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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER 000-31161
ARENA PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 23-2908305
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
6166 Nancy Ridge Drive, San Diego, CA 92121
(ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(858) 453-7200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrant's knowledge, in the
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K [ ]
The approximate aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant was approximately $256,000,000
as of March 1, 2001, based upon the closing price of the Common Stock as
reported on the Nasdaq Stock Market on such date. For purposes of this
calculation, shares of Common Stock held by directors, officers and stockholders
whose ownership in the registrant is known by the registrant to exceed five
percent have been excluded. This number is provided only for purposes of this
report and does not represent an admission by either the registrant or any such
person as to the status of such person.
As of March 1, 2001 there were 22,696,913 shares of the registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Arena Pharmaceuticals, Inc. Proxy Statement dated March
29, 2001, for the Annual Meeting of Shareholders to be held May 8, 2001 (the
"Proxy Statement"), to be filed no later than 120 days after December 31, 2000,
referred to herein as the "Proxy Statement," are incorporated by reference into
Part III of this Report on Form 10-K.
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ARENA PHARMACEUTICALS, INC.
INDEX
PAGE NO.
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PART I
Item 1. Business 1
Item 2. Properties 23
Item 3. Legal Proceedings 23
Item 4. Submissions of Matters to a Vote of Security Holders 23
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 23
Item 6. Selected Financial Data 25
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations 26
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 31
Item 8. Financial Statements and Supplementary Data 32
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 53
PART III
Item 10. Directors and Executive Officers of the Registrant 53
Item 11. Executive Compensation 53
Item 12. Security Ownership of Certain Beneficial Owners and Management 53
Item 13. Certain Relationships and Related Transactions 53
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 53
INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K includes forward-looking statements. These
forward-looking statements are subject to certain risks and uncertainties,
including those identified below, which could cause actual results to differ
materially from such statements. The words "believe," "expect," "anticipate,"
"estimate," "optimistic," "intend," "plan," "project," "target," "aim," "will,"
and similar expressions identify forward-looking statements. Readers of the
annual report on Form 10-K are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date on which they are
made. Arena Pharmaceuticals, Inc. undertakes no obligation to update publicly or
revise any forward-looking statements. Factors that could cause actual results
to differ materially from the forward-looking statements, including the
company's goals referred to in the annual report on Form 10-K, include, but are
not limited to, the inability of Arena Pharmaceuticals, Inc. to achieve future
quarterly or annual financial results, the receipt of milestone payments, if
any, from any collaborator of Arena or its subsidiaries, the timing, success and
cost of preclinical research, out-licensing endeavors and clinical studies, if
any. Additional risk factors that could cause actual results to differ
materially from those in Arena Pharmaceutical, Inc.'s forward looking statements
are disclosed in Arena's SEC reports, including but not limited to Arena's Form
S-1 and most recent quarterly report on Form 10-Q and this annual report on Form
10-K.
PART I
Item 1. Business
OUR COMPANY
We were incorporated on April 14, 1997 in the state of Delaware and
commenced operations in July 1997. We have developed a new technology, which we
call CART-TM- (Constitutively Activated Receptor Technology), that we use to
identify drug-like compounds more efficiently than traditional drug discovery
techniques. CART allows us to develop novel biochemical assays to discover
drug-like compounds that target G protein-coupled receptors, called GPCRs, an
important class of receptors. Additionally, we believe that CART is applicable
to other human receptor classes, such as tyrosine kinase receptors, or TKRs, as
well as to non-human receptors for the discovery of animal therapeutics and
agricultural products.
In the recent past, the pharmaceutical and biotechnology industries
have increasingly focused their drug discovery efforts on receptor-based drug
targets because drugs discovered using these targets have the potential for
increased specificity and reduced side effects. Of the leading 100
pharmaceutical products, based on 1999 revenues, 34 wholly or in part act on
GPCRs. In 1999, these GPCR-based pharmaceutical products represented over $34
billion in sales, and included Claritin(RM) for allergies, Zantac(RM) for
gastric ulcers, Imitrex(RM) for migraines and Cozaar(RM) for hypertension.
1
We use CART to discover drug-like compounds by genetically altering
receptors to mimic the biological response that occurs when the native ligand
binds to the receptor. We refer to these genetically altered receptors as
CART-activated receptors. We use CART-activated receptors as a screening tool to
identify chemical compounds that alter the biological response of the receptor,
and these compounds form the basis for drug candidates. Using CART technology,
we have discovered drug-like compounds that have demonstrated pharmacological
activity in pre-clinical, or animal, studies through our own internal research
and drug development efforts, as well as through those of our collaborators.
Based upon the success of CART, we have entered into collaborative relationships
with a number of pharmaceutical and biotechnology companies, including Eli Lilly
and Company, Taisho Pharmaceutical Co., Ltd., Fujisawa Pharmaceutical Co., Ltd.
and Lexicon Genetics, Inc.
THE DRUG DISCOVERY PROBLEM
Diseases in humans are caused by the abnormal function of cells. Both
normal and abnormal cellular function is principally the result of communication
between cells. This cellular communication occurs when a ligand is released from
a cell and binds to a receptor on the surface of that cell or another cell. This
binding triggers the initiation of various signals within that cell, resulting
in changes in cellular function. By interacting with the receptor to mimic or
block ligand-receptor binding, drugs affect abnormal cellular function and
thereby regulate the disease process.
Receptors are classified into categories based upon similarities in
their biochemical and structural properties. They are located in various tissues
throughout the body and affect a variety of cellular functions. There are four
principal classes of human receptors: GPCRs; TKRs; ligand-gated ion channel
receptors; and intracellular receptors. We focus on GPCRs because they are the
predominant class of receptors involved in cellular function.
The ligand that naturally binds to a receptor and activates or inhibits
a biological response is referred to as a receptor's native ligand. A receptor
for which the native ligand has been discovered is called a known receptor,
while a receptor for which the native ligand has not been identified is called
an orphan receptor. Genomics researchers believe that GPCRs comprise 2% to 3% of
the human genome (approximately 1,000 GPCRs), the vast majority of which are
orphans.
Advances in genomics research have enabled researchers, including us,
to directly identify the genetic sequence of previously unidentified receptors,
including GPCRs, from basic genetic information. As more GPCRs are made
available, the opportunity to use this information for drug discovery efforts
should increase. Although hundreds of new, orphan GPCRs are being made publicly
available through genomics research, traditional drug discovery techniques to
find new drug candidates cannot be applied to orphan GPCRs until the native
ligands for these orphan GPCRs are identified because these traditional
techniques seek to find drug-like compounds that imitate or inhibit ligand
binding to the receptor.
The process of identifying native ligands is very uncertain, generally
involving many stages of tissue extraction and extensive purification. To our
knowledge, of the hundreds of orphan GPCRs that have been identified, only a
handful of examples exist where a novel native ligand has been discovered by
intentionally targeting an orphan GPCR. Even when successful, identifying the
native ligand typically requires four to five years and costs millions of
dollars per GPCR. For example, a GPCR called GPR 14 was discovered in 1995, but
its native ligand, urotensin II, was not identified until 1999. The process of
identifying native ligands is typically the step that limits the rate at which
drugs are discovered at receptor targets.
OUR SOLUTION - CART TECHNOLOGY
We do not use, and therefore do not need to identify, the receptor's
native ligand for our drug discovery efforts. We use our CART technology to
discover drug-like compounds by CART-activating receptors to mimic the
biological response that occurs when the native ligand binds to the receptor.
Therefore, CART technology avoids a major bottleneck in drug discovery efforts
at orphan receptors.
CART technology can be applied broadly to GPCRs because all GPCRs have
highly similar structural elements, consisting of:
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- - three extracellular loops on the outside of the cell
- - three intracellular loops on the inside of the cell
- - seven regions that cross through the cell surface, or membrane, and connect
the extracellular and intracellular loops
When a ligand binds to the extracellular portion of the GPCR, changes
occur to the intracellular portion of the GPCR that permit a signaling molecule
located within the cell, called a G protein, to bind to the intracellular
portion of the GPCR. This leads to further intracellular changes, resulting in a
biological response within the cell.
Under normal physiological conditions, a GPCR exists in equilibrium
between two different states: an inactive state and an active state. When the
GPCR's equilibrium shifts to an active state, the GPCR is able to link to a G
protein, thus producing a biological response. When the GPCR's equilibrium
shifts to an inactive state, the receptor is typically unable to link to a G
protein, and therefore unable to produce a biological response. When a native
ligand binds to the GPCR, the GPCR's equilibrium shifts and the GPCR is
stabilized in the active state.
By altering the genetic structure of a GPCR, our CART technology
stabilizes the GPCR in the active state in the absence of the native ligand.
Drug screening and discovery targeting GPCRs using CART technology is
comprised of four stages:
- - altering the molecular structure of an intracellular loop or intracellular
portion of the GPCR to generate a CART-activated form of the GPCR
- - introducing the CART-activated form of the receptor into mammalian cells,
which, in turn, manufacture the CART-activated form of these receptors at
the cell surface
- - analyzing the cells containing the CART-activated GPCR to detect biological
responses that result from the linking of the CART-activated GPCR to a G
protein
- - screening chemical libraries of small molecule compounds against the cell
membranes containing the CART-activated GPCR to identify compounds that
interact with the GPCR
Screening using CART technology allows us to simultaneously identify
compounds that act as receptor inhibitors to decrease the detected biological
responses, or act as receptor activators to increase the detected responses.
Therefore, our CART technology allows us to discover drugs that either inhibit
or enhance biological activity.
CART technology is also useful for identifying drug-like compounds that
reduce cellular responses resulting from ligand-independent activity of
receptors. These drugs are termed inverse agonists and are the preferred drugs
for treating diseases in which ligand-independent receptor activity may be
important, such as schizophrenia. In general, traditional ligand-based drug
screening techniques can only be used to identify neutral antagonists, which do
not affect the ligand-independent activity of the receptor. We can directly
identify inverse agonists using our CART technology by screening for
ligand-independent receptor activity. We believe the inverse agonists that we
identify will possess improved properties over neutral antagonists because they
inhibit both ligand-induced as well as ligand-independent activity.
In addition, because CART does not require the use of the native
ligand, we are not limited to finding drug-like compounds that bind to a
receptor at the receptor's ligand binding site. Instead, CART technology exposes
the entire receptor surface to drug-like compounds, allowing for the detection
of drug candidates which bind at any point on the receptor surface. We believe
that this feature of CART technology is important not only with respect to
orphan receptors, but known receptors as well, because it provides us with the
ability to discover new drugs with unique mechanisms of action.
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In summary, we believe that our platform CART technology offers several
key advantages for drug discovery over other screening techniques. Screening
CART-activated receptors:
- - does not require prior identification of the native ligand for an orphan
receptor
- - enhances the detection of, and simultaneously identifies, both receptor
inhibitor and receptor activator compounds
- - allows for the identification of compounds or drug candidates that inhibit
both ligand-induced and ligand-independent activity
- - provides the ability to discover novel and improved therapeutics at known
receptor targets
OUR STRATEGY
Our strategy is to use CART to become a leader in the discovery of new
drug candidates using orphan and known GPCRs. The major elements of our strategy
are to:
Apply CART to orphan GPCR targets to leverage available genomics
information. The completion of the first draft of the human genome has provided
gene sequence information on an unprecedented number of receptor drug targets,
including numerous previously unidentified GPCRs. CART technology can be applied
to these orphan GPCR targets to discover drug candidates. This can be done more
quickly and efficiently using CART technology than with traditional drug
discovery screening techniques because drug discovery using CART does not
require the identification and characterization of a receptor's native ligand, a
process which typically requires four to five years and costs millions of
dollars per receptor.
Discover new drug candidates that have unique mechanisms of action for
known GPCRs. We believe that CART provides us with the ability to discover new
drug candidates with unique mechanisms of action at known receptor targets,
which may be more effective and may have fewer side effects than existing drugs.
Unlike traditional drug discovery methods, we are not limited to finding drug
candidates that bind to a receptor at the receptor's ligand binding site.
Because CART technology exposes the entire GPCR surface to drug candidates, we
can discover drug-like compounds that act upon any part of the receptor surface.
Develop multiple pharmaceutical product candidates for GPCR targets.
CART technology allows us to identify drug-like compounds that act as receptor
inhibitors to reduce biological activity, or receptor activators to increase
biological activity. Therefore, CART provides the opportunity to simultaneously
discover multiple different drug-like compounds with unique mechanisms of action
for each receptor target, any of which may ultimately become successful
commercial pharmaceutical products.
Enter into strategic collaborations to discover and develop novel drug
candidates. We intend to enter into additional strategic collaborations to
discover and develop novel drug candidates using our CART technology. We believe
that the broad applicability of our CART technology will allow us to enter into
additional collaborations that focus on a variety of diseases and target a large
number of orphan and known GPCRs. We have entered into collaborations with Eli
Lilly, Taisho and Fujisawa under which we CART-activate a significant number of
GPCR targets and may receive additional revenues in the form of development
fees, milestone payments and royalties on products, if any, developed to target
these GPCRs.
Apply CART to other human receptors and non-human receptors for human
therapeutic, agricultural and other applications. We believe CART technology can
also be applied to other types of human receptors, such as TKRs, which are often
implicated as important factors in various diseases, such as breast cancer. We
are also applying our CART technology to non-human receptors for a variety of
applications including plant receptors to discover chemical growth factors,
insect receptors to discover insect control agents and viral receptors to
discover novel anti-viral drug candidates. We have CART-activated a number of
these other types of receptors and intend to pursue opportunities developed from
these receptors.
4
Continue to protect and expand our intellectual property rights. We
have filed approximately 120 independent patent applications with the United
States Patent and Trademark Office, and are filing some of these patent
applications worldwide. Four United States patents have been issued to us. We
believe that we will be issued additional patents on our CART technology and
patents on our CART-activated receptors because our technology genetically
modifies these receptors and changes their function. We intend to continually
seek ways to vigorously protect and enforce our rights with respect to our
intellectual property.
APPLICATIONS OF CART
Over the past three years, we have obtained the full-length gene
sequences of 330 human GPCRs and made them available for CART-activation and
screening. We also have obtained five non-human receptors, including plant,
viral and insect receptors. Through the use of our proprietary CART technology,
we have successfully identified compounds that inhibit or activate a number of
known and orphan receptor targets.
ORPHAN GPCRS
An important element of our CART technology involves using the gene
sequences of orphan GPCRs to understand and define the tissue and cellular
distribution of these GPCRs. The gene sequences provide us with the necessary
tools to locate the orphan receptors in tissues. Once we have identified the
location of an orphan receptor in tissues, we can determine the normal function
of the orphan receptor and compare that function to the function of the orphan
GPCR in diseased tissues. We then use our CART technology to screen the targeted
receptor for drug-like compounds that can be employed to verify the proposed
receptor function.
We have prioritized and applied our CART technology to orphan GPCRs as
having high potential value as drug discovery targets against specific diseases
or indications, based upon the distribution of the GPCR in specified tissues.
Examples of some of our more advanced CART programs are summarized below.
OBESITY. National Institutes of Health statistics indicate that
approximately 100 million adults in the United States are overweight and that
22% of these are considered clinically obese. The few currently approved drugs
for the treatment of obesity in the United States act either as appetite
suppressants or blockers of fat absorption. However, cardiovascular or
gastrointestinal side effects may limit the long-term effectiveness of these
drugs. Consequently, more effective therapeutics are urgently needed for this
major public health problem.
We have an ongoing program directed towards the development of novel
anti-obesity drugs. We have identified a number of orphan GPCRs on brain cells
related to the control of feeding and metabolism, including the 18F, 19U, 19X
and 19NY GPCRs. For example, we have discovered an over-abundance of the 18F
GPCR in the brain metabolism centers of genetically obese rats. We believe that
this discovery indicates that overactivity of this GPCR may be associated with
obesity.
We are using our CART technology to identify drug-like compounds that
inhibit the activity of the 18F GPCR. Repeated administration of the drug-like
compounds we have identified has resulted in reduced food intake and sustained
weight loss in normal laboratory animals. Similar results were also obtained in
a diet-induced animal model of human obesity. In this diet-induced animal model,
these drug-like compounds also acted to increase fat metabolism and resulted
specifically in a loss of fat mass. We have found that the 18F GPCR is also
located on human fat cells. Therefore, we believe that these drug-like compounds
may provide the basis for a novel approach to the treatment of human obesity by
simultaneously reducing food intake and increasing fat metabolism.
Our anti-obesity drug program demonstrates the advantages of CART
technology for rapid drug candidate discovery. The process of discovering
promising drug candidates took approximately 18 months beginning from our
initial discovery of the over-abundance of the 18F GPCR in genetically obese
animals to the animal testing of the drug-like compounds that we discovered
using our CART technology. In January 2001, we licensed our 18F receptor to
Taisho which is discussed below under the heading "Our GPCR Collaborators."
CANCER. We have identified several orphan GPCRs, including the 18AD,
20WW, 20PO, 19AG and 19Y GPCRs, which we believe represent therapeutic targets
for the treatment of a variety of cancers. These orphan
5
GPCRs are attractive therapeutic targets because they have been shown to be
present in abnormally high levels in ovarian, colorectal, gastrointestinal and
uterine cancer cells and cause unwanted proliferation of cells in laboratory
experiments.
CARDIOVASCULAR DISEASE. We have identified several orphan GPCRs,
including the 19L and 20RH GPCRs, that are located within the cardiovascular
system, such as on heart tissues and blood vessel walls. The 19L receptor has
been localized to the smooth muscle cells of blood vessel walls and is regulated
under conditions associated with vessel damage and artherosclerotic damage. The
20RH receptor has been localized to heart myocytes and is regulated both in IN
VITRO and IN VIVO models associated with cardiomyopathy. Using CART technology
we aim to identify small molecule regulators of these receptors which may have
potential to treat diseases related to aberrant cardiovascular function.
DIABETES. One of the orphan GPCRs that we discovered, the 19AJ GPCR, is
specifically located on insulin producing beta cells in the pancreas. Normally,
glucose stimulates the beta cell to produce insulin, but in diabetes the beta
cell often becomes less sensitive to glucose and the ability of the beta cell to
produce insulin is impaired. The 19AJ GPCR appears to make the beta cells more
responsive to glucose concentrations, resulting in enhanced insulin release. By
applying CART technology to the 19AJ GPCR we will seek to discover drug
candidates to treat diabetes, which, according to the National Institutes of
Health, affected approximately 15.7 million people in the United States in 1997.
