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Spencer Osborne is founder of Satellite Standard Group [SSG], and a partner of Sirius Buzz (http://siriusbuzz.com/). Sirius Buzz covers the satellite radio industry as well as companies that do business in this sector. Sirius Buzz provides information and opinion to readers with an interest in... More
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  • How And When Arena Gets Paid 8 comments
    Jun 27, 2014 9:23 AM | about stocks: ARNA

    After a recent article of mine a reader had some very good questions about exactly how and when Arena gets paid. The discussion was centered on milestone payments and purchase price adjustments. This goes to the very core of investing in Arena stock and deals with expectations. It is my opinion that none of these milestones related to U.S sales will come into play in 2014 or 2015, but instead are likely 2016 events.

    Before moving into the meat and potatoes, we should establish a few things:

    1. Calendar Year - The period from January 1st through December 31st. In the case of Arena, the claendar year aligns with the fiscal year. In the case of Eisai, the calendar year does not align with the fiscal year.
    2. Fiscal Year - A period of one year that can start on any given date and run for 365 days. The Eisai fiscal year runs from April 1st through March 31st.
    3. Commercial Year - In simple terms, this was established by the launch of Belviq. Though Belviq launched on June 7th, 2013, the commercial year is July 1st through June 30th.
    4. The contract information provided in this article is from the original deal that involved the Americas. The rest of the world deal was reached last Fall, and we do not have all of the details of it, but we do know that some minor changes were made.

    At the end of this article I provide the payment section of the contract in its entirety.

    There are complexities to the deal that many investors may not be aware of. In general terms, Eisai pays Arena based upon estimates of what will be sold. Eisai gives Arena a rolling projection each month that encapsulates product estimates (how many bottles will be needed) for the next 18 months. Today, Arena should have in its hands, a document, that estimates product orders through December 31st of 2015.

    Eisai pays Arena based on an estimate and the companies "true up" what has been paid vs. actuals each month. At the end of Eisai's fiscal year (March 31st) a check is cut by Eisai to Arena, or Arena to Eisai for the delta between estimated net sales and actual net sales.

    The percentage of net sales that Arena receives is currently 31.5%. That number can grow as high as 36.5% as time passes and if net sales get to certain levels. Adjustments to the percentage happen in Eisai fiscal years (April 1st through March 31st).

    In simple terms, the percentage of "royalty" is based on fiscal year, purchase price adjustments are based on commercial year, milestones are based on event, and we look at Arena performance based on calendar year.

    (click to enlarge)

    There are several caveats to all of this. The contract information is below:

    PAYMENTS

    7.1. Initial Payment. In partial consideration for entering into this Agreement, Eisai shall pay to Arena a payment in the amount of US$50,000,000 within five days after the Effective Date. Such payment is not refundable or creditable against any other payments owed or payable by Eisai to Arena under this Agreement.

    7.2. Milestone Payments. In further consideration for entering into this Agreement, Eisai shall pay to Arena each milestone payment set out below within 30 days following the first achievement of the corresponding milestone event. The payments set forth in this Section 7.2 shall not be refundable or creditable against any other payments owed or payable by Eisai to Arena under this Agreement.

    Milestone Event

    Milestone Payment

    (a) Upon Commercial Approval of the Initial Product US$[…***…] (provided that such payment shall be US$[…***…] if there is a Black Box Warning in the initial U.S. Package Insert for the Initial Product)

    (b) If Commercial Approval of the Initial Product is achieved (i) on or prior to […***…], upon Commercial Approval of the Initial Product or (ii) after […***…], upon the occurrence of the date that is 15 days after the end of the month in which Net Sales for a Commercial Year first exceed US$[…***…] US$ […***…]

    (c) Upon Regulatory Approval in the Territory of a […***…] US$ […***…]

    (d) Upon approval by the FDA of prescribing information for the Initial Product in the Territory that (i) […***…] and […***…] (or […***…] of […***…] and […***…]) from the […***…], (ii) […***…] or […***…] of the […***…], or […***…] with respect to the […***…] of the […***…], and (iii) […***…] to […***…] such […***…] and […***…] from the […***…] to […***…] in the […***…] US$ […***…]

    (e) Upon receipt of determination by FDA of exclusivity for the Initial Product under FFDCA Section 505A(b) or (c) US$ […***…]

