Note 10—Commitments and Contingencies

Commitments

The Company's corporate headquarters are located in East Brunswick, New Jersey, where it leases approximately 53,000 square feet of office space. The lease has a base average annual rental expense of approximately $1.9 million and expires in March 2013. The Company has two five-year renewal options under the lease. In connection with this lease arrangement, the Company was required to provide a $1.3 million security deposit by way of an irrevocable letter of credit, which is secured by a cash deposit of $1.3 million and is reflected as restricted cash on the Company's consolidated balance sheets at December 31, 2011 and 2010. The Company is also obligated to pay its share of operating maintenance and real estate taxes with respect to its leased property.

Rent expense charged to operations was approximately $2.0 million, $1.9 million and $2.0 million for the years ended December 31, 2011, 2010 and 2009, respectively. Rent expense is presented within research and development and selling, general and administrative expense in the consolidated statements of operations.

The future annual minimum lease payments (exclusive of amounts for real estate taxes, maintenance etc.) for each of the following calendar years are:


Year Ending December 31:	(In thousands)
2012	$	1,883
2013		476
Thereafter		—

Total minimum payments	$	2,359

At December 31, 2011, the Company has employment agreements with eight senior officers. Under these agreements, the Company has committed to total aggregate base compensation per year of approximately $3.1 million plus other fringe benefits and bonuses. These employment agreements generally have an initial term of three years and are automatically renewed thereafter for successive one-year periods unless either party gives the other notice of non-renewal. In addition, the Company currently has in place severance agreements with two former employees, which aggregate to approximately $0.9 million of liabilities on the consolidated balance sheet at December 31, 2011, which will be paid in equal installments over the next twelve months.

In 2007, the Company entered into commercial supply and development agreements with Bio-Technology General (Israel) Ltd, ("BTG"), pursuant to which BTG serves as the manufacturer and commercial supplier of the pegloticase drug substance for KRYSTEXXA and provides development, manufacturing and other services in relation to the product. Under the agreements, BTG also provided support with respect to the Company's biologics license application ("BLA") for KRYSTEXXA. Pursuant to its terms, the development agreement automatically expired upon the FDA's approval for marketing of KRYSTEXXA in the United States. Under the commercial supply agreement with BTG, as amended, BTG is obligated to manufacture the Company's firmly forecasted commercial supply of KRYSTEXXA and the Company is obligated to purchase from BTG at least 80% of its worldwide requirements of pegloticase drug substance. However, if BTG produces specified numbers of failed batches of pegloticase drug substance within one or more calendar quarters, then the Company may purchase all of its KRYSTEXXA requirements from other suppliers until BTG demonstrates to the Company's reasonable satisfaction that it has remedied its supply failure. In addition, if the Company's product forecasts are reasonably anticipated to exceed BTG's processing capacity, then the Company may purchase from other suppliers the KRYSTEXXA requirements that exceed BTG's capacity. The Company is obligated to provide BTG with a rolling forecast on a monthly basis setting forth the total quantity of pegloticase drug substance it expects to require for commercial supply in the following 18 months. The first six months of each forecast represent a rolling firm irrevocable order, and the Company may only increase or decrease its forecast for the next 12 months within specified limits. As of December 31, 2011, based on the current forecast, the Company expects to purchase an aggregate of approximately $4.9 million of pegloticase drug substance over the next 12 months. The Company has cumulatively paid BTG non-refundable fees of $6.7 million to reserve manufacturing capacity relating to potential future orders of pegloticase drug substance, of which $1.3 remain unapplied at December 31, 2011. Beginning in December 2015, which is the seventh anniversary of BTG's first delivery of pegloticase drug substance under the commercial supply agreement, either the Company or BTG may provide three years advance notice to terminate the commercial supply agreement, effective not earlier than December 2018. The commercial supply agreement may also be terminated in the event of insolvency or uncured material breach by either party.

