<PAGE> 1
This filing is made pursuant to Rule 424(a) under the Securities
Act of 1933 in connection with Registration No. 333-35944.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES, AND IT IS NOT SOLICITING AN OFFER
TO BUY THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION, DATED JULY 10, 2000
PROSPECTUS
5,000,000 SHARES
[ARENA LOGO]
COMMON STOCK
-------------------------
Arena Pharmaceuticals is offering 5,000,000 shares of its common stock.
This is our initial public offering. We applied to have our common stock
approved for quotation on the Nasdaq National Market under the symbol "ARNA." We
anticipate that the initial public offering price will be between $15.00 and
$17.00 per share.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 8.
-------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C>
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
PER SHARE TOTAL
------------------------------------------------------------------------------------------------------
Public Offering Price..................................... $ $
Underwriting Discounts and Commissions.................... $ $
Proceeds to Arena Pharmaceuticals......................... $ $
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
</TABLE>
The underwriters have an option to purchase up to an additional 750,000
shares of common stock from us to cover over-allotments. The underwriters expect
to deliver the shares to purchasers on or about , 2000.
ING BARINGS
PRUDENTIAL VECTOR HEALTHCARE
a unit of Prudential Securities
SG COWEN
The date of this prospectus is , 2000
<PAGE> 2
\
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY.......................................... 3
RISK FACTORS................................................ 8
FORWARD-LOOKING STATEMENTS.................................. 16
USE OF PROCEEDS............................................. 17
DIVIDEND POLICY............................................. 17
CAPITALIZATION.............................................. 18
DILUTION.................................................... 19
SELECTED FINANCIAL DATA..................................... 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 22
BUSINESS.................................................... 27
MANAGEMENT.................................................. 44
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 50
PRINCIPAL STOCKHOLDERS...................................... 52
DESCRIPTION OF CAPITAL STOCK................................ 54
SHARES ELIGIBLE FOR FUTURE SALE............................. 58
UNDERWRITING................................................ 60
LEGAL MATTERS............................................... 62
EXPERTS..................................................... 62
WHERE YOU CAN FIND ADDITIONAL INFORMATION................... 62
INDEX TO FINANCIAL STATEMENTS............................... F-1
</TABLE>
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
We have included this information in the prospectus summary because we believe
this information is highly important in making a decision to invest in our
common stock. However, before investing in our common stock you should read this
entire prospectus carefully, including the section entitled "Risk Factors" and
our financial statements and related notes, for a more complete understanding of
our business and this offering.
OUR COMPANY
We are a biotechnology company that has developed a new technology referred
to as CART, which we use to identify new drug candidates more efficiently than
traditional drug discovery techniques. Using CART, we have discovered new drug
candidates in the areas of obesity and schizophrenia, which have demonstrated
pharmacological activity in animal studies. These discoveries were made over an
18 month period and resulted from our own internal research and development
efforts, as well as through the efforts of our collaborators. These discoveries
were accomplished in a short time period because CART eliminates the need to use
a signaling molecule, called a ligand, that is essential for traditional drug
discovery techniques. The success of CART has enabled us to establish
collaborative drug discovery programs with a number of pharmaceutical and
biotechnology companies, including Eli Lilly and Company, Taisho Pharmaceutical
Co., Ltd., and Fujisawa Pharmaceutical Company, Ltd.
We use CART to discover chemical compounds that target an important class
of receptors, called G protein-coupled receptors, which are located on the
surface of cells. Pharmaceutical and biotechnology companies are increasingly
focusing their drug discovery efforts on receptor-based drug targets. This is
because drugs that target receptors have the potential for regulating diseases
with increased specificity and reduced side effects. Of the 100 leading
pharmaceutical products, based on 1999 revenues, 49 target receptors as their
primary mechanism of action. Of these 49 receptor-based drugs, 31 wholly or in
part act on G protein-coupled receptors. In 1999, pharmaceutical products that
act wholly or in part on G protein-coupled receptors represented over $27
billion in sales and included some of the world's largest-selling drugs, such as
Claritin(R) for allergies, Zantac(R) for gastric ulcers, Imitrex(R) for
migraines and Cozaar(R) for hypertension.
THE DRUG DISCOVERY PROBLEM
Scientists are using advances in genomics research to identify new drug
targets, many of which are receptors, which are located on the surface of cells.
These new drug targets form the basis of drug discovery for the treatment of
disease. Diseases in humans are caused by the abnormal function of cells.
Changes in cellular function occur when a ligand is released from a cell and
binds to a receptor on that cell or another cell. This binding triggers the
initiation of various signals within the cell, resulting in changes in
biological activity. Drugs interact with the receptor to imitate or inhibit
binding of the ligand to the receptor and thereby affect cellular function to
regulate the disease process.
Traditional drug discovery techniques require scientists to identify the
ligand that naturally binds to the receptor, called a receptor's native ligand.
The process of identifying a native ligand for a specific receptor is very
uncertain and, even when successful, has typically taken scientists four to five
years and costs millions of dollars per receptor. To our knowledge, only a
limited number of examples exist where a native ligand for a G protein-coupled
receptor has been intentionally discovered. Therefore, the process of
identifying these ligands is usually the step that limits the rate at which
drugs are discovered at new receptor targets.
OUR SOLUTION -- CART
We and our collaborators use CART to pursue drug discovery efforts at a
receptor without using the receptor's native ligand. Instead, we use CART to
genetically alter, or activate, receptors to mimic the biological response that
occurs when the ligand binds to the receptor. We use these activated receptors
as screening tools to identify chemical compounds that alter this biological
response and that are the basis for drug discovery.
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<PAGE> 4
We particularly focus our technology on G protein-coupled receptors for
which the native ligand to the receptor is not known. A G protein-coupled
receptor for which the native ligand is not known is called an orphan G
protein-coupled receptor. Genomics researchers estimate that there are
approximately 2,000 G protein-coupled receptors in the human body with potential
pharmaceutical applications, of which approximately 1,900 are orphan G
protein-coupled receptors. CART enables us and our collaborators to rapidly
access these orphan G protein-coupled receptors to develop drug candidates.
CART is also applicable to drug discovery for G protein-coupled receptors
for which the native ligand is identified, which are called known G
protein-coupled receptors. Traditional drug discovery focuses on discovering
drugs that bind at a particular receptor's ligand binding site. In contrast,
CART exposes the entire receptor's surface to drug discovery efforts, thereby
increasing the likelihood of discovering new drug candidates that might not
otherwise be discovered using traditional drug discovery techniques. We believe
that we can use CART to discover new drug candidates that could have improved
properties compared to existing drug compounds that target known G
protein-coupled receptors.
APPLICATIONS OF CART
We have successfully identified drug candidates that inhibit or activate a
number of G protein-coupled receptor targets. We focus on chemical compounds
that are capable of being taken orally and that are relatively easy to
manufacture. While we currently focus on G protein-coupled receptors as drug
targets, we believe CART has broad application and can also be applied to other
types of human receptors, as well as to plant, viral and insect receptors. In
the past three years, we have obtained the full-length genetic sequences of 265
G protein-coupled receptors and made them available for activation and
screening. Of these, 134 are human orphan G protein-coupled receptors, and 126
are human known G protein-coupled receptors. The remaining five are non-human
receptors, including plant, viral and insect receptors.
We have selected and applied CART to 15 orphan G protein-coupled receptors
that we believe have high potential value as drug targets for the discovery of
therapeutics to treat diseases such as obesity, cancer, cardiovascular disease,
diabetes, inflammation and Alzheimer's Disease. We applied CART to one of these
orphan G protein-coupled receptors that our scientists discovered to be
associated with feeding behavior and metabolism. We screened our chemical
library against this receptor, and our scientists discovered a number of
compounds that caused an immediate and rapid loss of body weight in laboratory
animals that was maintained throughout the course of the experiments. We believe
these compounds may be the basis for the development of therapeutic products for
the treatment of obesity, which affects approximately 22 million adults in the
United States. Using our chemical library, we have also discovered drug
candidates that may be useful in the treatment of diseases resulting from the
overactivity of known G protein-coupled receptors, including a known G
protein-coupled receptor which is associated with psychiatric disorders such as
schizophrenia. We discovered these obesity and schizophrenia drug candidates
within approximately 18 months from the initial application of CART to these
receptors.
OUR COLLABORATORS
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 will activate a number of mutually selected
G protein-coupled receptors and will provide Eli Lilly with biochemical tests,
called assays, for use at 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. Under the terms of the agreement, we received an
up-front payment, and, if various milestones are achieved, we are entitled to
receive assay development fees, milestone payments and royalties based on
product sales.
In May of 2000, we entered into a collaborative agreement with Taisho, a
leading Japan-based pharmaceutical company. This collaboration focuses on a
specified number of G protein-coupled receptors
4
<PAGE> 5
of interest to Taisho for its drug discovery efforts. Under the terms of the
agreement, we will receive an up-front payment, and, if various milestones are
achieved, we are entitled to receive assay development fees, screening fees,
milestone payments and royalties based on product sales. In January 2000, we
entered into a collaborative agreement with Fujisawa, another leading
Japan-based pharmaceutical company, to validate as drug screening targets up to
13 orphan G protein-coupled receptors. We have also entered into collaborative
agreements with Lexicon Genetics, Inc. and Neurocrine Biosciences, Inc. We
intend to enter into additional collaborations focusing on a variety of diseases
and targeting a number of orphan and known G protein-coupled receptors.
We have received an aggregate of approximately $2.3 million in cash
proceeds from Eli Lilly and Taisho through June 30, 2000.
OTHER ELEMENTS OF OUR BUSINESS
In 1998, we licensed from SSP Co., Ltd. the rights to develop T-82, a novel
drug candidate that we are developing for the potential treatment of Alzheimer's
Disease. T-82 possesses a unique pharmacological profile that we believe, based
on animal testing, will result in enhanced therapeutic activity over current
drugs used to treat Alzheimer's Disease. We have completed three Phase I
clinical trials of T-82 and plan to begin Phase II clinical testing of T-82 this
year. We intend to enter into a collaborative relationship with a third party to
further develop T-82.
Through our wholly-owned subsidiary, Aressa Pharmaceuticals, Inc., we may
opportunistically in-license products from pharmaceutical or biotechnology
companies. Since its formation, Aressa has in-licensed one compound, an
anti-fungal compound, which is currently in pre-clinical development. We also
have a 46% equity interest in ChemNavigator.com, Inc., which is developing an
Internet-based search engine that allows scientists to search for chemical
compounds based primarily on the similarity of chemical structures.
OUR BUSINESS STRATEGY
Our strategy is to use CART to become a leader in the discovery of new drug
candidates targeting G protein-coupled receptors. The elements of our strategy
are to:
- leverage available genomics information by applying CART to orphan G
protein-coupled receptor targets
- discover new drug candidates that have unique mechanisms of action for
known G protein-coupled receptor targets
- develop multiple pharmaceutical product candidates for G protein-coupled
receptor targets
- enter into strategic collaborations to discover and develop novel drug
candidates
- apply CART to other human receptors and non-human receptors for human
therapeutic, agricultural and other applications
- continue to protect and expand our intellectual property rights
We were formed in April 1997. Our corporate headquarters is located at 6166
Nancy Ridge Drive, San Diego, California 92121. Our telephone number is (858)
453-7200.
CART(TM), Arena(TM), Aressa(TM) and ChemNavigator(TM) are trademarks of
Arena Pharmaceuticals, Inc. Arena Pharmaceuticals(R) and our logo are both
registered trademarks of Arena Pharmaceuticals, Inc. Trade names and trademarks
of other companies appearing in this prospectus are the property of the
respective holders.
5
<PAGE> 6
THE OFFERING
Common stock offered by us............ 5,000,000 shares
Common stock to be outstanding after
this offering......................... 19,996,597 shares
Use of proceeds....................... For general corporate purposes,
including working capital, research
and development and clinical testing,
and potentially for acquisitions of
complementary businesses or
technologies. You should read the
discussion under the heading "Use of
Proceeds" for more information.
Proposed Nasdaq National Market
symbol................................ ARNA
The number of shares of our common stock to be outstanding upon completion
of this offering is based on the shares outstanding as of March 31, 2000, plus
1,323,146 shares of our common stock issuable upon the conversion of our Series
G preferred stock that we issued in April 2000, plus 310,875 shares of our
common stock issued upon the exercise of options between April 1 and June 30,
2000, and excludes:
- 2,000,000 shares of common stock that will be reserved for issuance under
our 2000 Equity Compensation Plan
- 572,800 shares of common stock issuable upon the exercise of outstanding
options under our 1998 Equity Compensation Plan at a weighted average
exercise price of $0.65 per share
- 18,000 shares of common stock issuable upon exercise of one of our
outstanding warrants at an exercise price of $3.49 per share
- 755,000 shares of common stock issuable upon conversion of our
outstanding convertible note
You should read the discussion under the heading "Capitalization" for more
information regarding the outstanding shares of our common stock, warrants and
options to purchase our common stock.
Generally, the information in this prospectus, unless otherwise noted:
- reflects the automatic conversion, on a one-for-one basis, of all of the
outstanding shares of our preferred stock into an aggregate of 12,698,578
shares of common stock at the closing of this offering
- reflects the issuance of 393,419 shares of our common stock upon the
exercise of all but one of our outstanding warrants at a weighted average
exercise price of $2.86 per share at the closing of this offering
- assumes that the over-allotment option granted to the underwriters to
purchase up to 750,000 additional shares of common stock is not exercised
6
<PAGE> 7
SUMMARY FINANCIAL DATA
The following table summarizes our financial data. The summary financial
data for the period from April 14, 1997 (inception) through December 31, 1997
and the years ended December 31, 1998 and 1999 are derived from our audited
financial statements. We have also included data from our unaudited financial
statements for the three months ended March 31, 1999 and 2000. The pro forma
balance sheet data gives effect to the issuance of 1,323,146 shares of our
Series G preferred stock in April 2000, the conversion of all of our outstanding
shares of preferred stock, including our Series G preferred stock, into
12,698,578 shares of common stock, the issuance of 310,875 shares of our common
stock upon the exercise of options between April 1 and June 30, 2000 and the
issuance of 393,419 shares of our common stock upon the exercise of all but one
of our outstanding warrants. The pro forma as adjusted balance sheet data
reflects the sale by us of 5,000,000 shares of common stock in this offering at
an assumed initial public offering price of $16.00 per share. You should read
this data together with our financial statements and related notes included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 14, 1997
(INCEPTION) THREE MONTHS ENDED
THROUGH YEAR ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ----------------------- -------------------
1997 1998 1999 1999 2000
-------------- --------- ---------- ------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating expenses:
Research and development........... $ 447 $ 2,615 $ 8,336 $ 1,777 $ 2,399
General and administrative......... 235 729 1,814 304 424
Amortization of deferred
compensation(1)................. -- -- 378 -- 409
----- ------- -------- ------- --------
Total operating expenses........ 682 3,344 10,528 2,081 3,232
Interest income...................... 23 42 447 114 157
Interest expense..................... (36) (94) (166) (31) (60)
Other income......................... -- -- 9 -- 13
----- ------- -------- ------- --------
Net loss............................. (695) (3,396) (10,238) (1,998) (3,122)
Non-cash preferred stock charge...... -- -- -- -- (14,188)
----- ------- -------- ------- --------
Net loss applicable to common
stockholders....................... $(695) $(3,396) $(10,238) $(1,998) $(17,310)
===== ======= ======== ======= ========
Pro forma net loss per share......... $ (1.29) $ (1.76)
======== ========
Shares used in calculating pro forma
net loss per share................. 7,927 9,827
======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 27,547 $ 33,772 $106,972
Total assets.............................................. 30,701 36,926 110,126
Long-term debt, net of current portion.................... 2,078 2,078 2,078
Prepaid financing proceeds................................ 4,514 -- --
Redeemable convertible preferred stock.................... 38,797 -- --
Accumulated deficit....................................... (17,451) (17,451) (17,451)
Total stockholders' equity (deficit)...................... (16,395) 33,142 106,342
</TABLE>
-------------------------
(1) $264,419 and $285,398 related to research and development expenses and
$113,690 and $124,081 related to general and administrative expenses, for
the year ended December 31, 1999 and for the three months ended March 31,
2000, respectively.
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<PAGE> 8
RISK FACTORS
Investing in our common stock involves a high degree of risk. You should
carefully consider the following risk factors and all other information
contained in this prospectus before purchasing our common stock. If any of the
following risks actually occur, our business, financial condition and results of
operations could be seriously harmed, the trading price of our common stock
could decline and you could lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
WE ARE AT AN EARLY STAGE OF DEVELOPMENT, HAVE A HISTORY OF LOSSES AND LIMITED
REVENUES AND MAY NEVER BECOME PROFITABLE.
We were formed in April 1997 and are a development 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 March 31, 2000, we had
accumulated losses of approximately $17.5 million. We expect our losses will
continue for at least the next several years, and that these losses will
increase as we expand our research and development activities, incur significant
clinical and testing costs and expand our facilities and operations. 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
profitability is longer than we anticipate, or if we are unable to obtain
necessary funds, we may never become profitable and may have to discontinue our
operations.
WE WILL NEED ADDITIONAL CAPITAL IN THE FUTURE TO SUFFICIENTLY FUND OUR
OPERATIONS AND RESEARCH, AND WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL CAPITAL ON
TERMS FAVORABLE TO US.
We have consumed substantial amounts of capital to date and our operating
expenditures are expected to increase over the next several years as we expand
our infrastructure and research and development activities. We believe that the
net proceeds from this offering will be sufficient to support our current
operating plan through at least the next two years. We will likely require
additional financing in the future. Our future funding requirements will depend
on many factors, including, but not limited to:
- any changes in the breadth of our research and development programs,
pre-clinical studies or clinical trials, if any
- our ability to maintain and establish new research collaborations
- the receipt of contingent licensing or milestone fees, if any, from our
current or future collaborative and license agreements, if established
- the time and costs involved in filing, prosecuting, defending and
enforcing patent and intellectual property claims
- the timing of regulatory approvals
- our effective use of the proceeds raised in this offering
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 raise additional funds through the incurrence of debt, and
the holders of
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<PAGE> 9
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 developing our
products.