    ***Confidential Treatment Requested

    (f) Upon Regulatory Approval in the Territory of the […***…] for […***…] that is […***…] US$ […***…]

    As used herein, "Commercial Approval" means the date, after the earlier of (NYSE:A) Regulatory Approval for the Initial Product has been obtained and (NYSE:B) the First Commercial Sale of the Initial Product by Eisai or any of its Affiliates to a Third Party in the Territory, that Arena has delivered to Eisai the Launch Quantity of the Initial Product. "Launch Quantity" means the amount of the Initial Product ordered by Eisai under all Purchase Orders submitted no later than five days after such Regulatory Approval of the Initial Product is obtained, which Purchase Orders shall be submitted in accordance with the agreed Launch Forecast under Section 6.2 and shall not exceed the quantity of the Initial Product specified in the Launch Forecast.

    No payment under Section 7.2 will be made more than once.

    For the avoidance of doubt, in no event shall Eisai pay more than US$160,000,000 under this Section 7.2 (or US$140,000,000 in accordance with Section 7.2(a) above).

    7.3. Product Purchase Price Payments for Commercial Supply of Product.

    (a) Product Purchase Price Calculation. In consideration of the commercial supply of each Product under this Agreement to Eisai by Arena, subject to Sections 7.3(d) and 7.5, Eisai shall pay to Arena a purchase price for Eisai's purchase of each unit of Finished Product equal to the greater of (i) the minimum price set forth in Section 7.3(e) below, and (ii) a percentage of the Net Sales of such Product (the "Product Purchase Price" for such Product), where such percentage is determined as set forth in the following schedule based on the aggregate annual (Fiscal Year) Net Sales of all Products (as such percentage rate is subject to adjustment under subclause (b) below):

    Aggregate Annual Fiscal Year Net Sales of ProductsPercentage Rate

    For the portion of aggregate annual Fiscal Year Net Sales of Products that are less than or equal to US$[…***…]

    31.5%

    For the portion of aggregate annual Fiscal Year Net Sales of Products that are greater than US$[…***…] but less than or equal to US$750,000,000

    […***…]%

    For the portion of aggregate annual Fiscal Year Net Sales of Products that are greater than US$750,000,000

    36.5%

    The Product Purchase Price for a particular Finished Product purchased by Eisai hereunder shall be paid as provided in subclause (c) below. In addition, the Product Purchase Prices paid by Eisai are subject to adjustment by the payment of the Product Purchase Price Adjustment Payments provided in Section 7.4.

    ***Confidential Treatment Requested

    (b) Percentage Rate Adjustment for Generic Sales. If, during any Calendar Quarter there have been sales of a Generic Version of a Product in the Territory, the percentage rate under Section 7.3(a) used to determine the Product Purchase Price for Eisai's purchase of such Product shall be adjusted downward as of either (i) with respect to the first Calendar Quarter in which the aggregate units of all Generic Versions of such Product sold in the Territory in such Calendar Quarter exceed […***…]% of the aggregate units of such Product and all Generic Versions of such Product sold in the Territory in such Calendar Quarter, if Eisai notifies Arena thereof no later than 15 days after the end of such Calendar Quarter, the later of the first day of such Calendar Quarter or the first day of the month in which a Third Party first sells a Generic Version of such Product in the Territory or (ii) the first day of the Calendar Quarter immediately following the Calendar Quarter in which the aggregate units of all Generic Versions of a Product sold in the Territory in such first Calendar Quarter exceed […***…]% of the aggregate units of such Product and all Generic Versions of such Product sold in the Territory in such first Calendar Quarter if Eisai notifies Arena thereof more than 15 days after the end of such first Calendar Quarter, as follow: (A) to […***…]% of the percentage rate otherwise applicable under the schedule in Section 7.3(a) (i.e., from 31.5%, […***…]% and 36.5% to […***…]%,[…***…]%, and […***…]%, respectively) in the event that aggregate units of all Generic Versions of such Product sold in the Territory in the applicable Calendar Quarter exceed […***…]% of the aggregate units of such Product and all Generic Versions of such Product sold in the Territory in the applicable Calendar Quarter; or (B) to […***…]% of the percentage rate otherwise applicable under the schedule in Section 7.3(a) (i.e., from 31.5%, […***…]% and 36.5% to […***…]%,[…***…]%, and […***…]%, respectively) in the event that the aggregate units of all Generic Versions of such Product sold in the Territory in the applicable Calendar Quarter exceed […***…]% of the aggregate units of such Product and all Generic Versions of such Product sold in the Territory in the applicable Calendar Quarter; provided, that the percentage rates under the schedule in Section 7.3(a) shall not be adjusted as provided above unless and until the aggregate units of all Generic Versions of such Product in the Territory in a Calendar Quarter exceed […***…]% of the aggregate units of such Product and all Generic Versions of such Product sold in the Territory in such Calendar Quarter; and further provided if after launch of a Generic Version of the applicable Product that results in a reduction of the percentage rates under the schedule in Section 7.3(a), a Resumption Date (as defined below) occurs, the above reduction in the percentage rate shall thereafter no longer apply unless and until the aggregate units of all Generic Versions of such Product sold in the Territory in a Calendar Quarter again exceed […***…]% of the aggregate units of such Product and the Generic Versions of such Product sold in the Territory in the applicable Calendar Quarter, in which case the above provisions again apply. As used herein, a "unit" of a product means the equivalent of a prescription for 30 day supply of such product, and units of generic sales shall be determined by IMS data (or an equivalent, reliable source of prescribing information as agreed by the Parties in writing). As used herein, "Resumption Date" with respect to a Product means the date (if any) after launch of a Generic Version of such Product that results in a reduction of the percentage rates under the schedule in Section 7.3(a) that is the earlier of (x) if a court or courts of competent jurisdiction issues one or more preliminary or permanent injunction(s) enjoining the sale of all Generic Versions of such Product, or if all Generic Versions of such Product are withdrawn pursuant to settlement agreement(s) or for another reason, the date that is

