Arena Pharmaceuticals, Inc.
ARENA PHARMACEUTICALS INC (Form: 10-K, Received: 03/21/2001 17:21:58)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


FORM 10-K


[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

OR

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

FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .

COMMISSION FILE NUMBER 000-31161

ARENA PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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

6166 Nancy Ridge Drive, San Diego, CA 92121
(ZIP CODE)

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ]

The approximate aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $256,000,000 as of March 1, 2001, based upon the closing price of the Common Stock as reported on the Nasdaq Stock Market on such date. For purposes of this calculation, shares of Common Stock held by directors, officers and stockholders whose ownership in the registrant is known by the registrant to exceed five percent have been excluded. This number is provided only for purposes of this report and does not represent an admission by either the registrant or any such person as to the status of such person.


As of March 1, 2001 there were 22,696,913 shares of the registrant's Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Arena Pharmaceuticals, Inc. Proxy Statement dated March 29, 2001, for the Annual Meeting of Shareholders to be held May 8, 2001 (the "Proxy Statement"), to be filed no later than 120 days after December 31, 2000, referred to herein as the "Proxy Statement," are incorporated by reference into

Part III of this Report on Form 10-K.


ARENA PHARMACEUTICALS, INC.

INDEX

                                                                                          PAGE NO.
                                                                                          -------
PART I

Item 1.  Business                                                                             1
Item 2.  Properties                                                                          23
Item 3.  Legal Proceedings                                                                   23
Item 4.  Submissions of Matters to a Vote of Security Holders                                23

Part II
Item 5.  Market for the Registrant's Common Equity and Related Stockholder Matters           23
Item 6.  Selected Financial Data                                                             25
Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations                                                                       26
Item 7A. Quantitative and Qualitative Disclosures about Market Risk                          31
Item 8.  Financial Statements and Supplementary Data                                         32
Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial
         Disclosure                                                                          53

PART III

Item 10. Directors and Executive Officers of the Registrant                                  53
Item 11. Executive Compensation                                                              53
Item 12. Security Ownership of Certain Beneficial Owners and Management                      53
Item 13. Certain Relationships and Related Transactions                                      53

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     53


INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS

This annual report on Form 10-K includes forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties, including those identified below, which could cause actual results to differ materially from such statements. The words "believe," "expect," "anticipate," "estimate," "optimistic," "intend," "plan," "project," "target," "aim," "will," and similar expressions identify forward-looking statements. Readers of the annual report on Form 10-K are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. Arena Pharmaceuticals, Inc. undertakes no obligation to update publicly or revise any forward-looking statements. Factors that could cause actual results to differ materially from the forward-looking statements, including the company's goals referred to in the annual report on Form 10-K, include, but are not limited to, the inability of Arena Pharmaceuticals, Inc. to achieve future quarterly or annual financial results, the receipt of milestone payments, if any, from any collaborator of Arena or its subsidiaries, the timing, success and cost of preclinical research, out-licensing endeavors and clinical studies, if any. Additional risk factors that could cause actual results to differ materially from those in Arena Pharmaceutical, Inc.'s forward looking statements are disclosed in Arena's SEC reports, including but not limited to Arena's Form S-1 and most recent quarterly report on Form 10-Q and this annual report on Form 10-K.

PART I

Item 1. Business

OUR COMPANY

We were incorporated on April 14, 1997 in the state of Delaware and commenced operations in July 1997. We have developed a new technology, which we call CART-TM- (Constitutively Activated Receptor Technology), that we use to identify drug-like compounds more efficiently than traditional drug discovery techniques. CART allows us to develop novel biochemical assays to discover drug-like compounds that target G protein-coupled receptors, called GPCRs, an important class of receptors. Additionally, we believe that CART is applicable to other human receptor classes, such as tyrosine kinase receptors, or TKRs, as well as to non-human receptors for the discovery of animal therapeutics and agricultural products.

In the recent past, the pharmaceutical and biotechnology industries have increasingly focused their drug discovery efforts on receptor-based drug targets because drugs discovered using these targets have the potential for increased specificity and reduced side effects. Of the leading 100 pharmaceutical products, based on 1999 revenues, 34 wholly or in part act on GPCRs. In 1999, these GPCR-based pharmaceutical products represented over $34 billion in sales, and included Claritin(RM) for allergies, Zantac(RM) for gastric ulcers, Imitrex(RM) for migraines and Cozaar(RM) for hypertension.

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We use CART to discover drug-like compounds by genetically altering receptors to mimic the biological response that occurs when the native ligand binds to the receptor. We refer to these genetically altered receptors as CART-activated receptors. We use CART-activated receptors as a screening tool to identify chemical compounds that alter the biological response of the receptor, and these compounds form the basis for drug candidates. Using CART technology, we have discovered drug-like compounds that have demonstrated pharmacological activity in pre-clinical, or animal, studies through our own internal research and drug development efforts, as well as through those of our collaborators. Based upon the success of CART, we have entered into collaborative relationships with a number of pharmaceutical and biotechnology companies, including Eli Lilly and Company, Taisho Pharmaceutical Co., Ltd., Fujisawa Pharmaceutical Co., Ltd. and Lexicon Genetics, Inc.

THE DRUG DISCOVERY PROBLEM

Diseases in humans are caused by the abnormal function of cells. Both normal and abnormal cellular function is principally the result of communication between cells. This cellular communication occurs when a ligand is released from a cell and binds to a receptor on the surface of that cell or another cell. This binding triggers the initiation of various signals within that cell, resulting in changes in cellular function. By interacting with the receptor to mimic or block ligand-receptor binding, drugs affect abnormal cellular function and thereby regulate the disease process.

Receptors are classified into categories based upon similarities in their biochemical and structural properties. They are located in various tissues throughout the body and affect a variety of cellular functions. There are four principal classes of human receptors: GPCRs; TKRs; ligand-gated ion channel receptors; and intracellular receptors. We focus on GPCRs because they are the predominant class of receptors involved in cellular function.

The ligand that naturally binds to a receptor and activates or inhibits a biological response is referred to as a receptor's native ligand. A receptor for which the native ligand has been discovered is called a known receptor, while a receptor for which the native ligand has not been identified is called an orphan receptor. Genomics researchers believe that GPCRs comprise 2% to 3% of the human genome (approximately 1,000 GPCRs), the vast majority of which are orphans.

Advances in genomics research have enabled researchers, including us, to directly identify the genetic sequence of previously unidentified receptors, including GPCRs, from basic genetic information. As more GPCRs are made available, the opportunity to use this information for drug discovery efforts should increase. Although hundreds of new, orphan GPCRs are being made publicly available through genomics research, traditional drug discovery techniques to find new drug candidates cannot be applied to orphan GPCRs until the native ligands for these orphan GPCRs are identified because these traditional techniques seek to find drug-like compounds that imitate or inhibit ligand binding to the receptor.

The process of identifying native ligands is very uncertain, generally involving many stages of tissue extraction and extensive purification. To our knowledge, of the hundreds of orphan GPCRs that have been identified, only a handful of examples exist where a novel native ligand has been discovered by intentionally targeting an orphan GPCR. Even when successful, identifying the native ligand typically requires four to five years and costs millions of dollars per GPCR. For example, a GPCR called GPR 14 was discovered in 1995, but its native ligand, urotensin II, was not identified until 1999. The process of identifying native ligands is typically the step that limits the rate at which drugs are discovered at receptor targets.

OUR SOLUTION - CART TECHNOLOGY

We do not use, and therefore do not need to identify, the receptor's native ligand for our drug discovery efforts. We use our CART technology to discover drug-like compounds by CART-activating receptors to mimic the biological response that occurs when the native ligand binds to the receptor. Therefore, CART technology avoids a major bottleneck in drug discovery efforts at orphan receptors.

CART technology can be applied broadly to GPCRs because all GPCRs have highly similar structural elements, consisting of:

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- three extracellular loops on the outside of the cell

- three intracellular loops on the inside of the cell

- seven regions that cross through the cell surface, or membrane, and connect the extracellular and intracellular loops

When a ligand binds to the extracellular portion of the GPCR, changes occur to the intracellular portion of the GPCR that permit a signaling molecule located within the cell, called a G protein, to bind to the intracellular portion of the GPCR. This leads to further intracellular changes, resulting in a biological response within the cell.

Under normal physiological conditions, a GPCR exists in equilibrium between two different states: an inactive state and an active state. When the GPCR's equilibrium shifts to an active state, the GPCR is able to link to a G protein, thus producing a biological response. When the GPCR's equilibrium shifts to an inactive state, the receptor is typically unable to link to a G protein, and therefore unable to produce a biological response. When a native ligand binds to the GPCR, the GPCR's equilibrium shifts and the GPCR is stabilized in the active state.

By altering the genetic structure of a GPCR, our CART technology stabilizes the GPCR in the active state in the absence of the native ligand.

Drug screening and discovery targeting GPCRs using CART technology is comprised of four stages:

- altering the molecular structure of an intracellular loop or intracellular portion of the GPCR to generate a CART-activated form of the GPCR

- introducing the CART-activated form of the receptor into mammalian cells, which, in turn, manufacture the CART-activated form of these receptors at the cell surface

- analyzing the cells containing the CART-activated GPCR to detect biological responses that result from the linking of the CART-activated GPCR to a G protein

- screening chemical libraries of small molecule compounds against the cell membranes containing the CART-activated GPCR to identify compounds that interact with the GPCR

Screening using CART technology allows us to simultaneously identify compounds that act as receptor inhibitors to decrease the detected biological responses, or act as receptor activators to increase the detected responses. Therefore, our CART technology allows us to discover drugs that either inhibit or enhance biological activity.

CART technology is also useful for identifying drug-like compounds that reduce cellular responses resulting from ligand-independent activity of receptors. These drugs are termed inverse agonists and are the preferred drugs for treating diseases in which ligand-independent receptor activity may be important, such as schizophrenia. In general, traditional ligand-based drug screening techniques can only be used to identify neutral antagonists, which do not affect the ligand-independent activity of the receptor. We can directly identify inverse agonists using our CART technology by screening for ligand-independent receptor activity. We believe the inverse agonists that we identify will possess improved properties over neutral antagonists because they inhibit both ligand-induced as well as ligand-independent activity.

In addition, because CART does not require the use of the native ligand, we are not limited to finding drug-like compounds that bind to a receptor at the receptor's ligand binding site. Instead, CART technology exposes the entire receptor surface to drug-like compounds, allowing for the detection of drug candidates which bind at any point on the receptor surface. We believe that this feature of CART technology is important not only with respect to orphan receptors, but known receptors as well, because it provides us with the ability to discover new drugs with unique mechanisms of action.

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In summary, we believe that our platform CART technology offers several key advantages for drug discovery over other screening techniques. Screening CART-activated receptors:

- does not require prior identification of the native ligand for an orphan receptor

- enhances the detection of, and simultaneously identifies, both receptor inhibitor and receptor activator compounds

- allows for the identification of compounds or drug candidates that inhibit both ligand-induced and ligand-independent activity

- provides the ability to discover novel and improved therapeutics at known receptor targets

OUR STRATEGY

Our strategy is to use CART to become a leader in the discovery of new drug candidates using orphan and known GPCRs. The major elements of our strategy are to:

Apply CART to orphan GPCR targets to leverage available genomics information. The completion of the first draft of the human genome has provided gene sequence information on an unprecedented number of receptor drug targets, including numerous previously unidentified GPCRs. CART technology can be applied to these orphan GPCR targets to discover drug candidates. This can be done more quickly and efficiently using CART technology than with traditional drug discovery screening techniques because drug discovery using CART does not require the identification and characterization of a receptor's native ligand, a process which typically requires four to five years and costs millions of dollars per receptor.

Discover new drug candidates that have unique mechanisms of action for known GPCRs. We believe that CART provides us with the ability to discover new drug candidates with unique mechanisms of action at known receptor targets, which may be more effective and may have fewer side effects than existing drugs. Unlike traditional drug discovery methods, we are not limited to finding drug candidates that bind to a receptor at the receptor's ligand binding site. Because CART technology exposes the entire GPCR surface to drug candidates, we can discover drug-like compounds that act upon any part of the receptor surface.

Develop multiple pharmaceutical product candidates for GPCR targets. CART technology allows us to identify drug-like compounds that act as receptor inhibitors to reduce biological activity, or receptor activators to increase biological activity. Therefore, CART provides the opportunity to simultaneously discover multiple different drug-like compounds with unique mechanisms of action for each receptor target, any of which may ultimately become successful commercial pharmaceutical products.

Enter into strategic collaborations to discover and develop novel drug candidates. We intend to enter into additional strategic collaborations to discover and develop novel drug candidates using our CART technology. We believe that the broad applicability of our CART technology will allow us to enter into additional collaborations that focus on a variety of diseases and target a large number of orphan and known GPCRs. We have entered into collaborations with Eli Lilly, Taisho and Fujisawa under which we CART-activate a significant number of GPCR targets and may receive additional revenues in the form of development fees, milestone payments and royalties on products, if any, developed to target these GPCRs.

Apply CART to other human receptors and non-human receptors for human therapeutic, agricultural and other applications. We believe CART technology can also be applied to other types of human receptors, such as TKRs, which are often implicated as important factors in various diseases, such as breast cancer. We are also applying our CART technology to non-human receptors for a variety of applications including plant receptors to discover chemical growth factors, insect receptors to discover insect control agents and viral receptors to discover novel anti-viral drug candidates. We have CART-activated a number of these other types of receptors and intend to pursue opportunities developed from these receptors.

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Continue to protect and expand our intellectual property rights. We have filed approximately 120 independent patent applications with the United States Patent and Trademark Office, and are filing some of these patent applications worldwide. Four United States patents have been issued to us. We believe that we will be issued additional patents on our CART technology and patents on our CART-activated receptors because our technology genetically modifies these receptors and changes their function. We intend to continually seek ways to vigorously protect and enforce our rights with respect to our intellectual property.

APPLICATIONS OF CART

Over the past three years, we have obtained the full-length gene sequences of 330 human GPCRs and made them available for CART-activation and screening. We also have obtained five non-human receptors, including plant, viral and insect receptors. Through the use of our proprietary CART technology, we have successfully identified compounds that inhibit or activate a number of known and orphan receptor targets.

ORPHAN GPCRS

An important element of our CART technology involves using the gene sequences of orphan GPCRs to understand and define the tissue and cellular distribution of these GPCRs. The gene sequences provide us with the necessary tools to locate the orphan receptors in tissues. Once we have identified the location of an orphan receptor in tissues, we can determine the normal function of the orphan receptor and compare that function to the function of the orphan GPCR in diseased tissues. We then use our CART technology to screen the targeted receptor for drug-like compounds that can be employed to verify the proposed receptor function.

We have prioritized and applied our CART technology to orphan GPCRs as having high potential value as drug discovery targets against specific diseases or indications, based upon the distribution of the GPCR in specified tissues. Examples of some of our more advanced CART programs are summarized below.

OBESITY. National Institutes of Health statistics indicate that approximately 100 million adults in the United States are overweight and that 22% of these are considered clinically obese. The few currently approved drugs for the treatment of obesity in the United States act either as appetite suppressants or blockers of fat absorption. However, cardiovascular or gastrointestinal side effects may limit the long-term effectiveness of these drugs. Consequently, more effective therapeutics are urgently needed for this major public health problem.

We have an ongoing program directed towards the development of novel anti-obesity drugs. We have identified a number of orphan GPCRs on brain cells related to the control of feeding and metabolism, including the 18F, 19U, 19X and 19NY GPCRs. For example, we have discovered an over-abundance of the 18F GPCR in the brain metabolism centers of genetically obese rats. We believe that this discovery indicates that overactivity of this GPCR may be associated with obesity.

We are using our CART technology to identify drug-like compounds that inhibit the activity of the 18F GPCR. Repeated administration of the drug-like compounds we have identified has resulted in reduced food intake and sustained weight loss in normal laboratory animals. Similar results were also obtained in a diet-induced animal model of human obesity. In this diet-induced animal model, these drug-like compounds also acted to increase fat metabolism and resulted specifically in a loss of fat mass. We have found that the 18F GPCR is also located on human fat cells. Therefore, we believe that these drug-like compounds may provide the basis for a novel approach to the treatment of human obesity by simultaneously reducing food intake and increasing fat metabolism.

Our anti-obesity drug program demonstrates the advantages of CART technology for rapid drug candidate discovery. The process of discovering promising drug candidates took approximately 18 months beginning from our initial discovery of the over-abundance of the 18F GPCR in genetically obese animals to the animal testing of the drug-like compounds that we discovered using our CART technology. In January 2001, we licensed our 18F receptor to Taisho which is discussed below under the heading "Our GPCR Collaborators."

CANCER. We have identified several orphan GPCRs, including the 18AD, 20WW, 20PO, 19AG and 19Y GPCRs, which we believe represent therapeutic targets for the treatment of a variety of cancers. These orphan

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GPCRs are attractive therapeutic targets because they have been shown to be present in abnormally high levels in ovarian, colorectal, gastrointestinal and uterine cancer cells and cause unwanted proliferation of cells in laboratory experiments.

CARDIOVASCULAR DISEASE. We have identified several orphan GPCRs, including the 19L and 20RH GPCRs, that are located within the cardiovascular system, such as on heart tissues and blood vessel walls. The 19L receptor has been localized to the smooth muscle cells of blood vessel walls and is regulated under conditions associated with vessel damage and artherosclerotic damage. The 20RH receptor has been localized to heart myocytes and is regulated both in IN VITRO and IN VIVO models associated with cardiomyopathy. Using CART technology we aim to identify small molecule regulators of these receptors which may have potential to treat diseases related to aberrant cardiovascular function.

DIABETES. One of the orphan GPCRs that we discovered, the 19AJ GPCR, is specifically located on insulin producing beta cells in the pancreas. Normally, glucose stimulates the beta cell to produce insulin, but in diabetes the beta cell often becomes less sensitive to glucose and the ability of the beta cell to produce insulin is impaired. The 19AJ GPCR appears to make the beta cells more responsive to glucose concentrations, resulting in enhanced insulin release. By applying CART technology to the 19AJ GPCR we will seek to discover drug candidates to treat diabetes, which, according to the National Institutes of Health, affected approximately 15.7 million people in the United States in 1997.

INFLAMMATION. We have identified several orphan GPCRs, including the 18AF and 19W GPCRs, that may mediate inflammatory responses in various locations of the body. Our preliminary data suggest that the 18AF GPCR may regulate brain cells related to inflammation. Based upon its sequence structure, the 18AF GPCR appears to be related to a group of GPCRs called chemokine receptors. Chemokine receptors are known to be involved in the inflammation process, and brain inflammation is involved in a number of neurodegenerative disorders, including stroke. The number of 19W GPCRs is increased in dying cells during inflammation, suggesting that the 19W GPCR may be involved in controlling the process of cell death. We have CART-activated the 19W GPCR and have developed an assay for screening of chemical compounds against this GPCR. Drug candidates that modulate the activity of these GPCRs may provide a unique therapeutic approach to the treatment or mediation of inflammatory responses. According to the National Institutes of Health, diseases involving inflammation afflict over 25 million people in the United States.

ALZHEIMER'S DISEASE. Several of our orphan GPCR targets are located on cells within the central nervous system, including the 18L GPCR. The 18L GPCR is located on nerve cells in an area of the brain called the hippocampus, which is responsible for controlling memory function. In Alzheimer's Disease, normal memory processes in the hippocampus are severely impaired. We believe drugs that modulate the 18L GPCR could be useful for controlling memory function and for the treatment of symptoms of Alzheimer's Disease, which, according to the National Institutes of Health, affects four million people in the United States.

KNOWN GPCRS

Although we focus on orphan GPCRs, we also apply our CART technology to known GPCRs. We believe that the application of our CART technology to known GPCRs will identify novel classes of drug candidates that may be more effective and may have fewer side effects than existing drugs that target known GPCRs.

Our principal advantage in applying CART technology to known GPCRs is our ability to directly identify drug-like compounds that act as inverse agonists, which cannot be directly identified using traditional ligand-based screening techniques. Inverse agonists are particularly relevant in treating diseases in which ligand-independent GPCR activity, or overactivity, is implicated.

We have identified drug-like compounds that are capable of inhibiting both ligand-independent and ligand-dependent activity at selected known GPCR targets. We are currently developing candidates that target these overactive known GPCRs to treat the related diseases. Our most advanced program targets the serotonin 5HT2A GPCR for potential treatment of schizophrenia and other psychiatric disorders.

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According to the National Institutes of Health, approximately 1% of the population develops schizophrenia during their lifetime. More than 2 million Americans suffer from schizophrenia in a given year. We have tested currently available anti-psychotic drugs and have found that they act as inverse agonists at a known GPCR, referred to as the 5HT2A GPCR. Using our CART technology, we have discovered and are developing a number of new candidates that act as inverse agonists at the 5HT2A GPCR. These candidates displayed activities in tests involving laboratory animals indicating that they could be useful in treating psychiatric disorders such as schizophrenia and depression. Moreover, our CART-identified 5HT2A inverse agonists possess a higher degree of receptor selectivity than currently marketed anti-psychotics, which suggests our inverse agonists may be more effective. To date, these candidates exhibit no evidence of side effects in laboratory animals.

Our anti-psychotic drug program also demonstrates the advantages of CART technology for rapid drug candidate discovery. The process of discovering promising drug-like compounds took approximately 18 months beginning from the application of our CART technology to the 5HT2A GPCR to the animal testing of the candidates that we discovered using CART technology. We intend to enter into a collaboration to further expand our anti-psychotic drug program with the goal of selecting one or more of our novel anti-psychotic drug candidates that target the 5HT2A GPCR, for future clinical development.

OTHER AREAS OF CART APPLICATION

OLFACTORY AND TASTE GPCRS. A specialized multigene family of GPCRs has been identified in the nasal membrane and is responsible for the sense of smell. Another family of GPCRs has recently been discovered in the tongue and is believed to be responsible for the perception of taste. We are applying our CART technology to a number of olfactory and taste GPCRs to identify novel compounds that we believe will be of potential commercial value in the fragrance and food additive industries.

PLANT GPCRS. Plants respond to a variety of environmental and internal signals that regulate aspects of their growth and development. GPCRs have recently been identified in a variety of plants and have been implicated in the action of a variety of plant hormones. We are presently applying our CART technology to plant GPCRs in an attempt to identify novel regulators of the life cycle of plants that may affect crop growth and development.

VIRAL GPCRS. GPCRs are involved in either replication or infection in a number of viruses. Some herpes viruses, including the Kaposi's sarcoma-associated virus, have GPCRs within their genome which are important for replication. Other GPCRs appear necessary for primary infection. For example, HIV infects cells by binding to a GPCR that transports the virus into cells. A number of orphan GPCRs have been identified which appear to act in a similar manner for other viruses. Our goal is to identify novel anti-viral drugs using CART technology.

INSECT GPCRS. Insect genomes also include GPCRs, and we have begun the process of applying CART technology to insect GPCRs in an attempt to identify compounds that may offer the potential for improved and environmentally safer insect control agents. Our goal is to use CART-activated insect GPCRs to find compounds that selectively reduce pest reproduction and feeding behavior.

TYROSINE KINASE RECEPTORS. In addition to applying our CART technology to orphan GPCRs, we are also applying our CART technology to other human receptor classes, including orphan TKRs. A number of orphan TKRs have been located on cancerous tissues and may be involved in excessive cell proliferation and growth. As with GPCRs, our CART technology allows us to activate orphan TKRs in the absence of native ligands and screen the activated TKRs to identify novel inhibitors of TKR activity. We are currently evaluating orphan TKRs for drug screening.

GENETIC "KNOCK-IN" MODELS. We are collaborating with Lexicon Genetics to develop mice that produce CART-activated GPCRs, or GPCR knock-ins, by using state-of-the-art molecular genetic techniques. By producing CART-activated orphan GPCRs in animals, we believe that we will gain valuable insight into the functionality of individual GPCRs, as well as indications of human disease for which drugs that target these GPCRs may be useful. In addition, we expect that these knock-in animals will provide an animal model that can be used to test the potency of drug-like compounds discovered using CART-activated GPCRs. The first knock-in GPCR animals developed based upon this collaboration were born in February 2001.

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OUR GPCR COLLABORATORS

Our success will depend in large part upon our ability to enter into successful collaborations with other pharmaceutical and biotechnology companies. We are active in the scientific community and within the industry and regularly make presentations regarding our research and development programs and the applications of our CART technology at scientific conferences and industry conventions. We believe that our participation at these events has led, and will continue to lead, to contacts with existing and potential collaborators. We have entered into a number of strategic collaborations in the recent past to discover novel drug candidates using our CART technology, and we expect to enter into additional collaborations and expand our existing collaborations in the future.

ELI LILLY

In April 2000, we entered into a research alliance with Eli Lilly, one of the world's leading pharmaceutical companies. Our collaboration with Eli Lilly is principally focused on the central nervous system and endocrine therapeutic fields. We will also focus on the cardiovascular field and may expand our collaboration to other therapy classes, including cancer.

During our collaboration, we will pursue an agreed upon research plan with Eli Lilly that has several objectives. During the term of our collaboration, we will mutually review and select GPCRs that will become subject to the collaboration. These GPCRs may be provided either by us or by Eli Lilly. All of our pre-existing CART-activated GPCRs were excluded from the collaboration. We and Eli Lilly will each share our respective knowledge of the GPCRs that become subject to the collaboration to validate and CART-activate selected receptors. We will jointly select a number of proprietary central nervous system, endocrine and cardiovascular GPCRs for CART-activation, and we will then provide Eli Lilly with enabled high-throughput screens for use at their screening facilities. During the term of the agreement, we will continue to receive research funding from Eli Lilly for our internal resources committed to the collaboration, which will be augmented by substantial resource commitments by Eli Lilly. Eli Lilly will be responsible for screening its chemical compound library using selected CART-activated receptors, for identifying drug candidates and for the pre-clinical and clinical testing and development of drug candidates. We may receive up to $1.25 million per receptor based upon milestone payments in connection with the successful application of CART to each receptor, and up to an additional $6.0 million based upon clinical development milestone payments for each drug candidate discovered using CART. We may also receive additional milestone and royalty payments associated with the commercialization of drugs discovered using CART, if any.

Once the assay development fee has been paid for a CART-activated GPCR, Eli Lilly will have exclusive rights to screen chemical libraries, discover drug candidates that target that GPCR, and to develop, register and sell any resulting products worldwide. We retain rights to partner or independently develop GPCRs that do not become subject to the collaboration.

The term of our collaboration agreement with Eli Lilly is five years. Either Eli Lilly or we can terminate the agreement with or without cause effective three years after the date of the agreement by giving written notice prior to the conclusion of the 33rd month after the date of the agreement. In addition, either party can terminate the agreement at any time if the other party commits a material breach, and Eli Lilly can terminate the agreement at any time if, among other reasons, Eli Lilly does not approve suitable replacements for key employees who leave us. The parties will continue to have various rights and obligations under the agreement after the agreement is terminated. The extent of these continuing rights and obligations depends on many factors, such as when the agreement is terminated, by which party and for what reason. These continuing obligations may include further research and development efforts by us and a variety of payments by Eli Lilly.

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Eli Lilly is a significant customer and the loss of such customer would have a material adverse effect on our business and future revenue stream.

Revenue recognized under the Eli Lilly collaboration was approximately $5.2 million for the year ended December 31, 2000 consisting of research funding of approximately $2.9 million, milestone achievements related to the activation of nine selected GPCRs for approximately $2.2 million, and amortization of an up-front payment of $75,000.

TAISHO

In May 2000, we entered into a research collaboration with Taisho to initiate a research collaboration focused on several GPCRs selected by Taisho in therapeutic areas of interest to Taisho. Under the terms of the agreement, Taisho will receive exclusive, worldwide rights to the selected GPCR targets and to any drug candidates discovered using the activated versions of these receptors. We may receive up to a total of $2.3 million in revenues per receptor associated with research, development and screening fees. We may also receive clinical development milestones, regulatory approval milestones and royalties on drug sales, if any.

Taisho is a significant customer and the loss of such customer would have a material adverse effect on our business and future revenue stream.

Revenue recognized under the Taisho collaboration was approximately $2.4 million for the year ended December 31, 2000 consisting of milestone achievements of approximately $2.3 million related to receptor activation selection and screening assay fees, and amortization of an up-front payment of $80,000.

In January 2001, we signed an amendment expanding our original agreement with Taisho whereby Taisho was granted world-wide rights to our 18F Program which includes a GPCR that we believe represents an obesity orphan receptor target and small molecule modulators discovered using this receptor. In accordance with the amendment, Taisho will make a one-time payment to us for the 18F program based upon work completed by us to date. In addition, the Company may receive additional milestone and research funding payments and royalties on drug sales, if any.

FUJISAWA

In January 2000, we entered into a collaborative agreement with Fujisawa, a leading Japan-based pharmaceutical company with significant drug discovery research efforts. During the collaboration, we will jointly validate up to 13 orphan GPCRs as drug screening targets. We will be responsible for receptor identification, location and regulation, and will apply our CART technology to GPCRs selected by Fujisawa. We will also seek to validate screening assays based on the selected GPCRs. Fujisawa will be entitled to screen selected assays against its chemical compound library to identify drug candidates. Fujisawa will also be responsible for the pre-clinical and clinical development of any drug candidates that we or Fujisawa discover. We may also screen the selected GPCRs using our in-house chemical library. When Fujisawa selects its first receptor, we will be entitled to receive a one-time initiation fee of $500,000. If we and Fujisawa then achieve various milestones, we may receive up to a maximum of $3.5 million per selected receptor for assay transfer, screening and exclusivity fees, and up to a maximum of $2.0 million per selected receptor based upon the filing of one or more investigational new drug applications for each drug candidate discovered using a CART-activated receptor. We may also receive clinical development milestones, regulatory approval milestones and royalties on drug sales, if any. We and Fujisawa may never achieve research, development or commercialization milestones under the agreement.

Our collaborative agreement with Fujisawa will terminate upon the expiration of Fujisawa's obligation to make royalty payments under the agreement, if any. Fujisawa may terminate the agreement at any time by providing us with written notice of their intention to do so and by returning any proprietary rights they have acquired under the agreement. Additionally, either party may terminate the agreement for a material breach of the agreement by the other party. The termination or expiration of the agreement will not affect any rights that have accrued to the benefit of either party prior to the termination or expiration.