In 2007, the Company entered into a services agreement with Fujifilm Diosynth Biotechnologies USA LLC ("Fujifilm"), pursuant to which Fujifilm is preparing to serve as the Company's secondary source supplier in the United States of pegloticase drug substance for KRYSTEXXA. Under the agreement, the Company is obligated to make specified milestone payments related to the technology transfer, and subsequent performance, of the manufacturing and supply process, which was initiated in August 2007 with BTG's cooperation. In November 2009, the Company entered into a revised services agreement with Fujifilm, pursuant to which the Company delayed the 2009 conformance batch production campaign until 2010. During the first quarter of 2010, the conformance batch production campaign at Fujifilm commenced. As a result of batch failures at Fujifilm based on one manufacturing specification, the 2010 conformance batch production campaign was terminated in December 2010. The Company and Fujifilm renegotiated the agreement in June 2011. The Company expects the additional costs associated with the conformance campaign for the twelve months ended December 31, 2012 to approximate $0.8 million. Either the Company or Fujifilm may terminate the services agreement in the event of an uncured material breach by the other party. In addition, the Company may terminate the agreement at any time upon 45 days advance notice. If the Company terminates the agreement other than for Fujifilm's breach, or if Fujifilm terminates the agreement for our breach, the Company must pay Fujifilm a termination fee based on the value of then remaining unbilled activities under the agreement. Either party may also terminate the agreement within 30 days after any written notice from Fujifilm that, in its reasonable judgment and based on a change in the assumptions or objectives for the project; it cannot continue to perform its obligations without a change in the scope, price or payment schedule for the project.

In 2007, the Company entered into a supply agreement with NOF Corporation of Japan ("NOF"), pursuant to which NOF serves as the Company's exclusive supplier of mPEG-NPC, which is used in the PEGylation process to produce the pegloticase drug substance for KRYSTEXXA. The Company must purchase its entire supply of mPEG-NPC from NOF unless NOF fails to supply at least 75% of the Company's firm orders, in which case the Company may obtain mPEG-NPC from a third party until NOF's supply failure is remedied to the Company's reasonable satisfaction. Under the agreement, the Company is obligated to make specified minimum purchases of mPEG-NPC from NOF. The Company must provide NOF with a rolling forecast on a quarterly basis setting forth the total quantity of mPEG-NPC that it expects to require in the following 18 months. The first six months of each forecast represent a rolling firm irrevocable order, and the Company may only increase or decrease its forecast for the next 12 months within specified limits. As December 31, 2011, based on current forecasts, the Company expects to purchase mPEG-NPC at an aggregate cost of approximately $12.6 million through 2017. For any given year, upon three months advance notice, the Company may terminate its minimum purchase obligation for the entire year or the remainder of that year by paying NOF 50% of the minimum purchase obligation for that year or the remainder of that year. NOF is obligated under the supply agreement to use commercially reasonable efforts to submit a Type II Drug Master File, or its equivalent, to the appropriate regulatory agency in one country outside of the United States or in the European Union. The Company's agreement with NOF has an initial term ending in May 2017 and may be extended for an additional 10 years by mutual agreement of the parties at least 12 months before the expiration of the initial term. Prior to the expiration of the term, either the Company or NOF may terminate the agreement for convenience upon 24 months advance notice. Either the Company or NOF may terminate the agreement in the event of the other party's insolvency or uncured material breach. In the event that NOF terminates the agreement for convenience or if the Company terminates the agreement for NOF's breach or bankruptcy, the Company may require NOF to continue to supply mPEG-NPC for up to two years following the termination date. If the Company terminates the agreement for convenience or if NOF terminates the agreement for the Company's breach, the Company must pay NOF 50% of the minimum purchase obligation for the period from the termination date until the date on which the agreement would have expired.

In 2008, the Company entered into a non-exclusive commercial supply agreement with Sigma-Tau PharmaSource, Inc. ("Sigma-Tau") (formerly known as Enzon Pharmaceuticals, Inc., which was acquired by Sigma-Tau in January 2010). Under the terms of the commercial supply agreement, Sigma-Tau has agreed to fill, label, package, test and provide specified product support services for the final KRYSTEXXA product. In return, the Company agreed that once KRYSTEXXA received FDA marketing approval, the Company would purchase product support services from Sigma-Tau. As of December 31, 2011, the Company expects to purchase from Sigma-Tau support services at an aggregate cost of approximately $1.3 million over the next 12 months. These purchase obligations are based on a rolling forecast that the Company has agreed to provide to Sigma-Tau on a quarterly basis setting forth the total amount of final product that it expects to require in the following 24 months. The first six months of each forecast will represent a rolling firm irrevocable order, and the Company may only increase or decrease its forecast for the next 18 months within specified limits. If the Company cancels batches subject to a firm order, it must pay Sigma-Tau a fee. Under the agreement, the Company is also obligated to pay Sigma-Tau a rolling, non-refundable capacity reservation fee, which may be credited against the fees for Sigma-Tau's production of the final product. Either the Company or Sigma-Tau may terminate the agreement upon 24 months advance notice given 30 days before each year's anniversary date of the agreement. If the Company terminates the agreement, it would be obligated to pay Sigma-Tau a fee based on the previously submitted rolling forecasts. Either the Company or Sigma-Tau may also terminate the agreement in the event of insolvency or uncured material default in performance by either party.