    ***Confidential Treatment Requested

    the earlier of (i) the end of the last month of the first period of three consecutive months after issuance of such injunction(s) or effectiveness of such settlement agreement(s) or other withdrawal during which the monthly average Net Sales of such Product exceed […***…]% of the monthly average of Net Sales of such Product over the […***…] months prior to the commercial launch of the first Generic Version of such Product in the Territory and (ii) […***…] months after issuance of such injunction(s) or effectiveness of such settlement agreement(s) or other withdrawal with respect to all Generic Versions of such Product, or (y) if all Generic Versions of such Product sold in the Territory in a subsequent Calendar Quarter are less than […***…]% of the aggregate units of such Product and the Generic Versions of such Product sold in the Territory in such subsequent Calendar Quarter, the end of the last month of the first period of three consecutive months after such subsequent Calendar Quarter during which the monthly average Net Sales of such Product exceed […***…]% of the monthly average of Net Sales of such Product over the […***…] months prior to the commercial launch of the Generic Version of such Product that resulted in the reduction of the percentage rates under the schedule in Section 7.3(a).

    (c) Payment of Product Purchase Prices; Reports. At a reasonable time prior to the initial Eisai purchase of a particular Product, but in no event later than 30 days before the anticipated First Commercial Sale of such Product, and at the beginning of each Fiscal Semester thereafter, the Parties shall discuss in good faith and agree on a reasonable estimate of the actual Product Purchase Price for such Product purchase (based on the Product Purchase Price calculation under subsection (a) above), which estimate shall be based on a reasonable approximation of the aggregate Net Sales of such Product to be recognized by Eisai and its Affiliates during the Fiscal Year in which such Fiscal Semester occurs (each such agreed estimate, the "Estimated Price" for such Product, for the applicable Fiscal Semester). For all amounts of a Product purchased by Eisai in a Fiscal Semester, promptly after Arena delivers such Product to Eisai, Arena shall invoice Eisai an amount equal to the total units of such Product delivered by Arena to Eisai, times the Estimated Price for such Product applicable to such Fiscal Semester, and Eisai shall pay such invoiced amount no later than 30 days after receipt of the invoice. Within 10 days after the end of each month (other than the end of a Calendar Quarter) after the First Commercial Sale of the first Product, Eisai shall prepare and send to Arena a report stating: (i) the total amount of Net Sales of each Product during such month, and; (ii) the detailed total deductions (in each allowed category) from gross amounts invoiced to arrive at Net Sales; and (iii) the sales in units of each Product in the Territory and gross amounts invoiced for such sales, on a Product-by-Product basis during such month. Within 15 days after the end of each Calendar Quarter (other than the end of a Fiscal Year) after the First Commercial Sale of the first Product, Eisai shall prepare and send to Arena a report stating: (x) the total amount of Net Sales of each Product during such Calendar Quarter; (y) the detailed and total deductions (in each allowed category) from gross amounts invoiced to arrive at such Net Sales; and (z) the sales in units of each Product in the Territory and gross amounts invoiced for such sales, on a Product-by-Product basis during such Calendar Quarter. Within 15 days after the end of each Fiscal Year, Eisai shall prepare and send to Arena a report stating: (A) the total amount of Net Sales of each Product during such Fiscal Year, and the detailed and total deductions (in each allowed category) from gross amounts invoiced to arrive at Net Sales; (B) the sales in units of each Product in the Territory and gross amounts invoiced for such sales, on a Product-by-Product basis during such Fiscal Year; (NYSE:C) the calculation of the actual aggregate