INFLAMMATION. We have identified several orphan GPCRs, including the
18AF and 19W GPCRs, that may mediate inflammatory responses in various locations
of the body. Our preliminary data suggest that the 18AF GPCR may regulate brain
cells related to inflammation. Based upon its sequence structure, the 18AF GPCR
appears to be related to a group of GPCRs called chemokine receptors. Chemokine
receptors are known to be involved in the inflammation process, and brain
inflammation is involved in a number of neurodegenerative disorders, including
stroke. The number of 19W GPCRs is increased in dying cells during inflammation,
suggesting that the 19W GPCR may be involved in controlling the process of cell
death. We have CART-activated the 19W GPCR and have developed an assay for
screening of chemical compounds against this GPCR. Drug candidates that modulate
the activity of these GPCRs may provide a unique therapeutic approach to the
treatment or mediation of inflammatory responses. According to the National
Institutes of Health, diseases involving inflammation afflict over 25 million
people in the United States.
ALZHEIMER'S DISEASE. Several of our orphan GPCR targets are located on
cells within the central nervous system, including the 18L GPCR. The 18L GPCR is
located on nerve cells in an area of the brain called the hippocampus, which is
responsible for controlling memory function. In Alzheimer's Disease, normal
memory processes in the hippocampus are severely impaired. We believe drugs that
modulate the 18L GPCR could be useful for controlling memory function and for
the treatment of symptoms of Alzheimer's Disease, which, according to the
National Institutes of Health, affects four million people in the United States.
KNOWN GPCRS
Although we focus on orphan GPCRs, we also apply our CART technology to
known GPCRs. We believe that the application of our CART technology to known
GPCRs will identify novel classes of drug candidates that may be more effective
and may have fewer side effects than existing drugs that target known GPCRs.
Our principal advantage in applying CART technology to known GPCRs is
our ability to directly identify drug-like compounds that act as inverse
agonists, which cannot be directly identified using traditional ligand-based
screening techniques. Inverse agonists are particularly relevant in treating
diseases in which ligand-independent GPCR activity, or overactivity, is
implicated.
We have identified drug-like compounds that are capable of inhibiting
both ligand-independent and ligand-dependent activity at selected known GPCR
targets. We are currently developing candidates that target these overactive
known GPCRs to treat the related diseases. Our most advanced program targets the
serotonin 5HT2A GPCR for potential treatment of schizophrenia and other
psychiatric disorders.
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According to the National Institutes of Health, approximately 1% of the
population develops schizophrenia during their lifetime. More than 2 million
Americans suffer from schizophrenia in a given year. We have tested currently
available anti-psychotic drugs and have found that they act as inverse agonists
at a known GPCR, referred to as the 5HT2A GPCR. Using our CART technology, we
have discovered and are developing a number of new candidates that act as
inverse agonists at the 5HT2A GPCR. These candidates displayed activities in
tests involving laboratory animals indicating that they could be useful in
treating psychiatric disorders such as schizophrenia and depression. Moreover,
our CART-identified 5HT2A inverse agonists possess a higher degree of receptor
selectivity than currently marketed anti-psychotics, which suggests our inverse
agonists may be more effective. To date, these candidates exhibit no evidence of
side effects in laboratory animals.
Our anti-psychotic drug program also demonstrates the advantages of
CART technology for rapid drug candidate discovery. The process of discovering
promising drug-like compounds took approximately 18 months beginning from the
application of our CART technology to the 5HT2A GPCR to the animal testing of
the candidates that we discovered using CART technology. We intend to enter into
a collaboration to further expand our anti-psychotic drug program with the goal
of selecting one or more of our novel anti-psychotic drug candidates that target
the 5HT2A GPCR, for future clinical development.
OTHER AREAS OF CART APPLICATION
OLFACTORY AND TASTE GPCRS. A specialized multigene family of GPCRs has
been identified in the nasal membrane and is responsible for the sense of smell.
Another family of GPCRs has recently been discovered in the tongue and is
believed to be responsible for the perception of taste. We are applying our CART
technology to a number of olfactory and taste GPCRs to identify novel compounds
that we believe will be of potential commercial value in the fragrance and food
additive industries.
PLANT GPCRS. Plants respond to a variety of environmental and internal
signals that regulate aspects of their growth and development. GPCRs have
recently been identified in a variety of plants and have been implicated in the
action of a variety of plant hormones. We are presently applying our CART
technology to plant GPCRs in an attempt to identify novel regulators of the life
cycle of plants that may affect crop growth and development.
VIRAL GPCRS. GPCRs are involved in either replication or infection in a
number of viruses. Some herpes viruses, including the Kaposi's
sarcoma-associated virus, have GPCRs within their genome which are important for
replication. Other GPCRs appear necessary for primary infection. For example,
HIV infects cells by binding to a GPCR that transports the virus into cells. A
number of orphan GPCRs have been identified which appear to act in a similar
manner for other viruses. Our goal is to identify novel anti-viral drugs using
CART technology.
INSECT GPCRS. Insect genomes also include GPCRs, and we have begun the
process of applying CART technology to insect GPCRs in an attempt to identify
compounds that may offer the potential for improved and environmentally safer
insect control agents. Our goal is to use CART-activated insect GPCRs to find
compounds that selectively reduce pest reproduction and feeding behavior.
TYROSINE KINASE RECEPTORS. In addition to applying our CART technology
to orphan GPCRs, we are also applying our CART technology to other human
receptor classes, including orphan TKRs. A number of orphan TKRs have been
located on cancerous tissues and may be involved in excessive cell proliferation
and growth. As with GPCRs, our CART technology allows us to activate orphan TKRs
in the absence of native ligands and screen the activated TKRs to identify novel
inhibitors of TKR activity. We are currently evaluating orphan TKRs for drug
screening.
GENETIC "KNOCK-IN" MODELS. We are collaborating with Lexicon Genetics
to develop mice that produce CART-activated GPCRs, or GPCR knock-ins, by using
state-of-the-art molecular genetic techniques. By producing CART-activated
orphan GPCRs in animals, we believe that we will gain valuable insight into the
functionality of individual GPCRs, as well as indications of human disease for
which drugs that target these GPCRs may be useful. In addition, we expect that
these knock-in animals will provide an animal model that can be used to test the
potency of drug-like compounds discovered using CART-activated GPCRs. The first
knock-in GPCR animals developed based upon this collaboration were born in
February 2001.
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OUR GPCR COLLABORATORS
Our success will depend in large part upon our ability to enter into
successful collaborations with other pharmaceutical and biotechnology companies.
We are active in the scientific community and within the industry and regularly
make presentations regarding our research and development programs and the
applications of our CART technology at scientific conferences and industry
conventions. We believe that our participation at these events has led, and will
continue to lead, to contacts with existing and potential collaborators. We have
entered into a number of strategic collaborations in the recent past to discover
novel drug candidates using our CART technology, and we expect to enter into
additional collaborations and expand our existing collaborations in the future.
ELI LILLY
In April 2000, we entered into a research alliance with Eli Lilly, one
of the world's leading pharmaceutical companies. Our collaboration with Eli
Lilly is principally focused on the central nervous system and endocrine
therapeutic fields. We will also focus on the cardiovascular field and may
expand our collaboration to other therapy classes, including cancer.
During our collaboration, we will pursue an agreed upon research plan
with Eli Lilly that has several objectives. During the term of our
collaboration, we will mutually review and select GPCRs that will become subject
to the collaboration. These GPCRs may be provided either by us or by Eli Lilly.
All of our pre-existing CART-activated GPCRs were excluded from the
collaboration. We and Eli Lilly will each share our respective knowledge of the
GPCRs that become subject to the collaboration to validate and CART-activate
selected receptors. We will jointly select a number of proprietary central
nervous system, endocrine and cardiovascular GPCRs for CART-activation, and we
will then provide Eli Lilly with enabled high-throughput screens for use at
their screening facilities. During the term of the agreement, we will continue
to receive research funding from Eli Lilly for our internal resources committed
to the collaboration, which will be augmented by substantial resource
commitments by Eli Lilly. Eli Lilly will be responsible for screening its
chemical compound library using selected CART-activated receptors, for
identifying drug candidates and for the pre-clinical and clinical testing and
development of drug candidates. We may receive up to $1.25 million per receptor
based upon milestone payments in connection with the successful application of
CART to each receptor, and up to an additional $6.0 million based upon clinical
development milestone payments for each drug candidate discovered using CART. We
may also receive additional milestone and royalty payments associated with the
commercialization of drugs discovered using CART, if any.
Once the assay development fee has been paid for a CART-activated GPCR,
Eli Lilly will have exclusive rights to screen chemical libraries, discover drug
candidates that target that GPCR, and to develop, register and sell any
resulting products worldwide. We retain rights to partner or independently
develop GPCRs that do not become subject to the collaboration.
The term of our collaboration agreement with Eli Lilly is five years.
Either Eli Lilly or we can terminate the agreement with or without cause
effective three years after the date of the agreement by giving written notice
prior to the conclusion of the 33rd month after the date of the agreement. In
addition, either party can terminate the agreement at any time if the other
party commits a material breach, and Eli Lilly can terminate the agreement at
any time if, among other reasons, Eli Lilly does not approve suitable
replacements for key employees who leave us. The parties will continue to have
various rights and obligations under the agreement after the agreement is
terminated. The extent of these continuing rights and obligations depends on
many factors, such as when the agreement is terminated, by which party and for
what reason. These continuing obligations may include further research and
development efforts by us and a variety of payments by Eli Lilly.
8
Eli Lilly is a significant customer and the loss of such customer would
have a material adverse effect on our business and future revenue stream.
Revenue recognized under the Eli Lilly collaboration was approximately
$5.2 million for the year ended December 31, 2000 consisting of research funding
of approximately $2.9 million, milestone achievements related to the activation
of nine selected GPCRs for approximately $2.2 million, and amortization of an
up-front payment of $75,000.
TAISHO
In May 2000, we entered into a research collaboration with Taisho
to initiate a research collaboration focused on several GPCRs selected by
Taisho in therapeutic areas of interest to Taisho. Under the terms of the
agreement, Taisho will receive exclusive, worldwide rights to the selected
GPCR targets and to any drug candidates discovered using the activated
versions of these receptors. We may receive up to a total of $2.3 million in
revenues per receptor associated with research, development and screening
fees. We may also receive clinical development milestones, regulatory
approval milestones and royalties on drug sales, if any.
Taisho is a significant customer and the loss of such customer would
have a material adverse effect on our business and future revenue stream.
Revenue recognized under the Taisho collaboration was approximately
$2.4 million for the year ended December 31, 2000 consisting of milestone
achievements of approximately $2.3 million related to receptor activation
selection and screening assay fees, and amortization of an up-front payment of
$80,000.
In January 2001, we signed an amendment expanding our original
agreement with Taisho whereby Taisho was granted world-wide rights to our 18F
Program which includes a GPCR that we believe represents an obesity orphan
receptor target and small molecule modulators discovered using this receptor. In
accordance with the amendment, Taisho will make a one-time payment to us for the
18F program based upon work completed by us to date. In addition, the Company
may receive additional milestone and research funding payments and royalties on
drug sales, if any.
FUJISAWA
In January 2000, we entered into a collaborative agreement with
Fujisawa, a leading Japan-based pharmaceutical company with significant drug
discovery research efforts. During the collaboration, we will jointly validate
up to 13 orphan GPCRs as drug screening targets. We will be responsible for
receptor identification, location and regulation, and will apply our CART
technology to GPCRs selected by Fujisawa. We will also seek to validate
screening assays based on the selected GPCRs. Fujisawa will be entitled to
screen selected assays against its chemical compound library to identify drug
candidates. Fujisawa will also be responsible for the pre-clinical and clinical
development of any drug candidates that we or Fujisawa discover. We may also
screen the selected GPCRs using our in-house chemical library. When Fujisawa
selects its first receptor, we will be entitled to receive a one-time initiation
fee of $500,000. If we and Fujisawa then achieve various milestones, we may
receive up to a maximum of $3.5 million per selected receptor for assay
transfer, screening and exclusivity fees, and up to a maximum of $2.0 million
per selected receptor based upon the filing of one or more investigational new
drug applications for each drug candidate discovered using a CART-activated
receptor. We may also receive clinical development milestones, regulatory
approval milestones and royalties on drug sales, if any. We and Fujisawa may
never achieve research, development or commercialization milestones under the
agreement.
Our collaborative agreement with Fujisawa will terminate upon the
expiration of Fujisawa's obligation to make royalty payments under the
agreement, if any. Fujisawa may terminate the agreement at any time by providing
us with written notice of their intention to do so and by returning any
proprietary rights they have acquired under the agreement. Additionally, either
party may terminate the agreement for a material breach of the agreement by the
other party. The termination or expiration of the agreement will not affect any
rights that have accrued to the benefit of either party prior to the termination
or expiration.
9
LEXICON GENETICS
In April 2000, we signed a binding letter of intent and memorandum of
agreement with Lexicon Genetics, a genomics company that uses a proprietary
technology to clone mice, enabling large-scale functional genomics. The
agreement establishes a research collaboration with Lexicon Genetics using their
proprietary technology to clone gene-targeted mice whose genomes have been
altered using specified CART-activated orphan GPCRs. Our collaboration with
Lexicon Genetics consists of a feasibility phase to determine both the utility
of this novel approach and the scope of any resulting licensing alliance. If we
proceed beyond the feasibility stage, the agreement establishes a licensing
alliance in which we and Lexicon Genetics will each contribute up to ten unique
GPCRs to clone mice containing CART-activated GPCRs for use as drug discovery
tools, and to discover drug candidates using these GPCRs. We will share equally
in the fees, milestones and royalties generated from any licensing agreement
with a third-party involving GPCRs developed through our licensing alliance.
OTHER AGREEMENTS
The Company's practice is to meet with pharmaceutical and biotechnology
companies on an on-going basis to discuss the possibility of collaborating with
them on projects of mutual interest. At present, the Company is in the early
stages of discussing with other companies the possibility of a number of such
arrangements. There can be no assurance that the Company will be successful in
consummating any such arrangement.
ACQUISITION OF BUNSEN RUSH LABORATORIES
In February 2001, we acquired all of the outstanding capital stock of
Bunsen Rush laboratories, Inc. (Bunsen Rush) through BRL Screening, our
wholly-owned subsidiary, for $15.0 million in cash. Bunsen Rush was a privately
held research-based company that provided receptor screening for the
pharmaceutical and biotechnology industries using its proprietary and patented
Melanophore Technology.
Melanophores are pigment-bearing cells. In response to light and a
range of chemical stimuli, they undergo rapid color change, a change that can be
mediated by GPCRs or receptor tyrosine kinases as a result of changes in second
messenger levels of cyclic AMP or diacylglycerol. During the color change,
pigment granules, referred to as "melanosomes", undergo rapid dispersion
throughout the cell or aggregation to the center of the cell. The reversible
movement of melanosomes along microtubules is driven by molecular motors. In
this new system, there is no new pigment synthesis; the same pigment is simply
redistributed within the cell. Pigment dispersion results in the cells appearing
dark while aggregation causes the cells to appear light, creating what has been
referred to as a "chameleon in a dish". In many cases, the response of the cells
is detectable in minutes using either a microplate reader or video imaging
system. In melanophores, activation of the G protein subtypes referred to as Gs
or Gq results in pigment dispersion, while activation by the G protein subtype
referred to as Gi leads to pigment aggregation. Melanophores are derived from
the neural crest and express a diverse set of G-proteins allowing them to
functionally express GPCRs.
In collaboration with us, Bunsen Rush has secured data that both we and
Bunsen Rush believe indicate that the Melanophore Technology is applicable to
CART-activated GPCRs. The Melanophore technology is the subject of issued U.S.
Patent Nos. 6,051,386 and 5,462,856. Melanophore Technology is a
functional-based screening technology used to identify compounds that interact
with cell surface receptors, including known and orphan GPCRs and receptor
tyrosine kinases. The functional nature of the Melanophore Technology eliminates
the need for radioactive or fluorescent screening techniques and provides a
simple and sensitive means to detect cellular signals generated by activated
GPCRs.
The Melanophore Technology has the potential to be a simple, robust and
widely applicable functional assay technique for the identification of
modulators to GPCRs and thus is complementary to our strategic objectives of
continually enhancing the breadth and applicability of our CART Technology. As
we continue to expand its high-throughput screening capabilities for
CART-activated known and orphan GPCRs, we believe that access to complementary
compound screening and identification techniques will help us streamline the
drug discovery process. We believe that in combination, CART Technology and
Melanophore Technology will provide a powerful means to enhance the discovery of
modulators at GPCRs. CART activation of receptors provides a signal to the
10
cell, and the Melanophore Technology provides a complementary, simple and
sensitive signal detection system with advantages for small molecule screening
over other techniques.
CHEMNAVIGATOR.COM
In early 1999, we developed an Internet-based search engine that allows
scientists to search for chemical compounds based primarily on the similarity of
chemical structures. We believe this is important for drug discovery purposes
because chemical similarity can be used as an indicator of biological activity.
ChemNavigator.com was formed in May 1999 and subsequently obtained independent
third-party financing. We licensed the search engine's underlying technology and
related intellectual property to ChemNavigator.com in exchange for stock. We
currently beneficially own approximately 34% of the outstanding common stock of
ChemNavigator.com.
ARESSA PHARMACEUTICALS
In August 1999, the Company formed Aressa Pharmaceuticals, Inc. as a
wholly-owned subsidiary to take advantage of opportunities to in-license and
develop niche products from other pharmaceutical or biotechnology companies. In
November 1999, Aressa entered into a licensing agreement with respect to a
patented anti-fungal compound. In October 2000, Aressa received gross proceeds
of $1 million whereby Aressa is no longer a wholly- owned subsidiary of the
Company, but rather a separately funded company. We currently beneficially own
approximately 83% of the outstanding common stock of Aressa.
T-82
We in-licensed T-82 from SSP Co., Ltd. in 1998 as a novel drug
candidate to treat Alzheimer's Disease. Our Phase I safety studies of this
compound began in 1999. We have completed four Phase I studies of T-82 through
2000 and have been assessing the data in conjunction with SSP. We were not
required to make milestone payments to SSP following completion of these
studies. We are required to make milestone payments to SSP upon the successful
completion of Phase II clinical studies, after successful completion of Phase
III clinical studies and, if applicable, after receiving marketing approval by
the FDA and European regulatory agencies, up to an aggregate maximum of $5.0
million. The four Phase I safety-based studies of T-82 evidenced results that we
believe establish the safety of T-82 in the tested parameters. However, our
analysis of all of the data for T-82, in conjunction with the extensive costs
associated with conducting Phase II and Phase III clinical studies of T-82, the
types and number of potential new treatments for Alzheimer's Disease that are in
more advanced stages of clinical testing, as well as the impact that these
factors may have on our ability to successfully out-license T-82 to a third
party have prompted us to consider if continuation of the T-82 program by us is
warranted. We therefore cannot assure you that we will continue development of
T-82 until we have completed the assessment of all data and information related
to this program.