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LEXICON GENETICS

In April 2000, we signed a binding letter of intent and memorandum of agreement with Lexicon Genetics, a genomics company that uses a proprietary technology to clone mice, enabling large-scale functional genomics. The agreement establishes a research collaboration with Lexicon Genetics using their proprietary technology to clone gene-targeted mice whose genomes have been altered using specified CART-activated orphan GPCRs. Our collaboration with Lexicon Genetics consists of a feasibility phase to determine both the utility of this novel approach and the scope of any resulting licensing alliance. If we proceed beyond the feasibility stage, the agreement establishes a licensing alliance in which we and Lexicon Genetics will each contribute up to ten unique GPCRs to clone mice containing CART-activated GPCRs for use as drug discovery tools, and to discover drug candidates using these GPCRs. We will share equally in the fees, milestones and royalties generated from any licensing agreement with a third-party involving GPCRs developed through our licensing alliance.

OTHER AGREEMENTS

The Company's practice is to meet with pharmaceutical and biotechnology companies on an on-going basis to discuss the possibility of collaborating with them on projects of mutual interest. At present, the Company is in the early stages of discussing with other companies the possibility of a number of such arrangements. There can be no assurance that the Company will be successful in consummating any such arrangement.

ACQUISITION OF BUNSEN RUSH LABORATORIES

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

Melanophores are pigment-bearing cells. In response to light and a range of chemical stimuli, they undergo rapid color change, a change that can be mediated by GPCRs or receptor tyrosine kinases as a result of changes in second messenger levels of cyclic AMP or diacylglycerol. During the color change, pigment granules, referred to as "melanosomes", undergo rapid dispersion throughout the cell or aggregation to the center of the cell. The reversible movement of melanosomes along microtubules is driven by molecular motors. In this new system, there is no new pigment synthesis; the same pigment is simply redistributed within the cell. Pigment dispersion results in the cells appearing dark while aggregation causes the cells to appear light, creating what has been referred to as a "chameleon in a dish". In many cases, the response of the cells is detectable in minutes using either a microplate reader or video imaging system. In melanophores, activation of the G protein subtypes referred to as Gs or Gq results in pigment dispersion, while activation by the G protein subtype referred to as Gi leads to pigment aggregation. Melanophores are derived from the neural crest and express a diverse set of G-proteins allowing them to functionally express GPCRs.

In collaboration with us, Bunsen Rush has secured data that both we and Bunsen Rush believe indicate that the Melanophore Technology is applicable to CART-activated GPCRs. The Melanophore technology is the subject of issued U.S. Patent Nos. 6,051,386 and 5,462,856. Melanophore Technology is a functional-based screening technology used to identify compounds that interact with cell surface receptors, including known and orphan GPCRs and receptor tyrosine kinases. The functional nature of the Melanophore Technology eliminates the need for radioactive or fluorescent screening techniques and provides a simple and sensitive means to detect cellular signals generated by activated GPCRs.

The Melanophore Technology has the potential to be a simple, robust and widely applicable functional assay technique for the identification of modulators to GPCRs and thus is complementary to our strategic objectives of continually enhancing the breadth and applicability of our CART Technology. As we continue to expand its high-throughput screening capabilities for CART-activated known and orphan GPCRs, we believe that access to complementary compound screening and identification techniques will help us streamline the drug discovery process. We believe that in combination, CART Technology and Melanophore Technology will provide a powerful means to enhance the discovery of modulators at GPCRs. CART activation of receptors provides a signal to the

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cell, and the Melanophore Technology provides a complementary, simple and sensitive signal detection system with advantages for small molecule screening over other techniques.

CHEMNAVIGATOR.COM

In early 1999, we developed an Internet-based search engine that allows scientists to search for chemical compounds based primarily on the similarity of chemical structures. We believe this is important for drug discovery purposes because chemical similarity can be used as an indicator of biological activity. ChemNavigator.com was formed in May 1999 and subsequently obtained independent third-party financing. We licensed the search engine's underlying technology and related intellectual property to ChemNavigator.com in exchange for stock. We currently beneficially own approximately 34% of the outstanding common stock of ChemNavigator.com.

ARESSA PHARMACEUTICALS

In August 1999, the Company formed Aressa Pharmaceuticals, Inc. as a wholly-owned subsidiary to take advantage of opportunities to in-license and develop niche products from other pharmaceutical or biotechnology companies. In November 1999, Aressa entered into a licensing agreement with respect to a patented anti-fungal compound. In October 2000, Aressa received gross proceeds of $1 million whereby Aressa is no longer a wholly- owned subsidiary of the Company, but rather a separately funded company. We currently beneficially own approximately 83% of the outstanding common stock of Aressa.

T-82

We in-licensed T-82 from SSP Co., Ltd. in 1998 as a novel drug candidate to treat Alzheimer's Disease. Our Phase I safety studies of this compound began in 1999. We have completed four Phase I studies of T-82 through 2000 and have been assessing the data in conjunction with SSP. We were not required to make milestone payments to SSP following completion of these studies. We are required to make milestone payments to SSP upon the successful completion of Phase II clinical studies, after successful completion of Phase III clinical studies and, if applicable, after receiving marketing approval by the FDA and European regulatory agencies, up to an aggregate maximum of $5.0 million. The four Phase I safety-based studies of T-82 evidenced results that we believe establish the safety of T-82 in the tested parameters. However, our analysis of all of the data for T-82, in conjunction with the extensive costs associated with conducting Phase II and Phase III clinical studies of T-82, the types and number of potential new treatments for Alzheimer's Disease that are in more advanced stages of clinical testing, as well as the impact that these factors may have on our ability to successfully out-license T-82 to a third party have prompted us to consider if continuation of the T-82 program by us is warranted. We therefore cannot assure you that we will continue development of T-82 until we have completed the assessment of all data and information related to this program.

INTELLECTUAL PROPERTY

Our success depends in large part on our ability to protect our proprietary technology and information, and operate without infringing on the proprietary rights of third parties. We rely on a combination of patent, trade secret, copyright and trademark laws, as well as confidentiality agreements, licensing agreements and other agreements, to establish and protect our proprietary rights. Since our inception, we have filed approximately 120 patent applications in the United States regarding our:

- CART technology

- orphan receptors and CART-activated orphan receptors

- CART-activated known receptors

- small molecule chemical compounds

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- acetylcholine enhancers

- web-based search engine technologies

The term of all of our patents, if any are issued, will commence on the date of issuance and terminate 20 years from the earliest effective filing date of the patent application. Because the time from filing to issuance of biotechnology patent applications is often more than three years, our patent protection, if any, on our products and technologies may be substantially less than 20 years.

We seek patent protection for all of our key inventions, including our CART technology, new receptors that we discover, genetically-altered receptors, and drug candidates identified by our CART technology. It has been possible to obtain broad, composition-of-matter patents on novel chemical compounds, such as the drug candidates, if any, that we identify using our CART technology. It has also been possible to obtain broad method patents for techniques and procedures for screening and drug-identification technologies, such as those embodied by our CART technology. It has generally not been possible to obtain broad composition-of-matter patents for nucleic acid and amino acid sequences. However, it has been possible to obtain patents that protect specific sequences and functional equivalents of those sequences. Furthermore, intellectual property law allows for separate and distinct patents for altered genetic sequences over previously disclosed sequences. We believe that we can obtain patents on our CART-activated receptor sequences because they are not functional equivalents of the natural version of the receptor. We have filed and will continue to file patent applications on these types of technologies. We believe that our CART technology does not infringe on third-party claims related to any aspect of our proprietary technology.

As a general matter, obtaining patents in the biotechnology and pharmaceutical fields is highly uncertain and involves complex legal, scientific and factual matters. Obtaining a patent in the United States in the biotechnology and pharmaceutical fields can be expensive and can, and often does, require several years to complete. Failure to receive patents pursuant to the applications referred to herein and any future applications could have a material adverse effect on the Company. Our patent filings in the United States may be subject to interference or reexamination proceedings. The defense and prosecution of interference and reexamination proceedings and related legal and administrative proceedings in the United States involve complex legal and factual questions. We also file patent applications outside of the United States. The laws of some foreign countries may not protect our proprietary rights to the same extent as do the laws of the United States. Third parties may attempt to oppose the issuance of our patents in foreign countries by way of opposition proceedings. Additionally, if an opposition proceeding is initiated against any of our patent filings in a foreign country, that proceeding could have an adverse effect on the corresponding patents that are issued or pending in the United States. If we become involved in any interference, reexamination, opposition or litigation proceedings in the United States or foreign countries regarding patent or other proprietary rights, those proceedings may result in substantial cost to us, regardless of the outcome, and may have a material adverse affect on our ability to develop, manufacture, market or license our technologies or products, or to maintain or form strategic alliances.

Although we plan to aggressively prosecute our patent applications and defend our patents against third-party infringement, we cannot assure you that any of our patent applications will result in the issuance of patents or that, if issued, such patents will not be challenged, invalidated or circumvented. Moreover, we cannot assure you that our patents, if any, will provide us protection against competitors with other technologies. Our technologies and potential products may conflict with patents that have been or may be granted to competitors, universities or others. As the biotechnology industry expands and more patents are issued, the risk increases that our technologies and potential products may give rise to claims that they infringe the patents of others. Third parties claiming infringement of their proprietary rights could bring legal actions against us claiming damages and seeking to enjoin our use or commercialization of a product or our use of a technology. In particular, patent applications or patents for innovative and broadly applicable technologies, such as our CART technology, are sometimes challenged by third parties as obvious, or as obvious extensions of technologies previously developed by those third parties. We cannot assure you that such claims will not be brought against us in the future. If any actions based on these claims are successful, in addition to any potential liability for damages, we could be required to obtain a license in order to continue to use a technology or to manufacture or market a product, or could be required to cease using those products or technologies. Any claim, with or without merit, could result in costly litigation and divert the efforts and attention of our scientific and management personnel. We cannot assure you that we would prevail in any

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action or that any license required under any patent would be made available or would be made available on acceptable terms.

In addition to patent protection, we rely upon trade secrets, proprietary know-how and continuing technological advances to develop and maintain our competitive position. To maintain the confidentiality of our trade secrets and proprietary information, all of our employees are required to enter into and adhere to an employment-confidentiality and invention-assignment agreement, laboratory notebook policy, and invention disclosure protocol, as a condition of employment. Additionally, our employment-confidentiality and invention-assignment agreement requires that our employees do not bring to Arena, or use without proper authorization, any third-party proprietary technology. We also require all of our consultants and collaborators that have access to proprietary property to execute confidentiality and invention rights agreements in our favor before beginning their relationship with us. While such arrangements are intended to enable us to better control the use and disclosure of our proprietary property and provide for our ownership of proprietary technology developed on our behalf, they may not provide us with meaningful protection for such property and technology in the event of unauthorized use or disclosure.

We have entered into a research agreement with the University of Glasgow to jointly develop screening strategies using our CART-activated GPCRs, combined with techniques claimed in a patent application owned by the University. Under this agreement, we have an option to take an exclusive license to this patent application, as well as techniques that are developed during the course of the research agreement. Although we are currently not in default under this agreement, we cannot assure you that we will not default under this agreement in the future.

COMPETITION

A major focus of our scientific and business strategy for our CART technology involves orphan GPCRs. Most major pharmaceutical companies, as well as several biotechnology companies, have drug discovery programs based upon GPCRs, including orphan GPCRs. In addition, other companies have attempted to overcome the problems associated with traditional drug screening by embarking upon a variety of alternative strategies. Although some of these approaches are indicated as being based upon ligand-independent strategies, like CART, we believe that all of these approaches have relied upon indirect measures of receptor activity, which we believe provide a limited possibility of assessing receptor-drug interaction and increase the possibility of false positive results.

Several of our existing and potential competitors have substantially greater product development capabilities and financial, scientific and marketing resources than we do. As a result, they may be able to adapt more readily to technological advances than we can, or to devote greater resources than we can to the research, development, marketing and promotion of drug discovery techniques or therapeutic products. Additionally, the technologies being developed by these companies may be more readily accepted or widely used than our CART technology. Our future success will depend in large part on our ability to maintain our competitive position. The biotechnology field is undergoing rapid and significant change and we may not be able to compete successfully with newly emerging technologies.

We will rely on our collaborators for support of our development programs for our drug candidates and intend to rely on our collaborators for the manufacturing and marketing of these products. Our collaborators may be conducting multiple product development efforts within the same disease areas that are the subjects of their agreements with us. Generally, our agreements with our collaborators do not preclude them from pursuing development efforts using a different approach from that which is the subject of our agreement with them. Any of our drug candidates therefore, may be subject to competition with a drug candidate under development by a collaborator.

GOVERNMENT REGULATION

Our and our collaborators' ongoing drug development activities are subject to the laws and regulations of governmental authorities in the United States and other countries in which these products may be marketed. Specifically, in the United States, the Food and Drug Administration (FDA) and comparable regulatory agencies in state and local jurisdictions impose substantial requirements on new product research and the clinical development, manufacture and marketing of pharmaceutical products, including testing and clinical trials to establish the safety

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and effectiveness of these products. Our and our collaborators' drug products will require regulatory approval before commercialization. Governments in other countries have similar requirements for testing, approval and marketing. In the United States, in addition to meeting FDA regulations, we are also subject to other federal, state and local environmental and safety laws and regulations, including regulation of the use and care of laboratory animals.

We do not plan to commercialize most of our drug candidates by ourselves, but intend to rely on our collaborators to develop and commercialize our drug candidates or those that our collaborators discover through the use of our technology. Before marketing in the United States, any pharmaceutical or therapeutic products developed by us or our collaborators must undergo rigorous pre-clinical testing and clinical trials and an extensive regulatory approval process implemented by the FDA under the federal Food, Drug and Cosmetic Act. The FDA regulates, among other things, the development, testing, manufacture, safety and effectiveness standards, record keeping, labeling, storage, approval, advertising, promotion, sale and distribution of pharmaceutical products. The regulatory review and approval process, which includes pre-clinical testing and clinical trials of each product candidate is lengthy, and uncertain. Securing FDA approval requires the submission of extensive pre-clinical and clinical data and supporting information to the FDA for each indication to establish a product candidate's safety and effectiveness. Additional animal studies, other pre-clinical tests or clinical trials may be requested by the FDA which may delay marketing approval. The approval process takes many years, requires the expenditure of substantial resources and may involve ongoing requirements for post-marketing studies.

Before commencing clinical investigations in humans, we or our collaborators must submit an Investigational New Drug application, or IND, to the FDA. We generally intend to rely on our collaborators to file IND applications and direct the regulatory approval process for the products they develop using our CART technology. Clinical trials are typically conducted in three sequential phases, although the phases may overlap or be combined. Phase I represents the initial administration of the drug to a small group of humans, either healthy volunteers or patients, to test for safety, dosage tolerance, absorption, metabolism, excretion and clinical pharmacology. Phase II involves studies in a relatively small number of patients to assess the effectiveness of the product, to ascertain dose tolerance and the optimal dose range and to gather additional data relating to safety and potential adverse effects. Once a drug is found to have some effectiveness and an acceptable safety profile in the targeted patient population, Phase III studies are initiated to establish safety and effectiveness in an expanded patient population and multiple clinical study sites. The FDA may require further post-marketing studies, referred to as Phase IV studies. The FDA reviews both the clinical plans and the results of the trials and may require that we discontinue the trials at any time if the FDA identifies any significant safety issues. Clinical testing must meet requirements for institutional review board oversight, informed consent, good clinical practices and FDA oversight.

The length of time necessary to complete clinical trials varies significantly and is difficult to predict. Clinical results are frequently susceptible to varying interpretations that may delay, limit or prevent regulatory approvals. Additional factors that can cause delay or termination of our clinical trials, or those of our collaborators, or may increase the cost of those trials, include, among other factors:

- lack of effectiveness of the product being tested

- adverse medical effects or side effects in treated patients

- slow patient enrollment in the clinical trial

- inadequately trained or insufficient personnel at the study site to assist in overseeing and monitoring the clinical trial

- delays in approval from a study site's review board

- longer treatment time required to demonstrate effectiveness or determine the appropriate product dose

- lack of sufficient supplies of the product candidate

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If pre-clinical and clinical studies are successful, the results, together with other information about the product and its manufacture, are submitted to the FDA in the form of an New Drug Application (NDA) to request marketing approval. Before receiving FDA approval to market a product, we or our collaborators must demonstrate that the product is safe and effective through clinical trials on the patient population that will be treated. The approval process is likely to require substantial time and effort and there can be no assurance that any approval will be granted on a timely basis, if at all. Additional animal studies or clinical trials may be requested during the FDA review period that may delay marketing approval. As part of the approval process, each manufacturing facility must be inspected by the FDA. Among the conditions of approval is the requirement that a manufacturer's quality control and manufacturing procedures conform with federally mandated current good manufacturing practices, or GMPs. Manufacturers must expend time, money and effort to ensure compliance with current GMPs and the FDA conducts periodic inspections to certify compliance. Violations may result in restrictions on the product or manufacturer, including costly recalls or withdrawal of the product from the market.

If regulatory approval of a product is granted by the FDA, this approval will be limited to those specific conditions for which the product is useful, as demonstrated through clinical studies. After FDA approval for the initial indications, further clinical trials will be necessary to gain approval for the use of the product for additional indications. Marketing or promoting a drug for an unapproved indication is prohibited. The FDA requires that adverse effects be reported to the FDA and may also require post-marketing testing to monitor for adverse effects, which can involve significant expense. Even after FDA approvals are obtained, a marketed product is subject to continual review. Later discovery of previously unknown problems or failure to comply with the applicable regulatory requirements may result in restriction on the marketing of a product or withdrawal of the product from the market as well as possible civil or criminal sanctions. Furthermore, failure to obtain reimbursement coverage from governmental or third party insurers may adversely impact successful commercialization.

Our access to and use of human or other tissue samples in our research and development efforts are subject to government regulation, both in the United States and abroad. United States and foreign government agencies may also impose restrictions on the use of data derived from human or other tissue samples. If our access to or use of human tissue samples, or our collaborator's use of data derived from such samples, is restricted, our business could suffer. Additionally, if we continue to develop our plant or insect programs, we may become subject to different government regulations relating to agricultural and industrial biotechnology products.

In addition to regulations enforced by the FDA, we are also subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act, the Controlled Substances Act and other present and potential future federal, state or local regulations. Our research and development programs involve the controlled use of hazardous materials, chemicals, biological materials and various radioactive compounds. Although we believe that our safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, we could be held liable for any damages that result, and the extent of that liability could exceed our resources.

RESEARCH

Research activities are important to our business. Research expenses related to the development of our technology and services and the improvement of our existing technology totaled approximately $12.1 million, $8.3 million and $2.6 million for the years ending December 31, 2000, 1999 and 1998, respectively. In the year ended December 31, 2000, the amount of research and development activities sponsored by our collaborators totaled approximately $2.9 million and was recorded as revenue.

COMPLIANCE WITH ENVIRONMENTAL REGULATIONS

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We believe that our operations comply in all material respects with the applicable environmental laws and regulations. Our compliance with these requirements did not and is not expected to have a material effect upon our capital expenditures, earnings or competitive position.

SOURCES AND AVAILABILITY OF RAW MATERIALS

In general, we purchase raw materials and supplies on the open market. Substantially all such materials are obtainable from a number of sources so that the loss of any one source of supply would not have a material adverse effect upon us.

OUR DATABASE

We have developed a web-based database that can be used to access relevant information and data generated from our research and development programs. Our database has a number of characteristics which we believe are unique. Our database allows individual users to obtain information on specific GPCR targets, including gene sequence information, data developed by us from GPCR tissue and cellular distribution studies, the results of drug screening and the results of our animal studies. In developing this database, we focused on the magnitude of data that we would generate based upon the number of GPCRs available to us, and the number of chemical compounds that would be screened in our assays. Our database, which is the subject of a pending patent application that we own, has a number of proprietary features that allow us to efficiently organize, store and access these data and information. Using this database, we and our collaborators can search for compounds by structure and assay results, and can search for genes by sequence and tissue or disease expression. One of our collaborators is currently using our database, and we believe our database will be a resource for collaborators who have a specific interest in diseases that affect certain tissues.

EMPLOYEES

As of March 1, 2001, we employed 122 people, including 102 in research and development and 20 in administration. Thirty-one of our employees hold doctoral degrees and an additional 17 hold other advanced degrees. None of our employees is covered by collective bargaining agreements. We consider our relationship with our employees to be good.

RISK FACTORS

WE ARE AT AN EARLY STAGE OF DEVELOPMENT AND HAVE A HISTORY OF LOSSES AND LIMITED REVENUES.

We were formed in April 1997 and are a early stage company with a limited operating history. To date, we have generated only limited revenues. Due in large part to the significant research and development expenditures required to identify and validate new drug targets and new drug candidates, we have generated losses each year since our inception. As of December 31, 2000, we had accumulated losses of approximately $20.7 million. We will generate revenues in the foreseeable future, if at all, solely from our collaboration and license agreements, and our losses may continue even if we or our collaborators successfully identify potential drug targets and drug candidates. If the time required to generate revenues and to achieve sustained profitability is longer than we anticipate, or if we are unable to obtain necessary funds, we may never achieve sustained profitability and may have to discontinue our operations.

MOST OF OUR EXPECTED FUTURE REVENUES ARE CONTINGENT UPON COLLABORATIVE AND LICENSE AGREEMENTS AND WE MAY NOT RECEIVE SUFFICIENT REVENUES FROM THESE AGREEMENTS TO SUSTAIN PROFITABILITY.

Our strategy is to use CART to generate meaningful revenues from our collaborative and license agreements. Our ability to generate revenues depends on our ability to enter into additional collaborative and license agreements with third parties and to maintain the agreements we currently have in place. We will receive little or no revenues under our agreements if our or our collaborators' research, development or marketing efforts are

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unsuccessful, or if our agreements are terminated early. Additionally, if we do not enter into new collaborative agreements, we will not receive future revenues from new sources.

Our future receipt of revenues from collaborative arrangements will be significantly affected by the amount of time and effort expended by our collaborators, the timing of the identification of useful drug targets and the timing of the discovery and development of drug candidates. Under our existing agreements, we may not earn significant milestone payments until our collaborators have advanced products into clinical testing, which may not occur for many years, if at all. We do not control the amount and timing of resources that our collaborators devote to our collaborative programs, potential products or product rights. Furthermore, we lack sales and marketing experience and will depend on our collaborators to market any drugs that we develop with them.

Conflicts may arise between us and our collaborators, such as conflicts concerning ownership rights to particular drug candidates. While our existing collaborative agreements typically provide that we receive milestone and royalty payments with respect to drugs developed from our collaborative programs, disputes may arise over the application of payment provisions to these drugs and any royalty payments may be at reduced rates. If any of our collaborators were to breach, terminate or fail to renew their collaborative agreements with us, the pre-clinical or clinical development or commercialization of the affected drug candidates or research programs could be delayed or terminated. Our collaborative agreements generally allow either party to terminate the agreements with advance written notice of that party's intent to terminate. In addition, our collaborators have the right to terminate the collaborative agreements under some circumstances in which we do not. In certain situations our collaborators can continue to use our technology after our agreements are terminated. You should read the section entitled "Business - Our GPCR Collaborators" for further information on the termination and other provisions of our material collaborative agreements.

Our collaborators may choose to use alternative technologies or develop alternative drugs either on their own or with other collaborators, including our competitors, in order to treat diseases that are targeted by collaborative arrangements with us. Our collaborative agreements typically do not prohibit these activities.

Consolidation in the pharmaceutical or biotechnology industry could have an adverse effect on us by reducing the number of potential collaborators or jeopardizing our existing relationships. We may not be able to enter into any new collaborative agreements.

IF PROBLEMS ARISE IN THE TESTING AND APPROVAL PROCESS, CART MAY NOT LEAD TO SUCCESSFUL DRUG DEVELOPMENT EFFORTS AND WE WILL NOT RECEIVE REVENUES.

We developed CART to identify drug candidates that may possess therapeutic potential and have entered into collaborative arrangements to discover and develop promising drug candidates. In order to receive milestone payments under our collaborative agreements, we or our collaborators must successfully complete pre-clinical and clinical trials of drug candidates discovered using CART. To date, we have identified only a few candidates, all of which are in the very early stages of development and none of which have completed the development process.

Developing drug candidates is highly uncertain and subject to a number of significant risks. Our access to and use of some human or other tissue samples in our research and development efforts is subject to government regulation, both in the United States and abroad. United States and foreign government agencies may also impose restrictions on the use of data derived from human or other tissue samples. Our collaborators will rely on third-party clinical investigators at medical institutions to conduct our clinical trials, and we may rely on other third-party organizations to perform data collection and analysis. As a result, we may face delays outside of our control. It may take us or our collaborators many years to complete any pre-clinical or clinical trials, and failure can occur at any stage of testing. Interim results of trials do not necessarily predict final results, and acceptable results in early trials may not be repeated in later trials. Moreover, if and when our programs reach clinical trials, we or our collaborators may decide to discontinue development of any or all of these projects at any time for commercial, scientific or other reasons.

In order to receive royalty payments from our collaborators, we or our collaborators must receive approval from regulatory agencies to market drugs discovered using CART. A new drug may not be sold until the FDA has approved a new drug application, or an NDA. If a product receives an approved NDA, this approval will be limited

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to those disease states and conditions for which the product is demonstrated through clinical trials to be safe and effective. Drug candidates developed by us or our collaborators may not prove to be safe and effective in clinical trials and may not meet all of the applicable regulatory requirements necessary to receive marketing approval. We do not expect any drugs resulting from our collaborators' research to be commercially available for many years, if at all.

DRUG DISCOVERY AND DEVELOPMENT IS AN INTENSELY COMPETITIVE PROCESS IN THE UNITED STATES AND ELSEWHERE AND THIS COMPETITIVE PROCESS COULD RENDER CART OBSOLETE OR NONCOMPETITIVE.

An important focus of our efforts is on GPCRs, particularly orphan GPCRs. Because GPCRs are an important target class for drug discovery efforts, we believe that most pharmaceutical companies, several biotechnology companies, and other organizations have internal drug discovery programs focused on drug discovery using GPCRs. Because the vast majority of GPCRs are orphan GPCRs, we believe that it is likely that many of these companies and organizations are focusing, or ultimately will focus, their drug discovery efforts on these orphan receptors. Another company or organization may have, or may develop, a technology using GPCRs, and in particular, orphan receptors, to discover and develop drug candidates more effectively, more quickly or at a lower cost than our technology. Such a technology could render CART obsolete or noncompetitive.

Many of the drugs that we or our collaborators are attempting to discover using CART would compete with existing therapies. In addition, many companies are pursuing the development of pharmaceuticals that target the same diseases and conditions that we are targeting such as cancer, obesity, cardiovascular disease, diabetes and Alzheimer's Disease. Our competitors may use discovery technologies and techniques or partner with collaborators in order to develop products more rapidly or successfully, or with less cost, than we or our collaborators are able to do. Many of our competitors, particularly large pharmaceutical companies, have substantially greater product development capabilities and greater financial, scientific and human resources than we do. Companies that complete clinical trials, obtain required regulatory agency approvals and commence commercial sale of their drugs before we do may achieve a significant competitive advantage, including certain patent and United States Food and Drug Administration, or FDA, marketing exclusivity rights. So far, we have not achieved any of these competitive advantages. Any results from our research and development efforts, or from our joint efforts with our existing or any future collaborators, might not compete successfully with existing products or therapies.

OUR SUCCESS IS DEPENDENT ON INTELLECTUAL PROPERTY RIGHTS HELD BY US AND THIRD PARTIES AND OUR INTEREST IN THESE RIGHTS IS COMPLEX AND UNCERTAIN.

Our success will depend in large part on our own and, to some extent, on our collaborators' abilities to obtain, secure and defend patents. We have numerous patent applications pending for our technology, including patent applications on drug candidate discovery techniques using CART, genetically altered GPCRs, GPCRs that we have discovered and compounds discovered using CART. Currently, four patents have been issued to us. The procedures for obtaining an issued patent in the United States and in most foreign countries are complex. These procedures require an analysis of the scientific technology related to the invention and many legal issues. We believe CART represents an entirely new way to discover drug candidates. Because of this, we expect that the analysis of our patent applications will be complex and time-consuming. Therefore, our patent position is very uncertain and we do not know when, or if, we will obtain additional issued patents for our technology.

When we activate a receptor, we change the way that the receptor would otherwise naturally function. We believe that our activated receptors are patentable. A third party may obtain an issued patent on a natural version of a receptor that we activate. We believe that an activated version of the natural receptor should not infringe a patent on the natural receptor. However, a third party who owns a patent on a natural version of a receptor may not agree with our position. We could be sued for patent infringement, and we do not know how a court would rule in such a case.

No consistent policy regarding the breadth of claims allowed in biotechnology patents has emerged to date. For example, on January 5, 2001 the United States Patent Office issued finalized Utility Examination Guidelines to its patent examiners that focus on what can be patented under United States patent law. These guidelines are expected to primarily impact the procedures that are used in determining the types of inventions that can be patented in the fields of biotechnology and chemistry. We do not know how, if at all, these guidelines may affect our patent

18

applications on CART, genetically altered GPCRs, GPCRs that we have discovered or chemical compounds that we discover as drug candidates using CART.

We also rely on trade secrets to protect our technology. However, trade secrets are difficult to protect. We require all of our employees to agree not to improperly use our trade secrets or disclose them to others, but we may be unable to determine if our employees have conformed or will conform with their legal obligations under these agreements. We also require collaborators and consultants to enter into confidentiality agreements, but may not be able to adequately protect our trade secrets or other proprietary information in the event of any unauthorized use or disclosure or the lawful development by others of this information. Many of our employees and consultants were, and many of our consultants may currently be, parties to confidentiality agreements with other pharmaceutical and biotechnology companies, and the use of our technology could violate these agreements. In addition, third parties may independently discover our trade secrets or proprietary information.

Technology licensed to us by others, or in-licensed technology, is important to some aspects of our business. We generally do not control the patent prosecution, maintenance or enforcement of in-licensed technology. Accordingly, we are unable to exercise the same degree of control over this intellectual property as we do over our internally developed technology. Moreover, some of our academic institution licensors, research collaborators and scientific advisors have rights to publish data and information to which we have rights. If we cannot maintain the confidentiality of our technology and other confidential information in connection with our collaborations, then our ability to receive patent protection or protect our proprietary information will be impaired.

A DISPUTE REGARDING THE INFRINGEMENT OR MISAPPROPRIATION OF OUR PROPRIETARY RIGHTS OR THE PROPRIETARY RIGHTS OF OTHERS COULD BE COSTLY AND RESULT IN DELAYS IN OUR RESEARCH AND DEVELOPMENT ACTIVITIES.