    ***Confidential Treatment Requested

    Product Purchase Price payments due to Arena on such sales; (NYSE:D) the total amount of Estimated Prices actually paid by Eisai to Arena upon invoice (as provided above) for the delivery of such Products to Eisai; and (NYSE:E) the amount of the reconciliation payment (the "Reconciliation Payment") for such Fiscal Year owed by Eisai to Arena, or Arena to Eisai (as applicable), based on the calculations in subclauses (C) and (D) above, such that after such Reconciliation Payment (by the appropriate Party to the other) Eisai has paid to Arena the total actual Product Purchase Price amount (as calculated under Section 7.3(a), but subject to Sections 7.3(d), 7.3(e) and 7.5) owed for the purchase of such Products sold in such Fiscal Year. Within 15 days of Arena's receipt of such report from Eisai, the applicable Party shall pay to the other the Reconciliation Payment shown to be owed in such report. Eisai shall be responsible for payment of any sales or value-added tax applicable to the sale of Finished Product by Arena to Eisai (either at the Estimated Price or Reconciliation Payment).

    (d) Purchase Price for Products Returned or Not Sold. The Parties hereby agree that, for any particular Finished Product delivered to Eisai other than Non-Conforming Finished Product that either (i) is not subsequently resold by Eisai (e.g., because it reaches the end of its shelf life prior to sale, or it is destroyed or damaged), or (ii) whose sales price is not included in Net Sales (e.g., due to credits or allowances for rejections or returns by the purchasing party, which are deducted from gross sales to calculate Net Sales), the Product Purchase Price that Eisai shall pay Arena for such Finished Product shall be the Finished Product COGS for such Finished Product, and the Reconciliation Payment for the period when such Finished Product is determined to meet the foregoing shall be adjusted to reflect such Product Purchase Price.

    (e) Minimum Product Purchase Price. Notwithstanding anything to the contrary in this Agreement, in no event will the Product Purchase Price for any Finished Product sold by Eisai and included in Net Sales, after applying all deductions under Sections 7.3(b) and 7.7, be less than US$[…***…] per tablet, which amount shall be adjusted annually to reflect any year-to-year percentage increase or decrease (as the case may be) in the U.S. Bureau of Labor Statistics' All Items Consumer Price Index for All Urban Consumers (CPI-U) for the U.S. City Average, 1982-84 = 100.

    7.4. Product Purchase Price Adjustment Payments. The Product Purchase Prices owed by Eisai for its purchase of Products from Arena that are then sold by Eisai in a particular Commercial Year are subject to adjustment by the payment by Eisai of one time purchase price adjustment payments, as provided below (each, a "Product Purchase Price Adjustment Payment") for achievement of Net Sales within any Commercial Year above the threshold Net Sales amounts set forth below:

    Aggregate Products Net Sales for a Commercial Year

    Product Purchase Price Adjustment Payment

    (a) at least US$250,000,000

    US$[…***…]

    (b) at least US$[…***…]

    US$[…***…]

    ***Confidential Treatment Requested

    (c) at least US$[…***…]

    US$[…***…]

    (d) at least US$[…***…]

    US$[…***…]

    (e) at least US$[…***…]

    US$[…***…]

    (f) at least US$[…***…]

    US$[…***…]

    (g) at least US$2,500,000,000

    US$[…***…]

