Arena Pharmaceuticals, Inc., or Arena, was incorporated on April 14, 1997, and commenced operations in July 1997. The Company is a biopharmaceutical company focused on delivering novel, transformational medicines with optimized pharmacology and pharmacokinetics to patients globally. The Company’s internally developed pipeline includes multiple potentially first- or best-in-class assets with broad clinical utility.

The Company’s most advanced investigational clinical programs include: etrasimod (APD334), being evaluated in a Phase 3 program for ulcerative colitis, or UC, a Phase 2b/3 program for Crohn’s disease, or CD, a Phase 2 program in alopecia areata, or AA, and a Phase 2b program for eosinophilic esophagitis, or EoE. The Company also plans to evaluate etrasimod in a Phase 3 program in atopic dermatitis, or AD. In addition, the Company is evaluating APD418, which is being developed for the treatment of acute heart failure, or AHF, in a Phase 2 trial. A second compound in its cardiovascular therapeutic area, temanogrel, is being evaluated in a Phase 2 trial in microvascular obstruction, or MVO, and a Phase 2 trial in Raynaud’s phenomenon secondary to systemic sclerosis, or SSc-RP. The Company is also evaluating possible strategic options for olorinab, a potential treatment for a broad range of visceral pain conditions associated with gastrointestinal diseases.

On December 12, 2021, Arena entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Pfizer Inc., a Delaware corporation (“Parent”), and Antioch Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Parent (“Merger Sub”), providing for, among other things, the merger of Merger Sub with and into Arena (the “Merger”), with Arena surviving the Merger.

(i) share of common stock of the Company, par value $0.0001 per share (each, a “Share”), issued and outstanding immediately prior to the Effective Time (other than (A) Shares owned by the Company as treasury stock, (B) Shares owned by Parent or Merger Sub and (C) any dissenting shares) will no longer be outstanding and will automatically be cancelled, retired and converted into the right to receive an amount in cash equal to $100.00, without interest thereon (the “Merger Consideration”);

(ii) option to purchase Shares (each, a “Company Option”) granted by the Company under the Company’s 2021 Long-Term Incentive Plan or prior stock plans (collectively, the “Company Stock Plans”) that is outstanding as of immediately prior to the Effective Time, whether or not then vested, will be cancelled and immediately cease to be outstanding and converted into the right to receive an amount in cash equal to the product of (1) the excess, if any, of the Merger Consideration over the per-share exercise price of such Company Option, multiplied by (2) the number of Shares then subject to such Company Option;

(iii) Company restricted stock unit, except as described in “(iv)” below, subject to vesting conditions based solely on continued employment or service to the Company or any of its subsidiaries granted by the Company under a Company Stock Plan that is unvested and outstanding as of immediately prior to the Effective Time will be cancelled and immediately cease to be outstanding and converted into the right to receive an amount in cash equal to the Merger Consideration;

(iv) Company restricted stock unit that is granted after December 12, 2021 (each, a “2022 Company RSU”) that is unvested and outstanding as of immediately prior to the Effective Time will be substituted automatically with a Parent restricted stock unit with respect to that number of shares of Parent common stock (each, an “Adjusted RSU”) that is equal to the product of (1) the total number of Shares subject to the 2022 Company RSU immediately prior to the Effective Time multiplied by (2)(a) the Merger Consideration divided by (b) the average of the volume-weighted average sales price per share of common stock of Parent on the New York Stock Exchange for the consecutive period of 15 trading days ending on

(and including) the trading day that is four trading days prior to the Effective Time, with any fractional shares rounded to the nearest whole share. Each Adjusted RSU will otherwise be subject to the same terms and conditions applicable to such 2022 Company RSU immediately prior to the Effective Time (including vesting terms, and subject to accelerated vesting in connection with certain qualifying terminations of employment following the Effective Time); and

(v) Company restricted stock unit granted by the Company under a Company Stock Plan that is subject to performance-based vesting conditions (each, a “Company PRSU”) that is unvested and outstanding as of immediately prior to the Effective Time will be cancelled and immediately cease to be outstanding and converted into the right to receive an amount in cash equal to the Merger Consideration (with all the performance-based vesting conditions associated with such Company PRSU being deemed achieved at the greater of actual completed performance at the Effective Time or at target for any Company PRSU).

Consummation of the Merger is subject to certain conditions, including, but not limited to, the: (i) Company’s receipt of the approval of the Company’s stockholders representing a majority of the outstanding Shares (the “Company Requisite Vote”), which was obtained on February 2, 2022; (ii) expiration or termination of any waiting periods applicable to the consummation of the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR Act”) and the receipt of certain additional clearances or approvals of certain other governmental bodies applicable to the Merger; and (iii) the absence of any law or order prohibiting or making illegal the consummation of the Merger. The Merger is targeted to close in the first half of 2022.

