Arena Pharmaceuticals, Inc.
ARENA PHARMACEUTICALS INC (Form: 10-Q, Received: 11/08/2017 16:15:29)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended September 30, 2017

or

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

For the transition period from                     to

Commission File Number: 000-31161

 

ARENA PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

23-2908305

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

6154 Nancy Ridge Drive, San Diego, CA

 

92121

(Address of principal executive offices)

 

(Zip Code)

 

858.453.7200

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.       Yes       No

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  (Do not check if a small reporting company)

  

Small reporting company

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).       Yes       No

The number of shares of common stock outstanding as of the close of business on November 3, 2017:

 

Class

 

Number of Shares Outstanding

Common Stock, $0.0001 par value

 

39,263,354

 

 

 

 


 

ARENA PHARMACEUTICALS, INC.

INDEX

 

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

1

 

Condensed Consolidated Balance Sheets - As of September 30, 2017, and December 31, 2016

1

 

Condensed Consolidated Statements of Operations and Comprehensive Loss - Three and Nine Months Ended September 30, 2017, and 2016

2

 

Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2017, and 2016

3

 

Notes to Unaudited Condensed Consolidated Financial Statements

4

Item 2.

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

14

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

20

Item 4.

Controls and Procedures

20

PART II—OTHER INFORMATION

Item 1.

Legal Proceedings

21

Item 1A.

Risk Factors

23

Item 5.

Other Information

45

Item 6.

Exhibits

46

Signatures

47

 

 

TRADEMARKS AND CERTAIN TERMS

Arena Pharmaceuticals ® and Arena ® are registered service marks of Arena. Any other brand names or trademarks appearing in this Quarterly Report on Form 10-Q are the property of their respective holders.

In this Quarterly Report on Form 10-Q , “Arena Pharmaceuticals,” “Arena,” “we,” “us” and “our” refer to Arena Pharmaceuticals, Inc., and our wholly owned subsidiaries on a consolidated basis, unless the context otherwise provides. “APD” is an abbreviation for Arena Pharmaceuticals Development.

 

 

i


 

PART I. FINANCI AL INFORMATION

Item 1.  Financial Statements.

ARENA PHARMACEUTICALS, INC.

Condensed Consolidated Balance Sheets

(In thousands)

(Unaudited)

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

278,738

 

 

$

90,712

 

Accounts receivable

 

 

2,373

 

 

 

20,162

 

Insurance recovery receivable

 

 

12,025

 

 

 

 

Inventory

 

 

6,848

 

 

 

6,708

 

Prepaid expenses and other current assets

 

 

3,717

 

 

 

2,307

 

Total current assets

 

 

303,701

 

 

 

119,889

 

Land, property and equipment, net

 

 

39,425

 

 

 

43,828

 

Intangibles, net

 

 

1,551

 

 

 

2,357

 

Other non-current assets

 

 

3,144

 

 

 

2,936

 

Total assets

 

$

347,821

 

 

$

169,010

 

Liabilities and Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and other accrued liabilities

 

$

7,889

 

 

$

12,116

 

Accrued clinical and preclinical study fees

 

 

4,898

 

 

 

3,883

 

Accrued litigation settlement

 

 

24,000

 

 

 

 

Payable to Eisai

 

 

 

 

 

9,074

 

Current portion of deferred revenues

 

 

27,991

 

 

 

35,288

 

Current portion of lease financing obligations

 

 

3,962

 

 

 

3,518

 

Total current liabilities

 

 

68,740

 

 

 

63,879

 

Other long-term liabilities

 

 

977

 

 

 

821

 

Deferred revenues, less current portion

 

 

1,267

 

 

 

2,167

 

Lease financing obligations, less current portion

 

 

58,716

 

 

 

61,748

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

Common stock

 

 

4

 

 

 

2

 

Additional paid-in capital

 

 

1,695,997

 

 

 

1,441,737

 

Accumulated other comprehensive loss

 

 

(828

)

 

 

(3,099

)

Accumulated deficit

 

 

(1,476,502

)

 

 

(1,398,736

)

Total equity attributable to stockholders of Arena

 

 

218,671

 

 

 

39,904

 

Equity (deficit) attributable to noncontrolling interest in consolidated variable interest entity

 

 

(550

)

 

 

491

 

Total equity

 

 

218,121

 

 

 

40,395

 

Total liabilities and equity

 

$

347,821

 

 

