Arena Pharmaceuticals, Inc.
ARENA PHARMACEUTICALS INC (Form: 10-Q, Received: 11/14/2001 11:09:00)
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


FORM 10-Q



/x/

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001

OR

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                TO                .

COMMISSION FILE NUMBER 000-31161

ARENA PHARMACEUTICALS, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
  23-2908305
(I.R.S. EMPLOYER
IDENTIFICATION NO.)

6166 Nancy Ridge Drive, San Diego, CA
(ADDRESS OF PRINCIPAL
EXECUTIVE OFFICES)

 

92121
(ZIP CODE)

(858) 453-7200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/  No / /

Indicate the number of shares outstanding of each of issuer's classes of
common stock, as of the latest practicable date.

COMMON STOCK, $0.0001
PAR VALUE

                     
27,571,671 SHARES

Class   Outstanding at October 31, 2001



ARENA PHARMACEUTICALS, INC.


INDEX

 
   
  PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1.   Financial Statements (Unaudited)   3
    Condensed Consolidated Balance Sheets—As of September 30, 2001
and December 31, 2000
  3
    Condensed Consolidated Statements of Operations—Three and Nine Month Periods Ended September 30, 2001 and 2000   4
    Condensed Consolidated Statements of Cash Flows—Nine Month Periods Ended September 30, 2001 and 2000   5
    Notes to Condensed Consolidated Financial Statements   6

Item 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

9

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

16

PART II. OTHER INFORMATION
Item 2.   Changes in Securities and Use of Proceeds   17
Item 6.   Exhibits and Reports on Form 8-K   17
Signatures   18

2


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Arena Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

 
  September 30,
2001

  December 31,
2000

 
 
  (unaudited)

  (Note)

 
ASSETS              
Current assets:              
  Cash and cash equivalents   $ 239,546,307   $ 144,413,176  
  Accounts receivable     3,087,083     2,116,146  
  Prepaid expenses     2,812,716     1,685,122  
   
 
 
    Total current assets     245,446,106     148,214,444  
Property and equipment, net     14,436,105     4,265,260  
Acquired technology and other intangibles, net     14,481,453      
Investments and other assets     5,215,420     232,225  
   
 
 
Total assets   $ 279,579,084   $ 152,711,929  
   
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY              
Current liabilities:              
  Accounts payable and accrued expenses   $ 1,201,257   $ 615,201  
  Accrued compensation     556,348     300,339  
  Current portion of deferred revenues     4,165,014     220,000  
  Current portion of obligations under capital leases     487,064     480,538  
   
 
 
    Total current liabilities     6,409,683     1,616,078  
Deferred revenues, less current portion     449,829     485,000  
Capital lease obligations, less current portion     532,087     960,517  
Deferred rent payable     866,209     866,009  
Stockholders' equity:              
  Common stock     2,757     2,268  
  Additional paid-in capital     300,578,412     177,373,030  
  Deferred compensation     (4,488,650 )   (7,899,970 )
  Accumulated deficit     (24,771,243 )   (20,691,003 )
   
 
 
Total stockholders' equity     271,321,276     148,784,325  
   
 
 
Total liabilities and stockholders' equity   $ 279,579,084   $ 152,711,929  
   
 
 

Note: The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the Unites States for complete financial statements.

See accompanying notes to condensed consolidated financial statements.

3


Arena Pharmaceuticals, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

 
  Three months ended
September 30,

  Nine months ended
September 30,

 
 
  2001
  2000
  2001
  2000
 
Revenues                          
  Total revenues   $ 3,472,338   $ 2,314,126   $ 12,194,928   $ 3,603,397  
Expenses                          
Research and development     6,230,959     3,465,360     15,375,823     8,546,347  
General and administrative     1,462,779     800,383     3,820,335     1,719,883  
Amortization of deferred compensation     1,071,653     1,123,358     3,413,050     2,952,402  
Amortization of acquired technology and other intangibles     384,249         896,581      
   
 
 
 
 
  Total operating expenses     9,149,640     5,389,101     23,505,789     13,218,632  
Interest income     2,592,735     1,701,698     6,040,800     2,325,098  
Other income (expense), net     1,065,013     (45,317 )   1,189,821     (136,739 )
   
 
 
 
 
Net loss     (2,019,554 )   (1,418,594 )   (4,080,240 )   (7,426,876 )
Non-cash preferred stock charge                 (22,391,068 )
   
 
 
 
 
Net loss applicable to common stockholders   $ (2,019,554 ) $ (1,418,594 ) $ (4,080,240 ) $ (29,817,944 )
   
 
 
 
 
Net loss per share, basic and diluted   $ (0.07 ) $ (0.09 ) $ (0.17 ) $ (4.91 )
   
 
 
 
 
Shares used in calculating net loss per share, basic and diluted     27,236,326     15,706,593     24,194,049     6,069,278  
   
 
 
 
 

See accompanying notes to condensed consolidated financial statements.

4


Arena Pharmaceuticals, Inc.

Condensed Consolidated Cash Flow Statements

(Unaudited)

 
  Nine months ended September 30,
 
 
  2001
  2000
 
Operating Activities              
Net loss   $ (4,080,240 ) $ (7,426,876 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:              
  Depreciation and amortization     1,085,031     562,230  
  Minority interest     183,000      
  Amortization of acquired technology and other intangibles     896,581      
  Amortization of deferred compensation     3,413,050     2,952,402  
  Interest accrued on note payable to related party         40,662  
  Deferred rent     200     36,219  
  Deferred revenues     169,405     918,854  
  Changes in operating assets and liabilities:              
    Accounts receivable     (970,937 )   (950,000 )
    Prepaid expenses     (1,127,594 )   (412,985 )
    Accounts payable and accrued expenses     894,065     443,039  
   
 
 
Net cash provided by (used in) operating activities     462,561     (3,836,455 )
Investing Activities              
  Acquisition of Bunsen Rush     (15,000,000 )    
  Purchases of land, property and equipment     (11,255,876 )   (1,515,527 )
  Investments and other assets     (1,855,791 )   (876,071 )
   
 
 
Net cash used in investing activities     (28,111,667 )   (2,391,598 )
Financing Activities              
  Advances under capital lease obligations         377,015  
  Principal payments under capital lease obligations     (421,904 )   (406,729 )
  Proceeds from warrants exercised         1,123,865  
  Proceeds from issuance of common stock     123,204,141     114,315,528  
  Proceeds from issuance of redeemable preferred stock         30,065,064  
   
 
 
Net cash provided by financing activities     122,782,237     145,474,743  
   
 
 
Net increase in cash and cash equivalents     95,133,131     139,246,690  
Cash and cash equivalents at beginning of period     144,413,176     5,401,508  
   
 
 
Cash and cash equivalents at end of period   $ 239,546,307   $ 144,648,198  
   
 
 
Supplemental Disclosures              
  Schedule of noncash activities:              
    Deferred revenue assumed in Bunsen Rush acquisition   $ 430,034   $  
   
 
 
    Equity investment in TaiGen for services to be performed   $ 3,310,404   $  
   
 
 

See accompanying notes to condensed consolidated financial statements.

5


NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

    The accompanying unaudited financial statements of Arena Pharmaceuticals, Inc. have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of results for a full year.

    The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in conjunction with the audited financial statements and footnotes thereto included in the Annual Report on Form 10-K, for the year ended December 31, 2000, as filed with the Securities and Exchange Commission ("SEC").

    The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect amounts reported in the condensed financial statements and related footnotes. Changes in the estimates may affect amounts reported in future periods.

    Certain reclassifications of prior year balances have been made to conform to the current format.

2. Net Loss Per Share

    In accordance with SFAS No. 128, Earnings Per Share, and SEC Staff Accounting Bulletin (or "SAB") No. 98, basic and diluted net loss per share are computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period.