MOST OF OUR EXPECTED FUTURE REVENUES ARE CONTINGENT UPON COLLABORATIVE AND
LICENSE AGREEMENTS AND WE MAY NOT RECEIVE SUFFICIENT REVENUES FROM THESE
AGREEMENTS TO ATTAIN 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 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 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 agreement
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. For example, during the first nine
months, Eli Lilly can terminate our collaborative agreement with them by giving
us written notice, and this termination would be effective one year after the
date of the agreement. 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 do not typically 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
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<PAGE> 10
identified only a few drug 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. We typically will, and our collaborators may, rely on
third-party clinical investigators at medical institutions to conduct our
clinical trials, and we occasionally 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 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.
WE FACE INTENSE COMPETITION IN THE UNITED STATES AND ELSEWHERE AND WE MAY NOT BE
ABLE TO COMPETE SUCCESSFULLY.
An important focus of our efforts is on G protein-coupled receptors,
particularly orphan G protein-coupled receptors. There are other companies and
organizations that also focus on the discovery and development of drug
candidates using G protein-coupled receptors, and some of these companies and
organizations claim to be able to do so using orphan G protein-coupled
receptors. Another company or organization may have, or may develop, a
technology using G protein-coupled receptors to discover and develop drug
candidates more effectively, quicker 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
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, including Meridia(R) for obesity, Clozaril(R) for schizophrenia and
Aricept(R) for Alzheimer's Disease, as well as products under development and
future products.
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<PAGE> 11
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 G protein-coupled receptors, G protein-coupled receptors that we have
discovered and compounds discovered using CART. However, no patents have been
issued to us as of the date of this prospectus. 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 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 March 7, 2000, the
United States patent office issued 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 how, if at all, these guidelines may affect our patent
applications on CART, genetically altered G protein-coupled receptors, G
protein-coupled receptors 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.
11
<PAGE> 12
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 publicly available 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 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.
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.
12
<PAGE> 13
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.
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 100 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.
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
13
<PAGE> 14
WE MAY BE UNABLE TO LICENSE T-82, AND OUR SUBSIDIARY MAY BE UNABLE TO LICENSE
ITS IN-LICENSED DRUG CANDIDATES, TO ANOTHER PARTY FOR ADVANCED CLINICAL
DEVELOPMENT AND COMMERCIALIZATION.
We have in-licensed a patented compound, referred to as T-82, which we are
developing for the treatment of Alzheimer's Disease. We have completed Phase I
clinical studies for T-82 and intend to begin Phase II clinical studies this
year. We plan to sub-license our rights to T-82 to a pharmaceutical company
prior to initiation of Phase III clinical studies in exchange for milestone
payments and royalties based upon sales, if any, of T-82. We may not be able to
sub-license our rights in T-82 to a pharmaceutical company on terms favorable to
us, if at all. If we cannot enter into such a sub-license agreement, we could
either lose our rights to T-82 or assume the risks of proceeding to further
develop, seek regulatory approval for, and, if approved, commercialize T-82
ourselves. Our subsidiary, Aressa, faces similar risks in connection with
sub-licensing, developing, testing and marketing compounds that it in-licenses.
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 will give 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. 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. ChemNavigator.com's expected funding requirements for the next 12 months
exceed its existing working capital, which raises substantial doubt about
ChemNavigator.com's ability to continue as a going concern. 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 does, 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.
14
<PAGE> 15
RISKS RELATED TO THIS OFFERING
OUR COMMON STOCK PRICE MAY BE HIGHLY VOLATILE AND YOUR INVESTMENT IN OUR COMMON
STOCK COULD DECLINE IN VALUE.
Prior to this offering, there has been no public market for our common
stock. After this offering, an active trading market in our common stock might
not develop, or if it does develop, might not continue. Additionally, the market
price of our common stock may fluctuate significantly in response to many
factors, many of which are beyond our control. You may not be able to resell
your shares at or above the initial public offering price due to the risks and
uncertainties described elsewhere in this "Risk Factors" section, as well as
other factors, including:
- changes in financial estimates or recommendations by securities analysts
regarding us or our common stock
- announcements about the biotechnology or pharmaceutical areas in which we
and our collaborators operate
- the impact of regulatory developments in the United States and foreign
countries on us or our collaborators
- public concern as to safety and effectiveness of research and products
developed by us, our collaborators or our competitors
The market price for securities of biotechnology companies, particularly
early-stage companies, has been increasingly volatile. In the past, following
periods of volatility in the market price of a particular company's securities,
securities class action litigation has often been brought against the company.
We may become involved in this type of litigation in the future. Litigation of
this type is often extremely expensive and diverts management's attention and
resources.
FUTURE SALES OF OUR COMMON STOCK COULD CAUSE THE MARKET PRICE OF OUR COMMON
STOCK TO DECLINE.
The market price of our common stock could decline due to sales of a large
number of shares in the market after this offering or the perception that such
sales could occur, including sales or distributions of shares by our large
stockholders. These sales could also make it more difficult for us to sell
equity securities in the future at a time and price that we deem appropriate to
raise funds through future offerings of common stock.
A number of our existing security holders will become eligible to sell
their shares in the public market after their lock-up agreements expire 180 days
after the closing of this offering. We have entered into registration rights
agreements with many of our existing stockholders that entitle them to have an
aggregate of 11,004,739 shares registered for sale in the public market in up to
16 separate registration statements. We also intend to register on Form S-8 an
aggregate of 2,572,800 shares issuable upon exercise of options we have granted
to purchase common stock, or reserved for issuance under our equity compensation
plans, within 90 days after the date of this prospectus. You should read the
discussion under the heading entitled "Shares Eligible for Future Sale" for
further information concerning potential sales of our shares after this
offering.
YOU WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION OF YOUR SHARES.
The assumed initial public offering price per share of our common stock is
substantially higher than the net tangible book value per share of our
outstanding common stock. As a result, investors purchasing common stock in this
offering will incur immediate and substantial dilution in the net tangible book
value of their common stock of $10.68 per share based on the assumed initial
public offering price of $16.00 per share. To the extent we raise additional
capital by issuing equity securities in the future, you and our other
15
<PAGE> 16
stockholders may experience substantial dilution and future investors may be
granted rights superior to those of our current stockholders. In the past, we
issued options and warrants to acquire capital stock at prices significantly
below the assumed initial public offering price of common stock in this
offering. There will be further dilution to investors when any of these
outstanding options and warrants are exercised.
THE INTERESTS OF OUR LARGEST STOCKHOLDERS MAY CONFLICT WITH OUR INTERESTS AND
THE INTERESTS OF OUR OTHER STOCKHOLDERS.
Immediately upon the completion of this offering, our current three largest
stockholders will beneficially own 7,960,654 shares, or approximately 38%, of
our outstanding common stock. This number includes 855,000 shares of common
stock issuable upon conversion of a convertible note and the exercise of a
warrant held by one of these stockholders. If these three stockholders choose to
act together, they could exert considerable influence over us, including with
respect to the election of directors and the approval of actions submitted to
our stockholders. In addition, without the consent of these stockholders, we may
be prevented from entering into transactions that could be beneficial to us,
such as acquisition proposals from third parties.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. These forward-looking statements are often accompanied by words
such as "believes," "anticipates," "estimates," "intends," "plans," "expects"
and similar expressions. These statements include, without limitation,
statements about market opportunity, our growth strategy and our expectations,
plans and objectives. These statements may be found in the sections of this
prospectus entitled "Prospectus Summary," "Risk Factors," "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," and in this prospectus generally. Our actual results
will likely differ, perhaps materially, from those anticipated in these
forward-looking statements as a result of various factors, including all the
risks discussed under "Risk Factors" and elsewhere in this prospectus. Because
of these uncertainties, you should not place undue reliance on our
forward-looking statements. We do not intend to update any of these factors or
to publicly announce the result of any revisions to any of our forward-looking
statements contained herein, whether as a result of new information, future
events or otherwise.
16
<PAGE> 17
USE OF PROCEEDS
The net proceeds to us from the sale of the 5,000,000 shares of our common
stock in this offering are estimated to be approximately $73.2 million, or $84.4
million if the underwriters' over-allotment option is exercised in full. These
estimates are based upon an assumed initial public offering price of $16.00 per
share after deducting underwriting discounts and commissions and estimated
offering expenses payable by us.
We intend to use the net proceeds from this offering for general corporate
purposes, including working capital, drug candidate discovery, development and
clinical testing using non-partnered G protein-coupled receptor 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 complementary businesses or technologies. We are not
currently engaged in negotiations to make any acquisitions.
The principal purposes of this offering are to increase our capitalization
and financial flexibility, to provide a public market for our common stock and
to facilitate access to the public equity markets. As of the date of this
offering, we cannot specify with certainty all of the particular uses for the
net proceeds of this offering. Accordingly, we will retain broad discretion in
the allocation of the net proceeds of this offering. Pending the use of the net
proceeds as described above, we intend to invest the net proceeds of this
offering in short-term, investment-grade, interest-bearing securities.
DIVIDEND POLICY
We have never paid cash dividends on our common stock. We do not anticipate
paying any cash dividends in the foreseeable future. We intend to retain any
future earnings to fund the continued development and growth of our business.
17
<PAGE> 18
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2000:
- on an actual basis derived from our unaudited financial statements
- on a pro forma basis to give effect to the issuance of 1,323,146 shares
of our Series G preferred stock in April 2000 and the automatic
conversion of all of our outstanding shares of preferred stock, plus our
Series G preferred stock, into an aggregate of 12,698,578 shares of
common stock, to give effect to the issuance of 310,875 shares of our
common stock upon the exercise of options between April 1 and June 30,
2000 and to give effect to the issuance of 393,419 shares of common stock
upon the exercise of all but one of our outstanding warrants upon the
completion of this offering
- on a pro forma as adjusted basis to also give effect to the sale of
5,000,000 shares of common stock offered hereby at an assumed initial
public offering price of $16.00 per share, after deducting underwriting
discounts and commissions and estimated offering expenses
You should read this table in conjunction with the financial statements and
the notes to those statements and the other financial information included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt, net of current portion...................... $ 2,078 $ 2,078 $ 2,078
Prepaid financing proceeds.................................. 4,514 -- --
Redeemable convertible preferred stock, $.0001 par value:
17,608,593 shares authorized, 11,375,432 shares issued and
outstanding, actual; 7,500,000 shares authorized, no
shares issued and outstanding, pro forma and pro forma as
adjusted.................................................. 38,797 -- --
Stockholders' equity (deficit):
Common Stock, $.0001 par value: 35,000,000 shares
authorized, 1,593,725 shares issued and outstanding,
actual; 67,500,000 shares authorized, pro forma and pro
forma as adjusted; 14,996,597 shares issued and
outstanding, pro forma; 19,996,597 shares issued and
outstanding, pro forma as adjusted..................... -- 1 2
Additional paid-in capital................................ 7,108 56,644 129,843
Deferred compensation..................................... (6,052) (6,052) (6,052)
Accumulated deficit....................................... (17,451) (17,451) (17,451)
-------- -------- --------
Total stockholders' equity (deficit)................... (16,395) 33,142 106,342
-------- -------- --------
Total capitalization................................. $ 28,994 $ 35,220 $108,420
======== ======== ========
</TABLE>
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of March 31, 2000, and does not
include:
- 2,000,000 shares of common stock that will be reserved for issuance under
our 2000 Equity Compensation Plan
- 572,800 shares of common stock issuable upon the exercise of outstanding
options under our 1998 Equity Compensation Plan at a weighted average
exercise price of $0.65 per share
- 18,000 shares of common stock issuable upon exercise of one of our
outstanding warrants at an exercise price of $3.49 per share
- 755,000 shares of common stock issuable upon conversion of our
outstanding convertible note
18
<PAGE> 19
DILUTION
As of March 31, 2000, our historical net tangible book value deficit was
approximately $16.4 million, or $(10.29) per share of common stock. Historical
net tangible book value per share is determined by dividing historical net
tangible book value, consisting of total tangible assets less total liabilities,
by the historical number of shares of common stock.
As of March 31, 2000, our pro forma net tangible book value was
approximately $33.1 million, or $2.21 per share of common stock. Pro forma net
tangible book value per share is determined by dividing pro forma net tangible
book value, consisting of total tangible assets less total liabilities, by the
pro forma number of 14,996,597 shares of common stock outstanding, after giving
effect to the issuance of 1,323,146 shares of our Series G preferred stock, the
automatic conversion of all of our outstanding shares of preferred stock, plus
our Series G preferred stock into 12,698,578 shares of common stock, the
issuance of 310,875 shares of our common stock upon the exercise of options
between April 1 and June 30, 2000 and the issuance of 393,419 shares of common
stock upon the exercise of all but one of our outstanding warrants, which will
occur at the closing of this offering.
Without taking into effect any other changes in pro forma net tangible book
value after March 31, 2000, and after giving effect to the sale of the common
stock offered hereby at an assumed initial public offering price of $16.00 per
share and the application of the net proceeds of this offering, the pro forma as
adjusted net tangible book value would have been $106.3 million, or $5.32 per
share. This represents an immediate increase in pro forma net tangible book
value of $3.11 per share to existing stockholders and immediate and substantial
dilution in pro forma as adjusted net tangible book value of $10.68 per share to
new investors who purchase shares in this offering. The following table
illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $16.00
Historical net tangible book value per share as of March 31,
2000...................................................... $(10.29)
Increase attributable to conversion of all of our
outstanding preferred stock at March 31, 2000 plus our
Series G preferred stock, the issuance of shares of our
common stock upon the exercise of options between April 1
and June 30, 2000 and the issuance of shares of common
stock upon the exercise of all but one of our outstanding
warrants.................................................. 12.50
-------
Pro forma net tangible book value per share before the
offering.................................................. 2.21
Increase per share attributable to new investors............ 3.11
-------
Pro forma as adjusted net tangible book value per share
after the offering........................................ 5.32
------
Dilution in net tangible book value per share to new
investors................................................. $10.68
======
</TABLE>
If the underwriters' over-allotment option is exercised in full, the pro
forma as adjusted net tangible book value per share after this offering would be
$5.66 per share, the increase in net tangible book value per share to existing
stockholders would be $3.45 per share and the dilution in net tangible book
value to new investors would be $10.34 per share.
The following table summarizes, on a pro forma as adjusted basis as of
March 31, 2000, the differences between the total consideration paid and the
average price per share paid by the existing stockholders and the new investors
based on an assumed initial public offering price of $16.00 per share:
<TABLE>
<CAPTION>
SHARES TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders....................... 14,996,597 75.0 $ 51,635,714 39.2 $ 3.44
New investors............................... 5,000,000 25.0 80,000,000 60.8 16.00
---------- ----- ------------ -----
Total..................................... 19,996,597 100.0 $131,635,714 100.0
========== ===== ============ =====
</TABLE>
These tables include 570,025 shares of common stock subject to repurchase
by us as of June 30, 2000. The shares that are subject to repurchase by us were
issued upon the exercise of options that were granted under our 1998 Equity
Compensation Plan, but that had not vested at the time of exercise. The exercise
of these unvested options was permitted by the option agreements under which
these options were granted. In the event that an employee leaves our employ
prior to full vesting, we have the right to repurchase any unvested shares at
the original purchase price.
These tables assume that none of the stock options outstanding as of June
30, 2000 are exercised. As of June 30, 2000, there were 572,800 shares of common
stock issuable upon exercise of outstanding stock options at a weighted average
exercise price of $0.65 per share, and 18,000 shares of common stock issuable
upon exercise of an outstanding warrant at an exercise price of $3.49 per share.
19
<PAGE> 20
SELECTED FINANCIAL DATA
Our selected statement of operations data for the period April 14, 1997
(inception) through December 31, 1997 and the years ended December 31, 1998 and
1999 and our balance sheet data as of December 31, 1998 and 1999 have been
derived from our financial statements, which have been audited by Ernst & Young
LLP, independent auditors, and are included elsewhere in this prospectus. Our
balance sheet data as of December 31, 1997 have been derived from our financial
statements which have been audited by Ernst & Young LLP and are not included in
this prospectus. We have also included our statement of operations data for the
three months ended March 31, 1999 and 2000 and our balance sheet data as of
March 31, 2000 from our unaudited financial statements included in this
prospectus. You should read the data set forth below together with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our financial statements and related notes included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 14, 1997
(INCEPTION) THREE MONTHS ENDED
THROUGH YEAR ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------------ ------------------
1997 1998 1999 1999 2000
-------------- ---------- ----------- ------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating expenses:
Research and development.............. $ 447 $ 2,615 $ 8,336 $ 1,777 $ 2,399
General and administrative............ 235 729 1,814 304 424
Amortization of deferred
compensation(1).................... -- -- 378 -- 409
------ ------- -------- ------- --------
Total operating expenses........... 682 3,344 10,528 2,081 3,232
Interest income......................... 23 42 447 114 157
Interest expense........................ (36) (94) (166) (31) (60)
Other income............................ -- -- 9 -- 13
------ ------- -------- ------- --------
Net loss................................ (695) (3,396) (10,238) (1,998) (3,122)
Non-cash preferred stock charge......... -- -- -- -- (14,188)
------ ------- -------- ------- --------
Net loss applicable to common
stockholders.......................... $ (695) $(3,396) $(10,238) $(1,998) $(17,310)
====== ======= ======== ======= ========
Historical net loss per share, basic and
diluted............................... $(0.73) $ (3.51) $ (10.05) $ (2.03) $ (15.92)
====== ======= ======== ======= ========
Shares used in calculating historical
net loss per share, basic and
diluted............................... 955 967 1,018 985 1,087
====== ======= ======== ======= ========
Pro forma net loss per share............ $ (1.29) $ (1.76)
======== ========
Shares used in calculating pro forma net
loss per share........................ 7,927 9,827
======== ========
</TABLE>
-------------------------
(1) $264,419 and $285,398 related to research and development expenses and
$113,690 and $124,081 related to general and administrative expenses, for
the year ended December 31, 1999 and for the three months ended March 31,
2000, respectively.
20
<PAGE> 21
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
----------------------------- MARCH 31,
1997 1998 1999 2000
------ ------- -------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................... $1,553 $ 194 $ 5,402 $ 27,547
Total assets...................................... 2,422 1,653 8,526 30,701
Long-term debt, net of current portion............ 791 971 2,159 2,078
Prepaid financing proceeds........................ -- -- -- 4,514
Redeemable convertible preferred stock............ 2,193 2,599 18,252 38,797
Accumulated deficit............................... (695) (4,091) (14,329) (17,451)
Total stockholders' deficit....................... (695) (4,068) (13,900) (16,395)
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are a development stage biotechnology company. 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 March 31, 2000, we had an accumulated deficit of $17.2
million. We expect to incur additional operating losses as we continue to
develop our technologies and to fund internal research and development. We have
generated limited revenues to date. 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. You should read the discussion
under the heading "Risk Factors" for further information on the risks we face.