$

169,010

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

1


 

ARENA PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except per share data)

(Unaudited)

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net product sales

 

$

3,075

 

 

$

3,323

 

 

$

7,845

 

 

$

11,104

 

Other Eisai collaboration revenue

 

 

2,223

 

 

 

12,954

 

 

 

5,539

 

 

 

18,155

 

Other collaboration revenue

 

 

1,881

 

 

 

1,737

 

 

 

5,439

 

 

 

6,066

 

Toll manufacturing

 

 

769

 

 

 

1,228

 

 

 

2,241

 

 

 

3,276

 

Total revenues

 

 

7,948

 

 

 

19,242

 

 

 

21,064

 

 

 

38,601

 

Operating Costs and Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product sales

 

 

1,739

 

 

 

882

 

 

 

5,768

 

 

 

4,161

 

Cost of toll manufacturing

 

 

1,222

 

 

 

1,930

 

 

 

3,215

 

 

 

4,876

 

Research and development

 

 

17,307

 

 

 

17,466

 

 

 

50,740

 

 

 

54,514

 

General and administrative

 

 

7,791

 

 

 

8,590

 

 

 

23,191

 

 

 

23,979

 

Litigation settlement expense, net

 

 

11,975

 

 

 

 

 

 

11,975

 

 

 

 

Restructuring charges

 

 

 

 

 

231

 

 

 

 

 

 

6,346

 

Total operating costs and expenses

 

 

40,034

 

 

 

29,099

 

 

 

94,889

 

 

 

93,876

 

Loss from operations

 

 

(32,086

)

 

 

(9,857

)

 

 

(73,825

)

 

 

(55,275

)

Interest and Other Income (Expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

13

 

 

 

54

 

 

 

63

 

 

 

247

 

Interest expense

 

 

(1,516

)

 

 

(1,609

)

 

 

(4,624

)

 

 

(4,907

)

Other

 

 

925

 

 

 

(1,067

)

 

 

(391

)

 

 

(1,275

)

Total interest and other expense, net

 

 

(578

)

 

 

(2,622

)

 

 

(4,952

)

 

 

(5,935

)

Net loss

 

 

(32,664

)

 

 

(12,479

)

 

 

(78,777

)

 

 

(61,210

)

Less net loss attributable to noncontrolling interest in

   consolidated variable interest entity

 

 

311

 

 

 

122

 

 

 

1,054

 

 

 

122

 

Net loss attributable to stockholders of Arena

 

$

(32,353

)

 

$

(12,357

)

 

$

(77,723

)

 

$

(61,088

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to stockholders of Arena per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.86

)

 

$

(0.51

)

 

$

(2.24

)

 

$

(2.51

)

Diluted

 

$

(0.86

)

 

$

(0.51

)

 

$

(2.24

)

 

$

(2.51

)

Shares used in calculating net loss attributable to stockholders of

   Arena per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

37,766

 

 

 

24,325

 

 

 

34,692

 

 

 

24,307

 

Diluted

 

 

37,766

 

 

 

24,325

 

 

 

34,692

 

 

 

24,307

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(32,664

)

 

$

(12,479

)

 

$

(78,777

)

 

$

(61,210

)

Foreign currency translation gain (loss)

 

 

(443

)

 

 

694

 

 

 

2,271

 

 

 

2,046

 

Comprehensive loss

 

 

(33,107

)

 

 

(11,785

)

 

 

(76,506

)

 

 

(59,164

)

Less comprehensive loss attributable to noncontrolling interest in consolidated variable interest entity

 

 

311

 

 

 

122

 

 

 

1,054

 

 

 

122

 

Comprehensive loss attributable to stockholders of Arena

 

$

(32,796

)

 

$

(11,663

)

 

$

(75,452

)

 

$

(59,042

)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

2


 

ARENA PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2017

 

 

2016

 

Operating Activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(78,777

)

 

$

(61,210

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

4,516

 

 

 

7,005

 

Amortization of intangibles

 

 

919

 

 

 

104

 

Share-based compensation

 

 

5,858

 

 

 

9,261

 

Litigation settlement expense, net

 

 

11,975

 

 

 

 

Amortization of prepaid financing costs

 

 

102

 

 

 

102

 

Loss (gain) on disposal of property and equipment

 

 

(379

)

 

 

798

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

18,172

 

 

 

(13,122

)

Inventory

 

 

213

 

 

 

157

 