INTELLECTUAL PROPERTY
Our success depends in large part on our ability to protect our
proprietary technology and information, and operate without infringing on the
proprietary rights of third parties. We rely on a combination of patent, trade
secret, copyright and trademark laws, as well as confidentiality agreements,
licensing agreements and other agreements, to establish and protect our
proprietary rights. Since our inception, we have filed approximately 120 patent
applications in the United States regarding our:
- - CART technology
- - orphan receptors and CART-activated orphan receptors
- - CART-activated known receptors
- - small molecule chemical compounds
11
- - acetylcholine enhancers
- - web-based search engine technologies
The term of all of our patents, if any are issued, will commence on the
date of issuance and terminate 20 years from the earliest effective filing date
of the patent application. Because the time from filing to issuance of
biotechnology patent applications is often more than three years, our patent
protection, if any, on our products and technologies may be substantially less
than 20 years.
We seek patent protection for all of our key inventions, including our
CART technology, new receptors that we discover, genetically-altered receptors,
and drug candidates identified by our CART technology. It has been possible to
obtain broad, composition-of-matter patents on novel chemical compounds, such as
the drug candidates, if any, that we identify using our CART technology. It has
also been possible to obtain broad method patents for techniques and procedures
for screening and drug-identification technologies, such as those embodied by
our CART technology. It has generally not been possible to obtain broad
composition-of-matter patents for nucleic acid and amino acid sequences.
However, it has been possible to obtain patents that protect specific sequences
and functional equivalents of those sequences. Furthermore, intellectual
property law allows for separate and distinct patents for altered genetic
sequences over previously disclosed sequences. We believe that we can obtain
patents on our CART-activated receptor sequences because they are not functional
equivalents of the natural version of the receptor. We have filed and will
continue to file patent applications on these types of technologies. We believe
that our CART technology does not infringe on third-party claims related to any
aspect of our proprietary technology.
As a general matter, obtaining patents in the biotechnology and
pharmaceutical fields is highly uncertain and involves complex legal, scientific
and factual matters. Obtaining a patent in the United States in the
biotechnology and pharmaceutical fields can be expensive and can, and often
does, require several years to complete. Failure to receive patents pursuant to
the applications referred to herein and any future applications could have a
material adverse effect on the Company. Our patent filings in the United States
may be subject to interference or reexamination proceedings. The defense and
prosecution of interference and reexamination proceedings and related legal and
administrative proceedings in the United States involve complex legal and
factual questions. We also file patent applications outside of the United
States. The laws of some foreign countries may not protect our proprietary
rights to the same extent as do the laws of the United States. Third parties may
attempt to oppose the issuance of our patents in foreign countries by way of
opposition proceedings. Additionally, if an opposition proceeding is initiated
against any of our patent filings in a foreign country, that proceeding could
have an adverse effect on the corresponding patents that are issued or pending
in the United States. If we become involved in any interference, reexamination,
opposition or litigation proceedings in the United States or foreign countries
regarding patent or other proprietary rights, those proceedings may result in
substantial cost to us, regardless of the outcome, and may have a material
adverse affect on our ability to develop, manufacture, market or license our
technologies or products, or to maintain or form strategic alliances.
Although we plan to aggressively prosecute our patent applications and
defend our patents against third-party infringement, we cannot assure you that
any of our patent applications will result in the issuance of patents or that,
if issued, such patents will not be challenged, invalidated or circumvented.
Moreover, we cannot assure you that our patents, if any, will provide us
protection against competitors with other technologies. Our technologies and
potential products may conflict with patents that have been or may be granted to
competitors, universities or others. As the biotechnology industry expands and
more patents are issued, the risk increases that our technologies and potential
products may give rise to claims that they infringe the patents of others. Third
parties claiming infringement of their proprietary rights could bring legal
actions against us claiming damages and seeking to enjoin our use or
commercialization of a product or our use of a technology. In particular, patent
applications or patents for innovative and broadly applicable technologies, such
as our CART technology, are sometimes challenged by third parties as obvious, or
as obvious extensions of technologies previously developed by those third
parties. We cannot assure you that such claims will not be brought against us in
the future. If any actions based on these claims are successful, in addition to
any potential liability for damages, we could be required to obtain a license in
order to continue to use a technology or to manufacture or market a product, or
could be required to cease using those products or technologies. Any claim, with
or without merit, could result in costly litigation and divert the efforts and
attention of our scientific and management personnel. We cannot assure you that
we would prevail in any
12
action or that any license required under any patent would be made available or
would be made available on acceptable terms.
In addition to patent protection, we rely upon trade secrets,
proprietary know-how and continuing technological advances to develop and
maintain our competitive position. To maintain the confidentiality of our trade
secrets and proprietary information, all of our employees are required to enter
into and adhere to an employment-confidentiality and invention-assignment
agreement, laboratory notebook policy, and invention disclosure protocol, as a
condition of employment. Additionally, our employment-confidentiality and
invention-assignment agreement requires that our employees do not bring to
Arena, or use without proper authorization, any third-party proprietary
technology. We also require all of our consultants and collaborators that have
access to proprietary property to execute confidentiality and invention rights
agreements in our favor before beginning their relationship with us. While such
arrangements are intended to enable us to better control the use and disclosure
of our proprietary property and provide for our ownership of proprietary
technology developed on our behalf, they may not provide us with meaningful
protection for such property and technology in the event of unauthorized use or
disclosure.
We have entered into a research agreement with the University of
Glasgow to jointly develop screening strategies using our CART-activated GPCRs,
combined with techniques claimed in a patent application owned by the
University. Under this agreement, we have an option to take an exclusive license
to this patent application, as well as techniques that are developed during the
course of the research agreement. Although we are currently not in default under
this agreement, we cannot assure you that we will not default under this
agreement in the future.
COMPETITION
A major focus of our scientific and business strategy for our CART
technology involves orphan GPCRs. Most major pharmaceutical companies, as well
as several biotechnology companies, have drug discovery programs based upon
GPCRs, including orphan GPCRs. In addition, other companies have attempted to
overcome the problems associated with traditional drug screening by embarking
upon a variety of alternative strategies. Although some of these approaches are
indicated as being based upon ligand-independent strategies, like CART, we
believe that all of these approaches have relied upon indirect measures of
receptor activity, which we believe provide a limited possibility of assessing
receptor-drug interaction and increase the possibility of false positive
results.
Several of our existing and potential competitors have substantially
greater product development capabilities and financial, scientific and marketing
resources than we do. As a result, they may be able to adapt more readily to
technological advances than we can, or to devote greater resources than we can
to the research, development, marketing and promotion of drug discovery
techniques or therapeutic products. Additionally, the technologies being
developed by these companies may be more readily accepted or widely used than
our CART technology. Our future success will depend in large part on our ability
to maintain our competitive position. The biotechnology field is undergoing
rapid and significant change and we may not be able to compete successfully with
newly emerging technologies.
We will rely on our collaborators for support of our development
programs for our drug candidates and intend to rely on our collaborators for the
manufacturing and marketing of these products. Our collaborators may be
conducting multiple product development efforts within the same disease areas
that are the subjects of their agreements with us. Generally, our agreements
with our collaborators do not preclude them from pursuing development efforts
using a different approach from that which is the subject of our agreement with
them. Any of our drug candidates therefore, may be subject to competition with a
drug candidate under development by a collaborator.
GOVERNMENT REGULATION
Our and our collaborators' ongoing drug development activities are
subject to the laws and regulations of governmental authorities in the United
States and other countries in which these products may be marketed.
Specifically, in the United States, the Food and Drug Administration (FDA) and
comparable regulatory agencies in state and local jurisdictions impose
substantial requirements on new product research and the clinical development,
manufacture and marketing of pharmaceutical products, including testing and
clinical trials to establish the safety
13
and effectiveness of these products. Our and our collaborators' drug products
will require regulatory approval before commercialization. Governments in other
countries have similar requirements for testing, approval and marketing. In the
United States, in addition to meeting FDA regulations, we are also subject to
other federal, state and local environmental and safety laws and regulations,
including regulation of the use and care of laboratory animals.
We do not plan to commercialize most of our drug candidates by
ourselves, but intend to rely on our collaborators to develop and commercialize
our drug candidates or those that our collaborators discover through the use of
our technology. Before marketing in the United States, any pharmaceutical or
therapeutic products developed by us or our collaborators must undergo rigorous
pre-clinical testing and clinical trials and an extensive regulatory approval
process implemented by the FDA under the federal Food, Drug and Cosmetic Act.
The FDA regulates, among other things, the development, testing, manufacture,
safety and effectiveness standards, record keeping, labeling, storage, approval,
advertising, promotion, sale and distribution of pharmaceutical products. The
regulatory review and approval process, which includes pre-clinical testing and
clinical trials of each product candidate is lengthy, and uncertain. Securing
FDA approval requires the submission of extensive pre-clinical and clinical data
and supporting information to the FDA for each indication to establish a product
candidate's safety and effectiveness. Additional animal studies, other
pre-clinical tests or clinical trials may be requested by the FDA which may
delay marketing approval. The approval process takes many years, requires the
expenditure of substantial resources and may involve ongoing requirements for
post-marketing studies.
Before commencing clinical investigations in humans, we or our
collaborators must submit an Investigational New Drug application, or IND, to
the FDA. We generally intend to rely on our collaborators to file IND
applications and direct the regulatory approval process for the products they
develop using our CART technology. Clinical trials are typically conducted in
three sequential phases, although the phases may overlap or be combined. Phase I
represents the initial administration of the drug to a small group of humans,
either healthy volunteers or patients, to test for safety, dosage tolerance,
absorption, metabolism, excretion and clinical pharmacology. Phase II involves
studies in a relatively small number of patients to assess the effectiveness of
the product, to ascertain dose tolerance and the optimal dose range and to
gather additional data relating to safety and potential adverse effects. Once a
drug is found to have some effectiveness and an acceptable safety profile in the
targeted patient population, Phase III studies are initiated to establish safety
and effectiveness in an expanded patient population and multiple clinical study
sites. The FDA may require further post-marketing studies, referred to as Phase
IV studies. The FDA reviews both the clinical plans and the results of the
trials and may require that we discontinue the trials at any time if the FDA
identifies any significant safety issues. Clinical testing must meet
requirements for institutional review board oversight, informed consent, good
clinical practices and FDA oversight.
The length of time necessary to complete clinical trials varies
significantly and is difficult to predict. Clinical results are frequently
susceptible to varying interpretations that may delay, limit or prevent
regulatory approvals. Additional factors that can cause delay or termination of
our clinical trials, or those of our collaborators, or may increase the cost of
those trials, include, among other factors:
- - lack of effectiveness of the product being tested
- - adverse medical effects or side effects in treated patients
- - slow patient enrollment in the clinical trial
- - inadequately trained or insufficient personnel at the study site to assist
in overseeing and monitoring the clinical trial
- - delays in approval from a study site's review board
- - longer treatment time required to demonstrate effectiveness or determine
the appropriate product dose
- - lack of sufficient supplies of the product candidate
14
If pre-clinical and clinical studies are successful, the results,
together with other information about the product and its manufacture, are
submitted to the FDA in the form of an New Drug Application (NDA) to request
marketing approval. Before receiving FDA approval to market a product, we or our
collaborators must demonstrate that the product is safe and effective through
clinical trials on the patient population that will be treated. The approval
process is likely to require substantial time and effort and there can be no
assurance that any approval will be granted on a timely basis, if at all.
Additional animal studies or clinical trials may be requested during the FDA
review period that may delay marketing approval. As part of the approval
process, each manufacturing facility must be inspected by the FDA. Among the
conditions of approval is the requirement that a manufacturer's quality control
and manufacturing procedures conform with federally mandated current good
manufacturing practices, or GMPs. Manufacturers must expend time, money and
effort to ensure compliance with current GMPs and the FDA conducts periodic
inspections to certify compliance. Violations may result in restrictions on the
product or manufacturer, including costly recalls or withdrawal of the product
from the market.
If regulatory approval of a product is granted by the FDA, this
approval will be limited to those specific conditions for which the product is
useful, as demonstrated through clinical studies. After FDA approval for the
initial indications, further clinical trials will be necessary to gain approval
for the use of the product for additional indications. Marketing or promoting a
drug for an unapproved indication is prohibited. The FDA requires that adverse
effects be reported to the FDA and may also require post-marketing testing to
monitor for adverse effects, which can involve significant expense. Even after
FDA approvals are obtained, a marketed product is subject to continual review.
Later discovery of previously unknown problems or failure to comply with the
applicable regulatory requirements may result in restriction on the marketing of
a product or withdrawal of the product from the market as well as possible civil
or criminal sanctions. Furthermore, failure to obtain reimbursement coverage
from governmental or third party insurers may adversely impact successful
commercialization.
Our access to and use of human or other tissue samples in our research
and development efforts are subject to government regulation, both in the United
States and abroad. United States and foreign government agencies may also impose
restrictions on the use of data derived from human or other tissue samples. If
our access to or use of human tissue samples, or our collaborator's use of data
derived from such samples, is restricted, our business could suffer.
Additionally, if we continue to develop our plant or insect programs, we may
become subject to different government regulations relating to agricultural and
industrial biotechnology products.
In addition to regulations enforced by the FDA, we are also subject to
regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act, the Controlled Substances Act and other present and potential
future federal, state or local regulations. Our research and development
programs involve the controlled use of hazardous materials, chemicals,
biological materials and various radioactive compounds. Although we believe that
our safety procedures for handling and disposing of such materials comply with
the standards prescribed by state and federal regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, we could be held liable for any
damages that result, and the extent of that liability could exceed our
resources.
RESEARCH
Research activities are important to our business. Research expenses
related to the development of our technology and services and the improvement of
our existing technology totaled approximately $12.1 million, $8.3 million and
$2.6 million for the years ending December 31, 2000, 1999 and 1998,
respectively. In the year ended December 31, 2000, the amount of research and
development activities sponsored by our collaborators totaled approximately $2.9
million and was recorded as revenue.
COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
15
We believe that our operations comply in all material respects with the
applicable environmental laws and regulations. Our compliance with these
requirements did not and is not expected to have a material effect upon our
capital expenditures, earnings or competitive position.
SOURCES AND AVAILABILITY OF RAW MATERIALS
In general, we purchase raw materials and supplies on the open market.
Substantially all such materials are obtainable from a number of sources so that
the loss of any one source of supply would not have a material adverse effect
upon us.
OUR DATABASE
We have developed a web-based database that can be used to access
relevant information and data generated from our research and development
programs. Our database has a number of characteristics which we believe are
unique. Our database allows individual users to obtain information on specific
GPCR targets, including gene sequence information, data developed by us from
GPCR tissue and cellular distribution studies, the results of drug screening and
the results of our animal studies. In developing this database, we focused on
the magnitude of data that we would generate based upon the number of GPCRs
available to us, and the number of chemical compounds that would be screened in
our assays. Our database, which is the subject of a pending patent application
that we own, has a number of proprietary features that allow us to efficiently
organize, store and access these data and information. Using this database, we
and our collaborators can search for compounds by structure and assay results,
and can search for genes by sequence and tissue or disease expression. One of
our collaborators is currently using our database, and we believe our database
will be a resource for collaborators who have a specific interest in diseases
that affect certain tissues.
EMPLOYEES
As of March 1, 2001, we employed 122 people, including 102 in research
and development and 20 in administration. Thirty-one of our employees hold
doctoral degrees and an additional 17 hold other advanced degrees. None of our
employees is covered by collective bargaining agreements. We consider our
relationship with our employees to be good.
RISK FACTORS
WE ARE AT AN EARLY STAGE OF DEVELOPMENT AND HAVE A HISTORY OF LOSSES AND LIMITED
REVENUES.
We were formed in April 1997 and are a early stage company with a
limited operating history. To date, we have generated only limited revenues. Due
in large part to the significant research and development expenditures required
to identify and validate new drug targets and new drug candidates, we have
generated losses each year since our inception. As of December 31, 2000, we had
accumulated losses of approximately $20.7 million. We will generate revenues in
the foreseeable future, if at all, solely from our collaboration and license
agreements, and our losses may continue even if we or our collaborators
successfully identify potential drug targets and drug candidates. If the time
required to generate revenues and to achieve sustained profitability is longer
than we anticipate, or if we are unable to obtain necessary funds, we may never
achieve sustained profitability and may have to discontinue our operations.
MOST OF OUR EXPECTED FUTURE REVENUES ARE CONTINGENT UPON COLLABORATIVE AND
LICENSE AGREEMENTS AND WE MAY NOT RECEIVE SUFFICIENT REVENUES FROM THESE
AGREEMENTS TO SUSTAIN PROFITABILITY.
Our strategy is to use CART to generate meaningful revenues from our
collaborative and license agreements. Our ability to generate revenues depends
on our ability to enter into additional collaborative and license agreements
with third parties and to maintain the agreements we currently have in place. We
will receive little or no revenues under our agreements if our or our
collaborators' research, development or marketing efforts are
16
unsuccessful, or if our agreements are terminated early. Additionally, if we do
not enter into new collaborative agreements, we will not receive future revenues
from new sources.
Our future receipt of revenues from collaborative arrangements will be
significantly affected by the amount of time and effort expended by our
collaborators, the timing of the identification of useful drug targets and the
timing of the discovery and development of drug candidates. Under our existing
agreements, we may not earn significant milestone payments until our
collaborators have advanced products into clinical testing, which may not occur
for many years, if at all. We do not control the amount and timing of resources
that our collaborators devote to our collaborative programs, potential products
or product rights. Furthermore, we lack sales and marketing experience and will
depend on our collaborators to market any drugs that we develop with them.
Conflicts may arise between us and our collaborators, such as conflicts
concerning ownership rights to particular drug candidates. While our existing
collaborative agreements typically provide that we receive milestone and royalty
payments with respect to drugs developed from our collaborative programs,
disputes may arise over the application of payment provisions to these drugs and
any royalty payments may be at reduced rates. If any of our collaborators were
to breach, terminate or fail to renew their collaborative agreements with us,
the pre-clinical or clinical development or commercialization of the affected
drug candidates or research programs could be delayed or terminated. Our
collaborative agreements generally allow either party to terminate the
agreements with advance written notice of that party's intent to terminate. In
addition, our collaborators have the right to terminate the collaborative
agreements under some circumstances in which we do not. In certain situations
our collaborators can continue to use our technology after our agreements are
terminated. You should read the section entitled "Business - Our GPCR
Collaborators" for further information on the termination and other provisions
of our material collaborative agreements.