The accompanying consolidated financial statements have been prepared in accordance with US generally accepted accounting principles, or GAAP, and reflect all of the Company’s activities, including those of its wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. Certain prior period amounts in the consolidated financial statements have been reclassified to conform to the current period presentation.

To limit the spread of coronavirus disease 2019, or COVID-19, governments have taken various actions including the issuance of stay-at-home orders and social distancing guidelines, causing some businesses to suspend operations and or experience a reduction in demand for many products from direct or ultimate customers. Accordingly, businesses have adjusted, reduced or suspended operating activities. Beginning the week of March 16, 2020, substantially all of the Company’s workforce began working from home, either all or substantially all of the time. In addition, the Company has experienced delays in site initiation and participant enrollment and screening rates in certain of its clinical development programs as a result of the COVID-19 pandemic. The potential impact, if any, that these site-level delays could have on the Company’s development program timelines remains uncertain. The effects of the stay-at-home orders and the Company’s work-from-home policies may negatively impact productivity, disrupt its business and delay its development programs, and may delay the Company’s regulatory and commercialization timelines, the magnitude of which will depend, in part, on the length and severity of the restrictions and other limitations on its ability to conduct its business in the ordinary course. The Company’s future research and development expenses and selling, general and administrative expenses may vary significantly if it experiences an increased impact from COVID-19 on the costs and timing associated with the conduct of its clinical trials and other related business activities.

The Company will require substantial cash to achieve its objectives of discovering, developing and commercializing drugs, as this process typically takes many years and potentially hundreds of millions of dollars for an individual drug. The Company may not have adequate available cash, or assets that could be readily turned into cash, to meet these objectives in the long term. The Company will need to obtain significant funds under its existing collaborations and license agreements, under new collaboration, licensing or other commercial agreements for one or more of its drug candidates and programs or patent portfolios, or from other potential sources of liquidity, which may include the sale of equity, issuance of debt or other transactions.

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed below, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its consolidated financial statements upon adoption.

Standard

Description

Effective Date

Effect on the Financial
Statements or Other Significant Matters

ASU 2016-13, Measurement of Credit Losses (Topic 326): Financial Statements – Credit Losses

ASU 2016-13 revised the measurement of credit losses for financial assets measured at amortized cost from an incurred loss to an expected loss methodology.

January 1, 2020

The Company adopted ASU 2016-13 on January 1, 2020 which did not have a material impact on its consolidated financial statements.

ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes

ASU 2019-12 modifies ASC 740, Income Taxes to simplify the accounting for income taxes in various areas.

January 1, 2021

The Company adopted ASU 2019-12 on January 1, 2021 which did not have a material impact on its consolidated financial statements.

ASU 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)

ASU 2020-01 clarifies the interactions between Topic 321 (equity securities), Topic 323 (equity method and joint ventures) and Topic 815 (derivatives and hedge accounting). The ASU addresses the accounting for the transition into and out of the equity method and measuring certain purchased options and forward contracts to acquire investments.

January 1, 2021

The Company adopted ASU 2020-01 on January 1, 2021 which did not have a material impact on its consolidated financial statements.

ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables—Nonrefundable Fees and Other Cost

ASU 2020-08 clarifies an entity should, for each reporting period, reevaluate the amortization period for a premium paid on an individual callable debt security that has multiple call dates.

January 1, 2021

The Company adopted ASU 2020-08 on January 1, 2021 which did not have a material impact on its consolidated financial statements.

Cash and cash equivalents consist of cash and highly liquid investments with remaining maturities of three months or less when purchased. The following table provides a reconciliation of the components of cash, cash equivalents and restricted cash reported in the consolidated balance sheets to the total of the amount presented in the consolidated statements of cash flows, in thousands:

The Company defines investments as income-yielding securities that can be readily converted to cash and classifies such investments as available-for-sale. The Company carries these securities at fair value and reports unrealized gains and losses as a separate component of accumulated other comprehensive income or loss. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included in interest income. Realized gains and losses and declines in securities are included in other income or expense. The cost of securities sold is based on the specific identification method. Interest and dividends on available-for-sale securities are included in interest income.

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash, cash equivalents and available-for-sale investments. The Company limits its exposure to credit loss by holding cash primarily in US dollars or placing its cash and investments in US government, agency or government-sponsored enterprise obligations and in corporate debt instruments that are rated investment grade, in accordance with an investment policy approved by its Board of Directors.

The Company’s customers are typically other biopharmaceutical companies to which it licenses its intellectual property, or sells research and development services or other services under license or collaboration agreements. For the year ended December 31, 2021 and 2020, the Company recognized an immaterial amount of revenue. For the year ended December 31, 2019, more than 99% of the Company’s annual revenue was from United Therapeutics.