    Under the provisions of SAB No. 98, common shares issued for nominal consideration, if any, would be included in the per share calculations as if they were outstanding for all periods presented. No common shares have been issued for nominal consideration.

3. Comprehensive Loss

    Comprehensive loss for all periods presented is the same as net loss.

4. Deferred Stock Compensation

    For the nine months ended September 30, 2001 and the year ended December 31, 2000, in connection with the grant of stock options to employees, the Company recorded deferred stock compensation totaling approximately $226,000 and $11.1 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, or quoted market value after July 28, 2000, 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. For the nine months ended September 30, 2001 and 2000, the Company recorded amortization of deferred compensation expense of approximately $3.4 million and $3.0 million, respectively. At September 30, 2001, total charges to be recognized in future periods from amortization of deferred stock

6


compensation are anticipated to be approximately $818,000, $2.5 million, $1.0 million, and $112,000 for the remaining three months of 2001, and for the years ending December 31, 2002, 2003 and 2004, respectively.

5. Non-cash Preferred Stock Charge

    In January 2000, March 2000 and April 2000 the Company sold Shares of Series E Convertible Redeemable Preferred Stock, Series F Convertible Redeemable Preferred Stock and Series G 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, March 2000 and April 2000 and determined it to be $4.68, $13.50 and $13.50, respectively. The Company recorded a non-cash preferred stock charge in the amount of approximately $22.4 million in the nine months ended September 30, 2000. The Company recorded the charge at the date of issuance by offsetting charges and credits to preferred stock, without any effect on stockholders' equity. The non-cash preferred stock charge increases the loss applicable to common stockholders in the calculation of basic and diluted net loss per share for the nine months ended September 30, 2000.

6. Initial Public Offering of Common Stock

    On July 28, 2000 the Company completed an initial public offering in which it sold 6,000,000 shares of common stock at $18.00 per share for net proceeds of approximately $98.8 million, net of underwriting discounts, commissions and offering expenses. Upon the closing of the offering, all of the Company's redeemable convertible preferred stock converted into 12,698,578 shares of common stock.

    On August 10, 2000 the underwriters exercised an over-allotment option to purchase an additional 900,000 shares resulting in net proceeds to the Company of approximately $15.1 million.

7. Follow-on Offering of Common Stock

    On June 21, 2001 the Company completed a follow-on offering in which it sold 4,000,000 shares of common stock at $27.50 per share for net proceeds of approximately $103.5 million, net of underwriting discounts, commissions and offering expenses.

    On June 27, 2001 the underwriters exercised an over-allotment option to purchase an additional 750,000 shares resulting in net proceeds to the Company of approximately $19.5 million. The net proceeds were received by the Company on July 2, 2001.

8. Acquisition

    On February 15, 2001, the Company completed the acquisition of Bunsen Rush Laboratories, Inc. ("Bunsen Rush") for cash of $15.0 million. The net assets, revenues and operations of Bunsen Rush were not material to the Company. Substantially all of the purchase price has been assigned to acquired technology and other intangibles, which are being amortized over 10 years. Had the acquisition been completed on January 1, 2000 or 2001, the Company's pro forma revenues for the periods reported on this Form 10-Q would not have been materially different than as reported herein, and net loss and net loss per share would have been impacted by the amortization of intangible assets described previously and the reduction of interest income as a result of the use of cash to effect the acquisition.

7


9. New Accounting Pronouncements

    In July 2001, the Financial Accounting Standards Board issued FASB Statements Nos. 141 and 142, Business Combinations and Goodwill and Other Intangible Assets ("FAS 141" and "FAS 142," respectively). FAS 141 replaces Accounting Principles Board Opinion No. 16 and eliminates pooling-of-interests accounting prospectively. It also provides guidance on purchase accounting related to the recognition of intangible assets and accounting for negative goodwill. FAS 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Under FAS 142, goodwill will be tested annually and whenever events or circumstances occur indicating that goodwill might be impaired. FAS 141 and FAS 142 are effective for all business combinations completed after June 30, 2001. Upon adoption of FAS 142, amortization of goodwill recorded for business combinations consummated prior to July 1, 2001 will cease, and intangible assets acquired prior to July 1, 2001 that do not meet the criteria for recognition under FAS 141 will be reclassified to goodwill. Companies are required to adopt FAS 142 for fiscal years beginning after December 15, 2001, but early adoption is permitted under certain circumstances. The adoption of these standards is not expected to have a material impact on the Company's results of operations and financial position.

8


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

    This discussion and analysis should be read in conjunction with our financial statements and accompanying notes included in this report and the financial statements and notes thereto for the year ended December 31, 2000 included in the Company's last Annual Report on Form 10-K, which was filed with the SEC. Operating results are not necessarily indicative of results that may occur in future periods.

    Certain statements contained in this report on Form 10-Q and other public statements that are not historical facts, including those statements that refer to our plans, goals, objectives, expectations, strategies, intentions and beliefs, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by terminology such as "will," "may," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue," or similar words. You should not place undue reliance on these forward-looking statements. These statements involve risks and uncertainties that may cause actual results or events to differ materially from those expressed or implied in our forward-looking statements. Factors that might cause such differences include, but are not limited to, the following: the ability to complete Project Genesis, if at all, within a reasonable time period; future quarterly or annual financial results; the timing, success and cost of preclinical research, out-licensing endeavors and clinical studies; and receipt of additional milestone payments, if any, from collaborators. Additional risk factors that could cause such differences are discussed elsewhere in this document and in "Risk Factors" in our registration statement filed June 21, 2001 on Form S-1, as amended, and in our last Annual Report on Form 10-K. We assume no obligation to update these forward-looking statements as circumstances change in the future.

    We were incorporated on April 14, 1997 in the state of Delaware and commenced operations in July 1997. We are an emerging biopharmaceutical company focused principally on discovering drugs that act on an important class of drug targets called G protein-coupled receptors, or GPCRs. We have developed a technology called Constitutively Activated Receptor Technology, or CART, that can be applied to GPCRs and other classes of receptors to identify drug leads. We believe that CART is a more efficient drug discovery technique than traditional drug discovery techniques. Using CART, we have discovered new drug leads in the areas of obesity and schizophrenia. In both of these programs, drug leads were discovered within 18 months, which is substantially less time than might be required to discover a drug lead using traditional drug discovery techniques. We use CART in conjunction with our Melanophore Technology, a function-based screening technology used to identify compounds that interact with cell surface receptors, including known and orphan GPCRs and tyrosine kinase receptors, or TKRs. The functional nature of Melanophore Technology eliminates the need for radioactive or fluorescent screening techniques and provides a simple and sensitive means to detect cellular signals generated by activated receptors.

    In January 2001, we purchased a facility we were leasing along with an adjoining building that was leased to a tenant until the end of August 2001, at 6138-6150 Nancy Ridge Drive in San Diego, California. We paid cash of $5.4 million and will amortize the building cost over the building's useful life, estimated to be 20 years.

    In January 2001, we signed an amendment expanding our original May 2000 agreement with Taisho Pharmaceutical Co., Ltd. ("Taisho") whereby Taisho was granted world-wide rights to our 18-F Program, an obesity orphan receptor target and small molecule modulators. In accordance with the amendment, Taisho made a one-time payment in the first quarter of 2001 to us for the 18-F Program based upon work already completed by the Company. In addition, we may receive additional milestone and research funding payments and royalties on drug sales, if any.

9


    In February 2001, for $15.0 million in cash we acquired, through our wholly-owned subsidiary BRL Screening, Inc., all of the outstanding capital stock of Bunsen Rush, a privately-held research-based company that offers receptor screening to the pharmaceutical and biotechnology industries using its proprietary and patented Melanophore Technology.