Our collaborators may choose to use alternative technologies or develop
alternative drugs either on their own or with other collaborators, including our
competitors, in order to treat diseases that are targeted by collaborative
arrangements with us. Our collaborative agreements typically do not prohibit
these activities.
Consolidation in the pharmaceutical or biotechnology industry could
have an adverse effect on us by reducing the number of potential collaborators
or jeopardizing our existing relationships. We may not be able to enter into any
new collaborative agreements.
IF PROBLEMS ARISE IN THE TESTING AND APPROVAL PROCESS, CART MAY NOT LEAD TO
SUCCESSFUL DRUG DEVELOPMENT EFFORTS AND WE WILL NOT RECEIVE REVENUES.
We developed CART to identify drug candidates that may possess
therapeutic potential and have entered into collaborative arrangements to
discover and develop promising drug candidates. In order to receive milestone
payments under our collaborative agreements, we or our collaborators must
successfully complete pre-clinical and clinical trials of drug candidates
discovered using CART. To date, we have identified only a few candidates, all of
which are in the very early stages of development and none of which have
completed the development process.
Developing drug candidates is highly uncertain and subject to a number
of significant risks. Our access to and use of some human or other tissue
samples in our research and development efforts is subject to government
regulation, both in the United States and abroad. United States and foreign
government agencies may also impose restrictions on the use of data derived from
human or other tissue samples. Our collaborators will rely on third-party
clinical investigators at medical institutions to conduct our clinical trials,
and we may rely on other third-party organizations to perform data collection
and analysis. As a result, we may face delays outside of our control. It may
take us or our collaborators many years to complete any pre-clinical or clinical
trials, and failure can occur at any stage of testing. Interim results of trials
do not necessarily predict final results, and acceptable results in early trials
may not be repeated in later trials. Moreover, if and when our programs reach
clinical trials, we or our collaborators may decide to discontinue development
of any or all of these projects at any time for commercial, scientific or other
reasons.
In order to receive royalty payments from our collaborators, we or our
collaborators must receive approval from regulatory agencies to market drugs
discovered using CART. A new drug may not be sold until the FDA has approved a
new drug application, or an NDA. If a product receives an approved NDA, this
approval will be limited
17
to those disease states and conditions for which the product is demonstrated
through clinical trials to be safe and effective. Drug candidates developed by
us or our collaborators may not prove to be safe and effective in clinical
trials and may not meet all of the applicable regulatory requirements necessary
to receive marketing approval. We do not expect any drugs resulting from our
collaborators' research to be commercially available for many years, if at all.
DRUG DISCOVERY AND DEVELOPMENT IS AN INTENSELY COMPETITIVE PROCESS IN THE UNITED
STATES AND ELSEWHERE AND THIS COMPETITIVE PROCESS COULD RENDER CART OBSOLETE OR
NONCOMPETITIVE.
An important focus of our efforts is on GPCRs, particularly orphan
GPCRs. Because GPCRs are an important target class for drug discovery efforts,
we believe that most pharmaceutical companies, several biotechnology companies,
and other organizations have internal drug discovery programs focused on drug
discovery using GPCRs. Because the vast majority of GPCRs are orphan GPCRs, we
believe that it is likely that many of these companies and organizations are
focusing, or ultimately will focus, their drug discovery efforts on these orphan
receptors. Another company or organization may have, or may develop, a
technology using GPCRs, and in particular, orphan receptors, to discover and
develop drug candidates more effectively, more quickly or at a lower cost than
our technology. Such a technology could render CART obsolete or noncompetitive.
Many of the drugs that we or our collaborators are attempting to
discover using CART would compete with existing therapies. In addition, many
companies are pursuing the development of pharmaceuticals that target the same
diseases and conditions that we are targeting such as cancer, obesity,
cardiovascular disease, diabetes and Alzheimer's Disease. Our competitors may
use discovery technologies and techniques or partner with collaborators in order
to develop products more rapidly or successfully, or with less cost, than we or
our collaborators are able to do. Many of our competitors, particularly large
pharmaceutical companies, have substantially greater product development
capabilities and greater financial, scientific and human resources than we do.
Companies that complete clinical trials, obtain required regulatory agency
approvals and commence commercial sale of their drugs before we do may achieve a
significant competitive advantage, including certain patent and United States
Food and Drug Administration, or FDA, marketing exclusivity rights. So far, we
have not achieved any of these competitive advantages. Any results from our
research and development efforts, or from our joint efforts with our existing or
any future collaborators, might not compete successfully with existing products
or therapies.
OUR SUCCESS IS DEPENDENT ON INTELLECTUAL PROPERTY RIGHTS HELD BY US AND THIRD
PARTIES AND OUR INTEREST IN THESE RIGHTS IS COMPLEX AND UNCERTAIN.
Our success will depend in large part on our own and, to some extent,
on our collaborators' abilities to obtain, secure and defend patents. We have
numerous patent applications pending for our technology, including patent
applications on drug candidate discovery techniques using CART, genetically
altered GPCRs, GPCRs that we have discovered and compounds discovered using
CART. Currently, four patents have been issued to us. The procedures for
obtaining an issued patent in the United States and in most foreign countries
are complex. These procedures require an analysis of the scientific technology
related to the invention and many legal issues. We believe CART represents an
entirely new way to discover drug candidates. Because of this, we expect that
the analysis of our patent applications will be complex and time-consuming.
Therefore, our patent position is very uncertain and we do not know when, or if,
we will obtain additional issued patents for our technology.
When we activate a receptor, we change the way that the receptor would
otherwise naturally function. We believe that our activated receptors are
patentable. A third party may obtain an issued patent on a natural version of a
receptor that we activate. We believe that an activated version of the natural
receptor should not infringe a patent on the natural receptor. However, a third
party who owns a patent on a natural version of a receptor may not agree with
our position. We could be sued for patent infringement, and we do not know how a
court would rule in such a case.
No consistent policy regarding the breadth of claims allowed in
biotechnology patents has emerged to date. For example, on January 5, 2001 the
United States Patent Office issued finalized Utility Examination Guidelines to
its patent examiners that focus on what can be patented under United States
patent law. These guidelines are expected to primarily impact the procedures
that are used in determining the types of inventions that can be patented in the
fields of biotechnology and chemistry. We do not know how, if at all, these
guidelines may affect our patent
18
applications on CART, genetically altered GPCRs, GPCRs that we have discovered
or chemical compounds that we discover as drug candidates using CART.
We also rely on trade secrets to protect our technology. However, trade
secrets are difficult to protect. We require all of our employees to agree not
to improperly use our trade secrets or disclose them to others, but we may be
unable to determine if our employees have conformed or will conform with their
legal obligations under these agreements. We also require collaborators and
consultants to enter into confidentiality agreements, but may not be able to
adequately protect our trade secrets or other proprietary information in the
event of any unauthorized use or disclosure or the lawful development by others
of this information. Many of our employees and consultants were, and many of our
consultants may currently be, parties to confidentiality agreements with other
pharmaceutical and biotechnology companies, and the use of our technology could
violate these agreements. In addition, third parties may independently discover
our trade secrets or proprietary information.
Technology licensed to us by others, or in-licensed technology, is
important to some aspects of our business. We generally do not control the
patent prosecution, maintenance or enforcement of in-licensed technology.
Accordingly, we are unable to exercise the same degree of control over this
intellectual property as we do over our internally developed technology.
Moreover, some of our academic institution licensors, research collaborators and
scientific advisors have rights to publish data and information to which we have
rights. If we cannot maintain the confidentiality of our technology and other
confidential information in connection with our collaborations, then our ability
to receive patent protection or protect our proprietary information will be
impaired.
A DISPUTE REGARDING THE INFRINGEMENT OR MISAPPROPRIATION OF OUR PROPRIETARY
RIGHTS OR THE PROPRIETARY RIGHTS OF OTHERS COULD BE COSTLY AND RESULT IN DELAYS
IN OUR RESEARCH AND DEVELOPMENT ACTIVITIES.
Our success depends, in part, on our ability to operate without
infringing on or misappropriating the proprietary rights of others. There are
many issued patents and patent applications filed by third parties relating to
products or processes that could be determined to be similar or identical to
ours or our licensors, and others may be filed in the future. Our activities, or
those of our licensors or collaborators, may infringe patents owned by others.
Although the government sponsored project to sequence the human genome has made
genomics information freely available to the public, other organizations and
companies are seeking proprietary positions on genomics information that overlap
with the government sponsored project. Our activities, or those of our licensors
or collaborators, could be affected by conflicting positions that may exist
between any overlapping genomics information made available publicly as a result
of the government sponsored project and genomics information that other
organizations and companies consider to be proprietary.
We believe that there may be significant litigation in the industry
regarding patent and other intellectual property rights. Any legal action
against us, or our collaborators, claiming damages or seeking to enjoin
commercial activities relating to the affected products or our methods or
processes could:
- - require us, or our collaborators, to obtain a license to continue to use,
manufacture or market the affected products, methods or processes, which
may not be available on commercially reasonable terms, if at all
- - prevent us from making, using or selling the subject matter claimed in
patents held by others and subject us to potential liability for damages
- - consume a substantial portion of our managerial and financial resources
- - result in litigation or administrative proceedings that may be costly,
whether we win or lose
In addition, third parties may infringe on or misappropriate our
proprietary rights, and we may have to institute costly legal action against
them to protect our intellectual property rights. We may not be able to afford
the costs of enforcing our intellectual property rights against third parties.
19
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS OUTSIDE THE
UNITED STATES.
Patent law outside the United States is uncertain and in many countries
is currently undergoing review and revision. The laws of some countries do not
protect our intellectual property rights to the same extent as United States
laws. It may be necessary or useful for us to participate in proceedings to
determine the validity of our, or our competitors', foreign patents, which could
result in substantial cost and divert our efforts and attention from other
aspects of our business.
One of our United States patent applications relating to some aspects
of our technology that we filed internationally was not timely filed in the
designated foreign countries. We have taken remedial actions in an attempt to
file the patent application in a number of these foreign countries. We cannot
assure you that any of these remedial actions will be successful, or that
patents based upon this patent application will be issued to us in any of these
foreign countries. In particular, we failed to timely file this patent
application in Japan and, as a result, no patent will be issued to us in Japan
based upon this particular patent application. Based upon other patent
applications that relate to CART that we have filed in the United States and
internationally, we believe that there will be no material adverse effect on our
business or operating results if we fail to obtain a patent based on the subject
matter of this particular patent application.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE AND MAY CAUSE OUR STOCK PRICE TO
DECLINE.
Our revenues and results of operations may fluctuate significantly from
quarter to quarter, depending on a variety of factors, including:
- - variations in milestone and royalty payments
- - the timing of discovery and development of drug candidates, if any
- - changes in the research and development budgets of our existing
collaborators or potential collaborators
- - others introducing new drug discovery techniques or new drugs that target
the same diseases and conditions that we and our collaborators target
- - regulatory actions
- - expenses related to, and the results of, litigation and other proceedings
relating to intellectual property rights or other matters
We will not be able to control many of these factors and we believe
that period-to-period comparisons of our financial results will not necessarily
be indicative of our future performance. If our revenues in a particular period
do not meet expectations, we may not be able to adjust our expenditures in that
period, which could cause our operating results to suffer. If our operating
results in any future period fall below the expectations of securities analysts
or investors, our stock price may fall by a significant amount.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE TO SUFFICIENTLY FUND OUR OPERATIONS
AND RESEARCH, AND IF NEEDED, WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL CAPITAL ON
TERMS FAVORABLE TO US.
We have consumed substantial amounts of capital to date and we expect
to increase our operating expenses over the next several years as we expand our
facilities, infrastructure and research and development activities. Based upon
our current and our anticipated activities, we believe that our current funds
will be sufficient to support our current operating plan through at least the
next two years. However, if this plan changes, we may require additional
financing sooner. For example, we may use a portion of our funds to acquire
complementary businesses or technologies. Financing may not be available or may
not be available on terms favorable to us. To the extent that we raise
additional funds through collaboration and licensing arrangements, we may be
required to relinquish some rights to our technologies or drug candidates, or
grant licenses on terms that are unfavorable to us. We may also
20
raise additional funds through the incurrence of debt, and the holders of any
debt we may issue could have rights superior to your rights. If adequate funds
are not available, we will not be able to continue our development.
OUR RESEARCH AND DEVELOPMENT EFFORTS WILL BE SERIOUSLY JEOPARDIZED IF WE ARE
UNABLE TO ATTRACT AND RETAIN KEY EMPLOYEES.
We are a small company with less than 125 employees. Our success
depends, in part, on the continued contributions of our principal management and
scientific personnel, and we face intense competition for such personnel. In
particular, our research programs depend on our ability to attract and retain
highly skilled scientists. If we lose the services of any of our key personnel,
in particular Jack Lief, Dominic P. Behan or Derek T. Chalmers, as well as other
principal members of our scientific or management staff, our research and
development or management efforts could be interrupted or significantly delayed.
For example, Eli Lilly has the right to terminate our collaboration agreement if
they do not approve suitable replacements for key employees who leave us.
Although we have not experienced problems retaining key employees, our employees
can terminate their employment with us at any time. We may also encounter
increasing difficulty in attracting enough qualified personnel as our operations
expand and the demand for these professionals increases, and this difficulty
could impede the attainment of our research and development objectives.
OUR BUSINESS MAY BE ADVERSELY AFFECTED BY HIGHER ENERGY COSTS AND INTERRUPTED
POWER SUPPLIES RESULTING FROM THE ELECTRICAL POWER SHORTAGES CURRENTLY AFFECTING
THE STATE OF CALIFORNIA.
Our corporate headquarters and laboratories are located in San
Diego, California. Electrical power is vital to our operations and we rely on a
continuous power supply to conduct our operations. California is in the midst of
a power crisis and has recently experienced significant power shortages. In the
event of an acute power shortage, California has on some occasions implemented,
and may in the future continue to implement, rolling blackouts throughout
California.
For this type of contingency, we have acquired a stand-by electrical
generator to provide power to our laboratories and offices. However, the
stand-by generator is not yet fully installed. If blackouts interrupt our power
supply frequently or for more than a few days we, most likely, would have to
reduce or temporarily discontinue our normal operations. In addition, the cost
of our research and development efforts may increase because of the disruption
to our operations. Any such reduction or disruption of our operations at our
facilities could negatively impact our revenues and results of operations
significantly. In addition, this could cause our stock price to fall by a
significant amount.
IF WE USE BIOLOGICAL AND HAZARDOUS MATERIALS IN A MANNER THAT CAUSES INJURY OR
VIOLATES LAWS, OUR BUSINESS AND OPERATIONS MAY SUFFER.
Our research and development activities involve the controlled use of
potentially harmful biological materials as well as hazardous materials,
chemicals and various radioactive compounds. For example, we use radioactive
phosphorous-32 on a daily basis and sodium cyanide on a regular basis. We cannot
completely eliminate the risk of accidental contamination, which could cause:
- - an interruption of our research and development efforts
- - injury to our employees resulting in the payment of damages
- - liabilities under federal, state and local laws and regulations governing
the use, storage, handling and disposal of these materials and specified
waste products
CONTINUATION OF OUR DEVELOPMENT PLANS FOR T-82 IS UNCERTAIN
We have completed four Phase I studies of T-82 through 2000 and have
been assessing the data in conjunction with SSP. These four Phase I safety-based
studies evidenced results that we believe establish the safety
21
of T-82 in the tested parameters. However, our analysis of all of the data for
T-82, in conjunction with the extensive costs associated with conducting Phase
II and Phase III clinical studies of T-82, the types and number of potential new
treatments for Alzheimer's Disease that are in more advanced stages of clinical
testing and regulatory review, as well as the impact that these factors may have
on our ability to receive regulatory approval for commercialization of T-82 or
successfully out-license T-82 to a third party have prompted us to consider if
continuation of the T-82 program by us is warranted. Although a final decision
has not yet been made, we cannot assure you that we will continue development of
T-82 until we have completed the assessment of all data and information related
to this program. In the event that we decide to continue with our T-82
development program, and based upon the foregoing considerations, we may be
unable to out-license T-82 to another party as we had originally intended, or we
may be unable to secure regulatory approval for the commercialization of T-82.
ANTI-TAKEOVER PROVISIONS IN OUR CERTIFICATE OF INCORPORATION AND DELAWARE LAW
COULD PREVENT A POTENTIAL ACQUIROR FROM BUYING YOUR STOCK.
Provisions of our certificate of incorporation and Delaware law could
make it more difficult for a third party to acquire us, even if the acquisition
would be beneficial to our stockholders. Our amended and restated certificate of
incorporation gives our board of directors the authority to issue up to
7,500,000 shares of preferred stock and to determine the price, rights,
preferences and privileges and restrictions, including voting rights, of those
shares without any further vote or action by our stockholders. Some of the
rights of the holders of common stock may be subject to, and may be harmed by,
the rights of the holders of any shares of preferred stock that may be issued in
the future. The issuance of preferred stock could potentially prevent us from
consummating a merger, reorganization, sale of substantially all of our assets,
liquidation or other extraordinary corporate transaction without the approval of
the holders of the outstanding shares of preferred stock. These provisions could
prevent the consummation of a transaction in which our stockholders could
receive a substantial premium over the current market price for their shares.
OUR EQUITY INTEREST IN CHEMNAVIGATOR.COM MAY HAVE NO VALUE.
We have licensed certain Internet-related technologies to
ChemNavigator.com in exchange for shares of ChemNavigator.com stock. We
currently have a 34% equity interest in ChemNavigator.com. Since it was formed
in May 1999, ChemNavigator.com has incurred net operating losses and negative
cash flows from operating activities, and we expect ChemNavigator.com to incur
increasing net operating losses and negative cash flows for the foreseeable
future. ChemNavigator.com has received only limited revenues to date, and it may
not be able to generate sufficient revenues or obtain financing to offset its
losses. We are currently not attributing any book value to our equity interest
in ChemNavigator.com.
ChemNavigator.com also faces intense competition from established
companies that provide Internet-based products to the same customers as
ChemNavigator.com. Some of these companies have greater financial, technical and
human resources than ChemNavigator.com has, have a longer operating history and
are more well-known to ChemNavigator.com's target customers. If
ChemNavigator.com is not able to compete successfully, it will not achieve
profitability and may have to discontinue operations.
OUR EQUITY INTEREST IN ARESSA PHARMACEUTICALS MAY HAVE NO VALUE.
We currently have an 83% equity interest in Aressa. Since it was formed
in August 1999, Aressa has incurred net operating losses and negative cash flows
from operating activities, and we expect Aressa to incur increasing net
operating losses and negative cash flows for the foreseeable future. Aressa has
not received any revenues to date, and it may never generate any revenues or
obtain financing to offset its losses and may have to discontinue operations. We
are currently not attributing any book value to our equity interest in Aressa.