Our success depends, in part, on our ability to operate without infringing on or misappropriating the proprietary rights of others. There are many issued patents and patent applications filed by third parties relating to products or processes that could be determined to be similar or identical to ours or our licensors, and others may be filed in the future. Our activities, or those of our licensors or collaborators, may infringe patents owned by others. Although the government sponsored project to sequence the human genome has made genomics information freely available to the public, other organizations and companies are seeking proprietary positions on genomics information that overlap with the government sponsored project. Our activities, or those of our licensors or collaborators, could be affected by conflicting positions that may exist between any overlapping genomics information made available publicly as a result of the government sponsored project and genomics information that other organizations and companies consider to be proprietary.

We believe that there may be significant litigation in the industry regarding patent and other intellectual property rights. Any legal action against us, or our collaborators, claiming damages or seeking to enjoin commercial activities relating to the affected products or our methods or processes could:

- require us, or our collaborators, to obtain a license to continue to use, manufacture or market the affected products, methods or processes, which may not be available on commercially reasonable terms, if at all

- prevent us from making, using or selling the subject matter claimed in patents held by others and subject us to potential liability for damages

- consume a substantial portion of our managerial and financial resources

- result in litigation or administrative proceedings that may be costly, whether we win or lose

In addition, third parties may infringe on or misappropriate our proprietary rights, and we may have to institute costly legal action against them to protect our intellectual property rights. We may not be able to afford the costs of enforcing our intellectual property rights against third parties.

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WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS OUTSIDE THE UNITED STATES.

Patent law outside the United States is uncertain and in many countries is currently undergoing review and revision. The laws of some countries do not protect our intellectual property rights to the same extent as United States laws. It may be necessary or useful for us to participate in proceedings to determine the validity of our, or our competitors', foreign patents, which could result in substantial cost and divert our efforts and attention from other aspects of our business.

One of our United States patent applications relating to some aspects of our technology that we filed internationally was not timely filed in the designated foreign countries. We have taken remedial actions in an attempt to file the patent application in a number of these foreign countries. We cannot assure you that any of these remedial actions will be successful, or that patents based upon this patent application will be issued to us in any of these foreign countries. In particular, we failed to timely file this patent application in Japan and, as a result, no patent will be issued to us in Japan based upon this particular patent application. Based upon other patent applications that relate to CART that we have filed in the United States and internationally, we believe that there will be no material adverse effect on our business or operating results if we fail to obtain a patent based on the subject matter of this particular patent application.

OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE AND MAY CAUSE OUR STOCK PRICE TO DECLINE.

Our revenues and results of operations may fluctuate significantly from quarter to quarter, depending on a variety of factors, including:

- variations in milestone and royalty payments

- the timing of discovery and development of drug candidates, if any

- changes in the research and development budgets of our existing collaborators or potential collaborators

- others introducing new drug discovery techniques or new drugs that target the same diseases and conditions that we and our collaborators target

- regulatory actions

- expenses related to, and the results of, litigation and other proceedings relating to intellectual property rights or other matters

We will not be able to control many of these factors and we believe that period-to-period comparisons of our financial results will not necessarily be indicative of our future performance. If our revenues in a particular period do not meet expectations, we may not be able to adjust our expenditures in that period, which could cause our operating results to suffer. If our operating results in any future period fall below the expectations of securities analysts or investors, our stock price may fall by a significant amount.

WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE TO SUFFICIENTLY FUND OUR OPERATIONS AND RESEARCH, AND IF NEEDED, WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL CAPITAL ON TERMS FAVORABLE TO US.

We have consumed substantial amounts of capital to date and we expect to increase our operating expenses over the next several years as we expand our facilities, infrastructure and research and development activities. Based upon our current and our anticipated activities, we believe that our current funds will be sufficient to support our current operating plan through at least the next two years. However, if this plan changes, we may require additional financing sooner. For example, we may use a portion of our funds to acquire complementary businesses or technologies. Financing may not be available or may not be available on terms favorable to us. To the extent that we raise additional funds through collaboration and licensing arrangements, we may be required to relinquish some rights to our technologies or drug candidates, or grant licenses on terms that are unfavorable to us. We may also

20

raise additional funds through the incurrence of debt, and the holders of any debt we may issue could have rights superior to your rights. If adequate funds are not available, we will not be able to continue our development.

OUR RESEARCH AND DEVELOPMENT EFFORTS WILL BE SERIOUSLY JEOPARDIZED IF WE ARE UNABLE TO ATTRACT AND RETAIN KEY EMPLOYEES.

We are a small company with less than 125 employees. Our success depends, in part, on the continued contributions of our principal management and scientific personnel, and we face intense competition for such personnel. In particular, our research programs depend on our ability to attract and retain highly skilled scientists. If we lose the services of any of our key personnel, in particular Jack Lief, Dominic P. Behan or Derek T. Chalmers, as well as other principal members of our scientific or management staff, our research and development or management efforts could be interrupted or significantly delayed. For example, Eli Lilly has the right to terminate our collaboration agreement if they do not approve suitable replacements for key employees who leave us. Although we have not experienced problems retaining key employees, our employees can terminate their employment with us at any time. We may also encounter increasing difficulty in attracting enough qualified personnel as our operations expand and the demand for these professionals increases, and this difficulty could impede the attainment of our research and development objectives.

OUR BUSINESS MAY BE ADVERSELY AFFECTED BY HIGHER ENERGY COSTS AND INTERRUPTED POWER SUPPLIES RESULTING FROM THE ELECTRICAL POWER SHORTAGES CURRENTLY AFFECTING THE STATE OF CALIFORNIA.

Our corporate headquarters and laboratories are located in San Diego, California. Electrical power is vital to our operations and we rely on a continuous power supply to conduct our operations. California is in the midst of a power crisis and has recently experienced significant power shortages. In the event of an acute power shortage, California has on some occasions implemented, and may in the future continue to implement, rolling blackouts throughout California.

For this type of contingency, we have acquired a stand-by electrical generator to provide power to our laboratories and offices. However, the stand-by generator is not yet fully installed. If blackouts interrupt our power supply frequently or for more than a few days we, most likely, would have to reduce or temporarily discontinue our normal operations. In addition, the cost of our research and development efforts may increase because of the disruption to our operations. Any such reduction or disruption of our operations at our facilities could negatively impact our revenues and results of operations significantly. In addition, this could cause our stock price to fall by a significant amount.

IF WE USE BIOLOGICAL AND HAZARDOUS MATERIALS IN A MANNER THAT CAUSES INJURY OR VIOLATES LAWS, OUR BUSINESS AND OPERATIONS MAY SUFFER.

Our research and development activities involve the controlled use of potentially harmful biological materials as well as hazardous materials, chemicals and various radioactive compounds. For example, we use radioactive phosphorous-32 on a daily basis and sodium cyanide on a regular basis. We cannot completely eliminate the risk of accidental contamination, which could cause:

- an interruption of our research and development efforts

- injury to our employees resulting in the payment of damages

- liabilities under federal, state and local laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products

CONTINUATION OF OUR DEVELOPMENT PLANS FOR T-82 IS UNCERTAIN

We have completed four Phase I studies of T-82 through 2000 and have been assessing the data in conjunction with SSP. These four Phase I safety-based studies evidenced results that we believe establish the safety

21

of T-82 in the tested parameters. However, our analysis of all of the data for T-82, in conjunction with the extensive costs associated with conducting Phase II and Phase III clinical studies of T-82, the types and number of potential new treatments for Alzheimer's Disease that are in more advanced stages of clinical testing and regulatory review, as well as the impact that these factors may have on our ability to receive regulatory approval for commercialization of T-82 or successfully out-license T-82 to a third party have prompted us to consider if continuation of the T-82 program by us is warranted. Although a final decision has not yet been made, we cannot assure you that we will continue development of T-82 until we have completed the assessment of all data and information related to this program. In the event that we decide to continue with our T-82 development program, and based upon the foregoing considerations, we may be unable to out-license T-82 to another party as we had originally intended, or we may be unable to secure regulatory approval for the commercialization of T-82.

ANTI-TAKEOVER PROVISIONS IN OUR CERTIFICATE OF INCORPORATION AND DELAWARE LAW COULD PREVENT A POTENTIAL ACQUIROR FROM BUYING YOUR STOCK.

Provisions of our certificate of incorporation and Delaware law could make it more difficult for a third party to acquire us, even if the acquisition would be beneficial to our stockholders. Our amended and restated certificate of incorporation gives our board of directors the authority to issue up to 7,500,000 shares of preferred stock and to determine the price, rights, preferences and privileges and restrictions, including voting rights, of those shares without any further vote or action by our stockholders. Some of the rights of the holders of common stock may be subject to, and may be harmed by, the rights of the holders of any shares of preferred stock that may be issued in the future. The issuance of preferred stock could potentially prevent us from consummating a merger, reorganization, sale of substantially all of our assets, liquidation or other extraordinary corporate transaction without the approval of the holders of the outstanding shares of preferred stock. These provisions could prevent the consummation of a transaction in which our stockholders could receive a substantial premium over the current market price for their shares.

OUR EQUITY INTEREST IN CHEMNAVIGATOR.COM MAY HAVE NO VALUE.

We have licensed certain Internet-related technologies to ChemNavigator.com in exchange for shares of ChemNavigator.com stock. We currently have a 34% equity interest in ChemNavigator.com. Since it was formed in May 1999, ChemNavigator.com has incurred net operating losses and negative cash flows from operating activities, and we expect ChemNavigator.com to incur increasing net operating losses and negative cash flows for the foreseeable future. ChemNavigator.com has received only limited revenues to date, and it may not be able to generate sufficient revenues or obtain financing to offset its losses. We are currently not attributing any book value to our equity interest in ChemNavigator.com.

ChemNavigator.com also faces intense competition from established companies that provide Internet-based products to the same customers as ChemNavigator.com. Some of these companies have greater financial, technical and human resources than ChemNavigator.com has, have a longer operating history and are more well-known to ChemNavigator.com's target customers. If ChemNavigator.com is not able to compete successfully, it will not achieve profitability and may have to discontinue operations.

OUR EQUITY INTEREST IN ARESSA PHARMACEUTICALS MAY HAVE NO VALUE.

We currently have an 83% equity interest in Aressa. Since it was formed in August 1999, Aressa has incurred net operating losses and negative cash flows from operating activities, and we expect Aressa to incur increasing net operating losses and negative cash flows for the foreseeable future. Aressa has not received any revenues to date, and it may never generate any revenues or obtain financing to offset its losses and may have to discontinue operations. We are currently not attributing any book value to our equity interest in Aressa.

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OUR RECENT ACQUISITION OF BUNSEN RUSH LABORATORIES, INC. PRESENTS NEW CHALLENGES THAT MAY NEGATIVELY AFFECT OUR BUSINESS.

We recently acquired Bunsen Rush Laboratories, Inc. ("Bunsen Rush") through our wholly owned subsidiary BRL Screening, Inc. Bunsen Rush was a privately held research-based company that provided receptor screening for the pharmaceutical and biotechnology industries using its proprietary and patented Melanophore Technology. It may turn out the costs associated with using the Melanophore Technology with Arena's CART Technology may exceed our original assumptions or that the advantages of combining the Melanophore Technology with CART Technology may be limited. Moreover, there is no assurance that Bunsen Rush's operations can be successfully integrated into Arena's operations or that all of the benefits expected from such integration will be realized. Furthermore, there can be no assurance that our operations, management and personnel will be compatible with those former employees of Bunsen Rush who have become employees of our wholly owned subsidiary. As a result of any of these factors, our stock price could decline significantly.

WE MAY ENGAGE IN STRATEGIC TRANSACTIONS, WHICH COULD ADVERSELY AFFECT OUR BUSINESS.

From time to time we consider strategic transactions and alternatives with the goal of maximizing stockholder value. For example, in February 2001 we completed the acquisition of Bunsen Rush Laboratories, Inc. through our wholly-owned subsidiary BRL Screening, Inc. We will continue to evaluate other potential strategic transactions and alternatives which we believe may enhance stockholder value. These additional potential transactions may include a variety of different business arrangements, including spin-offs, acquisitions, strategic partnerships, joint ventures, restructurings, divestitures, business combinations and investments. We cannot assure you that any such transactions will be consummated on favorable terms or at all, will in fact enhance stockholder value, or will not adversely affect our business or the trading price of our stock. Any such transaction may require us to incur non-recurring or other charges and may pose significant integration challenges and/or management and business disruptions, any of which could materially and adversely affect our business and financial results.

ITEM 2. PROPERTIES

Our facilities consist of approximately 63,000 square feet of research and office space located at 6150 and 6166 Nancy Ridge Drive, San Diego, California. At our 6166 Nancy Ridge Drive facility, we currently lease approximately 37,000 square feet of space, of which 23,000 square feet is laboratory space and 14,000 square feet is office space. In 2000, the Company began leasing additional facilities located at 6150 Nancy Ridge Drive consisting of approximately 26,000 square feet. In January 2001, we purchased the 6150 Nancy Ridge Drive facility as well as the adjoining facility at 6138 Nancy Ridge Drive. The 6138 Nancy Ridge Drive facility, consisting of approximately 26,000 square feet, is currently occupied by a tenant whose lease expires on August 31, 2001. After the lease expires, we will use the additional space primarily for additional laboratory and office space. We believe these facilities will be adequate to meet our near-term space requirements. In addition, we believe that the space needed to accommodate our growth through 2002 is available.

ITEM 3. LEGAL PROCEEDINGS.

None.

ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

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Our common stock has traded on the Nasdaq National Market under the symbol "ARNA" since July 28, 2000. The following table sets forth, for the period indicated, the high and low bid quotations for the common stock as reported by the Nasdaq National Market.

                                                              HIGH             LOW
Third Quarter (Commencing July 28, 2000)                     $47.00          $18.00
Fourth Quarter                                               $44.00          $13.625

On March 1, 2001, the last reported sale price on the Nasdaq National Market for our common stock was $23.00 per share.

HOLDERS

As of March 1, 2001 there were approximately 4,170 stockholders of record of the Company's common stock.

DIVIDENDS

Dividends may be paid on common stock of Arena as are declared by the Board of Directors from funds that the law allows to be used for dividends. Under Delaware law, dividends may only be paid from surplus or from net profits for the year and/or the preceding year. Since the Company has neither surplus nor net profits from the current year or the preceding year, the Company is prevented from paying dividends until such conditions change. The Company has not paid dividends on its common stock, and currently does not plan to pay any cash dividends in the foreseeable future.

USE OF PROCEEDS FROM THE SALE OF REGISTERED SECURITIES

On July 28, 2000 we completed our initial public offering of 6,000,000 shares of our common stock at an initial public offering price of $18.00 per share for gross proceeds of $108.0 million and estimated net proceeds of approximately $98.8 million. We paid a total of approximately $7.6 million in underwriting discounts and commissions and other costs and expenses, other than underwriting discounts and commissions, totaled approximately $1.6 million in connection with the offering. The managing underwriters in the offering were ING Barings, Prudential Vector Healthcare and SG Cowen. The shares of common stock sold in the offering were registered under the Securities Act of 1933 in a Registration Statement on Form S-1, as amended (No. 333-35944). The Securities and Exchange Commission declared the Registration Statement effective on July 27, 2000.

Furthermore, on August 10, 2000 the underwriters exercised an over-allotment option for an additional 900,000 shares of our common stock at the initial public offering price of $18.00 per share for gross proceeds of $16.2 million and net proceeds of approximately $15.1 million. The shares sold to underwriters in the over-allotment option were also registered on Form S-1. We paid a total of approximately $1.1 million in underwriting discounts and commissions in connection with the exercise of the over-allotment option.

Our total net proceeds from the initial public offering were approximately $113.9 million. No expenses were paid or payments made to our directors, officers or affiliates or 10% owners of any class of our equity securities. From the date of our IPO through December 31, 2000, all of the net proceeds remain in working capital, held as temporary investments in short-term money funds. In January 2001, we used cash proceeds of $5.4 million to acquire facilities at 6138-6150 Nancy Ridge Drive in San Diego, California. In February 2001, we used cash of $15.0 million to acquire all of the outstanding stock of Bunsen Rush, a privately held company. The acquisition was completed through a merger into our wholly-owned subsidiary, BRL Screening, Inc. We intend to use the balance of the net proceeds from the offering for general corporate purposes, including working capital, drug candidate discovery, development and clinical testing using non-partnered GPCR targets, and other research and development and clinical testing activities. The amounts and timing of our actual expenditures for each purpose may vary significantly depending upon numerous factors. In addition, we may use a portion of the net proceeds to acquire other complementary businesses or technologies.

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ITEM 6. SELECTED FINANCIAL DATA

The following Selected Financial Data should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 8. Financial Statements and Supplementary Data" included elsewhere in this Annual Report on Form 10-K.

                                                               Year ended December 31,
                                                 -----------------------------------------------------
                                                                                                         Period from April 14,
                                                                                                         1997 (inception)
                                                                                                         through December
                                                           2000               1999             1998          31,1997
                                                 ----------------------------------------------------------------------------
REVENUES
  Total revenues                                     $   7,683,396      $         --      $        --       $      --

EXPENSES

Research and development                                12,080,204         8,336,483        2,615,526         447,038
General and administrative                               2,678,980         1,814,023          728,806         234,614
Amortization of deferred compensation                    4,342,896           378,109               --              --
                                                 ---------------------------------------------------------------------
  Total operating expenses                              19,102,080        10,528,615        3,344,332         681,652
Interest and other, net                                  5,056,714           290,665          (51,986)        (13,113)
                                                 ---------------------------------------------------------------------
Net loss                                                (6,361,970)      (10,237,950)      (3,396,318)       (694,765)

Non-cash preferred stock charge                        (22,391,068)               --               --              --
                                                 ---------------------------------------------------------------------

Net loss applicable to common stockholders           $ (28,753,038)     $(10,237,950)     $(3,396,318)      $(694,765)
                                                 =====================================================================

Historical net loss per share, basic and diluted     $       (2.84)     $     (10.05)     $     (3.51)      $   (0.73)
                                                 =====================================================================

Shares used in calculating historical net loss
per share, basic and diluted                            10,139,755         1,018,359          966,799         955,000
                                                 =====================================================================

Pro forma net loss per share                          $      (1.65)     $      (1.29)
                                                 ====================================

Shares used in calculating pro forma net
loss per share                                          17,411,028         7,926,952
                                                 ====================================

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                                                                                     As of December 31,
                                                            ----------------------------------------------------------------------
                                                                 2000             1999              1998              1997
                                                            ----------------------------------------------------------------------
Balance Sheet Data:
Cash and cash equivalents                                     $ 144,413,176     $  5,401,508      $    194,243         $1,553,422
Total assets                                                    152,711,929        8,525,840         1,653,090          2,421,603
Long-term debt, net of current portion                              960,517        2,158,784           970,785            790,863
Redeemable convertible preferred stock                                   --       18,251,949         2,598,643          2,193,356
Deferred compensation                                            (7,899,970)        (625,955)               --                 --
Accumulated deficit                                             (20,691,003)     (14,329,033)       (4,091,083)          (694,765)
Total stockholder's equity (deficit)                            148,784,325      (13,899,549)       (4,068,283)          (694,665)

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis in conjunction with "Item 8. Financial Statements and Supplementary Data" included elsewhere in this Annual Report on 10-K.

Since our inception in April 1997, we have devoted substantially all of our resources to the research and development of CART. We have incurred significant operating losses since our inception and, as of December 31, 2000, we had an accumulated deficit of $20.7 million. Our prospects should be considered in light of the risks, expenses and difficulties encountered by companies in the early stages of development, particularly those companies in the rapidly changing pharmaceutical and biotechnology industries.

In April 2000, we entered into a significant collaborative agreement with Eli Lilly, one of the world's leading pharmaceutical companies. This collaboration focuses principally on diseases of the central nervous system and endocrine system, as well as cardiovascular diseases, and may be expanded to other diseases, including cancer. We activate mutually selected G protein-coupled receptors and will provide Eli Lilly with biochemical assays for use in their screening facilities. We have received, and will continue to receive, research funding from Eli Lilly for our internal resources committed to these tasks, which will be augmented by substantial resource commitments by Eli Lilly. We may receive up to $1.25 million per receptor based upon milestone payments in connection with the successful application of CART to each receptor, and up to an additional $6.0 million based upon clinical development milestone payments for each drug candidate discovered using CART. We may also receive additional milestone and royalty payments associated with the commercialization of drugs discovered using CART, if any. In addition, we have entered into other collaborative agreements, including with Taisho and Fujisawa, regarding the application of CART to G protein-coupled receptors. We have recognized revenues of approximately $5.2 million from our collaboration with Eli Lilly and approximately $2.4 million from our collaboration with Taisho.

In February 2001, the Company, through its wholly-owned subsidiary BRL Screening, Inc., acquired for $15.0 million in cash all of the outstanding capital stock of Bunsen Rush Laboratories, Inc. (Bunsen Rush), a privately held research based company that provides receptor screening for the pharmaceutical and biotechnology industries using its proprietary and patented Melanophore Technology. Melanophore Technology is a functional-based screening technology used to identify compounds that interact with cell surface receptors, including known and orphan GPCRs and receptor tyrosine kinases. The functional nature of Melanophore Technology eliminates the need for radioactive or fluorescent screening techniques and provides a simple and sensitive means to detect cellular signals generated by activated GPCRs.

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

- establishing additional collaborations with pharmaceutical and biotechnology companies based on using CART

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

26

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

- We intend to map the GPCRs to all of the major body systems

Our ability to achieve our identified goals or objectives is dependent upon many factors, some of which are out of our control, and we may not achieve our identified goals or objectives.

Our quarterly operating results will depend upon many factors, including expiration of research contracts with our collaborators, the size of future collaborations, the success rate of our technology collaborations leading to milestones and royalties, and general and industry-specific economic conditions which may affect research and development expenditures. As a consequence, our revenues in future periods are likely to fluctuate significantly from period to period.

Our research and development expenses consist primarily of salaries and related personnel expenses. As of December 31, 2000, all research and development costs have been expensed as incurred. We believe that continued investment in research and development is critical to attaining our strategic objectives and we expect these expenses to continue and to increase. General and administrative expenses consist primarily of salaries and related personnel expenses for executive, finance and administrative personnel, professional fees, and other general corporate expenses. As we add personnel and incur additional costs related to the growth of our business, general and administrative expenses will also increase.

DEFERRED COMPENSATION

Deferred compensation for stock options granted by us to our employees and directors has been determined as the difference between the estimated market value of our common stock on the date the options were granted, and the exercise price of the options. Deferred compensation is initially recorded as a component of stockholders' equity and is amortized using a graded vesting method as charges to operations over the vesting period of the options. In connection with the grant of stock options to our employees, consultants and directors, we recorded deferred compensation of approximately $11.6 million in the year ended December 31, 2000 and $1.0 million in the year ended December 31, 1999. As of December 31, 2000, the total charges to be recognized in future periods from amortization of deferred stock compensation are anticipated to be approximately $4.1 million, $2.6 million, $1.1 million, and $99,000 for the years ending December 31, 2001, 2002, 2003 and 2004, respectively. Deferred compensation for stock options granted by us to our consultants has been determined in accordance with Statement of Financial Accounting Standards No. 123 and Emerging Issues Task Force 96-18 as the fair value of the equity instruments issued. Deferred compensation for stock options that we grant to consultants is periodically remeasured as the underlying options vest. Our stock options generally vest over four years from the date of grant.

RESULTS OF OPERATIONS

Year ended December 31, 2000 compared to the year ended December 31, 1999

Revenues. We recorded revenues of $7.7 million for the year ended December 31, 2000 as compared to no revenue for the year ended December 31, 1999. The revenues for the year ended December 31, 2000 were primarily attributable to our collaborations with Eli Lilly and Taisho, which included research funding, milestone achievements, and technology access and development fees. Research funding is recognized as revenue when the services are rendered. Revenue from technology access and development fees is recognized ratably over the term of the collaboration. Revenue from milestones is recognized when the milestone is achieved. If our collaborators pay us before we recognize the revenue, we will defer revenue recognition of these payments until earned. As of December 31, 2000 we had current and non-current deferred revenues totaling approximately $705,000.

Research and development expenses. Our research and development expenses increased $3.8 million to $12.1 million for the year ended December 31, 2000, from $8.3 million for the year ended December 31, 1999. This increase was primarily due to increased personnel related expenses of $3.5 million and lab supplies costing $1.4 million in order to expand the application of our technology. The increase was offset by reduced expenses of $1.1

27

million related to the development of T-82 for which we initiated our first Phase I clinical trial in early 1999, and which was completed in late 1999.

General and administrative expenses. Our general and administrative expenses increased $900,000 to $2.7 million for the year ended December 31, 2000, from $1.8 million for the year ended December 31, 1999. This increase was primarily due to increased personnel expenses related to additional personnel hired in the accounting, legal and general administration departments. This increased staffing was necessary to manage and support our continued growth as well as to accommodate the demands associated with operating as a public company.

Amortization of deferred compensation. We recorded amortization of deferred compensation of approximately $4.3 million for the year ended December 31, 2000 as compared to $378,000 for the year ended December 31, 1999.

Interest income. Interest income increased $4.2 million to $4.6 million for the year ended December 31, 2000, from $447,000 for the year ended December 31, 1999. The increase was primarily attributable to higher average levels of cash and cash equivalents in the year ended December 31, 2000.

Interest expense. Interest expense increased $54,000 to $220,000 for the year ended December 31, 2000 from $166,000 for the year ended December 31, 1999. This increase represents interest incurred on our equipment leases.

Gain on investment. For the year ended December 31, 2000 we recorded a gain on the sale of liquid short-term investments in the amount of $576,000.

Other income. Other income increased $48,000 to $57,000 for the year ended December 31, 2000 from $9,000 for the year ended December 31, 1999. This increase represents rental income received from subleasing office space.

Net loss. Net loss decreased $3.8 million to $6.4 million for the year ended December 31, 2000 compared to $10.2 million for the year ended December 31, 1999. The decrease reflects revenues of $7.7 million in the year ended December 31,2000 reduced by increases in research and development and general and administrative expenses as well as amortization of deferred compensation.

Non-cash preferred stock charge. We recorded a non-cash preferred stock charge of $22.4 million for the year ended December 31, 2000. This non-cash preferred stock charge relates to the issuance of our Series E preferred stock in January 2000, our Series F preferred stock in March 2000 and our Series G preferred stock in April 2000, which were converted into shares of our common stock upon the closing of our initial public offering. We recorded the non-cash preferred stock charge at the dates of issuance by increasing the net loss applicable to common stockholders, without any effect on total stockholders' equity. The amount increased our basic net loss per share for the year ended December 31, 2000.

Year ended December 31, 1999 compared to the year ended December 31, 1998

Research and development expenses. Our research and development expenses increased $5.7 million to $8.3 million for the year ended December 31, 1999, from $2.6 million for the year ended December 31, 1998. This increase was primarily due to increased personnel related expenses of $2.5 million and lab supplies costing $1.3 million in order to expand the application of our technology, expenses of $1.5 million associated with our first Phase I clinical trial of T-82 which were initiated in early 1999, and facility related expenses of $358,000 as a result of our facility expansion.

General and administrative expenses. Our general and administrative expenses increased $1.1 million to $1.8 million for the year ended December 31, 1999, from $729,000 for the year ended December 31, 1998. This increase was primarily related to five additional personnel hired during 1999 to help support the growing responsibilities of the accounting, legal and general administration departments.

28

Amortization of deferred compensation. We recorded amortization of deferred compensation of approximately $378,000 for the year ended December 31, 1999. There was no amortization of deferred compensation in the year ended December 31, 1998.

Interest income. Interest income increased $405,000 to $447,000 for the year ended December 31, 1999, from $42,000 for the year ended December 31, 1998. The increase was primarily attributable to higher levels of cash and cash equivalents in 1999 from the proceeds of the sale of our Series D convertible preferred stock in January 1999.

Interest expense. Interest expense increased $72,000 to $166,000 for the year ended December 31, 1999 from $94,000 for the year ended December 31, 1998. This increase represents interest incurred on our equipment leases as well as interest accrued on our other debt.

Net loss. Net loss increased $6.8 million to $10.2 million for the year ended December 31, 1999 compared to $3.4 million for the year ended December 31, 1998. The increase reflects increases in research and development and general and administrative expenses, offset in part by the increase in interest income.

Year ended December 31, 1998 compared to the period from April 14, 1997 (inception) through December 31, 1997

Research and development expenses. Our research and development expenses increased $2.2 million to $2.6 million for the year ended December 31, 1998, from $447,000 for the period from April 14, 1997 through December 31, 1997. This increase was primarily due to increased personnel expenses of $1.3 million and lab supplies costing $538,000 in order to expand the application of our technology, and facility related expenses of $348,000 as a result of our facility expansion.

General and administrative expenses. Our general and administrative expenses increased $494,000 to $729,000 for the year ended December 31, 1998, from $235,000 for the period from April 14, 1997 through December 31, 1997. This increase was primarily due to increased personnel related expenses of $400,000 in order to establish and support the growing responsibilities of the accounting, legal and general administration departments and facility-related expenses of $76,000 as a result of our facility expansion.

Interest income. Interest income increased $19,000 to $42,000 for the year ended December 31, 1998, from $23,000 for the period from April 14, 1997 through December 31, 1997. The increase was primarily attributable to higher average cash levels in 1998.

Interest expense. Interest expense increased $58,000 to $94,000 for the year ended December 31, 1998 from $36,000 for the period from April 14, 1997 through December 31, 1997. The increase represents interest incurred on our equipment lease as well as interest accrued on our other debt for a full year.

Net loss. Net loss increased $2.7 million to $3.4 million for the year ended December 31, 1998 compared to $695,000 for the period from April 14, 1997 through December 31, 1997. The increase reflects increases in research and development and general and administrative expenses.

LIQUIDITY AND CAPITAL RESOURCES

We have experienced net losses and negative cash flow from operations since our inception. At December 31, 2000, we had an accumulated deficit of $20.7 million and since our inception, we had used cash from operations of $15.8 million. Our net losses have resulted primarily from expenses incurred in connection with our research and development activities and general and administrative expenses. As of December 31, 2000, we had $144.4 million in cash and cash equivalents compared to $5.4 million in cash and cash equivalents as of December 31, 1999.

Net cash used in operating activities was approximately $4.1 million during the year ended December 31, 2000, approximately $8.7 million during the year ended December 31, 1999 and was approximately $2.4 million during the year ended December 31, 1998. The primary use of cash was to fund our net losses for these periods,

29

adjusted for non-cash expenses, including $4.3 million in non-cash amortization of deferred compensation during the year ended December 31, 2000, and changes in operating assets and liabilities.