The Company believes that its current arrangements for the supply of clinical and commercial quantities of pegloticase drug substance and finished form KRYSTEXXA will be adequate to satisfy its currently forecasted commercial requirements of KRYSTEXXA and any currently planned future clinical studies.

The Company is a party to an exclusive royalty bearing license agreement with Mountain View Pharmaceuticals ("MVP") and Duke University ("Duke"), originally entered into in 1997 and amended in 2001, granting the Company rights under technology relating to mammalian and non-mammalian uricases, and MVP's technology relating to mPEG conjugates of these uricases, as well as patents and pending patent applications covering this technology, to make, use and sell, for human treatment, products that use this technology. These patents and pending patent applications constitute the fundamental composition of matter and underlying manufacturing patents for KRYSTEXXA.

The agreement requires the Company to pay to MVP and Duke quarterly royalty payments within 60 days after the end of each quarter based on KRYSTEXXA net sales made in that quarter by us. The royalty rate for a particular quarter ranges between 8% and 12% of net sales based on the amount of cumulative net sales made by us. As of December 31, 2011 the Company has made $0.5 million in royalty payments pursuant to the agreement. In addition, and pursuant to the agreement, the Company is required to make potential separate milestone payments to MVP and Duke if the Company successfully commercializes KRYSTEXXA and attains specified KRYSTEXXA sales targets. As of December 31, 2011, the Company has made aggregate payments of approximately $2.5 million to MVP and Duke for the achievement of milestones under this agreement. During the years ended December 31, 2011 and 2009, the Company did not make any milestone payments to MVP and Duke under the agreement. For the year ended December 31, 2010 the Company made payments aggregating to $0.8 million to MVP and Duke upon obtaining regulatory approval for KRYSTEXXA in the United States, which was one of the five major global markets identified in the agreement. During the year ended December 31, 2011, the Company achieved the first sales milestone pursuant to the agreement and accordingly accrued $0.8 million. The Company also expects to achieve the second and final sales-based milestone in 2012, which will require the Company to pay MVP and Duke approximately $1.0 million. Also under the agreement, for sales made by sub-licensees and not by the Company, the Company is required to pay royalties of 20% on any revenues or other consideration we receive from sub-licensees during any quarter. The Company records the royalty and sales-based milestone payments pursuant to the MVP and Duke agreement as a component of cost of goods sold in its consolidated statements of operations.

The Company previously received financial support of research and development from the Office of the Chief Scientist of the State of Israel ("OCS"), and the Israel-United States Bi-national Industrial Research and Development Foundation ("BIRD"), of approximately $2.6 million for the development of KRYSTEXXA. As a result of the commercialization and commencement of KRYSTEXXA sales in 2011, the Company has incurred royalties of approximately $0.9 million for OCS and BIRD for the year ended December 31, 2011. The Company records these payments as a component of cost of goods sold in its consolidated statements of operations. In addition, under the Israeli Law of Encouragement of Research and Development in Industry, as amended, as a result of the funding received from OCS, if the Company does not manufacture 100% of its annual worldwide bulk product requirements in Israel, the Company may be subject to additional payments, based upon the percentage of manufacturing that does not occur in Israel.

Contingencies

In May 2007, the Company filed a notice of appeal with the New Jersey Division of Taxation contesting a New Jersey Sales & Use Tax assessment of $1.2 million for the tax periods 1999 through 2003. The Company believes it is not subject to taxes on services that were provided to the Company. In May 2010, the Company attended an appeals conference with the Conference and Appeals Branch of the New Jersey Division of Taxation to discuss its case in contesting the Sales & Use Tax assessment. After discussions with the New Jersey appellate division, the Company's appeal was denied. The previous assessment of $1.2 million was increased by $0.5 million to $1.7 million reflecting additional interest and penalties. The Company filed a timely appeal with the New Jersey Tax Court to continue the appeal process on December 13, 2010. Settlement discussions took place throughout 2011 and in December a settlement agreement was reached with New Jersey Division of Taxation in which the Company paid $327,000 that included penalty and interest. This matter is now considered closed and the lawsuit has been dismissed.