22
OUR RECENT ACQUISITION OF BUNSEN RUSH LABORATORIES, INC. PRESENTS NEW CHALLENGES
THAT MAY NEGATIVELY AFFECT OUR BUSINESS.
We recently acquired Bunsen Rush Laboratories, Inc. ("Bunsen Rush")
through our wholly owned subsidiary BRL Screening, Inc. Bunsen Rush was a
privately held research-based company that provided receptor screening for the
pharmaceutical and biotechnology industries using its proprietary and patented
Melanophore Technology. It may turn out the costs associated with using the
Melanophore Technology with Arena's CART Technology may exceed our original
assumptions or that the advantages of combining the Melanophore Technology with
CART Technology may be limited. Moreover, there is no assurance that Bunsen
Rush's operations can be successfully integrated into Arena's operations or that
all of the benefits expected from such integration will be realized.
Furthermore, there can be no assurance that our operations, management and
personnel will be compatible with those former employees of Bunsen Rush who have
become employees of our wholly owned subsidiary. As a result of any of these
factors, our stock price could decline significantly.
WE MAY ENGAGE IN STRATEGIC TRANSACTIONS, WHICH COULD ADVERSELY AFFECT OUR
BUSINESS.
From time to time we consider strategic transactions and alternatives
with the goal of maximizing stockholder value. For example, in February 2001 we
completed the acquisition of Bunsen Rush Laboratories, Inc. through our
wholly-owned subsidiary BRL Screening, Inc. We will continue to evaluate other
potential strategic transactions and alternatives which we believe may enhance
stockholder value. These additional potential transactions may include a variety
of different business arrangements, including spin-offs, acquisitions, strategic
partnerships, joint ventures, restructurings, divestitures, business
combinations and investments. We cannot assure you that any such transactions
will be consummated on favorable terms or at all, will in fact enhance
stockholder value, or will not adversely affect our business or the trading
price of our stock. Any such transaction may require us to incur non-recurring
or other charges and may pose significant integration challenges and/or
management and business disruptions, any of which could materially and adversely
affect our business and financial results.
ITEM 2. PROPERTIES
Our facilities consist of approximately 63,000 square feet of research
and office space located at 6150 and 6166 Nancy Ridge Drive, San Diego,
California. At our 6166 Nancy Ridge Drive facility, we currently lease
approximately 37,000 square feet of space, of which 23,000 square feet is
laboratory space and 14,000 square feet is office space. In 2000, the Company
began leasing additional facilities located at 6150 Nancy Ridge Drive consisting
of approximately 26,000 square feet. In January 2001, we purchased the 6150
Nancy Ridge Drive facility as well as the adjoining facility at 6138 Nancy Ridge
Drive. The 6138 Nancy Ridge Drive facility, consisting of approximately 26,000
square feet, is currently occupied by a tenant whose lease expires on August 31,
2001. After the lease expires, we will use the additional space primarily for
additional laboratory and office space. We believe these facilities will be
adequate to meet our near-term space requirements. In addition, we believe that
the space needed to accommodate our growth through 2002 is available.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
23
Our common stock has traded on the Nasdaq National Market under the
symbol "ARNA" since July 28, 2000. The following table sets forth, for the
period indicated, the high and low bid quotations for the common stock as
reported by the Nasdaq National Market.
HIGH LOW
Third Quarter (Commencing July 28, 2000) $47.00 $18.00
Fourth Quarter $44.00 $13.625
On March 1, 2001, the last reported sale price on the Nasdaq National
Market for our common stock was $23.00 per share.
HOLDERS
As of March 1, 2001 there were approximately 4,170 stockholders of
record of the Company's common stock.
DIVIDENDS
Dividends may be paid on common stock of Arena as are declared by the
Board of Directors from funds that the law allows to be used for dividends.
Under Delaware law, dividends may only be paid from surplus or from net profits
for the year and/or the preceding year. Since the Company has neither surplus
nor net profits from the current year or the preceding year, the Company is
prevented from paying dividends until such conditions change. The Company has
not paid dividends on its common stock, and currently does not plan to pay any
cash dividends in the foreseeable future.
USE OF PROCEEDS FROM THE SALE OF REGISTERED SECURITIES
On July 28, 2000 we completed our initial public offering of 6,000,000
shares of our common stock at an initial public offering price of $18.00 per
share for gross proceeds of $108.0 million and estimated net proceeds of
approximately $98.8 million. We paid a total of approximately $7.6 million in
underwriting discounts and commissions and other costs and expenses, other than
underwriting discounts and commissions, totaled approximately $1.6 million in
connection with the offering. The managing underwriters in the offering were ING
Barings, Prudential Vector Healthcare and SG Cowen. The shares of common stock
sold in the offering were registered under the Securities Act of 1933 in a
Registration Statement on Form S-1, as amended (No. 333-35944). The Securities
and Exchange Commission declared the Registration Statement effective on July
27, 2000.
Furthermore, on August 10, 2000 the underwriters exercised an
over-allotment option for an additional 900,000 shares of our common stock at
the initial public offering price of $18.00 per share for gross proceeds of
$16.2 million and net proceeds of approximately $15.1 million. The shares sold
to underwriters in the over-allotment option were also registered on Form S-1.
We paid a total of approximately $1.1 million in underwriting discounts and
commissions in connection with the exercise of the over-allotment option.
Our total net proceeds from the initial public offering were
approximately $113.9 million. No expenses were paid or payments made to our
directors, officers or affiliates or 10% owners of any class of our equity
securities. From the date of our IPO through December 31, 2000, all of the net
proceeds remain in working capital, held as temporary investments in short-term
money funds. In January 2001, we used cash proceeds of $5.4 million to acquire
facilities at 6138-6150 Nancy Ridge Drive in San Diego, California. In February
2001, we used cash of $15.0 million to acquire all of the outstanding stock of
Bunsen Rush, a privately held company. The acquisition was completed through a
merger into our wholly-owned subsidiary, BRL Screening, Inc. We intend to use
the balance of the net proceeds from the offering for general corporate
purposes, including working capital, drug candidate discovery, development and
clinical testing using non-partnered GPCR targets, and other research and
development and clinical testing activities. The amounts and timing of our
actual expenditures for each purpose may vary significantly depending upon
numerous factors. In addition, we may use a portion of the net proceeds to
acquire other complementary businesses or technologies.
24
ITEM 6. SELECTED FINANCIAL DATA
The following Selected Financial Data should be read in conjunction
with "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Item 8. Financial Statements and Supplementary Data"
included elsewhere in this Annual Report on Form 10-K.
Year ended December 31,
-----------------------------------------------------
Period from April 14,
1997 (inception)
through December
2000 1999 1998 31,1997
----------------------------------------------------------------------------
REVENUES
Total revenues $ 7,683,396 $ -- $ -- $ --
EXPENSES
Research and development 12,080,204 8,336,483 2,615,526 447,038
General and administrative 2,678,980 1,814,023 728,806 234,614
Amortization of deferred compensation 4,342,896 378,109 -- --
---------------------------------------------------------------------
Total operating expenses 19,102,080 10,528,615 3,344,332 681,652
Interest and other, net 5,056,714 290,665 (51,986) (13,113)
---------------------------------------------------------------------
Net loss (6,361,970) (10,237,950) (3,396,318) (694,765)
Non-cash preferred stock charge (22,391,068) -- -- --
---------------------------------------------------------------------
Net loss applicable to common stockholders $ (28,753,038) $(10,237,950) $(3,396,318) $(694,765)
=====================================================================
Historical net loss per share, basic and diluted $ (2.84) $ (10.05) $ (3.51) $ (0.73)
=====================================================================
Shares used in calculating historical net loss
per share, basic and diluted 10,139,755 1,018,359 966,799 955,000
=====================================================================
Pro forma net loss per share $ (1.65) $ (1.29)
====================================
Shares used in calculating pro forma net
loss per share 17,411,028 7,926,952
====================================
25
As of December 31,
----------------------------------------------------------------------
2000 1999 1998 1997
----------------------------------------------------------------------
Balance Sheet Data:
Cash and cash equivalents $ 144,413,176 $ 5,401,508 $ 194,243 $1,553,422
Total assets 152,711,929 8,525,840 1,653,090 2,421,603
Long-term debt, net of current portion 960,517 2,158,784 970,785 790,863
Redeemable convertible preferred stock -- 18,251,949 2,598,643 2,193,356
Deferred compensation (7,899,970) (625,955) -- --
Accumulated deficit (20,691,003) (14,329,033) (4,091,083) (694,765)
Total stockholder's equity (deficit) 148,784,325 (13,899,549) (4,068,283) (694,665)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion and analysis in conjunction
with "Item 8. Financial Statements and Supplementary Data" included elsewhere in
this Annual Report on 10-K.
Since our inception in April 1997, we have devoted substantially all of
our resources to the research and development of CART. We have incurred
significant operating losses since our inception and, as of December 31, 2000,
we had an accumulated deficit of $20.7 million. Our prospects should be
considered in light of the risks, expenses and difficulties encountered by
companies in the early stages of development, particularly those companies in
the rapidly changing pharmaceutical and biotechnology industries.
In April 2000, we entered into a significant collaborative agreement
with Eli Lilly, one of the world's leading pharmaceutical companies. This
collaboration focuses principally on diseases of the central nervous system and
endocrine system, as well as cardiovascular diseases, and may be expanded to
other diseases, including cancer. We activate mutually selected G
protein-coupled receptors and will provide Eli Lilly with biochemical assays for
use in their screening facilities. We have received, and will continue to
receive, research funding from Eli Lilly for our internal resources committed to
these tasks, which will be augmented by substantial resource commitments by Eli
Lilly. We may receive up to $1.25 million per receptor based upon milestone
payments in connection with the successful application of CART to each receptor,
and up to an additional $6.0 million based upon clinical development milestone
payments for each drug candidate discovered using CART. We may also receive
additional milestone and royalty payments associated with the commercialization
of drugs discovered using CART, if any. In addition, we have entered into other
collaborative agreements, including with Taisho and Fujisawa, regarding the
application of CART to G protein-coupled receptors. We have recognized revenues
of approximately $5.2 million from our collaboration with Eli Lilly and
approximately $2.4 million from our collaboration with Taisho.
In February 2001, the Company, through its wholly-owned subsidiary BRL
Screening, Inc., acquired for $15.0 million in cash all of the outstanding
capital stock of Bunsen Rush Laboratories, Inc. (Bunsen Rush), a privately held
research based company that provides receptor screening for the pharmaceutical
and biotechnology industries using its proprietary and patented Melanophore
Technology. Melanophore Technology is a functional-based screening technology
used to identify compounds that interact with cell surface receptors, including
known and orphan GPCRs and receptor tyrosine kinases. The functional nature of
Melanophore Technology eliminates the need for radioactive or fluorescent
screening techniques and provides a simple and sensitive means to detect
cellular signals generated by activated GPCRs.
We plan to pursue several specific objectives during the remainder of
2001, namely:
- - establishing additional collaborations with pharmaceutical and
biotechnology companies based on using CART
- - expanding the number of receptors available for activation by CART through
internal research efforts and, potentially, external licensing agreements
26
- - increasing our internally funded drug discovery efforts, including
expansion of our chemistry and screening efforts
- - We intend to map the GPCRs to all of the major body systems
Our ability to achieve our identified goals or objectives is dependent
upon many factors, some of which are out of our control, and we may not achieve
our identified goals or objectives.
Our quarterly operating results will depend upon many factors,
including expiration of research contracts with our collaborators, the size of
future collaborations, the success rate of our technology collaborations leading
to milestones and royalties, and general and industry-specific economic
conditions which may affect research and development expenditures. As a
consequence, our revenues in future periods are likely to fluctuate
significantly from period to period.
Our research and development expenses consist primarily of salaries and
related personnel expenses. As of December 31, 2000, all research and
development costs have been expensed as incurred. We believe that continued
investment in research and development is critical to attaining our strategic
objectives and we expect these expenses to continue and to increase. General and
administrative expenses consist primarily of salaries and related personnel
expenses for executive, finance and administrative personnel, professional fees,
and other general corporate expenses. As we add personnel and incur additional
costs related to the growth of our business, general and administrative expenses
will also increase.
DEFERRED COMPENSATION
Deferred compensation for stock options granted by us to our employees
and directors has been determined as the difference between the estimated market
value of our common stock on the date the options were granted, and the exercise
price of the options. Deferred compensation is initially recorded as a component
of stockholders' equity and is amortized using a graded vesting method as
charges to operations over the vesting period of the options. In connection with
the grant of stock options to our employees, consultants and directors, we
recorded deferred compensation of approximately $11.6 million in the year ended
December 31, 2000 and $1.0 million in the year ended December 31, 1999. As of
December 31, 2000, the total charges to be recognized in future periods from
amortization of deferred stock compensation are anticipated to be approximately
$4.1 million, $2.6 million, $1.1 million, and $99,000 for the years ending
December 31, 2001, 2002, 2003 and 2004, respectively. Deferred compensation for
stock options granted by us to our consultants has been determined in accordance
with Statement of Financial Accounting Standards No. 123 and Emerging Issues
Task Force 96-18 as the fair value of the equity instruments issued. Deferred
compensation for stock options that we grant to consultants is periodically
remeasured as the underlying options vest. Our stock options generally vest over
four years from the date of grant.
RESULTS OF OPERATIONS
Year ended December 31, 2000 compared to the year ended December 31, 1999
Revenues. We recorded revenues of $7.7 million for the year ended
December 31, 2000 as compared to no revenue for the year ended December 31,
1999. The revenues for the year ended December 31, 2000 were primarily
attributable to our collaborations with Eli Lilly and Taisho, which included
research funding, milestone achievements, and technology access and development
fees. Research funding is recognized as revenue when the services are rendered.
Revenue from technology access and development fees is recognized ratably over
the term of the collaboration. Revenue from milestones is recognized when the
milestone is achieved. If our collaborators pay us before we recognize the
revenue, we will defer revenue recognition of these payments until earned. As of
December 31, 2000 we had current and non-current deferred revenues totaling
approximately $705,000.
Research and development expenses. Our research and development
expenses increased $3.8 million to $12.1 million for the year ended December 31,
2000, from $8.3 million for the year ended December 31, 1999. This increase was
primarily due to increased personnel related expenses of $3.5 million and lab
supplies costing $1.4 million in order to expand the application of our
technology. The increase was offset by reduced expenses of $1.1
27
million related to the development of T-82 for which we initiated our first
Phase I clinical trial in early 1999, and which was completed in late 1999.
General and administrative expenses. Our general and administrative
expenses increased $900,000 to $2.7 million for the year ended December 31,
2000, from $1.8 million for the year ended December 31, 1999. This increase was
primarily due to increased personnel expenses related to additional personnel
hired in the accounting, legal and general administration departments. This
increased staffing was necessary to manage and support our continued growth as
well as to accommodate the demands associated with operating as a public
company.
Amortization of deferred compensation. We recorded amortization of
deferred compensation of approximately $4.3 million for the year ended December
31, 2000 as compared to $378,000 for the year ended December 31, 1999.
Interest income. Interest income increased $4.2 million to $4.6 million
for the year ended December 31, 2000, from $447,000 for the year ended December
31, 1999. The increase was primarily attributable to higher average levels of
cash and cash equivalents in the year ended December 31, 2000.
Interest expense. Interest expense increased $54,000 to $220,000 for
the year ended December 31, 2000 from $166,000 for the year ended December 31,
1999. This increase represents interest incurred on our equipment leases.
Gain on investment. For the year ended December 31, 2000 we recorded a
gain on the sale of liquid short-term investments in the amount of $576,000.
Other income. Other income increased $48,000 to $57,000 for the year
ended December 31, 2000 from $9,000 for the year ended December 31, 1999. This
increase represents rental income received from subleasing office space.
Net loss. Net loss decreased $3.8 million to $6.4 million for the year
ended December 31, 2000 compared to $10.2 million for the year ended December
31, 1999. The decrease reflects revenues of $7.7 million in the year ended
December 31,2000 reduced by increases in research and development and general
and administrative expenses as well as amortization of deferred compensation.
Non-cash preferred stock charge. We recorded a non-cash preferred stock
charge of $22.4 million for the year ended December 31, 2000. This non-cash
preferred stock charge relates to the issuance of our Series E preferred stock
in January 2000, our Series F preferred stock in March 2000 and our Series G
preferred stock in April 2000, which were converted into shares of our common
stock upon the closing of our initial public offering. We recorded the non-cash
preferred stock charge at the dates of issuance by increasing the net loss
applicable to common stockholders, without any effect on total stockholders'
equity. The amount increased our basic net loss per share for the year ended
December 31, 2000.
Year ended December 31, 1999 compared to the year ended December 31, 1998
Research and development expenses. Our research and development
expenses increased $5.7 million to $8.3 million for the year ended December 31,
1999, from $2.6 million for the year ended December 31, 1998. This increase was
primarily due to increased personnel related expenses of $2.5 million and lab
supplies costing $1.3 million in order to expand the application of our
technology, expenses of $1.5 million associated with our first Phase I clinical
trial of T-82 which were initiated in early 1999, and facility related expenses
of $358,000 as a result of our facility expansion.
General and administrative expenses. Our general and administrative
expenses increased $1.1 million to $1.8 million for the year ended December 31,
1999, from $729,000 for the year ended December 31, 1998. This increase was
primarily related to five additional personnel hired during 1999 to help support
the growing responsibilities of the accounting, legal and general administration
departments.
28
Amortization of deferred compensation. We recorded amortization of
deferred compensation of approximately $378,000 for the year ended December 31,
1999. There was no amortization of deferred compensation in the year ended
December 31, 1998.
Interest income. Interest income increased $405,000 to $447,000 for the
year ended December 31, 1999, from $42,000 for the year ended December 31, 1998.
The increase was primarily attributable to higher levels of cash and cash
equivalents in 1999 from the proceeds of the sale of our Series D convertible
preferred stock in January 1999.
Interest expense. Interest expense increased $72,000 to $166,000 for
the year ended December 31, 1999 from $94,000 for the year ended December 31,
1998. This increase represents interest incurred on our equipment leases as well
as interest accrued on our other debt.
Net loss. Net loss increased $6.8 million to $10.2 million for the year
ended December 31, 1999 compared to $3.4 million for the year ended December 31,
1998. The increase reflects increases in research and development and general
and administrative expenses, offset in part by the increase in interest income.