In April 2000, we entered into a significant collaborative agreement with
Eli Lilly, one of the world's leading pharmaceutical companies. This
collaboration will focus 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 will activate a number of 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. Under the terms of the agreement, we received a one-time up-front payment
in the amount of $500,000 which we will recognize ratably over the five-year
collaboration term. In the future, 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 received approximately $1.5 million in cash proceeds from Eli
Lilly, and approximately $800,000 in cash proceeds from Taisho, through June 30,
2000.
We plan to pursue several specific objectives during the remainder of 2000,
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
- increasing our internally funded drug discovery efforts, including
expansion of our chemistry and screening efforts
- continuing clinical trials of T-82 and potentially entering into
collaborations to develop our anti-obesity and anti-psychotic drug
programs
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.
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Our research and development expenses consist primarily of salaries and
related personnel expenses. As of March 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 $1.0 million in the year ended
December 31, 1999 and $5.8 million in the three months ended March 31, 2000. In
addition to these charges, we expect to record an additional $3.3 million of
deferred stock compensation in the second quarter of 2000. The total charges to
be recognized in future periods from amortization of deferred stock compensation
as of June 30, 2000 are anticipated to be approximately $3.3 million, $3.3
million, $2.1 million, $698,000, and $17,000 for the remaining nine months of
2000, and for 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
Three months ended March 31, 2000 compared to the three months ended March 31,
1999
Research and development expenses. Our research and development expenses
increased $600,000 to $2.4 million for the three months ended March 31, 2000,
from $1.8 million for the three months ended March 31, 1999. This increase was
primarily due to increased personnel related expenses of $800,000 and lab
supplies costing $284,000 to support the personnel in order to expand the
application of our technology. The increase was offset by reduced expenses of
$483,000 related to the development of T-82 for which we initiated Phase I
clinical trials in early 1999, and which were completed in late 1999. We expect
to initiate Phase II clinical trials in the third quarter of 2000.
General and administrative expenses. Our general and administrative
expenses increased $120,000 to $424,000 for the three months ended March 31,
2000, from $304,000 for the three months ended March 31, 1999. This increase was
primarily due to increased personnel expenses related to five additional
personnel hired in the accounting, legal and general administration departments.
This increased staffing was necessary to manage and support our continued
growth.
Amortization of deferred compensation. We recorded amortization of deferred
compensation of approximately $409,000 for the three months ended March 31,
2000.
Interest income. Interest income increased $43,000 to $157,000 for the
three months ended March 31, 2000, from $114,000 for the three months ended
March 31, 1999. The increase was primarily attributable to higher average levels
of cash and cash equivalents in the three months ended March 31, 2000.
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Interest expense. Interest expense increased $29,000 to $60,000 for the
three months ended March 31, 2000 from $31,000 for the three months ended March
31, 1999. This increase represents interest incurred on our equipment leases, as
well as interest accrued on our other debt.
Net loss. Net loss increased $1.1 million to $3.1 million for the three
months ended March 31, 2000 compared to $2.0 million for the three months ended
March 31, 1999. The increase reflects 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 $14.2 million for the three months ended March 31, 2000. This non-cash
preferred stock charge relates to the issuance of our Series E preferred stock
in January 2000 and our Series F preferred stock in March 2000, which is
convertible into shares of our common stock. We recorded the non-cash preferred
stock charge at the date 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 three months ended March
31, 2000. In addition, we expect to record a non-cash preferred stock charge of
$8.2 million in the quarter ended June 30, 2000. This non-cash preferred stock
charge relates to the issuance of our Series G preferred stock in April 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 to support the increased personnel in order to
expand the application of our technology, expenses of $1.5 million associated
with our Phase I clinical trials 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.
Amortization of deferred compensation. We recorded amortization of deferred
compensation of approximately $378,000 for the year ended December 31, 1999.
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
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through December 31, 1997. This increase was primarily due to increased
personnel expenses of $1.3 million and lab supplies costing $538,000 to support
the increased personnel 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 March 31, 2000, we had an accumulated deficit of $17.5 million
and had used cash from operations of $14.6 million. Our net losses have resulted
primarily from expenses incurred in connection with our research and development
activities and general and administrative expenses. To date, we have funded our
operations primarily through private equity financings.
As of March 31, 2000, we had $27.5 million in cash and cash equivalents
compared to $5.4 million in cash and cash equivalents as of December 31, 1999.
As of March 31, 2000, on a pro forma basis, taking into effect the sale of
1,323,146 shares of our Series G preferred stock in April 2000, the exercise of
options, between April 1 and June 30, 2000 to purchase 310,875 shares of our
common stock and the exercise of all but one of our outstanding warrants to
purchase our common stock, we had $33.8 million in cash and cash equivalents.
Net cash used in operating activities was approximately $2.9 million during
the three months ended March 31, 2000 and was approximately $1.1 million during
the three months ended March 31, 1999. Net cash used in operating activities was
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, adjusted for non-cash
expenses and changes in operating assets and liabilities.
Net cash used in investing activities was approximately $150,000 during the
three months ended March 31, 2000 and was approximately $250,000 during the
three months ended March 31, 1999. Net cash used in investing activities was
approximately $2.1 million during the year ended December 31, 1999 and 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 $25.2 million
during the three months ended March 31, 2000 and was approximately $14.5 million
during the three months ended March 31, 1999. Net cash proceeds from financing
activities was approximately $16.0 million during the year ended December 31,
1999 and was approximately $1.7 million during the year ended December 31, 1998.
The
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net cash proceeds from financing activities during these periods were primarily
from the issuance of preferred stock.
We lease our corporate and research and development facilities under a
lease which expires on April 30, 2013. The lease provides us with options to
extend the lease 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 leases are approximately $500,000 in 2000, $500,000
in 2001, $500,000 in 2002, $381,000 in 2003 and $17,000 in 2004.
We expect to continue to incur substantial losses through at least fiscal
2000, and may incur net losses in subsequent periods. 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 20 to 25
employees, primarily scientists, by the end of 2000. While we believe that the
net proceeds from this offering, combined with 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, 1999, we had approximately $12.6 million of net
operating loss carryforwards and $681,000 of research and development 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 an ownership
change. Any future ownership change may limit the use of net operating loss and
tax credit carryforwards. Based on our valuation and applicable Internal Revenue
Code regulations, we believe this offering will not have a material effect on
our ability to use those carryforwards.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ON 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 investments
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. To date we have limited default risk by
investing primarily in treasury-backed securities. If market interest rates were
to decrease by 1.0% from March 31, 2000, future interest income from our
portfolio would decline annually by less than $275,000. 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.
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BUSINESS
OUR COMPANY
We have developed a new technology, which we call CART, that we use to
identify drug candidates more efficiently than traditional drug discovery
techniques. CART allows us to develop novel biochemical assays to discover drug
candidates 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, 49 target receptors as their primary mechanism
of action. Of these 49 receptor-based drugs, 31 wholly or in part act on GPCRs.
In 1999, these GPCR-based pharmaceutical products represented over $27 billion
in sales, and included Claritin(RM) for allergies, Zantac(RM) for gastric
ulcers, Imitrex(RM) for migraines and Cozaar(RM) for hypertension.
We use CART to discover drug candidates 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 candidates 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,
Taisho, Fujisawa, Lexicon Genetics and Neurocrine Biosciences.
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. Although we believe CART technology is
applicable to all of the principal classes of 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 there are approximately 2,000 GPCRs
within the human genome which are potential targets for drug development.
Approximately 1,900 of these are orphan GPCRs.
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
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increase. However, 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 candidates 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 six
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 candidates 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:
- 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.
[DIAGRAM DEPICTING GPCR-MEDIATED BIOLOGICAL RESPONSE]
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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.
[DIAGRAM DEPICTING LIGAND-DEPENDENT GPCR ACTIVATION]
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.
[DIAGRAM DEPICTING CART-ACTIVATED GPCR]
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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 candidates 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 candidates that bind to a receptor at the
receptor's ligand binding site. Instead, CART technology exposes the entire
receptor surface to drug candidates, 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.
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. Recent advances in genomics research have 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
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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 several 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 candidates that act upon any part of the receptor surface.
Develop multiple pharmaceutical product candidates for GPCR targets. CART
technology allows us to identify drug candidates 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 candidates 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 a number of 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
collaborations that focus on a variety of diseases and target a large number of
orphan and known GPCRs. We have recently entered into collaborations with Eli
Lilly, Taisho and Fujisawa under which we will 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.
Continue to protect and expand our intellectual property rights. We have
filed 100 independent patent applications with the United States Patent and
Trademark Office, and are filing some of these patent applications worldwide.
Although no patents have been issued to us, we believe that we can obtain
patents on our CART technology and that we can obtain 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 genetic
sequences of 265 GPCRs and made them available for CART-activation and
screening. Of these, 134 are human orphan GPCRs and 126 are human known GPCRs.
The remaining five are non-human receptors, including plant, viral and insect
receptors. Through the use of our proprietary CART technology, we have
successfully identified drug 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 genetic
sequences of orphan GPCRs to understand and define the tissue and cellular
distribution of these GPCRs. The genetic sequences provide us with the necessary
tools to locate the orphan receptors in tissues. Once we have
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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 candidates that can be employed to verify
the proposed receptor function.
We have prioritized and applied our CART technology to 15 orphan GPCRs,
identified below by our code names, as having high potential value as drug
discovery targets against specific diseases or indications, based upon the
distribution of the GPCR in specified tissues. These GPCRs and their intended
disease targets are:
<TABLE>
<S> <C> <C>
---------------------------------------------------------------------------------------------
INDICATION ORPHAN GPCRS TISSUE DISTRIBUTION
Obesity 18F Hypothalamus
-----------------------------------------------------------------
19U Hypothalamus
-----------------------------------------------------------------
19X Forebrain
-----------------------------------------------------------------
19NY Hypothalamus
---------------------------------------------------------------------------------------------
Cancer:
Ovarian 18A Adrenal/ovary
-----------------------------------------------------------------
Colorectal 18AI Intestine
-----------------------------------------------------------------
Osteosarcoma 19AG Bone/pancreas
-----------------------------------------------------------------
Leiomyoma 19Y Uterus
-----------------------------------------------------------------
Breast 18AD Breast
---------------------------------------------------------------------------------------------
Cardiovascular disease 18C Blood vessels
-----------------------------------------------------------------
18D Heart/other
---------------------------------------------------------------------------------------------
Diabetes 19AJ Pancreas
---------------------------------------------------------------------------------------------
Inflammation 18AF Spleen/lymph nodes/brain
-----------------------------------------------------------------
19W T cells
---------------------------------------------------------------------------------------------
Alzheimer's Disease 18L Hippocampus
---------------------------------------------------------------------------------------------
</TABLE>
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 candidates that inhibit
the activity of the 18F GPCR. Repeated administration of the drug candidates 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
candidates 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 candidates may provide the basis
for a novel approach to the treatment of human obesity by simultaneously
reducing food intake and increasing fat metabolism. Additionally, our animal
data indicate that our drug candidates may not have the same side effects that
are associated with currently available anti-obesity drugs.
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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 from our initial
discovery of the over-abundance of the 18F GPCR in genetically obese animals to
the animal testing of the drug candidates that we discovered using our CART
technology. We intend to enter into one or more collaborations to further expand
our anti-obesity drug program with the ultimate goal of selecting one or more of
our novel anti-obesity drug candidates that target orphan GPCRs, such as the 18F
GPCR, for future clinical development.
Cancer. We have identified several orphan GPCRs, including the 18A, 18AI,
19AG and 19Y GPCRs, which we believe represent therapeutic targets for the
treatment of a variety of cancers. These orphan GPCRs are attractive therapeutic
targets because they have been shown to be present at abnormally high levels in
ovarian, colorectal, gastrointestinal and uterine cancer cells and cause
unwanted proliferation of cells in laboratory experiments. Additionally, we have
identified another orphan GPCR, the 18AD GPCR, which potentially suppresses the
growth of tumor cells. We determined that there are high levels of the 18AD GPCR
present in tissues adjacent to cancerous breast tissue. We tested a CART-
activated form of the 18AD GPCR in a non-animal, or in vitro, cancer model and
showed that this GPCR suppressed cell proliferation. This suggests to us that
drug candidates that activate the function of the 18AD GPCR could inhibit tumor
growth, providing a potential new treatment approach for breast and other
cancers.
Cardiovascular disease. We have identified several orphan GPCRs, including
the 18C and 18D GPCRs, that are located within the cardiovascular system, such
as on heart tissues and blood vessel walls. Blood pressure is regulated by
constriction or relaxation of blood vessels which is effected by GPCRs located
on blood vessel walls. We believe that some of the drug candidates that we have
identified using CART technology that target these GPCRs have potential to
regulate blood pressure and treat diseases such as hypertension. According to
the National Institutes of Health, hypertension affects approximately 50 million
people in the United States, and can lead to heart disease and stroke, which are
among the leading causes of death in the United States.
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
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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 primarily 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 candidates 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. Diseases
in which we believe overactive known GPCRs are implicated include:
<TABLE>
DISEASE OVERACTIVE KNOWN GPCRS
<S> <C>
Schizophrenia 5HT(2A), D(4)
--------------------------------------------------------------------
Depression 5HT(2A)
--------------------------------------------------------------------
Hyperthyroidism Thyrotropin
--------------------------------------------------------------------
Hypertension Angiotensin AT(1A)
--------------------------------------------------------------------
Asthma Adenosine A(1)
--------------------------------------------------------------------
Melanoma MC-1
--------------------------------------------------------------------
Retinitis Pigmentosa Rhodopsin
--------------------------------------------------------------------
</TABLE>
We have identified drug candidates that are capable of inhibiting both
ligand-independent and ligand-dependent activity at selected known GPCR targets.
We are currently developing drug candidates that target these overactive known
GPCRs to treat the related diseases. Our most advanced program targets the
serotonin 5HT(2A) GPCR for potential treatment of schizophrenia and other
psychotic disorders.
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 5HT(2A) GPCR. Using our CART technology, we
have discovered and are developing a number of new drug candidates that act as
inverse agonists at the 5HT(2A) GPCR. These drug candidates displayed activities
in tests involving laboratory animals indicating that they would be useful in
treating psychiatric disorders such as schizophrenia. Moreover, our
CART-identified 5HT(2A) 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 drug 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 candidates took approximately 18 months from the application of
our CART technology to the 5HT(2A) GPCR to the animal testing of the drug
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 5HT(2A) GPCR, for future clinical development.
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<PAGE> 35
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 nine 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 candidates discovered using CART-activated GPCRs.
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.
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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
will principally focus 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 existing CART-activated GPCRs are 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. We
have received approximately $1.5 million in cash proceeds from Eli Lilly through
June 30, 2000, comprised of a one-time up-front payment of $500,000 and research
funding of approximately $1.0 million. 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. In the future, 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. We and Eli Lilly may never achieve our 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. 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. Eli
Lilly can terminate the agreement with or without cause by giving us written
notice during the first nine months after the date of the agreement, and this
termination would be effective one year after the date of the agreement. 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.
Taisho
In May 2000, we entered into an agreement with Taisho, in the form of a
binding letter of intent, 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 have received approximately
$800,000 in cash proceeds from Taisho through June 30, 2000, which includes a
one-time up-front payment. We may receive up to a total of $2.3 million in
revenues per
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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. We and Taisho are currently finalizing the
remaining terms of our collaboration. We and Taisho may never achieve the fees
and payment milestones.
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 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. 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.
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.
Neurocrine Biosciences
In September 1999, we entered into an agreement with Neurocrine
Biosciences, a biotechnology company focused on the discovery and development of
novel therapeutics to treat diseases and disorders of the central nervous system
and immune system. Neurocrine Biosciences has the right, prior to September
2000, to provide us with up to three orphan GPCRs obtained by them to which we
will apply our CART technology. We will not receive any payment for
CART-activating these GPCRs. We may also screen the activated orphan GPCRs using
our in-house chemical library, or using Neurocrine Biosciences' in-house
chemical library, for which we will receive payments in amounts agreeable to us
and Neurocrine
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<PAGE> 38
Biosciences. Neurocrine Biosciences will retain the rights to the CART-activated
GPCRs and any drug candidates that are discovered using these GPCRs.
OTHER ELEMENTS OF OUR BUSINESS
T-82
In 1998, we licensed the rights from SSP to develop T-82, a novel drug
candidate to treat Alzheimer's Disease. We believe T-82 possesses a unique
pharmacological profile that will translate into enhanced therapeutic activity
over currently available drugs for Alzheimer's Disease. We have completed three
Phase I clinical trials of T-82, involving single and multiple dose studies, as
well as a study to evaluate the possible interaction of T-82 with food. We
intend to begin Phase II clinical testing of T-82 in 2000 and to enter into a
collaborative relationship with a third party to further develop T-82.
Currently available drugs to treat Alzheimer's Disease inhibit the enzyme
acetylcholinesterase. Acetylcholinesterase breaks down acetylcholine, an
important chemical for normal memory and cognitive function. By inhibiting the
enzyme acetylcholinesterase, currently available drugs prevent the breakdown of
acetylcholine. T-82 also acts to prevent the breakdown of acetylcholine by
inhibiting acetylcholinesterase, but unlike existing drugs which have limited
clinical effectiveness, we believe T-82 may cause the release of additional
acetylcholine from nerve terminals. This additional mechanism results from the
ability of T-82 to block a serotonin receptor, 5HT(3), which normally acts, in
part, to inhibit the release of acetylcholine from nerve terminals. Moreover,
the side-effects of currently-approved Alzheimer's Disease drugs include
drug-induced nausea and vomiting, which may cause some patients to reduce or
discontinue their use of the drugs. We believe T-82 possesses a pharmacological
advantage over current Alzheimer's drugs because of evidence that inhibition of
the 5HT(3) receptor not only enhances acetylcholine release, but also reduces
vomiting by inhibiting certain neural pathways.