Investments and ownership interests are accounted for under equity method accounting if the Company has the ability to exercise significant influence but does not have a controlling financial interest. The Company records its interest in the net earnings of its equity method investees within other income or loss in the consolidated statements of operations. The Company records its interest in the net earnings of its equity method investments based on the most recently available financial statements of the investees.

The carrying amount of the investment in equity interests is adjusted to reflect the Company's interest in net earnings, dividends received and impairments. The Company reviews for impairment whenever factors indicate that the carrying amount of the investment might not be recoverable. In such a case, the decrease in value is recognized in the period the impairment occurs in the consolidated statements of operations.

Property and equipment are stated at cost and depreciated over the estimated useful lives of the assets (generally) 3 to 15 years using the straight-line method. Buildings are stated at cost and depreciated over an estimated useful life of approximately 20 years using the straight-line method. Leasehold improvements are stated at cost and amortized over the shorter of the estimated useful lives of the assets or the lease term using the straight-line method. Capital improvements are stated at cost and amortized over the estimated useful lives of the underlying assets using the straight-line method.

The functional currency of the Company’s wholly owned subsidiary in Switzerland, APD GmbH, is the Swiss franc. Accordingly, all assets and liabilities of this subsidiary are translated to US dollars based on the applicable exchange rate on the balance sheet date. Revenue and expense components are translated to US dollars at weighted-average exchange rates in effect during the period. Gains and losses resulting from foreign currency translation are reported as a separate component of accumulated other comprehensive income or loss in the equity section of the Company’s consolidated balance sheets. Foreign currency transaction gains and losses are primarily the result of remeasuring US dollar-denominated receivables and payables of the Company’s foreign subsidiaries.

The Company’s share-based awards are measured at fair value and recognized over the requisite service or performance period. The fair value of each stock option is estimated on the date of grant using the Black-Scholes option pricing model, based on the market price of the underlying common stock, expected term, expected stock price volatility and expected risk-free interest rate. Expected volatility is computed using historical volatility for a period equal to the expected term. The expected term of options is determined based on historical experience of similar awards, giving consideration to the contractual terms of the share-based awards, vesting schedules and post-vesting terminations. The risk-free interest rates are based on the US Treasury yield curve, with a remaining term approximately equal to the expected term used in the option pricing model. The Company accounts for forfeitures in the period they occur. The fair value of each restricted stock unit award is estimated based on the market price of the underlying common stock on the date of the grant. The fair value of restricted stock unit awards that include market-based performance conditions is estimated on the date of grant using a Monte Carlo simulation model, based on the market price of the underlying common stock, expected performance measurement period, expected stock price volatility and expected risk-free interest rate.

The Company’s revenues to date have been generated primarily through collaboration and license agreements. The Company’s collaboration and license agreements frequently contain multiple types of promised goods or services including (i) intellectual property licenses, (ii) product research, development and regulatory services and (iii) product manufacturing. Consideration received under these arrangements may include upfront payments, research and development funding, cost reimbursements, milestone payments, payments for product sales and royalty payments.

Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration that the Company expects to be entitled to receive in exchange for these services and excludes sales incentives and amounts collected on behalf of third parties. The Company analyzes the nature of these performance obligations in the context of individual collaboration and license agreements in order to assess the distinct performance obligations. The Company applies the following five steps to recognize revenue:

i)Identify the contract with a customer. The Company considers the terms and conditions of its collaboration and license agreements to identify contracts within the scope of ASC 606. The Company considers that it has a contract with a customer when the contract is approved, it can identify each party's rights regarding the goods and services to be transferred, it can identify the payment terms for the goods and services, it has determined the customer has the ability and intent to pay and the contract has commercial substance. The Company uses judgment in determining the customer's ability and intent to pay, which is based upon factors including the customer's historical payment experience or, for new customers, credit and financial information pertaining to the customers.

ii)Identify the performance obligations in the contract. Performance obligations in the Company’s collaboration and license agreements are identified based on the goods and services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the services is separately identifiable from other promises in the contract. The Company’s performance obligations generally consist of intellectual property licenses, research, development and/or regulatory services and manufacturing and supply commitments.

iii)Determine the transaction price. The Company determines the transaction price based on the consideration to which it expects to be entitled in exchange for transferring goods and services to the customer. In determining the transaction price, any variable consideration would be considered, to the extent applicable, if, in its judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. In accordance with the royalty exception under ASC 606 for licenses of intellectual property, the transaction price excludes future royalty payments to be received from the Company’s customers. None of the Company’s collaboration and license agreements contain consideration payable to its customer or a significant financing component.

iv)Allocate the transaction price to performance obligations in the contract. If the contract contains a single performance obligation, the entire transaction price is allocated to that performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price.

v)Recognize revenue when or as performance obligation are satisfied. Revenue is recognized at the time the related performance obligation is satisfied by transferring the promised goods or services to a customer. The Company recognizes revenue when it transfers control of the goods or services to its customers for an amount that reflects the consideration that it expects to receive in exchange for those services.

