Exhibit – 10.20

 

Execution Version

 

CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THS DOCUMENT, MARKED BY ASTERISKS,
HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISION
PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

 

 

RESEARCH COLLABORATION AND LICENSE AGREEMENT

 

THIS AGREEMENT is effective as of October 21, 2002 (the “Effective Date”),
between MERCK & CO., INC., a New Jersey corporation with offices located at One
Merck Drive, Whitehouse Station, NJ (“MERCK”) and ARENA PHARMACEUTICALS, INC., a
Delaware corporation with offices located at 6166 Nancy Ridge Drive, San Diego,
CA (“ARENA”).

 

Background:

 

A.                       ARENA has expertise and intellectual property relating
to G-protein coupled receptors (“GPCRs”) ****, *** and ****, and its drug
discovery  receptor technology.

 

B.                         MERCK and ARENA desire to enter into a research
collaboration to: (a) better understand these receptors, along with other novel
receptors first identified under the Program (as described in Section 1.32); (b)
seek to validate such one or more receptors as pharmaceutical targets, and (c)
discover and develop therapeutics acting upon such target(s).

 

C.                         MERCK also desires to obtain certain exclusive
licenses from ARENA under ARENA Patents and ARENA Know-How (as defined),
together with the intellectual property generated by ARENA under the Program
upon the terms set out in this Agreement, and ARENA desires to grant such
licenses to MERCK.

 

ARENA and MERCK (hereafter “Party,” if singular or “Parties,” if plural) agree
as follows:

 

ARTICLE I

DEFINITIONS

 

Unless specifically set forth herein to the contrary, the following terms,
whether used in the singular or plural, shall have the respective meanings set
forth below:

 

1.1                               “Active Compound” means any composition of
matter, including a chemical entity, protein, antibody, small molecule or other
compound:

 

a)  that is discovered, identified, or synthesized by or on behalf of ARENA
and/or MERCK or its Affiliates or sublicensees, pursuant to work conducted under
the Program up to the ***** anniversary of the end of the Program Term and
meeting the criteria for selectivity, activity and potency in in vitro assays as
set out in Attachment A, which is made part of this Agreement and may be
modified by the JRC; or

 

b)  that is owned or Controlled by a Party, assayed under the Program, and
meeting the criteria for selectivity, activity and potency in in vitro assays as
set out in Attachment A; or

 

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c) that is designated an “Active Compound” by the JRC; or

 

d)  (i) whose therapeutic application is identified by MERCK or its Affiliates
or sublicensees as a direct result of its use of a Target  ; (ii) which binds to
the Target, is assayed by MERCK using Arena Know-How provided to MERCK under the
Agreement, or the Target or the assay claimed in a granted Arena Patent in the
United States or by the European Patent Office; and (iii) is developed by MERCK
or its Affiliates because of its affinity for the Target.  It being understood
and agreed that MERCK can use the Targets solely for counter screening without
any obligation to ARENA under this Agreement.

 

Notwithstanding the foregoing provisions of Section 1.1, Active Compound shall
not include any compound: (x) marketed by MERCK or its Affiliates as of the
Effective Date for ********** therapeutic benefits; or (y) formally designated
by MERCK as a development candidate for ********** therapeutic benefits and is
the subject of an IND as of the Effective Date.

 

1.2                               “Affiliate”means any corporation or other
business entity:  (i) of which more than fifty percent (50%) or more of the
securities or other ownership interests (or, if the jurisdiction where such
entity is domiciled prohibits foreign ownership of such amount, the maximum
ownership interest permitted by such laws) representing the equity, the voting
stock or general partnership interests are owned, or controlled, directly or
indirectly, by MERCK or (ii) which, directly or indirectly, owns, or controls
more than fifty percent (50%) or more of the securities or other ownership
interests representing the equity, the voting stock or, if applicable, the
general partnership interest, of MERCK; or (iii) which otherwise, directly or
indirectly, controls, is controlled by, or is under common control with MERCK,
where, for the purposes of this Section, the word “control” (with the
correlative meanings for the terms “controlled by” or “under the common control
with”) means the actual power to direct or cause the direction of the management
of the applicable business entity.

 

1.3                               “Annual FTE Rate” means the amount MERCK will
pay ARENA over a consecutive 12-month period during the Program Term to support
one (1) FTE dedicated to the Program.  The Annual FTE Rate will be
********************* dollars ($*********) per 12-month period during the
Program Term.

 

1.4                               “Arena Know-How” means all information,
materials (including compounds) and technology, including, but not limited to,
discoveries, processes, methods, protocols, formulas, data, inventions
(including, Arena Program Information and Inventions, and Arena’s rights in
Collaboration Information and Inventions), know-how and trade secrets,
patentable or otherwise, which during the term of this Agreement are: (a) owned
or Controlled by ARENA; (b) not generally known; and (c) necessary or useful to
MERCK in connection with the Program, or the research, development, manufacture,
marketing,

 

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use, or sale of Compound or Product in the Territory, but excluding published
ARENA Patents and Collaboration Patents.

 

1.5                               “Arena Patents” means all Patents owned or
Controlled by ARENA that are necessary or useful to MERCK in connection with the
Program, or the research, development, manufacture, marketing, use, or sale of
Program Compounds or Products in the Territory.

 

1.6                               “Arena Program Information and Inventions”
means all Program Information and Inventions developed or invented solely by
ARENA (including by its employees, agents or consultants).

 

1.7                               “Calendar Quarter” means the respective
periods of three consecutive calendar months ending on March 31, June 30,
September 30 and December 31.

 

1.8                               “Calendar Year”  means each successive period
of 12 months starting on January 1 and ending on December 31.

 

1.9                               “CART Technology” means ARENA’s receptor
technology, together with related Arena Know-How as applied to the Field.

 

1.10                        “Change of Control” is defined in Section 9.3.

 

1.11                        “Combination Product”  means a Product that includes
one or more active ingredients, other than a Program Compound, in combination
with a Program Compound.

 

1.12                        “Collaboration Patents” means all Patents that claim
inventions in Program Information and Inventions that are invented jointly by
ARENA and MERCK (including by their respective employees, agents or
consultants).

 

1.13                        “Collaboration Information and Inventions” means all
Program Information and Inventions developed or invented jointly by ARENA and
MERCK (including by their respective employees, agents or consultants).

 

1.14                        “Control” means, with respect to a compound,
material, information or intellectual property right, possession by a Party of a
license with the right to sublicense existing as of the Effective Date or that
is acquired during the term of this Agreement.

 

1.15                        “Field” means research, drug discovery, development
or commercialization of human or animal therapeutics related to the mediation 
of the *********** activity of ****** through a Target.

 

1.16                        “First Commercial Sale” means, with respect to any
Product, the first sale by MERCK, its Affiliates, or sublicensees for end use or
consumption of such Product in a country after all required approvals, including
marketing and pricing approvals, if applicable, have been granted by the
governing authorities of such country (it being understood and agreed that no
sales to the public will take place in any country until all required approvals
in such country have been granted).

 

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1.17                        “FTE” means the equivalent of a full-time
scientist’s work time in full working days over a 12-month period (including
normal vacations, sick days and holidays, but excluding weekends).  The portion
of an FTE year devoted by an ARENA scientist to the Program shall be determined
by dividing the number of full working days during any 12-month period devoted
by such employee to the Program by the total number of working days of such
scientist during any such 12-month period.  For the avoidance of doubt, an FTE
allocated to the Program must be a scientist working on the Program in
accordance with the criteria set out in Section 2.2.

 

1.18                        “IND” means an Investigational New Drug filing with
the United States Food and Drug Administration, or its equivalent in a Major
Market.

 

1.19                        “Information”  means all information, materials, and
data, including all scientific, preclinical, gene sequence, clinical,
regulatory, manufacturing, marketing, financial, or patent information, and
other commercial information and data, whether communicated in writing or orally
or by any other method, which is provided by one Party to the other Party in
connection with this Agreement.

 

1.20                        “JRC” means the Joint Research Committee described
in Section 2.6 of this Agreement.

 

1.21                        “Major Market” means the United States, Canada, the
United Kingdom, Japan, France, Germany, Italy or Spain.

 

1.22                        “Marketing Approval” means any and all approvals
(including price and reimbursement approvals), licenses, registrations, or
authorizations of the European Union or any country, federal, state or local
regulatory agency, department, bureau or other government entity that is
necessary for the manufacture, use, storage, import, transport and/or sale of a
Product for human use in such jurisdiction and following which the Product may
be legally sold in such jurisdiction.

 

1.23                        “Merck Know-How” means all information, materials
(including compounds), and technology, including but not limited to,
discoveries, processes, methods, protocols, formulas, data, inventions
(including, Merck Program Information and Inventions, and Merck’s rights in
Collaborative Information and Inventions), know-how and trade secrets,
patentable or otherwise, which during the term of this Agreement are: (a) owned
or Controlled by MERCK; (b) not generally known; and (c)   are necessary or
useful to ARENA in the performance of ARENA’s obligations under the Program, but
excluding Merck Patents and Collaboration Patents.

 

1.24                        “Merck Program Information and Inventions” means all
Program Information and Inventions developed or invented solely by MERCK
(including by its employees, agents or consultants).

 

1.25                        “Merck Patents” means all Patents owned or
Controlled by MERCK that are necessary or useful in connection with the Program,
or necessary or useful to the research, development, manufacture, marketing, use
or sale of Program Compound or Product in the Territory.

 

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1.26                        “Net Sales” means the gross invoiced amount  of
Product(s) sold by MERCK, its Affiliates or sublicensees (which term does not
include distributors) to the first independent third party after deducting, if
not previously deducted, from the amount invoiced or received (it being
understood and agreed that MERCK, its Affiliates and sublicensees will not
receive any amounts for sales of Product unless such amounts have been invoiced
by MERCK, its Affiliates or sublicensees):

 

(a)           trade and quantity discounts;

 

(b)                                 returns, rebates and allowances;

 

(c)                                  chargebacks and other amounts paid on sale
or dispensing of Product;

 

(d)                                 retroactive price reductions that are
actually allowed or granted;

 

(e)                                  sales commission paid to distributors
and/or selling agents;

 

(f)                                    a fixed amount equal to **** percent (*%)
of the amount invoiced to cover bad debt, sales or excise taxes, early payment
cash discounts, transportation and insurance charges and additional special
transportation, custom duties, and other governmental charges; and

 

(g)                                 the standard inventory cost of devices or
delivery systems used for dispensing or administering Product which accompany
Product as it is sold.

 

With respect to sales of a Combination Product, Net Sales shall be calculated on
the basis of the invoice price of the Combination Product multiplied by a
fraction, the numerator of which shall be the invoice price of the Product
containing Program Compound as the sole active ingredient in the same strength
and  the denominator of which shall be the sum of the numerator and the invoice
price(s) of product(s) containing each other active ingredient as the sole
active ingredient in the same strength as in the Combination Product.  Invoice
price shall be determined in accordance with MERCK’s regular accounting
methods.  If representative products for the above calculation are not
available, MERCK and ARENA will discuss an appropriate method for calculating
Net Sales for such Combination Product.  The deductions set out in subparagraphs
(a) through (g) will be applied in calculating Net Sales for a combination
Product.

 

1.27                        “Patents” means any and all patents and patent
applications, certificates of invention and applications for certificates of
invention, including divisions, continuations, continuations-in-part, reissues,
renewals, extensions, supplementary protection certificates or the like of any
of the foregoing and all foreign equivalents thereof in the Territory that a
Party or its Affiliates owns or Controls during the term of this Agreement
which: (i) claim, cover or relate to Active Compound, Targets, Program
Compounds, or Products; or (ii) Program Information and Inventions.