Prepaid expenses and other assets

 

 

(1,354

)

 

 

(514

)

Payables and accrued liabilities

 

 

(12,697

)

 

 

8,820

 

Deferred revenues

 

 

(8,739

)

 

 

(4,929

)

Other long-term liabilities

 

 

(303

)

 

 

62

 

Net cash used in operating activities

 

 

(60,494

)

 

 

(53,466

)

Investing Activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(91

)

 

 

(644

)

Proceeds from sale of property and equipment

 

 

789

 

 

 

786

 

Other non-current assets

 

 

91

 

 

 

(659

)

Net cash provided by (used in) investing activities

 

 

789

 

 

 

(517

)

Financing Activities:

 

 

 

 

 

 

 

 

Principal payments on lease financing obligations

 

 

(2,588

)

 

 

(2,189

)

Proceeds from issuance of common stock, net

 

 

248,329

 

 

 

288

 

Net cash provided by (used in) financing activities

 

 

245,741

 

 

 

(1,901

)

Effect of exchange rate changes on cash

 

 

1,990

 

 

 

1,329

 

Net increase (decrease) in cash and cash equivalents

 

 

188,026

 

 

 

(54,555

)

Cash and cash equivalents at beginning of period

 

 

90,712

 

 

 

156,184

 

Cash and cash equivalents at end of period

 

$

278,738

 

 

$

101,629

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

3


 

ARENA PHARMACEUTICALS, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Arena Pharmaceuticals, Inc. should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the Securities and Exchange Commission, or SEC, from which we derived our condensed consolidated balance sheet as of December 31, 2016. The accompanying condensed consolidated financial statements have been prepared in accordance with US generally accepted accounting principles, or GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, since they are interim statements, the accompanying condensed consolidated financial statements do not include all of the information and notes required by GAAP for complete financial statements. The accompanying condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, that are, in the opinion of our management, necessary to a fair statement of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year.

The accompanying condensed consolidated financial statements include the balances and activity of our wholly owned subsidiaries and Beacon Discovery, Inc., or Beacon, a variable interest entity in which we have the controlling financial interest (see Note 12). 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 condensed 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 condensed consolidated statements of operations and comprehensive loss.

On June 14, 2017, we filed a certificate of amendment to our certificate of incorporation with the Secretary of State of the state of Delaware to effect a one-for-ten reverse split of our issued and outstanding common stock. The accompanying condensed consolidated financial statements and notes thereto give retrospective effect to the reverse stock split for all periods presented. All issued and outstanding common stock, options exercisable for common stock, restricted stock units, performance restricted stock units, and per share amounts contained in the condensed consolidated financial statements have been retroactively adjusted to reflect this reverse stock split for all periods presented. Concurrent with the reverse stock split we effected a reduction in the number of authorized shares of common stock from 367,500,000 shares to 73,500,000 shares.

Liquidity.

As of September 30, 2017, we had cash and cash equivalents of approximately $278.7 million. We believe our cash and cash equivalents will be sufficient to fund our operations for at least the next 12 months.

We will require substantial cash to achieve our objectives of discovering, developing and commercializing drugs, as this process typically takes many years and potentially 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.

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.

4


 

The new guidance allows for two m ethods 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 open ing retained earnings balance for the year of implementation. We plan to adopt the new revenue standard effective January 1, 2018, using a modified retrospective method with the cumulative effect of the change reflected in retained earnings as of January 1 , 2018.

We have 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 payments, 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 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 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 periods, and interim periods within those periods, beginning after December 15, 2017, 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 May 2017, the FASB issued ASU No. 2017-09, Scope of Modification Accounting . ASU No. 2017-09 clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. This guidance is to be applied prospectively to awards modified on or after the adoption date and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, with early adoption permitted. We do not expect the adoption of ASU 2017-09 to have a material impact on our consolidated financial statements unless there are significant changes to our outstanding share based payment awards at which time we would assess the impact of the standard .

Use of Estimates.

The preparation of financial statements in accordance 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.

Contingencies.

We disclose information regarding each material claim where the likelihood of a loss contingency is probable or reasonably possible. If a loss contingency is probable and the amount of the loss can be reasonably estimated, we record an accrual for the loss. In such cases, there may be an exposure to potential loss in excess of the amount accrued. The insurance recoveries are recorded in the period when the insurance reimbursement is deemed probable. The ability to predict the ultimate outcome of such matters involves judgments, estimates and inherent uncertainties. The actual outcome of such matters could differ materially from management’s estimates. 