We have worldwide rights to clinically develop and market T-82, except in
Japan. We share rights with SSP to license and market T-82 in ten Asian
countries. We will share data related to pre-clinical studies, clinical studies
and the manufacturing of T-82 with SSP, and SSP will share similar data
developed by SSP with us. SSP has agreed to manufacture and supply T-82 to us
for all clinical trials, at no cost to us. Our license requires us 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. In addition, we
will pay SSP escalating royalties based upon net sales of T-82, if any.
Aressa
In August 1999, we formed Aressa, 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 SSP with respect to a patented anti-fungal compound
discovered by SSP, called SS750. Aressa is currently supervising pre-clinical
studies of SS750, which are funded by SSP. Aressa may explore other
opportunities to in-license niche products.
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 46% of the outstanding common stock of
ChemNavigator.com.
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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 100 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
- 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. 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.
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<PAGE> 40
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 action or that any license required under any patent
would be made available or would be made available on acceptable terms.
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 its behalf, they may not provide us with meaningful
protection for such property and technology in the event of unauthorized use or
disclosure.
We have obtained a worldwide license from SSP, except for Japan, to issued
and pending patents with claims directed to the chemical composition of T-82,
and Aressa has obtained a similar license from SSP to issued and pending patents
with claims directed to the chemical composition of SS750. We have also obtained
an exclusive, worldwide license from Albany Medical College to a pending patent
application with claims directed to mutations to several known GPCRs. However,
no international patent protection may be obtained on the subject matter of this
patent application. In addition, 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 neither we nor
Aressa are currently in default under any of these agreements, we cannot assure
you that we or Aressa will not default under these agreements in the future.
Should such a default occur, our licenses could be terminated and we could lose
the right to continue to develop T-82, SS750, or our other products or
technologies that are subject to these agreements. The loss of our rights to
develop T-82, SS750 or our other licensed products or technologies could harm
our business.
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
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variety of alternative strategies. Although some of these approaches are
ligand-independent, like CART, we believe that all of these approaches have
relied upon indirect measures of receptor activity, which 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 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 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 that may delay marketing approval may be
requested by FDA. 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,
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<PAGE> 42
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
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 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 states and 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
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<PAGE> 43
possible civil or criminal sanctions. Furthermore, failure to obtain
reimbursement coverage from governmental or third party insurers may adversely
impact our 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.
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 June 30, 2000, we employed 85 people, including 71 in research and
development and 14 in administration. Twenty-four of our employees hold doctoral
degrees and an additional 13 hold other advanced degrees. None of our employees
is covered by collective bargaining agreements. We consider our relationship
with our employees to be good.
OUR FACILITY
Our facility is located at 6166 Nancy Ridge Drive, San Diego, California.
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. Our
lease has a 15-year term and will expire in 2013. We have entered into a lease
for an additional approximately 52,000 square feet of space which we will use
primarily for additional laboratory space beginning in early 2001. The term of
this lease will also expire in 2013.
LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information regarding our executive officers
and directors:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jack Lief(1)................................. 54 President, Chief Executive Officer and Director
Dominic P. Behan, Ph.D. ..................... 36 Vice President, Research and Director
Derek T. Chalmers, Ph.D. .................... 36 Vice President, Research and Director
Joyce H. Williams............................ 55 Vice President, Drug Development
Richard P. Burgoon, Jr. ..................... 39 Senior Vice President, Operations, General
Counsel and Secretary
Robert Hoffman............................... 34 Vice President, Finance
Louis J. Scotti.............................. 44 Vice President, Business Development
Elaine Alexander, M.D., Ph.D. ............... 47 Vice President, Experimental and
Clinical Research
Nigel Beeley, Ph.D. ......................... 49 Vice President, Chief Chemical Officer
John P. McAlister, III, Ph.D.(2) ............ 51 Director
Michael Steinmetz, Ph.D.(1)(2)............... 52 Director
Stefan Ryser, Ph.D.(1)(2).................... 40 Director
</TABLE>
-------------------------
(1) Member of the compensation committee.
(2) Member of the audit committee.
Jack Lief is a co-founder of Arena and has served as a director and our
President and Chief Executive Officer since April 1997. Mr. Lief is also
currently serving as a director and President of Aressa and as a director and
Chief Executive Officer of ChemNavigator.com. From 1995 until April 1997, Mr.
Lief served as an advisor and consultant to numerous biopharmaceutical
organizations. From 1989 to 1994, he served as Senior Vice President, Corporate
Development and Secretary of Cephalon, Inc. From 1983 to 1989, Mr. Lief served
as Director of Business Development and Strategic Planning for Alpha Therapeutic
Corporation. Mr. Lief joined Abbott Laboratories in 1972 where he served until
1983, most recently as the head of International Marketing Research. Mr. Lief
holds a B.A. from Rutgers University and a M.S. in psychology (experimental and
neurobiology) from Lehigh University.
Dominic P. Behan, Ph.D. is a co-founder of Arena and has served as our Vice
President, Research since April 1997 and as a director since April 2000. From
1993 to December 1996, Dr. Behan directed various research programs at
Neurocrine Biosciences. From 1990 until 1993, he was engaged in research at the
Salk Institute. Dr. Behan holds a Ph.D. in biochemistry from Reading University,
England.
Derek T. Chalmers, Ph.D. is a co-founder of Arena and has served as our
Vice President, Research since April 1997 and as a director since April 2000.
From 1994 to December 1996, Dr. Chalmers directed various research programs at
Neurocrine Biosciences. From 1990 until 1994, he was engaged in research at the
University of Michigan. Dr. Chalmers holds a Ph.D. in neuroscience and
neuropharmacology from the University of Glasgow, Scotland.
Joyce H. Williams has served as our Vice President, Drug Development since
February 1998. From January 1997 to February 1998, Ms. Williams served as
Regulatory Consultant for ProFocus Regulatory Solutions. From 1995 to 1996, she
served as Executive Director, Regulatory Affairs at Advanced Sterilization
Products, a division of Johnson & Johnson. Ms. Williams has over 20 years of
experience in regulatory affairs with pharmaceutical and medical technology
firms. Ms. Williams holds a B.A. from Case Western Reserve University and an
M.B.A. from Pepperdine University.
Richard P. Burgoon, Jr. joined Arena in April 1998, most recently serving
as our Senior Vice President, Operations, General Counsel and Secretary. Mr.
Burgoon is also currently serving as a director
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<PAGE> 45
and Secretary of Aressa and ChemNavigator.com. From 1997 to 1998, Mr. Burgoon
was an attorney for Reed, Smith, Shaw & McClay. From 1994 to 1997, Mr. Burgoon
served as Senior Director and Patent Counsel at Cephalon, Inc. From 1992 to
1994, he served as Intellectual Property Counsel to IDEC Pharmaceuticals
Corporation. From 1990 to 1992, he served as Staff Attorney at Beckman
Instruments, Inc. Mr. Burgoon holds B.S. and B.A. degrees from the University of
California, Irvine. He received his J.D. from the Franklin Pierce Law Center.
Robert Hoffman has served as our Vice President, Finance since April 2000
and served as our controller from August 1997 until April 2000. From 1994 to
1997, he served as assistant controller for Document Sciences Corporation. Mr.
Hoffman holds a B.B.A. from St. Bonaventure University in New York and is
licensed as a CPA in the state of California.
Louis J. Scotti has served as our Vice President, Business Development
since August 1999. From June 1998 until July 1999, Mr. Scotti served as
President and Chief Executive Officer for ProtoMed, Inc. From April 1996 to June
1998, he served as Executive Director of Licensing for Ligand Pharmaceuticals,
Inc. From 1986 to 1995, he served in various positions at Reed & Carnrick
Pharmaceuticals, most recently as Vice President of Marketing and Business
Development. Mr. Scotti holds a B.S.E. in biomedical engineering from the
University of Pennsylvania.
Elaine Alexander, M.D., Ph.D. has served as our Vice President,
Experimental and Clinical Research since May 1999. From 1998 to 1999, she served
as a consultant to biotechnology companies and the National Institutes of
Health. From 1993 to 1997, she served as Director of Experimental and
Exploratory Research for Cephalon, Inc. Dr. Alexander holds a Ph.D. and M.D.
from the University of California, Los Angeles.
Nigel Beeley, Ph.D. has served as our Vice President, Chief Chemical
Officer since March 1999. From 1994 to 1999, he served as Senior Director of
Chemistry for Amylin Pharmaceuticals, Inc. Dr. Beeley holds a Ph.D. in chemistry
from the University of Manchester, England.
John P. McAlister, III, Ph.D. has served as a director on our board since
July 1997. Dr. McAlister joined Tripos, Inc. in 1982, and since 1988, has served
as President of Tripos, a software company serving the life sciences industry.
Dr. McAlister holds a Ph.D. in Biochemistry and X-Ray Crystallography from the
University of Wisconsin, Madison. He currently also serves as a director of
Tripos.
Michael Steinmetz, Ph.D. has served as a director on our board since May
1999. Since 1997, he has served as Managing Director for MPM Asset Management
LLC, a venture capital firm focusing on investments in the biotechnology
industry. From 1991 to 1997, he served as Vice President Preclinical Research
and Development of various divisions of F. Hoffmann-La Roche Ltd. Dr. Steinmetz
holds a Ph.D. in natural sciences from the University of Munich, Germany. He
currently also serves as a director of Caliper Technologies Corp.
Stefan Ryser, Ph.D. has served as a director on our board since May 1999.
Since 1998, Dr. Ryser has served as Chief Executive Officer and as a member and
delegate of the board of International Biomedicine Management Partners Inc., a
company that manages investments in the biotechnology industry. From January
1989 until December 1997, he held various positions, including Scientific
Assistant to the President of Global Research and Development, at F. Hoffmann-La
Roche Ltd. Dr. Ryser holds a Ph.D. in molecular biology from the University of
Basel, Switzerland. He currently also serves as a director of Genaissance
Pharmaceuticals, Inc., Telik, Inc., and Cytokinetics, Inc.
Except as otherwise provided by our by-laws for filling vacancies on our
board of directors, our directors are elected at our annual meeting of
stockholders and hold office until their respective successors are elected, or
until their earlier resignation or removal.
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BOARD COMMITTEES
We have established a compensation committee and an audit committee. The
compensation committee members are Mr. Lief, Dr. Ryser and Dr. Steinmetz. The
compensation committee reviews and approves the compensation and benefits for
our executive officers, and makes recommendations to the board of directors
regarding these matters. Under our 2000 Equity Compensation Plan, the outside
directors of our compensation committee will authorize and approve stock option
grants and make recommendations to the board of directors regarding these
matters.
The audit committee members are Dr. McAlister, Dr. Ryser and Dr. Steinmetz.
The audit committee reviews the results and scope of the audit and other
services provided by our independent auditors, and reviews and evaluates our
audit and control functions.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Lief, who is a member of our compensation committee, is also our Chief
Executive Officer and serves as a director and Chief Executive Officer of
ChemNavigator.com and as a director and President of Aressa.
DIRECTOR COMPENSATION
Other than expenses in connection with attendance at meetings and other
customary expenses, we currently do not compensate any non-employee members of
our board of directors. Directors who are also employees do not receive
additional compensation for serving as directors.
Under our 2000 Equity Compensation Plan, non-employee directors will be
eligible to receive option grants to purchase shares of our common stock, as
determined by the board of directors. Non-employee directors will also be
eligible to receive direct stock issuances. You should read the discussion under
the section entitled "Compensation plans" for further information regarding our
2000 Equity Compensation Plan.
EXECUTIVE COMPENSATION
The following tables set forth in summary form information concerning the
compensation paid by us during the fiscal year ended December 31, 1999, to our
Chief Executive Officer and each of our other four most highly paid executive
officers whose salary and bonus for the fiscal year exceeded $100,000 and who
served as an executive officer of ours during the fiscal year.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
---------------------
SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR COMPENSATION OPTIONS/SARS(#) COMPENSATION
--------------------------- ---- ------------ --------------------- ------------
<S> <C> <C> <C> <C>
Jack Lief...................................... 1999 $197,600 12,500 --(1)
President and Chief Executive Officer
Dominic P. Behan............................... 1999 137,500 12,500 $2,404(2)
Vice President, Research
Derek T. Chalmers.............................. 1999 137,500 12,500 4,807(2)
Vice President, Research
Richard P. Burgoon, Jr. ....................... 1999 156,183 22,500 2,981(1)(2)
Senior Vice President, Operations and General
Counsel
Joyce Williams................................. 1999 154,283 10,000 --
Vice President, Drug Development
</TABLE>
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<PAGE> 47
-------------------------
(1) Pursuant to a four year consulting agreement with ChemNavigator.com, Mr.
Lief was awarded 200,000 shares of common stock of ChemNavigator.com in May
1999. The shares vest at a rate of 50,000 shares a year beginning in May
2000, provided that Mr. Lief remains employed by us. Pursuant to a four year
consulting agreement with ChemNavigator.com, Mr. Burgoon was awarded 175,000
shares of common stock of ChemNavigator.com in May 1999. The shares vest at
a rate of 43,750 shares a year beginning in May 2000, provided that Mr.
Burgoon remains employed by us.
(2) After their annual anniversary hire date, each of our employees may elect to
be paid for unused vacation time in the form of additional salary. In the
fiscal year ended December 31, 1999, Dr. Behan and Mr. Burgoon both elected
to be paid in the form of additional salary for one week of unused vacation
time and Dr. Chalmers elected to be paid in the form of additional salary
for two weeks of unused vacation time.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth, as to the named executive officers,
information concerning stock options granted during the fiscal year ended
December 31, 1999.
Amounts represent the hypothetical gains that could be achieved from the
respective options if exercised at the end of the option term and are not
predictive of our future gains, if any. These gains are based on assumed rates
of stock appreciation of 5% and 10% compounded annually from the date the
respective options were granted to their expiration date based upon an initial
public offering price of $16.00, minus the applicable per share exercise price.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF
SECURITIES PERCENT EXERCISE STOCK PRICE APPRECIATION
UNDERLYING OF TOTAL PRICE FOR OPTION TERM
OPTIONS OPTIONS PER EXPIRATION -------------------------
NAME GRANTED GRANTED SHARE DATE 5% 10%
---- ----------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Jack Lief........................ 12,500 3.4% $0.60 6/30/08 $318,279 $511,248
Dominic P. Behan................. 12,500 3.4 0.60 6/30/08 318,279 511,248
Derek T. Chalmers................ 12,500 3.4 0.60 6/30/08 318,279 511,248
Richard P. Burgoon, Jr........... 22,500 6.0 0.60 4/5/09 572,902 920,247
Joyce H. Williams................ 10,000 2.7 0.60 2/8/09 254,623 408,999
</TABLE>
Pursuant to stock option agreements between us and Mr. Lief, Dr. Behan, Dr.
Chalmers, Mr. Burgoon and Ms. Williams, each of these individuals is entitled to
exercise their options prior to vesting. If they exercise their options prior to
vesting, they will receive restricted shares which will vest in accordance with
the normal vesting schedule set forth in their stock option agreement and are
subject to repurchase by us if they cease to be employed by us.
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<PAGE> 48
1999 YEAR-END OPTION VALUES
The following table sets forth information concerning options to purchase
common stock held as of December 31, 1999 by each of the officers named in the
summary compensation table that have stock options.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AS OF DECEMBER 31, 1999(1) AS OF DECEMBER 31, 1999(2)
------------------------------ ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ---------------- ----------- -------------
<S> <C> <C> <C> <C>
Jack Lief................................... 28,125 34,375 443,125 539,375
Dominic P. Behan............................ 28,125 34,375 443,125 539,375
Derek T. Chalmers........................... 28,125 34,375 443,125 539,375
Richard P. Burgoon, Jr...................... -- 52,500 -- 820,500
Joyce H. Williams........................... -- 10,000 -- 154,000
</TABLE>
-------------------------
(1) Pursuant to stock option agreements between us and Mr. Lief, Dr. Behan, Dr.
Chalmers, Mr. Burgoon and Ms. Williams, each of these individuals is
entitled to exercise his or her options prior to vesting. Therefore, all of
the exercisable options are vested, but have not yet been exercised, and all
of the unexerciseable options may be exercised, but have not yet vested and
will only vest subject to the terms of the stock option agreements.
(2) There was no public trading market for our common stock as of December 31,
1999. Accordingly, these values have been calculated on the basis of the
assumed initial public offering price of $16.00 per share minus the
applicable per share exercise price.
COMPENSATION PLANS
The purpose of our equity compensation plans is to provide our designated
employees, certain consultants and advisors who perform services for us, and
non-employee members of our board of directors, with the opportunity to receive
grants of incentive stock options, nonqualified stock options and restricted
stock. Our plans permit the Compensation Committee to select eligible persons to
receive awards and to determine the terms and conditions of such awards. The
Compensation Committee will also set the vesting schedule and exercise price of
the options, provided that the option exercise price may not be less than 85% of
the fair market value per share of our common stock on the date of grant. In
addition, no participant may be granted incentive stock options that are first
exercisable in any one calendar year with fair market value in excess of
$100,000. The options and restricted stock granted under our equity compensation
plans generally vest ratably over a four-year vesting period from the date of
grant and are exercisable up to ten years from the date of grant.
1998 Equity Compensation Plan
Our 1998 Equity Compensation Plan was adopted by our board of directors in
June 1998 and later approved by our stockholders. The aggregate number of shares
of our common stock that is available under our 1998 Equity Compensation Plan is
1,500,000. As of June 30, 2000, we had granted incentive stock options and
non-qualified stock options to purchase 1,504,025 shares of common stock at a
weighted average price of $0.52 per share under the provisions of our 1998
Equity Compensation Plan. As of June 30, 2000, 922,100 of the stock options were
exercised, 9,125 were canceled and 40,750 were vested. Pursuant to stock option
agreements between us and some optionholders for option grants under this plan,
some of our optionholders are entitled to exercise their options prior to
vesting. All of the unexercisable options granted under our 1998 Equity
Compensation Plan may be exercised immediately, but will vest subject to the
terms of the particular stock option agreement. We may seek board approval for
the issuance of options to acquire the remaining 5,100 shares available under
our 1998 Equity Compensation Plan prior to completion of this offering.
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2000 Equity Compensation Plan
Our 2000 Equity Compensation Plan was adopted by our board of directors in
April 2000 and was approved by our stockholders in May 2000. The aggregate
number of shares of our common stock that may be issued pursuant to the 2000
Equity Compensation Plan is 2,000,000 shares. As of the date of this prospectus,
we have not granted any options under our 2000 Equity Compensation Plan.