 

1.28                        “Phase I Clinical Study” means a human clinical
trial designed and conducted by MERCK, its Affiliates or authorized sublicensees
that is intended to initially evaluate the

 

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safety and/or pharmacological or antigenic effect of a Product in human subjects
or that would satisfy the requirements of 21 CFR 312.21(a) or its foreign
equivalent in a Major Market.

 

1.29                        “Phase II Clinical Trial” means a human clinical
trial designed and conducted by MERCK, its Affiliates or authorized sublicensees
that is intended to initially evaluate the effectiveness of a Product for a
particular indication or indications in human subjects with the disease or
indication under study or that would otherwise satisfy the requirements of 21
CFR 312.21(b) or its foreign equivalent in a Major Market.

 

1.30                        “Phase III Clinical Trial” means a pivotal human
clinical trial designed and conducted by MERCK, its Affiliates or authorized
sublicensees that is intended  to establish safety and efficacy of a Product as
a basis for a marketing application that would satisfy the requirements of 21
CFR 312.21(c) or its foreign equivalent in a Major Market.

 

1.31                        “Product” means a  preparation in final form for
sale by prescription, over-the-counter or any other method, for any and all uses
(including, without limitation, human and/or animal and/or agriculture use)
containing one or more Program Compounds  as a pharmaceutically  active
ingredient(s), including, without limitation, any Combination Product.

 

1.32                        “Program” means the collaborative research program
conducted by the Parties under the Research Plan to better understand the
Targets, and discover  Active Compounds and Program Compounds as set out in
Articles II and III.

 

1.33                        “Program Compound” means an Active Compound that
during or after the Program Term (i) has a scientific data package that has been
evaluated by MERCK or one of its Affiliates or sublicensees and, at MERCK’s or,
if applicable, one its Affiliates’ or sublicensees’, sole discretion
*****************************************************************
*******************************************************************************************,
approved by the MERCK Safety Assessment Review Committee (or its successor or
equivalent) to move the Active Compound to formal safety assessment studies (or
its successor or equivalent) by the Safety Assessment Department (or its
successor or equivalent) of MERCK or one of its Affiliates or sublicensees; or
(ii) otherwise has been approved by MERCK or one of its Affiliates or
sublicenses for clinical trials or commercialization and been the subject of an
IND.

 

1.34                        “Program Information and Inventions”  means all
data, information and materials, and intellectual property rights therein,
generated or arising from the Parties’ work, alone or jointly, under the
Program.

 

1.35                        “Program Term” means the period from the Effective
Date until the third anniversary of the Effective Date, or until such earlier
date when the Program is terminated pursuant to Section 2.8, or the Agreement is
terminated pursuant to Article VIII.

 

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1.36                        “Proof of Concept Milestone” means the date of
in-vivo demonstration of****************************************
********************************************************************************,
to the satisfaction of the

                JRC.

 

1.37                        “Research Plan” means the plan (the initial form of
which is attached to and made part of this Agreement as Attachment B) that sets
out the research work to be performed by ARENA and MERCK in conducting the
Program, as such plan may be amended or modified by the JRC or the Parties as
contemplated under this Agreement.

 

1.38                        “Targets” means: (1) the GPCRs identified as ****,
*****, and ****; and (2) any GCPR that (a) is first discovered under the Program
by ARENA, MERCK or jointly by ARENA and MERCK; and (b)
***********************************; provided that if any  GCPR described in
subsection (2) of this Section 1.38 is at the time of its discovery then the
subject of a pre-existing contractual obligation that would prevent use of such
GPCR in the Program, then such GCPR is not included in the definition of Target.

 

1.39                        “Technical Grounds” means: (1) the failure of the
Parties to reach the Proof of Concept Milestone by the second anniversary of the
Effective Date, (2) the JRC concludes that: (a) a significant adverse event
affecting all the Targets, all Program Compounds and all Active Compounds has
arisen during the conduct of the Program, or (b) continuation of the Program is
no longer scientifically promising because the role of all the Targets proves
incorrect, or none of the Targets are valid as a suitable target for development
of a pharmaceutical product; or (3) a reasonable determination by MERCK’s Patent
department, upon consultation with ARENA Patent attorneys, that a third party’s
valid patent rights block the Program activities in a manner such that the
Program activities cannot be reasonably modified to still achieve significant
goals of the Program.

 

1.40                        “Territory” means all of the countries in the world,
and their territories and possessions.

 

1.41                        “Valid Patent Claim” means a claim of an issued and
unexpired patent included within the Arena Patents, Merck Patents or
Collaboration Patents, which has not been revoked or held unenforceable or
invalid by a decision of a court or other governmental agency of competent
jurisdiction, unappealable or unappealed within the time allowed for appeal, and
which has not been disclaimed, denied or admitted to be invalid or unenforceable
through reissue or disclaimer or otherwise.

 

ARTICLE II
PROGRAM

 

2.1                               General.  ARENA and MERCK shall conduct the
Program in: (a) accordance with the provisions of the Research Plan and the
terms set out in this Agreement; and (b) good scientific manner, and in
compliance in all respects of applicable laws, rules and regulations and good
laboratory practices.  The Research Plan shall be revised annually, or more
often as determined by the JRC.  During the Program Term, the JRC may amend the
Research Plan, provided that such amended Research Plans must be in writing and
signed by an authorized representative of each Party.

 

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2.2                               FTE Commitments and Funding.

 

(a)                                  During the Program Term, ARENA shall
dedicate FTEs to the Program to work directly and exclusively on the Program. 
The JRC is entitled to increase or decrease the number of FTEs, provided it does
so in a writing signed by an authorized representative of each Party.  MERCK
shall fund each FTE at the Annual FTE Rate.  MERCK will pay ARENA the Annual FTE
Rate in four equal Calendar Quarter installments, each installment equal to
one-quarter of the Annual FTE Rate multiplied by the number of FTEs for the
Calendar Quarter.  ********************************************
******************************************
************************************.  If at any time during the Program Term
the number of FTEs dedicated to the Program falls below the number established
in this Agreement or by the JRC, ARENA will immediately notify MERCK of such
discrepancy, and MERCK will be entitled to adjust the Program funding payment as
appropriate.

 

(b)                                 For the initial year of the Program Term,
ARENA shall dedicate ********** (**) FTEs to the Program to work directly and
exclusively on the Program, and MERCK will provide funding for that number of
FTEs at the Annual FTE Rate.  FTE funding for the first year of the Program Term
(assuming a staffing level of ** FTEs) is set out in Exhibit 2.2(b).  ARENA will
ensure that on the Effective Date that ********** (**)FTEs dedicated to the
Program will begin the Program activities assigned to ARENA as specified in the
Research Plan.  The JRC is entitled to modify the number of ARENA FTEs dedicated
to the Program after the first year of the Program Term.

 

(c)                                  ARENA shall ensure: (i) by confidentiality
agreement that all FTEs and all other ARENA personnel, employees, and agents
involved in the Program shall comply with the confidentiality provisions of this
Agreement; and (ii) that each FTE that works on the Program is qualified by
appropriate experience and qualifications to perform the Program work assigned
to such FTE in a capable and professional manner.  If MERCK reasonably believes,
and has so notified ARENA about the basis for its belief, that any FTE working
on the Program is not meeting the foregoing requirements, then at MERCK’s
request, ARENA will shift such FTE off the Program and replace him/her with a
satisfactory FTE.

 

(d)                                 MERCK is entitled to arrange for its
employees to visit (at MERCK’s expense) ARENA at its offices and laboratories
during normal business hours and upon reasonable advance notice to discuss
Program activities in detail with ARENA personnel and FTEs working on the
Program.  ARENA shall reasonably cooperate in making arrangements for MERCK to
conduct such visits.

 

2.3                               Exchange of Information.  Upon execution of
this Agreement, ARENA shall use reasonable efforts to disclose to MERCK in
English and in writing all ARENA Know-How not previously disclosed, provided
that ARENA is not required to disclose any Arena Know-How that Arena reasonably
determines is not necessary or useful for purposes of the licenses granted in
Section 3.1(a), nor is ARENA required to disclose in

 

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writing any Arena Know-How which cannot be readily reduced to writing, however
ARENA will use reasonable efforts to disclose such Arena Know-How to the extent
possible if MERCK reasonably determines that such Arena Know How is necessary or
useful for the success of the Program. During the term of this Agreement, ARENA
shall also use reasonable efforts to promptly disclose to MERCK in English and
in writing on an ongoing basis all ARENA Know-How, provided that ARENA is not
required to disclose any Arena Know-How that Arena reasonably determines is not
necessary or useful for purposes of the license granted in Section 3.1(a) or 3.2
or which cannot be readily reduced to writing.  For clarity and notwithstanding
anything to the contrary contained in this Section 2.3, upon execution of this
Agreement ARENA shall fully disclose in writing the Arena Know-How described in
Exhibit 2.3.  MERCK shall use reasonable efforts to promptly disclose to ARENA
in English and in writing all MERCK Know-How that MERCK reasonably determines is
necessary for ARENA’s performance of its Program responsibilities, provided,
that MERCK  is only required to disclose MERCK Know-How that MERCK reasonably
determines is necessary or useful for purposes of the license granted in Section
3.1(b) or which cannot be readily reduced to writing, however MERCK will use
reasonable efforts to disclose such Merck Know-How to the extent possible if
ARENA reasonably determines that such Merck Know How is necessary or useful for
the success of the Program.

 

2.4                               Exclusive Efforts in the Field.  During the
Program Term and for a three-year period immediately following the earlier of
the expiration or termination of the Program Term, ARENA shall work exclusively
(even as to ARENA) with MERCK in the Field, and will not knowingly conduct any
activity concerning discovering, identifying, researching or developing
compounds that meet the Active Compound criteria of Section 1.1 outside of the
Program, use Targets for counter-screening against other GPCRs outside the
Program, or license or use with any third party the Targets, Arena Patents,
Arena Know-How or Collaboration Information and Inventions in the Field.

 

2.5                               ARENA CART Technology.  As part of its efforts
under the Program, ARENA shall apply the CART Technology to the identification,
discovery and synthesis of Active Compounds.  The CART Technology shall remain
proprietary to ARENA.  MERCK shall nonetheless have the right to use such CART
Technology as applied to Targets within the Program during the Program Term.

 

2.6                               Joint Research Committee.

 

(a)                                  The Program shall be conducted under the
direction of a Joint Research Committee, which shall consist of six (6) voting
members, with each Party having  the right to designate three (3) of such JRC
members.  Each Party shall appoint its respective representatives to the JRC
from time to time, and may substitute one or more of its representatives, in its
sole discretion, effective upon notice to the other Party of such change.  Each
of these representatives shall have appropriate technical credentials,
experience and knowledge, and shall maintain ongoing familiarity with the
Program.  One of the voting members of the JRC appointed by MERCK shall be
designated as the JRC Chair.  The JRC Chair shall have no

 

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voting rights or decision making authority over that vested in any JRC member. 
The JRC Chair shall have responsibility for calling JRC meetings, circulating
agendas, and performing administrative tasks required to assure efficient
operation of the JRC.

 

(b)                                 Each Party is entitled, subject to advance
notice to the other Party and no reasonable objection by such Party, to invite
additional representatives or consultants to attend JRC meetings, subject to
compliance by such representatives with the confidentiality safeguards of
Article IV, and any additional confidentiality or other requirements as the JRC
may reasonably require for attendance.

