term Incentive Plan, as amended, to reserve an additional 3,800,000 shares of common stock for inducement awards. The nonstatutory stock options have a seven-year term and will vest over four years, with 25% of the shares subject to vesting one year after grant and the remainder of the shares vesting quarterly over the following three years in equal installments, subject to his continued service through the applicable vesting dates and possible acceleration in specified circumstances.
Termination of Chief Medical Officer.
In June 2016, our Board of Directors terminated without cause our former Senior Vice President and Chief Medical Officer, William R. Shanahan, Jr., M.D., J.D. Under our Amended and Restated Severance Benefit Plan, as amended, or Severance Benefit Plan, Dr. Shanahan is entitled to receive the following termination benefits: (1) a cash severance payment of approximately $0.5 million (subject to applicable withholdings); (2) continuation of health insurance coverage for a period of 12 months; (3) acceleration of the stock options and RSUs (other than PRSUs) held by Dr. Shanahan that would otherwise have vested through the 12-month period following the date of his termination, provided that, for purposes of calculating such vesting acceleration, any unvested portion of such equity awards that were scheduled to vest in annual installments are treated as if the original grant provided for vesting in equal monthly installments rather than annually; and (4) continued stock option exercisability until the later of (i) the end of the original post-termination exercise period provided in the applicable stock option agreement or (ii) 12 months (but not beyond the original contractual life of the option). In addition, with respect to outstanding PRSUs, when our Board of Directors’ Compensation Committee determines our relative performance for an applicable performance period, a pro-rata portion of the relevant PRSUs held by Dr. Shanahan is eligible to vest (based on the percentage of the performance period that Dr. Shanahan provided service prior to his termination). The pro-rata vesting may be accelerated if we undergo a change in control before the scheduled end of the performance period. We recorded a charge of $1.0 million in the second quarter of 2016 related to these benefits, including non-cash, share-based compensation expense of $0.4 million, which is included in research and development expenses in our consolidated statement of operations and comprehensive loss for the year ended December 31, 2016. As of December 31, 2016, substantially all of these accrued benefits have been paid.
In July 2016, we and Dr. Shanahan entered into a one-year services agreement whereby Dr. Shanahan performs services for us relating to our research and development programs. As compensation, Dr. Shanahan receives a fixed monthly fee along with reimbursement of certain pre-approved expenses and continued stock option exercisability until 24 months from the July 2016 effective date of this agreement (but not beyond the original contractual life of the option). We recorded a charge of $0.1 million in the third quarter of 2016 related to this compensation, including non-cash, share-based compensation expense, which is included in research and development expenses in our consolidated statement of operations and comprehensive loss for the year ended December 31, 2016.
Appointment of Chief Financial Officer.
In June 2016, our Board of Directors appointed Kevin R. Lind as our Executive Vice President and Chief Financial Officer. In connection with such appointment, our Board’s Compensation Committee approved an inducement stock option grant to Mr. Lind to purchase 800,000 shares of our common stock under our 2013 Long-Term Incentive Plan, as amended, to reserve an additional 800,000 shares of common stock for inducement awards. The nonstatutory stock options have a seven-year term and will vest over 4 years, with 25% of the shares subject to vesting one year after grant and the remainder of the shares vesting monthly over the following three years in equal installments, subject to his continued service through the applicable vesting dates and possible acceleration in specified circumstances.
Appointment of Chief Business Officer.
In August 2016, our Board of Directors appointed Vincent Aurentz as our Executive Vice President and Chief Business Officer. In connection with such appointment, our Board’s Compensation Committee approved an inducement stock option grant to Mr. Aurentz to purchase 800,000 shares of our common stock under our 2013 Long-Term Incentive Plan, as amended, to reserve an additional 800,000 shares of common stock for inducement awards, which resulted in the total number of shares of common stock reserved for inducement awards during 2016 to be 5,400,000. The nonstatutory stock options have a seven-year term and will vest over 4 years, with 25% of the shares subject to vesting one year after grant and the remainder of the shares vesting monthly over the
90
following three years in equal installments, subj
ect to his continued service through the applicable vesting dates and possible acceleration in specified circumstances.
Resignation of Chief Scientific Officer.
