Document:

Exhibit
10.6

 

2003

AMPHENOL MANAGEMENT INCENTIVE PLAN

 

I.       Purpose

The purpose of the Plan is to reward eligible key
employees of Amphenol Corporation and affiliated operations with cash bonus
payments based on contributions to overall results and specific accomplishments.

 

II.      Eligibility

Select management personnel, as designated by the
Chairman, President and CEO.  Generally,
participation includes senior management positions, corporate staff managers,
general managers and their designated direct reports.

 

III.     Plan Components

There are several key performance factors that are
considered by executive management and the Compensation Committee.  These include, but are not limited to, the
following:

 

•        Year-over-year improvement

•        Accomplishments against budget

•        Customer satisfaction

•        Quality management

•        New market/new product positioning

•        Cost reductions/productivity
improvements

•        Balance sheet management

•        Unit contribution to total Amphenol
performance

•        Overall Amphenol performance

 

Financial performance for each unit is measured by
revenues, operating income, cash flow and ROI. 
Financial performance for total Amphenol includes these same factors and
EPS growth.

 

IV.    Administration

•        Generally,
payments are made during the first calendar quarter following the plan year.
All payments are subject to the recommendation of the Chairman, President and
CEO and to the approval of the Compensation Committee.

 

•        Payments
are based upon average base salary during the plan year (new hires will be
prorated accordingly if hired after February 1st of plan year).

 

•        The maximum allowable payout under the
plan is 2x the target bonus as applied to average base salary.

 

•        To be
eligible for the bonus payment, a participant must be an active employee on the
payroll at the time when the bonus payment is issued.  Exceptions must be recommended by the Chairman, President and the
CEO and be approved by the Compensation Committee.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

 

1

 

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,

 

2

 

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).

 

3

 

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.

 

4

 

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

 

5

 

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.

 

6

 

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.

 

7

 

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

 

8

 

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

 

9

 

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.

 

10

 

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;

 

11

 

 

(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

 

12

 

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).

 

13

 

(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.

 

14

 

(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,

 

15

 

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

 

16

 

(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.

 

17

 

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).

 

18

 

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 

 

19

 

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 

 

20

 

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 $**************

 

21

 

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.

 

22

 

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 

 

23

 

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

 

24

 

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

 

25

 

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,

 

26

 

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.

 

27

 

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.

 

28

 

(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).

 

29

 

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.

 

30

 

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.

 

31

 

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

 

32

 

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:

 

33

 

(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

 

34

 

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

 

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.

 

36

 

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

 

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

 

Execution Version

 

ATTACHMENT A

 

Active
Compound Criteria

 

 

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

***************************************************

 

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

 

i

 

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

 

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 =          $************

 

 

iii

 

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.

 

iv

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