 

(c)                                  The JRC shall perform the following
functions:

 

(i)                                     determine the overall strategy for the
Program;

 

(ii)                                  formulate and adjust the Research Plan,
and the Active Compound criteria (the initial form of which appears in
Attachment A) as needed, including but not limited to allocation of FTEs and
other Program resources;

 

(iii)                               monitor and assess the progress of the
Program, the Program’s research results, and oversee the exchange of Information
between the Parties;

 

(iv)                              determine the number of FTEs dedicated to the
Program, and how such FTEs will be allocated, consistent with the provisions of
Section 2.2;

 

(v)                                 consider issues of priority in the Program,
and review and advise on any budgetary and economic matters relating to the
Program;

 

(vi)                              arrange for the evaluation of Active Compounds
under the Program; designate compounds that meet the acceptance criteria set out
in Section 1.1 as Active Compounds, and release Active Compounds from the
Program in accordance with Section 2.11;

 

(vii)                           as appropriate, nominate Program Compounds for
acceptance by MERCK in accordance with Section 1.33 during the period ending on
the first anniversary of the end of the Program Term;

 

(viii)                        monitor and record the achievement and timing of
Milestones in Section 5.3.

 

Decisions of the JRC shall be by unanimous consent.  If the JRC cannot or does
not, after good faith efforts, reach agreement on an issue, then upon request by
either Party, the disputed matter shall be referred to the Chief Executive
Officer of ARENA and to a Vice President, Merck Research Laboratories, who shall
promptly meet and endeavor to come to an agreement in a timely manner.  If such
individuals cannot reach agreement as to such issue, then: (i) if such issue is
as to a scientific, safety or technical matter under the Program, the final
decision shall be made by a Senior Vice President of Merck Research
Laboratories, taking reasonable efforts to mitigate  the impact of the decision
on ARENA; and (ii) if such issue is as to any other matter (such as financial or
legal matters) the final resolution will be made pursuant to Section 9.10.

 

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Notwithstanding and without limiting the foregoing, a Senior Vice President of
Merck Research Laboratories is not entitled to (i) make a final decision under
this Subsection regarding a change in the number of ARENA FTEs dedicated to the
Program and funded by MERCK that would result in a reduction or an addition of
more than (**) *** FTEs from the number of FTE’s last jointly approved by the
JRC, (ii) unilaterally amend the Research Plan, (iii) modify the criteria set
out in Attachment A, or (iv) make a determination that a compound is not an
Active Compound or release an Active Compound from the Program.

 

2.7                               Meetings, Expense, Minutes and JRC Term.

 

(a)                                  During the Program Term, the JRC shall meet
at least each Calendar Quarter to monitor progress and provide direction to the
Program, with the location for such meetings alternating between ARENA and MERCK
facilities (or such other locations as is determined by the JRC). 
Alternatively, the JRC may meet by means of teleconference, videoconference or
other similar communications equipment.  The first JRC meeting will occur no
later than forty-five (45) days after the Effective Date.

 

(b)                                 Each Party shall bear its own expenses
related to JRC meeting attendance.

 

(c)                                  The JRC Chair shall designate a recording
secretary to prepare written minutes of each JRC meeting and written records of
all JRC decisions, whether made at a Committee meeting or otherwise.  Such
minutes shall provide a description, in reasonable detail, of the discussions at
the meeting and a list of any actions, decisions, or determinations approved by
the JRC.  The JRC Chair will distribute draft minutes to all JRC members within
ten (10) business days after each meeting.  Minutes will be finalized no later
than thirty (30) days after the meeting to which the minutes pertain.  Finalized
minutes will be distributed to the Parties after approval of the drafts by the
JRC Chair.

 

(d)                                 The JRC shall exist for twelve (12) months
following the termination or expiration of the Program Term.

 

2.8                               Early Termination of the Program.  MERCK is
entitled to terminate the Program:

 

(a)                                  as set out in Article VIII;

 

(b)                                 without cause, at any time on or after the
second anniversary of the Effective Date upon written notice from MERCK given 
at least 90 days prior to such termination date, if Milestones 1, 2 and 3
(described in Section 5.3) have been achieved and paid; and

 

(c)                                  without cause, at any time after the second
anniversary of the Effective Date upon written notice from MERCK given on or
after the second anniversary of the Effective Date and at least 180 days prior
to such termination date;

 

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(d)                                 for Technical Grounds, at any time upon 
thirty (30) days prior written notice from MERCK.

 

(e)                                  in the event of a “Change of Control” (as
defined in Section 9.3) of ARENA by giving thirty (30) days advance written
notice to ARENA.

 

In the event of any termination under this Section, MERCK will not be obligated
to make any remaining FTE payments for Program activities scheduled to take
place after the termination date.  ARENA and MERCK shall each continue to use
its diligent efforts to perform the activities assigned to it under the Research
Plan until the effective date of termination, provided, however, neither ARENA
nor MERCK shall have any further obligation to conduct research activities under
this Agreement after the effective date of the termination of the Program. For
the avoidance of doubt if the JRC cannot unanimously agree that Technical
Grounds have occurred, a Senior Vice President of Merck Research Laboratories is
entitled to make the final decision on whether a Technical Grounds event has
occurred. In the event of a termination of the Program by MERCK (but not by
ARENA) for Technical Grounds under Section 2.8(d), all licenses granted to MERCK
under this Agreement become non-exclusive and ARENA is released from its
obligation of exclusivity under Section 2.4, and MERCK is released from its
obligations under Sections 2.9.3 and 3.3, but not its obligations, if any, under
Article V.

 

2.9                               Records and Reports.

 

2.9.1                                 Records.  ARENA and MERCK each shall
maintain records that shall be complete and accurate and shall fully and
properly reflect all work done and results achieved in the performance of the
Program in sufficient detail and in good scientific manner appropriate for
patent and regulatory purposes.

 

2.9.2                                 Copies and Inspection of Records.  MERCK
shall have the right, during normal business hours and upon reasonable notice no
more than once every six months, to inspect and copy all of the records of ARENA
referenced in Section 2.9.1.  MERCK shall maintain such records and the
information disclosed therein in confidence in accordance with Article IV.  All
inspections, copying and visits hereunder shall be conducted in a manner so as
not to disrupt ARENA’s business or cause any disclosure of any other ARENA
confidential information.

 

2.9.3                                 Quarterly Reports.  Within thirty (30)
days following the end of each Calendar Quarter during the term of this
Agreement, ARENA shall provide to MERCK a written progress report which shall
describe the work performed to date on the Program, evaluate the work performed
in relation to the goals of the Program and provide such other information
required by the Program or reasonably requested by MERCK relating to the
progress of the goals or performance of the Program.  Upon request, ARENA shall
provide copies of the records described in Section 2.9.1.   Within thirty (30)
days following the end of each Calendar Year during the term of this Agreement
after the later of either the achievement of Milestone 3 or the Program has
ended, MERCK shall provide to ARENA

 

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upon ARENA’s request a written progress report which shall describe the work
performed during such Calendar Year on developing and commercializing Active
Compounds and Program Compounds, and evaluate the work performed in relation to
the goals of the developing and commercializing Program Compounds.

 

2.10                        Program Information and Inventions.  Program
Information and Inventions shall be owned as follows:

 

(a)                                  ARENA Program Information and Inventions
shall be owned solely by ARENA;

 

(b)                                 MERCK Program Information and Inventions
shall be owned solely by MERCK; and

 

(c)                                  Collaboration Information and Inventions
shall be owned jointly by ARENA and MERCK.

 

Each Party shall promptly disclose to the other the development, making,
conception and reduction to practice of all Collaboration Information and
Inventions and all other Program Information and Inventions.  However, Arena
Patents and Merck Patents containing Program Information and Inventions shall be
disclosed to the other Party within thirty (30) days after the filing of the
first patent application.

 

2.11                        Rights to Compounds.  The Parties contemplate that
each of them will make compounds from its library available for testing for
purposes of this Agreement and that additional compounds may be invented and/or
synthesized in the course of the Program.  In respect of such compounds, the
Parties agree as follows:

 

(a)                                  Compounds that are invented outside of the
Program by a Party, and which are tested in the Program, but either fail to
qualify as an Active Compound under Section 1.1 or are determined by the JRC
under the provisions of Sections 2.6 or 2.11(c) not to be Active Compounds,
shall revert to the Party which made such compound available, without any
restriction or obligations under this Agreement provided, in the case of MERCK,
that any such released compound is not subsequently tested or developed (other
than counter-screening) using Arena Know-How or the Target or the assay claimed
in a granted Arena Patent in the United States or by the European Patent Office.

 

(b)                                 Compounds (including, but not limited to,
Active Compounds) which are invented solely by one Party under the Program shall
be owned by the Party which invented each such compound, and compounds which are
invented jointly by the Parties shall be owned jointly by ARENA and MERCK.  If
any  compounds fail to qualify as an Active Compound under Section 1.1, or are
determined by the JRC pursuant to Section 2.6 not to be a viable Program
Compound candidate, then such compound shall revert to the Party or Parties that
own such compounds, without any restriction or obligation under this Agreement,
except as described in Subsection 2.11(d) and(e).

 

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(c)                                  ARENA is not entitled to use or screen any
Active Compound discovered, identified, synthesized, assayed, contributed or
developed in or under the Program for any purpose outside the scope of the
Program unless and until such Active Compound is released from this Agreement by
the JRC.  The JRC is entitled to release any Active Compound from the Program if
the JRC determines that such Active Compound is not a viable Program Compound
candidate.  In any event, the JRC shall release an Active Compound from the
Program if such Active Compound is not accepted as a Program Compound under the
provisions of Sections 1.33 and 2.11(f) by the first anniversary of the
termination date of the Program Term.

 

(d)                                 ARENA’s rights to compounds owned by ARENA
in accordance with Subsection 2.11(b) are subject to the following restrictions
and non-exclusive license grant:

 

(A)              ARENA is entitled to use any compound solely invented by ARENA
under the Program but not qualifying as an Active Compound under Section 1.1,
and any Active Compound invented by ARENA (solely or jointly) under the Program
but released by the JRC, for all uses outside the Field during the period of
exclusivity set out in Section 2.4.  Once the Section 2.4 exclusivity period
lapses, ARENA shall be entitled to make free use of such compounds for any and
all purposes; and

 

(B)                ARENA hereby grants MERCK a non-exclusive, sublicensable
license to use those compounds described in Subsection 2.11(d)(A), for MERCK’s
and its Affiliates research, drug discovery and commercialization activities.

 

(e)                                  If within a seven year period from the date
of the end of the Program, MERCK files an IND on a released Active Compound  for
*********** effects or other therapeutic applications for such compound which
were identified under the Program, such compound will be deemed a “Program
Compound” even if such Active Compound had been previously released by the JRC
under Sections 2.11(b) or (c), and MERCK shall be obligated to pay ARENA
applicable Program Compound and Product milestone payments and royalties
pursuant to Article V.

 

(f)                                    Once MERCK or one of its Affiliates or
sublicensees formally accepts an Active Compound as a Program Compound, it will
notify ARENA of this decision in writing or during a JRC meeting (as evidenced
by written Committee meeting minutes).

 

ARTICLE III

LICENSE; DEVELOPMENT AND COMMERCIALIZATION

 

3.1                               License Grants to Conduct the Program.

 

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(a)                                  ARENA hereby grants MERCK an exclusive
license in the Field under (i) Arena Patents, (ii) ARENA’s interest in
Collaboration Patents, and (iii) Arena Know-How, for the sole purposes of
enabling MERCK to conduct the Program research activities assigned to MERCK or
its Affiliates under the Research Plan.  The foregoing license may be
sublicensed to MERCK Affiliates and, with the consent of ARENA, to third party
sublicensees.

 

(b)                                 MERCK hereby grants ARENA a non-exclusive
license in the Field under (i) Merck Patents, (ii) MERCK’s interest in
Collaboration Patents, and (iii) Merck Know-How for the sole purpose of enabling
ARENA to conduct the Program research activities assigned to ARENA under the
Research Plan.  The foregoing license may be sublicensed with the consent of the
Parties to third party sublicensees.