Year ended December 31, 1998 compared to the period from April 14, 1997
(inception) through December 31, 1997
Research and development expenses. Our research and development
expenses increased $2.2 million to $2.6 million for the year ended December 31,
1998, from $447,000 for the period from April 14, 1997 through December 31,
1997. This increase was primarily due to increased personnel expenses of $1.3
million and lab supplies costing $538,000 in order to expand the application of
our technology, and facility related expenses of $348,000 as a result of our
facility expansion.
General and administrative expenses. Our general and administrative
expenses increased $494,000 to $729,000 for the year ended December 31, 1998,
from $235,000 for the period from April 14, 1997 through December 31, 1997. This
increase was primarily due to increased personnel related expenses of $400,000
in order to establish and support the growing responsibilities of the
accounting, legal and general administration departments and facility-related
expenses of $76,000 as a result of our facility expansion.
Interest income. Interest income increased $19,000 to $42,000 for the
year ended December 31, 1998, from $23,000 for the period from April 14, 1997
through December 31, 1997. The increase was primarily attributable to higher
average cash levels in 1998.
Interest expense. Interest expense increased $58,000 to $94,000 for the
year ended December 31, 1998 from $36,000 for the period from April 14, 1997
through December 31, 1997. The increase represents interest incurred on our
equipment lease as well as interest accrued on our other debt for a full year.
Net loss. Net loss increased $2.7 million to $3.4 million for the year
ended December 31, 1998 compared to $695,000 for the period from April 14, 1997
through December 31, 1997. The increase reflects increases in research and
development and general and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
We have experienced net losses and negative cash flow from operations
since our inception. At December 31, 2000, we had an accumulated deficit of
$20.7 million and since our inception, we had used cash from operations of $15.8
million. Our net losses have resulted primarily from expenses incurred in
connection with our research and development activities and general and
administrative expenses. As of December 31, 2000, we had $144.4 million in cash
and cash equivalents compared to $5.4 million in cash and cash equivalents as of
December 31, 1999.
Net cash used in operating activities was approximately $4.1 million
during the year ended December 31, 2000, approximately $8.7 million during the
year ended December 31, 1999 and was approximately $2.4 million during the year
ended December 31, 1998. The primary use of cash was to fund our net losses for
these periods,
29
adjusted for non-cash expenses, including $4.3 million in non-cash amortization
of deferred compensation during the year ended December 31, 2000, and changes in
operating assets and liabilities.
Net cash used in investing activities was approximately $2.2 million
during the year ended December 31, 2000 and was approximately $2.1 million
during the year ended December 31, 1999. Net cash used in investing activities
was approximately $593,000 during the year ended December 31, 1998. Net cash
used in investing activities was primarily the result of the acquisition of
laboratory and computer equipment, leasehold improvements and furniture and
fixtures.
Net cash proceeds from financing activities was approximately $145.3
million, $16.0 million and $1.7 million during the years ended December 31,
2000, 1999 and 1998, respectively. The net cash proceeds from financing
activities during the year ended December 31, 2000 was primarily from net
proceeds of $113.9 million from our initial public offering in July 2000 as well
as $30.1 million from the issuance of preferred stock. The net cash proceeds
from financing activities for the years ended December 31, 1999 and 1998 were
primarily from the issuance of preferred stock.
We lease a corporate research and development facility under a lease
which expires on April 30, 2013. The lease provides us with options to extend
for two additional five-year periods. We have also entered into capital lease
agreements for various lab and office equipment. The terms of these capital
lease agreements range from 48 to 60 months. Current total minimum annual
payments under these capital leases are approximately $614,000 in 2001, $614,000
in 2002, $480,000 in 2003 and $45,000 in 2004.
In January 2001, we purchased a facility we were previously leasing as
well as the adjoining building at 6138-6150 Nancy Ridge Drive in San Diego for
cash of $5.4 million. Of the 52,000 square foot facility, 26,000 square feet is
subleased to a tenant until August of 2001.
In February 2001, the Company, through its wholly-owned subsidiary BRL
Screening, Inc., acquired all of the outstanding capital stock of Bunsen Rush, a
privately held research based company, for cash of $15.0 million.
The amount and timing of future losses are highly uncertain. Our
ability to achieve and thereafter sustain profitability will be dependent upon,
among other things, obtaining additional strategic alliances as well as
establishing additional collaborative or licensing arrangements.
Based on the research collaborations we already have in place and our
current internal business plan, we expect to hire an additional 40 to 50
employees, primarily scientists, by the end of 2001. While we believe that our
current capital resources and anticipated cash flows from licensing activities,
will be sufficient to meet our capital requirements for at least the next two
years, we cannot assure you that we will not require additional financing before
such time. Our funding requirements may change at any time due to technological
advances or competition from other companies. Our future capital requirements
will also depend on numerous other factors, including scientific progress in our
research and development programs, additional personnel costs, progress in
pre-clinical testing, the time and cost related to proposed regulatory
approvals, if any, and the costs of filing and prosecution of patent
applications and enforcing patent claims. We cannot assure you that adequate
funding will be available to us or, if available, that such funding will be
available on acceptable terms. Any shortfall in funding could result in the
curtailment of our research and development efforts.
INCOME TAXES
As of December 31, 2000, we had approximately $12.2 million of net
operating loss carryforwards and $1.6 million of research and development tax
credit carryforwards for federal income tax purposes. These carryforwards expire
on various dates beginning in 2012. These amounts reflect different treatment of
expenses for tax reporting than are used for financial reporting. United States
tax law contains provisions that may limit our ability to use net operating loss
and tax credit carryforwards in any year, or if there has been a significant
ownership change. Any future significant ownership change may limit the use of
net operating loss and tax credit carryforwards.
30
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates
primarily to our cash equivalents and short-term investments. We do not use
derivative financial instruments in our investment portfolio. Our cash and
investment policy emphasizes liquidity and preservation of principal over other
portfolio considerations. We select investments that maximize interest income to
the extent possible within these guidelines. If market interest rates were to
decrease by 1% from December 31, 2000, we would expect future interest income
from our portfolio to decline annually by less than $1.4 million. The modeling
technique used measures the change in fair values arising from an immediate
hypothetical shift in market interest rates and assumes ending fair values
include principal plus earned interest.
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ARENA PHARMACEUTICALS, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Ernst & Young LLP, Independent Auditors....................................................... 33
Balance Sheets.......................................................................................... 34
Statements of Operations................................................................................ 35
Statements of Stockholders' Equity (Deficit)............................................................ 36
Statements of Cash Flows................................................................................ 37
Notes to Financial Statements........................................................................... 38
32
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Arena Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of Arena
Pharmaceuticals, Inc. as of December 31, 2000 and 1999, and the related
statements of operations, stockholders' equity (deficit) and cash flows for each
of the three years in the period ended December 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Arena
Pharmaceuticals, Inc. at December 31, 2000 and 1999 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
/s/ ERNST & YOUNG LLP
San Diego, California
January 15, 2001
33
ARENA PHARMACEUTICALS, INC.
BALANCE SHEETS
DECEMBER 31,
--------------------------------
2000 1999
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $144,413,176 $ 5,401,508
Accounts receivable 2,116,146 -
Prepaid expenses 1,685,122 172,052
------------ ------------
Total current assets 148,214,444 5,573,560
Property and equipment, net 4,265,260 2,773,382
Deposits and restricted cash 88,016 178,898
Other assets 144,209 -
------------ ------------
Total assets $152,711,929 $ 8,525,840
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 915,540 $ 866,414
Current portion of deferred revenues 220,000 -
Current portion of obligations under capital leases 480,538 355,119
------------ ------------
Total current liabilities 1,616,078 1,221,533
Convertible note payable to related party, less current
portion - 934,312
Obligations under capital leases, less current portion 960,517 1,224,472
Deferred rent 866,009 793,123
Deferred revenues 485,000 -
Commitments
Redeemable convertible preferred stock, $.0001 par value:
7,500,000 shares authorized at December 31, 2000, 7,792,533
shares authorized at December 31, 1999; no shares issued
and outstanding at December 31, 2000; 6,908,593 shares
issued and outstanding at December 31, 1999 - 18,251,949
Stockholders' equity (deficit):
Common stock, $.0001 par value: 67,500,000 and 25,000,000
shares authorized at December 31, 2000 and 1999,
respectively; 22,688,313 and 1,116,375 shares issued and
outstanding at December 31, 2000 and December 31, 1999,
respectively 2,268 111
Additional paid-in capital 177,373,030 1,055,328
Deferred compensation (7,899,970) (625,955)
Accumulated deficit (20,691,003) (14,329,033)
------------ ------------
Total stockholders' equity (deficit) 148,784,325 (13,899,549)
------------ ------------
Total liabilities and stockholders' equity (deficit) $152,711,929 $ 8,525,840
============ ============
See accompanying notes.
34
ARENA PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
--------------------------------------------
2000 1999 1998
------------ ------------ -----------
Revenues $ 7,683,396 $ -- $ --
Operating expenses:
Research and development 12,080,204 8,336,483 2,615,526
General and administrative 2,678,980 1,814,023 728,806
Amortization of deferred compensation
($3,018,623 and $264,419 related to research and
development expenses and $1,324,273 and $113,690
related to general and administrative expenses for
the year ended December 31, 2000 and 1999,
respectively) 4,342,896 378,109 --
------------ ------------ -----------
Total operating expenses 19,102,080 10,528,615 3,344,332
Interest income 4,644,471 446,848 42,266
Interest expense (220,483) (165,603) (94,252)
Gain on sale of investment 575,855 -- --
Other income 56,871 9,420 --
------------ ------------ -----------
Net loss (6,361,970) (10,237,950) (3,396,318)
Non-cash preferred stock charge (22,391,068) -- --
Net loss applicable to common stockholders $(28,753,038) $(10,237,950) $(3,396,318)
============ ============ ===========
Net loss per share, basic and diluted $ (2.84) $ (10.05) $ (3.51)
============ ============ ===========
Shares used in calculating net loss per
share, basic and diluted 10,139,755 1,018,359 966,799
============ ============ ===========
See accompanying notes.
35
ARENA PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDERS'
--------------------- PAID-IN DEFERRED ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT (DEFICIT)
---------- ------- ------------ ----------- ------------ ------------
Balance at December 31, 1997 1,000,000 $ 100 $ -- $ -- $ (694,765) $ (694,665)
Issuance of common stock warrants
in connection with technology
agreement -- -- 14,000 -- -- 14,000
Issuance of common stock upon
exercise of options 43,500 4 8,696 -- -- 8,700
Net loss -- -- -- -- (3,396,318) (3,396,318)
---------- ------- ------------ ----------- ------------ ------------
Balance at December 31, 1998 1,043,500 104 22,696 -- (4,091,083) (4,068,283)
Issuance of common stock upon
exercise of options 72,875 7 28,568 -- -- 28,575
Deferred compensation related to
stock options -- -- 1,004,064 (1,004,064) -- --
Amortization of deferred
compensation -- -- -- 378,109 -- 378,109
Net loss -- -- -- -- (10,237,950) (10,237,950)
---------- ------- ------------ ----------- ------------ ------------
Balance at December 31, 1999 1,116,375 111 1,055,328 (625,955) (14,329,033) (13,899,549)
Issuance of common stock upon
exercise of options, net of
repurchases 808,300 81 360,044 -- -- 360,125
Issuance of common stock upon
exercise of warrants 410,060 41 1,123,925 -- -- 1,123,966
Conversion of convertible note into
common stock 755,000 75 975,499 -- -- 975,574
Issuance of common stock in initial
public offering, net of offering
costs of $10,274,000 6,900,000 690 113,925,310 -- -- 113,926,000
Conversion of preferred stock to
common stock upon closing of
initial public offering 12,698,578 1,270 48,316,013 -- -- 48,317,283
Deferred compensation related to
stock options -- -- 11,616,911 (11,616,911) -- --
Amortization of deferred
compensation -- -- -- 4,342,896 -- 4,342,896
Net loss -- -- -- -- (6,361,970) (6,361,970)
---------- ------- ------------ ----------- ------------ ------------
Balance at December 31, 2000 22,688,313 $ 2,268 $177,373,030 $(7,899,970) $(20,691,003) $148,784,325
========== ======= ============ =========== ============ ============
See accompanying notes.
36
ARENA PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
------------- ------------ -----------
OPERATING ACTIVITIES
Net loss $ (6,361,970) $(10,237,950) $(3,396,318)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 787,829 399,278 171,942
Amortization of deferred compensation 4,342,896 378,109 --
Interest accrued on notes payable to related party 41,262 80,635 83,896
Warrants issued in connection with technology agreement -- -- 14,000
Deferred rent 72,886 45,699 747,424
Deferred financing costs -- 150,711 (150,711)
Change in operating assets and liabilities:
Accounts receivable (2,116,146) -- --
Prepaid expenses and other assets (1,657,279) (110,071) (18,793)
Deferred revenues 705,000 -- --
Accounts payable and accrued expenses 49,126 624,195 110,170
------------- ------------ -----------
Net cash used in operating activities (4,136,396) (8,669,394) (2,438,390)
INVESTING ACTIVITIES
Purchases of property and equipment (2,279,707) (2,007,020) (558,933)
Deposits and restricted cash 90,882 (98,383) (34,171)
------------- ------------ -----------
Net cash used in investing activities (2,188,825) (2,105,403) (593,104)
FINANCING ACTIVITIES
Advances under capital lease obligations 377,015 1,562,690 148,299
Principal payments on capital leases (515,551) (116,427) (14,971)
Proceeds from issuance of redeemable preferred stock 30,065,334 14,132,224 405,287
Proceeds from issuance of common stock 115,410,091 28,575 8,700
Proceeds from convertible note payable to related party -- 375,000 1,125,000
------------- ------------ -----------
Net cash provided by financing activities 145,336,889 15,982,062 1,672,315
------------- ------------ -----------
Net increase (decrease) in cash and cash equivalents 139,011,668 5,207,265 (1,359,179)
Cash and cash equivalents at beginning of period 5,401,508 194,243 1,553,422
------------- ------------ -----------
Cash and cash equivalents at end of period $ 144,413,176 $ 5,401,508 $ 194,243
============= ============ ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Interest paid $ 179,221 $ 84,968 $ 10,356
============= ============ ===========
Conversion of convertible note to related party into
common stock $ 975,574 $ -- $ --
============= ============ ===========
Conversion of convertible note to related party into
redeemable preferred stock $ -- $ 1,521,082 $ --
============= ============ ===========
See accompanying notes.
37
ARENA PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Arena Pharmaceuticals, Inc. (the "Company") was incorporated on April
14, 1997 and commenced operations in July 1997. The Company operates in one
business segment and has developed a broadly applicable technology that is used
to identify drug candidates in a more efficient manner than traditional drug
discovery approaches.
PRINCIPLES OF CONSOLIDATION
The financial statements do not include the accounts of its majority
owned subsidiary, Aressa Pharmaceuticals, Inc. ("Aressa"). Management believes
that majority ownership and control of Aressa is temporary in accordance with
Statement of Financial Accounting Standards ("SFAS 94") "Consolidation of All
Majority Owned Subsidiaries," has therefore not consolidated Aressa's activity.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and investments with original
maturities of less than three months when purchased.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments, including cash and cash equivalents, accounts
payable and accrued expenses, are carried at cost. Management believes these
recorded amounts approximate fair value because of the short-term maturity of
these instruments.
CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash and cash equivalents.
The Company limits its exposure to credit loss by placing its cash with high
credit quality financial institutions.
Two collaborative partners individually accounted for 67.6% and 31.0%
of total revenues during the year ended December 31, 2000.
38
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated over the
estimated useful lives of the assets (generally three to seven years) using the
straight-line method. Amortization of leasehold improvements is computed over
the shorter of the lease term or the estimated useful life of the related
assets.
LONG-LIVED ASSETS
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," if indicators of
impairment exist, the Company assesses the recoverability of the affected
long-lived assets by determining whether the carrying value of such assets can
be recovered through the undiscounted future operating cash flows. If impairment
is indicated, the Company measures the amount of such impairment by comparing
the carrying value of the asset to the present value of the expected future cash
flows associated with the use of the asset. While the Company's current and
historical operating and cash flow losses are indicators of impairment, the
Company believes the future cash flows to be received from the long-lived assets
will exceed the assets' carrying value, and accordingly the Company has not
recognized any impairment losses through December 31, 2000.
DEFERRED RENT
Rent expense is recorded on a straight-line basis over the term of the
lease. The difference between rent expense and amounts paid under the lease
agreements is recorded as deferred rent in the accompanying balance sheets.
STOCK OPTIONS
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes
the use of the fair value based method of accounting for stock-based
compensation arrangements, under which compensation cost is determined using the
fair value of stock-based compensation determined as of the grant date, and is
recognized over the periods in which the related services are rendered. SFAS No.
123 also permits companies to elect to continue using the current intrinsic
value accounting method specified in Accounting Principles Board (APB) Opinion
No. 25 to account for stock-based compensation. The Company has elected to
retain the intrinsic value based method, and has disclosed the pro forma effect
of using the fair value based method to account for its stock-based compensation
(Note 8).
Options and warrants issued to non-employees are recorded fair value as
prescribed by SFAS No. 123 and EITF 96-18 and periodically remeasured and
expensed over the period services are provided.
REVENUES
Up-front fees under the Company's collaborations will be deferred and
recognized over the period the related services are provided. Amounts received
for research funding for a specified number of full time researchers are
recognized as revenue as the services are provided, as long as the amounts
received are not refundable regardless of the research project. Assay
development fees will be recognized upon completion of the screen and acceptance
by the collaborators. Milestone and royalty payments will be recognized upon
completion of specified milestones pursuant to the collaborative agreements.
39
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT COSTS
Costs incurred in connection with the development of new products and
changes to existing products are charged to operations as incurred.
PATENT COSTS
Costs related to filing and pursuing patent applications are expensed
as incurred as recoverability of such expenditures is uncertain.
COMPUTER SOFTWARE COSTS
In May 2000, the Emerging Issues Task Force ("EITF") released Issue No.
00-2, "Accounting for Web Site Development Costs." EITF Issue No. 00-2
establishes standards for determining the capitalization or expensing of
incurred costs relating to the development of Internet web sites based upon the
respective stage of development. The Issue is effective for fiscal quarters
beginning after June 30, 2000 (including costs incurred for projects in process
at the beginning of the quarter of adoption). The adoption of EITF No. 00-2 did
not affect the Company's financial results.
INCOME TAXES
In accordance with SFAS No. 109, "Accounting for Income Taxes," a
deferred tax asset or liability is determined based on the difference between
the financial statement and tax basis of assets and liabilities as measured by
the enacted tax rates which will be in effect when these differences reverse.
The Company provides a valuation allowance against net deferred tax assets
unless, based upon the available evidence, it is more likely than not that the
deferred tax assets will be realized.