401(k) PLAN
We have established a tax-qualified employee savings and retirement plan,
or 401(k) Plan, which our full-time employees may participate in if they choose
to do so. Pursuant to the 401(k) Plan, eligible employees may elect to reduce
their current compensation by up to the lesser of 14% of their annual
compensation and the statutorily prescribed limit, which is $10,500 in 2000, and
have the amount of such reduction contributed to the 401(k) Plan. The trustees
of the 401(k) Plan, at the direction of each participant, invest the
contributions to the 401(k) Plan in designated investment options. The 401(k)
Plan is intended to qualify under Section 401 of the Internal Revenue Code, so
that contributions to the 401(k) Plan and income earned on the 401(k) Plan
contributions are not taxable until withdrawn, and so that the contributions we
make will be deductible when made. Employees are eligible to participate in the
401(k) Plan on the first day of their employment. Our matching contributions
totaled $149,000 in the year ended December 31, 1999 and $27,000 in the year
ended December 31, 1998. Our matching contributions are subject to a five-year
vesting schedule.
EMPLOYMENT AGREEMENTS
Our officers serve at the discretion of our board of directors. We have not
entered into any written employment agreements with any of our employees.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION
Limitation on liability
Our certificate of incorporation provides that the liability of our
directors will be limited to the fullest extent permitted by Delaware law. Our
directors will not be personally liable to us or our stockholders for monetary
damages resulting from a breach of fiduciary duty except for:
- any breach of the duty of loyalty to us or our stockholders
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law
- liability under Section 174 of the Delaware General Corporation Law
- any transaction from which the director derived an improper personal
benefit
This limitation of liability does not apply to the responsibility or
liability of our directors pursuant to any criminal statute nor does it relieve
our directors from payment of taxes pursuant to federal, state or local law.
Indemnification
Our by-laws provide that we will indemnify our directors and executive
officers and may indemnify our other corporate agents, to the fullest extent
permitted by Delaware law. Section 145 of the Delaware corporate laws provides a
corporation with the power to indemnify any officer or director acting in his
capacity as the corporation's representative who was, is or is threatened to be
made, a party to any action or proceeding for expenses, judgments, fines and
amounts paid in settlement actually and reasonably incurred in connection with
such action or proceeding. The indemnity provisions apply whether the action
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<PAGE> 50
was instituted by a third-party or arose by or in our right. Generally, the only
limitation on our ability to indemnify our officers and directors is if their
actions violate a criminal statute or if their actions or failures to act are
finally determined by a court to have constituted willful misconduct or
recklessness.
We currently have directors' and officers' liability insurance to provide
our directors and officers with insurance coverage for losses arising from
claims based on breaches of duty, negligence, errors and other wrongful acts.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Dr. McAlister, a member of our board of directors, is also the Chief
Executive Officer and President of Tripos. Tripos is the beneficial owner of
approximately 12.8% of our common stock. In 1997, we issued a note payable to
Tripos in the principal amount of $755,000, at an annual interest rate of 9.5%,
convertible into 755,000 shares of our common stock, and a warrant to purchase
100,000 shares of our common stock at an exercise price of $0.70 per share in
connection with an agreement which provides us access to Tripos' chemical
library. In June 1997, we issued a total of 245,000 shares of Series A preferred
stock to Tripos for an aggregate purchase price of $245,000. In November 1997,
Tripos also purchased 480,000 shares of our Series B preferred stock for an
aggregate purchase price of $600,000. In 1998, we issued a convertible note
payable to Tripos in the principal amount of $1,500,000, at an annual interest
rate of 9.5%. The note was converted into 435,840 shares of Series D preferred
stock in January 1999. We have also entered into a research collaboration
agreement and a software license agreement with Tripos, and we may enter into
additional agreements with Tripos for the joint development of drug candidates
using CART-activated receptors and Tripos' chemical library. We will share
expenses and any proceeds resulting from our collaboration with Tripos and will
pay Tripos a fee for services they provide outside of our collaboration.
Dr. Steinmetz, a member of our board of directors, is also a Managing
Director for MPM Asset Management. MPM Asset Management is the beneficial owner
of approximately 26.8% of our common stock. In January 1999, entities controlled
by MPM Asset Management purchased 2,005,731 shares of our Series D preferred
stock for an aggregate purchase price of $7,000,001. In January 2000, entities
controlled by MPM Asset Management purchased 1,141,033 shares of our Series E
preferred stock for an aggregate purchase price of $4,564,132. In March 2000,
entities controlled by MPM Asset Management purchased 865,385 shares of our
Series F preferred stock for an aggregate purchase price of $4,500,002. Dr.
Steinmetz is the holder of record of 50,000 shares of ChemNavigator.com's Series
A preferred stock, 13,296 shares of its Series B preferred stock and holds a
warrant to purchase 3,324 shares of common stock of ChemNavigator.com, for which
he paid an aggregate purchase price of $80,315.
Dr. Ryser, a member of our board of directors, is also a member and
delegate of the board of International Biomedicine Management Partners, Inc.
International Biomedicine Management Partners is the beneficial owner of 12.9%
of our common stock. In January 1999, International BM Biomedicine Holdings,
Inc. purchased 1,432,665 shares of our Series D preferred stock for an aggregate
purchase price of $5,000,001. In January 2000, International BM Biomedicine
Holdings also purchased 500,000 shares of our Series E preferred stock for an
aggregate purchase price of $2,000,000.
Dr. Michael E. Lewis, one of our co-founders, is a principal in
BioDiligence Partners, Inc. We paid BioDiligence Partners $120,000 during 1999
and $42,500 for the first three months of 2000, for consulting services
rendered. We did not pay any cash compensation directly to Dr. Lewis in 1999 or
during the first three months of 2000.
In April 2000, Mr. Scotti, our Vice President, Business Development,
purchased 10,000 shares of our Series G preferred stock for an aggregate
purchase price of $73,000.
Mr. Lief, our President and Chief Executive Officer, is also the President
of Aressa, the Chief Executive Officer of ChemNavigator.com, and a member of the
board of directors of Aressa and of
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<PAGE> 51
ChemNavigator.com. In November 1997, Mr. Lief purchased 28,000 shares of our
Series B preferred stock for an aggregate purchase price of $35,000. Mr. Lief
has entered into a four-year service agreement with ChemNavigator.com in which
he agrees to provide up to 200 hours of service per year. As compensation for
his services he has received 200,000 shares of common stock of
ChemNavigator.com, which vest over a period of four years, subject to Mr. Lief
remaining in our employ.
Mr. Burgoon, our Senior Vice President, Operations, General Counsel and
Secretary, is also the Secretary of Aressa and ChemNavigator.com, and is a
member of the board of directors of Aressa and of ChemNavigator.com. Mr. Burgoon
has entered into a four-year service agreement with ChemNavigator.com in which
he agrees to provide up to 200 hours of service per year. As compensation for
his services he has received 175,000 shares of common stock of
ChemNavigator.com, which vest over a period of four years, subject to Mr.
Burgoon remaining in our employ.
Mr. Hoffman, our Vice President, Finance, has entered into a four-year
service agreement with ChemNavigator.com in which he agrees to provide up to 200
hours of service per year. As compensation for his services he has received
100,000 shares of common stock of ChemNavigator.com, which vest over a period of
four years, subject to Mr. Hoffman remaining in our employ.
In addition, Dr. Beeley, our Vice President, Chief Chemical Officer, and
some of our other employees have provided consulting services to
ChemNavigator.com and have received options to purchase shares of common stock
of ChemNavigator.com as compensation for services rendered. Other than as set
forth above, we do not expect our employees to provide significant services to
ChemNavigator.com. We also sublease office space to ChemNavigator.com at a fair
market rate.
We were formed in 1997. In June 1997, we issued 1,000,000 shares of common
stock to our founders at a price of $0.0001 per share for a total cash
consideration of $100. Our founders include Mr. Lief, who received 225,000
shares, Dr. Behan, who received 250,000 shares, Dr. Chalmers, who received
250,000 shares, and Dr. Lewis, who received 225,000 shares.
We believe that all of the transactions described above were made and are
on terms no less favorable to us than those that could be obtained from
independent third parties in arms-length negotiations.
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<PAGE> 52
PRINCIPAL STOCKHOLDERS
The following table provides information regarding beneficial ownership of
our common stock before this offering and as adjusted to reflect the sale of the
5,000,000 shares of common stock offered hereby, by:
- each person, group or entity who beneficially owns more than 5% of our
stock
- each of our directors
- each of our named executive officers
- all of our executive officers and directors as a group
The following table reflects as outstanding the number of shares of our
common stock outstanding as of March 31, 2000, the automatic conversion of all
outstanding shares of our preferred stock, including Series G preferred stock,
into 12,698,578 shares of common stock, the issuance of 310,875 shares of our
common stock issued upon exercise of options between April 1 and June 30, 2000
and the issuance of 393,419 shares of our common stock upon the exercise of all
but one of our outstanding warrants upon the closing of this offering. The
amounts and percentages of common stock beneficially owned are reported on the
basis of regulations of the SEC governing the determination of beneficial
ownership of securities. Under the rules of the SEC, a person is deemed to be a
"beneficial owner" of a security if that person has or shares "voting power,"
which includes the power to vote or to direct the voting of such security, or
"investment power," which includes the power to dispose of or to direct the
disposition of such security. A person is also deemed to be a beneficial owner
of any securities for which that person has a right to acquire beneficial
ownership presently or within 60 days. Under these rules, more than one person
may be deemed a beneficial owner of the same securities and a person may be
deemed to be the beneficial owner of securities as to which that person has no
economic interest.
<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING SHARES
NUMBER OF SHARES --------------------
OF COMMON STOCK BEFORE AFTER
NAME BENEFICIALLY OWNED OFFERING OFFERING
---- ------------------ -------- --------
<S> <C> <C> <C>
MPM Asset Management(1).................................... 4,012,149 26.8% 20.1%
International BM Biomedicine Holdings, Inc.(2)............. 1,932,665 12.9 9.7
Tripos, Inc.(3)............................................ 2,015,840 12.8 9.7
Eaton Vance Worldwide Health Sciences Fund(4).............. 832,018 5.5 4.2
Jack Lief(5)............................................... 415,500 2.8 2.1
Dominic P. Behan(6)........................................ 412,500 2.7 2.1
Derek T. Chalmers(7)....................................... 412,500 2.7 2.1
Richard P. Burgoon, Jr.(8)................................. 112,500 * *
Joyce Williams(9).......................................... 60,000 * *
Michael Steinmetz(1)....................................... 4,012,149 26.8 20.1
Stefan Ryser(2)............................................ 1,932,665 12.9 9.7
John P. McAlister, III(3).................................. 2,015,840 12.8 9.7
All directors and executive officers as a group(10) (12
persons)................................................. 9,563,654 59.6% 45.4%
</TABLE>
-------------------------
* Less than one percent.
(1) Reflects 3,473,112 shares held of record by BB Bioventures, Limited
Partnership, 497,310 shares held of record by MPM Bioventures Parallel Fund,
L.P., and 41,727 shares held of record by the MPM Asset Management Investors
1999 LLC. Dr. Steinmetz is the Managing Director of MPM Asset Management,
which is the fund manager of each of BB Bioventures, MPM Bioventures
Parallel Fund and MPM Asset Management Investors. The address of MPM Asset
Management is One Cambridge Center, 9th Floor, Cambridge, Massachusetts
02142. Dr. Steinmetz disclaims beneficial ownership of shares in which he
does not have a pecuniary interest. Dr. Steinmetz is the holder of record of
50,000
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<PAGE> 53
shares of ChemNavigator.com's Series A preferred stock, 13,296 shares of its
Series B preferred stock and holds a warrant to purchase 3,324 shares of the
common stock of ChemNavigator.com.
(2) Reflects shares owned by International BM Biomedicine Holdings, Inc. Dr.
Ryser is a member and delegate of the board of International Biomedicine
Management Partners, Inc., a company that manages investments on behalf of
International BM Biomedicine Holdings. Dr. Ryser disclaim beneficial
ownership of shares in which he does not have a pecuniary interest. The
address for International BM Biomedicine Holdings is House of Commerce,
Aeschenplatz, P.O. Box 136, CH-4010, Basel, Switzerland.
(3) Includes 755,000 shares that may be acquired upon the conversion of a
convertible note. Dr. McAlister is the President and a director of Tripos.
The address for Tripos is 1699 South Hanlev Road, St. Louis, Missouri
63144. Dr. McAlister disclaims beneficial ownership of shares in which he
does not have a pecuniary interest.
(4) The address for Eaton Vance Worldwide Health Sciences Fund is 767 Third
Avenue, 8th Floor, New York, New York 10017.
(5) Includes 134,375 shares that were issued to Mr. Lief upon the exercise of
unvested stock options. Shares issued upon the exercise of unvested stock
options will vest over the four-year term of the underlying stock option
agreement, subject to repurchase by us if Mr. Lief leaves our employ. Mr.
Lief also owns 200,000 shares of the common stock of ChemNavigator.com,
subject to repurchase by ChemNavigator.com if Mr. Lief is no longer
employed by us.
(6) Includes 112,500 shares issuable upon the exercise of stock options.
Includes 25,000 shares that were issued to Dr. Behan upon the exercise of
unvested stock options. Shares issued upon the exercise of unvested stock
options will vest over the four-year term of the underlying stock option
agreement, subject to repurchase by us if Dr. Behan is no longer employed
by us.
(7) Includes 112,500 shares issuable upon the exercise of stock options.
Includes 25,000 shares that were issued to Dr. Chalmers upon the exercise
of unvested stock options. Shares issued upon the exercise of unvested
stock options will vest over the four-year term of the underlying stock
option agreement, subject to repurchase if Dr. Chalmers is no longer
employed by us.
(8) Includes 48,750 shares issuable upon the exercise of stock options.
Includes 38,125 shares that were issued to Mr. Burgoon upon the exercise of
unvested stock options. Shares issued upon the exercise of unvested stock
options will vest over the four-year term of the underlying stock option
agreement, subject to repurchase by us if Mr. Burgoon leaves our employ.
Mr. Burgoon also owns 175,000 shares of the common stock of
ChemNavigator.com, subject to repurchase by ChemNavigator.com if Mr.
Burgoon is no longer employed by us.
(9) Includes 37,500 shares that were issued to Ms. Williams upon the exercise
of unvested stock options. Shares issued upon the exercise of unvested
stock options will vest over the four-year term of the underlying stock
option agreement, subject to repurchase by us if Ms. Williams is no longer
employed by us.
(10) Includes 755,000 shares that may be acquired upon the conversion of a
convertible note and 293,750 shares issuable upon the exercise of stock
options.
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<PAGE> 54
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
Our authorized capital stock as of March 31, 2000 consisted of 35,000,000
shares of common stock and 17,608,593 shares of preferred stock, and as of this
date, there were 1,593,725 shares of common stock and 11,375,432 shares of
preferred stock outstanding. Between April 1 and June 30, 2000, we issued an
aggregate of 310,875 shares of our common stock pursuant to the exercise of
outstanding options. As of June 30, 2000, we had 65 stockholders of record of
our common stock and 134 stockholders of record of our preferred stock. On April
17, 2000, we issued an aggregate of 1,323,146 shares of Series G preferred stock
to various existing stockholders and to 34 additional stockholders of record.
Upon the closing of this offering:
- our certificate of incorporation will be amended and restated to provide
for a total of 75,000,000 shares of authorized capital stock, consisting
of 67,500,000 shares of common stock, par value $0.0001, and 7,500,000
shares of preferred stock, par value $0.0001
- all but one of our outstanding warrants will be exercised, resulting in
the issuance of 393,419 shares of common stock
- all 12,698,578 outstanding shares of our preferred stock will convert
into common stock
As a result, after giving effect to the sale of the common stock in this
offering, we will have a total of 19,996,597 shares of common stock and no
shares of preferred stock outstanding, assuming that the underwriters do not
exercise their over-allotment option.
COMMON STOCK
Voting:
- one vote for each share held of record on all matters submitted to a vote
of our stockholders
- no cumulative voting rights
- election of directors by plurality of votes cast
- all other matters by majority of votes cast
Dividends:
- subject to preferential dividend rights of outstanding preferred stock,
if any
- common stockholders are entitled to receive ratably declared dividends
- our board of directors may only declare dividends out of legally
available funds
Additional Rights:
- subject to the preferential liquidation rights of outstanding shares of
preferred stock, if any, common stockholders are entitled to receive
ratably net assets, available after the payment of all debts and
liabilities, upon our liquidation, dissolution or winding up
- no preemptive rights
- no subscription rights
- no redemption rights
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<PAGE> 55
- no sinking fund rights
- no conversion rights
The rights and preferences of common stockholders, including the right to
elect directors, are subject to the rights of any series of preferred stock we
may issue in the future.
PREFERRED STOCK
After completion of this offering, our amended and restated certificate of
incorporation will provide that we may, by resolution of our board of directors,
and without any further vote or action by our stockholders, authorize and issue,
subject to limitations prescribed by law, up to an aggregate of 7,500,000 shares
of preferred stock. The preferred stock may be issued in one or more series.
With respect to any series, our board of directors may determine the designation
and the number of shares, preferences, limitations and special rights, including
dividend rights, conversion rights, voting rights, redemption rights and
liquidation preferences. Because of the rights that may be granted, the issuance
of preferred stock may delay, defer or prevent a change of control.
Prior to this offering, we had issued and outstanding 12,698,578 shares of
preferred stock. Upon the completion of this offering, all of our outstanding
shares of preferred stock will automatically convert into 12,698,578 shares of
common stock.
WARRANTS AND CONVERTIBLE NOTE
Prior to this offering, we had issued and outstanding warrants to purchase:
- 100,000 shares of common stock at an exercise price of $0.70 per share
- 13,333 shares of common stock at an exercise price of $5.75 per share
- 280,086 shares of common stock at an exercise price of $3.49 per share
- 18,000 shares of common stock at an exercise price of $3.49 per share
All but one of the warrants will be exercised at the closing of this
offering. The warrant to purchase 18,000 shares of common stock, with an
exercise price of $3.49 per share, will remain outstanding after the closing of
this offering. If this warrant is not exercised by April 26, 2006, subject to
the market price of our common stock, the warrant holder has the option to
require us to purchase the warrant at a price of $12.00 per share or we have the
option to repurchase the warrant from the holder at a price of $20.00 per share.