In September 2016, Dominic P. Behan, Ph.D., D.Sc., our former Executive Vice President and Chief Scientific Officer resigned from the Company, including from our Board of Directors. Dr. Behan's resignation follows our strategic shift in priorities to emphasize our proprietary clinical stage pipeline, which was announced in June 2016. Dr. Behan’s resignation was for good reason under our Severance Benefit Plan resulting from Dr. Behan’s materially diminished duties and responsibilities following this strategic shift.
Following his resignation from the Company, Dr. Behan acts as the Chair of our Scientific Advisory Board and provides consulting services to us regarding our research and development program under a five-year consulting agreement, or Consulting Agreement, which may be terminated earlier by either party on 30 days advanced written notice. Dr. Behan receives a market rate hourly consulting fee, along with reimbursement of certain pre-approved expenses. In addition, Dr. Behan’s consulting services constitute continuous service with us, and as a result, the outstanding equity awards we previously granted to Dr. Behan continue to vest and/or be exercisable, as those services are provided in accordance with the applicable plan(s) and written grant instrument(s) for such awards.
Under the Severance Benefit Plan, Dr. Behan is entitled to receive the following termination benefits: (1) a cash severance payment of approximately $0.9 million (subject to applicable withholdings); (2) continuation of health insurance coverage for a period of 18 months; (3) acceleration of the stock options and RSUs (other than PRSUs) held by Dr. Behan that would otherwise have vested through the 18-month period following his Arena employee-status termination date, provided that, for purposes of calculating such vesting acceleration, any unvested portion of such equity awards that were scheduled to vest in annual installments are treated as if the original grant provided for vesting in equal monthly installments rather than annually; (4) for options that were vested as of his Arena employee-status termination date, including those for which vesting was accelerated upon his termination, continued stock option exercisability until the later of (i) the end of the original post-termination exercise period provided in the applicable stock option agreement measured from the date of cessation of services under the Consulting Agreement or (ii) 18 months following his Arena employee status termination date (but not beyond the original contractual life of the option) and (5) for options that were not vested as of his Arena employee-status termination date, continued stock option exercisability, to the extent vested as of the date of cessation of services under the Consulting Agreement, until the end of the original post-termination exercise period provided in the applicable stock option agreement measured from the date of cessation of services under the Consulting Agreement (but not beyond the original contractual life of the option).
We recorded a charge of $2.6 million in the third quarter of 2016 related to these benefits, including non-cash, share-based compensation expense of $1.6 million, which is included in research and development expenses in our consolidated statement of operations and comprehensive loss for the year ended December 31, 2016. As of December 31, 2016, there are remaining accruals for these benefits of $0.9 million included in accounts payable and other accrued expenses, the majority of which we paid in the first quarter of 2017.
Termination of Senior Vice President of Operations and Head of Global Regulatory Affairs.
In October 2016, our Board of Directors terminated without cause our former Senior Vice President and Head of Regulatory Affairs, Craig M. Audet. Mr. Audet is entitled to receive the following termination benefits: (1) a cash severance payment of approximately $0.5 million (subject to applicable withholdings); (2) compensation in lieu of continuation of health insurance coverage for a period of 12 months; (3) acceleration of the stock options and RSUs (other than PRSUs) held by Mr. Audet that would otherwise have vested through the 12-month period following the date of his termination, provided that, for purposes of calculating such vesting acceleration, any unvested portion of such equity awards that were scheduled to vest in annual installments are treated as if the original grant provided for vesting in equal monthly installments rather than annually; and (4) continued stock option exercisability until the later of (i) the end of the original post-termination exercise period provided in the applicable stock option agreement or (ii) 24 months (but not beyond the original contractual life of the option). We recorded a charge of $1.0 million in the fourth quarter of 2016 related to these benefits, including non-cash, share-based compensation expense of $0.4 million, which is included in research and development expenses in our consolidated statement of operations and comprehensive loss for the year ended December 31, 2016. As of December 31, 2016, there are remaining accruals for these benefits of $0.5 million included in accounts payable and other accrued expenses, which we expect to pay in the second quarter of 2017.