 

 

5


 

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.

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 September 30, 2017

 

 

 

Balance

 

 

Quoted Prices in

Active Markets

(Level 1)

 

 

Significant Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable Inputs

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds 1

 

$

6,434

 

 

$

6,434

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

$

 

 

$

 

 

 

(1)

Included in cash and cash equivalents in our condensed consolidated balance sheets.

 

 

3. Inventory

Inventory consisted of the following, in thousands:

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Raw materials

 

$

2,713

 

 

$

2,553

 

Work in process

 

 

3,310

 

 

 

3,943

 

Finished goods

 

 

825

 

 

 

212

 

Total inventory

 

$

6,848

 

 

$

6,708

 

 

 

4. Land, Property and Equipment

Land, property and equipment consisted of the following, in thousands:

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Cost

 

$

102,665

 

 

$

108,356

 

Less accumulated depreciation and amortization

 

 

(63,240

)

 

 

(64,528

)

Land, property and equipment, net

 

$

39,425

 

 

$

43,828

 

 

 

6


 

5. Accounts Payable and Other Accrued Liabilities

Accounts payable and other accrued liabilities consisted of the following, in thousands:

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Accounts payable

 

$

2,542

 

 

$

5,977

 

Accrued compensation

 

 

4,256

 

 

 

4,820

 

Other accrued liabilities

 

 

1,091

 

 

 

1,319

 

Total accounts payable and other accrued liabilities

 

$

7,889

 

 

$

12,116

 

 

 

6. Collaborations

Please refer to our Annual Report on Form 10-K for the year ended December 31, 2016, for additional information regarding the collaborations described below.

Eisai.

In July 2010, we granted Eisai Inc. and Eisai Co., Ltd. (collectively, 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 a new Transaction Agreement and a new Supply Agreement (collectively, 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 our 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. This is collectively referred to as the License Deliverable.

 

A manufacturing and supply commitment for two years commencing December 28, 2016, or Manufacturing and Supply Commitment Deliverable.

 

Bulk inventory and precursor material for manufacturing lorcaserin, or Inventory Deliverable. 

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

Manufacturing and supply commitment 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.

7


 

On December 28, 2016, Eisai paid us $10.0 million to acquire our entire inventory of bulk lorcaserin and the precursor materials for man ufacturing lorcaserin. This payment was included in the arrangement consideration allocated to the units of accounting under the Eisai Agreement. A portion of this inventory has remained at our Zofingen, Switzerland facility for us to use to manufacture fi nished 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 has been and will be physica lly transferred to Eisai upon Eisai’s request to transfer and the rest is expected to be physically transferred at the end of the manufacturing and supply commitment period.

Allocation of Eisai Agreement arrangement consideration to the units of accounting.

The total arrangement consideration of $115.6 million under the Eisai Agreement 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, which were assigned to Eisai; (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 revenue in 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 on that date. There is no fixed schedule for delivery given a portion has been and will be delivered on a continuous basis as we perform under the manufacturing commitment, another portion has been and will be physically transferred to Eisai upon request by Eisai and the rest is expected to be physically transferred at the end of the manufacturing and supply commitment period. Also, the risks of ownership for this inventory did not pass to Eisai in 2016 as we have financial responsibility for 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. For the three months ended September 30, 2017, we recognized revenue from net product sales related to the Inventory Deliverable of $2.1 million and cost of product sales of $0.3 million related to this inventory. For the nine months ended September 30, 2017, we recognized revenue from net product sales related to the Inventory Deliverable of $6.1 million and cost of product sales of $0.9 million related to this inventory.

 

$20.8 million was allocated to the Manufacturing and Supply Commitment Deliverable. This deliverable is being provided over 2017 and 2018 as product is shipped to Eisai. For the three months ended September 30, 2017, we recognized $2.7 million as revenue for the arrangement consideration allocated to this deliverable, of which $1.0 million is classified as net product sales and $1.7 million of manufacturing support payments is classified as other Eisai collaboration revenue. For the nine months ended September 30, 2017, we recognized $6.8 million as revenue for the arrangement consideration allocated to this deliverable, of which $1.8 million is classified as net product sales and $5.0 million of manufacturing support payments is classified as other Eisai collaboration revenue

The condensed consolidated balance sheet at September 30, 2017, includes deferred revenues of $25.9 million relating to the Eisai Agreement (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). Included in our ending inventory balance at September 30, 2017, of $6.8 million is $3.7 million related to the carrying value of the remaining product on-hand 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 or otherwise transferred to Eisai.