    If, for any particular Commercial Year, Eisai has sold (for the first time) an amount of the Products in excess of one of the above threshold Net Sales amounts, then Eisai shall pay to Arena, as an adjustment to the Product Purchase Price paid by Eisai for its purchase of such Products, a Product Purchase Price Adjustment Payment in the amount listed above for such threshold, such payment to be made within 45 days of the end of the month during such Commercial Year when such threshold amount is first reached; provided that if more than one such Net Sales threshold is first achieved in the same Commercial Year, then (x) the total amount of Product Purchase Price Adjustment Payments paid by Eisai for such achievements shall equal (and not exceed) the Product Purchase Price Adjustment Payment owed for the larger Net Sales threshold (that is, for the second (and any subsequent) threshold amount that is reached, Eisai shall pay to Arena, within 45 days of the end of the month during such Commercial Year when such subsequent threshold(s) amount is first reached, the difference between the Product Purchase Price Adjustment Payment owed for the larger Net Sales threshold and the total of the Product Purchase Price Adjustment Payment(s) paid by Eisai for the Net Sales threshold(s) met previously in such Commercial Year), and (y) the Product Purchase Price Adjustment Payment(s) (based on the above schedule) that was (or were) not paid due to the limitation in the foregoing clause (x) shall be paid in the first subsequent Commercial Year when the respective Net Sales threshold is again met and no other Product Purchase Price Adjustment Payment is due. For example, if annual Net Sales for Commercial Years 1 and 2 are US$[…***…] and US$[…***…], respectively, then a US$[…***…] payment shall be paid when the first threshold is met in Commercial Year 1, and a subsequent payment of US$[…***…] shall be paid after the second threshold is met in Commercial Year 1. In Commercial Year 2, a US$[…***…] payment shall be paid when the first threshold is met in Commercial Year 2. As an additional example, if annual Net Sales for Commercial Years 1, 2 and 3 are US$[…***…], US$[…***…], and US$[…***…], respectively, then a US$[…***…] payment shall be paid for Commercial Year 1 (in increments of US$[…***…] and US$[…***…]), a US$[…***…] payment shall be paid for Commercial Year 2 (in increments of US$[…***…] and US$[…***…]), and a US$[…***…] payment shall be paid for Commercial Year 3. Eisai covenants to record and track its aggregate Product Net Sales for Commercial Years on a monthly basis to determine accurately when any of the above aggregate Net Sales thresholds has been met, and to report any such threshold achievement to Arena within 30 days after such threshold has been achieved. Any such Product Purchase Price Adjustment payment will be allocated to Product sales made during the Commercial Year up to date that the Net Sales threshold triggering such payment is achieved.

    ***Confidential Treatment Requested

    No Product Purchase Price Adjustment Payment under Section 7.4 will be made more than once regardless of the number of times any particular Net Sales threshold that causes such payment is subsequently achieved again.

    For the avoidance of doubt, in no event shall Eisai pay more than US$1,160,000,000 under this Section 7.4.

    7.5. Non-Commercial Product Purchase Price. With respect to any Finished Products delivered by Arena to Eisai that are used as samples or as part of a compassionate use, named patient use or indigent patient program in the Territory and thus are disposed of by Eisai (or its Affiliate) without charge, Eisai shall pay Arena an amount equal to the Finished Product COGS with respect thereto. Arena shall invoice Eisai with respect to such Finished Products promptly after delivery of such Finished Products to Eisai and Eisai shall pay Arena such invoiced amount no later than 30 days after receipt of the applicable invoice.

    7.6. Payment Method; Currency. All payments to the Payee Party under this Agreement shall be made by bank wire transfer in immediately available funds to an account in the name of the Payee Party designated in writing by the Payee Party. Payments hereunder shall be considered to be made as of the day on which they are received by the Payee Party's designated bank. Unless otherwise expressly stated in this Agreement, all amounts specified to be payable under this Agreement are in United States Dollars and shall be paid in United States Dollars.