    In April 2001, we signed a binding letter of intent with Axiom Biotechnologies, Inc. for a collaborative research program involving Axiom's proprietary RHACE™ Technology and Human Cell Bank, as well as the purchase by us of $2.0 million of Axiom's preferred stock. Axiom's unique assets include the Axiom Human Cell Bank, a large pharmacologically and genetically characterized collection of human cells. Under the scientific collaboration, we will jointly develop and share information related to the localization of known GPCRs within human cell lines owned by Axiom. Axiom will also profile several thousand of our small molecule compounds using its technologies and we will have exclusive rights to these data. We will exclusively own the information related to the localization of orphan GPCRs within these cell lines. The Axiom stock purchase was completed August 2001.

    We have entered into purchase agreements to acquire two properties, for cash, located adjacent to our existing facilities. We expect to complete the acquisition of both of these properties in November of this year. The acquisition price of the first property, located at 6154 Nancy Ridge Drive, is $5.3 million and consists of approximately 51,000 square feet of space suitable for office and laboratory expansion. The acquisition price of the second property, located at 6114 Nancy Ridge Drive, is $1.3 million and consists of approximately 13,000 square feet of space suitable for office and laboratory expansion. The 6154 Nancy Ridge Drive property will continue to be leased to the current tenant until approximately the fourth quarter of 2002, at which time we will begin to occupy the facility. The 6114 Nancy Ridge Drive property will continue to be leased to the current tenant for approximately three months following the purchase before we will begin to occupy the facility.

    In June 2001, we entered into an agreement with ICI to apply our CART technology to olfactory and gustatory GPCRs. The initial stage of research under our agreement will last approximately six months. We intend to use our CART technology to develop olfactory and/or gustatory GPCR assays for ICI and then screen using compounds supplied by ICI businesses.

    We signed an agreement effective July 2001 with TaiGen Biotechnology Co., Ltd. (TaiGen), a start-up biopharmaceutical organization focused on the discovery and development of innovative therapeutics, which became effective in July 2001. In exchange for equity in TaiGen's Series A preferred financing, TaiGen has the right to select and obtain several GPCRs from us. We will activate, develop a screening assay and transfer selected activated receptors to TaiGen. We may also receive royalty payments based on annual TaiGen licensing revenue. We will not initially receive any cash payments from TaiGen. In the future, however, we expect to recognize revenue upon transfer of selected receptor screens to TaiGen. We account for our ownership interest in TaiGen using the equity method of accounting.

    In October 2001, Eli Lilly and Co. (Eli Lilly) exercised its option under our existing agreement to expand the collaboration to include the selection of GPCRs in the area of oncology. We may receive milestone payments for each receptor in connection with the successful application of CART to each receptor and additional 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.

    Since our inception, we have devoted substantially all of our resources to the research and development of our technologies. We have incurred significant operating losses since our inception and, as of September 30, 2001, we had an accumulated deficit of $24.8 million. Our prospects should be considered in light of the risks, expenses and difficulties encountered by companies in the early stages

10


of development, particularly those companies in the rapidly changing pharmaceutical and biotechnology industries.

    We plan to pursue several specific objectives during the remainder of 2001, namely:

    seek additional collaborations with pharmaceutical and biotechnology companies

    expand the number of receptors available for activation by CART through internal research efforts and, potentially, external licensing agreements

    increase our internally funded drug discovery efforts, including expansion of our chemistry and screening efforts

    pursue these and other objectives as part of Project Genesis, described below.

Project Genesis

    We have initiated Project Genesis, an internal drug discovery program using a combination of CART, Melanophore Technology and other technologies that we believe will allow us to discover a substantial number of unique small molecule drug leads and drug candidates. With the recent completion of the sequencing of the human genome, we view Project Genesis as a logical extension of our scientific and business capabilities. To the extent that the human genome project has identified all of the genes within humans, we believe that Project Genesis will allow us to discover new drug leads at all of the estimated 800 therapeutically relevant GPCRs.

    Project Genesis is comprised of the following specific components:

    Acquiring all of the estimated 800 therapeutically relevant GPCRs. We expect to acquire these GPCRs through our own internal research efforts as well as from outside sources. To date, we have secured more than 700 of the estimated 800 therapeutically relevant GPCRs through our own research efforts. We expect to essentially complete this portion of Project Genesis by the end of 2001.

    Determining the location and relative expression levels of GPCRs. An outside vendor has created customized GPCR probe microarrays for us using our proprietary sequence information. We have used these probe microarrays to determine the location of more than 700 GPCRs and their relative expression levels in normal human tissue. We will also use these probe microarrays to examine GPCR expression levels in a variety of human diseased tissues and biopsy samples. This will allow us to prioritize GPCRs of therapeutic interest for drug discovery screening.

    Preparing the GPCRs for screening. We are building a library of full-length GPCRs that we will CART-activate and clone in preparation for expression and high throughput screening.

    Screening the CART-activated GPCRs. We will use Melanophore Technology and other techniques to screen all of the GPCRs that demonstrate CART-activation using our library of chemical compounds to identify potential drug leads.

    Identifying potential drug candidates. We will use medicinal chemistry to develop drug candidates for animal testing and potential clinical development.

    We may enter into collaborative arrangements at any stage of Project Genesis with respect to any CART-activated receptor, drug leads or drug candidates that we discover.

    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 the expiration or termination of research agreements with our collaborators, the size of future collaborations, the success

11


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.

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000

Revenues

    Revenues for the quarter ended September 30, 2001 increased $1.2 million, or 50%, to $3.5 million compared to $2.3 million for the same quarter last year. The increase was primarily attributable to collaborations with Eli Lilly and Taisho, both significant customers, which included research funding, milestone payments, and technology access and development fees. Research funding is recognized as revenue when the services are rendered. Revenues from technology access and development fees are recognized over the term of the collaboration. Revenues from milestone payments are recognized when the milestone is achieved as evidenced by written acknowledgement from our collaborator, provided that the milestone event represents the culmination of an earnings process, its achievement was not reasonably assured at the inception of the agreement and the parties performance obligations after the milestone achievement will continue at a level comparable to the level before the milestone achievement. Our collaborators often pay us before we recognize the revenue, and these payments are deferred until earned. As of September 30, 2001, we had current and long-term deferred revenues totaling approximately $4.6 million.

Research and Development

    Research and development expenses increased $2.7 million, or 80%, to $6.2 million for the quarter ended September 30, 2001 from $3.5 million for the same quarter last year. The increase was primarily due to an increase in wages and benefits due to an increase in scientific personnel, along with an increase in lab supplies and equipment costs to support the personnel in order to expand the application of our technology. As of September 30, 2001, 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 including Project Genesis, and we expect these expenses to continue to increase in the near and long-term.

General and Administrative

    General and administrative expenses increased $662,000 to $1.5 million for the quarter ended September 30, 2001 from $800,000 for the quarter ended September 30, 2000. The increase was a result of increased personnel added to support a growing company as well as supporting the needs of a public company. 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. We expect that our general and administrative expenses will continue to increase to support our growth and requirements as a public company.

Non-Cash Stock-Based Compensation Charges

    Deferred compensation for options granted to employees has been determined as the difference between the exercise price and the fair value of our common stock, as estimated by us, or quoted market value after July 28, 2000, for financial reporting purposes, on the date options were granted. Deferred compensation for options granted to consultants was determined in accordance with Statement of Financial Accounting Standards No. 123 as the fair value of the equity instruments issued and is periodically remeasured as the underlying options vest in accordance with EITF 96-18.

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    For the quarter ended September 30, 2001, we recorded amortization expense for deferred compensation of approximately $1.1 million, compared to $1.1 million for the quarter ended September 30, 2000.

Amortization of Acquired Technology and Other Intangibles

    Amortization expense of acquired technology and other intangibles was $384,000 for the quarter ended September 30, 2001 and represented amortization related to our acquisition of Bunsen Rush versus no expense for the quarter ended September 30, 2000.