COMPREHENSIVE LOSS
In accordance with SFAS No. 130, "Reporting Comprehensive Loss," all
components of comprehensive loss, including net loss, are reported in the
financial statements in the period in which they are recognized. Comprehensive
loss is defined as the change in equity during a period from transactions and
other events and circumstances from non-owner sources. Net loss and other
comprehensive loss, including unrealized gains and losses on investments, is
reported net of their related tax effect, to arrive at comprehensive loss. For
the years ended December 31, 2000, 1999 and 1998, comprehensive loss equals the
net loss as reported.
40
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE
Basic and diluted net loss per common share are presented in conformity
with SFAS No. 128, "Earnings per Share" for all periods presented. Under the
provisions of SAB 98, common stock and convertible preferred stock that has been
issued or granted for nominal consideration prior to the anticipated effective
date of the initial public offering must be included in the calculation of basic
and diluted net loss per common share as if these shares had been outstanding
for all periods presented. To date, the Company has not issued or granted shares
for nominal consideration.
In accordance with SFAS No. 128, basic and diluted net loss per share
has been computed using the weighted-average number of shares of common stock
outstanding during the period, less shares subject to repurchase. Pro forma
basic and diluted net loss per common share, as presented in the statements of
operations, has been computed for the year ended December 31, 2000 and 1999 as
described above, and also gives effect to the conversion of preferred stock upon
closing of the initial public offering.
The following table presents the calculation of net loss per share:
YEAR ENDED DECEMBER 31,
----------------------------------------------
2000 1999 1998
------------- ------------- -------------
Net loss $ (28,753,038) $ (10,237,950) $ (3,396,318)
============= ============= =============
Basic and diluted net loss per
share $ (2.84) $ (10.05) $ (3.51)
============= ============= =============
Weighted-average shares used in
computing net loss per share,
basic and diluted 10,139,755 1,018,359 966,799
============= ============= =============
Pro forma net loss per share,
basic and diluted $ (1.65) $ (1.29)
============= =============
Shares used above 10,139,755 1,018,359
Pro forma adjustment to
reflect assumed
weighted-average effect of
conversion of preferred
stock 7,271,273 6,908,593
------------- -------------
Shares used in computing pro
forma net loss per share,
basic and diluted 17,411,028 7,926,952
============= =============
The Company has excluded all outstanding stock options and warrants,
and shares subject to repurchase from the calculation of diluted loss per common
share because all such securities are antidilutive for all periods presented.
The total number of shares excluded from the calculation of diluted net loss per
share, prior to application of the treasury stock method for stock options, was
509,850, 81,000 and 61,625 for the years ended December 31, 2000, 1999 and 1998,
respectively. Such securities, had they been dilutive, would have been included
in the computation of diluted net loss per share.
SEGMENT REPORTING
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," requires the use of a management approach in identifying segments
of an enterprise. Management has determined that the Company operates in one
business segment.
41
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EFFECT OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which will
be effective January 1, 2001. SFAS No. 133 establishes accounting and reporting
standards requiring that every derivative instrument, including certain
derivative instruments imbedded in other contracts, be recorded in the balance
sheet as either an asset or liability measured at its fair value. The statement
also requires that changes in the derivative's fair value be recognized in
earnings unless specified hedge accounting criteria are met. Management believes
the adoption of SFAS No. 133 will not have an effect on the financial
statements, as the Company does not engage in the activities covered by SFAS No.
133.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, Revenue Recognition ("SAB 101"). SAB 101
provides the SEC Staff's views in applying generally accepted accounting
principles to various revenue recognition issues and specifically addresses
revenue recognition for upfront, non-refundable fees earned in connection with
research collaboration arrangements. It is the SEC's position that such fees
should generally be recognized over the term of the agreement. The Company
expects to apply this accounting to its future collaborations. The Company
believes its revenue recognition policy is in compliance with SAB 101.
2. INVESTMENT IN CHEMNAVIGATOR.COM
In January 1999, the Company began development of an Internet-based
search engine that allows scientists to search for compounds based primarily on
the similarity of chemical structures. In May 1999, ChemNavigator.com was
incorporated and in June 1999, the Company licensed to ChemNavigator.com a
website, the trademark ChemNavigator and goodwill associated with the trademark,
intellectual property related to the search engine, as well as technology needed
to perform chemical similarity searches. In return, the Company received
2,625,000 shares of preferred stock in ChemNavigator.com valued at $2,625,000
based on independent investors' participation in ChemNavigator.com's Series A
preferred round of financing. However, the Company's historical cost basis in
the licensed technology was zero and the Company therefore recorded its
investment in ChemNavigator.com at zero in accordance with SAB 48, which calls
for predecessor cost accounting to account for the exchange of non-monetary
assets for stock. As of December 31, 2000, the Company equity ownership
represented approximately 34% of the outstanding voting equity securities of
ChemNavigator.com. ChemNavigator.com has an accumulated deficit and since the
Company is under no obligation to reimburse the other ChemNavigator.com
stockholders for its share of ChemNavigator.com's losses, the Company has not
included any equity in the net loss of ChemNavigator.com in the Company's
Statements of Operations.
The Company subleases office space to ChemNavigator.com. The current
sublease payment of $5,592 per month can be adjusted monthly based upon changes
in the number of ChemNavigator.com employees.
Jack Lief, the Company's President and Chief Executive Officer, is also
the Chairman of the Board of ChemNavigator.com. Richard P. Burgoon, Jr., the
Company's Senior Vice President, Operations, General Counsel and Secretary, is
also the Secretary of ChemNavigator.com and a member of its board of directors.
42
3. INVESTMENT IN ARESSA PHARMACEUTICALS, INC.
In August 1999, the Company formed Aressa Pharmaceuticals, Inc. to take
advantage of opportunities to in-license and develop niche products from other
pharmaceutical or biotechnology companies. In October 2000, the Company received
shares of preferred stock in Aressa valued at $5.0 million based on the
participation of independent investors in Aressa's Series A preferred round of
financing raising gross proceeds of $1.0 million. As of December 31, 2000, the
Company owned approximately 83% of the outstanding voting equity securities of
Aressa. Management believes that majority ownership and control is temporary and
in accordance with FAS 94, has therefore not consolidated Aressa's activity.
Jack Lief, the Company's President and Chief Executive Officer, is also
the Chief Executive Officer and President of Aressa. Richard P. Burgoon, Jr.,
the Company's Senior Vice President, Operations, General Counsel and Secretary,
is also the Chief Operating Officer and Secretary of Aressa. Joyce Williams, the
Company's Vice President, Drug Development is also the Vice President,
Regulatory and Clinical Affairs of Aressa.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
------------------------------
2000 1999
----------- -----------
Laboratory and computer equipment $ 3,659,632 $ 2,641,072
Furniture and fixtures 267,841 185,220
Leasehold improvements 1,714,622 536,096
----------- -----------
5,642,095 3,362,388
----------- -----------
Less accumulated depreciation and amortization (1,376,835) (589,006)
----------- -----------
$ 4,265,260 $ 2,773,382
=========== ===========
Cost and accumulated amortization of equipment under capital leases totaled
$2,331,000 and $810,000, and $1,931,000 and $331,000 at December 31, 2000 and
1999, respectively.
5. CONVERTIBLE NOTES PAYABLE TO RELATED PARTY
In 1997, the Company issued a convertible note payable to Tripos, Inc.
("Tripos"), a significant stockholder, for the principal amount of $755,000 at
an annual interest rate of 9.5%. In 2000, upon the closing of the Company's
initial public offering, all outstanding principal and accrued interest under
this convertible note was converted into 755,000 shares of common stock.
Interest expense for the years ended December 31, 2000, 1999 and 1998 was
approximately $41,000, $72,000 and $72,000, respectively.
In 1998, the Company issued a convertible note payable to Tripos, for a
principal amount of up to $1,500,000 at an annual interest rate of 9.5%. The
Company received proceeds of $1,125,000 on this note payable in 1998, and
$375,000 in 1999. In 1999, all outstanding principal and accrued interest under
this convertible note payable was converted into 435,840 shares of Series D
redeemable convertible preferred stock. Upon the closing of the Company's
initial public offering, these shares converted into common stock of the
Company.
At the date each note was entered into, the note was convertible into
stock at the then-current fair value of such stock, and therefore there is no
beneficial conversion feature associated with the notes.
43
6. COMMITMENTS
LEASES
In 1997, the Company leased its facilities located at 6166 Nancy Ridge
Drive in San Diego, California under an operating lease that had an expiration
date in 2004. The Company had an option to buy the facilities during the first
12 months of the lease term for $2,141,309. In 1998, the Company assigned the
option to a publicly traded Real Estate Investment Trust ("REIT") in exchange
for $733,322 in cash. The $733,322 in cash is being recognized on a
straight-line basis as a reduction in the rent expense on the underlying lease.
In addition, the Company signed a new lease with the REIT, which expires in
2013. The lease provides the Company with an option to extend the lease term via
two five-year options. Under the terms of the new lease, effective April 30,
1998, monthly rental payments will be increased on April 30, 2000 and annually
thereafter by 2.75%. In accordance with the terms of the new lease, the Company
is required to maintain restricted cash balances totaling $79,955 on behalf of
the landlord as rent deposits throughout the term of the lease.
In 2000, the Company leased additional facilities located at 6150 Nancy
Ridge Drive in San Diego, California under an operating lease which expires in
2013. In January 2001, the Company purchased this facility for approximately
$5.4 million in cash.
Rent expense was $728,369, $598,903 and $366,505 for the years ended
December 31, 2000, 1999 and 1998, respectively.
Annual future minimum lease obligations as of December 31, 2000 are as
follows:
YEAR ENDING DECEMBER 31, OPERATING LEASES CAPITAL LEASES
------------------------ ---------------- --------------
2001 $ 663,017 $ 613,883
2002 678,528 613,883
2003 694,465 480,289
2004 611,866 44,875
2005 628,691 --
Thereafter 5,693,571 --
---------------- --------------
Total minimum lease payments $ 8,970,138 1,752,930
================
Less amount representing interest (311,875)
--------------
Present value of minimum lease obligations 1,441,055
Less current portion (480,538)
--------------
Long-term portion of capital lease obligations $ 960,517
==============
The table above representing annual future minimum operating lease
obligations is exclusive of the 6150 Nancy Ridge Drive facility which we
purchased in January 2001.
Future minimum rentals to be received under non-cancelable subleases as
of December 31, 2000 totaled approximately $36,000.
44
7. COLLABORATIONS
COLLABORATIVE AGREEMENT WITH ELI LILLY
In April 2000, the Company entered into a research alliance with Eli
Lilly. The collaboration with Eli Lilly will principally focus on the central
nervous system and endocrine therapeutic fields. The collaboration will also
focus on the cardiovascular field and may expand into other therapy classes,
including cancer.
During the collaboration, the Company will pursue an agreed upon
research plan with Eli Lilly that has several objectives. During the term of the
collaboration, the Company will mutually review and select G-Protein Coupled
Receptors (GPCRs) that will become subject to the collaboration. These GPCRs may
be provided either by the Company or by Eli Lilly. All of the Company's existing
CART-activated GPCRs are excluded from the collaboration. The Company and Eli
Lilly will each share their respective knowledge of the GPCRs that become
subject to the collaboration to validate and CART-activate selected receptors.
The Company and Eli Lilly will jointly select a number of proprietary central
nervous system, endocrine and cardiovascular GPCRs for CART-activation, and the
Company will then provide Eli Lilly with enabled high-throughput screens for use
at their screening facilities. During the term of the agreement, the Company
will continue to receive research funding from Eli Lilly for internal resources
committed to the collaboration, which will be augmented by substantial resource
commitments by Eli Lilly. Eli Lilly will be responsible for screening its
chemical compound library using selected CART-activated receptors, for
identifying drug candidates and for the pre-clinical and clinical testing and
development of drug candidates. The Company may receive $1.25 million per
receptor based upon milestone payments in connection with the successful
application of CART to each receptor, and up to an additional $6.0 million based
upon clinical development milestone payments for each drug candidate discovered
using CART. The Company may also receive additional milestone and royalty
payments associated with the commercialization of drugs discovered using CART,
if any. The Company and Eli Lilly may never achieve the discovery, development
or commercialization milestones.
Once the assay development fee has been paid for a CART-activated GPCR,
Eli Lilly will have exclusive rights to screen chemical libraries, discover drug
candidates that target that GPCR, and to develop, register and sell any
resulting products worldwide. The Company retains rights to partner or
independently develop GPCRs that do not become subject to the collaboration.
The term of the collaboration agreement with Eli Lilly is five years.
Either Eli Lilly or the Company can terminate the agreement with or without
cause effective three years after the date of the agreement by giving written
notice prior to the conclusion of the 33rd month after the date of the
agreement. In addition, either party can terminate the agreement at any time if
the other party commits a material breach, and Eli Lilly can terminate the
agreement at any time if, among other reasons, Eli Lilly does not approve
suitable replacements for key employees who leave the Company. The parties will
continue to have various rights and obligations under the agreement after the
agreement is terminated. The extent of these continuing rights and obligations
depends on many factors, such as when the agreement is terminated, by which
party and for what reason. These continuing obligations may include further
research and development efforts by the Company and a variety of payments by Eli
Lilly.
Revenues recognized under the Eli Lilly collaboration was approximately
$5.2 million for the year ended December 31, 2000 consisting of research funding
of approximately $2.9 million, milestone achievements of approximately $2.2
million, and amortization of the up-front payment of $75,000.
45
7. COLLABORATIONS (CONTINUED)
COLLABORATIVE AGREEMENT WITH TAISHO
In May 2000, the Company entered into an agreement with Taisho to
initiate a research collaboration focused on several GPCRs selected by Taisho in
therapeutic areas of interest to Taisho. Under the terms of the agreement,
Taisho will receive exclusive, worldwide rights to the selected GPCR targets and
to any drug candidates discovered using the activated versions of these
receptors. The Company may receive up to a total of $2.3 million in revenues per
receptor associated with research, development and screening fees. The Company
may also receive clinical development milestones, regulatory approval milestones
and royalties on drug sales, if any.
Revenues recognized under the Taisho collaboration was approximately
$2.4 million for the year ended December 31, 2000 consisting of milestone
achievements of approximately $2.3 million and amortization of the up-front
payment of $80,000.
COLLABORATIVE AGREEMENT WITH FUJISAWA
In January 2000, the Company entered into a collaborative agreement
with Fujisawa, a leading Japan-based pharmaceutical company with significant
drug discovery research efforts. During the collaboration, the Company will
jointly validate up to 13 orphan GPCRs as drug screening targets. The Company
will be responsible for receptor identification, location and regulation, and
will apply its CART technology to GPCRs selected by Fujisawa. The Company will
also seek to validate screening assays based on the selected GPCRs. Fujisawa
will be entitled to screen selected assays against its chemical compound library
to identify drug candidates. Fujisawa will also be responsible for the
pre-clinical and clinical development of any drug candidates that the Company or
Fujisawa discover. The Company may also screen the selected GPCRs using its
in-house chemical library. When Fujisawa selects its first receptor, the Company
will be entitled to receive a one-time initiation fee of $500,000. If the
Company and Fujisawa then achieve various milestones, the Company may receive up
to a maximum of $3.5 million per selected receptor in assay transfer, screening
and exclusivity fees, and up to a maximum of $2.0 million per selected receptor
based upon the filing of one or more investigational new drug applications for
each drug candidate discovered using a CART-activated receptor. The Company may
also receive clinical development milestones, regulatory approval milestones and
royalties on drug sales, if any. The Company and Fujisawa may never achieve
research, development or commercialization milestones under the agreement. The
Company's collaborative agreement with Fujisawa will terminate upon the
expiration of Fujisawa's obligation to make royalty payments under the
agreement, if any. Fujisawa may terminate the agreement at any time by providing
the Company with written notice of their intention to do so and by returning any
proprietary rights they have acquired under the agreement. Additionally, either
party may terminate the agreement for a material breach of the agreement by the
other party. The termination or expiration of the agreement will not affect any
rights that have accrued to the benefit of either party prior to the termination
or expiration.
8. STOCKHOLDERS' EQUITY
PREFERRED STOCK
Concurrent with the closing of the Company's initial public offering in July
2000, all outstanding shares of the Company's preferred stock converted into
12,698,578 shares of common stock.
46
COMMON STOCK
In June 1997, a total of 1,000,000 shares of common stock were issued
to the founders of the Company at a price of $.0001 per share under founder
stock purchase agreements. The Company issued 50,000 of these shares to an
outside founder, which vest ratably over 50 months. Unvested shares are subject
to repurchase by the Company, at the original purchase price, if the
relationship between the Company and the outside founder terminates. In 1999,
17,500 shares were repurchased.
WARRANTS
During the year ended December 31, 2000, all outstanding warrants were
converted into 410,060 shares of common stock of the Company. At December 31,
2000, no warrants are outstanding.
INCENTIVE STOCK PLANS
The Company's Amended and Restated 1998 Equity Compensation Plan (the
"1998 Plan") provides designated employees of the Company, certain consultants
and advisors who perform services for the Company, and non-employee members of
the Company's Board of Directors with the opportunity to receive grants of
incentive stock options, nonqualified stock options and restricted stock. The
options and restricted stock generally vest 25% a year for four years and are
immediately exercisable up to ten years from the date of grant. At December 31,
2000, 1,500,000 shares of common stock were authorized for issuance under the
1998 Plan.
In 2000, the board of directors adopted and stockholders approved the
2000 Equity Compensation Plan (the "2000 Plan") which provides designated
employees of the Company, certain consultants and advisors who perform services
for the Company, and non-employee members of the Company's Board of Directors
with the opportunity to receive grants of incentive stock options, nonqualified
stock options and restricted stock. The options and restricted stock generally
vest 25% a year for four years and are immediately exercisable up to ten years
from the date of grant. At December 31, 2000, 2,000,000 shares of common stock
were authorized for issuance under the 2000 Plan.
Unvested shares issued to our employees, consultants, advisors and
non-employee members of the Company's Board of Directors pursuant to the
exercise of options are subject to repurchase, at the original purchase price,
in the event of termination of employment or engagement. In the event the
Company elects not to buy back any such unvested shares, the unvested options
will be expensed at their fair value at that point in time. At December 31,
2000, 509,850 shares of common stock issued pursuant to the exercise of options
were subject to repurchase by the Company. In accordance with FAS 128, the
Company has excluded unvested common stock arising from exercised options in its
basic loss per share calculations.