 

3.2                               License Grants to MERCK from ARENA.  ARENA
hereby grants MERCK an exclusive license, with the right to grant sublicenses,
under Arena Know-How, Arena Patents and ARENA’s interest in Collaboration
Patents and Collaboration Information and Inventions to: (a) discover, develop,
make, have made, use, import, sell and offer to sell Program Compounds and
Products (including any diagnostic or pharmaco-genomic products or services
described in Section 5.9) in the Territory, and to otherwise enable MERCK to
fulfil its obligations and exercise its rights under this Agreement; and (b) use
Targets for all activities  in the Territory, including, but, not limited to
research drug discovery, development and commercialization activities.

 

3.3                               Product Development and Commercialization.

 

(a)                                  MERCK agrees to use commercially reasonable
efforts, consistent with the usual practice followed by MERCK to take compounds
forward within Merck Research Laboratories as drug development candidates, to
take Active Compound(s) forward for approval as Program Compound(s).  After
MERCK’s approval of such a Program Compound, MERCK shall, at it own expense, use
reasonable efforts to develop and to introduce a Product in a Major Market as
soon as practical, consistent with the efforts MERCK uses in pursuing the
development of other products representing a similar marketing opportunity. 
MERCK shall be deemed to have satisfied its obligations under this Section 3.3
if MERCK has an ongoing and active research program or marketing program as
described above, as appropriate, directed in good faith toward production and
use of a Product.

 

(b)                                 If either the making, having made, use, sale
or import by MERCK, its Affiliates and/or sublicensees, of Program Compounds or
Products, or the use by MERCK, its Affiliates and/or sublicensees of Targets
consistent with the license grants set out in Article III, would infringe during
the term of this Agreement a valid claim of a granted patent which ARENA owns or
Controls and which patent is not covered by the grants in Article III, ARENA
hereby grants to MERCK, its Affiliates and its sublicensees, to the extent ARENA
is legally able to do so, a non-exclusive, royalty-free license in the Territory
under such issued letters patent solely for MERCK and its Affiliates and/or
sublicensees to make, have made, use,

 

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offer to sell, sell and import Program Compounds and Products in the Territory,
and use the Targets as permitted under Article III.

 

ARTICLE IV

CONFIDENTIALITY AND PUBLICATION

 

4.1                               Nondisclosure Obligations.  All Information
disclosed by one Party to the other under this Agreement shall be maintained in
confidence by the receiving Party and shall not be disclosed to any non-party or
used for any purpose except as expressly permitted in this Agreement without the
prior written consent of the disclosing Party, except to the extent that such
Information:

 

(a)                                  is known by the receiving Party at the time
of its receipt, as documented by business records, and not through a prior
disclosure by the disclosing Party;

 

(b)                                 is properly in the public domain;

 

(c)                                  is subsequently disclosed to the receiving
Party by a third party who may lawfully do so and is not under an obligation of
confidentiality to the disclosing Party; or

 

(d)                                 is developed by the receiving Party
independently of Information received from the disclosing Party, as documented
by business records.

 

For the avoidance of doubt, subject to the foregoing 4.1(b) exception and except
in connection with the prosecution of Patents or other activities in furtherance
of the Program, during the term of this Agreement ARENA is not entitled to
disclose any of the DNA sequences described in Exhibit 2.3, the connection of
such sequences to the Targets or any utility of such Targets to any third party
without the prior written consent of MERCK.

 

4.2                               Permitted Disclosure of Information. 
Notwithstanding anything to the contrary contained in Section 4.1, a Party
receiving Information of the other Party may disclose such Information:

 

(a)                                  required to be submitted by the recipient
to governmental authorities to facilitate the issuance of any necessary
registrations or filings in connection with conducting clinical trials for the
Product, or developing, manufacturing or commercializing the Product, provided
that reasonable methods shall be taken to assure confidential treatment of such
information;

 

(b)                                 by either Party to its permitted
sublicensees, agents, consultants, Affiliates and/or other third parties to the
extent necessary for the research and development, manufacturing, registration
and/or marketing of the Product (or for such parties to determine their interest
in performing such activities) in accordance with this Agreement on the
condition that such third parties agree to be bound by the confidentiality
obligations contained within this Agreement; or

 

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(c)                                  if required to be disclosed by law or court
order, provided that notice is promptly delivered to the other Party in order to
provide an opportunity to challenge or limit the disclosure obligation, and
provided further the Party required to disclose cooperates with the other Party
in limiting disclosure to the extent so required.

 

4.3                               Publication. MERCK and ARENA each acknowledge
the other’s interest in publishing its results to obtain recognition within the
scientific community and to advance the state of scientific knowledge.  Each
Party also recognizes the mutual interest in obtaining valid patent protection
and in protecting business interests and trade secret information. 
Consequently, either Party, its employees, agents or consultants wishing to make
such a publication shall deliver to the other Party a copy of the proposed
written publication or an outline of an oral disclosure at least sixty (60) days
prior to submission for publication or presentation.  The reviewing Party shall
have the right to:

 

(a)                                  propose modifications to the publication
for patent reasons, trade secret reasons or business reasons or

 

(b)                                 request a reasonable delay in publication or
presentation in order to protect know-how and patentable information.  If the
reviewing Party requests a delay, the publishing Party shall delay submission or
presentation for a period of at least ninety (90) days to enable patent
applications protecting each Party’s rights in such information to be filed in
accordance with Article VII.  Upon expiration of such ninety (90) day period,
the publishing or presenting Party shall be free to proceed with the publication
or presentation. If the reviewing Party requests modifications to the
publication, the publishing Party shall edit such publication to prevent
disclosure of trade secret or proprietary business information prior to
submission of the publication or presentation.

 

4.4                               Publicity and Press Releases. Except where and
to the extent a Party determines disclosure is required under applicable
governing law or regulation, no Party shall disclose the existence or terms of
this Agreement (other than to its Affiliates), or make any public announcements
or issue any press releases concerning this Agreement or its subject matter
without the prior review of and written consent for such public announcement or
press release by the other Party.  Each Party will allow the other Party at
least ten (10) business days to review and comment upon any public announcements
or press release.  MERCK acknowledges that ARENA may be required to disclose the
existence of terms of this Agreement to comply with applicable Securities and
Exchange Commission rules and NASDAQ regulations.

 

ARTICLE V

PAYMENTS; ROYALTIES AND REPORTS

 

5.1                                Commitment Fee.  In consideration of ARENA’s
commitment to perform its obligations under the Program and for access to the
ARENA Know-How and ARENA Patents granted hereunder, MERCK shall pay ARENA a
commitment fee of four million dollars ($4,000,000.00) no later that thirty (30)
days after the Effective Date.

 

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5.2                                Program Funding.  In consideration for
ARENA’s performance of its obligations under the Program, and subject to the
terms contained in this Agreement, MERCK shall provide FTE funding as specified
in Section 2.2.

 

5.3                                Milestone Payments.  Subject to the terms of
this Agreement, MERCK shall pay to ARENA the following milestone payments:

 

Milestone 1:                            *********** dollars ($***********) upon
achievement of the Proof of Concept Milestone.

 

Milestone 2:                            ************ dollars ($***********) upon
acceptance by MERCK of an assay developed by ARENA under the Program that is
validated, to MERCK’s satisfaction exercised in good faith, as suitable to
direct compound screening and medicinal chemistry optimization to maximize
separation of activity of ********************.  For the avoidance of doubt, it
is anticipated that this assay would measure the propensity of compounds to
cause ******************.  This assay could be constructed through steps
involving a) identification of the key receptor or receptors involved in
****************** and b) composition of an assay that is specific for that
receptor or those receptors.  Alternatively, it could be constructed through
steps including a) identification of the key cell type involved in
*****************, and b) composition of an assay using these cells.

 

Milestone 3:                            *********** dollars ($***********) upon
MERCK’s acceptance of the first Program Compound.

 

Milestone 4:                            *********** dollars ($************) upon
the start by MERCK of the first Phase I Clinical Study for a Program Compound. 
It is understood that such Phase I Clinical Study will be deemed to start on the
date of administration to the first patient in such study.

 

Milestone 5:                            ************ dollars ($***********) upon
the start by MERCK of the first Phase II Clinical Study for a Program Compound. 
It is understood that such Phase II Clinical Study will be deemed to start on
the date of administration to the first patient in such study.

 

Milestone 6:                            *********** dollars ($************) upon
the start by MERCK of the first Phase III Clinical Study for a Program
Compound.  It is understood that such Phase III Clinical Study will be deemed to
start on the date of administration to the first patient in such study.

 

Milestone 7:                             *********** dollars ($***********) upon
the acceptance for review of a Marketing Application for the first Product by
the United States Food and Drug Administration (or its Major Market equivalent
in a Major Market).

 

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Milestone 8:                            *********** dollars ($**********) upon
the first Marketing Approval in a Major Market.

 

MERCK shall notify ARENA in writing within thirty (30) days upon the achievement
of each milestone described in this Section 5.3, and upon such notice shall pay
ARENA the appropriate milestone payment.  With the sole exception of Milestone
4, the milestone payments described in this Section 5.3  shall be payable only
upon the initial achievement of such milestone for the first Program Compound,
and no amounts shall be due for subsequent or repeated achievements of such
milestone.  Milestone 4 can be reached and the Milestone 4 payment triggered, up
to a total of ***** times, provided that ***** distinct Program Compounds, each
with activity against a different Target, satisfy the Milestone 4 criteria.  The
first Milestone payment for Milestone 4 shall be fully creditable against
subsequent achievement of such Milestone in the event that clinical studies were
terminated without achieving Marketing Approval for a previous Program Compound
for which Milestone 4 was paid.  For avoidance of doubt, a single Program
Compound having activity against more than one Target shall not require an
additional Milestone 4 milestone payment.  All Milestone payments are
non-refundable and, except as set forth above with respect to Milestone 4,
non-creditable.  Notwithstanding anything else to the contrary, Milestones 1, 2
and 3 shall be deemed achieved no later than the start of the first Phase I
Clinical Study for a Program Compound.

 

5.4                                Royalties.

 

5.4.1                                 Royalties Payable By MERCK.  Subject to
the terms and conditions of this Agreement, MERCK shall pay to ARENA royalties
during each Calendar Year on a country-by-country basis:

 

(a)                                  if the sale or approved use of the Product
would infringe a Valid Patent Claim in the country of sale, then:

 

(i)                         an amount equal to **** percent (*%) of the annual
Net Sales of such Products in such countries, until the total annual Net Sales
of Products by MERCK, its Affiliates or sublicensees equals *******
*******dollars ($****************); and

 

(ii)                      for that amount of annual Net Sales of Products by
MERCK, its Affiliates or sublicensees greater than *********** dollars
($***************), an amount equal to *** percent (*%) of the annual Net Sales
of such Products in such countries, until the total annual Net Sales of Products
by MERCK, its Affiliates or sublicensees equals *********** dollars
($**************); and

 

(iii)                   for that amount of annual Net Sales of Products by
MERCK, its Affiliates or sublicensees greater than *********** dollars
($****************), an amount equal to ***** percent (*%) of such annual Net
Sales in such countries until the total annual Net

 

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Sales of Products by MERCK, its Affiliates or sublicensees equals ************
dollars ($****************); and

 

(iv)                  for that amount of annual Net Sales of Products by MERCK,
its Affiliates or sublicensees greater than ************ dollars
($*************), an amount equal to *** percent (**%) of such annual Net Sales
in such countries; or

 

(b)                                 for sales in countries other than those
covered in Subsection 5.4.1(a):

 

(i)                         an amount equal to ************ percent (***%) of
the Net Sales of such Products in such countries, until the total annual Net
Sales of Products by MERCK, its Affiliates or sublicensees equals *** *******
dollars ($****************);

 

(ii)                      an amount equal to ***** percent (*%) of the Net Sales
of such Products in such countries, until the total annual Net Sales of Products
by MERCK, its Affiliates or sublicensees equals *** ******* dollars
($****************);

 

(iii)                   for that amount of annual Net Sales of Products by
MERCK, its Affiliates or sublicensees greater than *********** dollars
($*************), an amount equal to **** percent (*%) of such annual Net Sales
in such countries until the total annual Net Sales of Products by MERCK, its
Affiliates or sublicensees equals **** ******** dollars ($****************);

 

(iv)                  for that amount of annual Net Sales of Products by MERCK,
its Affiliates or sublicensees greater than ************ dollars
($*************), an amount equal to **** percent (*%) of such annual Net Sales
in such countries.