Interest Income

    Interest income increased $891,000 to approximately $2.6 million for the quarter ended September 30, 2001 from $1.7 million for the same quarter last year, due to higher average cash balances primarily related to our follow-on offering in June 2001 through which we raised net cash proceeds of $123.0 million.

Other Income, net

    Other income, net increased $1.1 million to $1.1 million for the quarter ended September 30, 2001 from $(45,000) for the quarter ended September 30, 2000. The increase was due primarily to a gain of $1.2 million from the sale of an investment offset by $183,000 in expenses attributable to our share of the net loss of TaiGen, which we have accounted for by the equity method of accounting.

NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000

Revenues

    Revenues for the nine months ended September 30, 2001 increased $8.6 million, or 238%, to $12.2 million compared to $3.6 million for the same period last year. The revenues for the nine months ended September 30, 2001 were primarily attributable to our collaborations with Eli Lilly and Taisho, both significant customers, which included research funding, milestone payments, and technology access and development fees. Research funding is recognized as revenue when the services are rendered. Revenues from milestone payments are recognized when the milestone is achieved as evidenced by written acknowledgement from our collaborator, provided that the milestone event represents the culmination of an earnings process, its achievement was not reasonably assured at the inception of the agreement and the parties performance obligations after the milestone achievement will continue at a level comparable to the level before the milestone achievement. Revenues from technology access and development fees are recognized over the term of the collaboration. Revenues from milestone payments are recognized when the milestone is achieved. Our collaborators often pay us before we recognize the revenue, and these payments are deferred until earned. As of September 30, 2001, we had current and long-term deferred revenues totaling approximately $4.6 million.

Research and Development

    Research and development expenses increased $6.9 million, or 80%, to $15.4 million for the nine months ended September 30, 2001 from $8.5 million for the same period last year. The increase was due primarily to an increase in wages and benefits due to an increase in scientific personnel, along with an increase in lab supplies and equipment costs to support the personnel in order to expand the application of our technology. As of September 30, 2001, 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 including Project Genesis, and we expect these expenses to continue to increase in the near and long-term.

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General and Administrative

    General and administrative expenses increased $2.1 million to approximately $3.8 million for the nine months ended September 30, 2001 from $1.7 million for the nine months ended September 30, 2000. The increase was a result of increased personnel added to support a growing company as well as supporting the needs of a public company. 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. We expect that our general and administrative expenses will continue to increase to support our growth and requirements as a public company.

Non-Cash Stock-Based Compensation Charges

    Deferred compensation for options granted to employees has been determined as the difference between the exercise price and the fair value of our common stock, as estimated by us, or quoted market value after July 28, 2000, for financial reporting purposes, on the date options were granted. Deferred compensation for options granted to consultants was determined in accordance with Statement of Financial Accounting Standards No. 123 as the fair value of the equity instruments issued and is periodically remeasured as the underlying options vest in accordance with EITF 96-18.

    For the nine months ended September 30, 2001, we recorded amortization expense for deferred compensation of approximately $3.4 million, compared to $3.0 million for the nine months ended September 30, 2000.

Amortization of Acquired Technology and Other Intangibles

    Amortization expense of acquired technology and other intangibles was $897,000 for the nine months ended September 30, 2001 and represented amortization related to our acquisition of Bunsen Rush versus no expense for the nine months ended September 30, 2000.

Interest Income

    Interest income increased $3.7 million to $6.0 million for the nine months ended September 30, 2001 from $2.3 million for the same period last year, due to higher average cash balances primarily related to our initial public offering in July 2000 and our follow-on offering in June 2001 through which in total we raised net cash proceeds of $236.9 million.

Other Income, net

    Other income, net increased $1.3 million to $1.2 million for the nine months ended September 30, 2001 from $(137,000) for the nine months ended September 30, 2000. The increase was due primarily to a gain of $1.2 million from the sale of an investment and rental income of $211,000, partially offset by interest expense of $80,000, and $183,000 in expenses attributable to our share of the net loss of TaiGen, which we have accounted for by the equity method of accounting.

LIQUIDITY AND CAPITAL RESOURCES

    At September 30, 2001, we had an accumulated deficit of $24.8 million. Our accumulated deficit is the result of expenses incurred in connection with our research and development activities and general and administrative expenses. To date, we have funded our operations primarily through public and private equity financings and to a lesser extent, through funding from our collaborators.

    As of September 30, 2001, we had $239.5 million in cash and cash equivalents compared to $144.4 million in cash and cash equivalents as of December 31, 2000. The increase of $95.1 million was primarily attributable to net proceeds of $123.0 million from our follow-on offering that was completed in June 2001. This increase was partially offset by our acquisition of Bunsen Rush for $15.0 million in

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cash in February 2001, the purchase of our facility for $5.4 million in January 2001, equipment purchases totaling $5.9 million and our payment of $2.0 million in connection with our equity investment in Axiom Biotechnologies.

    Net cash provided by operating activities was approximately $463,000 during the nine months ended September 30, 2001 compared to net cash used in operating activities of approximately $3.8 million during the same period last year. The primary source of cash in the first nine months of 2001 was related to the net loss for the period, adjusted for non-cash expenses, including amortization of deferred compensation, amortization of acquired technology and other intangibles, and changes in operating assets and liabilities. The primary use of cash in the same period of 2000 was to fund our net losses for the period, adjusted for non-cash expenses, including deferred compensation, and changes in operating assets and liabilities.

    Net cash used in investing activities was approximately $28.1 million during the nine months ended September 30, 2001 compared with approximately $2.4 million during the same period last year. Net cash used in investing activities in first nine months of 2001 was primarily the result of the acquisition of Bunsen Rush, our facility purchase, the acquisition of laboratory and computer equipment, leasehold improvements and furniture and fixtures and our equity investment in Axiom Biotechnologies. Net cash used in investing activities in the first nine months of 2000 was primarily the result of the acquisition of laboratory and computer equipment, leasehold improvements and furniture and fixtures as well as prepayments made for directors and officers insurance premiums.

    Net cash provided by financing activities was approximately $122.8 million during the nine months ended September 30, 2001 compared with approximately $145.5 million during the same period last year. Net cash provided by financing activities for the first nine months of 2001 was primarily attributable to proceeds received from the issuance of our common stock from our follow-on offering that was completed in June 2001, partially offset by principal payments on our capital leases. The net cash provided by financing activities for the same period last year was primarily attributable to proceeds received from our initial public offering that was completed in July 2001 and the issuance of our preferred and common stock.

    We lease a corporate research and development facility under a lease which expires on April 13, 2013. The lease provides us with options to extend for two additional five-year periods. We have also entered into capital lease agreements for various lab and office equipment. The terms of these capital lease agreements range from 48 to 60 months. At December 31, 2000 current total minimum annual payments under these capital leases were approximately $614,000 in 2001, $614,000 in 2002, $480,000 in 2003 and $45,000 in 2004.

    In January 2001, we purchased a facility we were previously leasing as well as the adjoining building at 6138-6150 Nancy Ridge Drive in San Diego for cash of $5.4 million.

    We have entered into purchase agreements to acquire two additional properties, for cash, located adjacent to our existing facilities. We expect to complete the acquisition of both of these properties in November of this year. The acquisition price of the first property, located at 6154 Nancy Ridge Drive, is $5.3 million and the acquisition price of the second property, located at 6114 Nancy Ridge Drive, is $1.3 million. In February 2001, the Company, through its wholly-owned subsidiary BRL Screening, Inc., acquired all of the outstanding capital stock of Bunsen Rush, a privately-held research-based company, for cash of $15.0 million.

    In April 2001, we entered into a binding letter of intent for a research collaboration with Axiom Biotechnologies, Inc. Under the terms of the agreement, we will identify the location and expression of GPCRs contained in Axiom's human cell lines. In addition, we acquired approximately 570,000 shares of Axiom's preferred stock for $2.0 million in August 2001.