91
14. Restructuring Activities
In the fourth quarter of 2015, we committed to a reduction in our US workforce of approximately 35%, or approximately 80 employees, which we substantially completed by the end of 2015. In the fourth quarter of 2015, we also committed to a reduction in our Swiss workforce of approximately 17%, or approximately 14 employees, which we substantially completed by the end of the second quarter of 2016. As a result of these workforce reductions, we recorded a restructuring charge in the fourth quarter of 2015 for termination benefits, including severance and other benefits, of $4.0 million, and at December 31, 2016, all of this charge has been paid.
In the second quarter of 2016, we committed to a reduction in our US workforce of approximately 73%, or approximately 100 employees, which we substantially completed in the third quarter of 2016. As a result of this workforce reduction, we recorded a restructuring charge in the second quarter of 2016 of $6.1 million for termination benefits, including severance and other benefits. Included within this amount is non-cash, share-based compensation expense of $1.0 million related to the accelerated vesting of stock options and the extension of the exercise period of vested options for employees impacted by the workforce reduction. At December 31, 2016, substantially all of this charge has been paid.
In the third quarter of 2016, we committed to a reduction of our manufacturing workforce in Zofingen, Switzerland of approximately 23%, or approximately 15 employees, which we substantially completed by the end of the January 2017. As a result of this workforce reduction, we recorded a restructuring charge in the third quarter of 2016 of $0.2 million for cash termination benefits. At December 31, 2016, substantially all of this charge has been paid.
15. Quarterly Financial Data (Unaudited)
The following tables present selected quarterly financial data for the years presented, in thousands, except per share data:
2016
|
|
Quarter ended
December 31
|
|
|
Quarter ended
September 30
|
|
|
Quarter ended
June 30
|
|
|
Quarter ended
March 31
|
|
Revenues
|
|
$
|
85,374
|
|
|
$
|
19,242
|
|
|
$
|
9,512
|
|
|
$
|
9,847
|
|
Operating costs and expenses
|
|
|
47,245
|
|
|
|
29,099
|
|
|
|
35,735
|
|
|
|
29,042
|
|
Net income (loss)
|
|
|
38,314
|
|
|
|
(12,479
|
)
|
|
|
(27,183
|
)
|
|
|
(21,548
|
)
|
Net income (loss) attributable to stockholders of Arena
|
|
|
38,572
|
|
|
|
(12,357
|
)
|
|
|
(27,183
|
)
|
|
|
(21,548
|
)
|
Net income (loss) attributable to stockholders of Arena per share,
basic and diluted
|
|
|
0.16
|
|
|
|
(0.05
|
)
|
|
|
(0.11
|
)
|
|
|
(0.09
|
)
|
2015
|
|
Quarter
ended
December 31
|
|
|
Quarter ended
September 30
|
|
|
Quarter ended
June 30
|
|
|
Quarter ended
March 31
|
|
Revenues
|
|
$
|
7,751
|
|
|
$
|
9,138
|
|
|
$
|
9,181
|
|
|
$
|
12,256
|
|
Operating costs and expenses
|
|
|
37,045
|
|
|
|
34,319
|
|
|
|
36,160
|
|
|
|
34,000
|
|
Net loss
|
|
|
(30,459
|
)
|
|
|
(26,418
|
)
|
|
|
(26,807
|
)
|
|
|
(24,295
|
)
|
Net loss per share, basic and diluted
|
|
|
(0.13
|
)
|
|
|
(0.11
|
)
|
|
|
(0.11
|
)
|
|
|
(0.10
|
)
|
16. Beacon Discovery, Inc.
On
September 1, 2016, we entered into a
series of agreements with Beacon. Beacon, a privately held drug discovery incubator which focuses on identifying and advancing molecules targeting GCPRs, was founded and is owned by several of our former employees.
We entered into a license and collaboration agreement with Beacon, pursuant to which we transferred certain equipment to Beacon and granted Beacon a non-exclusive, non-assignable and non-sublicensable license to certain database information relating to compounds, receptors and pharmacology, and transferred certain equipment to Beacon. Beacon will seek to engage global partners to facilitate discovery and development. Beacon has agreed to assign to us any intellectual property relating to our existing research and development programs developed in the course of performing research for us, and grant us a non-exclusive license to any intellectual property developed outside the course of performing work for us that is reasonably necessary or useful for developing or commercializing the products under our research and development programs. We are also entitled to rights of negotiation and rights of first refusal to potentially obtain licenses to compounds discovered and developed by Beacon. In addition, we are entitled to receive (i) a percentage of any revenue received by Beacon on or after the second anniversary of the effective date of the agreement from any third party pursuant to a third-party license, including upfront payments, milestone payments and royalties; (ii) single-digit royalties on the aggregate net sales of any related products sold by Beacon and its affiliates; and (iii) in the event that Beacon is sold, a percentage of the consideration for such sale transaction.