Net cash used in investing activities was approximately $2.2 million during the year ended December 31, 2000 and was approximately $2.1 million during the year ended December 31, 1999. Net cash used in investing activities was approximately $593,000 during the year ended December 31, 1998. Net cash used in investing activities was primarily the result of the acquisition of laboratory and computer equipment, leasehold improvements and furniture and fixtures.

Net cash proceeds from financing activities was approximately $145.3 million, $16.0 million and $1.7 million during the years ended December 31, 2000, 1999 and 1998, respectively. The net cash proceeds from financing activities during the year ended December 31, 2000 was primarily from net proceeds of $113.9 million from our initial public offering in July 2000 as well as $30.1 million from the issuance of preferred stock. The net cash proceeds from financing activities for the years ended December 31, 1999 and 1998 were primarily from the issuance of preferred stock.

We lease a corporate research and development facility under a lease which expires on April 30, 2013. The lease provides us with options to extend for two additional five-year periods. We have also entered into capital lease agreements for various lab and office equipment. The terms of these capital lease agreements range from 48 to 60 months. Current total minimum annual payments under these capital leases are approximately $614,000 in 2001, $614,000 in 2002, $480,000 in 2003 and $45,000 in 2004.

In January 2001, we purchased a facility we were previously leasing as well as the adjoining building at 6138-6150 Nancy Ridge Drive in San Diego for cash of $5.4 million. Of the 52,000 square foot facility, 26,000 square feet is subleased to a tenant until August of 2001.

In February 2001, the Company, through its wholly-owned subsidiary BRL Screening, Inc., acquired all of the outstanding capital stock of Bunsen Rush, a privately held research based company, for cash of $15.0 million.

The amount and timing of future losses are highly uncertain. Our ability to achieve and thereafter sustain profitability will be dependent upon, among other things, obtaining additional strategic alliances as well as establishing additional collaborative or licensing arrangements.

Based on the research collaborations we already have in place and our current internal business plan, we expect to hire an additional 40 to 50 employees, primarily scientists, by the end of 2001. While we believe that our current capital resources and anticipated cash flows from licensing activities, will be sufficient to meet our capital requirements for at least the next two years, we cannot assure you that we will not require additional financing before such time. Our funding requirements may change at any time due to technological advances or competition from other companies. Our future capital requirements will also depend on numerous other factors, including scientific progress in our research and development programs, additional personnel costs, progress in pre-clinical testing, the time and cost related to proposed regulatory approvals, if any, and the costs of filing and prosecution of patent applications and enforcing patent claims. We cannot assure you that adequate funding will be available to us or, if available, that such funding will be available on acceptable terms. Any shortfall in funding could result in the curtailment of our research and development efforts.

INCOME TAXES

As of December 31, 2000, we had approximately $12.2 million of net operating loss carryforwards and $1.6 million of research and development tax credit carryforwards for federal income tax purposes. These carryforwards expire on various dates beginning in 2012. These amounts reflect different treatment of expenses for tax reporting than are used for financial reporting. United States tax law contains provisions that may limit our ability to use net operating loss and tax credit carryforwards in any year, or if there has been a significant ownership change. Any future significant ownership change may limit the use of net operating loss and tax credit carryforwards.

30

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk for changes in interest rates relates primarily to our cash equivalents and short-term investments. We do not use derivative financial instruments in our investment portfolio. Our cash and investment policy emphasizes liquidity and preservation of principal over other portfolio considerations. We select investments that maximize interest income to the extent possible within these guidelines. If market interest rates were to decrease by 1% from December 31, 2000, we would expect future interest income from our portfolio to decline annually by less than $1.4 million. The modeling technique used measures the change in fair values arising from an immediate hypothetical shift in market interest rates and assumes ending fair values include principal plus earned interest.

31

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ARENA PHARMACEUTICALS, INC.
INDEX TO FINANCIAL STATEMENTS

                                                                                                            PAGE
                                                                                                            ----
Report of Ernst & Young LLP, Independent Auditors.......................................................      33

Balance Sheets..........................................................................................      34

Statements of Operations................................................................................      35

Statements of Stockholders' Equity (Deficit)............................................................      36

Statements of Cash Flows................................................................................      37

Notes to Financial Statements...........................................................................      38

32

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Arena Pharmaceuticals, Inc.

We have audited the accompanying balance sheets of Arena Pharmaceuticals, Inc. as of December 31, 2000 and 1999, and the related statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Arena Pharmaceuticals, Inc. at December 31, 2000 and 1999 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States.

                                                           /s/ ERNST & YOUNG LLP



San Diego, California
January 15, 2001

33

ARENA PHARMACEUTICALS, INC.

BALANCE SHEETS

                                                                          DECEMBER 31,
                                                               --------------------------------
                                                                    2000               1999
                                                               ------------        ------------
ASSETS
Current assets:
   Cash and cash equivalents                                   $144,413,176        $ 5,401,508
   Accounts receivable                                            2,116,146                  -
   Prepaid expenses                                               1,685,122            172,052
                                                               ------------        ------------
     Total current assets                                       148,214,444          5,573,560

Property and equipment, net                                       4,265,260          2,773,382
Deposits and restricted cash                                         88,016            178,898
Other assets                                                        144,209                  -
                                                               ------------        ------------
     Total assets                                              $152,711,929        $ 8,525,840
                                                               ============        ===========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
   Accounts payable and accrued expenses                       $    915,540        $   866,414
   Current portion of deferred revenues                             220,000                  -
   Current portion of obligations under capital leases              480,538            355,119
                                                               ------------        ------------
     Total current liabilities                                    1,616,078          1,221,533

Convertible note payable to related party, less current
   portion                                                                -            934,312
Obligations under capital leases, less current portion              960,517          1,224,472
Deferred rent                                                       866,009            793,123
Deferred revenues                                                   485,000                  -

Commitments
Redeemable convertible preferred stock, $.0001 par value:
   7,500,000 shares authorized at December 31, 2000, 7,792,533
   shares authorized at December 31, 1999; no shares issued
   and outstanding at December 31, 2000; 6,908,593 shares
   issued and outstanding at December 31, 1999                            -         18,251,949

Stockholders' equity (deficit):
   Common stock, $.0001 par value: 67,500,000 and 25,000,000
     shares authorized at December 31, 2000 and 1999,
     respectively; 22,688,313 and 1,116,375 shares issued and
     outstanding at December 31, 2000 and December 31, 1999,
     respectively                                                     2,268                111
    Additional paid-in capital                                  177,373,030          1,055,328
    Deferred compensation                                        (7,899,970)          (625,955)
    Accumulated deficit                                         (20,691,003)       (14,329,033)
                                                               ------------        ------------
     Total stockholders' equity (deficit)                       148,784,325        (13,899,549)
                                                               ------------        ------------
     Total liabilities and stockholders' equity (deficit)      $152,711,929        $ 8,525,840
                                                               ============        ============

See accompanying notes.

34

ARENA PHARMACEUTICALS, INC.

STATEMENTS OF OPERATIONS

                                                                 YEAR ENDED DECEMBER 31,
                                                        --------------------------------------------
                                                             2000           1999             1998
                                                        ------------   ------------      -----------
Revenues                                                $  7,683,396   $         --      $        --


Operating expenses:
   Research and development                               12,080,204      8,336,483        2,615,526
   General and administrative                              2,678,980      1,814,023          728,806
   Amortization of deferred compensation
     ($3,018,623 and $264,419 related to research and
     development expenses and $1,324,273 and $113,690
     related to general and administrative expenses for
     the year ended December 31, 2000 and 1999,
     respectively)                                         4,342,896        378,109               --
                                                        ------------   ------------      -----------
     Total operating expenses                             19,102,080     10,528,615        3,344,332
   Interest income                                         4,644,471        446,848           42,266
   Interest expense                                         (220,483)      (165,603)         (94,252)
   Gain on sale of investment                                575,855             --               --
   Other income                                               56,871          9,420               --
                                                        ------------   ------------      -----------
   Net loss                                               (6,361,970)   (10,237,950)      (3,396,318)
   Non-cash preferred stock charge                       (22,391,068)            --               --
   Net loss applicable to common stockholders           $(28,753,038)  $(10,237,950)     $(3,396,318)
                                                        ============   ============      ===========
   Net loss per share, basic and diluted                $      (2.84)  $     (10.05)     $     (3.51)
                                                        ============   ============      ===========
   Shares used in calculating  net loss per
     share, basic and diluted                             10,139,755      1,018,359          966,799
                                                        ============   ============      ===========

See accompanying notes.

35

ARENA PHARMACEUTICALS, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

                                                                                                                 TOTAL
                                              COMMON STOCK          ADDITIONAL                                STOCKHOLDERS'
                                          ---------------------      PAID-IN       DEFERRED      ACCUMULATED     EQUITY
                                             SHARES     AMOUNT       CAPITAL     COMPENSATION      DEFICIT      (DEFICIT)
                                          ----------    -------    ------------   -----------   ------------   ------------
Balance at December 31, 1997               1,000,000    $   100    $         --   $        --    $  (694,765)  $   (694,665)
   Issuance of common stock warrants
     in connection with technology
     agreement                                    --         --          14,000            --             --         14,000
   Issuance of common stock upon
     exercise of options                      43,500          4           8,696            --             --          8,700
   Net loss                                       --         --              --            --     (3,396,318)    (3,396,318)
                                          ----------    -------    ------------   -----------   ------------   ------------
Balance at December 31, 1998               1,043,500        104          22,696            --     (4,091,083)    (4,068,283)
   Issuance of common stock upon
     exercise of options                      72,875          7          28,568            --             --         28,575
   Deferred compensation related to
     stock options                                --         --       1,004,064    (1,004,064)            --             --
   Amortization of deferred
     compensation                                 --         --              --       378,109             --        378,109
   Net loss                                       --         --              --            --    (10,237,950)   (10,237,950)
                                          ----------    -------    ------------   -----------   ------------   ------------
Balance at December 31, 1999               1,116,375        111       1,055,328      (625,955)   (14,329,033)   (13,899,549)
   Issuance of common stock upon
     exercise of options, net of
     repurchases                             808,300         81         360,044            --             --        360,125
   Issuance of common stock upon
     exercise of warrants                    410,060         41       1,123,925            --             --      1,123,966
   Conversion of convertible note into
     common stock                            755,000         75         975,499            --             --        975,574
   Issuance of common stock in initial
     public offering, net of offering
     costs of $10,274,000                  6,900,000        690     113,925,310            --             --    113,926,000
   Conversion of preferred stock to
     common stock upon closing of
     initial public offering              12,698,578      1,270      48,316,013            --             --     48,317,283
   Deferred compensation related to
     stock options                                --         --      11,616,911   (11,616,911)            --             --
   Amortization of deferred
     compensation                                 --         --              --     4,342,896             --      4,342,896
   Net loss                                       --         --              --            --     (6,361,970)    (6,361,970)
                                          ----------    -------    ------------   -----------   ------------   ------------
Balance at December 31, 2000              22,688,313    $ 2,268    $177,373,030   $(7,899,970)  $(20,691,003)  $148,784,325
                                          ==========    =======    ============   ===========   ============   ============

See accompanying notes.

36

ARENA PHARMACEUTICALS, INC.

STATEMENTS OF CASH FLOWS

                                                                           YEAR ENDED DECEMBER 31,
                                                                  ------------------------------------------
                                                                      2000           1999           1998
                                                                  -------------  ------------    -----------
OPERATING ACTIVITIES
Net loss                                                          $  (6,361,970) $(10,237,950)   $(3,396,318)
Adjustments to reconcile net loss to net cash used in
   operating activities:
    Depreciation and amortization                                       787,829       399,278        171,942
    Amortization of deferred compensation                             4,342,896       378,109             --
    Interest accrued on notes payable to related party                   41,262        80,635         83,896
    Warrants issued in connection with technology agreement                  --            --         14,000
    Deferred rent                                                        72,886        45,699        747,424
    Deferred financing costs                                                 --       150,711       (150,711)
    Change in operating assets and liabilities:
       Accounts receivable                                           (2,116,146)           --             --
       Prepaid expenses and other assets                             (1,657,279)     (110,071)       (18,793)
       Deferred revenues                                                705,000            --             --
       Accounts payable and accrued expenses                             49,126       624,195        110,170
                                                                  -------------  ------------    -----------
     Net cash used in operating activities                           (4,136,396)   (8,669,394)    (2,438,390)
INVESTING ACTIVITIES
   Purchases of property and equipment                               (2,279,707)   (2,007,020)      (558,933)
   Deposits and restricted cash                                          90,882       (98,383)       (34,171)
                                                                  -------------  ------------    -----------
     Net cash used in investing activities                           (2,188,825)   (2,105,403)      (593,104)

FINANCING ACTIVITIES
   Advances under capital lease obligations                             377,015     1,562,690        148,299
   Principal payments on capital leases                                (515,551)     (116,427)       (14,971)
   Proceeds from issuance of redeemable preferred stock              30,065,334    14,132,224        405,287
   Proceeds from issuance of common stock                           115,410,091        28,575          8,700
   Proceeds from convertible note payable to related party                   --       375,000      1,125,000
                                                                  -------------  ------------    -----------
     Net cash provided by financing activities                      145,336,889    15,982,062      1,672,315
                                                                  -------------  ------------    -----------
   Net increase (decrease) in cash and cash equivalents             139,011,668     5,207,265     (1,359,179)
   Cash and cash equivalents at beginning of period                   5,401,508       194,243      1,553,422
                                                                  -------------  ------------    -----------
   Cash and cash equivalents at end of period                     $ 144,413,176  $  5,401,508    $   194,243
                                                                  =============  ============    ===========

SUPPLEMENTAL DISCLOSURE OF
   CASH FLOW INFORMATION:
   Interest paid                                                  $     179,221  $     84,968    $    10,356
                                                                  =============  ============    ===========
   Conversion of convertible note to related party into
     common stock                                                 $     975,574  $         --    $        --
                                                                  =============  ============    ===========
   Conversion of convertible note to related party into
     redeemable preferred stock                                   $          --  $  1,521,082    $        --
                                                                  =============  ============    ===========

See accompanying notes.

37

ARENA PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS

1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

THE COMPANY

Arena Pharmaceuticals, Inc. (the "Company") was incorporated on April 14, 1997 and commenced operations in July 1997. The Company operates in one business segment and has developed a broadly applicable technology that is used to identify drug candidates in a more efficient manner than traditional drug discovery approaches.

PRINCIPLES OF CONSOLIDATION

The financial statements do not include the accounts of its majority owned subsidiary, Aressa Pharmaceuticals, Inc. ("Aressa"). Management believes that majority ownership and control of Aressa is temporary in accordance with Statement of Financial Accounting Standards ("SFAS 94") "Consolidation of All Majority Owned Subsidiaries," has therefore not consolidated Aressa's activity.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of cash and investments with original maturities of less than three months when purchased.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Financial instruments, including cash and cash equivalents, accounts payable and accrued expenses, are carried at cost. Management believes these recorded amounts approximate fair value because of the short-term maturity of these instruments.

CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents. The Company limits its exposure to credit loss by placing its cash with high credit quality financial institutions.

Two collaborative partners individually accounted for 67.6% and 31.0% of total revenues during the year ended December 31, 2000.

38

1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost and depreciated over the estimated useful lives of the assets (generally three to seven years) using the straight-line method. Amortization of leasehold improvements is computed over the shorter of the lease term or the estimated useful life of the related assets.

LONG-LIVED ASSETS

In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," if indicators of impairment exist, the Company assesses the recoverability of the affected long-lived assets by determining whether the carrying value of such assets can be recovered through the undiscounted future operating cash flows. If impairment is indicated, the Company measures the amount of such impairment by comparing the carrying value of the asset to the present value of the expected future cash flows associated with the use of the asset. While the Company's current and historical operating and cash flow losses are indicators of impairment, the Company believes the future cash flows to be received from the long-lived assets will exceed the assets' carrying value, and accordingly the Company has not recognized any impairment losses through December 31, 2000.

DEFERRED RENT

Rent expense is recorded on a straight-line basis over the term of the lease. The difference between rent expense and amounts paid under the lease agreements is recorded as deferred rent in the accompanying balance sheets.

STOCK OPTIONS

SFAS No. 123, "Accounting for Stock-Based Compensation," establishes the use of the fair value based method of accounting for stock-based compensation arrangements, under which compensation cost is determined using the fair value of stock-based compensation determined as of the grant date, and is recognized over the periods in which the related services are rendered. SFAS No. 123 also permits companies to elect to continue using the current intrinsic value accounting method specified in Accounting Principles Board (APB) Opinion No. 25 to account for stock-based compensation. The Company has elected to retain the intrinsic value based method, and has disclosed the pro forma effect of using the fair value based method to account for its stock-based compensation (Note 8).

Options and warrants issued to non-employees are recorded fair value as prescribed by SFAS No. 123 and EITF 96-18 and periodically remeasured and expensed over the period services are provided.

REVENUES

Up-front fees under the Company's collaborations will be deferred and recognized over the period the related services are provided. Amounts received for research funding for a specified number of full time researchers are recognized as revenue as the services are provided, as long as the amounts received are not refundable regardless of the research project. Assay development fees will be recognized upon completion of the screen and acceptance by the collaborators. Milestone and royalty payments will be recognized upon completion of specified milestones pursuant to the collaborative agreements.

39

1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

RESEARCH AND DEVELOPMENT COSTS

Costs incurred in connection with the development of new products and changes to existing products are charged to operations as incurred.

PATENT COSTS

Costs related to filing and pursuing patent applications are expensed as incurred as recoverability of such expenditures is uncertain.

COMPUTER SOFTWARE COSTS

In May 2000, the Emerging Issues Task Force ("EITF") released Issue No. 00-2, "Accounting for Web Site Development Costs." EITF Issue No. 00-2 establishes standards for determining the capitalization or expensing of incurred costs relating to the development of Internet web sites based upon the respective stage of development. The Issue is effective for fiscal quarters beginning after June 30, 2000 (including costs incurred for projects in process at the beginning of the quarter of adoption). The adoption of EITF No. 00-2 did not affect the Company's financial results.

INCOME TAXES

In accordance with SFAS No. 109, "Accounting for Income Taxes," a deferred tax asset or liability is determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. The Company provides a valuation allowance against net deferred tax assets unless, based upon the available evidence, it is more likely than not that the deferred tax assets will be realized.

COMPREHENSIVE LOSS

In accordance with SFAS No. 130, "Reporting Comprehensive Loss," all components of comprehensive loss, including net loss, are reported in the financial statements in the period in which they are recognized. Comprehensive loss is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Net loss and other comprehensive loss, including unrealized gains and losses on investments, is reported net of their related tax effect, to arrive at comprehensive loss. For the years ended December 31, 2000, 1999 and 1998, comprehensive loss equals the net loss as reported.

40

1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

NET LOSS PER SHARE

Basic and diluted net loss per common share are presented in conformity with SFAS No. 128, "Earnings per Share" for all periods presented. Under the provisions of SAB 98, common stock and convertible preferred stock that has been issued or granted for nominal consideration prior to the anticipated effective date of the initial public offering must be included in the calculation of basic and diluted net loss per common share as if these shares had been outstanding for all periods presented. To date, the Company has not issued or granted shares for nominal consideration.

In accordance with SFAS No. 128, basic and diluted net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. Pro forma basic and diluted net loss per common share, as presented in the statements of operations, has been computed for the year ended December 31, 2000 and 1999 as described above, and also gives effect to the conversion of preferred stock upon closing of the initial public offering.

The following table presents the calculation of net loss per share:

                                                YEAR ENDED DECEMBER 31,
                                    ----------------------------------------------
                                         2000            1999             1998
                                    -------------   -------------    -------------
Net loss                            $ (28,753,038)  $ (10,237,950)   $  (3,396,318)
                                    =============   =============    =============
Basic and diluted net loss per
  share                             $       (2.84)  $      (10.05)   $       (3.51)
                                    =============   =============    =============
Weighted-average shares used in
  computing net loss per share,
  basic and diluted                    10,139,755       1,018,359          966,799
                                    =============   =============    =============
Pro forma net loss per share,
  basic and diluted                 $       (1.65)  $       (1.29)
                                    =============   =============
Shares used above                      10,139,755       1,018,359
  Pro forma adjustment to
    reflect assumed
    weighted-average effect of
    conversion of  preferred
    stock                               7,271,273       6,908,593
                                    -------------   -------------
  Shares used in computing pro
    forma net loss per share,
    basic and diluted                  17,411,028       7,926,952
                                    =============   =============

The Company has excluded all outstanding stock options and warrants, and shares subject to repurchase from the calculation of diluted loss per common share because all such securities are antidilutive for all periods presented. The total number of shares excluded from the calculation of diluted net loss per share, prior to application of the treasury stock method for stock options, was 509,850, 81,000 and 61,625 for the years ended December 31, 2000, 1999 and 1998, respectively. Such securities, had they been dilutive, would have been included in the computation of diluted net loss per share.

SEGMENT REPORTING

SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," requires the use of a management approach in identifying segments of an enterprise. Management has determined that the Company operates in one business segment.

41

1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

EFFECT OF NEW ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which will be effective January 1, 2001. SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments imbedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement also requires that changes in the derivative's fair value be recognized in earnings unless specified hedge accounting criteria are met. Management believes the adoption of SFAS No. 133 will not have an effect on the financial statements, as the Company does not engage in the activities covered by SFAS No. 133.

In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, Revenue Recognition ("SAB 101"). SAB 101 provides the SEC Staff's views in applying generally accepted accounting principles to various revenue recognition issues and specifically addresses revenue recognition for upfront, non-refundable fees earned in connection with research collaboration arrangements. It is the SEC's position that such fees should generally be recognized over the term of the agreement. The Company expects to apply this accounting to its future collaborations. The Company believes its revenue recognition policy is in compliance with SAB 101.

2. INVESTMENT IN CHEMNAVIGATOR.COM

In January 1999, the Company began development of an Internet-based search engine that allows scientists to search for compounds based primarily on the similarity of chemical structures. In May 1999, ChemNavigator.com was incorporated and in June 1999, the Company licensed to ChemNavigator.com a website, the trademark ChemNavigator and goodwill associated with the trademark, intellectual property related to the search engine, as well as technology needed to perform chemical similarity searches. In return, the Company received 2,625,000 shares of preferred stock in ChemNavigator.com valued at $2,625,000 based on independent investors' participation in ChemNavigator.com's Series A preferred round of financing. However, the Company's historical cost basis in the licensed technology was zero and the Company therefore recorded its investment in ChemNavigator.com at zero in accordance with SAB 48, which calls for predecessor cost accounting to account for the exchange of non-monetary assets for stock. As of December 31, 2000, the Company equity ownership represented approximately 34% of the outstanding voting equity securities of ChemNavigator.com. ChemNavigator.com has an accumulated deficit and since the Company is under no obligation to reimburse the other ChemNavigator.com stockholders for its share of ChemNavigator.com's losses, the Company has not included any equity in the net loss of ChemNavigator.com in the Company's Statements of Operations.

The Company subleases office space to ChemNavigator.com. The current sublease payment of $5,592 per month can be adjusted monthly based upon changes in the number of ChemNavigator.com employees.

Jack Lief, the Company's President and Chief Executive Officer, is also the Chairman of the Board of ChemNavigator.com. Richard P. Burgoon, Jr., the Company's Senior Vice President, Operations, General Counsel and Secretary, is also the Secretary of ChemNavigator.com and a member of its board of directors.

42

3. INVESTMENT IN ARESSA PHARMACEUTICALS, INC.

In August 1999, the Company formed Aressa Pharmaceuticals, Inc. to take advantage of opportunities to in-license and develop niche products from other pharmaceutical or biotechnology companies. In October 2000, the Company received shares of preferred stock in Aressa valued at $5.0 million based on the participation of independent investors in Aressa's Series A preferred round of financing raising gross proceeds of $1.0 million. As of December 31, 2000, the Company owned approximately 83% of the outstanding voting equity securities of Aressa. Management believes that majority ownership and control is temporary and in accordance with FAS 94, has therefore not consolidated Aressa's activity.

Jack Lief, the Company's President and Chief Executive Officer, is also the Chief Executive Officer and President of Aressa. Richard P. Burgoon, Jr., the Company's Senior Vice President, Operations, General Counsel and Secretary, is also the Chief Operating Officer and Secretary of Aressa. Joyce Williams, the Company's Vice President, Drug Development is also the Vice President, Regulatory and Clinical Affairs of Aressa.

4. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

                                                                               DECEMBER 31,
                                                                     ------------------------------
                                                                         2000               1999
                                                                     -----------        -----------
Laboratory and computer equipment                                    $ 3,659,632        $ 2,641,072
Furniture and fixtures                                                   267,841            185,220
Leasehold improvements                                                 1,714,622            536,096
                                                                     -----------        -----------
                                                                       5,642,095          3,362,388
                                                                     -----------        -----------
Less accumulated depreciation and amortization                        (1,376,835)          (589,006)
                                                                     -----------        -----------
                                                                     $ 4,265,260        $ 2,773,382
                                                                     ===========        ===========

Cost and accumulated amortization of equipment under capital leases totaled $2,331,000 and $810,000, and $1,931,000 and $331,000 at December 31, 2000 and 1999, respectively.

5. CONVERTIBLE NOTES PAYABLE TO RELATED PARTY

In 1997, the Company issued a convertible note payable to Tripos, Inc. ("Tripos"), a significant stockholder, for the principal amount of $755,000 at an annual interest rate of 9.5%. In 2000, upon the closing of the Company's initial public offering, all outstanding principal and accrued interest under this convertible note was converted into 755,000 shares of common stock. Interest expense for the years ended December 31, 2000, 1999 and 1998 was approximately $41,000, $72,000 and $72,000, respectively.

In 1998, the Company issued a convertible note payable to Tripos, for a principal amount of up to $1,500,000 at an annual interest rate of 9.5%. The Company received proceeds of $1,125,000 on this note payable in 1998, and $375,000 in 1999. In 1999, all outstanding principal and accrued interest under this convertible note payable was converted into 435,840 shares of Series D redeemable convertible preferred stock. Upon the closing of the Company's initial public offering, these shares converted into common stock of the Company.

At the date each note was entered into, the note was convertible into stock at the then-current fair value of such stock, and therefore there is no beneficial conversion feature associated with the notes.

43

6. COMMITMENTS

LEASES

In 1997, the Company leased its facilities located at 6166 Nancy Ridge Drive in San Diego, California under an operating lease that had an expiration date in 2004. The Company had an option to buy the facilities during the first 12 months of the lease term for $2,141,309. In 1998, the Company assigned the option to a publicly traded Real Estate Investment Trust ("REIT") in exchange for $733,322 in cash. The $733,322 in cash is being recognized on a straight-line basis as a reduction in the rent expense on the underlying lease. In addition, the Company signed a new lease with the REIT, which expires in 2013. The lease provides the Company with an option to extend the lease term via two five-year options. Under the terms of the new lease, effective April 30, 1998, monthly rental payments will be increased on April 30, 2000 and annually thereafter by 2.75%. In accordance with the terms of the new lease, the Company is required to maintain restricted cash balances totaling $79,955 on behalf of the landlord as rent deposits throughout the term of the lease.

In 2000, the Company leased additional facilities located at 6150 Nancy Ridge Drive in San Diego, California under an operating lease which expires in 2013. In January 2001, the Company purchased this facility for approximately $5.4 million in cash.

Rent expense was $728,369, $598,903 and $366,505 for the years ended December 31, 2000, 1999 and 1998, respectively.

Annual future minimum lease obligations as of December 31, 2000 are as follows:

                        YEAR ENDING DECEMBER 31,                            OPERATING LEASES       CAPITAL LEASES
                        ------------------------                            ----------------       --------------
2001                                                                        $       663,017        $      613,883
2002                                                                                678,528               613,883
2003                                                                                694,465               480,289
2004                                                                                611,866                44,875
2005                                                                                628,691                    --
Thereafter                                                                        5,693,571                    --
                                                                            ----------------       --------------
         Total minimum lease payments                                       $     8,970,138             1,752,930
                                                                            ================
Less amount representing interest                                                                       (311,875)
                                                                                                   --------------
Present value of minimum lease obligations                                                              1,441,055
Less current portion                                                                                     (480,538)
                                                                                                   --------------
Long-term portion of capital lease obligations                                                     $      960,517
                                                                                                   ==============

The table above representing annual future minimum operating lease obligations is exclusive of the 6150 Nancy Ridge Drive facility which we purchased in January 2001.

Future minimum rentals to be received under non-cancelable subleases as of December 31, 2000 totaled approximately $36,000.

44

7. COLLABORATIONS

COLLABORATIVE AGREEMENT WITH ELI LILLY

In April 2000, the Company entered into a research alliance with Eli Lilly. The collaboration with Eli Lilly will principally focus on the central nervous system and endocrine therapeutic fields. The collaboration will also focus on the cardiovascular field and may expand into other therapy classes, including cancer.

During the collaboration, the Company will pursue an agreed upon research plan with Eli Lilly that has several objectives. During the term of the collaboration, the Company will mutually review and select G-Protein Coupled Receptors (GPCRs) that will become subject to the collaboration. These GPCRs may be provided either by the Company or by Eli Lilly. All of the Company's existing CART-activated GPCRs are excluded from the collaboration. The Company and Eli Lilly will each share their respective knowledge of the GPCRs that become subject to the collaboration to validate and CART-activate selected receptors. The Company and Eli Lilly will jointly select a number of proprietary central nervous system, endocrine and cardiovascular GPCRs for CART-activation, and the Company will then provide Eli Lilly with enabled high-throughput screens for use at their screening facilities. During the term of the agreement, the Company will continue to receive research funding from Eli Lilly for internal resources committed to the collaboration, which will be augmented by substantial resource commitments by Eli Lilly. Eli Lilly will be responsible for screening its chemical compound library using selected CART-activated receptors, for identifying drug candidates and for the pre-clinical and clinical testing and development of drug candidates. The Company may receive $1.25 million per receptor based upon milestone payments in connection with the successful application of CART to each receptor, and up to an additional $6.0 million based upon clinical development milestone payments for each drug candidate discovered using CART. The Company may also receive additional milestone and royalty payments associated with the commercialization of drugs discovered using CART, if any. The Company and Eli Lilly may never achieve the discovery, development or commercialization milestones.

Once the assay development fee has been paid for a CART-activated GPCR, Eli Lilly will have exclusive rights to screen chemical libraries, discover drug candidates that target that GPCR, and to develop, register and sell any resulting products worldwide. The Company retains rights to partner or independently develop GPCRs that do not become subject to the collaboration.