    7.7. Necessary Third Party IP. If either Party becomes aware of a Patent in the Territory owned by a Third Party that it believes will, or may, be infringed by the manufacture, importation, development or Commercialization of any Product in the Territory as contemplated by this Agreement, such Party shall notify the other Party of such Patent. The Parties then shall discuss the matter and seek in good faith to agree on whether the Parties should take a license under such Patent, and if so, on what terms; provided, that if the Parties are unable to agree after a reasonable period, not to exceed 30 days, of good faith discussions, then Eisai shall have the right to obtain such a license on such terms as it determines in its sole discretion. The Parties shall share the actual out-of-pocket amounts paid to the Third Party for any such license under such a Patent with respect to the Initial Product, with Eisai bearing […***…]% of such amounts and Arena bearing […***…]%; provided that (a) in no event shall Arena be required to pay any amount of its share of such payments in any Calendar Quarter that exceeds […***…]% of the Product Purchase Price Payments earned by Arena for Finished Product supplied to Eisai during such Calendar Quarter, and any amount of Arena's share of such expenses not paid in any Calendar Quarter due to the foregoing limitation shall be carried forward and paid in future Calendar Quarters, (b) payments for past activities shall be subject to Section 9.4 to the extent applicable and (c) to the extent such license is required based on a Patent related to the manufacturing of such Finished Product, then, to the extent that Arena agrees to the terms of such license, Arena shall bear […***…]% of the actual out-of-pocket amounts paid to any Third Party for such license. The applicable percentages for any such license with respect to any Additional Product shall be determined pursuant to Section 3.3.

    ***Confidential Treatment Requested

    7.8. Taxes. The milestones, Product Purchase Price, Product Purchase Price Adjustment Payments and other amounts payable by one Party (the "Paying Party") to the other Party (the "Payee Party") pursuant to this Agreement (each, a "Payment") shall not be reduced on account of any taxes except to the extent of amounts required to be withheld by the Paying Party by Applicable Laws, if any. The Payee Party alone shall be responsible for paying any and all taxes (other than withholding taxes required by Applicable Laws to be withheld from Payments and remitted by the Paying Party) levied on account of, or measured in whole or in part by reference to, any Payments it receives. Without limiting the above, the Paying Party shall not withhold from the Payments any taxes except to the extent that it is required to do so by Applicable Laws. Notwithstanding the foregoing, if the Payee Party is entitled under any applicable tax treaty to a reduction of rate of, or the elimination of, applicable withholding tax, it may deliver to the Paying Party or the appropriate governmental authority (with the assistance of the Paying Party to the extent that this is reasonably required and is expressly requested in writing) the prescribed forms necessary to reduce the applicable rate of withholding or to relieve the Paying Party of its obligation to withhold tax, and the Paying Party shall apply the reduced rate of withholding, or dispense with withholding, as the case may be; provided, that the Paying Party has received evidence, in a form reasonably satisfactory to the Paying Party, of the Payee Party's delivery of all applicable forms (and, if necessary, its receipt of appropriate governmental authorization) at least 15 days prior to the time that the applicable Payment is due. If, in accordance with the foregoing, the Paying Party withholds any amount, it shall pay to the Payee Party the balance when due, make timely payment to the proper taxing authority of the withheld amount and send to the Payee Party proof of such payment within 10 days following such payment.

    7.9. Records.

    (a) Eisai shall keep, and cause its Affiliates to keep, complete, true and accurate books of accounts and records for the purpose of determining the amounts payable to Arena pursuant to Section 7.2, Section 7.3, Section 7.4 and Section 7.5. Such books and records shall be kept for such period of time required by Applicable Laws, but no less than at least five years following the end of the Calendar Quarter to which they pertain. Such records shall be subject to inspection in accordance with Section 7.10.

    (b) Arena shall keep, and cause its Affiliates to keep, complete, true and accurate books of accounts and records for the purpose of determining the Finished Product COGS pursuant to this Agreement. Such books and records shall be kept for such period of time required by Applicable Laws, but no less than at least five years following the end of the Calendar Quarter to which they pertain. Such records shall be subject to inspection in accordance with Section 7.10.

    7.10. Audits.

    (a) Upon not less than 60 days' prior written notice, Eisai shall permit an independent, certified public accountant of international recognition (for the purposes of this Section 7.10, the "Auditor") selected by Arena and reasonably acceptable to Eisai, which acceptance shall not be unreasonably conditioned, withheld or delayed, to audit or inspect those books or records of Eisai and its Affiliates that relate to Net Sales and Reconciliation Payments for the sole purpose of verifying the Product Purchase Price payments, Product Purchase Price Adjustment Payments and Reconciliation Payments.