The Company generates revenue from licensing its intellectual property including know-how and development and commercialization rights. These licenses provide customers with a term-based license to further research, develop and commercialize its internally discovered drug candidates. The consideration the Company receives in the form of nonrefundable upfront consideration related to the functional intellectual property licenses is recognized when it transfers such license to the customer unless the license is combined with other goods or services into one performance obligation, in which case the revenue is recognized over a period of time based on the Company’s estimated pattern in which it satisfies the combined performance obligation. The Company’s licensing agreements are generally cancellable. Customers have the right to terminate their contracts upon notice. The Company has the right to terminate the contracts generally only if the customer is in breach of the contract and fails to remedy the breach in accordance with the contractual terms.

The Company generates royalty revenue from sales of its intellectual property. The Company estimates the future royalty payments and recognizes revenue with a corresponding contract asset at a point in time when it transfers the intellectual property to the customer. The Company periodically reassesses its estimate of the future royalty payments and recognizes any estimate adjustments as revenue in the current period.

The Company generates revenue from research, development and regulatory services it provides to its customers in connection with the licensed intellectual property. The services the Company provides to its customers primarily includes scientific research activities, preparation for and management of clinical trials, and assistance during the regulatory approval application process. Revenue associated with these services is recognized based on its estimate of total consideration to be received for such services and the pattern in which it performs the services. The pattern of performance is generally determined to be the amount of incurred expenses reimbursed by the customer as a percentage of total expected reimbursable expenses associated with the contract.

Most of the Company’s collaboration and license agreements with customers contain multiple promised goods or services. Based on the characteristics of the promised goods and services the Company analyzes whether they are separate or combined performance obligations. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. The Company determines standalone selling price based on its overall pricing and discounting objectives, taking into consideration the type of services, estimates of hourly market rates, and stage of the research, development or clinical trials.

Under the royalty exception in ASC 606 for licensed intellectual property, the Company does not recognize any revenue for the variable amounts related to sales-based royalties and milestones until the later of when the sales occur or the performance obligation is satisfied or partially satisfied. Accordingly, the revenue related to future sales-based royalties and milestones are excluded from the estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied.

The Company accrues clinical trial expenses based on work performed. In determining the amount to accrue, the Company relies on estimates of total costs incurred based on enrollment, the completion of trials and other events. The Company follows this method because it believes reasonably dependable estimates of the costs applicable to various stages of a clinical trial can be made. However, the actual costs and timing of clinical trials are uncertain, subject to risks and may change depending on a number of factors. Differences between the actual clinical trial costs and the estimated clinical trial costs that the Company has accrued in any prior period are recognized in the subsequent period in which the actual costs become known. Historically, these differences have not been material; however, material differences could occur in the future. Payments made to reimburse collaborators for the Company’s share of their research and development activities are recorded as research and development expenses, and are recognized as the work is performed.

Comprehensive income or loss is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. The Company reports components of comprehensive income or loss in the period in which they are recognized. For the years ended December 31, 2021, 2020 and 2019, comprehensive income (loss) consisted of net income (loss), foreign currency translation gains and losses, and unrealized gains and losses related to available-for-sale investments.

The Company calculates basic and diluted loss per share using the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by dividing the net loss by the weighted average number of common shares and common stock equivalents outstanding for the period determined using the treasury stock method. For purposes of this calculation, stock options, employee stock purchase plan rights, restricted stock units, and performance-based restricted stock units are considered to be common stock equivalents but are not included in the calculations of diluted net loss per share for periods of losses as their effect would be anti-dilutive.

Since the Company reported a net loss for the years ended December 31, 2021, and 2020, in addition to excluding potentially dilutive out-of-the money securities, the Company excluded from its calculation of loss per share all potentially dilutive (i) in-the-money stock options, (ii) RSUs, (iii) PRSUs and (iv) shares to be purchased under the employee stock purchase plan. The diluted net loss per share is the same as basic net loss per share for periods a net loss was reported.

The Company uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The Company’s deferred tax assets and liabilities are determined using the enacted tax rates expected to be in effect for the years in which those tax assets are expected to be realized.

The realization of the Company’s deferred tax assets is dependent upon its ability to generate sufficient future taxable income. The Company establishes a valuation allowance when it is more-likely-than-not the future realization of all or some of the deferred tax assets will not be achieved. The evaluation of the need for a valuation allowance is performed on a jurisdiction-by-jurisdiction basis, and includes a review of all available evidence, both positive and negative.