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    In June 2001, we completed a follow-on offering in which we sold 4,000,000 shares of common stock at $27.50 per share for net proceeds of approximately $103.5 million, net of underwriting discounts, commissions and offering expenses. In the same month the underwriters exercised an over-allotment option to purchase an additional 750,000 shares resulting in net proceeds to the Company of approximately $19.5 million. The net proceeds from the over-allotment were received by the Company on July 2, 2001.

    Our ability to 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 15 to 30 employees, primarily scientists, by the end of 2001. While we believe that our current capital resources and anticipated cash flows from collaborations 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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    Our exposure to market risk for changes in interest rates relates primarily to our cash equivalents and short-term investments. We do not use derivative financial instruments in our investment portfolio. Our cash and investment policy emphasizes liquidity and preservation of principal over other portfolio considerations. We select investments that maximize interest income to the extent possible within these guidelines. If market interest rates were to decrease by 1% from September 30, 2001, we would expect future interest income from our portfolio to decline by less than $2.4 million over the next 12 months. 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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PART II. OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

    On July 28, 2000 we completed our initial public offering of 6,000,000 shares of our common stock and on August 10, 2000 the underwriters exercised an over-allotment option for an additional 900,000 shares of our common stock. The shares of common stock sold in the offering were registered under the Securities Act of 1933 in a Registration Statement on Form S-1, as amended (No. 333-35944). The Securities and Exchange Commission declared the Registration Statement effective on July 27, 2000.

    Our total net proceeds from the initial public offering were approximately $113.9 million. Of the net proceeds, through September 30, 2001, we have used approximately $5.4 million to acquire facilities at 6138-6150 Nancy Ridge Drive in San Diego, California, $15.0 million to acquire all of the outstanding stock of Bunsen Rush, $2.0 million to acquire stock in Axiom Biotechnologies, Inc. and $5.9 million for lab, equipment and furniture purchases and leasehold improvements. The balance of the net proceeds remains in working capital, held as temporary investments in short-term money funds.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

    (a) Exhibits

10.21   Separation Agreement and Release by and between Arena Pharmaceuticals, Inc., and Richard P. Burgoon, Jr. dated September 11, 2001
10.22   Letter Agreement dated September 13, 2001, by and between Arena Pharmaceuticals, Inc. and Steven W. Spector

    (b) Reports on Form 8-K

        None.

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SIGNATURES

    Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

    ARENA PHARMACEUTICALS, INC.

Dated: November 14, 2001

 

By:

 

/s/ 
JACK LIEF    
Name: Jack Lief
Title: President and Chief Executive Officer

 

 

By:

 

/s/ 
ROBERT HOFFMAN    
Name: Robert Hoffman
Title: Vice President, Finance, Chief Accounting Officer

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EXHIBIT INDEX

Exhibit No.

  Description

10.21

 

Separation Agreement and Release by and between Arena Pharmaceuticals, Inc., and Richard P. Burgoon, Jr. dated September 11, 2001

10.22

 

Letter Agreement dated September 13, 2001, by and between Arena Pharmaceuticals, Inc. and Steven W. Spector



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INDEX
Arena Pharmaceuticals, Inc. Condensed Consolidated Balance Sheets
Arena Pharmaceuticals, Inc. Condensed Consolidated Statements of Operations (Unaudited)
Arena Pharmaceuticals, Inc. Condensed Consolidated Cash Flow Statements (Unaudited)
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SIGNATURES
EXHIBIT INDEX

EXHIBIT 10.21

CONFIDENTIAL

SEPARATION AGREEMENT AND RELEASE

This Separation Agreement and Release (hereafter "Agreement") is entered into by and between Arena Pharmaceuticals, Inc. (hereafter, as defined below, "Company") and Richard P. Burgoon, Jr. (hereafter "Executive"), an individual who resides in California. As used in this Agreement, "Company" shall include and encompass all of the past, present, or future parent, affiliated, related and/or subsidiary companies of Arena Pharmaceuticals, Inc. (including without limitation ChemNavigator.com, Inc., Aressa Pharmaceuticals, Inc. and BRL Screening, Inc.), and their past, present, and future directors, shareholders, officers, employees, agents, attorneys and representatives. In consideration of the mutual promises and undertakings of the parties, it is agreed as follows:

1. FINAL DAY OF EMPLOYMENT. Executive's final day of employment with the Company is September 30, 2001 (the "Separation Date"). Executive hereby resigns as an officer and director, as applicable, of the Company, including, without limitation, ChemNavigator.com, Inc., as of September 30, 2001. Following this date, Executive shall cease to be employed by the Company in any capacity, and shall cease to be an officer and/or director of the Company. In addition, Executive's Services Agreement with Chemnavigator.com, Inc. (the "Services Agreement"), a true and correct copy of which is attached hereto as Exhibit "A", shall terminate effective the Separation Date.

2. PAYMENT. In consideration for the release provided in Paragraph 4 and the performance of the consulting services identified in paragraph 8 below, following the Company's receipt of a fully executed copy of this Agreement and the expiration of the revocation period identified in paragraph 13 below, the Company will:

Pay Executive through November 15, 2001 severance pay in an amount equivalent to Executive's regular weekly salary as of the Separation Date. Such payment shall be made on those days Executive would have received payment of wages were he still employed by the Company, beginning on the first payday after this Agreement becomes effective, or the Separation Date, whichever is later. Executive will be responsible for all taxes associated with severance payments received from the Company.

Arrange to provide to the Executive, through November 15, 2001, without cost, health and dental insurance benefits substantially similar to those which the Executive is receiving immediately prior to the Separation Date; or, as an alternative, the Company may elect to pay the Executive cash in lieu of such coverage in an amount equal to the Executive's cost (taking into account the tax effect to the Executive) of continuing such coverage, where such coverage may not be continued (or where such continuation would adversely affect the tax status of the plan pursuant to which the coverage is provided). The COBRA health care continuation coverage period under Section 4980B of the Internal Revenue Code of 1986, as amended (the "Code") will begin to run at the earlier of (i) November

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15, 2001, or (ii) when a cash payment is made in lieu of such coverage. Benefits otherwise receivable by the Executive pursuant to this paragraph 2(b), shall be reduced to the extent comparable benefits are actually received by the Executive without cost between the Separation Date and November 15, 2001 (and any such benefits actually received by the Executive shall be reported to the Company by the Executive); provided that this reduction shall not apply to any benefits with respect to which the Company has made a cash payment in lieu of coverage.

3. STOCK OPTIONS, ETC. Executive agrees and acknowledges that Exhibit B accurately sets forth all of his (i) unexercised options to purchase shares of the Company's Common Stock and the restricted stock which have been granted or issued under the Company's equity compensation plans or otherwise (the "Employee Options"), or (ii) restricted stock issued to Executive pursuant to the Services Agreement (the "ChemNavigator Shares") as of September 30, 2001, and which expire or are subject to forfeiture or repurchase upon the termination of Executive's employment in accordance with the terms of such Employee Options or Services Agreement, as applicable. In consideration of Executive's agreement to the terms of this Agreement, (x) the Employee Options shall continue to vest in accordance with their terms through September 30, 2001, and shall remain exercisable for a period of 90 days thereafter, at which time any unexercised Employee Options shall terminate and be of no further force or effect, (y) 46,250 shares of Company stock that Executive received upon the exercise of unvested Employee Options shall vest as of September 11, 2001 and the Company hereby waives its right to repurchase such shares, and (z) the ChemNavigator Shares that are unvested or subject to repurchase or forfeiture as of September 30, 2001 shall be repurchased by ChemNavigator.com on such date at a purchase price of $.0001 per share pursuant to the terms of the Services Agreement. Executive hereby acknowledges receipt of $8.75 from ChemNavigator.com and directs ChemNavigator.com to cancel the outstanding certificate issued to Executive and issue a new certificate for 87,500 shares of ChemNavigator.com common stock. Executive agrees that all unvested, unexercised Employee Options terminate or are forfeited at September 30, 2001.