In a civil action filed in the Fayette Circuit Court in Kentucky on August 31, 2007 ( Joseph R. Berger vs. Savient Pharmaceuticals, Inc.), Dr. Joseph Berger alleged that he had entered into an agreement with the Company in December 1993, under which he assigned an invention and patent rights relating to the use of oxandrolone to treat an HIV-related disorder, the "Invention", to the Company in exchange for its agreement to use him as a researcher in certain clinical trials relating to the Invention, and that the Company had breached that agreement. Berger's verified complaint requested disgorgement of profits and assignment to Berger of the patents obtained on the Invention. During fact discovery in the action, the Company uncovered an April 6, 1992 Consulting Agreement between Berger and Savient's predecessor, Gynex Pharmaceuticals ("Gynex"), wherein Berger assigned the Invention to Gynex in consideration of, among other things, $20,000 from Gynex. After the April 6, 1992 agreement was presented to Berger, he filed an amended verified complaint which acknowledged the April 6, 1992 agreement, but contended that the $20,000 paid to him under the Agreement was not consideration for the assignment of the Invention. The Company filed a motion for summary judgment on Berger's claims and, on August 17, 2009, the Court issued an order granting the Company's motion and dismissing Berger's complaint and amended complaint with prejudice. Berger appealed the decision of the trial court granting the Company's motion for summary judgment, and the Company filed a notice of cross-appeal solely with respect to the decision of the trial court to apply Kentucky law to the facts of the case. On January 4, 2011, the Kentucky Appellate Court issued an order taking up Berger's appeal and the Company's cross-appeal on the papers, and on October 14, 2011, the Court upheld the lower court's decision.

In November 2008, Richard Sagall, an alleged stockholder, commenced an action in the U.S. District Court for the Southern District of New York seeking to certify a class of shareholders who held Savient securities between December 13, 2007 and October 24, 2008. The suit alleges that the Company made false and misleading statements relating to the GOUT1 and GOUT2 phase 3 clinical trials, and that the Company failed to disclose in a timely manner serious adverse events which occurred in five patients in these trials. In March 2009, the Court issued an order appointing a lead plaintiff and the law firm Pomerantz Haudek Block Grossman & Gross LLP as lead counsel. The action was also re-captioned as Lawrence J. Koncelik vs. Savient Pharmaceuticals, et al . Thereafter, the lead plaintiff filed his amended complaint in April 2009, seeking unspecified monetary damages. In June 2009, Savient and the other named defendants moved to dismiss the complaint. The lead plaintiff subsequently filed an opposition to the Company's motion to dismiss and the Company filed its reply in October 2009. Oral arguments were heard by the Court in February 2010 relating to the Company's motion to dismiss. On September 29, 2010, the Court issued a memorandum decision and order granting the Company's motion to dismiss the amended complaint in its entirety. On October 28, 2010, the lead plaintiff timely filed a notice of appeal of the Court's decision with the United States Court of Appeals for the Second Circuit and the briefing on that appeal was completed in June 2011 with oral arguments scheduled for November 8, 2011. On January 13, 2012, the Second Circuit issued a summary order affirming the dismissal.

From time to time, the Company becomes subject to legal proceedings and claims in the ordinary course of business. Such claims, even if without merit, could result in the significant expenditure of the Company's financial and managerial resources. The Company is not aware of any legal proceedings or claims that it believes will, individually or in the aggregate, materially harm its business, results of operations, financial condition or cash flows.

The Company is obligated under certain circumstances to indemnify certain customers for certain or all expenses incurred and damages suffered by them as a result of any infringement of third-party patents. In addition, the Company is obligated to indemnify its officers and directors against all reasonable costs and expenses related to stockholder and other claims pertaining to actions taken in their capacity as officers and directors which are not covered by the Company's directors and officer's insurance policy. These indemnification obligations are in the regular course of business and in most cases do not include a limit on maximum potential future payments, nor are there any recourse provisions or collateral that may offset the cost.