 

(c)                                  Royalties on each Product at the terms set
forth above shall be effective as of the date of First Commercial Sale of
Product in a country and shall continue until (i) the expiration of the last
applicable Valid Patent Claim which provides exclusivity for such Product in
such country in the case of sales under Subsection 5.4.1 (a) or (ii) until the
****** anniversary of the First Commercial Sale in such country in the case of
sales of Product under Subsection 5.4.1 (b), in each case subject to the
following conditions:

 

(x)                                   that only one royalty shall be due with
respect to the same unit of Product;

 

(y)                                 that no royalties shall be due upon the sale
or other transfer among MERCK, its Affiliates or sublicensees, but in such cases
the royalty shall be due and calculated upon MERCK’s

 

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or its Affiliate’s or its sublicensee’s Net Sales to the first independent third
party;

 

(z)                                   in no event shall royalties on Product Net
Sales be payable for a period of less than a total of ***** years from the date
of First Commercial Sale of Product in a country.  If the last applicable Valid
Patent Claim expires before the ******* anniversary of the First Commercial Sale
in such country, MERCK will be obligated to pay royalties at the levels set out
in Subsection 5.4.1(a) until such expiration date, and royalties at the levels
set out in Subsection 5.4.1(b) from such expiration date until the *******
anniversary of the First Commercial Sale of the Product in such country.

 

(aa)                            no royalties shall accrue on the disposition
without charge of Product in reasonable quantities by MERCK, its Affiliates or
its sublicensees as samples (promotion or otherwise) or as donations (e.g., to
non-profit institutions or government agencies for a non-commercial purpose);
and

 

(bb)                          that after the conditions in Subsection 5.4.1.(c)
(i) and (ii) are met, MERCK shall have a royalty-free paid up license.

 

(d)  For avoidance of doubt, Net Sales for determining the applicable royalty
tiers set out in Subsection 5.4.1(a) are based on aggregate  Net Sales of
Products in all countries covered in Subsection 5.4.1(a).  Net Sales for
determining the applicable royalty tiers set out in Subsection 5.4.1(b) are
based on aggregate Net Sales of Products in all countries covered in Subsection
5.4.1(b).

 

5.4.2                                 Royalty Calculation Example.  The
following is an example of royalties calculated according to Section 5.4.1(a)
(exclusive of the net sales thresholds in non-patented countries as described in
Section 5.4.1(b) where the royalty is *** as much).

 

If annual Net Sales in a given Calendar Year = US $*********** (US
$***************) in countries where the Section 5.4.1(a) Valid Patent Claim
royalty rate is applied.

 

On the first $********* ( $****************) of Net Sales:

$**************** x *% royalty                             =                  US
$*************

 

On the next $********* ($****************) of Net Sales

$**************** x *% royalty                             =                  US
$*************

 

On the next $*********** ($****************) of Net Sales

$**************** x *% royalty                             =                  US
$**************

 

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Total royalty paid for the entire Calendar Year           =          US
$**************

 

5.4.3                                 Change in Sales Practices. The Parties
acknowledge that during the term of this Agreement, MERCK’s sales practices for
the marketing and distribution of Product may change to the extent to which the
calculation of the payment for royalties on Net Sales may become impractical or
even impossible. In such event the Parties agree to meet and discuss in good
faith new ways of compensating ARENA on a basis economically equivalent to the
payments to ARENA to the extent provided for  under Section  5.4.1.

 

5.4.4                                 Bulk Compound.  In those cases where MERCK
sells bulk Program Compound rather than Product to an independent third party,
the royalty obligations of this Article V shall be applicable to such bulk
Program Compound.

 

5.4.5                                 Compulsory Licenses.  If a compulsory
license is granted with respect to Product in any country in the Territory with
a royalty rate lower than the royalty rate provided by Section 5.4.1, then the
royalty rate to be paid by MERCK on Net Sales in that country under Section
5.4.1 shall be reduced to the rate paid by the compulsory licensee for those
Products sold under the compulsory license.

 

5.4.6                                 Third Party Licenses.  If one or more
patent licenses from a third party or parties are required by MERCK, its
Affiliates and/or sublicensees to develop, make, have made, use, sell or import
Compound or Product in a particular country (“Third Party Patent License(s)”),
***** percent (**%) of any consideration actually paid  under such Third Party
Patent License(s) by MERCK, its Affiliates or sublicensees,  for sale of such
Compound or Product in a country for such Calendar Quarter shall be credited
against the royalty payments due ARENA by MERCK with respect to the sale of such
Products or Compounds in such country, provided, however, that the royalties
payable to ARENA in any given year shall not be reduced by more than *****
percent (**%) in such year.

 

5.4.7                                 Competitive Product.   MERCK shall not be
required to make any royalty payments under Section 5.4(a) in a country once a
third party or parties (other than MERCK, its Affiliates, sublicenses or
MERCK-authorized distributors) selling product or products with the same active
ingredients as the Product have sold in the aggregate at least ***** percent
(**%) of units sold to consumers in such country as determined by IMS sales
figures, or in the absence of IMS, any reputable reporting entity.

 

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5.5                               Reports; Payment of Royalty.  Following the
First Commercial Sale of a Product and during the term of the Agreement, MERCK
shall furnish to ARENA a quarterly written report for the Calendar Quarter
showing the sales of all Products subject to royalty payments sold by MERCK, its
Affiliates and its sublicensees in the Territory during the reporting period and
the royalties payable under this Agreement.  Reports shall be due on the
sixtieth (60th) day following the close of each Calendar Quarter.  Royalties
that have accrued in a particular Calendar Quarter shall be due and payable on
the date such royalty report is due. MERCK shall keep complete and accurate
records in sufficient detail to enable the royalties payable hereunder to be
determined.

 

5.6                               Audits.

 

(a)                                  Upon the written request of ARENA and not
more than once in each Calendar Year, MERCK shall permit an independent
certified public accounting firm of nationally recognized standing selected by
ARENA and reasonably acceptable to MERCK, at ARENA’s expense, to have access
during normal business hours to such of the records of MERCK as may be
reasonably necessary to verify the accuracy of the royalty reports hereunder for
any Calendar Year ending not more than twenty-four (24) months prior to the date
of such request.  The accounting firm shall disclose to ARENA only the details
called for in Section 5.5 and whether the royalty reports are correct or
incorrect and the specific amount of any discrepancies.  No other information
shall be provided to ARENA.

 

(b)                                 If such accounting firm correctly identifies
a discrepancy during such period, the appropriate Party shall make payment to
correct such discrepancy within 30 days of the date ARENA delivers to MERCK such
accounting firm’s written report so correctly concluding.  The fees charged by
such an accounting firm shall be paid by ARENA, except under the following
circumstances: if the payments made or payable were at least ********* dollars
($**********) and less than ********* percent (**%) of the amount that should
have been paid during the period in question, MERCK shall reimburse ARENA for
the reasonable costs of such audit.

 

(c)                                  MERCK shall include in each sublicense
granted by it pursuant to this Agreement a provision requiring the sublicensee
to make reports to MERCK, to keep and maintain records of sales made pursuant to
such sublicense and to grant access to such records by ARENA’s independent
accountant to the same extent required of MERCK under this Agreement.

 

(d)                                 Upon the expiration of twenty-four (24)
months following the end of any Calendar Year, if there is no pending
controversy, the calculation of royalties payable with respect to such Calendar
Year shall be binding and conclusive upon ARENA, and MERCK and its sublicensees
shall be released from any liability or accountability with respect to royalties
for such Calendar Year.

 

(e)                                  ARENA shall treat all information subject
to review under this Section 5.6 or under any sublicense agreement in accordance
with the confidentiality and non-use

 

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provisions of Article IV of this Agreement, and shall cause its accounting firm
to enter into an acceptable confidentiality agreement with MERCK (and its
applicable Affiliates and sublicensees) obligating such firm to retain all such
information in confidence pursuant to such confidentiality agreement.

 

5.7                               Payment Exchange Rate.  All payments to be
made by MERCK to ARENA under this Agreement shall be made in United States
dollars and may be paid by check made to the order of ARENA or bank wire
transfer in immediately available funds to such bank account in the United
States designated in writing by ARENA from time to time.  In the case of sales
outside the United States, the rate of exchange to be used in computing the
amount of currency equivalent in United States dollars due ARENA shall be the
rate of exchange used by MERCK in its worldwide accounting system and on the
periodic schedule used by Merck for its own financial reporting purposes at such
time.

 

5.8                               Income Tax Withholding.  If laws, rules or
regulations require withholding of income taxes or other taxes imposed upon
payments set forth in this Article V, MERCK shall make such withholding payments
as required and subtract such withholding payments from the payments set forth
in this Article V.  MERCK shall submit appropriate proof of payment of the
withholding taxes to ARENA within a reasonable period of time.

 

5.9                               Diagnostic or Pharmaco-Genomic Product
Compensation.  If MERCK, its Affiliates or sublicensees develop a diagnostic or
pharmaco-genomic product or service resulting from the use of Arena Know-How,
the Parties shall negotiate in good faith an appropriate royalty compensation
prior to commercialization of such diagnostic, pharmaco-genomic product or
service.

 

ARTICLE VI

REPRESENTATIONS AND WARRANTIES

 

6.1                               ARENA Representations and Warranties.  ARENA
represents and warrants to MERCK that as of the Effective Date:

 

(a)                                  to ARENA’s knowledge, the “Arena Core
Patents” and Arena Know-How exist and are not invalid or unenforceable, in whole
or in part.  For the purposes of this Section 6.1 the term “ARENA Core Patents”
means those Arena Patents that claim the Targets, the CART Technology in the
Field, sequences and/or method of making, or using the Targets or the CART
Technology.

 

(b)                                 it has the full corporate right, power and
authority to enter into this Agreement, to perform the Program and to grant the
licenses granted under Article III;

 

(c)                                  it has not previously assigned,
transferred, conveyed, or otherwise encumbered its right, title and interest in
Arena Core Patent Rights, or Arena Know-How in the Field; nor previously
disclosed any of the DNA sequences described in Exhibit 2.3, the connection of
such sequences to the Targets or any utility of such Targets to any third party,
except pursuant to the prosecution of Patents, or under written

 

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confidentiality agreements which prohibit such third parties from using or
disclosing such information after the Effective Date.

 

(d)                                 to  ARENA’s knowledge, it is the sole and
exclusive owner of the Arena Patent Rights and Arena Know-How, all of which are
free and clear of any liens, charges and encumbrances, and no other person,
corporate or other private entity, or governmental entity or subdivision
thereof, has or shall have any claim of ownership with respect to the Arena
Patent Rights and Arena Know-How;

 

(e)                                  to  ARENA’s knowledge, neither (1) the
exercise of the licenses granted to MERCK under the Arena Patents and Arena
Know-How, including the development, manufacture, use, sale and import of
Program Compounds and Products, nor (2) the participation in the Program of the
ARENA FTEs or the ARENA members of the JRC, interferes with or infringe on any
confidentiality rights or intellectual property rights owned or possessed by any
third party, and;

 

(f)                                    there are no claims, judgments or
settlements against or owed by ARENA or pending or threatened claims or
litigation relating to the ARENA Core Patents, and ARENA Know-How.