Axovant Sciences GmbH.

We and Axovant Sciences GmbH, or Axovant, have a development, marketing and supply agreement, or Axovant Agreement, under which 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.

8


 

Under the Axovant Agreement, we received an upfront payment of $4.0 million in May 2015, which was recorded as deferred revenues and is bei ng recognized as revenue ratably over approximately five years, which is the period in which we expect to provide services relating to development under the arrangement. We will receive payments from sales of nelotanserin under the Axovant Agreement and ar e 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 milestone payments in case of full development and regulatory success of nelotan serin. Of these payments, two development milestone payments totaling $4.0 million are substantive and four regulatory milestone payments totaling $37.5 million are substantive.

For the three and nine months ended September 30, 2017, we recorded revenue of $0.5 million and $1.6 million, respectively, related to the Axovant Agreement. For the three and nine months ended September 30, 2016, we recorded revenue of $0.5 million and $1.7 million, respectively related to the Axovant Agreement.

Boehringer Ingelheim International GmbH.

We and Boehringer Ingelheim International GmbH, or Boehringer Ingelheim, have a collaboration and license 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. Subsequent to September 30, 2017, we and Boehringer Ingelheim agreed to extend the term of the Boehringer Ingelheim Agreement by twelve months through January 2019.

In partial consideration of the exclusive 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.

Under the Boehringer Ingelheim Agreement, we are eligible to receive up to an aggregate of $251.0 million in success milestone payments in case of full commercial success of multiple drug products. Of these payments, three development milestones totaling $7.0 million are substantive, three development milestone payments totaling $30.0 million are non-substantive, nine regulatory milestone payments totaling $84.0 million are non-substantive and four commercial milestone payments totaling $130.0 million are non-substantive.

For the three and nine months ended September 30, 2017, we recorded revenue of $1.3 million and $3.8 million, respectively, related to the Boehringer Ingelheim Agreement. For the three and nine months ended September 30, 2016, we recorded revenue of $1.1 million and $3.9 million, respectively related to the Boehringer Ingelheim Agreement.

 

 

7. Stockholders’ Equity

In January 2017, we entered into an  Equity Distribution Agreement, or ATM, with Citigroup Global Markets, Inc., or the Sales Agent, under which we may offer and sell common stock having an aggregate offering price of up to $50.0 million from time to time though our Sales Agent. Sales of the shares under the ATM were 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. During the period from February through April 2017, we sold 489,023 shares of  our common stock at an average market price of $15.05 per share under the ATM for aggregate gross proceeds of approximately $7.4 million  before deducting commissions and expenses .

In April 2017, we completed the sale of an aggregate of 6,900,000 shares of our common stock under an underwritten public offering. Net proceeds from the offering were approximately $74.5 million after deducting underwriting discounts and commissions, and offering expenses payable by us.  

In July 2017, we completed the sale of additional 7,187,500 shares of our common stock under an underwritten public offering. Net proceeds from the offering were $162.0 million after deducting underwriting discounts and commissions, and offering expenses payable by us.

9


 

8. Share-based Co mpensation

We recognized share-based compensation expense as follows, in thousands:

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Cost of product sales

 

$

11

 

 

$

 

 

$

68

 

 

$

20

 

Research and development

 

 

380

 

 

 

1,200

 

 

 

1,335

 

 

 

4,940

 

General and administrative

 

 

1,499

 

 

 

981

 

 

 

4,455

 

 

 

3,269

 

Restructuring charges

 

 

 

 

 

 

 

 

 

 

 

1,032

 

Total share-based compensation expense

 

$

1,890

 

 

$

2,181

 

 

$

5,858

 

 

$

9,261

 

Total share-based compensation expense capitalized

   into inventory

 

$

 

 

$

64

 

 

$

 

 

$

149

 

 

The following table summarizes our stock option activity during the nine months ended September 30, 2017, in thousands (except per share data):

 

 

 

Options

 

 

Weighted-

Average

Exercise Price

 

Outstanding at January 1, 2017

 

 

2,520

 

 

$

30.30

 

Granted

 

 

1,969

 

 

 

15.02

 

Exercised

 

 

(296

)

 

