Basis of Presentation (Policies) | 9 Months Ended |
Sep. 30, 2014 |
Basis of Presentation | ' |
The accompanying unaudited condensed consolidated financial statements of Arena Pharmaceuticals, Inc., which include our wholly owned subsidiaries, 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, 2013, as filed with the Securities and Exchange Commission, or SEC, from which we derived our balance sheet as of December 31, 2013. The accompanying financial statements have been prepared in accordance with US generally accepted accounting principles, or GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, since they are interim statements, the accompanying financial statements do not include all of the information and notes required by GAAP for complete financial statements. The accompanying financial statements reflect all adjustments, consisting of normal recurring adjustments, that are, in the opinion of 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. |
New Accounting Guidance | ' |
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 outlines a comprehensive revenue recognition model and supersedes most current revenue recognition guidance. ASU No. 2014-09 is effective for annual reporting periods, and interim periods within those periods, beginning after December 15, 2016. ASU No. 2014-09 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 ASU No. 2014-09 is recognized as an adjustment to the fiscal 2017 opening retained earnings balance. We have not yet selected an adoption method as we are currently evaluating the impact of ASU No. 2014-09 on our consolidated financial statements. |
In August 2014, 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 the amendments in ASU No. 2014-15 should be followed to determine whether to disclose information about the relevant conditions and events. The amendments in ASU No. 2014-15 are effective for the annual reporting period ending after December 15, 2016, and for annual and interim periods thereafter. We do not expect the adoption of ASU No. 2014-15 to have a material impact on our consolidated financial statements. |
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. |
Fair Value Measurements | ' |
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: |
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Level 1 | | - | | Observable inputs such as unadjusted quoted prices in active markets for identical instruments. | | | | | | | | | | | | |
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Level 2 | | - | | Quoted prices for similar instruments in active markets or inputs that are observable for the asset or liability, either directly or indirectly. | | | | | | | | | | | | |
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Level 3 | | - | | Significant unobservable inputs based on our assumptions. | | | | | | | | | | | | |
Investments | ' |
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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 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 investment in TaiGen of 29.6 million shares based on its fair value of approximately $49.1 million, with the unrealized gain of $49.1 million recorded as a component of accumulated other comprehensive income (loss) in the stockholders’ equity section of our March 31, 2014, condensed consolidated balance sheet. We began recording our investment in TaiGen at fair value based on the trading price of TaiGen’s common stock, and the remaining investment was revalued on each balance sheet date, with any unrealized gains or losses recorded as a component of accumulated other comprehensive income (loss) in the stockholders’ equity section of our condensed consolidated balance sheets. |
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Gains and losses on the sale of available-for-sale securities are determined using the specific-identification method. During the three and nine months ended September 30, 2014, we sold 10.6 million and 29.6 million shares of TaiGen, respectively, and recorded gains of $16.3 million and $49.6 million, respectively, which were reclassified out of accumulated other comprehensive income. The following table summarizes the components of the unrealized gain (loss) on available-for-sale securities we recognized related to our investment in TaiGen in the three and nine months ended September 30, 2014, in thousands: |
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| | Three months ended | | | Nine months ended | | | | | | | | | |
September 30, 2014 | September 30, 2014 | | | | | | | | |
Reclassification adjustment for realized gain on sale of available-for-sale securities | | $ | (16,276 | ) | | $ | (49,553 | ) | | | | | | | | |
Unrealized holding gain (loss) on available-for-sale securities | | | (2,037 | ) | | | 49,553 | | | | | | | | | |
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Unrealized loss on available-for-sale securities | | $ | (18,313 | ) | | $ | 0 | | | | | | | | | |