We will also have outstanding a convertible note issued to Tripos in the
principal amount of $755,000, convertible into 755,000 shares of common stock.
REGISTRATION RIGHTS
Following completion of this offering, holders of 11,004,739 shares of
common stock, including common stock issuable upon conversion of our outstanding
note and the exercise of our outstanding warrant, will have the right to have
their shares registered under the Securities Act of 1933. These rights are
provided under the terms of three separate agreements between us and the holders
of these shares. Under these agreements, the holders of these shares have the
right, subject to specific conditions, to require us to file up to six
registration statements on their behalf and, when we become eligible to use Form
S-3 under the Securities Act, to require us to file up to ten additional
registration statements on Form S-3 on their behalf, for a total of up to 16
registration statements. The holders of these securities are also entitled to
require us to include their common stock in future registration statements we
file under the Securities Act of 1933.
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<PAGE> 56
Once a holder can sell all of his shares under Rule 144 of the Securities
Act during any 90 day period, the holder cannot require us to register his
shares under these agreements. Additionally, any remaining registration rights
terminate six years after the closing of this offering. Registration of shares
of common stock pursuant to the exercise of these registration rights would
result in such shares becoming freely tradable without restriction under the
Securities Act immediately upon the effectiveness of such registration and may
adversely affect our stock price. We expect that the holders of substantially
all of these securities will enter into lock-up agreements with the underwriters
preventing them from selling or transferring their shares for 180 days after
this offering.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF OUR CHARTER DOCUMENTS AND DELAWARE LAW
Our certificate of incorporation provides that our board of directors may
establish the rights of, and cause us to issue, substantial amounts of preferred
stock without the need for stockholder approval. Further, our board may
determine the terms, conditions, rights, privileges and preferences of the
preferred stock. Our board is required to exercise its business judgment when
making such determinations. Our board's use of its discretion to issue preferred
stock may inhibit the ability of third parties to acquire us. Additionally, our
board may issue the preferred stock in an attempt to dilute the common stock
held by entities seeking to obtain control of us. Some of the rights of the
holders of common stock will be subject to, and may be adversely affected by,
any preferred stock that may be issued in the future. Our preferred stock
provides desirable flexibility in connection with possible acquisitions,
financings and other corporate transactions. However, it may also have the
effect of discouraging, delaying or making it more difficult for third parties
to acquire or attempt to acquire control of us or substantial amounts of our
common stock.
After this offering is completed, Section 203 of the Delaware General
Corporation Law will apply to us. Section 203 of the Delaware General
Corporation Law generally prohibits certain business combinations between a
Delaware corporation and an "interested stockholder." An interested stockholder
is generally defined as a person who beneficially owns, or within three years
did own, directly or indirectly, 15% or more of the outstanding voting shares of
a Delaware corporation, or is an affiliate or associate of a person who meets
these criteria. The statute broadly defines business combinations to include:
- mergers
- consolidations
- sales or other dispositions of assets having an aggregate value equal to,
or in excess of 10% of the aggregate market value of, the consolidated
assets of the corporation or aggregate market value of all outstanding
stock of the corporation
- certain transactions that would increase the interested stockholder's
proportionate share ownership in the corporation
The statute prohibits any such business combination for a period of three
years commencing on the date the interested stockholder becomes an interested
stockholder, unless:
- the business combination is approved by the corporation's board of
directors prior to the date the interested stockholder becomes an
interested stockholder
- the interested stockholder acquired at least 85% of the voting stock of
the corporation (other than stock held by directors who are also officers
or by certain employee stock plans) in the transaction in which it
becomes an interested stockholder
- the business combination is approved by the board of directors and by the
affirmative vote of at least two-thirds of the outstanding voting stock
that is not owned by the interested stockholder
The Delaware General Corporation Law contains provisions enabling a
corporation to avoid Section 203's restrictions if the corporation's
stockholders vote to approve an amendment to the
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<PAGE> 57
corporation's certificate of incorporation or by-laws to avoid the restrictions.
In addition, the restrictions contained in Section 203 are not applicable to any
of our existing stockholders. We have not and do not currently intend to "elect
out" of the application of Section 203 of the Delaware General Corporation Law.
TRANSFER AGENT
The transfer agent and registrar for our common stock is American Security
Transfer & Trust, Inc.
NATIONAL MARKET LISTING
We applied to have our common stock approved for quotation on the Nasdaq
National Market under the symbol "ARNA."
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<PAGE> 58
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 19,996,597 shares of common
stock outstanding. This number is based upon 14,996,597 shares outstanding as of
March 31, 2000, after giving effect to the issuance of 1,323,146 shares of
Series G preferred stock, the conversion of all of our outstanding preferred
stock into 12,698,578 shares of common stock, the issuance of 310,875 shares of
our common stock upon the exercise of options between April 1 and June 30, 2000
and the exercise of all but one of our outstanding warrants into 393,419 shares
of common stock. Of these shares, the shares of common stock offered hereby will
be freely tradeable without restriction unless these shares are held by
affiliates as defined in Rule 144(a) under the Securities Act of 1933. The
remaining 14,996,597 shares of common stock to be outstanding after this
offering will be restricted shares under the Securities Act of 1933. Restricted
securities may be sold in the public market only if registered or if they
qualify for an exemption from registration under Rule 144. We will also have
outstanding a note convertible into 755,000 shares of common stock, a warrant
exercisable for 18,000 shares of common stock and options outstanding to
purchase 572,800 shares of common stock. Upon conversion of the note and
exercise of the warrant and these options, we would have an additional 1,345,800
shares of common stock outstanding which may be sold in the public market only
if registered or if they qualify for an exemption from registration under Rule
144. Subject to the lock-up agreements described below and the provisions of
Rule 144, additional shares will become available for sale in the public market.
In general, under Rule 144, an affiliate of ours, or a person, or persons
whose shares are aggregated, who has beneficially owned restricted shares for at
least one year, will be entitled to sell that number of shares in any
three-month period that does not exceed:
- the greater of one percent of the then outstanding shares of our common
stock, which will be approximately 200,000 shares immediately after this
offering, assuming no exercise of the underwriters' over-allotment
option, or
- the average weekly trading volume during the four calendar weeks
preceding the date on which notice of the sale is filed with the SEC
Sales pursuant to Rule 144 are subject to certain requirements relating to
manner of sale, notice and availability of current public information about us.
A person or persons whose shares are aggregated who is not deemed to have been
our affiliate at any time during the 90 days immediately preceding the sale and
who has beneficially owned his or her shares for at least two years is entitled
to sell such shares pursuant to Rule 144(k) without regard to the limitations
described above.
Each of our officers and directors, substantially all of our stockholders,
and holders of options and warrants to purchase our stock, and the holder of our
convertible note, have agreed not to offer, sell, contract to sell or otherwise
dispose of, or enter into any transaction that is designed to, or could be
expected to, result in the disposition of any shares of our common stock or
other securities convertible into or exchangeable or exercisable for shares of
our common stock or derivatives of our common stock owned by these persons prior
to this offering, or common stock issuable upon exercise of options or warrants
or the conversion of a note held by these persons, for a period of 180 days
after the date of this prospectus without the prior written consent of the
underwriters. This consent may be given at any time without public notice.
We have entered into a similar agreement with the underwriters, except that
we may grant options and sell shares pursuant to our 2000 Equity Compensation
Plan without such consent. There are presently no agreements between the
underwriters and any of our stockholders or affiliates releasing them from these
lock-up agreements prior to the expiration of the 180-day period.
We intend to file a registration statement on Form S-8 under the Securities
Act within 90 days after the date of this prospectus, to register shares issued
under our equity compensation plans in connection with stock option exercises.
Under our 1998 Equity Compensation Plan, options to purchase
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<PAGE> 59
1,494,900 shares of common stock have been issued, and under our 2000 Equity
Compensation Plan, options to purchase up to 2,000,000 shares of common stock
may be issued. Therefore, after the effective date of the Form S-8 up to
2,572,800 shares of common stock will be available for sale in the public
market, subject to Rule 144 volume limitations applicable to affiliates and
lock-up agreements. We have also granted registration rights to a number of our
existing stockholders, as well as to the holders of our warrants and our
convertible note, which entitle these persons to require us to file additional
registration statements to register the shares of our common stock that they
hold, or could receive upon the exercise of their warrant or the conversion of
their note. We could be required to file up to an additional 16 registration
statements for some of our current stockholders.
Prior to this offering, there has been no public market for our common
stock. Sales of substantial amounts of common stock or the availability of such
shares for sale could adversely affect prevailing market prices of our common
stock and our ability to raise additional capital. You should read the
discussion under the heading entitled "Risk Factors -- Future sales of our
common stock could cause the market price of our common stock to decline" for
further information about the effect future sales could have on the market price
of our common stock.
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<PAGE> 60
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters, for whom ING Barings LLC, Prudential Securities Incorporated and
SG Cowen Securities Corporation are acting as representatives, have severally
agreed to purchase from us the following respective number of shares of common
stock at the initial public offering price less the underwriting discounts and
commissions set forth on the cover page of this prospectus:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
ING Barings LLC.............................................
Prudential Securities Incorporated..........................
SG Cowen Securities Corporation.............................
----------
Total..................................................... 5,000,000
==========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares of common stock offered hereby are subject
to certain conditions. The underwriters are obligated to purchase all of the
shares of common stock offered hereby, other than those covered by the
over-allotment option described below, if any of the shares are purchased.
The underwriters propose to offer the shares of common stock to the public
at the public offering price set forth on the cover of this prospectus and to
some dealers at a price that represents a concession not in excess of $ per
share under the public offering price. The underwriters may allow, and these
dealers may allow, a concession of not more than $ per share to brokers or
other dealers. After the initial public offering, the offering price and other
selling terms may be changed by the representatives.
We have granted to the underwriters an option, exercisable not later than
30 days after the date of this prospectus, to purchase up to 750,000 additional
shares of common stock at the initial public offering price less the
underwriting discounts and commissions set forth on the cover page of this
prospectus. The underwriters may exercise this option only to cover
over-allotments made in connection with the sale of the common stock offered
hereby. To the extent that the underwriters exercise this option, each of the
underwriters will become obligated, subject to certain conditions, to purchase
approximately the same percentage of additional shares of common stock as the
number of shares of common stock to be purchased by it in the above table bears
to 5,000,000, and we will be obligated, pursuant to this option, to sell these
shares to the underwriters to the extent this option is exercised. If any
additional shares of common stock are purchased, the underwriters will offer the
additional shares on the same terms as those on which the 5,000,000 shares are
being offered.
The following table shows the fees to be paid to the underwriters by us in
connection with this offering. These amounts are shown assuming both no exercise
and full exercise of the underwriters' option to purchase additional shares of
common stock:
<TABLE>
<CAPTION>
TOTAL FEES
---------------------------
FEE PER SHARE NO EXERCISE FULL EXERCISE
------------- ----------- -------------
<S> <C> <C> <C>
Payable by us..................................... $ $ $
</TABLE>
In addition, we estimate that our share of the total expenses of this
offering, excluding underwriting discounts and commissions, will be
approximately $1,200,000.
We have agreed to indemnify the underwriters against some specified types
of liabilities, including liabilities under the Securities Act of 1933, or to
contribute to payments the underwriters may be required to make in respect of
any of these liabilities.
The representatives of the underwriters have advised us that they do not
intend to confirm sales to any account over which they exercise discretionary
authority.
In January 1999, ING Barings acted as our placement agent in connection
with the private placement of our Series D preferred stock for which it received
customary compensation, including a warrant to
60
<PAGE> 61
purchase shares of our common stock, and reimbursement of expenses. Upon the
exercise of this warrant and the conversion of our preferred stock held by an
individual associated with ING Barings into common stock upon the closing of
this offering (which preferred stock may be deemed to constitute underwriting
compensation in connection with this offering under the NASD's Conduct Rules),
ING Barings and this individual will own an aggregate of 302,762 shares of our
common stock. The underwriters and their affiliates may, from time to time,
engage in transactions with and perform services for us in the ordinary course
of our business.
The representatives have advised us that, pursuant to Regulation M under
the Securities Act of 1933, the underwriters may engage in transactions that
stabilize, maintain or otherwise affect the market price of our common stock.
Specifically, the underwriters may over-allot shares of our common stock in
connection with this offering, thus creating a short position in our common
stock for their own account. A short position results when an underwriter sells
more shares of common stock than that underwriter is committed to purchase.
Additionally, to cover these over-allotments or to stabilize the market price of
our common stock, the underwriters may bid for, and purchase, shares of our
common stock in the open market. Finally, the underwriters may also reclaim
selling concessions allowed to an underwriter or dealer if the underwriters
repurchase shares distributed by that underwriter or dealer. Any of these
activities may maintain the market price of our common stock at a level above
that which might otherwise prevail in the open market. These transactions may be
effected on the Nasdaq National Market or otherwise. The underwriters are not
required to engage in these activities and, if commenced, may end any of these
activities at any time.
Other than in the United States, neither we nor the underwriters have taken
any action that would permit a public offering of the shares of common stock
offered hereby in any jurisdiction where action for that purpose is required.
The shares of common stock offered hereby may not be offered or sold, directly
or indirectly, nor may this prospectus or any other offering material or
advertisements in connection with the offer and sale of any such shares of
common stock be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of such jurisdiction. Persons into whose possession this prospectus
comes are advised to inform themselves about, and to observe, any restrictions
relating to the offering of the common stock and the distribution of this
prospectus. This prospectus is not an offer to sell or a solicitation of an
offer to buy any shares of common stock offered hereby in any jurisdiction in
which such an offer or solicitation is unlawful.
At our request, the underwriters have reserved for sale, at the initial
public offering price, approximately 5% of the shares to be sold in this
offering for our directors, employees, their family members and other third
parties with whom we have a business relationship. Our senior management will
determine whether or not a person with whom we have a business relationship will
be included in the program. The number of shares of our common stock available
for sale to the general public will be reduced to the extent these reserved
shares are purchased. Any reserved shares that are not purchased by these
persons will be offered by the underwriters to the general public on the same
basis as the other shares in this offering.
We and each of our officers and directors, substantially all of our
stockholders, and holders of options and warrants to purchase our stock, and the
holder of our convertible note, have agreed not to offer, sell, contract to sell
or otherwise dispose of, or enter into any transaction that is designed to, or
could be expected to, result in the disposition of any shares of our common
stock or other securities convertible into or exchangeable or exercisable for
shares of our common stock or derivatives of our common stock owned by these
persons prior to this offering, or common stock issuable upon exercise of
options or warrants or the conversion of a note held by these persons, for a
period of 180 days after the date of this prospectus without the prior written
consent of the underwriters. This consent may be given at any time without
public notice.
Additionally, we may grant options and sell shares pursuant to our 2000
Equity Compensation Plan without such consent.
Shares may be made available via the Internet to customers of one or more
underwriters participating in this offering, including Prudential Securities
Incorporated which facilitates the marketing of new issues online through its
PrudentialSecurities.com division. Clients of Prudential Advisor(SM), a full
service
61
<PAGE> 62
brokerage firm program, may view offering terms and a prospectus online and
place orders through their financial advisors. If any underwriter uses the
Internet to make offers and sales, a copy of our preliminary prospectus in
electronic format will be made available on a website maintained by the
underwriter or pursuant to a hosting arrangement entered into by the underwriter
with a third party.
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for our common stock will
be determined by negotiation among us and the representatives of the
underwriters. Among the primary factors considered in determining the public
offering price will be:
- prevailing market conditions
- our results of operations in recent periods
- the present stage of our development
- assessment of our management
- the market capitalization and stage of development of other companies
that we and the underwriters believe to be comparable to our business
- estimates of our business potential
LEGAL MATTERS
Morgan, Lewis & Bockius LLP, Los Angeles, California will provide us with
an opinion relating to the validity of the common stock issued in this offering.
The validity of the shares of common stock issued in this offering will be
passed upon for the underwriters by Winthrop, Stimson, Putnam & Roberts, New
York, New York.
EXPERTS
The audited financial statements included in this prospectus have been
audited by Ernst & Young LLP, independent auditors, as described in their
report. We have included our financial statements in this prospectus in reliance
upon Ernst & Young LLP's report, given on their authority as experts in
accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed a registration statement on Form S-1 with the SEC with
respect to the common stock offered hereby. This prospectus, which constitutes a
part of the registration statement, does not contain all of the information set
forth in the registration statement or the exhibits and schedules which are part
of the registration statement. For further information regarding us and our
common stock, you should read the registration statement and the related
exhibits and schedules. You may read and copy any document we file at the SEC's
public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information about the public
reference room. Our SEC filings are also available to the public from the SEC's
website at http://www.sec.gov. Upon completion of this offering, we will become
subject to the information and periodic reporting requirements of the Securities
Exchange Act of 1934 and will file periodic reports, proxy statements and other
information with the SEC. These periodic reports, proxy statements and other
information will be available for inspection and copying at the SEC's public
reference room and the SEC's website referred to above.
62
<PAGE> 63
ARENA PHARMACEUTICALS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Stockholders' Deficit......................... F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 64
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Arena Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of Arena Pharmaceuticals,
Inc. (a development stage company) as of December 31, 1998 and 1999, and the
related statements of operations, stockholders' deficit and cash flows for the
period from April 14, 1997 (inception) through December 31, 1997, and the years
ended December 31, 1998 and 1999. 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.