 

16.78

 

Forfeited/cancelled/expired

 

 

(583

)

 

 

47.17

 

Outstanding at September 30, 2017

 

 

3,610

 

 

$

20.18

 

 

The following table summarizes activity with respect to our time-based restricted stock unit awards, or RSUs, during the nine months ended September 30, 2017, in thousands (except per share data):

 

 

 

RSUs

 

 

Weighted-

Average

Grant-Date

Fair Value

 

Unvested at January 1, 2017

 

 

3

 

 

$

42.56

 

Granted

 

 

 

 

 

 

 

Vested

 

 

 

 

 

 

 

Forfeited/cancelled

 

 

 

 

 

 

 

Unvested at September 30, 2017

 

 

3

 

 

$

42.56

 

 

During the nine months ended September 30, 2017, the remaining Total Stockholder Return, or TSR, performance restricted stock unit, or PRSU, awards that we granted to our executive officers in March 2014 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, 2014. In the aggregate, the target number of shares of common stock that could have been earned under the PRSUs granted in March 2014 was 69,498.

Of the target number of shares of 74,498 for PRSUs granted in March 2015, 35,554 have been cancelled due to management changes. All other PRSUs granted in March 2015 were outstanding and unvested at September 30, 2017.

 

 

9. Concentrations of Credit Risk and Major Customers

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 and 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.

10


 

The United States, South Ko rea, Israel and Taiwan are, to date, the only jurisdictions to which we have shipped BELVIQ to be commercially sold by our distributors. We also produce drug products for Siegfried AG, or Siegfried, and, to a lesser extent, another third party under toll m anufacturing agreements.

Percentages of our total revenues are as follows:

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Eisai Agreement (See Note 6)

 

 

66.7

%

 

 

77.0

%

 

 

63.5

%

 

 

65.6

%

Boehringer Ingelheim Agreement (See Note 6)

 

 

16.6

%

 

 

5.6

%

 

 

18.2

%

 

 

10.0

%

Toll manufacturing agreements

 

 

9.7

%

 

 

6.4

%

 

 

10.6

%

 

 

8.5

%

Axovant Agreement (See Note 6)

 

 

7.0

%

 

 

2.4

%

 

 

7.5

%

 

 

4.3

%

Other collaboration agreements

 

 

0.0

%

 

 

8.6

%

 

 

0.2

%

 

 

11.6

%

Total percentage of revenues

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

10. Net Loss Per Share

We calculate basic and diluted net loss attributable to stockholders of Arena 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 exclude from our calculation of diluted net loss attributable to stockholders of Arena per share all potentially dilutive in-the-money (i) stock options, (ii) RSUs, (iii) PRSUs and (iv) unvested restricted stock in our deferred compensation plan, and our diluted net loss per share is the same as our basic net loss per share.

The following table presents the weighted-average number of potentially dilutive securities that were excluded from our calculation of diluted net loss attributable to stockholders of Arena per share, in thousands:

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Stock options

 

 

3,862

 

 

 

2,856

 

 

 

3,667

 

 

 

2,479

 

RSUs and unvested restricted stock

 

 

3

 

 

 

18

 

 

 

3

 

 

 

24

 

Total

 

 

3,865

 

 

 

2,874

 

 

 

3,670

 

 

 

2,503

 

 

Because the market conditions for the PRSUs were not satisfied at September 30, 2017, or September 30, 2016, such securities are excluded from the table above.

 

 

11. 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

11


 

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. On April 28, 2017, the District Court denied our renewed m otion to dismiss. On November 3, 2017, we and the Lead Plaintiff signed a stipulation and agreement of settlement, or Stipulation, to resolve the consolidated class action. Under the terms of the Stipulation, and in exchange for a release of all claims by class members and a dismissal of the consolidated class action with prejudice, we have agreed (i) our insurers will pay class members and their attorneys a total of approximately $12.025 million and (ii) Arena will pay class members and their attorneys app roximately $11.975 million in either shares of our common stock or cash at our election . The terms of the settlement remain subject to preliminary approval by the District Court. If the settlement is preliminarily approved by the District Court, potential class members will be notified of the proposed settlement and the procedure by which they can become class members. The settlement will then be subject to final approval by the District Court. We recognized $11.975 million of net expense for the portion of the settlement that we will pay in either common stock or cash in the condensed consolidated statements of operations for the three and nine months ended September 30, 2017, and $24.0 million as a current liability in the condensed consolidated balance sh eet as of September 30, 2017 for the gross settlement liability, with a corresponding $12.025 million insurance recovery receivable.