The term of the collaboration agreement with Eli Lilly is five years. Either Eli Lilly or the Company can terminate the agreement with or without cause effective three years after the date of the agreement by giving written notice prior to the conclusion of the 33rd month after the date of the agreement. In addition, either party can terminate the agreement at any time if the other party commits a material breach, and Eli Lilly can terminate the agreement at any time if, among other reasons, Eli Lilly does not approve suitable replacements for key employees who leave the Company. The parties will continue to have various rights and obligations under the agreement after the agreement is terminated. The extent of these continuing rights and obligations depends on many factors, such as when the agreement is terminated, by which party and for what reason. These continuing obligations may include further research and development efforts by the Company and a variety of payments by Eli Lilly.

Revenues recognized under the Eli Lilly collaboration was approximately $5.2 million for the year ended December 31, 2000 consisting of research funding of approximately $2.9 million, milestone achievements of approximately $2.2 million, and amortization of the up-front payment of $75,000.

45

7. COLLABORATIONS (CONTINUED)

COLLABORATIVE AGREEMENT WITH TAISHO

In May 2000, the Company entered into an agreement with Taisho to initiate a research collaboration focused on several GPCRs selected by Taisho in therapeutic areas of interest to Taisho. Under the terms of the agreement, Taisho will receive exclusive, worldwide rights to the selected GPCR targets and to any drug candidates discovered using the activated versions of these receptors. The Company may receive up to a total of $2.3 million in revenues per receptor associated with research, development and screening fees. The Company may also receive clinical development milestones, regulatory approval milestones and royalties on drug sales, if any.

Revenues recognized under the Taisho collaboration was approximately $2.4 million for the year ended December 31, 2000 consisting of milestone achievements of approximately $2.3 million and amortization of the up-front payment of $80,000.

COLLABORATIVE AGREEMENT WITH FUJISAWA

In January 2000, the Company entered into a collaborative agreement with Fujisawa, a leading Japan-based pharmaceutical company with significant drug discovery research efforts. During the collaboration, the Company will jointly validate up to 13 orphan GPCRs as drug screening targets. The Company will be responsible for receptor identification, location and regulation, and will apply its CART technology to GPCRs selected by Fujisawa. The Company will also seek to validate screening assays based on the selected GPCRs. Fujisawa will be entitled to screen selected assays against its chemical compound library to identify drug candidates. Fujisawa will also be responsible for the pre-clinical and clinical development of any drug candidates that the Company or Fujisawa discover. The Company may also screen the selected GPCRs using its in-house chemical library. When Fujisawa selects its first receptor, the Company will be entitled to receive a one-time initiation fee of $500,000. If the Company and Fujisawa then achieve various milestones, the Company may receive up to a maximum of $3.5 million per selected receptor in assay transfer, screening and exclusivity fees, and up to a maximum of $2.0 million per selected receptor based upon the filing of one or more investigational new drug applications for each drug candidate discovered using a CART-activated receptor. The Company may also receive clinical development milestones, regulatory approval milestones and royalties on drug sales, if any. The Company and Fujisawa may never achieve research, development or commercialization milestones under the agreement. The Company's collaborative agreement with Fujisawa will terminate upon the expiration of Fujisawa's obligation to make royalty payments under the agreement, if any. Fujisawa may terminate the agreement at any time by providing the Company with written notice of their intention to do so and by returning any proprietary rights they have acquired under the agreement. Additionally, either party may terminate the agreement for a material breach of the agreement by the other party. The termination or expiration of the agreement will not affect any rights that have accrued to the benefit of either party prior to the termination or expiration.

8. STOCKHOLDERS' EQUITY

PREFERRED STOCK

Concurrent with the closing of the Company's initial public offering in July 2000, all outstanding shares of the Company's preferred stock converted into 12,698,578 shares of common stock.

46

COMMON STOCK

In June 1997, a total of 1,000,000 shares of common stock were issued to the founders of the Company at a price of $.0001 per share under founder stock purchase agreements. The Company issued 50,000 of these shares to an outside founder, which vest ratably over 50 months. Unvested shares are subject to repurchase by the Company, at the original purchase price, if the relationship between the Company and the outside founder terminates. In 1999, 17,500 shares were repurchased.

WARRANTS

During the year ended December 31, 2000, all outstanding warrants were converted into 410,060 shares of common stock of the Company. At December 31, 2000, no warrants are outstanding.

INCENTIVE STOCK PLANS

The Company's Amended and Restated 1998 Equity Compensation Plan (the "1998 Plan") provides designated employees of the Company, certain consultants and advisors who perform services for the Company, and non-employee members of the Company's Board of Directors with the opportunity to receive grants of incentive stock options, nonqualified stock options and restricted stock. The options and restricted stock generally vest 25% a year for four years and are immediately exercisable up to ten years from the date of grant. At December 31, 2000, 1,500,000 shares of common stock were authorized for issuance under the 1998 Plan.

In 2000, the board of directors adopted and stockholders approved the 2000 Equity Compensation Plan (the "2000 Plan") which provides designated employees of the Company, certain consultants and advisors who perform services for the Company, and non-employee members of the Company's Board of Directors with the opportunity to receive grants of incentive stock options, nonqualified stock options and restricted stock. The options and restricted stock generally vest 25% a year for four years and are immediately exercisable up to ten years from the date of grant. At December 31, 2000, 2,000,000 shares of common stock were authorized for issuance under the 2000 Plan.

Unvested shares issued to our employees, consultants, advisors and non-employee members of the Company's Board of Directors pursuant to the exercise of options are subject to repurchase, at the original purchase price, in the event of termination of employment or engagement. In the event the Company elects not to buy back any such unvested shares, the unvested options will be expensed at their fair value at that point in time. At December 31, 2000, 509,850 shares of common stock issued pursuant to the exercise of options were subject to repurchase by the Company. In accordance with FAS 128, the Company has excluded unvested common stock arising from exercised options in its basic loss per share calculations.

47

8. STOCKHOLDERS' EQUITY (CONTINUED)

Following is a summary of stock option activity:

                                                                                                 WEIGHTED-
                                                                                                  AVERAGE
                                                                        OPTIONS                EXERCISE PRICE
                                                                -------------------------    ------------------
Balance at December 31, 1997                                                  91,000               $  0.20
  Granted                                                                    360,000               $  0.20
  Exercised                                                                  (43,500)              $  0.20

Balance at December 31, 1998                                                 407,500               $  0.20
  Granted                                                                    373,100               $  0.60
  Exercised                                                                  (90,375)              $  0.33
  Canceled                                                                    (5,625)              $  0.47
                                                                -------------------------

Balance at December 31, 1999                                                 684,600               $  0.40
  Granted                                                                  1,215,175               $ 11.07
  Exercised                                                                 (809,425)              $  0.46
  Canceled                                                                   (25,875)              $  1.66
                                                                -------------------------

Balance at December 31, 2000                                               1,064,475               $ 12.44

At December 31, 2000, 1999 and 1998, options to purchase 53,625, 159,500, and 67,000 shares were vested. The weighted-average remaining contractual life of options outstanding at December 31, 2000, 1999 and 1998 was 9.22, 8.50 and 8.75 years, respectively. At December 31, 2000, 1999 and 1998, 509,850, 63,500 and 32,625 shares of common stock issued upon the exercise of options were subject to repurchase at the original purchase price at a weighted-average price of $.51, $.23 and $.20, respectively. At December 31, 2000, 1,483,750 shares were available for future grant. The 1,064,475 options not exercised at December 31, 2000 have exercise prices ranging from $.20 to $36.88 and can be exercised at any time; however, unvested shares are subject to repurchase at the original purchase price if a grantee terminates prior to vesting. In 2000, the Company granted 516,250 stock options to employees at less than the market price of the stock on the date of grant. The weighted-average exercise price was $24.96 and the weighted-average market value on the date of grant was $29.36.

Pro forma information regarding net income is required by SFAS No. 123 and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. For options granted through July 27, 2000, the fair value of options granted were estimated at the date of grant using the minimum value pricing model with the following weighted-average assumptions: risk free interest rate of 6.5%, dividend yield of 0%, and weighted-average expected life of the option of five years. For options granted from July 28, 2000 to December 31, 2000 the fair value of the options was estimated at the date of grant using the Black-Scholes method for option pricing with the following weighted-average assumptions: risk free interest rate of 6.5%, dividend yield of 0%, expected volatility of 90% and weighted-average expected life of the option of five years.

48

8. STOCKHOLDERS' EQUITY (CONTINUED)

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's adjusted pro forma information is as follows:

                                                                 YEAR ENDED DECEMBER 31,
                                                ------------------------------------------------------
                                                    2000                1999                   1998
                                                ------------        ------------           -----------
Adjusted pro forma net loss                     $(29,889,840)       $(10,250,000)          $(3,398,000)
Adjusted pro forma basic net loss per
   share                                        $      (2.95)       $     (10.07)          $     (3.51)

The effects of applying SFAS No. 123 for providing pro forma disclosures are not likely to be representative of the effect on reported net income for future years.

During the years ended December 31, 2000 and 1999, in connection with the grant of various stock options to employees, the Company recorded deferred stock compensation totaling approximately $11.6 million and $1.0 million, respectively, representing the difference between the exercise price and the estimated market value of the Company's common stock as determined by the Company's management on the date such stock options were granted. Deferred compensation is included as a reduction of stockholders' equity and is being amortized to expense over the vesting period of the options in accordance with FASB Interpretation No. 28, which permits an accelerated amortization methodology. During the years ended December 31, 2000 and 1999, the Company recorded amortization of deferred compensation expense of approximately $4.3 million and $378,000, respectively. At December 31, 2000, total charges to be recognized in future periods from amortization of deferred stock compensation are anticipated to be approximately $4.1 million, $2.6 million, $1.1 million and $99,000 for the years ending December 31, 2001, 2002, 2003 and 2004, respectively.

During the year ended December 31, 2000, in connection with the grant of stock options to consultants, the Company recorded deferred stock compensation totaling approximately $449,000. Deferred compensation for stock options granted to consultants is periodically remeasured as the underlying options vest. For the year ended December 31, 2000 the Company recorded approximately $323,000 in compensation expense relating to options granted to consultants. At December 31, 2000, total charges to be recognized in future periods from amortization of deferred stock compensation relating to options granted to consultants are anticipated to be approximately $126,000.

COMMON SHARES RESERVED FOR ISSUANCE

At December 31, 2000, 1,064,475 shares of common stock are reserved for issuance upon exercise of common stock options.

9. EMPLOYEE BENEFIT PLAN

The Company established a defined contribution employee retirement plan (the "401(k) Plan") effective January 1, 1998, conforming to Section 401(k) of the Internal Revenue Code ("IRC"). All eligible employees may elect to have a portion of their salary deducted and contributed to the 401(k) Plan up to the maximum allowable limitations of the IRC. Through March 31, 1999, the Company matched 50% of each participant's contribution up to the first 6% of annual compensation.

Effective April 1, 1999, the Company amended the 401(k) Plan, increasing the Company match to 100% of each participant's contribution up to the first 6% of annual compensation for all contributions made after April 1, 1999. The Company's matching portion, which totaled $281,595, $148,784 and $27,065 for the years ended December 31, 2000, 1999 and 1998, respectively, vests over a five-year period.

49

10. INCOME TAXES

At December 31, 2000, the Company had federal and California tax net operating loss carryforwards of approximately $12,158,000 and $12,791,000, respectively.

Significant components of the Company's deferred tax assets at December 31, 2000 and 1999 are shown below. A valuation allowance of $7,509,000 and $5,713,000 has been recognized to offset the deferred tax assets as of December 31, 2000 and 1999, respectively, as realization of such assets is uncertain.

                                                                                        DECEMBER 31,
                                                                          ------------------------------------
                                                                              2000                      1999
                                                                          -----------              -----------
Deferred tax assets:
   Net operating loss carryforwards                                       $ 4,991,000              $ 4,787,000

   Research and development credits                                         2,089,000                  928,000
   Other, net                                                                 597,000                  129,000
                                                                          -----------              -----------
Net deferred tax assets                                                     7,677,000                5,844,000
Valuation allowance for deferred tax assets                                (7,509,000)              (5,713,000)
                                                                          -----------              -----------
       Total deferred tax assets                                              168,000                  131,000

Deferred tax liabilities:
   Depreciation                                                              (168,000)                (131,000)
                                                                          -----------              -----------
   Net deferred tax assets                                                $        --              $        --
                                                                          ===========              ===========

The federal and California tax net operating loss carryforwards will begin to expire in 2012 and 2005, respectively, unless previously utilized. The Company also has federal and California research tax credit carryforwards of approximately $1,560,000 and $529,000, respectively, which will begin to expire in 2012 unless previously utilized.

Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use of the Company's net operating loss and credit carryforwards could be limited in the event of cumulative changes in ownership of more than 50%. Such a change occurred in prior years. However, the Company does not believe such limitation will have a material effect upon the Company's ability to utilize the carryforwards.

50

11. SUBSEQUENT EVENTS

BUILDING PURCHASE

In January 2001, the Company purchased a facility it was leasing along with an adjoining building that is currently leased to a tenant at 6138-6150 Nancy Ridge Drive in San Diego, California. The Company paid cash of $5.4 million and will amortize the cost over the building's useful life, estimated to be 20 years. The Company assumed the lease with the tenant, of which the term of the lease runs through August 31, 2001. The tenant has paid all rents through the expiration of the lease.

AMENDMENT TO COLLABORATIVE AGREEMENT WITH TAISHO

In January 2001, the Company signed an amendment expanding its original May 2000 agreement with Taisho whereby Taisho was granted world-wide rights to the Company's 18-F Program, an obesity orphan receptor target and small molecule modulators. In accordance with the amendment, Taisho will make a one-time payment in 2001 to the Company for the 18-F Program based upon work already completed by the Company. In addition, the Company may receive additional milestone and research funding payments and royalties on drug sales, if any.

ACQUISITION

In December 2000, the Company signed a binding letter of intent and memorandum of agreement to acquire all of the outstanding capital stock of Bunsen Rush Laboratories, Inc. (Bunsen Rush), a privately held research-based company that provides receptor screening for the pharmaceutical and biotechnology industries using its proprietary and patented Melanophore Technology. The purchase price was $15.0 million in cash. On February 15, 2001 the Company completed its acquisition of Bunsen Rush pursuant to an Agreement and Plan of Merger dated February 15, 2001. The acquisition was effected in the form of a merger of Bunsen Rush into BRL Screening, Inc., a newly formed wholly-owned subsidiary of the Company.

51

SUPPLEMENTARY FINANCIAL DATA

FINANCIAL INFORMATION BY QUARTER (UNAUDITED)

2000 for quarter ended                    Dec. 31         Sept 30          June 30        March 31            Year
------------------------------------- ---------------- --------------- ---------------- -------------- -------------------
Revenues                              $      4,079,999 $     2,314,126 $      1,289,271 $           -- $         7,683,396
Amortization of non-cash deferred
compensation                                 1,390,494       1,123,358        1,419,565        409,479           4,342,896
Net income (loss)                            1,064,906      (1,418,594)      (2,886,082)    (3,122,200)         (6,361,970)
Non-cash preferred stock charge                     --              --       (8,203,505)   (14,187,563)        (22,391,068)
Net income (loss) applicable to
common stockholders                          1,064,906      (1,418,594)     (11,089,587)   (17,309,763)        (28,753,038)
Basic and diluted earnings (loss)
per share                                         0.05           (0.09)           (8.47)        (15.92)              (2.84)
Pro forma earnings (loss) per share
                                                                 (0.07)           (0.81)         (1.76)              (1.65)


2000 for quarter ended                    Dec. 31         Sept 30          June 30        March 31            Year
------------------------------------- ---------------- --------------- ---------------- -------------- -------------------
Revenues                              $             -- $            -- $             -- $           -- $                --
Amortization of non-cash deferred              101,095          97,628          179,386             --             378,109
compensation
Net loss                                    (2,979,060)     (2,734,105)      (2,526,550)    (1,998,235)        (10,237,950)
Non-cash preferred stock charge
                                                    --              --               --             --                  --
Net loss applicable to common
stockholders                                (2,979,060)     (2,734,105)      (2,526,550)    (1,998,235)        (10,237,950)
Basic and diluted loss per share                 (2.84)          (2.65)           (2.48)         (2.03)             (10.05)
Pro forma loss per share                         (0.37)          (0.34)           (0.32)         (0.31)              (1.29)

52

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The information required by this item is incorporated herein by reference from the information under the caption "Election of Directors" on pages 2 through 4 and the caption "Compensation And Other Information Concerning Officers, Directors And Certain Stockholders" on pages 9 and 10 and the caption "Section 16(a) Beneficial Ownership Reporting Compliance" on pages 18 and 19 contained in the Proxy Statement.

ITEM 11. EXECUTIVE COMPENSATION.

The information required by this item is incorporated herein by reference from the information under the caption "Compensation And Other Information Concerning Officers, Directors And Certain Stockholders" on pages 9 through 13 and on page 19 under the caption "Compensation Committee Interlocks and Insider Participation" contained in the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information required by this item is incorporated herein by reference from the information under the caption "Security Ownership Of Certain Beneficial Owners And Management" on pages 17 and 18 contained in the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by this item is incorporated herein by reference from the information under the caption "Compensation And Other Information Concerning Officers, Directors And Certain Stockholders" specifically under the subheading "Certain Relationships and Related Transactions" on pages 19 and 20 contained in the Proxy Statement.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a) 1. Financial Statements.

Reference is made to the Index to Financial Statements under Item 8, Part II hereof.

2. Financial Statement Schedules.

The Financial Statement Schedules have been omitted either because they are not required or because the information has been included in the notes to the Financial Statements included in this Report on Form 10-K.

3. Exhibits

3.1+++   Fourth Amended and Restated Certificate of Incorporation of the
         Company, filed August 1, 2000.

3.2+ +   By-laws of the Company.

53

 4.1+ +   Form of common stock certificates.

10.1+ #   Arena Pharmaceuticals, Inc. 1998 Equity Compensation Plan.

10.2+ #   Arena Pharmaceuticals, Inc. 2000 Equity Compensation Plan.

10.3+ #   Services Agreement, dated May 26, 1999, by and between
          ChemNavigator.com, Inc. and Jack Lief.

10.4+ #   Services Agreement, dated May 26, 1999, by and between
          ChemNavigator.com, Inc. and Richard P. Burgoon, Jr.

10.5+ #   Services Agreement, dated May 26, 1999, by and between
          ChemNavigator.com, Inc. and Robert Hoffman.

10.6+     Lease, dated as of April 30, 1998, by and between ARE - 6166 Nancy
          Ridge, LLC and Arena Pharmaceuticals, Inc.; as amended by First
          Amendment to Lease dated as of June 30, 1998.

10.7***   Agreement, effective May 29, 2000, by and between Arena
          Pharmaceuticals, Inc. and Taisho Pharmaceutical Co., Ltd.

10.8***   First Amendment effective January 24, 2001 by and between Arena
          Pharmaceuticals, Inc. and Taisho Pharmaceuticals, Co., Ltd.

10.9=**   License Agreement, effective as of January 23, 1998 by and between
          Arena Pharmaceuticals, Inc. and SSP Co., Ltd., as amended by Addendum
          No. 1, dated April 5, 1999.

10.10**++ Research Collaboration and License Agreement, effective as of April 14, 2000, by and between Arena Pharmaceuticals, Inc. and Eli Lilly and Company.

10.11**++ Agreement, effective as of January 24, 2000, by and between Arena Pharmaceuticals, Inc. and Fujisawa Pharmaceutical Co., Ltd.

10.12+    Binding Letter of Intent & Memorandum of Agreement, dated as of April
          3, 2000, between Lexicon Genetics, Inc. and Arena Pharmaceuticals,
          Inc.

10.13++   Agreement, effective as of September 15, 1999, by and between Arena
          Pharmaceuticals, Inc. and Neurocrine Biosciences, Inc.

10.14     Purchase and Sale Agreement effective December 1, 2000 by and between
          Limar Realty Corp. #13 and Arena Pharmaceuticals, Inc.

10.15*    Agreement and Plan of Merger, dated February 15, 2001 by and among
          Arena Pharmaceuticals, Inc., BRL Screening, Inc., Bunsen Rush
          Laboratories, Inc., and Ethan A. Lerner, Michael R. Lerner, Peter M.
          Lerner, David Unett and Alison Roby-Shemkovitz.

21.1      Subsidiaries of Registrant

23.1      Consent of Ernst & Young LLP, Independent Auditors

24.1      Power of Attorney

* Incorporated by reference to the Company's Form 8-K filed on February 20, 2001.

** Confidential treatment has been granted for portions of this document.

54

*** Confidential treatment has been requested for portions of this document.

= Incorporated by reference to the Company's Registration Statement on Form S-1, filed April 28, 2000; SEC File No. 333-35944.

+ Incorporated by reference to the Company's Registration Statement on Form S-1, as amended filed June 22, 2000; SEC File No. 333-35944.

++ Incorporated by reference to the Company's Registration Statement on Form S-1, as amended filed July 19, 2000; SEC File No. 333-35944.

+++ Incorporated by reference to the Company's Registration Statement on Form S-1, as amended filed July 25, 2000; SEC File No. 333-35944.

# Indicates management contract or compensatory plan.

(b) Reports on Form 8-K

The Company did not file any reports on Form 8-K during the three months ended December 31, 2000.

(c) Exhibits

See item 14(a) above.

(d) Financial Statement Schedules

See Item 14 (a) (2) above

55

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 15, 2001.

Arena Pharmaceuticals, Inc.
A Delaware Corporation

By:  /s/  Jack Lief
     --------------
     Jack Lief
     Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 15, 2001.

Signatures                                          Title
----------                                          -----

By: /s/ Jack Lief                                      President, Chief Executive Officer
    -------------------------------                    and Director
        Jack Lief

By: /s/ Robert Hoffman                                 Vice President, Finance, Principal
    -------------------------------                    Financial Officer and Principal Accounting Officer
        Robert Hoffman

By: /s/ Dominic P. Behan                               Vice President, Research and
    -------------------------------                    Director
        Dominic P. Behan, Ph.D.


By: /s/ Derek T. Chalmers                              Vice President, Research and
    -------------------------------                    Director
        Derek T. Chalmers, Ph.D.

By: /s/ John P. McAlister, III
    -------------------------------
        John P. McAlister, III, Ph.D.                  Director

By: /s/ Michael Steinmetz
    -------------------------------
        Michael Steinmetz, Ph.D.                       Director

By: /s/ Stefan Ryser
    -------------------------------
        Stefan Ryser, Ph.D.                            Director

56

EXHIBIT INDEX

Exhibit Number             Description
--------------             -----------

3.1+ + +                   Fourth Amended and Restated Certificate of
                           Incorporation of the Company, filed August 1, 2000

3.2+ +                     By-laws of the Company

4.1+ +                     Form of common stock certificates

10.1+ #                    Arena Pharmaceuticals, Inc. 1998 Equity Compensation
                           Plan

10.2+ #                    Arena Pharmaceuticals, Inc. 2000 Equity Compensation
                           Plan

10.3+ #                    Services Agreement, dated May 26, 1999, by and
                           between ChemNavigator.com, Inc. and Jack Lief

10.4+ #                    Services Agreement, dated May 26, 1999, by and
                           between ChemNavigator.com, Inc. and Richard P.
                           Burgoon, Jr.

10.5+ #                    Services Agreement, dated May 26, 1999, by and
                           between ChemNavigator.com, Inc. and Robert Hoffman

10.6+                      Lease, dated as of April 30, 1998, by and between ARE
                           - 6166 Nancy Ridge, LLC and Arena Pharmaceuticals,
                           Inc. as amended by First Amendment to Lease dated as
                           of June 30, 1998

10.7***                    Agreement, effective May 29, 2000, by and between
                           Arena Pharmaceuticals, Inc. and Taisho Pharmaceutical
                           Co., Ltd.

10.8***                    First Amendment effective January 24, 2001 by and
                           between Arena Pharmaceuticals, Inc. and Taisho
                           Pharmaceutical, Co., Ltd.

10.9=**                    License Agreement, effective as of January 23, 1998
                           by and between Arena Pharmaceuticals, Inc. and SSP
                           Co., Ltd., as amended by Addendum No. 1, dated April
                           5, 1999

10.10**++                  Research Collaboration and License Agreement,
                           effective as of April 14, 2000, by and between Arena
                           Pharmaceuticals, Inc. and Eli Lilly and Company

10.11**++                  Agreement, effective as of January 24, 2000, by and
                           between Arena Pharmaceuticals, Inc. and Fujisawa
                           Pharmaceutical Co., Ltd.

10.12+                     Binding Letter of Intent & Memorandum of Agreement,
                           dated as of April 3, 2000, between Lexicon Genetics,
                           Inc. and Arena Pharmaceuticals, Inc.

10.13++                    Agreement, effective as of September 15, 1999, by and
                           between Arena Pharmaceuticals, Inc. and Neurocrine
                           Biosciences, Inc.

10.14                      Purchase and Sale Agreement effective December 1,
                           2000 by and between Limar Realty Corp. #13 and Arena
                           Pharmaceuticals, Inc.

10.15*                     Agreement and Plan of Merger, dated February 15, 2001
                           by and among Arena Pharmaceuticals, Inc., BRL
                           Screening, Inc., Bunsen Rush Laboratories, Inc., and
                           Ethan A. Lerner, Michael R. Lerner, Peter M. Lerner,
                           David Unett and Alison Roby-Shemkovitz.


21.1                       Subsidiaries of Registrant

23.1                       Consent of Ernst & Young LLP, Independent Auditors

24.1                       Power of Attorney

* Incorporated by reference to the Company's Form 8-K filed on February 20, 2001.

** Confidential treatment has been granted for portions of this document.

*** Confidential treatment has been requested for portions of this document.

= Incorporated by reference to the Company's Registration Statement on Form S-1, filed April 28, 2000; SEC File No. 333-35944.

+ Incorporated by reference to the Company's Registration Statement on Form S-1, as amended filed June 22, 2000; SEC File No. 333-35944.

++ Incorporated by reference to the Company's Registration Statement on Form S-1, as amended filed July 19, 2000; SEC File No. 333-35944.

+++ Incorporated by reference to the Company's Registration Statement on Form S-1, as amended filed July 25, 2000; SEC File No. 333-35944.

# Indicates management contract or compensatory plan.


EXHIBIT 10.7

CONFIDENTIAL TREATMENT HAS BEEN REQUESTED
FOR THE PORTIONS MARKED [***]

AGREEMENT BY AND BETWEEN
ARENA PHARMACEUTICALS, INC.
AND
TAISHO PHARMACEUTICAL CO., LTD.

                                TABLE OF CONTENTS

                                                                           PAGE


Article I.        Definitions                                                 1

Article II.       GPCR Selection By Taisho; Technology Access Fee             5

Article III.      Arena Activities                                            6

Article IV.       Research and Development Fees                               7

Article V.        License Grant                                               8

Article VI.       Screening By Arena                                          9

Article VII.      Clinical Development of CART-TM- Identified Compound       10

Article VIII.     Marketing Authorization                                    12

Article IX.       Clinical Development of Subsequent Compounds               13

Article X.        Royalty Payments                                           15

Article XI.       Payment Arrangement                                        16

Article XII.      Confidentiality                                            16

Article XIII.     Patent Infringement And Enforcement                        17

Article XIV.      Representations And Warranties                             18

Article XV.       Indemnity                                                  18

Article XVI.      Termination                                                19

Article XVII.     Relationship of the Parties                                20

Article XVIII.    Miscellaneous Provisions                                   20

Signature Blocks                                                             23

--PLEASE NOTE--

Provisions Within This Agreement Are Deemed "CONFIDENTIAL" In Accordance With The Terms of Article XII.

Reviewers are advised to confirm with their attorney as to any obligations and/or requirements regarding review of this Agreement


AGREEMENT

This Agreement ("Agreement") is effective as of May 29, 2000 ("Effective Date") by and between ARENA PHARMACEUTICALS, INC., having a place of business at 6166 Nancy Ridge Drive, San Diego, California, 92121 USA ("Arena"), and TAISHO PHARMACEUTICAL CO., LTD., having a place of business at 24-1, Takata 3-Chome, Toshimaku, Tokyo 170-8633, JAPAN ("Taisho").

WHEREAS, Taisho is a pharmaceutical company focused on contributing to the maintenance and improvement of consumer's health by creating and providing quality drugs, related healthcare products and information services that satisfy consumers with various lifestyles;

WHEREAS, Arena is a biopharmaceutical organization focused on the discovery and development of innovative therapeutics;

WHEREAS, Arena and Taisho each desire to enter into this Agreement on the terms and conditions set forth herein.

NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, Arena and Taisho hereby agree as follows:

ARTICLE I

DEFINITIONS

Unless otherwise specifically provided herein, the following terms shall have the following meanings:

"AFFILIATE" when used with reference to a specified person or entity, means any person or entity directly or indirectly controlling, controlled by or under common control with the specified person or entity, while "control" in this context means the direct or indirect ownership of at least 50% of the outstanding voting securities of a person or entity.

"ANNUAL" means the period between January 1 and December 31, inclusive.

"ARENA ACTIVATION TECHNOLOGY" means an Arena proprietary approach, referred to by Arena as "CART Technology", to identifying, selecting and altering a region(s) within a G Protein Coupled Receptor that, when altered, leads to or enhances ligand-independent constitutive activation of the altered receptor.

"ARENA LIBRARY COMPOUNDS" means approximately 80,000 Library Compounds synthesized by Arena prior to the Effective Date or during the term of this Agreement, or obtained by Arena from a Third Party prior to the Effective Date or during the term of this Agreement, excluding: (i) any compound(s) licensed by Arena to any Third Party prior to Screening of any Taisho Activated Receptor, and/or (ii) any compound(s) that is the subject of any negotiation between Arena and a Third Party prior to Screening of any Taisho Activated Receptor.

"ARENA PATENT RIGHTS" means all present and/or future patents (including inventor's certificates) and all present and/or future applications (including provisional applications) therefor throughout the world as the case may be, and substitutions, extensions, reissues,

1
CONFIDENTIAL

renewals, divisions, continuations, or continuation-in-part thereof or therefor, owned or controlled (either fully or partially) by Arena, or under which Arena may grant licenses or sublicenses, to the extent they are directed to (1) Arena Activation Technology applied to Taisho Selected GPCR(s) and/or (2) Taisho Activated Receptor(s) and/or (3) CART Identified Compound(s) and/or (4) Drug Product(s) and/or (5) Screening Assay(s).