(a development stage company) at December 31, 1998 and 1999 and the results of
its operations and its cash flows for the period from April 14, 1997 (inception)
through December 31, 1997, and the years ended December 31, 1998 and 1999, in
conformity with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
San Diego, California
May 29, 2000
F-2
<PAGE> 65
ARENA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
-------------------------- MARCH 31, MARCH 31,
1998 1999 2000 2000
----------- ------------ ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 194,243 $ 5,401,508 $ 27,547,339
Prepaid expenses................................... 61,981 172,052 158,926
----------- ------------ ------------
Total current assets........................ 256,224 5,573,560 27,706,265
Property and equipment, net.......................... 1,165,640 2,773,382 2,848,667
Deposits............................................. 560 98,943 8,061
Deferred financing costs............................. 150,711 -- 57,984
Restricted cash...................................... 79,955 79,955 79,955
----------- ------------ ------------
Total assets................................ $ 1,653,090 $ 8,525,840 $ 30,700,932
=========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses.............. $ 242,219 $ 866,414 $ 511,896
Current portion of convertible note payable to
related party.................................... 1,137,172 -- --
Current portion of obligations under capital
leases........................................... 25,130 355,119 387,753
----------- ------------ ------------
Total current liabilities................... 1,404,521 1,221,533 899,649
Convertible note payable to related party, less
current portion.................................... 862,587 934,312 952,244
Obligations under capital leases, less current
portion............................................ 108,198 1,224,472 1,125,583
Deferred rent........................................ 747,424 793,123 806,296
Commitments
Prepaid financing proceeds........................... -- -- 4,514,260
Redeemable convertible preferred stock, $.0001 par
value: 7,792,533 shares authorized at December 31,
1998 and 1999, 17,608,593 shares authorized at
March 31, 2000; 2,037,533, 6,908,593 and 11,375,432
shares issued and outstanding at December 31, 1998
and 1999, and March 31, 2000, respectively;
7,500,000 shares authorized, no shares issued and
outstanding pro forma (unaudited).................. 2,598,643 18,251,949 38,797,410 $ --
Stockholders' equity (deficit):
Common stock, $.0001 par value: 25,000,000 shares
authorized at December 31, 1998 and 1999,
35,000,000 shares authorized at March 31, 2000;
1,043,500, 1,116,375, and 1,593,725 shares issued
and outstanding at December 31, 1998 and 1999,
and March 31, 2000, respectively; 67,500,000
shares authorized, 12,969,157 shares issued and
outstanding pro forma (unaudited)................ 104 111 159 1,297
Additional paid-in capital......................... 22,696 1,055,328 7,107,750 45,904,022
Deferred compensation.............................. -- (625,955) (6,051,186) (6,051,186)
Deficit accumulated during the development stage... (4,091,083) (14,329,033) (17,451,233) (17,451,233)
----------- ------------ ------------ ------------
Total stockholders' equity (deficit)........ (4,068,283) (13,899,549) (16,394,510) $ 22,402,900
----------- ------------ ------------ ============
Total liabilities and stockholders' equity
(deficit)................................. $ 1,653,090 $ 8,525,840 $ 30,700,932
=========== ============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 66
ARENA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
APRIL 14, 1997 APRIL 14, 1997
(INCEPTION) THREE MONTHS ENDED (INCEPTION)
THROUGH YEAR ENDED DECEMBER 31, MARCH 31, THROUGH
DECEMBER 31, -------------------------- -------------------------- MARCH 31,
1997 1998 1999 1999 2000 2000
-------------- ----------- ------------ ----------- ------------ --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Operating expenses:
Research and
development............. $ 447,038 $ 2,615,526 $ 8,336,483 $ 1,776,650 $ 2,399,358 $ 13,798,405
General and
administrative.......... 234,614 728,806 1,814,023 304,396 423,828 3,201,271
Amortization of deferred
compensation ($264,419,
$285,398, and $549,817
related to research and
development expenses and
$113,690, $124,081 and
$237,771 related to
general and
administrative expenses
for the year ended
December 31, 1999, for
the three months ended
March 31, 2000 and for
the period from April
14, 1997 (inception)
through March 31, 2000,
respectively)........... -- -- 378,109 -- 409,479 787,588
--------- ----------- ------------ ----------- ------------ ------------
Total operating
expenses.............. 681,652 3,344,332 10,528,615 2,081,046 3,232,665 17,787,264
Interest income............. 22,750 42,266 446,848 113,925 157,461 669,325
Interest expense............ (35,863) (94,252) (165,603) (31,114) (59,579) (355,297)
Other income................ -- -- 9,420 -- 12,583 22,003
--------- ----------- ------------ ----------- ------------ ------------
Net loss.................... (694,765) (3,396,318) (10,237,950) (1,998,235) (3,122,200) (17,451,233)
Non-cash preferred stock
charge.................... -- -- -- -- (14,187,563) (14,187,563)
--------- ----------- ------------ ----------- ------------ ------------
Net loss applicable to
common stockholders....... $(694,765) $(3,396,318) $(10,237,950) $(1,998,235) $(17,309,763) $(31,638,796)
========= =========== ============ =========== ============ ============
Historical net loss per
share, basic and
diluted................... $ (0.73) $ (3.51) $ (10.05) $ (2.03) $ (15.92)
========= =========== ============ =========== ============
Shares used in calculating
historical net loss per
share, basic and
diluted................... 955,000 966,799 1,018,359 984,583 1,086,988
========= =========== ============ =========== ============
Pro forma net loss per
share..................... $ (1.29) $ (1.76)
============ ============
Shares used in calculating
pro forma net loss per
share..................... 7,926,952 9,827,102
============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE> 67
ARENA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING THE TOTAL
------------------- PAID-IN DEFERRED DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION STAGE EQUITY (DEFICIT)
--------- ------ ---------- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of Common Stock at $.0001 per
share to founders for cash............ 1,000,000 $100 $ -- $ -- $ -- $ 100
Net loss................................ -- -- -- -- (694,765) (694,765)
--------- ---- ---------- ----------- ------------ ------------
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 (unaudited)................ 477,350 48 217,712 -- -- 217,760
Deferred compensation related to stock
options (unaudited)................... -- -- 5,834,710 (5,834,710) -- --
Amortization of deferred compensation
(unaudited)........................... -- -- -- 409,479 -- 409,479
Net loss (unaudited).................... -- -- -- -- (3,122,200) (3,122,200)
--------- ---- ---------- ----------- ------------ ------------
Balance at March 31, 2000 (unaudited)..... 1,593,725 $159 $7,107,750 $(6,051,186) $(17,451,233) $(16,394,510)
========= ==== ========== =========== ============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE> 68
ARENA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
APRIL 14, 1997 THREE MONTHS ENDED APRIL 14, 1997
(INCEPTION) THROUGH YEAR ENDED DECEMBER 31, MARCH 31, (INCEPTION) THROUGH
DECEMBER 31, -------------------------- ------------------------- MARCH 31,
1997 1998 1999 1999 2000 2000
------------------- ----------- ------------ ----------- ----------- -------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss..................... $ (694,765) $(3,396,318) $(10,237,950) $(1,998,235) $(3,122,200) $(17,451,233)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization........... 17,786 171,942 399,278 56,966 165,963 754,969
Amortization of deferred
compensation........... -- -- 378,109 -- 409,479 787,588
Interest accrued on notes
payable to related
party.................. 35,863 83,896 80,635 26,842 17,932 218,326
Warrants issued in
connection with
technology agreement... -- 14,000 -- -- -- 14,000
Deferred rent............ -- 747,424 45,699 12,380 13,173 806,296
Deferred financing
costs.................. -- (150,711) 150,711 150,711 (57,984) (57,984)
Change in operating
assets and liabilities:
Prepaid expenses....... (43,188) (18,793) (110,071) (38,589) 13,126 (158,926)
Accounts payable and
accrued expenses..... 132,049 110,170 624,195 697,612 (354,518) 511,896
---------- ----------- ------------ ----------- ----------- ------------
Net cash used in
operating
activities........... (552,255) (2,438,390) (8,669,394) (1,092,313) (2,915,029) (14,575,068)
INVESTING ACTIVITIES
Purchases of property and
equipment................ (796,435) (558,933) (2,007,020) (250,874) (241,248) (3,603,636)
Deposits and restricted
cash..................... (46,344) (34,171) (98,383) 560 90,882 (88,016)
---------- ----------- ------------ ----------- ----------- ------------
Net cash used in
investing
activities........... (842,779) (593,104) (2,105,403) (250,314) (150,366) (3,691,652)
FINANCING ACTIVITIES
Advances under capital
lease obligations........ -- 148,299 1,562,690 -- 129,207 1,840,196
Principal payments on
capital leases........... -- (14,971) (116,427) (6,020) (195,462) (326,860)
Prepaid financing
proceeds................. -- -- -- -- 4,514,260 4,514,260
Proceeds from issuance of
redeemable preferred
stock.................... 2,193,356 405,287 14,132,224 14,136,586 20,545,461 37,276,328
Proceeds from issuance of
common stock............. 100 8,700 28,575 825 217,760 255,135
Proceeds from convertible
note payable to related
party.................... 755,000 1,125,000 375,000 375,000 -- 2,255,000
---------- ----------- ------------ ----------- ----------- ------------
Net cash provided by
financing
activities........... 2,948,456 1,672,315 15,982,062 14,506,391 25,211,226 45,814,059
---------- ----------- ------------ ----------- ----------- ------------
Net increase (decrease) in
cash and cash
equivalents.............. 1,553,422 (1,359,179) 5,207,265 13,163,764 22,145,831 27,547,339
Cash and cash equivalents
at beginning of period... -- 1,553,422 194,243 194,243 5,401,508 --
---------- ----------- ------------ ----------- ----------- ------------
Cash and cash equivalents
at end of period......... $1,553,422 $ 194,243 $ 5,401,508 $13,358,007 $27,547,339 $ 27,547,339
========== =========== ============ =========== =========== ============
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Interest paid.............. $ -- $ 10,356 $ 84,968 $ 4,272 $ 41,648 $ 136,972
========== =========== ============ =========== =========== ============
Conversion of convertible
note to related party
into redeemable preferred
stock.................... $ -- $ -- $ 1,521,082 $1,521,082 $ -- $ 1,521,082
========== =========== ============ =========== =========== ============
</TABLE>
See accompanying notes.
F-6
<PAGE> 69
ARENA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 2000, FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND
2000,
AND FOR THE PERIOD FROM APRIL 14, 1997 (INCEPTION) THROUGH MARCH 31, 2000 IS
UNAUDITED)
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 has developed a broadly
applicable platform technology that is used to identify drug candidates in a
more efficient manner than traditional drug discovery approaches. The Company
has generated limited revenues from operations and is classified as a
development stage company.
PRINCIPLES OF CONSOLIDATION
The financial statements include the accounts of the Company and its wholly
owned subsidiary, Aressa Pharmaceuticals, Inc. ("Aressa"). All intercompany
accounts and transactions have been eliminated. During 1999, Aressa had no
operating activities.
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.
INTERIM FINANCIAL INFORMATION
The financial information as of March 31, 2000, for three months ended
March 31, 1999 and 2000, and for the period from April 14, 1997 (inception)
through March 31, 2000 is unaudited and includes all adjustments, consisting
only of normal recurring adjustments, that the Company's management considers
necessary for a fair presentation of the Company's operating results and cash
flows for such periods. Results for the three month period ended March 31, 2000
are not necessarily indicative of results to be expected for the full fiscal
year of 2000 or any future period.
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. With the exception of the
convertible note, management believes these carrying costs approximate fair
value because of the short-term maturity of these instruments. The convertible
note payable and related accrued interest is not scheduled to be repaid until
June 2002. However, the Company anticipates that the note holder will convert
the note into 755,000 shares of common stock (with a fair value of $12,080,000
at an initial offering price of $16.00 per share) before the note is due and
payable.
F-7
<PAGE> 70
ARENA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000, FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND
2000,
AND FOR THE PERIOD FROM APRIL 14, 1997 (INCEPTION) THROUGH MARCH 31, 2000 IS
UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
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.
DEFERRED FINANCING COSTS
Costs incurred in 1998 related to the Series D Redeemable Preferred Stock
financing which closed in early 1999, and costs incurred in the three months
ended March 31, 2000 related to the Series G Preferred Stock financing which
closed in April 2000 (Note 9) have been deferred and were charged against the
proceeds of the offerings upon their completion.
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 Statement of Financial Accounting Standards ("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 March 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.
PREPAID FINANCING PROCEEDS
The Company received $4,514,260 in March 2000 from various prospective
investors in the Series G Preferred Stock financing which closed in April 2000
(Note 9). Such amounts were recorded as a liability at March 31, 2000, and were
transferred into Series G Redeemable Convertible Preferred Stock upon the
closing of the financing and issuance of the shares.
F-8
<PAGE> 71
ARENA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000, FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND
2000,
AND FOR THE PERIOD FROM APRIL 14, 1997 (INCEPTION) THROUGH MARCH 31, 2000 IS
UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 implicit 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
implicit 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 6).
Option grants and warrants issued to non-employees are valued using the
fair value based method prescribed by SFAS No. 123 and EITF 96-18 and expensed
over the period services are provided.
REVENUE
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 will be
recognized as revenue as the services are provided. 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.
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 March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for Costs of Computer Software
Developed or Obtained for Internal Use (SOP 98-1). This standard requires
companies to capitalize qualifying computer software costs, which are incurred
during the application development stage, and amortize them over the software's
estimated useful life. The Company adopted SOP 98-1 effective January 1, 1999
with no material effect on the financial statements.
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
F-9
<PAGE> 72
ARENA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000, FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND
2000,
AND FOR THE PERIOD FROM APRIL 14, 1997 (INCEPTION) THROUGH MARCH 31, 2000 IS
UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(including costs incurred for projects in process at the beginning of the
quarter of adoption). Management believes the adoption of EITF No. 00-2 will not
affect its 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 INCOME
In accordance with SFAS No. 130, Reporting Comprehensive Income, all
components of comprehensive income, including net income, are reported in the
financial statements in the period in which they are recognized. Comprehensive
income is defined as the change in equity during a period from transactions and
other events and circumstances from non-owner sources. Net income (loss) and
other comprehensive income (loss), including unrealized gains and losses on
investments, is reported net of their related tax effect, to arrive at
comprehensive income (loss). For the period from April 14, 1997 (inception)
through December 31, 1997, the years ended December 31, 1998 and 1999, the three
months ended March 31, 1999 and 2000, and for the period from April 14, 1997
(inception) through March 31, 2000, comprehensive loss equals the net loss as
reported.
NET LOSS PER SHARE
Basic and diluted net loss per common share are presented in conformity
with SFAS No. 128, Earnings per Share, and SAB 98, 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, 1999 and for the
three months ended March 31, 2000 as described above, and also gives effect to
the assumed conversion of preferred stock which will automatically convert to
common stock immediately prior to the completion of the offering contemplated by
this prospectus (using the "as if converted" method) from the original date of
issuance.
F-10
<PAGE> 73
ARENA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000, FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND
2000,
AND FOR THE PERIOD FROM APRIL 14, 1997 (INCEPTION) THROUGH MARCH 31, 2000 IS
UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table presents the calculation of net loss per share:
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 14, 1997
(INCEPTION) YEAR ENDED THREE MONTHS ENDED
THROUGH DECEMBER 31, MARCH 31,
DECEMBER 31, -------------------------- --------------------------
1997 1998 1999 1999 2000
-------------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Net loss...................... $(694,765) $(3,396,318) $(10,237,950) $(1,998,235) $(17,309,763)
========= =========== ============ =========== ============
Basic and diluted net loss per
share....................... $ (0.73) $ (3.51) $ (10.05) $ (2.03) $ (15.92)
========= =========== ============ =========== ============
Weighted-average shares used
in computing historical net
loss per share, basic and
diluted..................... 955,000 966,799 1,018,359 984,583 1,086,988
========= =========== ============ =========== ============
Pro forma net loss per share,
basic and diluted
(unaudited)................. $ (1.29) $ (1.76)
============ ============
Shares used above............. 1,018,359 1,086,988
Pro forma adjustment to
reflect weighted-average
effect of assumed
conversion of redeemable
convertible preferred
stock (unaudited)........ 6,908,593 8,740,114
------------ ------------
Shares used in computing pro
forma net loss per share,
basic and diluted
(unaudited).............. 7,926,952 9,827,102
============ ============
</TABLE>
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
41,000, 61,625, 81,000 and 439,575 for the period from April 14, 1997
(inception) through December 31, 1997, for the years ended December 31, 1998 and
1999, and the three months ended March 31, 2000, 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.
F-11
<PAGE> 74
ARENA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000, FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND
2000,
AND FOR THE PERIOD FROM APRIL 14, 1997 (INCEPTION) THROUGH MARCH 31, 2000 IS
UNAUDITED)
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
historical 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
web-site, 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 March 31, 2000, the
Company owned approximately 46% of the outstanding voting equity securities of
ChemNavigator.com. 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 $4,544 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
Chief Executive Officer of ChemNavigator.com and a member of its board of
directors. 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.
F-12
<PAGE> 75
ARENA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000, FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND
2000,
AND FOR THE PERIOD FROM APRIL 14, 1997 (INCEPTION) THROUGH MARCH 31, 2000 IS
UNAUDITED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1998 1999 2000
---------- ---------- ----------
<S> <C> <C> <C>
Laboratory and computer equipment................. $ 832,109 $2,641,072 $2,845,926
Furniture and fixtures............................ 46,009 185,220 209,910
Leasehold improvements............................ 477,250 536,096 547,800
---------- ---------- ----------
1,355,368 3,362,388 3,603,636
Less accumulated depreciation and amortization.... (189,728) (589,006) (754,969)
---------- ---------- ----------
$1,165,640 $2,773,382 $2,848,667
========== ========== ==========
</TABLE>
4. 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%. Unless converted, the principal and accrued
interest are due in full in June 2002. The principal and accrued interest may be
converted into 755,000 shares of Series A Redeemable Convertible Preferred Stock
at the election of the holder at any time during the note term. Interest expense
for the period from April 14, 1997 (inception) through December 31, 1997, the
years ended December 31, 1998 and 1999, and the period from April 14, 1997
(inception) through March 31, 2000 totaled $35,000, $72,000, $72,000, and
$197,000, respectively. Interest expense was $27,000 and $18,000 for the three
months ended March 31, 1999 and 2000, respectively. All of the interest expense
was accrued as of March 31, 2000.
In 1998, the Company issued a convertible note payable to Tripos, for a
principal amount 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.
At the date each note was entered into, the note was convertible into
preferred stock at the then-current fair value of such stock, and therefore
there is no beneficial conversion feature associated with the notes.
5. COMMITMENTS
LEASES
In 1997, the Company leased its facilities 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%. Rent expense was
F-13
<PAGE> 76
ARENA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000, FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND
2000,
AND FOR THE PERIOD FROM APRIL 14, 1997 (INCEPTION) THROUGH MARCH 31, 2000 IS
UNAUDITED)
5. COMMITMENTS (CONTINUED)
$32,266 for the period from April 14, 1997 (inception) through December 31,
1997, $366,505 and $598,903 for the years ended December 31, 1998 and 1999,
respectively, $147,288 and $147,939 for the three months ended March 31, 1999
and 2000, respectively, and $1,145,613 for the period from April 14, 1997
(inception) through March 31, 2000.