92
We entered a master services agreement with Beacon, pursuant to which Beacon performs certain research services for us.
We also entered into a separate services agreement with Beacon, pursuant to which Beacon now performs our research obligations under the Boehringer Ingelheim Agreement. In consideration for performing these research obligations, Beacon is entitled to receive the applicable FTE payments that are paid to us by Boehringer Ingelheim for the research services and certain milestone payments.
We also entered into a sublease agreement, or Sublease, with Beacon, pursuant to which we sublease approximately 15,000 square feet of laboratory, office and meeting room space to Beacon for a period of five years. Beacon can defer payments due to us under the Sublease by increasing the outstanding principal amount under a secured promissory note we issued to Beacon. The outstanding principal amount and all accrued or unpaid interest thereon (calculated at a simple interest rate of 7% per annum) shall be due and payable on the earlier of (i) August 31, 2022 or (ii) Beacon receiving cumulative cash proceeds of $10 million from the sale of equity, issuance of debt or third-party license revenue.
As Beacon would not be able to finance its activities without the financial support we are providing pursuant to these agreements, Beacon is considered a variable interest entity. Arena does not own any equity interest in Beacon; however, as these agreements provide us the controlling financial interest in Beacon, we consolidate Beacon’s balances and activity within our consolidated financial statements. The noncontrolling interest attributable to Beacon presented on our consolidated financial statements is comprised of Beacon’s equity ownership interests as we do not own any voting interest in Beacon.
The following table presents the assets and liabilities of Beacon which are included in our consolidated balance sheet at December 31, 2016, in thousands. The assets include only those assets that can be used to settle obligations of Beacon. The liabilities include third-party liabilities of Beacon. As of December 31, 2016, Beacon had no creditors with recourse to the general credit of Arena. The assets and liabilities exclude intercompany balances that eliminate in consolidation:
Assets of Beacon that can only be used to settle obligations of Beacon
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
311
|
|
Prepaid expense and other current assets
|
|
|
28
|
|
Land, property and equipment, net
|
|
|
705
|
|
Total assets of Beacon that can only be used to settle obligation of Beacon
|
|
$
|
1,044
|
|
|
|
|
|
|
Liabilities of Beacon for which creditors do not have recourse to the general credit of Arena
|
|
|
|
|
Accounts payable and other accrued liabilities
|
|
$
|
86
|
|
Total liabilities of Beacon for which creditors do not have recourse to the general credit of Arena
|
|
$
|
86
|
|
17. Subsequent Events
On January 4, 2017, we entered into an
Equity Distribution Agreement with Citigroup Global Markets Inc. (Citigroup), pursuant to which we may sell and issue shares of our common stock having an aggregate offering price of up to $50 million from time to time through Citigroup, as our sales agent (the ATM Offering). Sales of the shares under the Equity Distribution Agreement may be made in transactions that are deemed to be “at-the-market”
equity
offerings as defined in Rule 415 under the Securities Act of 1933, as amended, including sales made by means of ordinary brokers’ transactions, including on the NASDAQ Stock Market. Subject to the terms and conditions of the Equity Distribution Agreement, Citigroup will use its reasonable efforts to sell the shares from time to time based upon our instructions (including any price, time or size limits or other parameters or conditions we may impose). We will pay Citigroup a commission of up to 3.0% of the gross sales price of any shares sold under the Equity Distribution Agreement. As of March 10, 2017, we sold 2,017,301 shares of
our common stock at an average market price of $1.56 per share under the
Equity Distribution
Agreement, for aggregate gross proceeds of $
3.2 million
before deducting commissions and other issuance costs of $
0.1 million
. As of March 10, 2017, aggregate gross proceeds of up to $
46.8 million
remained available to us under the
Equity Distribution
Agreement.