Executive acknowledges that his right to participate in the 2001 Arena Employee Stock Purchase Plan (the "Stock Purchase Plan") terminates on the Separation Date. Executive acknowledges and agrees that he has previously elected to participate in the Stock Purchase Plan at the level of 5% of his Compensation (as defined in the Stock Purchase Plan) and that pursuant to the terms of the Stock Purchase Plan, the next Exercise Date on which Executive will purchase shares pursuant to the Stock Purchase Plan will be September 28, 2001. Executive further acknowledges and agrees that the number of shares purchased on that date shall be based on the market price of the stock on that date and that unless Executive elects to withdraw and has done so effectively pursuant to the terms of the Stock Purchase Plan, Executive will purchase such additional shares of stock on that date.

4. RELEASE BY EXECUTIVE. In consideration for the valuable benefits provided in paragraphs 2 and 3 above, Executive voluntarily and knowingly releases and discharges the Company from any and all claims or causes of action, known or unknown, in law or in equity, based upon any fact, circumstance, or event occurring or existing at or prior to Executive's execution of this Agreement. This release specifically includes but is not limited to any claims or actions arising out of or during Executive's employment with the Company and/or the separation of the

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employment. This includes a release of any rights or claims Executive may have under the Age Discrimination in Employment Act, which prohibits age discrimination in employment; Title VII of the Civil Rights Act of 1964, which prohibits discrimination and harassment in employment based on race, color, national origin, religion, ancestry, or sex; the Equal Pay Act, which prohibits paying men and women unequal pay for equal work; the Americans with Disabilities Act, which prohibits discrimination on the basis of physical or mental disability; the Family and Medical Leave Act, which permits leave for specified purposes and job restoration; and, every other federal, state or local law or regulation or common law prohibiting employment discrimination and/or harassment (such as the California Fair Employment & Housing Act and Family Rights Act) or limiting or prohibiting termination of employment or prescribing the method of payment or amount of wages and other compensation for work. This also includes a release by Executive of any claims for wrongful discharge, both in tort and contract (whether oral or written, express or implied), fraud, or other tort. This release covers both claims that Executive knows about and those Executive may not know about. THIS RELEASE INCLUDES, AMONG OTHERS, CLAIMS BASED ON AGE DISCRIMINATION IN VIOLATION OF THE FEDERAL AGE DISCRIMINATION IN EMPLOYMENT ACT AND APPLICABLE STATE LAW. SUCH LAWS PROHIBIT AN EMPLOYER FROM TAKING ADVERSE ACTION AGAINST AN EMPLOYEE, INCLUDING TERMINATING EMPLOYMENT, ON THE BASIS OF THE EMPLOYEE'S AGE OF 40 OR MORE. BY AGREEING TO THE RELEASE AND WAIVER IN THIS PARAGRAPH, EXECUTIVE IS AGREEING TO FOREGO ANY CLAIM AND AGREEING NOT TO SUE ON THE GROUND, AMONG OTHERS, THAT THE TERMINATION OF EXECUTIVE'S EMPLOYMENT BY THE COMPANY VIOLATED THE ADEA. This release does not include any right Executive may have to indemnification pursuant to (i) California Labor Code section 2802, or
(ii) the Indemnification Agreement in the form substantially provided and to be entered into by and between the Company and Executive (the "Indemnification Agreement"), or (iii) the Company's bylaws as now in effect with regard to any actions which may be brought against him by parties other than the Company in connection with his employment by the Company, provided that he cooperates fully with the Company as a witness or otherwise in connection with any such actions.

5. RELEASE BY THE COMPANY. The Company voluntarily and knowingly releases and discharges Executive from any and all claims or causes of action, known or unknown, in law or in equity, based upon any fact, circumstance, or event occurring or existing at or prior to Executive's execution of this Agreement, except claims or causes of action arising from or based on fraud by Executive, or the gross misconduct or criminal acts of Executive. This release specifically includes but is not limited to any claims or actions arising out of or during Executive's employment with the Company and/or the separation of the employment, except those relating to the fraud, gross misconduct or criminal acts of Executive.

6. WAIVER. Executive and the Company each expressly waives all rights afforded by any statute (such as Section 1542 of the Civil Code of California) which limits the effect of a release with respect to unknown claims. Executive and the Company each understands the significance of this release of unknown claims and waiver of statutory protection against a release of unknown claims (such as under Section 1542). Section 1542 of the Civil Code of the State of California states as follows:

"A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor."

3

Notwithstanding the provisions of Section 1542, and for the purpose of implementing a full and complete release, Executive and the Company each expressly acknowledges that this release is intended to include in its effect, without limitation, all claims which he does not know or suspect to exist in his favor at the time of execution hereof, and that this release contemplates the extinguishment of any such claim or claims; PROVIDED, that in the case of the Company, this release shall not extend to claims arising from or based on fraud by Executive, or the gross misconduct or criminal acts of Executive.

7. TRADE SECRETS AND CONFIDENTIAL INFORMATION. In further consideration for the benefits provided in paragraphs 2 and 3 above, Executive acknowledges and agrees that he will not reveal to any person or entity or use at any time in the future any trade secrets, proprietary or confidential information, manufacturing processes, marketing information, or customer information which he may have obtained during his employment with the Company. Such trade secrets and proprietary and confidential information include, but are not limited to, internal company reports, software, quality control standards and processes, environmental control standards and processes, research and development processes, personnel information, and technology information of any kind. Executive understands and agrees that his breach of the agreement in this paragraph may result in legal action by the Company seeking legal or equitable relief against him or any person or entity to whom he discloses or for whom he uses the information covered in this paragraph. Executive further acknowledges and agrees that the Company may suspend and not make any remaining payments under paragraph 2 if and when he violates this paragraph; PROVIDED that the Company gives Executive prior written notice to Executive of the nature of the alleged violation, including the Company's basis for believing Executive has violated the provisions of this paragraph, and of the Company's intent to suspend payments; PROVIDED, FURTHER, that if Executive disputes the alleged violation pursuant to the provisions of paragraph 15 herein, the Company shall continue making such payments; PROVIDED, FURTHER, that in the event Executive is found to have violated the provisions of this paragraph pursuant to the provisions of paragraph 15 herein, Executive shall pay to the Company an amount equal to all such payments made to Executive after the date the violation occurred, along with other damages, if any.

8. CONSULTING SERVICES. In further consideration for the benefits provided in paragraphs 2 and 3 above, Executive agrees to act as a consultant for the Company for a period between the Separation Date and November 15, 2001 (the "Consultancy Term"). The parties acknowledge that the Executive will be an independent contractor during the consultancy term and, consequently, the Executive will not receive any benefits provided to employees (other than those provided for in paragraph 2(b) above). During the Consultancy Term, the Executive will serve as a non-employee consultant to the Company and will perform services, including without limitation, providing advice and information concerning the Company's business, as reasonably requested and required by the Chief Executive Officer of the Company and/or his designee, from time to time upon reasonable prior notice; PROVIDED, that Executive shall not be required to perform such services in excess of ten (10) hours per week. In addition, the Executive will respond to inquiries from the Company about any matters concerning the Company or its affairs that occurred or arose during the period of the Executive's employment by the Company or during the Consultancy Term, and the Executive will cooperate with the Company in investigating, prosecuting and defending any charges, claims, demands, liabilities, causes of action, lawsuits and other proceedings by, against or involving the Company relating to any period during which the Executive was employed by or serving as a consultant to the Company or relating to matters of which the Executive had knowledge or should have knowledge by virtue

4

of his or her employment by or consultancy for the Company. The Company will reimburse the Executive for all reasonable expenses incurred in complying with this paragraph in accordance with the Company's employee business expense approval procedures then in effect.