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. Lupin is accused of infringing U.S. Patent Nos. 6,953,787; 7,514,422; 7,977,329; 8,207,158; 8,273,734; 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 Lupin’s 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. Teva is accused of infringing U.S. Patent Nos. 6,953,787; 7,514,422; 7,977,329; 8,207,158; 8,273,734; 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 Teva’s 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 April 18, 2017, Teva filed an amended answer, defenses and counterclaims 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. On May 1, 2017, the Teva and Lupin actions were consolidated for all purposes and will follow the case schedule that was previously entered in the Lupin action. We and Eisai Inc. filed an answer to Teva’s amended counterclaims on May 3, 2017. On or about October 16, 2017, we and Eisai Inc. received a “Paragraph IV certification” notification from Teva alleging that no valid, enforceable claim of U.S. Patent No. 9,770,455, which was listed in the Orange Book for BELVIQ ® and BELVIQ XR ® after the patent issued on September 26, 2017, will be infringed by Teva’s manufacture, importation, use, offer for sale or sale of the product described in its ANDA. On October 25, 2017, we and Eisai Inc. filed a first amended complaint against Lupin and Teva, adding infringement of U.S. Patent No. 9,770,455 by their respective ANDA products to the consolidated lawsuit. On or about November 6, 2017, we and Eisai Inc. received a “Paragraph IV certification” notification from Lupin alleging that no valid, enforceable claim of U.S. Patent No. 9,770,455 will be infringed by Lupin’s manufacture, importation, use, offer for sale or sale of the product described in its ANDA. We cannot predict the ultimate outcome of any proceeding.

 

 

12


 

12. Beacon Discovery, Inc.

In September 2016, we entered into a series of agreements with Beacon. Beacon is a privately-held drug discovery incubator that focuses on identifying and advancing molecules targeting GCPRs. Beacon was founded and is owned by several of our former employees.

As Beacon would not be able to finance its activities without the financial support we are providing pursuant to agreements it has with us, Beacon is a variable interest entity. Arena does not own any equity in Beacon; however, as these agreements provide us the controlling financial interest in Beacon, we consolidate Beacon’s balances and activity within our condensed consolidated financial statements. The noncontrolling interest attributable to Beacon presented on our condensed 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 a reconciliation of the equity attributable to the stockholders of Arena and the equity (deficit) attributable to Beacon, in thousands:

 

 

 

Equity Attributable to

Stockholders of Arena

 

 

Equity (Deficit) Attributable to

Noncontrolling Interest

in Consolidated

Variable Interest Entity

 

 

Total Equity

 

Balance at January 1, 2017

 

$

39,904

 

 

$

491

 

 

$

40,395

 

Net loss

 

 

(77,723

)

 

 

(1,054

)

 

 

(78,777

)

Translation gain

 

 

2,271

 

 

 

 

 

 

2,271

 

Other

 

 

254,219

 

 

 

13

 

 

 

254,232

 

Balance at September 30, 2017

 

$

218,671

 

 

$

(550

)

 

$

218,121

 

 

The following table presents the assets and liabilities of Beacon which are included in our condensed consolidated balance sheet at September 30, 2017, 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 September 30, 2017, 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

 

$

181

 

Prepaid expense and other current assets

 

 

42

 

Land, property and equipment, net

 

 

440

 

Total assets of Beacon that can only be used to settle

   obligations of Beacon

 

$

663

 

 

 

 

 

 

Liabilities of Beacon for which creditors do not have recourse to the general

   credit of Arena

 

 

 

 

Accounts payable and other accrued liabilities

 

$

145

 

Deferred revenues

 

 

88

 

Total liabilities of Beacon for which creditors do not have

   recourse to the general credit of Arena

 

$

233

 

 

 

13. Subsequent Events

See Note 11 for the update to our legal proceedings, which occurred subsequent to September 30, 2017. See Note 6 for an update to our Boehringer Ingelheim Agreement, which occurred subsequent to September 30, 2017.

 

 

13


 

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

General

This discussion and analysis should be read in conjunction with our financial statements and notes thereto included in this quarterly report on Form 10-Q, or Quarterly Report, and the audited consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2016, or 2016 Annual Report, as filed with the Securities and Exchange Commission, or SEC. Operating results are not necessarily indicative of results that may occur in future periods.