47
8. STOCKHOLDERS' EQUITY (CONTINUED)
Following is a summary of stock option activity:
WEIGHTED-
AVERAGE
OPTIONS EXERCISE PRICE
------------------------- ------------------
Balance at December 31, 1997 91,000 $ 0.20
Granted 360,000 $ 0.20
Exercised (43,500) $ 0.20
Balance at December 31, 1998 407,500 $ 0.20
Granted 373,100 $ 0.60
Exercised (90,375) $ 0.33
Canceled (5,625) $ 0.47
-------------------------
Balance at December 31, 1999 684,600 $ 0.40
Granted 1,215,175 $ 11.07
Exercised (809,425) $ 0.46
Canceled (25,875) $ 1.66
-------------------------
Balance at December 31, 2000 1,064,475 $ 12.44
At December 31, 2000, 1999 and 1998, options to purchase 53,625,
159,500, and 67,000 shares were vested. The weighted-average remaining
contractual life of options outstanding at December 31, 2000, 1999 and 1998 was
9.22, 8.50 and 8.75 years, respectively. At December 31, 2000, 1999 and 1998,
509,850, 63,500 and 32,625 shares of common stock issued upon the exercise of
options were subject to repurchase at the original purchase price at a
weighted-average price of $.51, $.23 and $.20, respectively. At December 31,
2000, 1,483,750 shares were available for future grant. The 1,064,475 options
not exercised at December 31, 2000 have exercise prices ranging from $.20 to
$36.88 and can be exercised at any time; however, unvested shares are subject to
repurchase at the original purchase price if a grantee terminates prior to
vesting. In 2000, the Company granted 516,250 stock options to employees at less
than the market price of the stock on the date of grant. The weighted-average
exercise price was $24.96 and the weighted-average market value on the date of
grant was $29.36.
Pro forma information regarding net income is required by SFAS No. 123
and has been determined as if the Company had accounted for its employee stock
options under the fair value method of that Statement. For options granted
through July 27, 2000, the fair value of options granted were estimated at the
date of grant using the minimum value pricing model with the following
weighted-average assumptions: risk free interest rate of 6.5%, dividend yield of
0%, and weighted-average expected life of the option of five years. For options
granted from July 28, 2000 to December 31, 2000 the fair value of the options
was estimated at the date of grant using the Black-Scholes method for option
pricing with the following weighted-average assumptions: risk free interest rate
of 6.5%, dividend yield of 0%, expected volatility of 90% and weighted-average
expected life of the option of five years.
48
8. STOCKHOLDERS' EQUITY (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
adjusted pro forma information is as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2000 1999 1998
------------ ------------ -----------
Adjusted pro forma net loss $(29,889,840) $(10,250,000) $(3,398,000)
Adjusted pro forma basic net loss per
share $ (2.95) $ (10.07) $ (3.51)
The effects of applying SFAS No. 123 for providing pro forma
disclosures are not likely to be representative of the effect on reported net
income for future years.
During the years ended December 31, 2000 and 1999, in connection with
the grant of various stock options to employees, the Company recorded deferred
stock compensation totaling approximately $11.6 million and $1.0 million,
respectively, representing the difference between the exercise price and the
estimated market value of the Company's common stock as determined by the
Company's management on the date such stock options were granted. Deferred
compensation is included as a reduction of stockholders' equity and is being
amortized to expense over the vesting period of the options in accordance with
FASB Interpretation No. 28, which permits an accelerated amortization
methodology. During the years ended December 31, 2000 and 1999, the Company
recorded amortization of deferred compensation expense of approximately $4.3
million and $378,000, respectively. At December 31, 2000, total charges to be
recognized in future periods from amortization of deferred stock compensation
are anticipated to be approximately $4.1 million, $2.6 million, $1.1 million and
$99,000 for the years ending December 31, 2001, 2002, 2003 and 2004,
respectively.
During the year ended December 31, 2000, in connection with the grant
of stock options to consultants, the Company recorded deferred stock
compensation totaling approximately $449,000. Deferred compensation for stock
options granted to consultants is periodically remeasured as the underlying
options vest. For the year ended December 31, 2000 the Company recorded
approximately $323,000 in compensation expense relating to options granted to
consultants. At December 31, 2000, total charges to be recognized in future
periods from amortization of deferred stock compensation relating to options
granted to consultants are anticipated to be approximately $126,000.
COMMON SHARES RESERVED FOR ISSUANCE
At December 31, 2000, 1,064,475 shares of common stock are reserved for
issuance upon exercise of common stock options.
9. EMPLOYEE BENEFIT PLAN
The Company established a defined contribution employee retirement plan
(the "401(k) Plan") effective January 1, 1998, conforming to Section 401(k) of
the Internal Revenue Code ("IRC"). All eligible employees may elect to have a
portion of their salary deducted and contributed to the 401(k) Plan up to the
maximum allowable limitations of the IRC. Through March 31, 1999, the Company
matched 50% of each participant's contribution up to the first 6% of annual
compensation.
Effective April 1, 1999, the Company amended the 401(k) Plan,
increasing the Company match to 100% of each participant's contribution up to
the first 6% of annual compensation for all contributions made after April 1,
1999. The Company's matching portion, which totaled $281,595, $148,784 and
$27,065 for the years ended December 31, 2000, 1999 and 1998, respectively,
vests over a five-year period.
49
10. INCOME TAXES
At December 31, 2000, the Company had federal and California tax net
operating loss carryforwards of approximately $12,158,000 and $12,791,000,
respectively.
Significant components of the Company's deferred tax assets at December
31, 2000 and 1999 are shown below. A valuation allowance of $7,509,000 and
$5,713,000 has been recognized to offset the deferred tax assets as of December
31, 2000 and 1999, respectively, as realization of such assets is uncertain.
DECEMBER 31,
------------------------------------
2000 1999
----------- -----------
Deferred tax assets:
Net operating loss carryforwards $ 4,991,000 $ 4,787,000
Research and development credits 2,089,000 928,000
Other, net 597,000 129,000
----------- -----------
Net deferred tax assets 7,677,000 5,844,000
Valuation allowance for deferred tax assets (7,509,000) (5,713,000)
----------- -----------
Total deferred tax assets 168,000 131,000
Deferred tax liabilities:
Depreciation (168,000) (131,000)
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
The federal and California tax net operating loss carryforwards will
begin to expire in 2012 and 2005, respectively, unless previously utilized. The
Company also has federal and California research tax credit carryforwards of
approximately $1,560,000 and $529,000, respectively, which will begin to expire
in 2012 unless previously utilized.
Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual
use of the Company's net operating loss and credit carryforwards could be
limited in the event of cumulative changes in ownership of more than 50%. Such a
change occurred in prior years. However, the Company does not believe such
limitation will have a material effect upon the Company's ability to utilize the
carryforwards.
50
11. SUBSEQUENT EVENTS
BUILDING PURCHASE
In January 2001, the Company purchased a facility it was leasing along
with an adjoining building that is currently leased to a tenant at 6138-6150
Nancy Ridge Drive in San Diego, California. The Company paid cash of $5.4
million and will amortize the cost over the building's useful life, estimated to
be 20 years. The Company assumed the lease with the tenant, of which the term of
the lease runs through August 31, 2001. The tenant has paid all rents through
the expiration of the lease.
AMENDMENT TO COLLABORATIVE AGREEMENT WITH TAISHO
In January 2001, the Company signed an amendment expanding its original May 2000
agreement with Taisho whereby Taisho was granted world-wide rights to the
Company's 18-F Program, an obesity orphan receptor target and small molecule
modulators. In accordance with the amendment, Taisho will make a one-time
payment in 2001 to the Company for the 18-F Program based upon work already
completed by the Company. In addition, the Company may receive additional
milestone and research funding payments and royalties on drug sales, if any.
ACQUISITION
In December 2000, the Company signed a binding letter of intent and
memorandum of agreement to acquire all of the outstanding capital stock of
Bunsen Rush Laboratories, Inc. (Bunsen Rush), a privately held research-based
company that provides receptor screening for the pharmaceutical and
biotechnology industries using its proprietary and patented Melanophore
Technology. The purchase price was $15.0 million in cash. On February 15, 2001
the Company completed its acquisition of Bunsen Rush pursuant to an Agreement
and Plan of Merger dated February 15, 2001. The acquisition was effected in the
form of a merger of Bunsen Rush into BRL Screening, Inc., a newly formed
wholly-owned subsidiary of the Company.
51
SUPPLEMENTARY FINANCIAL DATA
FINANCIAL INFORMATION BY QUARTER (UNAUDITED)
2000 for quarter ended Dec. 31 Sept 30 June 30 March 31 Year
- ------------------------------------- ---------------- --------------- ---------------- -------------- -------------------
Revenues $ 4,079,999 $ 2,314,126 $ 1,289,271 $ -- $ 7,683,396
Amortization of non-cash deferred
compensation 1,390,494 1,123,358 1,419,565 409,479 4,342,896
Net income (loss) 1,064,906 (1,418,594) (2,886,082) (3,122,200) (6,361,970)
Non-cash preferred stock charge -- -- (8,203,505) (14,187,563) (22,391,068)
Net income (loss) applicable to
common stockholders 1,064,906 (1,418,594) (11,089,587) (17,309,763) (28,753,038)
Basic and diluted earnings (loss)
per share 0.05 (0.09) (8.47) (15.92) (2.84)
Pro forma earnings (loss) per share
(0.07) (0.81) (1.76) (1.65)
2000 for quarter ended Dec. 31 Sept 30 June 30 March 31 Year
- ------------------------------------- ---------------- --------------- ---------------- -------------- -------------------
Revenues $ -- $ -- $ -- $ -- $ --
Amortization of non-cash deferred 101,095 97,628 179,386 -- 378,109
compensation
Net loss (2,979,060) (2,734,105) (2,526,550) (1,998,235) (10,237,950)
Non-cash preferred stock charge
-- -- -- -- --
Net loss applicable to common
stockholders (2,979,060) (2,734,105) (2,526,550) (1,998,235) (10,237,950)
Basic and diluted loss per share (2.84) (2.65) (2.48) (2.03) (10.05)
Pro forma loss per share (0.37) (0.34) (0.32) (0.31) (1.29)
52
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is incorporated herein by
reference from the information under the caption "Election of Directors" on
pages 2 through 4 and the caption "Compensation And Other Information
Concerning Officers, Directors And Certain Stockholders" on pages 9 and 10
and the caption "Section 16(a) Beneficial Ownership Reporting Compliance" on
pages 18 and 19 contained in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated herein by
reference from the information under the caption "Compensation And Other
Information Concerning Officers, Directors And Certain Stockholders" on pages
9 through 13 and on page 19 under the caption "Compensation Committee
Interlocks and Insider Participation" contained in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated herein by
reference from the information under the caption "Security Ownership Of Certain
Beneficial Owners And Management" on pages 17 and 18 contained in the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated herein by
reference from the information under the caption "Compensation And Other
Information Concerning Officers, Directors And Certain Stockholders"
specifically under the subheading "Certain Relationships and Related
Transactions" on pages 19 and 20 contained in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements.
Reference is made to the Index to Financial Statements under Item 8,
Part II hereof.
2. Financial Statement Schedules.
The Financial Statement Schedules have been omitted either because
they are not required or because the information has been included in the notes
to the Financial Statements included in this Report on Form 10-K.
3. Exhibits
3.1+++ Fourth Amended and Restated Certificate of Incorporation of the
Company, filed August 1, 2000.
3.2+ + By-laws of the Company.
53
4.1+ + Form of common stock certificates.
10.1+ # Arena Pharmaceuticals, Inc. 1998 Equity Compensation Plan.
10.2+ # Arena Pharmaceuticals, Inc. 2000 Equity Compensation Plan.
10.3+ # Services Agreement, dated May 26, 1999, by and between
ChemNavigator.com, Inc. and Jack Lief.
10.4+ # Services Agreement, dated May 26, 1999, by and between
ChemNavigator.com, Inc. and Richard P. Burgoon, Jr.
10.5+ # Services Agreement, dated May 26, 1999, by and between
ChemNavigator.com, Inc. and Robert Hoffman.
10.6+ Lease, dated as of April 30, 1998, by and between ARE - 6166 Nancy
Ridge, LLC and Arena Pharmaceuticals, Inc.; as amended by First
Amendment to Lease dated as of June 30, 1998.
10.7*** Agreement, effective May 29, 2000, by and between Arena
Pharmaceuticals, Inc. and Taisho Pharmaceutical Co., Ltd.
10.8*** First Amendment effective January 24, 2001 by and between Arena
Pharmaceuticals, Inc. and Taisho Pharmaceuticals, Co., Ltd.
10.9=** License Agreement, effective as of January 23, 1998 by and between
Arena Pharmaceuticals, Inc. and SSP Co., Ltd., as amended by Addendum
No. 1, dated April 5, 1999.
10.10**++ Research Collaboration and License Agreement, effective as of April
14, 2000, by and between Arena Pharmaceuticals, Inc. and Eli Lilly and
Company.
10.11**++ Agreement, effective as of January 24, 2000, by and between Arena
Pharmaceuticals, Inc. and Fujisawa Pharmaceutical Co., Ltd.
10.12+ Binding Letter of Intent & Memorandum of Agreement, dated as of April
3, 2000, between Lexicon Genetics, Inc. and Arena Pharmaceuticals,
Inc.
10.13++ Agreement, effective as of September 15, 1999, by and between Arena
Pharmaceuticals, Inc. and Neurocrine Biosciences, Inc.
10.14 Purchase and Sale Agreement effective December 1, 2000 by and between
Limar Realty Corp. #13 and Arena Pharmaceuticals, Inc.
10.15* Agreement and Plan of Merger, dated February 15, 2001 by and among
Arena Pharmaceuticals, Inc., BRL Screening, Inc., Bunsen Rush
Laboratories, Inc., and Ethan A. Lerner, Michael R. Lerner, Peter M.
Lerner, David Unett and Alison Roby-Shemkovitz.
21.1 Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney
* Incorporated by reference to the Company's Form 8-K filed on February 20,
2001.
** Confidential treatment has been granted for portions of this document.
54
*** Confidential treatment has been requested for portions of this document.
= Incorporated by reference to the Company's Registration Statement on Form
S-1, filed April 28, 2000; SEC File No. 333-35944.
+ Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended filed June 22, 2000; SEC File No. 333-35944.
++ Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended filed July 19, 2000; SEC File No. 333-35944.
+++ Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended filed July 25, 2000; SEC File No. 333-35944.
# Indicates management contract or compensatory plan.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three months
ended December 31, 2000.
(c) Exhibits
See item 14(a) above.
(d) Financial Statement Schedules
See Item 14 (a) (2) above
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on March
15, 2001.
Arena Pharmaceuticals, Inc.
A Delaware Corporation
By: /s/ Jack Lief
--------------
Jack Lief
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 15, 2001.
Signatures Title
- ---------- -----
By: /s/ Jack Lief President, Chief Executive Officer
------------------------------- and Director
Jack Lief
By: /s/ Robert Hoffman Vice President, Finance, Principal
------------------------------- Financial Officer and Principal Accounting Officer
Robert Hoffman
By: /s/ Dominic P. Behan Vice President, Research and
------------------------------- Director
Dominic P. Behan, Ph.D.
By: /s/ Derek T. Chalmers Vice President, Research and
------------------------------- Director
Derek T. Chalmers, Ph.D.
By: /s/ John P. McAlister, III
-------------------------------
John P. McAlister, III, Ph.D. Director
By: /s/ Michael Steinmetz
-------------------------------
Michael Steinmetz, Ph.D. Director
By: /s/ Stefan Ryser
-------------------------------
Stefan Ryser, Ph.D. Director
56
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
3.1+ + + Fourth Amended and Restated Certificate of
Incorporation of the Company, filed August 1, 2000
3.2+ + By-laws of the Company
4.1+ + Form of common stock certificates
10.1+ # Arena Pharmaceuticals, Inc. 1998 Equity Compensation
Plan
10.2+ # Arena Pharmaceuticals, Inc. 2000 Equity Compensation
Plan
10.3+ # Services Agreement, dated May 26, 1999, by and
between ChemNavigator.com, Inc. and Jack Lief
10.4+ # Services Agreement, dated May 26, 1999, by and
between ChemNavigator.com, Inc. and Richard P.
Burgoon, Jr.
10.5+ # Services Agreement, dated May 26, 1999, by and
between ChemNavigator.com, Inc. and Robert Hoffman
10.6+ Lease, dated as of April 30, 1998, by and between ARE
- 6166 Nancy Ridge, LLC and Arena Pharmaceuticals,
Inc. as amended by First Amendment to Lease dated as
of June 30, 1998
10.7*** Agreement, effective May 29, 2000, by and between
Arena Pharmaceuticals, Inc. and Taisho Pharmaceutical
Co., Ltd.
10.8*** First Amendment effective January 24, 2001 by and
between Arena Pharmaceuticals, Inc. and Taisho
Pharmaceutical, Co., Ltd.
10.9=** License Agreement, effective as of January 23, 1998
by and between Arena Pharmaceuticals, Inc. and SSP
Co., Ltd., as amended by Addendum No. 1, dated April
5, 1999
10.10**++ Research Collaboration and License Agreement,
effective as of April 14, 2000, by and between Arena
Pharmaceuticals, Inc. and Eli Lilly and Company
10.11**++ Agreement, effective as of January 24, 2000, by and
between Arena Pharmaceuticals, Inc. and Fujisawa
Pharmaceutical Co., Ltd.
10.12+ Binding Letter of Intent & Memorandum of Agreement,
dated as of April 3, 2000, between Lexicon Genetics,
Inc. and Arena Pharmaceuticals, Inc.
10.13++ Agreement, effective as of September 15, 1999, by and
between Arena Pharmaceuticals, Inc. and Neurocrine
Biosciences, Inc.
10.14 Purchase and Sale Agreement effective December 1,
2000 by and between Limar Realty Corp. #13 and Arena
Pharmaceuticals, Inc.
10.15* Agreement and Plan of Merger, dated February 15, 2001
by and among Arena Pharmaceuticals, Inc., BRL
Screening, Inc., Bunsen Rush Laboratories, Inc., and
Ethan A. Lerner, Michael R. Lerner, Peter M. Lerner,
David Unett and Alison Roby-Shemkovitz.
21.1 Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney
* Incorporated by reference to the Company's Form 8-K filed on February 20,
2001.
** Confidential treatment has been granted for portions of this document.
*** Confidential treatment has been requested for portions of this document.
= Incorporated by reference to the Company's Registration Statement on Form
S-1, filed April 28, 2000; SEC File No. 333-35944.
+ Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended filed June 22, 2000; SEC File No. 333-35944.
++ Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended filed July 19, 2000; SEC File No. 333-35944.
+++ Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended filed July 25, 2000; SEC File No. 333-35944.
# Indicates management contract or compensatory plan.