9. NON-DISPARAGEMENT. Executive and the Company acknowledge and agree that neither will make any negative or disparaging statements about the other, or in the case of Executive, about any of the Company's directors, officers, or employees (or any of the Company's parents, subsidiaries, and affiliates or any of their directors, officers, and employees), provided that it shall not be a violation of this paragraph for Executive, or the Company or its directors, officers or employees, to make truthful statements when required to do so by court order, by the proper inquiry of a State or Federal governmental agency, or by a subpoena to testify issued by a court of competent jurisdiction.

10. NON-ADMISSION. The Company has entered into this Agreement with Executive to effect a mutually acceptable termination of his employment with the Company. Neither the Company nor Executive believes or admits that it or he, respectively, has done anything wrong.

11. ENTIRE AGREEMENT. It is agreed and understood that this Agreement contains and comprises the entire understanding of the parties on the subjects covered herein and that there are no additional or other promises, representations, terms or provisions other than those expressly contained herein or in the Confidentiality and Invention Agreement or the Indemnification Agreement executed by Executive. This Agreement shall not be modified except in writing signed by each of the parties.

12. ENFORCEABILITY. If any term in this Agreement is determined to be unenforceable, that term and the remaining terms of this Agreement shall nevertheless be enforced to the fullest extent permitted by law. The unenforceability of any term shall not affect the enforceability of any remaining terms.

13. ACKNOWLEDGMENT OF TIME TO CONSIDER AND REVOKE AND RIGHT TO COUNSEL. In signing this Agreement, Executive acknowledges that:

He has been advised in writing to consult with an attorney before signing this Agreement.

He is entitled to not less than twenty-one (21) days to consider whether to enter into the Agreement.

He understands that this Agreement shall not become effective or enforceable until seven (7) days after Executive's execution and return to the Company of this Agreement. He also understands that he may revoke this Agreement during this seven (7) day period. To be effective, the revocation must be in writing and DELIVERED to the Company's Chief Executive Officer at the Company's Corporate Headquarters, within this seven (7) day period.

He understands that on the eighth day after Executive's execution of this Agreement, unless revoked earlier, this Agreement will become effective and enforceable without any further affirmative action by either himself or the Company.

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14. INDEMNIFICATION. The Company will enter into an Indemnification Agreement with Executive in the same form as that made generally available to the Company's officers and directors when and as approved by the Company's Board of Directors. The Company currently intends to enter into such Indemnification Agreements during the last quarter of 2001. With respect to Executive, the effective date of any such Indemnification Agreement shall e September 30, 2001.

15. ARBITRATION. Any dispute or controversy arising from or relating to this Agreement shall be decided exclusively by final and binding arbitration in the County of San Diego, State of California, in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association. The arbitrator shall be selected by agreement between Executive and the Company, but if the parties do not agree on an arbitrator within 30 days after the date of the notice requesting arbitration, the arbitrator shall be selected pursuant to the rules of that Association. At the request of either Executive or the Company, arbitration proceedings shall be conducted in the utmost secrecy, and, in such case, all documents, testimony and records shall be received, heard and maintained confidential by Executive and the Company and by their respective attorneys and experts who shall agree, in advance and in writing, to receive all such information confidentially and to maintain the secrecy of such information until such information shall become generally known. Each party shall pay its own expenses for the arbitration, and the fee and expenses of the arbitrator shall be shared equally.

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{SIGNATURE PAGE TO SEPARATION AND RELEASE AGREEMENT} In witness of which, the parties have executed this Separation Agreement and Release on the date set forth below.

ARENA PHARMACEUTICALS, INC.
BRL SCREENING, INC.
ARESSA PHARMACEUTICALS, INC.

By:      /s/ Jack Lief                          Dated:  September 11, 2001
    -----------------------------------
         Jack Lief
         President & CEO

CHEMNAVIGATOR.COM, INC.
CNC HOLDINGS, INC.

By:      /s/ Scott Hutton                       Dated:  September 11, 2001
    -----------------------------------
         Scott Hutton
         President & CEO

PLEASE READ THIS AGREEMENT CAREFULLY. IT CONTAINS A RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS. EXECUTIVE ACKNOWLEDGES THAT HE HAS READ THIS AGREEMENT, UNDERSTANDS IT AND IS VOLUNTARILY ENTERING INTO IT.

Agreed and Accepted:

         /s/ Richard P. Burgoon                 Dated:  September 11, 2001
---------------------------------------
Richard P. Burgoon, Jr.

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{SIGNATURE PAGE TO SEPARATION AND RELEASE AGREEMENT}

EXHIBIT A

SERVICES AGREEMENT

CHEMNAVIGATOR.COM, INC.

THIS SERVICES AGREEMENT is entered into as of May 26, 1999, by and between CHEMNAVIGATOR.COM, INC. a Delaware corporation ("CNC"), and RICHARD P. BURGOON, JR. ("Consultant").

1. CNC wishes to obtain the services of Consultant for certain purposes and Consultant wishes to provide such services, all subject to the terms and conditions of this Agreement.

NOW, THEREFORE, in consideration of the mutual promises hereinafter set forth, and intending to be legally bound hereby, CNC and Consultant hereby agree as follows:

1. SERVICES TO BE PROVIDED. During the term of this Agreement, Consultant shall perform for CNC the services described on EXHIBIT A attached hereto and made a part hereof (the "Services").

2. TERM. The initial term of this Agreement shall begin and terminate as set forth in EXHIBIT A.

3. COMPENSATION; NO BENEFITS.

(a) As compensation for Consultant's performance of the services to be performed by Consultant under this Agreement, CNC shall pay Consultant the amounts specified in EXHIBIT A attached hereto, in accordance with the schedule set forth in EXHIBIT
A. Consultant shall be responsible for all expenses incurred in connection with the performance of the Services, including travel, hotel and meal expenses, UNLESS the travel, hotel and meal expenses are approved in advance by CNC and the expenses are incurred in accordance with CNC's reimbursement policies.

(b) Consultant is not an employee of CNC and will not be entitled to participate in or receive any benefit or right as an CNC employee under any CNC employee benefit and welfare plans, including, without limitation, employee insurance, pension, savings and security plans as a result of Consultant entering into this Agreement.

4. OWNERSHIP OF RESULTS.

(a) All findings, conclusions and data and all inventions, discoveries, trade secrets, techniques, processes and know-how, whether or not patentable, that are made by Consultant, either alone or with others, in the performance of the Services or which result, to any extent, from use of CNC's premises or property (collectively, "Inventions") shall become the exclusive property of CNC. Consultant hereby assigns, transfers and conveys all of his/her right, title and interest in and to any and all Inventions to CNC.


(b) Upon the request and at the expense of CNC, Consultant will execute and deliver any and all instruments and documents and take such other acts as may be necessary or desirable to document such transfer or to enable CNC to apply for, prosecute and enforce patents, trademark registrations or copyrights in any jurisdiction with respect to any Inventions or to obtain any extension, validation, re-issue, continuance or renewal of any such intellectual property right. Without limiting the foregoing, Consultant shall assign, grant and convey unto CNC all of his/her right, title and interest, now existing or that may exist in the future, in and to any copyrights in any findings, reports, data compilations and other information and material resulting from the performance of the Services. Consultant shall not submit applications for copyright registration in any country for any information or materials created by Consultant pursuant to this Agreement.

(c) The provisions of this paragraph 4 shall survive the expiration or sooner termination of the term of this Agreement.

5. CONFIDENTIALITY. Consultant will not, either during or after the term of this Agreement disclose to any third person or use any confidential or proprietary information of CNC or its corporate collaborators for any purpose other than the performance of the Services, without the prior written authorization of CNC. This obligation shall not apply to information that is in the public domain through no fault of Consultant. For purposes of this paragraph 5, "confidential or proprietary information" includes, without limitation, the structure and activity of chemical compositions, biomaterials, micro-organisms, cells, cell lines and the progeny and derivatives thereof, patent applications, marketing methods and plans, pricing information, manufacturing information and other unpublished information related to the business or the financial condition of CNC and its affiliates and corporate collaborators. The provisions of this paragraph 5 shall survive the expiration or sooner termination of the terms of this Agreement.