 

Except as set forth above in this Section 6.1, ARENA makes no representations or
warranties and ARENA specifically disclaims any and all implied warranties,
including the warranties of merchantability and of fitness for a particular
purpose.  Without limiting the foregoing, MERCK acknowledges and agrees that
ARENA has not made any representation that any of the receptors or other
technologies subject to this Agreement are patentable.

 

6.2                               MERCK Representations and Warranties.  MERCK
represents and warrants to ARENA that as of the Effective Date:

 

(a)                                  to MERCK’s knowledge, the MERCK Patents and
MERCK Know-How exist and are not invalid or unenforceable, in whole or in part;
and

 

(b)                                 it has the full corporate right, power and
authority to enter into this Agreement, to perform the Program and to grant the
licenses granted under Article III; and

 

(c)                                  to Merck’s knowledge, neither (1) the
exercise of the licenses granted to Arena under the Merck Patents and Merck
Know-How under section 3.1(b), nor (2) the participation in the Program of the
MERCK members of the JRC or MERCK’s obligations with respect to the development
and commercialization of Program Compounds and Products, infringe on any
confidentiality rights or intellectual property rights owned or possessed by any
third party.

 

ARTICLE VII

PATENT MATTERS

 

7.1                               Filing, Prosecution and Maintenance of
Patents. Each Party agrees at its expense and as it each determines appropriate
to file, prosecute and maintain in the Territory, upon

 

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appropriate consultation with the other Party, Patents relating to the Program
Information and Inventions owned in whole by such Party, and, with respect to
ARENA, the inventions in the Arena Patents and Arena Know-How licensed to MERCK
under this Agreement. With respect to Collaboration Patents, MERCK shall  file,
prosecute, and maintain patent applications for such Collaboration Patents and
ARENA shall cooperate fully and shall cause its employees to cooperate fully on
the filing and prosecution of such Patents.  MERCK shall be responsible for its
internal costs and expenses incurred in filing, prosecuting and maintaining
patent applications for Collaboration Information and Inventions.  MERCK, at its
option, may choose to have mutually acceptable outside counsel prepare, file, 
prosecute and maintain applications for Patents on Collaboration Inventions. 
Each Party shall share equally the external costs and expenses, including patent
office fees and fees of the private law firm or agents used to prepare, file,
prosecute and maintain Collaboration Patents; provided, Arena’s cost shall not
exceed ******************** dollars ($****************) in any given Calendar
Year; and, provided further, that ARENA has no obligation to continue to share
costs after the Program Term unless MERCK is actively developing a Program
Compound for which an IND has been filed.  With respect to each Patent filed in
accordance with this Section 7, the filing Party shall give the non-filing Party
an opportunity to review the text of the application before filing, shall
consult with the non-filing Party with respect thereto, and shall supply the
non-filing Party with a copy of the application as filed, together with notice
of its filing date and serial number.  Each Party shall keep the other advised
of the status of the actual and prospective Patent filings and upon the request
of the other Party, provide advance copies of any papers related to the filing,
prosecution and maintenance of such Patent filings.  Each Party shall cooperate
fully and shall cause its employees to cooperate fully, on the filing and
prosecution of such Patents.  Each Party shall promptly give notice to the other
of the grant, lapse, revocation, surrender, invalidation or abandonment of any
Patents for which the Party is responsible for the filing, prosecution and
maintenance.

 

7.2                               Option to Prosecute and Maintain Patents. Each
Party shall give timely notice to the other Party of any decision not to file
applications or to cease prosecution and/or maintenance of any Patents on a
country by country basis in the Territory and, in such case, shall permit the
other Party at its sole discretion and expense, to file or to continue
prosecution or maintenance.

 

7.2.1                     If MERCK elects to continue prosecution or
maintenance, or to file in any country in the Territory based on ARENA’s
election not to file pursuant to Section 7.1, ARENA shall execute such documents
and perform such acts at its expense as may be reasonably necessary to effect an
assignment of such Collaboration Patents or Arena Patents to MERCK in a timely
manner.  Any patents or patent applications so assigned shall not be considered
Arena Patents or Collaboration Patents, and the claims of such Patents shall not
be considered Valid Patent Claims for the purposes of Section 5.4.1(a).

 

7.2.2                     If ARENA elects to continue prosecution or
maintenance, or to file in any country in the Territory based on MERCK’s
election not to file pursuant to Section 7.1,

 

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MERCK shall execute such documents and perform such acts at its expense as may
be reasonably necessary to effect an assignment of such Collaboration Patents or
Merck Patents to ARENA in a timely manner.  Any patents or patent applications
so assigned shall not be considered Merck Patents or Collaboration Patents, and
the claims of such Patents shall not be subject to the license provisions of
Section 3.

 

7.3                               Interference, Opposition, Reexamination and
Reissue.

 

(a)                                  Each Party, within ten days of learning of
such event, shall inform the other Party of any request for, or filing or
declaration of, any interference, opposition, or reexamination relating to the
Arena Patents, Merck Patents or Collaboration Patents.  ARENA shall be the lead
Party on any ARENA Patents,  MERCK shall be the lead Party on Merck Patents and
Collaboration Patents. MERCK and ARENA thereafter shall consult and cooperate
fully to determine a course of action with respect to any such proceedings.  A
non-lead Party shall have the right to review and consult with the lead Party
regarding  any submission to be made in connection with such proceeding.

 

(b)                                 Neither Party shall initiate any opposition,
reexamination or reissue proceeding relating to the Arena Patents, Merck
Patents, Collaboration Patents without the prior written consent of the other
Party, which consent shall not be unreasonably withheld.

 

(c)                                  In connection with any interference,
opposition, reissue, or reexamination proceeding relating to the Arena Patents,
Merck Patents or Collaboration Patents, MERCK and ARENA will cooperate fully and
will provide each other with any information or assistance that either
reasonably requests.  Each Party shall keep the other Party informed of
developments in any such action or proceeding, including, to the extent
permissible by law, consultation and approval of any settlement.

 

(d)                                 Each Party shall bear its own expenses for
any interference, opposition, reexamination, or reissue proceeding relating to
any solely owned Patent.  For any interference, opposition, reexamination, or
reissue proceeding relating to any Collaboration Patent, expenses shall be
shared equally by the Parties.

 

7.4                               Enforcement and Defense.

 

(a)                                  If either Party learns of (x) any
infringement of Arena Patents, Merck Patents or Collaboration Patents, or (y)
any misappropriation or misuse of Arena Know-How or Merck Know-How, such Party
shall promptly notify the other Party of such infringement, misappropriation or
misuse.  MERCK and ARENA thereafter shall consult and cooperate fully to
determine a course of action including, without limitation, the commencement of
legal action by either or both of MERCK and ARENA, to terminate any infringement
of such Patent rights or any misappropriation or misuse of Arena Know-How or
Merck Know-How.

 

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However, ARENA, upon notice to MERCK, shall have the first right to initiate and
prosecute such legal action at its own expense and in the name of ARENA (and, if
appropriate, MERCK), or to control the defense of any declaratory judgment
action relating to Arena Patents or Arena Know-How. ARENA promptly shall inform
MERCK if it elects not to exercise such first right, and if such infringement or
misuse materially adversely affects MERCK’s efforts under this Agreement, MERCK
thereafter shall have the right either to initiate and prosecute such action or
to control the defense of such declaratory judgment action in the name of MERCK
and, if necessary, ARENA.  Each Party shall be entitled to be represented by
counsel of its own choice.  MERCK shall have the first right to initiate and
prosecute such legal actions for Merck Patents and Collaboration Patents at its
own expense.

 

(b)                                 If ARENA elects not to initiate and
prosecute an action as provided in Subsection 7.4(a), and MERCK elects to do so,
the cost of any agreed upon course of action to terminate infringement of
Patents or misappropriation or misuse of Know-How, including the costs of any
legal action commenced or the defense of any declaratory judgment, shall be
borne by MERCK and ARENA on a pro rata basis taking into consideration the
relative economic losses suffered by each Party. Such pro rata basis shall be
determined by the Parties through good faith negotiations at the initiation of
the action.

 

(c)                                  For any action to terminate any
infringement of Patents or any misappropriation or misuse of Arena Know-How, if
either Party is unable to initiate or prosecute such action solely in its own
name, the other Party will join such action voluntarily and will execute all
documents necessary to initiate litigation to prosecute and maintain such
action.  In connection with any such action, MERCK and ARENA will cooperate
fully and will provide each other with any information or assistance that either
reasonably requests.  Each Party shall keep the other informed of developments
in any such action or proceeding, including, to the extent permissible by law,
the consultation and approval of any offer related thereto.

 

(d)                                 Any recovery obtained by either or both
MERCK and ARENA in connection with or as a result of any action contemplated by
this Section, whether by settlement or otherwise, shall be shared in order as
follows:

 

(1)                                  the Party which initiated and prosecuted
the action shall recoup all of its costs and expenses incurred in connection
with the action;

(2)                                  the other Party shall then, to the extent
possible, recover its costs and expenses incurred in connection with the action;
and

(3)                                  the amount of any recovery remaining shall
then be allocated between the Parties on a pro rata basis taking into
consideration the relative economic losses suffered by each Party, and to the
extent a pro rate basis has been established under Section 7.4(b) the same rate
shall apply.

 

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(e)                                  Each Party shall inform the other Party of
any certification regarding any Arena Patents, Merck Patents, or Collaboration
Patents it has received pursuant to either 21 U.S.C. §§ 355(b)(2)(A)(iv) or (j)
(2) (A) (vii) (IV) or its successor provisions or any similar provisions in a
country in the Territory other than the United States. ARENA shall provide MERCK
with a copy of such certification within five days of receipt by ARENA.  ARENA’s
and MERCK’s rights with respect to the initiation and prosecution of any legal
action as a result of such certification or any recovery obtained as a result of
such legal action shall be as defined in Subsections 7.4(a) through (d),
provided, however, that ARENA shall determine whether to exercise its first
right to initiate and prosecute any action and shall inform MERCK of such
decision within ten days of ARENA’s receipt of the certification, after which
time MERCK shall have the right to initiate and prosecute such action.

 

(f)                                    For any action under Section 7.4(a)-(c)
for which the Parties are sharing expenses, the Party that is contributing the
greatest monetary amount shall control the action, but shall continue to consult
with the other Party on all major strategy decisions.  If the Parties are
contributing equally, MERCK shall control the action.

 

7.5                               Patent Term Restoration.  The Parties shall
cooperate in obtaining patent term restoration or supplemental protection
certificates or their equivalents in any country in the Territory where
applicable to Merck Patents, Arena Patents or Collaboration Patents.  If
elections with respect to obtaining such patent term restoration are to be made,
MERCK shall have the right to make the election to seek patent term restoration
or supplemental protection and ARENA shall abide by such election.

 

ARTICLE VIII

TERM AND TERMINATION

 

8.1                               Term and Expiration.  This Agreement shall be
effective as of the Effective Date and, unless terminated earlier under Sections
8.2 or 8.3, shall continue in effect until expiration of all royalty obligations
under this Agreement.  Upon expiration of this Agreement due to expiration of
all royalty obligations pursuant to Subsection 5.4.1, MERCK’s licenses pursuant
to Article III shall become fully paid-up, perpetual licenses.