"ARENA SCREENING" has the same meaning as set forth in Section 6.2(a) of this Agreement.

"BACK-UP COMPOUND" means, as to EACH Taisho Activated Receptor, a subsequent CART Identified Compound developed by Taisho and/or Taisho's Licensee(s) subsequently to the preceding CART Identified Compound precedingly developed for the same or similar therapeutic indication as the preceding CART Identified Compound, that is developed after the discontinuation of the development of the preceding CART Identified Compound or that is reserved at the lower stage of the development than that of the preceding CART Identified Compound or that is simultaneously developed with the preceding CART Identified Compound with the intent to commercialize the subsequent CART Identified Compound only in the event the development of the preceding CART Identified Compound is discontinued. For the purpose of determination of such intent, a subsequent CART Identified Compound shall be deemed Subsequent Compound but not Back-Up Compound if Phase 3 Clinical Study thereof is started prior to the discontinuation of the development of the preceding CART Identified Compound.

"BEST REASONABLE COMMERCIAL EFFORTS" means efforts to achieve a designated objective, which efforts are based upon reasonably prudent business factors and considerations.

"CART IDENTIFIED COMPOUND(S)" means a compound, and/or a Derivative of a CART Identified Compound, that has been identified as a modulator of a Taisho Activated Receptor by Taisho or Taisho's Licensee(s) during the term of this Agreement or by Arena Screening.

"CONTINUING UTILIZATION FEE" has the same meaning as set forth in Section 5.5 of this Agreement.

"DERIVATIVE" of a first compound means a compound having the same core structure as the first compound, that has been synthesized or conceived, and then subsequently reduced to practice by Taisho, Taisho's Licensee(s) or Arena during the term of this Agreement.

"DRUG PRODUCT" means a therapeutic product comprising a CART Identified Compound.

"DRUG PRODUCT REVENUE" [************************************************** ******************************************************************************]

2
CONFIDENTIAL

"EFFECTIVE DATE" means the date first above written in this Agreement.

"ENDOGENOUS" means naturally occurring.

"EUROPEAN COUNTRY" means any of the following countries: United Kingdom, Germany, France, Italy, and Spain.

"FDA" means the United States Food and Drug Administration.

"G PROTEIN COUPLED RECEPTOR" and "GPCR" means an Endogenous cell-surface receptor defined by having three (3) intracellular loops, three (3) extracellular loops, an amino terminus and a carboxy terminus.

"INFORMATION" has the same meaning as set forth in Section 12.1 of this Agreement.

"IND" has the same meaning as set forth in 21 C.F.R. Section 312.20, including any and all amendments, modifications or changes as may be made thereto in the future, or the equivalent thereof in any applicable country within the Territory.

"LIBRARY COMPOUNDS" means chemical compounds.

"MARKETING AUTHORIZATION" means the granting or authorization, by an appropriate governmental agency, to commercialize a pharmaceutical product; by way of example, the FDA is an appropriate governmental agency.

"MEASURED RESPONSE" when used in reference to the phrase "Taisho Activated Receptor" means a signal measured based upon an assay end-point used to assess the signal.

"NOTICE" has the same meaning as set forth in Section 18.11 of this Agreement.

"PHASE 2 CLINICAL STUDY" has the same meaning as set forth in 21 C.F.R.
Section 312.21(b), including any and all amendments, modifications or changes thereto as may be made thereto in the future, or the equivalent thereof, in any applicable country within the Territory.

"PHASE 3 CLINICAL STUDY" has the same meaning as set forth in 21 C.F.R.
Section 312.21(c), including any and all amendments, modifications or changes thereto as may be made thereto in the future, or the equivalent thereof, in any applicable country within the Territory.

"PARTY" means either Arena or Taisho, as the case may be; "Parties" means both Arena and Taisho.

"REGULATORY AGENCY" includes, but is not be limited to, FDA, or similar regulatory bodies in the Territory.

"SCREENING" means the process of contacting a chemical compound with a Taisho Activated Receptor.

"SCREENING ASSAY" means an Arena assay approach for Screening that has been validated based upon Successful Screening of a Taisho Activated Receptor.

"SCREENING ASSAY NOTICE" has the same meaning as set forth in Section 3.2 of this Agreement.

3
CONFIDENTIAL

"SCREENING REQUEST" has the same meaning as set forth in Section 6.1 of this Agreement.

"SUBSEQUENT COMPOUND" means, as to EACH Taisho Activated Receptor, a subsequent CART Identified Compound developed by Taisho and/or Taisho's Licensee(s) subsequently to the preceding CART Identified Compound preceedingly developed for thesame or similar therapeutic indication as the preceding CART Identified Compound, that is developed after the receipt of Marketing Authorization for the preceding CART Identified Compound or that is simultaneously developed with the preceding CART Identified Compound with the intent to commercialize both Compounds. For the purpose of determination of such intent, a subsequent CART Identified Compound shall be deemed Subsequent Compound if Phase 3 Clinical Study thereof is started prior to the launch of the preceding CART Identified Compound.

"SUCCESSFUL SCREENING" when used in conjunction with the phrase "Taisho Activated Receptor" means that the results of the Screening has been positive whereby at least one molecule that has been contacted with the Taisho Activated Receptor reduces the Measured Response of the Taisho Activated Receptor by at least two (2) standard deviations from the mean response of a screening plate that includes that compound.

"TAISHO ACTIVATED RECEPTOR" means a Taisho Selected GPCR to which the Arena Activation Technology has been applied.

"TAISHO ACTIVATED RECEPTOR NOTICE" has the same meaning as set forth in
Section 3.1 of this Agreement.

"TAISHO DEVELOPMENT" as applied to the phrase "CART Identified Compound", means that Taisho management has approved research and development of a CART Identified Compound with the intent of developing data based upon such CART Identified Compound for inclusion within an IND.

"TAISHO'S LICENSEE(S)" means any person or entity, inclusive of Taisho's Affiliates, to which Taisho has granted sublicenses as referred to in Article V.

"TAISHO SELECTED GPCR" has the same meaning as set forth in Section 2.1 of this Agreement.

"TECHNICAL INFORMATION" means all information, trade secrets, know-how, methods of manufacture, processes, documents and materials related to Taisho Activated Receptor(s) and/or Screening Assay(s), and other proprietary information, whether patentable or unpatentable, related to Taisho Activated Receptor(s) and/or Screening Assay(s), including but not limited to, improvements, that are owned, possessed by, or licensed to Arena, whether now existing or hereafter developed or acquired during the term of this Agreement.

"TECHNOLOGY" means Arena Patent Rights and Technical Information.

"TERRITORY" means the world.

"THIRD PARTY" means any person or entity other than Taisho, Taisho's Licensee(s) and Arena.

[THE REST OF THIS PAGE IS INTENTIONALLY BLANK]

4
CONFIDENTIAL

ARTICLE II

GPCR SELECTION BY TAISHO;
TECHNOLOGY ACCESS FEE

2.1 Subject to the terms and conditions of this Agreement, Taisho shall be entitled to select up to a maximum of [**** (**)] GPCRs for inclusion in this Agreement (each GPCR a "Taisho Selected GPCR"). The selection of any particular GPCR for designation as a Taisho Selected GPCR shall be made exclusively by Taisho, subject to the following:

(a) the selection by Taisho of up to [**** (**)] GPCRs, each for designation as a Taisho Selected GPCR, shall be completed prior to the expiration of the [*****] anniversary of the Effective Date; and

(b) during the selection period set forth above, when Taisho requests information from Arena regarding GPCRs of possible interest to Taisho, Arena shall provide Taisho with supportive information for Taisho's selection of GPCRs and, in the event such GPCR(s) that have been activated by Arena Activation Technology or that are intended to be activated by Arena Activation Technology are available for Taisho's selection, Arena shall inform Taisho of such GPCR(s) as candidates for Taisho Selected GPCR; and

(c) in the event that Taisho selects a GPCR that, as of the date of such selection by Taisho, is the subject of another agreement or obligation between Arena and a Third Party, such GPCR shall not be designated as a Taisho Selected GPCR, and Arena shall provide Notice to Taisho that the proposed GPCR can not be designated as a Taisho Selected GPCR.

2.2 Taisho Selected GPCRs shall be attached hereto as APPENDIX A, which shall be updated when Taisho has selected a GPCR that is designated as a Taisho Selected GPCR. As of the Effective Date, Taisho has selected [**** (**)] GPCR for designation as a Taisho Selected GPCR. Accordingly, Taisho shall be permitted to select up to [**** (**)] additional GPCRs for designation as Taisho Selected GPCRs prior to the expiration of the [******] anniversary of the Effective Date.

2.3 In consideration of the rights granted under this Article II, within thirty (30) days of the Effective Date, Taisho shall provide to Arena a one-time, non-refundable, non-creditable fee of
[*************************** (*******)].

[THE REST OF THIS PAGE IS INTENTIONALLY BLANK]

5
CONFIDENTIAL

ARTICLE III

ARENA ACTIVITIES

3.1 DEVELOPMENT OF TAISHO ACTIVATED RECEPTOR. Subject to the terms and conditions of this Agreement, Arena agrees to use Best Reasonable Commercial Efforts to apply Arena Activation Technology to EACH Taisho Selected GPCR to establish a Taisho Activated Receptor. Upon creation of EACH Taisho Activated Receptor, Arena shall provide Notice to Taisho ("Taisho Activated Receptor Notice"), and such Taisho Activated Receptor Notice shall include data developed by Arena evidencing that the Taisho Activated Receptor is constitutively active.

3.2 DEVELOPMENT OF SCREENING ASSAY. Subject to the terms and conditions of this Agreement, Arena agrees to use Best Reasonable Commercial Efforts to develop a Screening Assay incorporating EACH Taisho Activated Receptor. Upon development of each Screening Assay, Arena shall provide Notice to Taisho ("Screening Assay Notice").

3.3 TRANSFER OF TAISHO ACTIVATED RECEPTOR AND TECHNICAL INFORMATION. Subject to the terms and conditions of this Agreement, within thirty (30) days of each Screening Assay Notice, Arena shall transfer to Taisho the applicable Taisho Activated Receptor in the form and quantity agreed to in advance by the Parties and a copy of all additional Technical Information owned or possessed by Arena then applicable to such Taisho Activated Receptor and Screening Assay incorporating such Taisho Activated Receptor. In the event the Successful Screening using the Taisho Activated Receptor cannot be measured by Taisho in accordance with the procedures and protocols used by Arena and provided to Taisho as part of the applicable Technical Information, Arena shall cooperate with Taisho in studying the cause and, if any defect in the Taisho Activated Receptor or the Screening Assay transferred by Arena to Taisho is detected and determined to have been caused by or effected by the activities of Arena, Arena shall at its costs and expenses repair the defect or transfer a substitute Taisho Activated Receptor and Screening Assay incorporating such substituted Taisho Activated Receptor to Taisho.

3.4 ADDITIONAL SUPPLY. When requested by Taisho in writing, Arena shall use its Best Reasonable Commercial Efforts to supply additional quantity of the Taisho Activated Receptor within the time period requested by Taisho. If so agreed by the Parties in writing, Arena shall supply additional Technical Information owned or possessed by Arena to enable Taisho to reproduce and/or increase the Taisho Activated Receptor for the purpose of the Screening.

[THE REST OF THIS PAGE IS INTENTIONALLY BLANK]

6
CONFIDENTIAL

ARTICLE IV

RESEARCH AND DEVELOPMENT FEES

4.1 RESEARCH AND DEVELOPMENT FEES. Taisho shall pay to Arena as follows as research and development fees for Arena's activities set forth in Article III.

(a) Within thirty (30) days after receipt of EACH Taisho Activated Receptor Notice, Taisho shall provide Arena with a research and development fee of [*************************** (*******)]. The Parties acknowledge and agree that the maximum amount that Taisho would be required to pay to Arena under this Section 4.1 (a) is
[****************************************** (**********)] in the event that Taisho selects up to [****] (**)]GPCRs for designation as Taisho Selected GPCRs prior to the second anniversary of the Effective Date, and each Taisho Selected GPCR is the subject of an Activation Receptor Notice. As to [******** (**) Taisho Selected GPCR selected as of the Effective Date, Taisho Activated Receptor thereof has been established as of the Effective Date and the payment under this Section 4.1 (a) shall be due and payable within thirty (30) days of the Effective Date.

(b) Within thirty (30) days after receipt of EACH Taisho Activated Receptor and Screening Assay, Taisho shall provide Arena with a research and development fee of [*************************** (*******)]. The Parties acknowledge and agree that the maximum amount that Taisho would be required to pay to Arena under this Section 4.1 (b) is
[*********************************** (*******)] in the event that Taisho selects
[***** (**)] GPCRs for designation as Taisho Selected GPCRs prior to the
[*******] anniversary of the Effective Date, and each Taisho Selected GPCR is the subject of a Screening Assay Notice.

(c) As to EACH Taisho Activated Receptor, within thirty (30) days after the earlier of (i) completion of the Screening by Taisho of approximately [*****] Library Compounds or (ii) completion of the Arena Screening, Taisho shall provide Arena with a research and development fee of
[*************************** (*******)]. The Parties acknowledge and agree that the maximum amount that Taisho would be required to pay to Arena under this
Section 4.1 (c) is [*************************** (*******)] in the event that Taisho selects [**** (**)] GPCRs for designation as Taisho Selected GPCRs prior to the [*****] anniversary of the Effective Date, and each Taisho Selected GPCR is the subject of a Screening Assay Notice, and each Taisho Activated Receptor is the subject of the Screening by Taisho of approximately [****] Library Compounds or the Arena Screening.

4.2 PAYMENT UNDERSTANDING. Taisho acknowledges and agrees that any payment due under this Article IV shall be made as required and that once made, such payment shall be non-refundable and non-creditable. Within 30 days of the receipt by Arena of each payment, Arena shall provide to Taisho a statement with supportive documents sufficiently verifying the costs and expenses incurred by Arena regarding the corresponding research and development activities.

7
CONFIDENTIAL

ARTICLE V

LICENSE GRANT

5.1 ARENA LICENSE. Arena hereby grants to Taisho the following with respect ONLY to the Taisho Activated Receptor that is the subject of the Screening Assay Notice:

(a) an exclusive right and license under the Technology, exclusive even as to Arena but subject to the provisions of Section 5.5 and Article VI, to use, have used, sell, have sold, import, have imported, further develop, improve and otherwise exploit in any manner the Taisho Activated Receptor, for the purpose of identification of CART Identified Compound(s) in the Territory including the right to sublicense the rights granted to Taisho by Arena hereunder, and

(b) an exclusive right and license under the Technology, exclusive even as to Arena, to develop, manufacture, have manufactured, promote, market, sell and distribute CART Identified Compound(s) and/or Drug Product(s) in the Territory including the right to sublicense the rights granted to Taisho by Arena hereunder.

5.2 SUBLICENSE. In the event that Taisho sublicenses any right granted by Arena hereunder, Taisho warrants that it shall notify Arena within one (1) month of the effective date of any such sublicense agreement; at all times during the term of this Agreement, Taisho shall have an affirmative obligation to make any such payments to Arena that Taisho would be required to make to Arena hereunder, irrespective of the financial situation of any such Taisho's Licensee(s).

5.3 IMPROVEMENTS.

(a) Taisho shall notify Arena, in writing, of any improvement discovered or developed by Taisho and/or Taisho's Licensee(s) related to the Technology.

(b) Arena shall notify Taisho, in writing, of any improvement discovered or developed by Arena related to the Technology within one (1) month of the discovery or development of such improvement.

(c) The obligations of Sections 5.3(a) and (b) of this Agreement shall be continuing throughout the term of this Agreement. During the term of this Agreement, Taisho shall be entitled to use any such improvement in accordance with the provisions of Sections 5.1 and 5.2 of this Agreement.

(d) Subject to Section 5.1 and except as specifically provided for in Section 5.3(e) hereof, Arena shall have a royalty-free, non-exclusive right and license to use all improvements of Taisho and/or Taisho's Licensee(s) referred to in Section 5.3(a) hereof and to disclose and sublicense the same to its licensees, if any.

(e) Both Parties acknowledge and agree that Arena has exclusive ownership of the Technology existing as of the Effective Date and any improvement thereof hereafter discovered or developed by Arena and that Taisho has exclusive ownership of or control over any improvement of the Technology hereafter discovered or developed by Taisho and/or Taisho's Licensee(s).

8
CONFIDENTIAL

5.4 NO WARRANTY. NEITHER PARTY MAKES ANY REPRESENTATION THAT ANY TAISHO SELECTED GPCR OR TAISHO ACTIVATED RECEPTOR OR SCREENING ASSAY TRANSFERRED BY ARENA TO TAISHO, OR USED BY ARENA ON BEHALF OF TAISHO IN ACCORDANCE WITH THIS AGREEMENT, WILL NOT INFRINGE ANY PATENT, COPYRIGHT, TRADEMARK OR OTHER PROPRIETARY RIGHT OF ANY OTHER PERSON. NEITHER PARTY MAKES ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR ANY OTHER WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO ANY TAISHO SELECTED GPCR OR TAISHO ACTIVATED RECEPTOR OR SCREENING ASSAY, AS THE CASE MAY BE.

5.5 CONTINUING UTILIZATION FEE.

(a) For EACH Taisho Activated Receptor, Taisho shall retain exclusive rights, for a period Taisho continues the identification and/or development of CART Identified Compound(s) with its Best Reasonable Commercial Efforts, in and to such Taisho Activated Receptor when Taisho provides Arena with a Continuing Utilization Fee of [*************************** (*******)] before the expiration of [**************** (*******)] days from the date of transfer of such Taisho Activated Receptor to Taisho ("Transfer Anniversary Date").

(b) The Parties acknowledge and understand that once made, EACH Continuing Utilization Fee shall be non-refundable and non-creditable, and that the maximum amount that Taisho would be required to pay to Arena under this
Section 5.5 is [********************************************* (*******)] in the event that (i) Taisho selects [****** (***)] GPCRs for designation as Taisho Selected GPCRs prior to the [******] anniversary of the Effective Date, whereby each Taisho Selected GPCR is the subject of a Screening Assay Notice, and (ii) Taisho provides a Continuing Utilization Fee for each Taisho Activated Receptor, and that, when Taisho does not provide a Continuing Utilization Fee for a Taisho Activated Receptor, the right and license granted to Taisho under Section 5.1(a) shall be converted to non-exclusive right and license after the Transfer Anniversary Date.

ARTICLE VI

SCREENING BY ARENA

6.1 TAISHO SCREENING REQUEST. During the term of this Agreement, Taisho is entitled to provide Notice to Arena requesting that Arena conduct Screening efforts for Taisho using a Taisho Activated Receptor, Screening Assay and Arena Library Compounds ("Screening Request").

6.2 SCREENING FEE. With EACH Screening Request made by Taisho under
Section 6.1 of this Agreement, Taisho shall simultaneously provide to Arena a Screening Fee of [*************************** (*******)]. Upon receipt of such Screening Fee, the following shall apply:

(a) For EACH Taisho Activated Receptor and its corresponding Screening Assay, Arena, using Best Reasonable Commercial Efforts, shall utilize the Taisho Activated Receptor and the Screening Assay for Screening using Arena Library Compounds ("Arena Screening").

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(b) For EACH Taisho Activated Receptor subject to Arena Screening, Arena shall use Best Reasonable Commercial Efforts to identify at least [*** (**)] CART Identified Compound.

(c) The Parties acknowledge and understand that once made, EACH Screening Fee shall be non-refundable and non-creditable, and that the maximum amount that Taisho would be required to pay to Arena under this Section 6.2 is [************************ (*******)] in the event that Taisho provides
[**** (**)] Screening Requests to Arena.

6.3 TAISHO SCREENING. In the event that Taisho does not provide a Screening Request to Arena for any, or all, Taisho Activated Receptor(s), Taisho shall use Best Reasonable Commercial Efforts to conduct Screening of approximately [****] Library Compounds obtained by Taisho using the Taisho Activated Receptor. When requested by Taisho in writing, Arena shall use its Best Reasonable Commercial Efforts to assist Taisho in setting-up the Screening Assays at Taisho's facility within the time period(s) requested by Taisho. Taisho agrees to reimburse Arena for the reasonable out-of-pocket costs associated with the assistance of Taisho with its Screening.

ARTICLE VII

CLINICAL DEVELOPMENT
OF CART IDENTIFIED COMPOUND

7.1 For each Taisho Activated Receptor, Taisho shall use Best Reasonable Commercial Efforts to develop into clinical development stage at least [*** (**)] CART Identified Compound. Arena acknowledges and agrees that Taisho shall have sole discretion to: (i) determine which CART Identified Compound to develop as a first Drug Product, Back-Up Compound or Subsequent Compound; and (ii) whether or not to continue development of any CART Identified Compound or Drug Product.

7.2 In consideration of the right and license granted to Taisho hereunder with respect to each Taisho Activated Receptor, Taisho agrees to pay to Arena the following clinical milestone fees for each CART Identified Compound as long as this Agreement is in full force and effect. For a CART Identified Compound, the payment shall be made only at the first occurrence, if any, of a milestone set forth below as to the Drug Product first applicable to such milestone that incorporate the CART Identified Compound, regardless of formulation and/or indication of the Drug Product. Provided, however, the Parties agree that (i) as long as the development of preceding CART Identified Compound is being continued, Taisho shall be exempted from the payments of milestone fees for Back-Up Compound and (ii) any milestone payment made by Taisho to Arena for the preceding CART Identified Compound may be fully credited by Taisho against milestone payments for Back-Up Compound that shall become due by Taisho when: (i) the development of the preceding CART Identified Compound is discontinued by Taisho and (ii) Back-Up Compound replaces the withdrawn preceding CART Identified Compound (such replacement shall be notified in writing to Arena by Taisho).

(a) ONE TIME IND DECISION FEE. Taisho shall provide Notice to Arena of its decision to implement Taisho Development of a CART Identified

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Compound. Within thirty (30) days of the date of such Notice, Taisho shall provide to Arena a One Time IND Decision Fee of [*************************** (*******)].

(b) ONE TIME IND MILESTONE. Upon the filing of the first IND in the Territory for a CART Identified Compound, Taisho shall provide to Arena a One Time IND Milestone of [********************* (*******)] within thirty (30) days of such filing.

(c) PHASE 2 CLINICAL STUDY MILESTONE. Within thirty (30) days of the dosing of the first human in a Phase 2 Clinical Study in the Territory of a Drug Product, Taisho shall provide to Arena a Phase 2 Clinical Study Milestone of [*************************** (*******)].

(d) PHASE 3 CLINICAL STUDY MILESTONE. Within thirty (30) days of the dosing of the first human in a Phase 3 Clinical Study in the Territory of a Drug Product, Taisho shall provide to Arena a Phase 3 Clinical Study Milestone of [*************************** (*******)].

7.3 The Parties acknowledge and agree that the maximum amount that Taisho would be required to pay to Arena under the provisions of Article VII of this Agreement as to each CART Identified Compound (inclusive of Back-Up Compound(s) thereof) would be [*************************** (*******)].

7.4 Notwithstanding anything to the contrary herein contained, payments of milestone fees for the Subsequent Compound shall only be subject to the provisions of Article IX of this Agreement, provided, that the provisions of Article IX of this Agreement shall only apply when, and to the extent that, Taisho has made all applicable payments for the preceding CART Identified Compound under Article VII of this Agreement.

7.5 NEITHER PARTY MAKES ANY REPRESENTATION TO THE OTHER THAT ANY CART IDENTIFIED COMPOUND OR ANY DRUG PRODUCT WILL NOT INFRINGE ANY PATENT, COPYRIGHT, TRADEMARK OR OTHER PROPRIETARY RIGHT OF ANY OTHER PERSON. NEITHER PARTY MAKES ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR ANY OTHER WARRANTY, EXPRESS OR IMPLIED, TO THE OTHER WITH RESPECT TO ANY CART IDENTIFIED COMPOUND OR ANY DRUG PRODUCT.

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ARTICLE VIII

MARKETING AUTHORIZATION

8.1 Taisho shall use Best Reasonable Commercial Efforts to seek Marketing Authorization for a Drug Product developed using a Taisho Activated Receptor in the United States, Japan and European County.

8.2 In consideration of the right and license granted to Taisho hereunder, Taisho agrees to pay to Arena the following marketing milestone fees for each CART Identified Compound as long as this Agreement is in full force and effect. As long as Taisho is using Taisho Activated Receptor, Screening Assay, CART Identified Compound and/or Drug Candidate, then all such payments shall be made by Taisho to Arena, even if this Agreement is not in full force and effect at the time that such payment is due. For a CART Identified Compound, the payment shall be made only at the first occurrence, if any, of a milestone set forth below as to the Drug Product first applicable to such milestone that incorporate the CART Identified Compound, regardless of formulation and/or indication of the Drug Product.

(a) UNITED STATES. For the first Drug Product that has received Marketing Authorization in the United States, Taisho shall provide Arena with an approval fee of [******************** (*******)] within thirty (30) days of receipt of notification of such Marketing Authorization.

(b) JAPAN. For the first Drug Product that has received Marketing Authorization in Japan, Taisho shall provide Arena with an approval fee of [**************** (*******)] within thirty (30) days of receipt of notification of such Marketing Authorization.

(c) EUROPEAN COUNTRY. For the first Drug Product that has received Marketing Authorization in the first European Country, Taisho shall provide Arena with an approval fee of [******************* (*******)] within thirty (30) days of receipt of notification of such Marketing Authorization.

8.3 The Parties acknowledge and agree that the maximum amount that Taisho would be required to pay to Arena under the provisions of Article VIII of this Agreement as to each CART Identified Compound would be
[*************************** (*******)].

8.4 Notwithstanding anything to the contrary herein contained, payments of marketing milestone fees for the Subsequent Compound shall only be subject to the provisions of Article IX of this Agreement, provided, that the provisions of Article IX of this Agreement shall only apply when, and to the extent that, Taisho has made all applicable payments under Article VIII of this Agreement.

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8.5 DRUG MASTER FILE. Taisho shall be responsible for the preparation and submission of a drug master file with FDA (as set forth in 21 C.F.R
Section 314.420(b)), or any similar file required by any Regulatory Agency. Arena shall, upon request by Taisho, give all reasonable assistance to Taisho to enable Taisho to develop, and obtain Marketing Authorization for Drug Product(s).

ARTICLE IX

CLINICAL DEVELOPMENT
OF SUBSEQUENT COMPOUNDS

9.1 Arena acknowledges and agrees that Taisho shall have sole discretion to determine whether or not Taisho shall: (i) develop any Subsequent Compound, and (ii) to continue development of any Subsequent Compound.

9.2 In consideration of the right and license granted to Taisho hereunder with respect to each Taisho Activated Receptor, Taisho agrees to pay to Arena the following clinical and marketing milestone fees for each Subsequent Compound as long as this Agreement is in full force and effect. As long as Taisho is using Taisho Activated Receptor, Screening Assay, CART Identified Compound and/or Drug Candidate, then all such payments shall be made by Taisho to Arena, even if this Agreement is not in full force and effect at the time that such payment is due. For a Subsequent Compound, the payment shall be made only at the first occurrence, if any, of a milestone set forth below as to the Drug Product first applicable to such milestone that incorporate the Subsequent Compound, regardless of formulation and/or indication of the Drug Product. Provided, however, the Parties agree that Taisho shall be exempted from the payments of the following milestone fees until the earlier of (i) Taisho obtains the Marketing Authorization of the preceding CART Identified Compound or (ii) Taisho express its intent to commercialize both the preceding CART Identified Compound and the Subsequent Compound or (iii) the subsequent CART Identified Compound is deemed the Subsequent Compound but not the Back-Up Compound according to the definitions thereof, and that if any milestone(s) set forth below occur during such exemption period, the corresponding milestone fee(s) shall be paid in a lump sum within thirty (30) days of the end of such exemption period.

(a) REDUCED IND DECISION FEE. Taisho shall provide Notice to Arena of its decision to implement Taisho Development of a Subsequent Compound. Within thirty (30) days of the date of such Notice, Taisho shall provide to Arena a Reduced IND Decision Fee of [*************************** (*******)].

(b) REDUCED IND MILESTONE. Upon the filing of an IND in the Territory for a Subsequent Compound, Taisho shall provide to Arena a Reduced IND Milestone of [*************************** (*******)] within thirty (30) days of such filing.

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(c) REDUCED PHASE 2 CLINICAL STUDY MILESTONE. Within thirty
(30) days of the dosing of the first human in a Phase 2 Clinical Study in the Territory of a Drug Product comprising a Subsequent Compound, Taisho shall provide to Arena with a Reduced Phase 2 Clinical Study Milestone of
[*********************** (*******)].

(d) REDUCED PHASE 3 CLINICAL STUDY MILESTONE. Within thirty
(30) days of the dosing of the first human in a Phase 3 Clinical Study in the Territory of a Drug Product comprising a Subsequent Compound, Taisho shall provide to Arena with a Reduced Phase 3 Clinical Study Milestone of
[*************************** (*******)].
(e) UNITED STATES. For a Drug Product comprising a Subsequent Compound that has received Marketing Authorization in the United States, Taisho shall provide Arena with an approval fee of [******************* (*******)] within thirty (30) days of receipt of notification of such Marketing Authorization.

(f) JAPAN. For a Drug Product comprising a Subsequent Compound that has received Marketing Authorization in Japan, Taisho shall provide Arena with an approval fee of [******************* (*******)] within thirty (30) days of receipt of notification of such Marketing Authorization.

(g) EUROPEAN COUNTRY. For a Drug Product comprising a Subsequent Compound that has received Marketing Authorization in the first European Country, Taisho shall provide Arena with an approval fee of
[******************** (*******)] within thirty (30) days of receipt of notification of such Marketing Authorization.

9.3 The Parties acknowledge and agree that the maximum amount that Taisho would be required to pay to Arena under the provisions of Section 9.2 of this Agreement as to each Subsequent Compound would be
[*************************** (*******)].
9.4 Arena acknowledges and agrees that in the event that Taisho discontinues development of a Subsequent Compound prior to the Market Authorization of the preceding CART Identified Compound, then any milestone payments otherwise due by Taisho for such Subsequent Compound under this Agreement shall not be required to be made by Taisho.

9.5 NEITHER PARTY MAKES ANY REPRESENTATION TO THE OTHER THAT SUBSEQUENT COMPOUND WILL NOT INFRINGE ANY PATENT, COPYRIGHT, TRADEMARK OR OTHER PROPRIETARY RIGHT OF ANY OTHER PERSON. NEITHER PARTY MAKES ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR ANY OTHER WARRANTY, EXPRESS OR IMPLIED, TO THE OTHER WITH RESPECT TO ANY SUBSEQUENT COMPOUND.