6. TERMINATION. Notwithstanding the provisions of paragraph 2, either Party may terminate this Agreement for any reason whatsoever, upon thirty
(30) days written notice to the other Party. In such event, CNC shall be responsible for any portion of the compensation owed to Consultant under paragraph 3 for any Services rendered prior to the effective date of such termination.

7. RETURN OF CNC PROPERTY. Consultant will return to CNC any property of CNC in his/her possession, at any time when so requested by CNC and in any event upon termination of this Agreement. Consultant will not remove any CNC property from CNC premises without written authorization from CNC.

8. NO CONFLICTING AGREEMENTS. Consultant represents that Consultant is not a party to any existing agreements that would prevent Consultant from entering into and performing this Agreement. Consultant will not enter into any other agreement that is in conflict with his/her obligations under this Agreement. Consultant shall not seek funding to support the Services from any third party (including the U.S. Government), without the prior written consent of CNC.

9. INDEPENDENT CONTRACTOR. Consultant is an independent contractor under this Agreement. Neither Party shall have the power to bind the other Party to any agreement, contract, obligation or liability.

10. ENTIRE AGREEMENT, AMENDMENT AND ASSIGNMENT. This Agreement is the sole agreement between Consultant and CNC with respect to the Services to be performed hereunder and it supersedes all prior agreements and understandings with respect thereto, whether oral or written. No modification to any provision of this Agreement shall be binding unless in writing and signed by both Consultant and a duly authorized representative of CNC. All of the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective heirs, executors, administrators, legal representatives, successors and assigns of the Parties hereto,


except that the duties and responsibilities of Consultant hereunder are of personal nature and shall not be assignable or delegable in whole or in part by Consultant.

11. GOVERNING LAW. This Agreement shall be governed by and interpreted in accordance with laws of the State of California, without giving effect to any conflict of law provisions.

12. NOTICES. All notices and other communications required or permitted hereunder or necessary or convenient in connection herewith shall be in writing and shall be deemed to have been given when hand delivered, sent by facsimile or mailed by registered or certified mail, as follows (provided that notice of change of address shall be deemed given only when received):

If to CNC, to:

ChemNavigator.com, Inc.
6166 Nancy Ridge Drive
San Diego, CA 92121
Attention: Scott Hutton
Facsimile No.: (858) 625-2377
With a copy to: Corporate Secretary

If to Consultant, to:

Richard P. Burgoon, Jr.

c/o Arena Pharmaceuticals, Inc.
6166 Nancy Ridge Drive
San Diego, CA 92131
FACSIMILE NO.: (619) 453-7210

or to such other names or addresses as CNC or Consultant, as the case may be, shall designate by notice to each other person entitled to receive notices in the manner specified in this paragraph.

13. COUNTERPARTS. This Agreement shall become binding when any one or more counterparts hereof, individually or taken together, shall bear the signatures of Consultant and CNC. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original as against any party whose signature appears thereon, but all of which together shall constitute but one and the same instrument.

14. SEVERABILITY. If any provision of this Agreement or application thereof to anyone or under any circumstances is adjudicated to be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect any other provision or application of this Agreement which can be given effect without the invalid or unenforceable provision or application and shall not invalidate or render unenforceable such provision or application in any other jurisdiction.

IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have duly executed, or caused to be duly executed, this Agreement as of the date first above written.


CHEMNAVIGATOR.COM, INC.

By: /s/ Jack Lief                               By:  /s/ Richard P. Burgoon, Jr.
    --------------------------------                 ---------------------------
JACK LIEF                                            Richard P. Burgoon, Jr.
     President
     ChemNavigator.Com, Inc.
     6166 Nancy Ridge Drive
     SAN DIEGO, CA 92121



Date: May 26, 1999                              Date: May 26, 1999


EXHIBIT A

DESCRIPTION OF CONSULTING SERVICES AND COMPENSATION

SCOPE OF SERVICES:

Consultant shall provide Company with legal services support. Consultant shall only be required to provide a maximum of 200 hours per year for Services.

COMPENSATION

Consultant shall be issued One Hundred Seventy Five Thousand (175,000) shares of Company Common Stock, par value $.0001 ("Founders Shares").

TERM:

48 months

SCHEDULE OF PAYMENTS:

The Founders Shares shall be issued to Consultant by the Company as follows:

Consultant shall make payment to the Company for the Founders Shares ($17.50), in full, within thirty (30) days of this Agreement.

Founders Shares shall vest as follows:

May 26, 2000:                      43,750
May 26, 2001:                      43,750
May 26, 2002:                      43,750
May 26, 2003:                      43,750

Accelerated vesting of all unvested shares shall occur at any of the following events:

1) on the completion of an acquisition or asset transfer of the Company (other than through the issuance by the Company of preferred stock), whereby at least 50.1% of the assets of the Company are acquired or transferred ("completion" being evidenced by the signing of a definitive agreement between the Company and the acquiring or transferee party); or

2) on the closing of a firm commitment underwritten public offering pursuant to an effective registration statement on Form S-1 or any equivalent or successor form under the Securities Act, covering the

offer and sale of Common Stock for the account of the Company to the public at a price per share (prior to underwriter commissions and offering expenses) of not less than $10.00 per share (appropriately


adjusted for any recapitalizations, stock splits, stock combinations, stock dividends and the like) which results in aggregate net cash proceeds to the Company in excess of Fifteen Million Dollars ($15,000,000).

Company reserves the right to re-purchase from Consultant any un-vested Founders Shares (at $.0001 per un-vested share) in the event that Consultant discontinues employment with Arena Pharmaceuticals, Inc.

   /s/ RPB
-------------------
CONSULTANT
                                    INITIALS


EXHIBIT B

As of September 30, 2001:

Total Unexercised           Total Vested             Shares Issued          ChemNavigator.com
    Options                 Unexercised             Upon Exercise of          Shares (subject
  Outstanding                 Options               Unvested Options          to repurchase)
  -----------                 -------               ----------------          --------------
     87,500                    12,500                     46,250                  87,500


EXHIBIT 10.22

[ARENA LOGO]

September 13, 2001

Dear Steve,

This will briefly confirm our understanding regarding your joining Arena as Vice President and General Counsel. In this position you will be responsible for overseeing all legal matters concerning Arena. You will be a member of Arena's Executive Committee and I expect that you will also be appointed Corporate Secretary at our next Board meeting. This is a key executive position and you will report to me.

Your starting salary will be $250,000 and you will be eligible for annual reviews and all employee benefits. In addition, you will receive 60,000 options priced at the close of Arena's next Board meeting. You will receive $50,000 relocation allowance; the unspent balance will be paid to you directly on January 2nd . I agreed that if $50,000 was insufficient to cover your after tax relocation costs, Arena would increase this relocation reimbursement up to $100,000.

We also discussed the fact that Arena does not provide employment agreements. To be fair, if during the next two years your employment is terminated, or your duties or reporting relationship are materially changed without cause (fraud, dishonesty, or willful failure to perform duties), the company would compensate you for the balance of two years salary including continuation of benefits and stock option vesting.

It is my understanding you hope to start on October 15th or November 1st. You also plan to spend a few days at Arena before the end of September to debrief your predecessor.

If appropriate, please signify your acceptance by signing below.

Best regards,

/s/  Jack Lief
---------------------
Jack Lief
President & CEO



Offer accepted by  /s/ STEVEN W. SPECTOR                          9/14/01
                   ------------------------------           -------------------
                       Steven W. Spector             Date