    (b) Upon not less than 60 days' prior written notice, Arena shall permit an Auditor selected by Eisai and reasonably acceptable to Arena, which acceptance shall not be unreasonably conditioned, withheld or delayed, to audit or inspect those books or records of Arena and its Affiliates that relate to the Finished Product COGS for the sole purpose of verifying the amounts invoiced by Arena pursuant to Section 7.3(d) or 7.5.

    (c) The audited Party shall not be obligated to provide the Auditor any records until the Auditor executes a confidentiality agreement in a form reasonably acceptable to the audited Party. The Auditor shall disclose to the auditing Party only whether any reports made or amounts invoiced under this Agreement are correct and details concerning any discrepancies. The Auditor shall send a copy of the report to the audited Party at the same time it is sent to the auditing Party. Such audits or inspections may be made no more than once each Calendar Year (unless an audit or inspection reveals a material inaccuracy in reports made or amounts invoiced under this Agreement, in which case it may be repeated within such Calendar Year), during normal business hours. If such report shows that the amounts paid by a Party for the period audited are less than the amounts actually payable by such Party to the other Party during the period audited, then (absent manifest error or fraud in such audit report) the audited Party shall pay to the other Party the amount of such underpayment plus interest under Section 7.11, from the date such amounts were originally owed until payment is made, within 30 days of receipt of such audit. If such report shows that the amounts paid by a Party for the period audited exceed the amounts actually owed by such Party to the other Party for the period audited, then (absent manifest error or fraud in such audit report) the audited Party shall deliver to the other Party an invoice for such excess amount, and the other Party shall pay such invoiced excess amount within 30 days of receipt of such invoice. Such records for any particular Calendar Quarter shall be subject to no more than one audit or inspection and no audit or inspection with respect to any Calendar Quarter may be initiated later than five years after the end of such Calendar Quarter. Audits and inspections conducted under this Section 7.10 shall be at the expense of the auditing Party, unless a variation or error producing (i) with respect to an audit or inspection pursuant to subsection (a), an underpayment in amounts payable exceeding an amount equal to 5% of the amount paid for a period covered by the audit or inspection is established, in which case all reasonable and verifiable costs relating to the audit or inspection for such period and any unpaid amounts that are discovered shall be paid by Eisai and (ii) with respect to an audit or inspection pursuant to subsection (b), an overpayment in amounts payable exceeding an amount equal to 5% of the amount paid for a period covered by the audit or inspection is established, in which case all reasonable and verifiable costs relating to the audit or inspection for such period and any unpaid amounts that are discovered shall be paid by Arena. The auditing Party shall endeavor in such audit not to unreasonably disrupt the normal business activities of the audited Party or its Affiliates.

    7.11. Payment Due Dates; Late Payments. If any Payment is due on a day when banks in New York, New York are generally closed, then such Payment shall not be considered late if made on the next day on which such banks are generally open. In the event that any Payment due under this Agreement is not made when due, such Payment shall accrue interest from the date due at a rate per annum equal to 4% above the U.S. Prime Rate (as set forth in the Wall Street Journal, Eastern Edition) for the date on which payment was originally due until the date such Payment plus accrued interest hereunder is actually made, calculated daily on the basis of a 365-day year, or similar reputable data source; provided that in no event shall such rate exceed the maximum legal annual interest rate. The payment of such interest shall not limit the Party entitled to receive such payment from exercising any other rights it may have as a consequence of the lateness of any Payment.

    Disclosure: The author is long ARNA.

    Stocks: ARNA
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Comments (8)
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  • daxtrdr
    , contributor
    Comments (145) | Send Message
     
    Spencer, great information. I stated before that I agreed Arena had no chance of receiving any milestone or adjustment payments in 2015. However, based on the defining of a commercial year and the fact that the first milestone payment of 25 mil is an event triggered payment, I am not so sure they are out of the question for 2015. Here is an excerpt from a post that I wrote on another board(thanks in large part to your help):

     

    Simple compounding formula:

     

    FV = PV[((1 + i)* - 1)/i] Where:

     

    * = 52 (number of weeks in a year)
    i = constant assumed average weekly growth in scripts
    PV = Present value of weekly scripts (Use IMS or Symphony your preference, with adjustment if desired)

     

    Acutally use your projected PV for next week. The time frame for all adjustments and milestones that Eisai and Arena use is from July 1 through June 30.