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ARTICLE X

ROYALTY PAYMENTS

10.1 ROYALTY PAYMENT. In consideration of the right and license granted to Taisho hereunder with respect to each Taisho Activated Receptor, for EACH Drug Product that has received Marketing Authorization, Taisho shall provide Arena with a royalty payment based on Annual Drug Product Revenue as set forth below for a period ending upon the expiration of [***** (***)] years from the Effective Date; such royalty payment shall be made within three (3) months of December 31 for the Annual period to which the Annual Drug Product Revenue applies:

(a) [***** (***)] of the portion of Annual Drug Product Revenue between [*************** ] and [********************]; and

(b) [***** (***)] of the portion of Annual Drug Product Revenue between [*************** ] and [********************]; and

(c) [***** (***)] of the portion of Annual Drug Product Revenue between [*************** ] and [********************]; and

(d) [***** (***)] of the portion of Annual Drug Product Revenue above [*************** ].

(e) By way of example and not limitation, in the event that Annual Drug Product Revenue for a Drug Product is [**************], Taisho shall provide a royalty payment to Arena of [***********], based upon an aggregate of:
[******] (Section 10.1(a) component); [******] (Section 10.1(b) component);
[*********] (Section 10.1(c) component); and [********] (Section 10.1(d) component).

10.2 AUDIT. In order to verify the completeness and correctness of Drug Product Revenue, Taisho shall maintain up to date books and records and Arena shall have the right to conduct, through independent certified public accountants, at its own cost and at any reasonable time during business hours, not more often than once each Annual period for not more than three (3) previous years, and upon reasonable prior notice, an audit of the accounting procedures and records of Taisho in computing and calculating royalty payment for Annual Drug Product Revenue due hereunder. The auditor shall make available to Taisho and Arena a report enumerating the period covered by the audit of Drug Product Revenue computed and calculated by the auditor. The costs of such audit shall be borne by Taisho in the event that a discrepancy of more than five per cent (5%) is discovered through such audit.

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ARTICLE XI

PAYMENT ARRANGEMENT

The Parties acknowledge and agree that any and all payments to be made by Taisho to Arena under this Agreement are to be (i) in United States Dollars and (ii) in full as indicated; provided, however, that any income or other tax which Taisho is required to pay or withhold on behalf of Arena with respect to payments payable to Arena hereunder shall be deducted from the amounts of such payments. Taisho agrees to reasonably cooperate with Arena in obtaining a foreign tax credit in the U.S. with respect to such payment due to Arena.

ARTICLE XII

CONFIDENTIALITY

12.1 Each party shall neither disclose to any Third Party any and all of the information ("Information") disclosed by the other Party hereunder and under the Mutual Non-Disclosure Agreement of August 31, 1999 between Arena and Taisho, nor permit any such Third Party to have access to such Information, nor use such Information for any purpose other than for purpose of this Agreement, without the prior written consent of the other Party.

12.2 The receiving Party's obligations under Article 12.1 hereof shall not apply, with respect to any of such Information to the extent that the receiving Party can establish by competent proof that such Information:

(a) is published, known publicly, or is already in the public domain at the time of receipt of it by the receiving Party;

(b) is published, becomes known publicly or becomes a part of the public domain by publication or otherwise after the time of receipt of it by the receiving Party, except by breach of this Agreement by the receiving Party;

(c) is obtained from a Third Party after the receipt of it by the receiving Party, provided, however, that said Third Party has not obtained it directly or indirectly from the disclosing Party;

(d) is in the receiving Party's possession on the date of the receipt of it and was not acquired directly or indirectly from the disclosing Party; or

(e) is subsequently developed by the receiving Party independent of the information received hereunder, as evidenced by competent written records established by the receiving Party.

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12.3 Notwithstanding anything to the contrary in this Agreement, the receiving Party shall be entitled to disclose such Information (i) to the extent required by applicable law or court order provided that the receiving Party furnishes the disclosing Party with written notice of such request, in advance of any such disclosure of the Information or (ii) to a government agency, regulatory authority, clinical research organization, clinical investigator or other Third Party to whom disclosure is necessary for development of the CART Identified Compound in connection with drug development, approval or registration of the CART Identified Compound and/or Drug Product.

The foregoing obligations of confidentiality shall survive for five (5) years after any termination or expiration of this Agreement.

ARTICLE XIII

PATENT INFRINGEMENT AND ENFORCEMENT

13.1 NOTIFICATION OF INFRINGEMENT. Each Party shall promptly provide Notice to the other of any infringement (of which it becomes aware) of the intellectual property rights including patent rights on any Taisho Activated Receptor(s) and/or Screening Assay(s) and/or CART Identified Compound(s) and/or Drug Product(s) by any Third Party and shall provide the other with any available evidence of such infringement of which the Party is aware.

13.2 SUIT FOR INFRINGEMENT.

(a) During the term of this Agreement, Arena shall be responsible for enforcement of the Arena Patent Rights including, but not limited to, the bringing of an action for patent infringement, selection of the forum for such action, and counsel, settlement of any such action, and the costs devoted to such action. Taisho agree to provide reasonable assistance except for financial assistance to Arena in the enforcement of Arena Patent Rights and Taisho may join such action as initiated by Arena with counsel at its own expense and seek its own damages and other relief. If, within ninety (90) days of Taisho's giving notice to Arena of a Third Party infringement in the Territory, Arena fails to institute the infringement suit that Taisho reasonably feels is required, Taisho may institute such infringement proceedings against said Third Party at its expense and Taisho shall have the right to receive all the amounts payable by said Third Party as a result of such proceedings.

(b) In the event a claim of patent infringement is made against Taisho by a Third Party in the Territory by reasons of Taisho's commercial activities hereunder, Taisho and Arena shall meet to analyze the infringement claim and avoidance of the same. If it is necessary to obtain an appropriate license from such a Third Party, the Parties shall, in negotiating such a license, make every efforts to minimize the amount of license fees and/or royalties payable to such Third Party and (i) in case that such license is related to Arena Activation Technology, Arena shall be responsible for such license fees and/or royalties, (ii) in case that such license is related to Taisho Selected GPCR and/or Taisho Activated Receptor and/or Screening Assay, and/or CART Identified Compound, and/or Drug Product, Taisho shall be responsible for such license fees and/or royalties,

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ARTICLE XIV

REPRESENTATION AND WARRANTIES

14.1 REPRESENTATIONS AND WARRANTIES OF TAISHO. Taisho represents and warrants to Arena as follows:

(a) The execution and delivery of this Agreement have been duly and validly authorized, and all necessary action has been taken to make this Agreement a legal, valid and binding obligation of Taisho enforceable in accordance with its terms.

(b) The execution and delivery of this Agreement and the performance by Taisho of its obligations hereunder will not contravene or result in the breach of the Certificate of Incorporation or Bylaws of Taisho or result in any material breach or violation of or material default under any material agreement, indenture, license, instrument or understanding or, to the best of its knowledge, result in breach of any law, rule, regulation, statute, order or decree, to which Taisho is a party or of which it or any of its property is subject.

14.2 REPRESENTATIONS AND WARRANTIES OF ARENA. Arena represents and warrants to Taisho as follows:

(a) The execution and delivery of this Agreement have been duly and validly authorized, and all necessary action has been taken to make this Agreement a legal, valid and binding obligation of Arena enforceable in accordance with its terms.

(b) The execution and delivery of this Agreement and the performance by Arena of its obligations hereunder will not contravene or result in the breach of the Certificate of Incorporation or Bylaws of Arena or result in any material breach or violation of or material default under any material agreement, indenture, license, instrument or understanding or, to the best of its knowledge, result in breach of any law, rule, regulation, statute, order or decree, to which Arena is a party or of which it or any of its property is subject.

ARTICLE XV

INDEMNITY

15.1 INDEMNIFICATION BY TAISHO. Taisho will indemnify and hold harmless Arena and its Affiliates, employees, officers, directors, shareholders and agents (an "Arena Indemnified Party") from and against all liability, loss, damages, costs and expenses (including reasonable attorneys' fees) which Arena Indemnified Party may incur, suffer or be required to pay resulting from or arising in connection with (i) the breach by Taisho of any agreement, covenant, representation or warranty of Taisho obtained in this Agreement, or (ii) negligence or omission of Taisho.

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15.2 INDEMNIFICATION BY ARENA. Arena will indemnify and hold harmless Taisho and its Affiliates, Taisho's Licensees, employees, officers, directors, shareholders and agents (an "Taisho Indemnified Party") from and against all liability, loss, damages, costs and expenses (including reasonable attorneys' fees) which Taisho Indemnified Party may incur, suffer or be required to pay resulting from or arising in connection with (i) the breach by Arena of any agreement, covenant, representation or warranty of Arena obtained in this Agreement, or (ii) negligence or omission of Arena.

15.3 CONDITIONS TO INDEMNIFICATION. The obligations of the indemnifying Party under Sections 15.1 and 15.2 of this Agreement are conditioned upon the prompt Notice to the indemnifying Party of any of the aforementioned suits or claims in writing within fifteen (15) days after receipt of notice by the indemnified Party of such suit or claim. The indemnifying Party shall have the right to assume the defense of any such suit or claim unless, in the reasoned judgment of the indemnified Party, such suit or claim involves an issue or matter which could have a materially adverse effect on the business, operations or assets of the indemnified Party, in which event the indemnified Party may participate in the defense of such suit or claim at its sole cost and expense. The provision for indemnification shall be void and there shall be no liability against a indemnified Party as to any suit or claim for which settlement or compromise or an offer of settlement or compromise is made without the prior consent of the indemnifying Party.

ARTICLE XVI

TERMINATION

16.1 BREACH. Failure by either Party to comply with any of its material obligations contained in this Agreement shall entitle the other Party to give Notice to the Party in default specifying the nature of the default and requiring it to cure such default. If such default is not cured within two (2) months after receipt of such Notice, the notifying Party shall be entitled, without prejudice to any of its other rights conferred on it by this Agreement, to terminate this Agreement and the licenses granted to the breaching Party hereunder with immediate effect by giving notice to such termination. The right of either Party to terminate this Agreement as herein provided shall not be affected in any way by its waiver of, or failure to take action with respect to, any previous default.

16.2 DURATION OF THIS AGREEMENT.

(a) This Agreement shall become effective from the Effective Date and continue to be in effect until expiration of Taisho's obligation of royalty payment hereunder, if any; such obligation of royalty payment shall be twenty (20) years from the Effective Date. Thereafter, all licenses or sublicenses granted hereunder shall become fully paid-up irrecoverable license.

(b) Either Party shall be entitled to terminate this Agreement in the event of

(1) insolvency of the other Party or commencement of bankruptcy proceedings by such Party; or

(2) dissolution of the other Party by that Party, or liquidation of such Party by that Party.

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(c) The Parties agree that in the event that Taisho sublicenses any of the rights granted to it under this Agreement to a Third Party, such sublicense shall include provisions whereby if such sublicensee(s) becomes insolvent, commences bankruptcy proceedings, dissolves, and/or liquidates its assets, any and all rights granted by Taisho to such sublicensee(s) shall automatically revert back to Taisho.

16.3 ACCRUED RIGHTS; SURVIVING OBLIGATIONS. Termination or expiration of this Agreement for any reason shall be without prejudice to any rights which shall have accrued to the benefit of either Party prior to such termination or expiration, nor shall such termination or expiration relieve either Party from obligations which are expressly indicated to survive termination or expiration of this Agreement.

ARTICLE XVII

RELATIONSHIP OF THE PARTIES

Nothing in this Agreement is intended or shall be deemed to constitute a partnership, agency, employer-employee, or joint venture relationship between the Parties. All activities by each Party hereunder shall be provided as an independent contractor. No Party shall incur any debts or make any commitments for the other, except to the extent, if at all, specifically provided herein.

ARTICLE XVIII

MISCELLANEOUS PROVISIONS

18.1 LIMITATIONS ON ASSIGNMENT. Neither this Agreement nor any interest hereunder shall be assignable or transferable by Arena or Taisho without the prior written consent of the other Party.

18.2 FURTHER ACTS AND INSTRUMENTS. Each Party hereto agrees to execute, acknowledge and deliver such further instruments and to do all such other acts as may be necessary or appropriate to carry out the purpose and intent of this Agreement.

18.3 ENTIRE AGREEMENT. This Agreement constitutes and contains the entire agreement of the Parties and supersedes any and all prior negotiations, correspondence, understandings, Letters of Intent and agreements between the Parties respecting the subject matter hereof. This Agreement may be amended or modified or one or more provisions hereof waived only by a written instrument signed by the Parties.

18.4 SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of this Agreement shall be interpreted as if such provision were so excluded.

18.5 CAPTIONS. The captions to this Agreement are for convenience only and are to be of no force or effect in construing and interpreting the provisions of this Agreement.

18.6 FORCE MAJEURE. Neither Party shall be liable to the other for loss or damages, or have any right to terminate this Agreement for any default or delay, attributable to any act of God, flood, fire, explosion, breakdown or plant strike, lockout,

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labor dispute, casualty, accident, war, revolution, civil commotion, act of a public enemy, blockage, embargo, injunction, law, order, proclamation, regulation, ordinance, demand or requirement of any government or subdivision, authority or representative of any government, or any other cause beyond the reasonable control of such Party.

18.7 NO TRADE NAME OR TRADEMARK LICENSE.

(a) No right, express or implied, is granted by this Agreement to Taisho, Taisho collaborators or Taisho's Licensees to use in any manner the name "Arena," "Arena Pharmaceuticals," "CART" or any trade name or trademark of Arena in any business dealing which is not directly connected with the performance of this Agreement; provided, however, that Taisho shall have the right to use or disclose the name Arena only to the extent and the manner as may be required by law.

(b) No right, express or implied, is granted by this Agreement to Arena, Arena collaborators or Arena licensees to use in any manner the name "Taisho" or any trade name or trademark of Taisho in any business dealing which is not directly connected with the performance of this Agreement; provided, however, that Arena shall have the right to use or disclose the name Taisho only to the extent and the manner as may be required by law.

(c) During the term of this Agreement, the Parties may issue a press release regarding the acceptance of this Agreement by the Parties with prior written consent of the other Party on the contents of such release, which consent shall not be unreasonably withheld (it is not necessary to obtain the consent of the other Party for disclosing the information regarding this Agreement which a Party is required by law to disclose).

18.8 GOVERNING LAW; CONSENT TO JURISDICTION. This Agreement shall be governed by and construed under applicable federal law of the United States of America and the laws of the State of California, excluding any conflict of law provisions. Each Party hereto hereby voluntarily and irrevocably waives trial by jury in any action or proceeding brought in connection with this Agreement, any of the other transaction documents or any of the transactions contemplated hereby or thereby. Each Party hereby expressly waives any and all rights to bring any suit, action or other proceeding in or before any court or tribunal other than arbitration court of the International Chamber of Commerce and covenants that it shall not seek in any manner to resolve any dispute other than as set forth in this Section 18.8 or to challenge or set aside any decision, award or judgment obtained in accordance with the provisions hereof. Each Party hereby expressly waives any and all objections it may have to venue, including, without limitation, the inconvenience of such forum, in any of such courts. In addition, the service of process regarding the arbitration shall be subject to the rules of arbitration of the International Chamber of Commerce or applicable laws. The Parties further agree that any dispute resolution initiated by Taisho under this Section 18.8 shall take place in San Diego, California (U.S.A.) and that any dispute resolution initiated by Arena under this Section 18.8 shall take place in Tokyo, JAPAN

18.9 EXPENSES. Except as otherwise provided herein, each Party hereto shall bear its legal and other expenses incurred in connection with the negotiation, execution, delivery and performance of this Agreement.

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18.10 COUNTERPARTS. This Agreement shall be executed in two counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

18.11 NOTICE. Unless otherwise provided, any notice required or permitted under this Agreement shall be given in writing and shall be deemed effectively given upon personal delivery to the Party to be notified or upon deposit with the registered or certified mail in the country of residence of the Party giving the notice, postage prepaid, or upon deposit with an internationally recognized express courier with proof of delivery, postage prepaid and addressed to the Party to be notified at the address or addresses indicated below, or upon the date of fax transmission of such notice (with proof of such fax transmission established by the sender's fax receipt) using the fax numbers listed below, or at such other address or fax number as such Party may designate by ten (10) days' advance written notice to the other Party with copies to be provided as follows:

IF TO ARENA, ADDRESSED TO:
Arena Pharmaceuticals, Inc.
6166 Nancy Ridge Drive
San Diego, CA 92121 USA
Attention: Jack Lief
President & CEO
Fax: (858) 453-7210

IF TO TAISHO, ADDRESSED TO:
Taisho Pharmaceutical Co., Ltd.
24-1, Takata 3-chome,
Toshimaku
Tokyo 170-8633, JAPAN

Attention:   Tetsuya Yamamoto
             Group Manager, Business Development Group
             Ethical Business Strategy Division,

Fax: 03-3985-0716

18.12 SURVIVING RIGHTS AND OBLIGATIONS. The following Articles and Sections shall survive any termination or expiration of this Agreement: Article I (Definitions); Article XI (Payment Arrangement); Article XII (Confidentiality); Article XIII (Patent Infringement and Enforcement); Article XIV (Representations and Warranties); Article XV (Indemnity); and Sections 5.3(d), 5.4, 18.8 and any payment otherwise subsequently or otherwise due under Articles VII, VIII, IX and/or X. Upon expiration of Taisho royalty obligation under this Agreement, all licenses and rights granted to Taisho hereunder shall become fully paid-up irrecoverable license.

[Signature page on next page]

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CONFIDENTIAL

WHEREUPON, the Parties have caused this Agreement to be executed by their duly authorized agents, as of the dates listed below.

ARENA PHARMACEUTICALS, INC. TAISHO PHARMACEUTICAL CO., LTD.

By:   /s/Jack Lief                            By:   /s/Akira Uehara
   -----------------------------                 ----------------------------
Name:    Jack Lief                            Name:    Akira Uehara
Title:   President & CEO                      Title:   President

Date: August 7, 2000                          Date: September 18, 2000

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CONFIDENTIAL

APPENDIX A

TAISHO SELECTED GPCRS

1. [*******************************], ALSO REFERRED TO AS "[*********]." SELECTED BY TAISHO AS OF THE EFFECTIVE DATE.

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CONFIDENTIAL


Exhibit 10.8

CONFIDENTIAL TREATMENT HAS BEEN REQUESTED
FOR THE PORTIONS MARKED [***]

FIRST AMENDMENT TO THE AGREEMENT

BY AND BETWEEN

ARENA PHARMACEUTICALS, INC.

AND

TAISHO PHARMACEUTICAL CO., LTD.

This First Amendment ("Amendment") to the Agreement dated May 29, 2000 by and between the Parties hereto ("Agreement") is effective as of JANUARY 24, 2001 ("Effective Date") by and between ARENA PHARMACEUTICALS, INC., having a place of business at 6166 Nancy Ridge Drive, San Diego, California, 92121 USA ("Arena"), and TAISHO PHARMACEUTICAL CO., LTD., having a place of business at 24-1, Takata 3-Chome, Toshimaku, Tokyo 170-8633, JAPAN ("Taisho").

RECITALS

WHEREAS, Arena and Taisho entered into the Agreement, and pursuant to the Agreement, Taisho has selected 18F Receptor (defined below) as second Taisho Selected GPCR.

NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, Arena and Taisho hereby agree as follows:

ARTICLE I
DEFINITIONS

Unless otherwise specifically provided herein, any capitalized term used in this Amendment shall have the same meaning as defined in the Agreement, and the following terms shall have the following meanings:

"EFFECTIVE DATE" for purposes of this Amendment means JANUARY 24, 2001.

"SECOND SELECTION DATE" means DECEMBER 25, 2000.

"18F COMPOUNDS" has the same meaning as set forth in Section 2.2 of this Amendment.

"18F RECEPTOR" has the same meaning as set forth in Section 2.1 of this Amendment.

ARTICLE II
18F RECEPTOR

2.1 According to Section 2.2 of the Agreement, Taisho has selected 18F Receptor as a Taisho Selected GPCR and the following clause shall be added to the APPENDIX A to the Agreement.

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CONFIDENTIAL

2.18F RECEPTOR, ALSO REFERRED TO AS "[ ]".
SELECTED BY TAISHO AS OF THE SECOND SELECTION DATE.

2.2 As of the Second Selection Date, Arena has applied Arena Activation Technology to 18F Receptor, established constitutively active Taisho Activated Receptor of 18F Receptor as of the Second Selection Date, developed the Screening Assay incorporating 18F Receptor, made Screening Assay Notice to Taisho, completed the Arena Screening for 18F Receptor, and identified as CART Identified Compounds the 18F Compounds which include the compound coded "[ ]" and derivatives thereof covered by the Arena Patent Rights included in US serial number [ ], filed with the US Patent & Trademark Office on [ ] and named "Small Molecule Modulators of [ ]".

2.3 In consideration of the rights granted under Article V of the Agreement with respect to 18F Receptor and the 18F Compounds and further consideration of Arena's activities described in Section 2.2 of this Amendment:

(i) within thirty (30) days of the Effective Date, Taisho shall provide Arena with a one-time, non-refundable, non-creditable fee of [ ], with respect to the rights exercisable in Japan, and

(ii) within thirty (30) days of the Effective Date, Taisho shall provide to Arena with a one-time, non-refundable, non-creditable fee of [ ] with respect to the rights exercisable in the world except Japan.

In addition, within thirty (30) days of the Effective Date, Taisho shall provide Arena with a Continuing Utilization Fee of [ ] for 18F Receptor, and Taisho shall have the right set forth in Section 5.5 of the Agreement with respect to 18F Receptor. The Parties agree that the total amount to be paid by Taisho to Arena under this Section 2.3 of the Amendment is [ ].

ARTICLE III
RESEARCH

3.1 TRANSFER OF RECEPTOR, COMPOUNDS AND TECHNICAL INFORMATION. Subject to the provisions of Article III of the Agreement, Arena shall transfer to Taisho 18F Receptor and Technical Information thereon within thirty (30) days of the Effective Date. In addition, Arena shall transfer to Taisho samples of the 18F Compounds in the form and quantity agreed to in advance by the Parties and Technical Information regarding the 18F Compounds within thirty (30) days of the Effective Date.

3.2 ADDITIONAL SUPPLY OF COMPOUNDS. When requested by Taisho in writing, Arena shall use its Best Reasonable Commercial Efforts to supply additional quantity of the 18F Compounds within the time period requested by Taisho. If so agreed by the Parties in writing, Arena shall supply additional Technical Information owned or possessed by Arena to enable Taisho to synthesis the 18F Compounds for the purpose of the Screening and Optimization defined in
Section 3.3 below.

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CONFIDENTIAL

3.3 OPTIMIZATION. Taisho has requested Arena to perform contract research for Taisho, and Arena has agreed to perform such contract research for Taisho, directed to optimization of the 18F Compounds for the purpose of identifying the most suitable compound for Taisho Development ("Optimization") in accordance with a mutually agreed upon plan for the Optimization, which shall be attached to this Amendment, when completed, as AMENDMENT APPENDIX A. Such compound(s) identified under the Optimization shall be deemed to be CART Identified Compound, regardless of the definition of CART Identified Compound(s) set forth in the Agreement. Any and all results obtained under the Optimization and intellectual property rights thereon shall be solely owned by Taisho.

3.4 RESEARCH FEE. As described in Section 2.2 in this Amendment, Arena has finished its Screening Assay development and its Screening activities for 18F Receptor under the Agreement as of the Second Selection Date, and Taisho shall reimburse the research and development fee for such activities of [ ] within sixty (60) days of the Second Selection Date. This fee shall include the research and development fees of each [ ] under Sections 4.1 (a) through (c) of Article IV of the Agreement and the Screening Fee of [ ] under Section 6.2 of the Agreement.

3.5 FEE FOR OPTIMIZATION. Taisho shall pay contract research fee for the Optimization at a rate of [ ] per Arena's full time equivalent equal to
[ ] hours ("FTE") per year. Within the mutually agreed upon plan for the Optimization, the number of Arena's FTEs may be increased or decreased yearly upon mutual agreement by Arena and Taisho, but shall in no event Arena's FTEs exceed [ ] FTEs per year.

3.6 PAYMENT UNDERSTANDING. Taisho acknowledges and agrees that any payment due under Sections 3.4 and 3.5 above shall be made as required and that once made, such payment shall be non-refundable and non-creditable. Within 30 days of the receipt by Arena of each payment, Arena shall provide to Taisho a statement with supportive documents sufficiently verifying the costs and expenses incurred by Arena regarding the corresponding research and development activities.

ARTICLE IV
NO OTHER AMENDMENT

Unless otherwise specifically stated herein, terms and conditions of the Agreement shall remain in full force and effect.

[THE REST OF THIS PAGE IS INTENTIONALLY BLANK]

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CONFIDENTIAL

WHEREUPON, the Parties have caused this Amendment to be executed by their duly authorized agents, as of the dates listed below.

ARENA PHARMACEUTICALS, INC.                 TAISHO PHARMACEUTICAL CO., LTD.



By: /s/ Jack Lief                           By: /s/ Akira Uehara
  -------------------------------             ----------------------------------
Name:   Jack Lief                           Name:   Akira Uehara
Title:  President & CEO                     Title:  President

Date: January 17, 2001                      Date: January 23, 2001

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CONFIDENTIAL

Exhibit 10.14

PURCHASE AND SALE AGREEMENT

By and Between

LIMAR REALTY CORP. #13

("SELLER")

and

ARENA PHARMACEUTICALS, INC.

("BUYER")


TABLE OF CONTENTS

                                                                            Page
1.       PURCHASE AND SALE....................................................1

2.       PURCHASE PRICE.......................................................2

3.       TITLE................................................................3

4.       ESCROW...............................................................4

5.       CLOSING..............................................................4

6.       DUE DILIGENCE........................................................5

7.       CONDITIONS TO CLOSING...............................................10

8.       DELIVERIES INTO ESCROW..............................................11

9.       PRORATIONS; CLOSING COSTS; CREDITS..................................13

10.      OPERATION OF PROPERTY PENDING THE CLOSING.  ........................15

11.      REPRESENTATIONS AND WARRANTIES......................................16

12.      INDEMNIFICATION.....................................................18

13.      CASUALTY OR CONDEMNATION............................................19

14.      COMMISSIONS.........................................................20

15.      NOTICES.............................................................20

16.      LIMITATIONS ON REPRESENTATIONS AND WARRANTIES.......................21

17.      MISCELLANEOUS.......................................................23

18.      DEFAULT.............................................................26

19.      DEFINITIONS.  ......................................................27


PURCHASE AND SALE AGREEMENT

THIS PURCHASE AND SALE AGREEMENT ("AGREEMENT") is made and entered into as of December 1, 2000 (the "EFFECTIVE DATE") by and between Limar Realty Corp. #13, a California corporation ("SELLER"), and Arena Pharmaceuticals, Inc., a Delaware corporation ("BUYER").

R E C I T A L S

This Agreement is made with respect to the following facts and circumstances:

A. Seller represents and warrants that it owns certain real property commonly known as the Arena Pharmaceuticals Building, 6138 and 6150 Nancy Ridge Drive, San Diego, CA, which real property, together with certain personal property is collectively referred to in this Agreement as the "Property" and is more particularly defined below.

B. Subject to the terms and conditions herein, Seller desires to sell and Buyer desires to purchase the Property.

NOW, THEREFORE, in consideration of the mutual covenants contained herein, Seller and Buyer agree as follows:

1. PURCHASE AND SALE.

1.1 PROPERTY. Subject to the terms and conditions hereof, Seller hereby agrees to sell, convey and assign to Buyer, and Buyer hereby agrees to purchase and accept from Seller on the Closing Date (as defined below) the following (collectively, the "PROPERTY"):

1.1.1 That certain tract or parcel of land situated in the City of San Diego, County of San Diego, California which is legally described on EXHIBIT 1.1.1 attached hereto, together with any and all rights, privileges and easements appurtenant thereto, which are owned by Seller (collectively, the "LAND");

1.1.2 All buildings, structures, fixtures and other improvements of every kind and description affixed to or located in, on, over, or under the Land (excluding fixtures owned by tenants) (all of which are collectively referred to as the "IMPROVEMENTS"); and

1.1.3 All right, title and interest of Seller in and to all tangible personal property of any type located upon the Land or within the Improvements and used exclusively in connection with the operation of the Land and Improvements (collectively, the "PERSONAL PROPERTY").

1.2 REAL PROPERTY. The Land and Improvements are collectively referred to as the "REAL PROPERTY".

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1.3 ASSIGNMENT. In addition, Seller shall convey and assign to Buyer all of the right, title and interest of Seller, if any, in and to (i) the lease(s) scheduled on EXHIBIT 1.3 (i) attached hereto (the "LEASE(S)") and all lease(s) approved by Buyer subject to Section 10.3 below, together with any and all security deposits in Seller's possession in connection therewith; (ii) all assignable service contracts and other agreements, if any, relating to the Real Property or Personal Property to be assumed by Buyer as described on EXHIBIT 1.3 (ii) attached hereto (collectively the "SERVICE CONTRACTS"); (iii) all assignable current licenses, permits, certificates of occupancy, approvals and entitlements issued or granted in connection with the Real Property as well as any and all assignable development rights and any other intangible rights, interests or privileges relating to or used in connection with the Real Property; (iv) any assignable right to use the current names of the Real Property, logos, trademarks, tradenames and symbols and promotional materials; and (v) all transferrable warranties, guarantees or sureties relating to the Real Property or the Personal Property. Such assignment shall be made pursuant to the Assignment and Assumption Agreement in the form described in
Section 8.1.3 below ("ASSIGNMENT"). All of the above interests as described in clauses (iii), (iv) and (v) of this Section 1.3 shall sometimes be referred to collectively as the "INTANGIBLE PROPERTY".

1.4 EXCLUDED PROPERTY. Notwithstanding anything to the contrary set forth herein, the Property being conveyed pursuant to this Agreement does not include (and Seller expressly reserves all rights with respect thereto) any existing claims or causes of action with respect to the Property to the extent attributable to the period prior to the Closing Date including, without limitation, any tax rebates attributable to the period prior to the Closing and claims against existing tenants with respect to matters accruing prior to the Closing Date or previous tenants. The provisions of this
Section 1.4 shall not be construed, however, to restrict the ability of Buyer following the Closing Date to deal with any existing tenants of the Real Property or to restrict the Buyer following the Closing Date from pursuing any and all remedies in connection with existing hazardous materials on, in or about the Real Property.