 

8.2                               Termination by MERCK.  Notwithstanding
anything to the contrary in this Agreement, MERCK shall have the right to
terminate this Agreement:

 

(a)                                  at any time after the end of the Program
Term for any reason by giving ninety (90) days advance written notice to ARENA;
or

 

(b)                                 pursuant to Section 2.8(d).

 

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If MERCK terminates this Agreement under Section 8.2, the rights and obligations
of the Parties under the Program shall terminate, including any FTE payment
obligations under the Program not due and owing as of the termination date. 
Notwithstanding the foregoing, all Milestone and royalties are still payable as
provided for in the Agreement.  In addition, all licenses granted to MERCK under
this Agreement become non-exclusive and ARENA is released from its obligation of
exclusivity under Section 2.4, and MERCK is released from its obligations under
Sections 2.9.3 and 3.3, but not any of its obligations under Article V.

 

8.3                               Termination.

 

8.3.1                                 Termination for Cause.  This Agreement may
be terminated by notice at any time during the term of this Agreement:

 

(a)                                  By either Party, if the other Party is in
breach of its material obligations under this Agreement by causes and reasons
within its control and has not cured such breach within ninety (90) days after
receipt of a letter requesting such cure; provided, however, that in the event
of a good faith dispute with respect to the existence of a material breach, the
ninety (90) day cure period shall be extended until such time as the dispute is
resolved pursuant to Section 9.10.

 

(b)                                 Notwithstanding Subsection 8.3.1(a), if
ARENA materially breaches its obligations during the Program Term, and fails to
cure such breach within ninety (90) days after notice of such breach or if such
default can be cured but cannot be cured within such ninety (90) day period, if
ARENA does not commence and diligently continue good faith efforts to cure such
default during such ninety (90) day period and thereafter, then MERCK may, in
lieu of termination under Subsection 8.3.1(a), terminate the Program, the
Program license granted to ARENA under Subsection 3.1(b) and all of MERCK’s
obligations to fund any further research hereunder, provided, however, that all
other rights and obligations of MERCK and ARENA under this Agreement shall be
preserved, including without limitation, the licenses retained by MERCK under
Subsection 3.1(a) and Section 3.2 of this Agreement.

 

(c)                                  If ARENA materially breaches its
obligations at any time during the term of this Agreement and MERCK either
notifies ARENA of the termination of this Agreement under Section 8.3.1(a) or
initiates arbitration against ARENA for breach of this Agreement, or both, any
milestone payments that MERCK may be required to pay to ARENA pursuant to
Section 5.3 of this Agreement shall be paid by MERCK instead into an escrow
account pending the resolution of the arbitration or other agreement of the
Parties.

 

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8.3.2                                 Effect of Termination for Cause on
Licenses.  If ARENA terminates this Agreement under Subsection 8.3.1(a), MERCK’s
licenses pursuant to Sections 3.1 and 3.2 shall terminate as of such termination
date.  If MERCK terminates this Agreement under Subsection 8.3.1(a), MERCK’s
licenses pursuant to Sections 3.1 and 3.2 shall become fully paid-up perpetual
licenses. Notwithstanding the foregoing, in the event of a good faith dispute
with respect to the existence of a material breach, no termination of this
Agreement shall occur until the arbitrator has issued a final and binding
decision that the breach was material and that the Party giving notice of
termination had the right to do so.

 

8.3.3                                 Effect of Termination for Bankruptcy.  If
this Agreement is terminated by or behalf of ARENA due to the rejection of this
Agreement  under Section 365(n) of the Bankruptcy Code, all licenses and rights
to licenses granted under or pursuant to this Agreement by ARENA to MERCK are,
and shall otherwise be deemed to be, for purposes of Section 365(n) of the
Bankruptcy Code, licenses of rights to “intellectual property” as defined under
Section 101(35A) of the Bankruptcy Code.  The Parties agree that MERCK, as a
licensee of such rights under this Agreement, shall retain and may fully
exercise all of its rights and elections under the Bankruptcy Code.  The Parties
further agree that, in the event of the commencement of a bankruptcy proceeding
by or against ARENA under the Bankruptcy Code, MERCK shall be entitled to a
complete duplicate of (or complete access to, as appropriate) any such
intellectual property and all embodiments of such intellectual property upon
written request therefore by MERCK.  Such intellectual property and all
embodiments thereof promptly shall be delivered to MERCK (i) upon any such
commencement of a bankruptcy proceeding upon written request therefore by MERCK,
unless ARENA elects to continue to perform all of its obligations under this
Agreement or (ii) if not delivered under (i) above, upon the rejection of this
Agreement by or on behalf of ARENA upon written request therefore by MERCK.

 

8.4                               Effect of Expiration or Termination. 
Expiration or termination of this Agreement shall not relieve the Parties of any
obligation accruing prior to such expiration or termination, including the
obligation to pay applicable FTE payments for Program activities that have taken
place before the termination date, Milestones or royalties for Product(s) sold
prior to such termination or that are due under this Agreement after such
termination.  Except as otherwise specifically provided above, all of the
Parties’ rights and obligations under the provisions of Sections 2.5 (ARENA Cart
Technology), 2.9 (Records and Reports), 2.10 (Program Information and
Inventions), 2.11 (Rights to Compounds), and Articles I,  IV, V (Milestones and
Royalties), VII (solely with respect to actions commenced before the effective
date of the termination of this Agreement), VIII and IX shall survive the
termination or expiration of the Agreement, with Article IV continuing in effect
for ten years thereafter.  Any expiration or early termination of this Agreement
shall be without prejudice to the rights of either Party against the other (i)
accrued or accruing under this Agreement prior to termination, including,
without limitation, the obligation to pay royalties for Products sold prior to
such termination or (ii) which survive termination.

 

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ARTICLE IX

MISCELLANEOUS

 

9.1                               Force Majeure.  Neither Party shall be held
liable or responsible to the other Party nor be deemed to have defaulted under
or breached this Agreement for failure or delay in fulfilling or performing any
term of this Agreement when such failure or delay is caused by or results from
causes beyond the reasonable control of the affected Party including, but not
limited to, fire, floods, mudslides, earthquakes, embargoes, war, acts of war
(whether war be declared or not), insurrections, riots, civil commotions,
strikes, lockouts or other labor disturbances, acts of God or acts, omissions or
delays in acting by any governmental authority or the other Party.  The affected
Party shall notify the other Party of such force majeure circumstances as soon
as reasonably practical.

 

9.2                               Excused Performance.  The obligation of MERCK
with respect to any Product under Section 3.3 is expressly conditioned upon the
continuing absence of any adverse condition or event relating to the safety or
efficacy of the Product.  The obligation of MERCK to develop or market any such
Product shall be delayed or suspended so long as in MERCK’s opinion any such
condition or event exists.  All judgments as to safety and efficacy shall be
made by MERCK in its sole discretion.  Notwithstanding the foregoing, MERCK
will  use reasonable commercial and scientific efforts, consistent with the
efforts MERCK uses in pursuing development of other products representing a
similar marketing opportunity, to resolve any adverse condition or event
relating to safety or efficacy of the Product .

 

9.3                               Binding Effect; Assignment.  This Agreement
shall inure to the benefit of and be binding upon each Party and its successors
and permitted assigns.  Except as otherwise provided in Subsections 9.3(a) and
(b), neither Party shall, directly or indirectly, assign this Agreement or any
of its rights or obligations under this Agreement without the prior written
consent of the other Party.  Any attempted or purported assignment in violation
of this Section 9.3 shall be void.

 

As used in Sections 2.8 and 9.3, “Change of Control” of a Party shall be deemed
to occur:

 

(1)           Upon the acquisition of any voting securities of the Party by a
“Person” (as the term “person” is used for purposes of section 13(d) or 14(d) of
the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
immediately after which such Person has “Beneficial Ownership” (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of more than fifty
percent (50%) of the then-outstanding shares of common stock of the Party, or
the combined voting power of the Party’s then-outstanding voting securities; or

 

(2)           The individuals who, immediately following the Effective Date, are
members of the Board of Directors of the Party (the “Incumbent Board”) cease for
any reason to constitute at least a majority of the members of the Party’s Board
of Directors, provided, however, that, any individual becoming a director
subsequent to the Effective Date whose election, or nomination for election by

 

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such company’s shareholders, was approved by a vote of at least a majority of
the directors then comprising the Incumbent Board shall be considered as though
such individual were a member of the Incumbent Board ; or

 

(3)           Upon the consummation of a merger, consolidation,  reorganization,
or sale of all or substantially all of the assets of the Party (a “Business
Combination”): (a) with or into the Party or a direct or indirect subsidiary of
the Party or (b) in which securities of the Party are issued, unless such merger
is a “Non-Control Transaction”.  A “Non-Control Transaction” shall mean a merger
in which: (A) the stockholders of the Party immediately before such merger own
directly or indirectly immediately following such merger at least fifty percent
(50%) of the combined voting power or the outstanding voting securities of the
surviving corporation; and (B) the individuals who were members of the Incumbent
Board immediately prior to the execution of the agreement providing for such
merger constitute at least a majority of the members of the board of directors
of the surviving corporation;

 

(4)           A complete liquidation or dissolution of the Party; or

 

(5)           The sale or other disposition of all or substantially all of the
assets of the Party to any Person (other than an Affiliate).

 

(a)                                  Notwithstanding the foregoing, MERCK may,
without ARENA’s consent, assign this Agreement and its rights and obligations
hereunder to an Affiliate or in connection with a Change of Control of MERCK. 
Any such assignee shall assume all obligations of its assignor under the
Agreement.

 

(b)                                 Notwithstanding the foregoing, a Change of
Control of ARENA shall not be deemed a termination event under Section 2.8(e),
provided, (i) that such Change of Control event is a Business Combination with a
company that agrees to assume  in a writing reasonably satisfactory to MERCK, of
all of the obligations of ARENA under this Agreement, and (ii) such Change of
Control event is not a Business Combination with a “***** Health Company
Acquirer”.  A “***** Health Company Acquirer” is a pharmaceutical company or
other health care company, or group of health care companies acting in concert,
with total annual sales of ethical pharmaceutical products (including sales by
all affiliates of such company or companies) prior to such acquisition in excess
of ********** dollars ($****************).  If a Change of Control takes the
form of a Business Combination of ARENA with a ***** Health Company Acquirer,
occurring for a period of up to ***** years beyond the Program Term then such
Change of Control shall be subject to Section 9.4.

 

In addition, if ARENA:

 

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(a)                                  decides to sell, offer to sell all or
substantially all its assets, or solicit offers from third parties for the
acquisition of all or substantially all of its assets related to this Agreement,
or

 

(b)                                 receives an offer from a third party seeking
to purchase all or substantially all of ARENA’s assets related to this
Agreement, or merge or consolidate with or into ARENA that the Board of
Directors of ARENA deems attractive, then

 

to the extent consistent with applicable law and the fiduciary duties of the
Board of Directors of ARENA, as reasonably determined by the Board of Directors
of ARENA, ARENA shall promptly notify MERCK of any such decision or receipt of
such offer, and will provide MERCK with sufficient details of any such proposed
transaction to enable MERCK to prepare a competitive offer to the extent ARENA
is legally able to do so.   To the extent consistent with applicable law and the
fiduciary duties of the Board of Directors if ARENA, as reasonably determined by
the Board of Directors of ARENA, ARENA will give MERCK a reasonable opportunity
to participate in a similar transaction, and allow MERCK to make an offer in
connection with such acquisition, merger or sale or assets.