This Quarterly Report includes forward-looking statements that involve a number of risks, uncertainties and assumptions. These forward-looking statements can generally be identified as such because the context of the statement will include words such as “may,” “will,” “intend,” “plan,” “believe,” “anticipate,” “expect,” “estimate,” “predict,” “potential,” “continue,” “likely,” or “opportunity,” the negative of these words or other similar words. Similarly, statements that describe our plans, strategies, intentions, expectations, objectives, goals or prospects and other statements that are not historical facts are also forward-looking statements. For such statements, we claim the protection of the Private Securities Litigation Reform Act of 1995. Readers of this Quarterly Report are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the time this Quarterly Report was filed with the SEC. These forward-looking statements are based largely on our expectations and projections about future events and future trends affecting our business, and are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. These risks and uncertainties include, without limitation, the risk factors identified in our SEC reports, including this Quarterly Report. In addition, past financial or operating performance is not necessarily a reliable indicator of future performance, and you should not use our historical performance to anticipate results or future period trends. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations and financial condition. Except as required by law, we undertake no obligation to update publicly or revise our forward-looking statements.

OVERVIEW AND RECENT DEVELOPMENTS

We are a 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:

 

Ralinepag  (formerly APD811) - an oral, next generation, selective IP receptor agonist targeting the prostacyclin pathway, for which we have reported positive topline results from our completed Phase 2 trial for pulmonary arterial hypertension, or PAH. Phase 3 trial preparations are ongoing.

 

Etrasimod   (formerly APD334) - an oral, next generation, selective sphingosine 1-phosphate, or S1P, receptor modulator targeting the S1P receptor subtypes 1, 4 and 5, which we are evaluating in multiple ongoing Phase 2 clinical trials for:

 

Ulcerative Colitis, or UC,

 

Pyoderma Gangrenosum, or PG,

 

Primary Biliary Cholangitis, or PBC.

 

APD371 - a highly selective, peripherally restricted, orally available, full agonist of the cannabinoid-2 receptor, which we are evaluating in an ongoing Phase 2 clinical trial for pain associated with Crohn’s disease

We continue to explore additional indications for all of our clinical-stage programs. Additionally, we have collaborations with the following pharmaceutical companies:

 

Eisai Inc. and Eisai Co., Ltd., or collectively, Eisai, in their efforts with respect to BELVIQ®,

 

Axovant Sciences GmbH, or Axovant, in its efforts with respect to nelotanserin, an orally available inverse agonist of the serotonin 2A receptor, which is in (i) a Phase 2 clinical trial in Lewy body dementia patients who experience frequent visual hallucinations, and (ii) a separate Phase 2 clinical trial to evaluate nelotanserin as a potential treatment for rapid-eye-movement, or REM, behavior disorder in patients with dementia with Lewy bodies, and

 

Boehringer Ingelheim International GmbH, or Boehringer Ingelheim, targeting a G protein-coupled receptor that belongs to the group of orphan central nervous system receptors, which is in preclinical development.

 

14


 

In June 2017, we filed a certificate of amendment to our certificate of incorporation with the Secretary of State of the state of Delaware to effect a one-for-ten reverse stock split of our issued and outstanding common stock. The accompanying condense d consolidated financial statements and notes thereto give retrospective effect to the reverse stock split for all periods presented. All issued and outstanding common stock, options exercisable for common stock, restricted stock units, performance restric ted stock units, and per share amounts contained in this report have been retroactively adjusted to reflect this reverse stock split for all periods presented. Concurrent with the reverse stock split we effected a reduction in the number of authorized shar es of common stock from 367,500,000 shares to 73,500,000 shares.

In December 2016, we amended and restated the terms of the marketing and supply agreement for lorcaserin with Eisai by entering into a new Transaction Agreement and a new Supply Agreement (collectively, 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.

In general, developing drugs and obtaining marketing approval is a long, uncertain and expensive process, and our ability to execute on our plans and achieve our goals depends on numerous factors, many of which we do not control. To date, we have generated limited revenues. We expect to continue to incur substantial net losses for at least the short term as we advance our clinical development programs, support our collaborators, and manufacture lorcaserin for Eisai.  

RESULTS OF OPERATIONS

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

Revenues

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

Source of revenue

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net product sales

 

$

3.1

 

 

$

3.3

 

 

$

7.8