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As of September 30, 2014, we had sold the remaining equity we held in TaiGen and had no remaining amount recorded in accumulated other comprehensive income related to our former investment in TaiGen. |
Derivative Liabilities | ' |
In August 2008, we issued a warrant to purchase 1,106,344 shares of our common stock at an exercise price of $7.71 per share that expires on August 14, 2015. As a result of the warrant’s anti-dilution provision and certain subsequent equity issuances at prices below the adjustment price of $6.72 defined in the warrant agreement, the number of shares issuable upon exercise of the warrant increased and the exercise price decreased. At September 30, 2014, the number of shares issuable upon exercise of the outstanding warrant was 1,965,418 at an exercise price of $4.34 per share. At September 30, 2014, the outstanding warrant was valued at $1.4 million and recorded as a current derivative liability on our condensed consolidated balance sheet. At December 31, 2013, the outstanding warrant was valued at $4.9 million and recorded as a long-term derivative liability on our condensed consolidated balance sheet. |
Our outstanding warrant is 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 condensed consolidated statements of operations and comprehensive income (loss). |
Concentration 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. |
Eisai is the exclusive distributor and our only customer for BELVIQ in the United States, which is the only jurisdiction for which BELVIQ has received regulatory approval for marketing. We also produce drug products for Siegfried AG, or Siegfried, under a manufacturing services agreement, and all of our manufacturing services revenues are attributable to Siegfried. |
Percentages of our total revenues are as follows: |
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| | Three months ended | | | Nine months ended | |
September 30, | September 30, |
| | 2014 | | | 2013 | | | 2014 | | | 2013 | |
Eisai marketing and supply agreement | | | 96.3 | % | | | 83.4 | % | | | 94.2 | % | | | 96.5 | % |
Manufacturing services agreement with Siegfried | | | 1.9 | % | | | 12.4 | % | | | 4.3 | % | | | 2.9 | % |
Other collaborative agreements | | | 1.8 | % | | | 4.2 | % | | | 1.5 | % | | | 0.6 | % |
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Total percentage of revenues | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % |
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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. |
When we are in a net loss position, we exclude from our calculation of diluted net loss per share all potentially dilutive (i) stock options, (ii) RSUs, (iii) PRSUs, (iv) unvested restricted stock in our deferred compensation plan and (v) warrants, and our diluted net loss per share is the same as our basic net loss per share for such periods. When we are in a net income position, the weighted-average number of shares used to calculate our diluted net income per share includes the potential dilutive effect of in-the-money securities, as determined using the treasury stock method. |
The table below reconciles the number of shares used to calculate basic and diluted net income (loss) per share for the periods presented, in thousands. |
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| | Three months ended | | | Nine months ended | |
September 30, | September 30, |
| | 2014 | | | 2013 | | | 2014 | | | 2013 | |
Weighted-average shares outstanding | | | 219,866 | | | | 218,316 | | | | 219,592 | | | | 217,923 | |
Potentially dilutive common shares outstanding: | | | | | | | | | | | | | | | | |
Stock options | | | 0 | | | | 0 | | | | 0 | | | | 5,489 | |
Warrants | | | 0 | | | | 0 | | | | 0 | | | | 876 | |
RSUs and unvested restricted stock | | | 0 | | | | 0 | | | | 0 | | | | 66 | |
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Weighted-average shares used to calculate diluted net income (loss) per share | | | 219,866 | | | | 218,316 | | | | 219,592 | | | | 224,354 | |
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The table below presents the potentially dilutive securities that would have been included in the above calculation of diluted net income (loss) per share if they were not antidilutive for the periods presented, in thousands. |
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| | Three months ended | | | Nine months ended | |
September 30, | September 30, |
| | 2014 | | | 2013 | | | 2014 | | | 2013 | |
Stock options | | | 11,614 | | | | 4,796 | | | | 12,185 | | | | 3,757 | |
Warrants | | | 55 | | | | 694 | | | | 490 | | | | 0 | |
RSUs, PRSUs, and unvested restricted stock | | | 508 | | | | 79 | | | | 214 | | | | 0 | |
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Total | | | 12,177 | | | | 5,569 | | | | 12,889 | | | | 3,757 | |
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