 

9.4                               Consequences of Certain Change of Control  by
ARENA.  In the event of a Change of Control event with a ***** Health Company
Acquirer as described in Section 9.3(b), ARENA, promptly (meaning, within two
business days or less) upon its ability legally to disclose information
concerning such Change of Control, shall notify MERCK in writing (sent by
telecopier or overnight courier) of such Change of Control, and MERCK may, at
its choice, on written notice to such assignee given at any time within sixty
(60) days of such assignment, effect any or all of the following changes to the
terms of this Agreement, which changes shall be effective retroactive to and
immediately upon the assignment of this Agreement:

 

(a)                                  termination of the Program and any further
obligation to pay for ARENA’s research efforts under the Program.  After such
termination, MERCK’s obligation to pay milestone payments as they may become
owing continues, provided however, that the amount of the milestone payment as
specified under Section 5.3 shall be multiplied by a fraction, the numerator of
which shall be equal to the number of days in the Program Term from the
Effective Date to the date of the assignment of this Agreement, and the
denominator of which shall be ****;

 

(b)                                 termination of the license under Subsection
3.1(b), and immediately thereafter such assignee shall return to MERCK or
destroy all copies of Information disclosed by MERCK to ARENA.  For clarity,
ARENA is not entitled to disclose any MERCK Information to a ***** Health
Company Acquirer;

 

(c)                                  possession, during the Program Term, of the
exclusive license under the ARENA Know-How, the ARENA Patents and under ARENA’s
interest in the Collaboration Information and Inventions and the Collaboration
Patents, to conduct the discovery, research and development of Active Compounds,
Program

 

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Compounds and Products under this Agreement.  The foregoing license may be
sublicensed during the Program Term to MERCK Affiliates and to third party
sublicensees.

 

For purposes of Subsections 9.4 (a) and (c) and Article I, the “Program Term”
shall have the period of time such term had under the provisions of Section 2.8
just prior to the assignment of the Agreement by ARENA.

 

Upon any such assignment, and whether or not MERCK elects to effect any or all
of the changes to this Agreement set out in Subsections 9.4(a) through (c),
MERCK shall retain all of its rights under this Agreement, including but not
limited to, the licenses granted to MERCK in Sections 3.1 (a) and 3.2 of this
Agreement and ARENA shall retain all of its rights (other than with respect to
participation in Program activities) under this Agreement, including but not
limited to milestone and royalty payments accruing under this Agreement.

 

In the event of a Change of Control, ARENA shall adopt procedures to be agreed
upon in writing by MERCK to prevent the disclosure of MERCK Information, Merck
Know-How, and Collaboration Information and Inventions (collectively “Sensitive
Information”) beyond the ARENA personnel having access to and knowledge of
Sensitive Information prior to the Change of Control and ARENA shall adopt
procedures approved in writing by MERCK to control the dissemination of
Sensitive Information disclosed after the Change of Control.  The purposes of
all such procedures shall be to strictly limit such disclosures to only those
personnel having a need to know Sensitive Information in order for ARENA to
perform its obligations.

 

9.5                               Standstill.   MERCK agrees that for a period
of ***** years after  the Effective Date, MERCK nor any of its Affiliates will,
without the prior written consent of ARENA:  (i) acquire securities representing
more than *% of the voting power of the outstanding voting securities of ARENA,
or (ii) make, or in any way participate in, directly or indirectly, any
“solicitation” of “proxies” (as such terms are used in the rules of the
Securities and Exchange Commission).  The foregoing provisions shall no longer
apply to MERCK (i) in the event that ARENA announces publicly that it is
seeking, or considering seeking, purchasers for its business or is otherwise
exploring, or considering exploring, strategic options regarding the sale of its
business, (ii) upon the commencement by a third party of a tender or exchange
offer for more than 50% of the voting power of the outstanding voting securities
of ARENA, (iii) if a third party acquires beneficial ownership of more than **%
of the outstanding common stock of ARENA, (iv) if ARENA publicly announces a
transaction, or an intention to effect any transaction, which would result in
(A) the sale by ARENA or one or more of its subsidiaries of assets representing
more than fifty percent (50%) of the consolidated earning power or assets of
ARENA and its subsidiaries, or (B)  the common shareholder of ARENA immediately
prior to such transaction owning less than 50% of the outstanding common stock
of the acquiring entity or, in the case of a merger transaction, the surviving
corporation (or, if the surviving corporation is a subsidiary of a parent
company, the parent company) or (C)

 

35

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a third party acquiring beneficial ownership of more than **% of the outstanding
common stock of ARENA.

 

9.6                               Severability.  If one or more of the
provisions contained in this Agreement are held invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions shall not be affected or impaired, unless the absence of
the invalidated provision(s) adversely affects the substantive rights of the
Parties.  The Parties shall in such case use their best efforts to replace the
invalid, illegal or unenforceable provision(s) with valid, legal and enforceable
provision(s) which, insofar as practical, implement the purposes of this
Agreement.

 

9.7                               Use of Names.  Neither Party may use the names
of the other Party or those of its Affiliates, sublicensees, employees, agents
or consultants or any of their trademarks, names, or symbols without the prior
written consent of the other Party.

 

9.8                               Notices.  All notices or other communications
which are required or permitted hereunder shall be in writing and sufficient if
delivered personally, sent by telecopier (and promptly confirmed by personal
delivery, registered or certified mail or overnight courier), sent by nationally
recognized overnight courier or sent by registered or certified mail, postage
prepaid, return receipt requested, addressed as follows:

 

if to ARENA:

 

 

 

 

at the address set out for ARENA on page 1, Attn:

 

 

President, Chief Executive Officer

 

 

Facsimile No.:  (858) 453-7210

with copy to:

 

Office of General Counsel

 

 

Facsimile No:  (858) 677-0065

 

 

 

if to MERCK:

 

Merck & Co., Inc.

 

 

One Merck Drive

 

 

P.O. Box 100

 

 

Whitehouse Station, NJ  08889-0100

 

 

Attn:  Office of Secretary

 

 

Facsimile No:  (908) 735-1246

 

 

 

with copy to:

 

Office of Assistant General Counsel

 

 

Facsimile No:  (908) 735-1226

 

or to such other address as the Party to whom notice is to be given may have
furnished to the other Party in writing in accordance herewith.  Any such
communication shall be deemed to have been given when delivered if personally
delivered or sent by telecopier on a business day, on the business day after
dispatch if sent by nationally recognized overnight courier and on the third
business day following the date of mailing if sent by mail.

 

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9.9                               Applicable Law.  This Agreement shall be
governed by and construed in accordance with the laws of the state of New Jersey
and patent laws of the United States without reference to any rules of conflict
of laws or renvoi that would require the application of the laws of a different
jurisdiction.

 

9.10                        Dispute Resolution & Arbitration.  The Parties shall
negotiate in good faith and use reasonable efforts to settle any dispute,
controversy or claim arising from or related to this Agreement.  If the Parties
do not fully settle, and a Party wishes to pursue the matter, each such dispute
shall be finally resolved by arbitration before a single arbitrator in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association (“AAA”) then pertaining, except where those rules conflict with this
provision, in which case this provision controls.  The Parties hereby consent to
the jurisdiction of the Federal District Court for the Southern District of New
York for the enforcement of these provisions and the entry of judgment on any
award rendered under this Section 9.10.  Should such court for any reason lack
jurisdiction, any court with jurisdiction shall enforce this clause and enter
judgment on any award.  The arbitrator shall be an attorney specializing in
business litigation who has at least 15 years of experience with a law firm or
corporation of over 25 lawyers or was a judge of a court of general
jurisdiction.  The arbitration shall be held in New York City and the arbitrator
shall apply the substantive law of New York, except that the interpretation and
enforcement of this arbitration provision shall be governed by the Federal
Arbitration Act.  Within 30 days of initiation of arbitration, the parties shall
reach agreement upon and thereafter follow procedures assuring that the
arbitration will be concluded and the award rendered within no more than six
months from selection of the arbitrator.  Failing such agreement, the AAA will
design and the parties will follow such procedures.  Each Party has the right
before or during the arbitration to seek and obtain from the appropriate court
provisional remedies such as attachment, preliminary injunction, replevin, etc.,
to avoid irreparable harm, maintain the status quo or preserve the subject
matter of the arbitration.  THE ARBITRATOR SHALL NOT AWARD ANY PARTY PUNITIVE,
EXEMPLARY OR CONSEQUENTIAL DAMAGES, AND EACH PARTY IRREVOCABLY WAIVES ANY RIGHT
TO SEEK SUCH DAMAGES.

 

9.11                        Entire Agreement.  This Agreement, together with the
confidentiality agreements dated March 21, 2002, July 26, 2002, September 17,
2002, and October 2, 2002, contains the entire understanding of the Parties with
respect to the subject matter hereof.  All express or implied agreements and
understandings, either oral or written, heretofore made relating to the subject
matter hereof are expressly superceded, except the confidentiality agreements
continue in full force and effect.  This Agreement may be amended, or any term
hereof modified, only by a written instrument duly executed by both Parties.

 

9.12                        Headings.  The captions to the Articles, Sections
and Subsections of this Agreement are not a part of the Agreement, but are
merely guides or labels to assist in locating and reading the Articles, Sections
and Subsections.

 

9.13                        Independent Contractors.  ARENA and MERCK shall be
independent contractors and the relationship between them shall not constitute a
partnership, joint venture or agency.

 

37

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Neither Party shall have the authority to make any statements, representations
or commitments of any kind, or to take any action, which shall be binding on the
other, without the prior written consent of the other Party.

 

9.14                       Waiver.  The waiver by a Party of any right under
this Agreement or of the other Party’s failure to perform or breach shall not be
a waiver of any other right, failure or breach whether of a similar nature or
otherwise.

 

9.15                       Counterparts.  This Agreement may be executed in two
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument

 

IN WITNESS WHEREOF, the parties have executed this Agreement as of its Effective
Date.

 

 

 

 

 

 

 

MERCK & CO., INC.

ARENA PHARMACEUTICALS, INC.

 

 

 

 

By:

/s/  Raymond V. Gilmartin

 

By:

/s/  Jack Lief

 

 

Name: Raymond V. Gilmartin

 

 

Name: Jack Lief

 

 

Title: Chairman, President and CEO

 

 

Title: President and CEO

 

 

 

 

 

 

 

 

October 16, 2002

 

 

October 14, 2002

 

 

Date

 

 

Date

 

 

38

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Execution Version

 

ATTACHMENT A

 

Active Compound Criteria

 

 

Potency: **********************************************************************
***************************************************

 

Selectivity: *************************************************************

 

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Execution Version

 

ATTACHMENT B

 

Research Plan

 

 

<< to be jointly prepared  and added>>

 

***A RESEARCH PLAN AND CHART, CONSISTING OF FOUR PAGES, HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE
24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.***

 

ii

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Execution Version

 

Exhibit 2.2(b)

 

 

FTE Funding for first year of Program Term (assuming an Effective Date of
10/21/02)

 

Payment 1 = $ ********** due within 30 days of the Effective Date ($*********
prorated from 10/21/02 – 12/31/02) [72/92 days]

Payment 2 = $ ************ due 1/2/03

Payment 3 = $ ************ due 4/1/03

Payment 4 = $ ************ due 7/1/03

Payment 5 = $   *********** due 10/1/03 for prorated amount from 10/1/03 –
10/21/03

 

Total =          $************

 

 

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Exhibit 2.3

 

1. ALL DNA sequences related to the Program.  That is, ***** and *****, and any
other ******* (as applicable) sequences for ***************.

2. Structures and synthetic routes for Arena active compounds.

3. Information to set-up the ********** at ***.

4. Full information about any and all experiments covered by Program.  For
example, details regarding all assays (**************************), ongoing
development of ***********, planned development of *** and ********, and
expression profiling results.

 

Points 1 and 2 should be addressed in written form by Arena.  Points 3 and 4
could be handled in a less formal way by the JRC.

 

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