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.
Annual future minimum lease obligations as of December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, OPERATING LEASES CAPITAL LEASES
------------------------ ---------------- --------------
<S> <C> <C>
2000.................................................. $ 548,945 $ 499,707
2001.................................................. 564,041 499,706
2002.................................................. 579,552 499,707
2003.................................................. 595,489 381,214
2004.................................................. 611,866 16,613
Thereafter............................................ 5,796,881 --
---------- ----------
Total minimum lease payments.................. $8,696,774 1,896,947
==========
Less amount representing interest....................... (317,356)
----------
Present value of minimum lease obligations.............. 1,579,591
Less current portion.................................... (355,119)
----------
Long-term portion of capital lease obligations.......... $1,224,472
==========
</TABLE>
Future minimum rentals to be received under non-cancelable subleases as of
December 31, 1999 totaled approximately $31,000.
Cost and accumulated depreciation of equipment under capital leases totaled
$1,931,000 and $331,000, respectively, at December 31, 1999.
6. 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 to 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 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 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
F-14
<PAGE> 77
ARENA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000, FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND
2000,
AND FOR THE PERIOD FROM APRIL 14, 1997 (INCEPTION) THROUGH MARCH 31, 2000 IS
UNAUDITED)
6. COLLABORATIONS (CONTINUED)
use at their screening facilities. The Company has received approximately $1.5
million in cash proceeds from Eli Lilly through June 30, 2000, comprised of a
one-time up-front payment of $500,000 and research funding of approximately $1.0
million. 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. In the future, the Company 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. 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. Eli
Lilly can terminate the agreement with or without cause by giving the Company
written notice during the first nine months after the date of the agreement, and
this termination would be effective one year after the date of the agreement.
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.
COLLABORATIVE AGREEMENT WITH TAISHO
In May 2000, the Company entered into an agreement with Taisho, in the form
of a binding letter of intent, 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 has received
approximately $800,000 in cash proceeds from Taisho through June 30, 2000, which
includes a one-time up-front payment. 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. The Company
and Taisho are currently finalizing the remaining terms of the collaboration.
The Company and Taisho may never achieve the fees and payment milestones.
F-15
<PAGE> 78
ARENA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000, FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND
2000,
AND FOR THE PERIOD FROM APRIL 14, 1997 (INCEPTION) THROUGH MARCH 31, 2000 IS
UNAUDITED)
6. COLLABORATIONS (CONTINUED)
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.
7. PREFERRED STOCK AND STOCKHOLDERS' EQUITY
PREFERRED STOCK
Through March 31, 2000, the Company has issued 245,000 shares of Series A
Redeemable Convertible Preferred Stock to Tripos at $1.00 per share for
aggregate net proceeds of $243,000; 1,752,533 shares of Series B Redeemable
Convertible Preferred Stock to various investors, including Tripos, at $1.25 per
share for aggregate net proceeds of $2,165,000; 40,000 shares of Series C
Redeemable Convertible Preferred Stock to outside investors at $5.00 per share
for aggregate net proceeds of $191,000; 4,871,060 shares of Series D Redeemable
Convertible Preferred Stock to various investors, including Tripos, at $3.49 per
share for aggregate net proceeds of $15,488,000; 2,000,000 shares of Series E
Redeemable Convertible Preferred Stock to various investors, all of whom were
then-current stockholders in the Company, at $4.00 per share for aggregate net
proceeds of $7,959,000; and 2,466,839 shares of Series F Redeemable Convertible
Preferred Stock to various investors at $5.20 per share for aggregate net
proceeds of $12,586,000.
In January 2000 and March 2000, the Company sold Shares of Series E
Convertible Redeemable Preferred Stock and Series F Convertible Redeemable
Preferred Stock, respectively at what management believed was fair value.
Subsequent to the commencement of the initial public offering process, the
Company re-evaluated the fair value of its common stock as of January 2000 and
March 2000 and
F-16
<PAGE> 79
ARENA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000, FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND
2000,
AND FOR THE PERIOD FROM APRIL 14, 1997 (INCEPTION) THROUGH MARCH 31, 2000 IS
UNAUDITED)
7. PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
determined it to be $4.68 and $13.50, respectively. In accordance with EITF
98-5, the Company recorded a deemed dividend on the Series F Redeemable
Preferred Stock equal to the lesser of (i) the difference between the initial
public offering price and the Series F Redeemable Preferred Stock sale price, or
(ii) the aggregate Series F Redeemable Preferred Stock sale price. The
incremental fair value of $14,187,563 is deemed to be the equivalent of a
non-cash preferred stock charge. The Company recorded the charge at the date of
issuance by offsetting charges and credits to preferred stock, without any
effect on total stockholders' equity. The non-cash preferred stock charge
increases the loss applicable to common stockholders in the calculation of basic
net loss per share for the three months ended March 31, 2000.
At the option of the holder, shares of the Redeemable Convertible Preferred
Stock are convertible into shares of Common Stock on a one-to-one basis, subject
to adjustment for dilution. At March 31, 2000, the Series A, Series B, Series C,
Series D, Series E and Series F Redeemable Convertible Preferred Stock are
convertible into 245,000, 1,752,533, 40,000, 4,871,060, 2,000,000 and 2,466,839
common shares, respectively. The Redeemable Convertible Preferred Stock will
automatically convert into common shares upon the earlier of the closing of a
firmly underwritten public offering of Common Stock under the Securities Act of
1933, as amended, in which the Company receives at least $20,000,000 in gross
proceeds at a price of at least $13.96 per share, or on the date specified by
written consent or agreement of the holders of 66 2/3% of the then outstanding
shares of Redeemable Convertible Preferred Stock. The Preferred stockholders
have voting rights equal to the number of common shares they would own upon
conversion.
Upon notice of at least 66 2/3% of the stockholders of each series of the
Redeemable Convertible Preferred Stock, the Company may be required to redeem
such series of the Redeemable Convertible Preferred Stock in three equal annual
installments beginning on the fifth anniversary of their respective original
issue dates and ending on the date two years from such first redemption date in
an amount consisting of the original issue price plus declared and unpaid
dividends.
The holders of Series A, Series B, Series D and Series E Redeemable
Convertible Preferred Stock are entitled to receive annual cumulative dividends
of 8% of the original issue price per share, when and if declared by the Board
of Directors, prior and in preference to the Series F Redeemable Convertible
Preferred and Common stockholders. As of March 31, 2000, no dividends have been
declared.
In the event of liquidation of the Company, holders of Series D and E
Redeemable Convertible Preferred Stock in preference to other series of stock
are entitled to receive their original purchase price, plus all accumulated and
unpaid dividends compounded annually in arrears on December 31 of each year
whether or not declared by the Board of Directors. Holders of Series A, Series
B, Series C and Series F Redeemable Convertible Preferred Stock are entitled to
a liquidation preference of $1.00, $1.25, $5.00 and $5.20 per share,
respectively, plus any declared and unpaid dividends on such shares. If, upon
the occurrence of such a liquidation event, the assets and funds of the Company
are insufficient to make payment in full to all holders of the Redeemable
Convertible Preferred Stock, then such assets and funds shall be distributed to
the holders of the Redeemable Convertible Preferred Stock ratably in proportion
to the full amounts to which they would otherwise be respectively entitled.
F-17
<PAGE> 80
ARENA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000, FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND
2000,
AND FOR THE PERIOD FROM APRIL 14, 1997 (INCEPTION) THROUGH MARCH 31, 2000 IS
UNAUDITED)
7. PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
A summary of the Redeemable Convertible Preferred Stock issued and
outstanding as of March 31, 2000 is as follows:
<TABLE>
<CAPTION>
LIQUIDATION
SHARES PREFERENCE
---------- -----------
<S> <C> <C>
Series A................................... 245,000 $ 245,000
Series B................................... 1,752,533 2,190,666
Series C................................... 40,000 200,000
Series D................................... 4,871,060 16,999,999
Series E................................... 2,000,000 8,000,000
Series F................................... 2,466,839 12,827,563
---------- -----------
11,375,432 $40,463,228
========== ===========
</TABLE>
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
In connection with the Series C Redeemable Convertible Preferred Stock
offering in December 1998, the Company issued warrants to purchase 13,333 shares
of Common Stock at $5.75 per share to the investors. The warrants are
exercisable at any time prior to the earlier of (i) ten years from the date of
issuance or (ii) immediately prior to an initial public offering, sale or merger
of the Company.
In connection with a Cooperative Technology Agreement, the Company issued
warrants to purchase 100,000 shares of Common Stock at $.70 per share to Tripos
in December 1998. The warrants are exercisable at any time prior to the earlier
of (i) seven years from the date of issuance or (ii) immediately prior to an
initial public offering. The number of warrants exercisable and the exercise
price are subject to adjustment for dilution. The estimated fair value of the
warrants of $14,000 was expensed in 1998.
In connection with the Company's offering of Series D Redeemable
Convertible Preferred Stock, the Company issued warrants to purchase 280,086
shares of Common Stock at $3.49 per share to its placement agent, ING Barings,
in 1999. The warrants are exercisable at any time prior to the earlier of (i)
ten years from the date of issuance or (ii) immediately prior to an initial
public offering. The number of warrants exercisable and the exercise price are
subject to adjustment for dilution. The estimated fair value of the warrants of
$165,300 was recorded as an issuance cost of the Series D financing.
In connection with the Company's lease line of credit, the Company issued
warrants to purchase 18,000 shares of Series D Redeemable Convertible Preferred
Stock at $3.49 per share to Silicon Valley Bank. The estimated fair value of the
warrants was not material. The warrants are exercisable anytime seven years from
the date of issuance.
F-18
<PAGE> 81
ARENA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000, FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND
2000,
AND FOR THE PERIOD FROM APRIL 14, 1997 (INCEPTION) THROUGH MARCH 31, 2000 IS
UNAUDITED)
7. PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
INCENTIVE STOCK PLAN
The Company's Amended and Restated 1998 Equity Compensation Plan (the
"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.
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 March 31, 2000,
439,575 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 pursuant to exercised options in its basic
earnings per share calculations.
The aggregate number of shares of Common Stock of the Company authorized
for issuance under the Plan is the sum of (i) 472,080 shares, plus (ii) as of
each December 31, after December 31, 1997, an additional number of shares equal
to 15% of the shares of Company Stock (as defined below) issued by the Company
during the preceding one-year period, with certain restrictions, subject to
adjustment for certain events including stock splits, reclassifications,
reorganizations and consolidations. "Company Stock" is defined as Common Stock,
or Common Stock issuable upon conversion or exercise of any Preferred Stock,
Warrants or other security convertible into Common Stock. At March 31, 2000,
1,500,000 shares of Common Stock were authorized for issuance under the Plan.
Following is a summary of stock option activity:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
OPTIONS EXERCISE PRICE
-------- --------------
<S> <C> <C>
Granted during 1997......................................... 91,000 $0.20
--------
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 (unaudited)....................................... 465,750 $0.60
Exercised (unaudited)..................................... (477,350) $0.46
--------
Balance at March 31, 2000 (unaudited)....................... 673,000 $0.50
========
</TABLE>
At December 31, 1998 and 1999, and at March 31, 2000, options to purchase
67,000, 159,500, and 104,250 shares were vested. The weighted-average remaining
contractual life of options outstanding at
F-19
<PAGE> 82
ARENA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000, FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND
2000,
AND FOR THE PERIOD FROM APRIL 14, 1997 (INCEPTION) THROUGH MARCH 31, 2000 IS
UNAUDITED)
7. PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
December 31, 1998 and 1999 was 8.75 and 8.50 years, respectively. At December
31, 1998 and 1999, 32,625 and 63,500 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 $.20 and $.23, respectively. At December 31, 1999,
345,102 shares were available for future grant.
Pro forma information regarding net income or loss is required to be
disclosed in accordance with SFAS No. 123, and has been determined as if the
Company had accounted for its employee stock options under the fair value method
of SFAS No. 123.
The fair value for these options was estimated at the dates of grant using
the minimum value option pricing model with the following weighted average
assumptions for 1997, 1998 and 1999, respectively: (i) weighted average
risk-free interest rate of 6.0%, (ii) expected dividend yield of 0%, and (iii)
five year estimated life of the options.
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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------- THREE MONTHS ENDED
1997 1998 1999 MARCH 31, 2000
--------- ----------- ------------ ------------------
<S> <C> <C> <C> <C>
Adjusted pro forma net loss....... $(695,000) $(3,398,000) $(10,250,000) $(17,341,000)
Adjusted pro forma basic net loss
per share....................... $ (0.73) $ (3.51) $ (10.07) $ (15.95)
</TABLE>
During the year ended December 31, 1999 and the three months ended March
31, 2000, in connection with the grant of various stock options to employees,
the Company recorded deferred stock compensation totaling approximately $1.0
million and $5.8 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 year ended December 31, 1999 and the three
months ended March 31, 2000, the Company recorded amortization of deferred
compensation expense of approximately $378,000 and $409,000, respectively. At
March 31, 2000, total charges to be recognized in future periods from
amortization of deferred stock compensation are anticipated to be approximately
$2,154,000, $2,186,000, $1,333,000 and $378,000 for the remaining nine months of
2000, and for the years ended December 31, 2001, 2002 and 2003, respectively.
F-20
<PAGE> 83
ARENA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000, FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND
2000,
AND FOR THE PERIOD FROM APRIL 14, 1997 (INCEPTION) THROUGH MARCH 31, 2000 IS
UNAUDITED)
7. PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
COMMON SHARES RESERVED FOR ISSUANCE
The following table summarizes common shares reserved for issuance at March
31, 2000 on exercise or conversion of:
<TABLE>
<S> <C>
Convertible Notes Payable................................ 755,000
Redeemable Convertible Preferred Stock................... 11,375,432
Common Stock options..................................... 673,000
Common and Preferred Stock warrants...................... 411,419
----------
Total Common shares reserved for issuance.............. 13,214,851
==========
</TABLE>
8. 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 $27,065, $148,784, $13,705 and $61,723
for the years ended December 31, 1998 and 1999, and the three months ended March
31, 1999 and 2000, respectively, vests over a five-year period.
9. INCOME TAXES
At December 31, 1999, the Company had federal and California tax net
operating loss carryforwards of approximately $12,611,000 and $6,484,000,
respectively.
Significant components of the Company's deferred tax assets at December 31,
1998 and 1999 are shown below. A valuation allowance of $1,573,000 and
$5,713,000 has been recognized to offset the
F-21
<PAGE> 84
ARENA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000, FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND
2000,
AND FOR THE PERIOD FROM APRIL 14, 1997 (INCEPTION) THROUGH MARCH 31, 2000 IS
UNAUDITED)
9. INCOME TAXES (CONTINUED)
deferred tax assets as of December 31, 1998 and 1999, respectively, as
realization of such assets is uncertain.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................ $ 1,285,000 $ 4,787,000
Research and development credits........................ 258,000 928,000
Accrued expenses........................................ 60,000 129,000
----------- -----------
Net deferred tax assets................................... 1,603,000 5,844,000
Valuation allowance for deferred tax assets............... (1,573,000) (5,713,000)
----------- -----------
Total deferred tax assets............................ 30,000 131,000
Deferred tax liabilities:
Depreciation............................................ (30,000) (131,000)
----------- -----------
Net deferred tax assets................................. $ -- $ --
=========== ===========
</TABLE>
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 $681,000 and $379,000, 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.
10. SUBSEQUENT EVENTS
INITIAL PUBLIC OFFERING
In April 2000, the board of directors authorized management of the Company
to file a registration statement with the Securities and Exchange Commission
permitting the Company to sell shares of its common stock to the public. If the
initial public offering is closed under the terms presently anticipated, all of
the preferred stock outstanding at March 31, 2000 will convert into 11,375,432
shares of common stock. Unaudited pro forma stockholders' equity, as adjusted
for the assumed conversion of the preferred stock, is set forth on the balance
sheet.
SERIES G PREFERRED STOCK FINANCING
On April 17, 2000, the Company issued 1,323,146 shares of Series G
Redeemable Convertible Preferred Stock at $7.30 per share for total gross
proceeds of $9,658,966. The holders of Series G Redeemable Convertible Preferred
Stock are entitled to receive annual cumulative dividends of 8% per share, when
and if declared by the Board of Directors, prior and in preference to holders of
Common Stock. In the event of liquidation of the Company, the holders of Series
G Redeemable Convertible Preferred Stock are entitled to a liquidation
preference of $7.30 per share. At the option of the holder,
F-22
<PAGE> 85
ARENA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000, FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND
2000,
AND FOR THE PERIOD FROM APRIL 14, 1997 (INCEPTION) THROUGH MARCH 31, 2000 IS
UNAUDITED)
10. SUBSEQUENT EVENTS (CONTINUED)
shares of Series G Redeemable Convertible Preferred Stock are convertible into
common shares, subject to adjustment for dilution. In connection with this round
of financing, the Company expects to record a non-cash preferred stock charge in
the amount of approximately $8,200,000 in the second quarter of 2000.
2000 EQUITY COMPENSATION PLAN
In April 2000, the Board adopted the 2000 Equity Compensation Plan. The
aggregate number of shares of common stock that may be issued pursuant to the
2000 Equity Compensation Plan is 2,000,000 shares. The Company has not granted
any options under the 2000 Equity Compensation Plan.
F-23
<PAGE> 86
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
5,000,000 SHARES
[ARENA LOGO]
COMMON STOCK
--------------------
PROSPECTUS
--------------------
ING BARINGS
PRUDENTIAL VECTOR HEALTHCARE
a unit of Prudential Securities
SG COWEN
------------------------
You should rely on the information contained in this document or to which
we have referred you. We have not authorized anyone to provide you with
information that is different. The information in this document may only be
accurate on the date of this document. This document may be used only where it
is legal to sell these securities.
------------------------
Until , 2000, all dealers that buy, sell or trade our
common stock, whether or not participating in this offering, may be required to
deliver a prospectus. This requirement is in addition to the dealers' obligation
to deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
------------------------
, 2000
--------------------------------------------------------------------------------
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