     

    Run the equation to get your projected FV of scripts that will be written during the time frame of July 1, 2014 through June 30, 2015.

     

    Assume 1 bottle = 1 script. That is what I am assuming anyway.

     

    Multiply your FV x Your assumed number of gross selling price per bottle. Mine is $200.

     

    You now have an estimated gross sales of belviq during the next measured year.
    ----------------------...

     

    Now, let's use an unadjusted IMS number of 10,000 for next week. This is close to where we are at today and it is conservative to use IMS unadjusted given all of the wild scenarios that have been postulated. And let's use an average wow script increase of 5%.

     

    If we run these numbers, the number of bottles sold during this upcoming "measured" or "commercial" year will be 2.3 million. This is enough to reach both the gross and net sales required to receive the 25 mil adjustment payment and the 30 mil milestone payment. And, Arena will have both payments in hand on or before July 31, 2015.

     

    I await my adjustment from you ;-)
    27 Jun, 11:43 AM Reply Like
  • Spencer Osborne
    , contributor
    Comments (6864) | Send Message
     
    Author’s reply » dax...

     

    I still think that there will be no bonuses in 2015.

     

    Gross sales need to be $460 million to get any bonus. That is about what it takes to reach $250 million in net sales, which is what triggers payment.

     

    With gross sales of $100 to $125 million this year, it would be tough to get a 4 fold increase in 2015.

     

    simply stated, it will take 2,281,000 scripts in 1 year to get to a bonus. That is an average of 44,000 per week.
    27 Jun, 11:47 AM Reply Like
  • daxtrdr
    , contributor
    Comments (145) | Send Message
     
    Spencer, 230 bottles sold @ $200/bottle would equal the required $460 million. The counting would reset starting July 1, 2014 and if we start with 10,000 scripts with a wow average increase of 5%, this would get us there. Is the 5% average wow too aggressive?

     

    Also, correct me if am wrong but, with regard to the milestone payment of $30 mil. If that is event driven, doesn't that mean the payment is due once that level is achieved from the start of sales last year until the level of $250 million is reached. If that is true it seems like that payment will definitely be reached in 2015.

     

    I'm sure my reasoning is flawed somewhere. Would appreciate your insight. Thank you.
    27 Jun, 12:00 PM Reply Like
  • Spencer Osborne
    , contributor
    Comments (6864) | Send Message
     
    Author’s reply » dax...

     

    The sales figures reset each year....it is not aggregate.

     

    In my opinion 5% is way to aggressive.
    27 Jun, 12:11 PM Reply Like
  • daxtrdr
    , contributor
    Comments (145) | Send Message
     
    Gotcha on the 5%. When you say the sales figures "reset" each year. Does that hold true for the milestone payment? I know it holds true for the adjustment payment, but if the milestone payment is "event" triggered does that mean the event must happen WITHIN the commercial year? Thanks.
    27 Jun, 12:16 PM Reply Like
  • Spencer Osborne
    , contributor
    Comments (6864) | Send Message
     
    Author’s reply » dax...

     

    an event within a year for the milestone.

     

    aggregate sales since launch do not apply to any of these. These payments are triggered either by the event happening in a fiscal year or commercial year depending on the bonus.
    27 Jun, 12:19 PM Reply Like
  • daxtrdr
    , contributor
    Comments (145) | Send Message
     
    Spencer, OK I've read the payment terms now. I see where milestone payments are largely triggered when there are additional approvals. It was with regard to that one milestone payment, triggered when 250 mil in net sales is reached during a commercial year, that had me confused. So, plainly stated, milestone payments are event driven with the exception of that one milestone payment which is determined by net sales in a commercial year, which is the same method used to determine adjustment payments.

     

    I can only assume that you have filled in a lot of the redacted dollar figures by PAYING ATTENTION to what has been said over the years by management at Arena and Eisai. This must be how you were able to construct your excellent chart above. There can't be anyone out there, aside from a few analysts, able to produce the chart you produced. And you provide it here for all to see.

     

    Outstanding!!!
    27 Jun, 07:36 PM Reply Like
  • Spencer Osborne
    , contributor
    Comments (6864) | Send Message
     
    Author’s reply » Thank you for the kind words. As I listen to presentations, there is often a new nugget of info provided in some way or another. I simply add it to my data
    27 Jun, 11:26 PM Reply Like
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