2. PURCHASE PRICE. Buyer shall pay as the total purchase price for the Property ("PURCHASE PRICE") the sum of Five Million Four Hundred Thousand Dollars ($5,400,000). The Purchase Price shall be paid as follows:

2.1 DEPOSIT. On or before one (1) business day following the Effective Date, Buyer shall cause One Hundred Thousand Dollars ($100,000) (the "DEPOSIT #1") in immediately available funds to be delivered into Escrow (as defined below). On or before one (1) business day following the Due Diligence Date (as defined below) provided that Buyer has given the Approval Notice (as defined below), Buyer shall cause an additional One Hundred Thousand Dollars ($100,000) (the "DEPOSIT #2") in immediately available funds to be delivered into Escrow. The "DEPOSIT" shall refer to the sum of the Deposit #1 and Deposit #2 as each of said amounts are received by Escrow. The failure of Buyer to timely deliver any of the respective Deposits shall be a material default, and shall entitle Seller, at Seller's sole option, to terminate this Agreement immediately by giving written notice of such termination to Buyer and the Title Company (as defined below);

2.2 INTEREST ON DEPOSIT. The Deposit shall be held by the Title Company as an earnest money deposit towards the Purchase Price. The Deposit shall be held in Escrow in accordance with the provisions of this Agreement in a federally insured interest bearing account or other investment suitable for daily investment reasonably acceptable to Seller and Buyer (and in any

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event with any risk of loss for the account of Buyer) with any interest accruing thereon to be paid or credited, except as otherwise provided in this Agreement, to Buyer. The term "Deposit" shall include any and all interest then accrued;

2.3 DISPOSITION OF DEPOSIT. At the Closing (as defined below) the Deposit shall be applied and credited toward the payment of the Purchase Price. If Escrow does not close, and this Agreement is terminated in a manner governed by Sections 7.3 or 13, the Deposit will be disbursed to Buyer as provided in such Sections. If the Escrow does not close and neither Section 7.3 nor Section 13 applies, the Deposit shall be returned to Buyer unless the provisions of Section 18.1 are applicable, in which case the disposition of the Deposit shall be governed by the provisions of Section 18.1; and

2.4 CASH BALANCE. On or before the Closing, Buyer shall deliver into Escrow in immediately available funds the balance of the Purchase Price. The Purchase Price, net of any prorations and closing costs to be paid by Seller as provided in this Agreement, shall be paid by the Title Company to Seller on the Closing Date by federal wire transfer of immediately available funds to a bank account(s) designated by Seller in a written notice to the Title Company given prior to the Closing.

3. TITLE.

3.1 VESTING OF TITLE. At Closing, Seller shall convey fee simple title to the Real Property to Buyer by execution and delivery of the Deed (as defined below). Issuance by the Title Company (or an unconditional commitment to issue) as of the Closing of the Buyer's Title Policy (as defined below) shall constitute evidence of delivery of title by Seller.

3.2 BUYER'S TITLE INSURANCE. At Closing, the Title Company shall issue to Buyer a CLTA standard coverage owner's form of title insurance policy in the amount of the Purchase Price insuring that fee simple title to the Real Property is vested in Buyer subject only to the Permitted Exceptions (as defined below) ("BUYER'S TITLE POLICY"). Buyer shall be entitled to request that the Title Company provide an ALTA title insurance policy and/or such endorsements to the Buyer's Title Policy as Buyer may reasonably require, provided that such ALTA policy and/or endorsements shall be at no cost or additional liability to Seller and the Closing shall not be delayed as a result of Buyer's request.

3.3 PERMITTED EXCEPTIONS. As a condition precedent of Buyer's obligations as provided in Section 7.2.4 but not as a covenant of Seller, Seller shall convey the Property and Buyer shall accept the Property subject to the following matters, which are collectively referred to as the "PERMITTED EXCEPTIONS":

3.3.1 all exceptions to title shown in the Title Report (as defined below) as it may be amended and on the Survey (as defined below) that are approved or deemed approved by Buyer as provided in Section 6.3

hereof;

                           3.3.2    the lien of non-delinquent real and personal
property taxes and assessments;

                           3.3.3    the rights of the tenant(s) under the
Lease(s);

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                           3.3.4    the Service Contracts, if any, to be assumed
by Buyer;

                           3.3.5    local, state and federal laws, ordinances or

governmental regulations, including but not limited to, building and zoning laws, ordinances and regulations, now existing or hereafter in effect with respect to the Real Property;

3.3.6 matters affecting the condition of title created by or with the written consent of Buyer;

3.3.7 water rights, and claims of title to water, whether or not shown by the public records;

3.3.8 unless Buyer elects to obtain an ALTA policy of title insurance, discrepancies, conflicts in boundary lines, shortages in area, encroachments, and any state of facts which inspection of the Real Property would disclose and which are not shown by the public records; and

3.3.9 standard printed exclusions generally included in a CLTA owner's policy (or ALTA owner's policy, as the case may be).

4. ESCROW.

4.1 OPENING OF ESCROW. Seller shall deliver a copy of a fully executed counterpart of this Agreement into escrow ("ESCROW") to be established at Chicago Title Company, 388 Market Street, Suite 1350, San Francisco, California 94111, Attention: Nicole Carr ("TITLE COMPANY") on or before three (3) days following the Effective Date.

4.2 INSTRUCTIONS TO TITLE COMPANY. Seller and Buyer shall each be entitled to submit escrow instructions to the Title Company in connection with the Closing of the Escrow. Seller and Buyer shall in addition execute such further escrow instructions as the Title Company may reasonably require in connection with the Closing so long as such instructions are consistent with the provisions of this Agreement and the escrow instructions of Seller and Buyer. In the event of any conflict between the terms and conditions of this Agreement and the provisions of any escrow instructions prepared by Seller, Buyer or the Title Company, the terms and conditions of this Agreement shall control.

5. CLOSING.

5.1 CLOSING. The purchase and sale of the Property as contemplated by this Agreement, including but not limited to the recordation of the Deed and the completion of the other matters required by this Agreement to be done contemporaneously (the "CLOSING") shall occur on a date selected by Seller (with written notice to Buyer no less than three (3) business days prior to the selected date), but shall occur no sooner than Monday, December 11, 2000 and no later than Wednesday, January 3, 2001. The date on which the Closing actually occurs shall be referred to as the "CLOSING DATE".

5.2 FAILURE TO CLOSE. If the Closing does not occur on or before the date set forth in Section 5.1 above (as such date may be extended pursuant to the express provisions of this Agreement), then in the absence of a written agreement between the parties to extend the Closing

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Date, either party hereto (so long as such party is not then in default pursuant to this Agreement), without waiving any rights it may otherwise have pursuant to the Agreement, may elect to terminate this Agreement by giving written notice of such termination to the other and to the Title Company.

6. DUE DILIGENCE.

6.1 DUE DILIGENCE PERIOD. The period commencing as of the Effective Date and continuing through 5:00 p.m. PST, Friday, December 8, 2000 (the "DUE DILIGENCE DATE") shall be referred to as the "DUE DILIGENCE PERIOD".

6.2 AVAILABLE INFORMATION. Seller shall make available to Buyer the following documents and materials (collectively, the "DUE DILIGENCE MATERIALS").

6.2.1 DELIVERED MATERIALS. Within two (2) days following the Effective Date, Seller will deliver or cause to be delivered to Buyer copies of all of the documents and materials relating to the Property listed on EXHIBIT 6.2.1 attached hereto provided that the same is not confidential or proprietary in nature. Seller has not undertaken any independent investigation as to the truth or accuracy of the documents and materials to be delivered and is providing same solely as an accommodation to Buyer.

6.2.2 PROPERTY FILES. Seller shall make available to Buyer and Buyer's agents and representatives, upon reasonable notice and during normal business hours, all files in the possession of Seller, or in possession of Seller's property manager, if any, relating to the ownership, operation, construction, use or occupancy of the Property, or any portion of the Property. Buyer, at its expense, may make photocopies of such material relative to the Property as Buyer may determine.

6.2.3 RESTRICTED INFORMATION. Notwithstanding any provision to the contrary, "Due Diligence Materials" shall not include, and Seller shall have no obligation to furnish or otherwise make available to Buyer, any of the following documents: (i) any internally or externally prepared reports or analysis concerning the valuation or economic performance of the Property; (ii) any information received from or concerning any other potential purchaser of the Property; (iii) any federal or state income tax returns; (iv) any documents, instruments or agreements evidencing, securing or relating to any mortgage loan currently encumbering the Real Property; (v) any correspondence or analyses regarding past, pending or proposed real property tax appeals; or (vi) any information or documentation that is privileged or otherwise legally protected from disclosure under applicable law.

6.2.4 CONFIDENTIALITY. Buyer and its representatives shall hold in strictest confidence all data and information obtained with respect to Seller or the Property whether obtained before or after the execution and delivery of this Agreement, and shall not disclose the same to others; provided, however, that it is understood and agreed that Buyer may disclose such data and information to the employees, lenders, consultants, accountants and attorneys of Buyer provided that such persons agree to treat such data and information confidentially. In the event this Agreement is terminated or Buyer fails to perform hereunder, Buyer shall promptly return to Seller any statements, documents, schedules, exhibits and other written information obtained from Seller in connection with this Agreement or the transaction contemplated herein. It is understood and agreed that, with respect to any provision of this Agreement which refers to the termination of this Agreement and the

5

return of the Deposit to Buyer, Twenty-Five Thousand Dollars ($25,000.00) of the Deposit shall not be returned to Buyer unless and until Buyer has fulfilled its obligation to return to Seller the materials described in the preceding sentence and the Buyer's Reports in accordance with Section 6.5. The provisions of this
Section 6.2.4 shall survive Closing or any termination of this Agreement.

6.3 TITLE REVIEW. The period commencing as of the Effective Date and continuing through the date which is ten (10) days following the Effective Date shall be referred to as the "TITLE REVIEW PERIOD".

6.3.1 TITLE MATERIAL. Promptly following the Effective Date, Seller will obtain and deliver to Buyer a current preliminary title report ("TITLE REPORT") for the Real Property prepared by the Title Company, together with a copy of the documents listed as exceptions therein. Buyer, at its election, may obtain a survey ("SURVEY") of the Real Property prepared by a licensed engineer which Survey shall be sufficient to provide the basis for an ALTA owner's policy of title insurance. The Survey shall be obtained by Buyer, if at all, prior to the expiration of the Title Review Period and, if obtained, Buyer shall promptly deliver a copy of the Survey to Seller and the Title Company. It is acknowledged that Buyer will not be entitled to obtain an ALTA title insurance policy with respect to the Real Property if Buyer elects not to timely obtain a Survey with respect to such Real Property.

6.3.2 REVIEW OF TITLE. Buyer shall notify Seller in writing (the "TITLE NOTICE") prior to the expiration of the Title Review Period which exceptions to title as shown on the Title Report and Survey, if any, will not be accepted by Buyer. If Buyer fails to notify Seller in writing of its disapproval of any exceptions to title by the expiration of the Title Review Period, Buyer shall be deemed to have approved the condition of title to the Real Property. If Buyer notifies Seller in writing that Buyer objects to any exceptions to title, Seller shall have one (1) business day after receipt of the Title Notice to notify Buyer (a) that Seller will remove such objectionable exceptions from title on or before the Closing, provided that Seller may extend the Closing for such period as shall be required to effect such cure, but not beyond ten (10) days; or (b) that Seller elects not to cause such exceptions to be removed. If Seller fails to timely give such notice to Buyer, the Seller shall be deemed to have given notice to Buyer under clause (b). Seller shall have no obligation to remove any title exceptions to which Buyer objects provided, however, that Seller shall remove, as of the Closing, all liens evidencing any deed of trust (and related documents) securing financing. The procurement by Seller of a commitment for the issuance of the Buyer's Title Policy (as defined in Section 3.2 hereof) or an endorsement thereto insuring Buyer against any title exception which was disapproved pursuant to this Section 6.3.2 shall be deemed a cure by Seller of such disapproval. If Seller gives or is deemed to have given Buyer notice under clause (b) above, Buyer shall have one (1) business day from the date on which such notice to Buyer is given in which to notify Seller that Buyer will nevertheless proceed with the purchase and take title to the Property subject to such exceptions, or that Buyer will terminate this Agreement. If Buyer fails to timely give such notice, Buyer will be deemed to have elected to proceed with the purchase and take title to the Property subject to such exceptions. If this Agreement is terminated pursuant to the foregoing provisions of this Section 6.3.2, then neither party shall have any further rights or obligations hereunder (except with respect to those matters expressly stated to survive such termination), the Deposit shall be returned to Buyer and each party shall bear its own costs incurred hereunder.

6.3.3 SUBSEQUENT TITLE DEFECTS. Buyer may, at or prior to Closing, notify Seller in writing (the "SUBSEQUENT TITLE DEFECTS NOTICE") of any objection(s) to title exceptions (a)

6

raised by the Title Company between the expiration of the Title Review Period and the Closing and (b) not disclosed by the Title Company or the Survey or otherwise known to Buyer prior to the expiration of the Title Review Period, provided that Buyer must notify Seller of such objection(s) to title within two
(2) business days of being made aware of the existence of such exception. If Buyer gives a Subsequent Title Defects Notice to Seller, Seller shall have two
(2) business days after receipt of the Subsequent Title Defects Notice to notify Buyer (a) that Seller will remove such objectionable exceptions from title on or before the Closing, provided that Seller may extend the Closing for such period as shall be required to effect such cure, but not beyond ten (10) days; or (b) that Seller elects not to cause such exceptions to be removed. If Seller fails to timely give such notice to Buyer, Seller shall have been deemed to have given notice to Buyer under clause (b). Seller shall have no obligation to remove any title exceptions to which Buyer objects, provided however, that Seller shall remove, as of the Closing, all liens evidencing any deed of trust (and related documents) securing financing. The procurement by Seller of a commitment of the Title Company for Buyer's Title Policy or an endorsement thereto insuring Buyer against any title exception which was disapproved pursuant to this Section 6.3.3 shall be deemed a cure by Seller of such disapproval. If Seller gives or is deemed to have given notice under clause (b) above, Buyer shall have two (2) business days from the date on which such notice to Buyer is given in which to notify Seller that Buyer will nevertheless proceed with the purchase and take title to the Property subject to such exceptions or that Buyer will terminate this Agreement. If Buyer fails to timely give such notice, Buyer shall be deemed to have elected to proceed with the purchase and take title to the Property subject to such exceptions. If this Agreement is terminated pursuant to the foregoing provisions of this Section 6.3.3 then neither party shall have any further rights or obligations hereunder (except with respect to those matters expressly set forth to survive such termination), the Deposit shall be returned to Buyer and each party shall bear its own costs incurred hereunder.

6.4 INSPECTION; RIGHT OF ENTRY. Buyer and Buyer's agents, contractors, engineers, consultants, employees and other representatives (collectively, "BUYER'S REPRESENTATIVES") shall have the right, during the Due Diligence Period and subject to the terms and conditions of Section 6.6 below,
(i) to enter the Real Property to inspect the same (including the performance of environmental audits of the Real Property in accordance with the terms of
Section 6.4.1 and 6.4.2 below), upon reasonable notice to Seller, provided that Buyer does not unreasonably disturb any business of Seller in connection with the Property or any tenant of the Real Property and provided that Seller shall be afforded the opportunity to participate in such visitations and (ii) to contact representatives of third parties who have executed Service Contracts with Seller or Seller's representatives regarding the Real Property. Buyer shall keep the Property free and clear of any mechanics' liens, materialmen's liens or claims arising out of any of Buyer's activities or those of Buyer's Representatives on or with respect to the Real Property. All entries onto the Real Property by Buyer and all inspections and examinations thereof shall be at Buyer's sole cost and expense, shall be done in a workmanlike manner in accordance with all applicable codes, statutes, ordinances, rules, regulations and laws and shall not disturb in any way the quiet occupancy or enjoyment of any tenant or other occupant of the Real Property. Buyer shall not perform any test or inspection or carry out any activity at the Real Property which damages the Real Property in any way or which is physically intrusive into the Improvements or soil of the Real Property without the prior written consent of Seller, which Seller may withhold in its sole and absolute discretion. After each entry onto any portion of the Real Property, Buyer, at its sole cost and expense shall repair (which shall include replacement where necessary) any damage to the Real Property arising from such entry. In connection with any inspections of the Real Property, Buyer and Buyer's Representatives will carry liability insurance adequate in Seller's reasonable judgement and, upon the request of Seller, will

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provide Seller with written evidence of same. Buyer will give Seller reasonable prior notice of its intention to conduct any inspections or tests with respect to the Real Property and Seller reserves the right to have a representative present.

6.4.1 PHASE I ENVIRONMENTAL AUDIT. During the Due Diligence Period, Buyer may conduct (or have conducted on its behalf by an environmental auditor) a Phase I environmental audit of the Real Property, subject to the terms and conditions of Sections 6.4.2 and 6.6 below.

6.4.2 ENVIRONMENTAL CONDITIONS. In the event that Buyer shall enter the Real Property for purposes of conducting a Phase I environmental audit of the Real Property, Buyer shall provide Seller with at least forty-eight (48) hours' prior written notice of its intent thereof. Buyer shall not conduct a Phase II environmental audit of the Real Property without the prior written consent of Seller which consent may be withheld or granted in the sole and absolute discretion of Seller. Buyer shall not disclose to any third party, other than Buyer's consultants, agents and attorneys associated with any environmental investigation of the Real Property and other than as may be required by applicable law, the results of any of Buyer's inspections or testing of the Real Property. Prior to performing any environmental inspections or testing of the Real Property, Buyer shall obtain any required permits and authorizations and shall pay all applicable fees required by any public body or agency in connection therewith.

6.5 BUYER'S REPORTS. If the Escrow fails to close for any reason other than Seller's material breach of this Agreement, then all studies, surveys (including, without limitation the Survey), if any, reports, test results and analyses concerning the Real Property prepared by, for or on behalf of Buyer in connection with the Real Property (collectively, "BUYER'S REPORTS") shall at the option of Seller, immediately be delivered and assigned to Seller free and clear of all claims and at no cost, expense or liability to Seller. Buyer shall not be required to deliver to Seller internally prepared reports or analyses concerning the valuation or potential performance of the Real Property. Any Buyer's Reports delivered to Seller at Seller's request pursuant to this
Section 6.5 shall be delivered without representation or warranty, nor shall Seller assert any warranty or rights against the consultants of Buyer who have prepared such Buyer's Reports.

6.6 INDEMNITY. Buyer shall indemnify, defend by counsel reasonably acceptable to Seller, and hold Seller harmless from and against any and all costs, expenses, claims, demands or liens, (including, without limitation, mechanics' liens) including reasonable attorneys' fees, arising from or in any fashion related to the entry by Buyer or Buyer's Representatives on the Real Property or the performance by Buyer or Buyer's Representatives of any testing or investigations of the Real Property except with respect to any loss or liability incurred by Seller resulting from the mere discovery by Buyer or Buyer's Representatives of the presence of hazardous materials at the Property or the existence of other defects with respect to the Property. Without limiting the scope or generality of the foregoing indemnity, Buyer shall not permit any mechanics', materialman's, or other lien against all or any part of the Real Property to exist as the result of any activity by Buyer or Buyer's Representatives undertaken in connection with the Real Property. If any such lien shall be filed against the Real Property or any portion of the Real Property, Buyer shall cause the lien to be discharged within five (5) business days after the filing thereof. The provisions of this Section 6.6 shall survive the Closing and delivery of the Deed and shall further survive any earlier termination of this Agreement.

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6.7 APPROVAL BY BUYER. Buyer shall have the right to review and approve, in its sole, absolute and subjective discretion, during the Due Diligence Period all aspects of the Property, including but not limited to,
(i) the Due Diligence Materials, (ii) the physical and environmental condition of the Real Property, including, without limitation, the condition of the Improvements, the condition of the soil at the Real Property, the condition of the ground water at the Real Property, and the presence or absence of any hazardous materials at the Real Property, (iii) the financial condition of the Property, including, without limitation, the feasibility, convertibility, desirability and suitability of the Property for Buyer's intended use and purposes, (iv) the legal condition of the Property, including, without limitation, the Property's compliance or non-compliance with all statutes, ordinances, codes, regulations, decrees, orders and laws applicable to the Property, (v) the Lease(s), (vi) the Service Contracts, if any, being assumed by Buyer, (vii) the existence or non-existence of any governmental or quasi-governmental entitlements, if any, affecting the Property or any portion of the Property, (viii) any dimensions or specifications of the Real Property or any part thereof, (ix) the zoning, building and land use restrictions applicable to the Real Property or any portion thereof, and (x) all other matters which Buyer deems relevant to its purchase of the Property. It is acknowledged that Buyer is the tenant of the Property and by reason of such existing relationship, is generally familiar with matters relating to the Property. In the event that Buyer elects to approve all of the matters as summarized in this Section 6.7 with respect to the Property, Buyer shall give written notice of such approval to Seller ("APPROVAL NOTICE") on or before the Due Diligence Date. The Approval Notice, if given by Buyer must be in the form of EXHIBIT 6.7 attached hereto. If Buyer fails to timely give the Approval Notice to Seller, Buyer shall conclusively be deemed to have disapproved the Property and more particularly the matters set forth in this Section 6.7 in which case this Agreement shall terminate, all rights and obligations hereunder of each party shall be at an end (except those matters which are specifically stated in this Agreement to survive the termination), the Deposit shall be promptly returned to Buyer and each party shall bear its own costs incurred hereunder. If Buyer timely gives the Approval Notice to Seller, then Buyer shall be considered to have elected to proceed with the purchase of the Property in accordance with the provisions of this Agreement, Buyer shall have no further rights with respect to this Section 6.7, the condition for the benefit of Buyer as set forth in Section 7.2.5 shall be considered to have been satisfied and Buyer shall have no further rights to assert the conditions set forth in such Sections.

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7. CONDITIONS TO CLOSING.

7.1 SELLER'S CONDITIONS. The obligation of Seller to sell and convey the Property pursuant to this Agreement is subject to the satisfaction on or before the Closing Date (or such earlier date as is specifically set forth in this Agreement) of all of the following conditions precedent, which conditions are for the benefit of Seller only and the satisfaction of which may be waived only in writing by Seller:

7.1.1 BUYER'S DELIVERIES. Delivery and execution by Buyer of all monies, items and instruments required to be delivered by Buyer pursuant to this Agreement;

7.1.2 BUYER'S REPRESENTATIONS. Buyer's warranties and representations set forth herein shall be true and correct in all material respects as of the Closing Date;

7.1.3 BUYER'S PERFORMANCE. Buyer shall have performed each and every agreement to be performed by Buyer pursuant to this Agreement; and

7.1.4 APPROVAL NOTICE. Buyer shall have timely given the Approval Notice to Seller in accordance with the provisions of Section 6.7.

7.2 BUYER'S CONDITIONS. The obligation of Buyer to acquire the Property pursuant to this Agreement is subject to the satisfaction on or before the Closing Date (or such earlier date as is specifically set forth in this Agreement) of all of the following conditions precedent which conditions are for the benefit of Buyer only and the satisfaction of which may be waived only in writing by Buyer:

7.2.1 SELLER'S DELIVERIES. Delivery and execution by Seller of all instruments and other items required to be delivered by Seller pursuant to this Agreement;

7.2.2 SELLER'S REPRESENTATIONS. Seller's warranties and representations set forth herein shall be true and correct in all material respects as of the Closing Date;

7.2.3 SELLER'S PERFORMANCE. Seller shall have performed each and every agreement to be performed by Seller pursuant to this Agreement;

7.2.4 BUYER'S TITLE POLICY. As of the Closing, the Title Company shall have issued or shall have committed to issue, upon the sole condition of the payment of its regularly scheduled premium, the Buyer's Title Policy; and

7.2.5 BUYER'S APPROVAL. On or before the Due Diligence Date, Buyer shall have given the Approval Notice to Seller in accordance with the provisions of Section 6.7.

7.3 FAILURE OF CONDITIONS. If any of the conditions set forth in Sections 7.1 or 7.2 are not timely satisfied or waived, for any reason other that the default of Buyer or Seller under this Agreement, then this Agreement and the rights and obligations of Buyer and Seller shall terminate and be of no further force or effect except as to those matters as specifically stated in this Agreement to survive termination, in which case the Title Company is hereby instructed to return promptly to

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the party which placed such items into Escrow all funds (including the Deposit which is to be promptly returned to Buyer) and documents which are held by the Title Company on the date of termination.

7.4 SATISFACTION OF CONDITIONS. The occurrence of the Closing shall constitute satisfaction of conditions set forth in Sections 7.1 and 7.2 not otherwise specifically satisfied or waived by Buyer or Seller.

8. DELIVERIES INTO ESCROW.

8.1 DELIVERIES BY SELLER. On or before the Closing, Seller shall deliver or cause to be delivered into Escrow the following documents duly executed and acknowledged where appropriate:

8.1.1 DEED. A grant deed (the "DEED") in the form attached hereto as EXHIBIT 8.1.1 conveying the Real Property to Buyer as provided in this Agreement which Deed is to be duly executed and acknowledged by Seller;

8.1.2 BILL OF SALE. Bill of sale ("BILL OF SALE") in the form attached hereto as EXHIBIT 8.1.2 conveying the Personal Property to Buyer which Bill of Sale is to be duly executed by Seller;

8.1.3 ASSIGNMENT. An Assignment in the form attached hereto as EXHIBIT 8.1.3 which is to be duly executed by Seller and Buyer;

8.1.4 FIRPTA. A certificate of non-foreign status to confirm that Buyer is not required to withhold part of the Purchase Price pursuant to Section 1445 of the Internal Revenue Code of 1986, as amended which is to be duly executed by Seller;

8.1.5 FORM 590. Franchise Tax Board Form (590) which is to be duly executed by Seller;

8.1.6 SELLER'S AUTHORITY. Such proof of Seller's authority and authorization to enter into this Agreement and consummate the transaction contemplated hereby and such proof of the power and authority of the individual(s) executing and/or delivering any instruments, documents or certificates on behalf of Seller to act for and bind Seller as may be reasonably required by Title Company; and

8.1.7 OTHER DOCUMENTS. Such other documents as may be reasonably necessary and appropriate to complete the Closing of the transaction contemplated herein.

8.2 DELIVERIES BY BUYER. On or before the Closing, Buyer shall deliver or cause to be delivered into Escrow the following funds (in cash) and documents duly executed and acknowledged where appropriate:

8.2.1 CASH. The Purchase Price and such additional sums as are necessary to pay the Buyer's share of closing costs, prorations and any fees as more particularly set forth in Section 9 below;

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                           8.2.2    ASSIGNMENT. An Assignment which is to be
duly executed by Seller and Buyer;

                           8.2.3    BUYER'S AFFIDAVIT. Buyer's Affidavit in the

form attached hereto as EXHIBIT 8.2.3 which is to be duly executed by Buyer;

8.2.4 BUYER'S AUTHORITY. Such proof of Buyer's authority and authorization to enter into this Agreement and consummate the transaction contemplated by this Agreement, and such proof of the power and authority of the individual(s) executing and/or delivering any instruments, documents or certificates on behalf of Buyer to act for and bind Buyer as may be reasonably required by Title Company or Seller; and

8.2.5 OTHER DOCUMENTS. Such other documents as may be reasonably necessary and appropriate to complete the Closing of the transaction contemplated herein.

8.3 DELIVERY TO BUYER UPON CLOSING. Seller shall deliver possession of the Property to Buyer upon the Closing subject to the rights of possession of the tenants pursuant to the Leases.

8.4 DELIVERY FOLLOWING CLOSING. Promptly following the Closing, Seller shall deliver to Buyer: (i) the original of the Lease(s); (ii) the originals of the Service Contracts, if any; (iii) all building plans and specifications with respect to the Real Property which are in the possession of Seller or reasonably accessible to Seller or its property manager; (iv) all structural reviews, architectural drawings, engineering, soils, seismic, geologic and architectural reports in the possession of Seller or reasonably accessible to Seller or its property manager; and (v) such other matters and documents in the possession of Seller or reasonably accessible to Seller or to its property manager as Buyer may reasonably request which relate to the Property and are not confidential and/or proprietary.

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9. PRORATIONS; CLOSING COSTS; CREDITS.

9.1 PRORATIONS.

9.1.1 RENT. Rents, revenues and other income from the Property, actually collected as of the Closing, shall be prorated through Escrow as of 12:01 a.m. on the Closing Date with Seller entitled to the prorated portion of such items attributable to the period prior to such date and time and Buyer entitled to the prorated portion of such items following such date and time. Any prepaid rent paid by a tenant of the Property shall be credited to Buyer. If any rent or other payments under the Lease(s) are in arrears as of the Closing Date, Buyer shall use reasonable efforts following the Closing to collect such rent or other payments provided that in no event shall Buyer be obligated to commence litigation to effect collection. Nothing in this Section 9.1.1 shall restrict Seller's right to collect delinquent rents directly from a tenant by any legal means. Notwithstanding any provision of this Agreement to the contrary in the event that the lease with Buyer terminates by merger as of the Closing, in no event shall such termination limit Seller's right to collect delinquent rent, if any, or to otherwise enforce the provisions of the lease described on Exhibit 1.3(i). Delinquent rent collected by Seller subsequent to the Closing shall be promptly paid to Buyer to the extent that Buyer is entitled to such rent in connection with the period on and after the Closing Date, and delinquent rent collected by Buyer subsequent to the Closing shall be promptly paid to Seller to the extent that Seller is entitled to such rent pursuant to the provisions of this Agreement relating to the period prior to the Closing Date. Seller and Buyer agree that all rent received by Seller or Buyer following Closing shall be applied first to any current rent then due Seller, if any, and then to delinquent rent, if any, due Buyer.

9.1.2 TAXES AND ASSESSMENTS. Except to the extent that real estate taxes are paid directly by the tenant(s), all nondelinquent real estate taxes on the Property shall be prorated through Escrow based on the actual current tax bill as of 12:01 a.m. on the Closing Date with Seller responsible for all such taxes attributable to the period prior to such date and time and Buyer responsible for all such taxes attributable to the period following such date and time. If after the Closing, supplemental real estate taxes are assessed against the Property by reason of any event occurring prior to the Closing Date, Buyer and Seller shall adjust the proration of the real estate taxes following the Closing. Any delinquent taxes on the Property shall be paid at the Closing from funds accruing to Seller. Any current installments with respect to assessments on the Real Property shall be prorated through Escrow as of 12:01 a.m. on the Closing Date and Seller shall have no obligation to pay any amount with respect to any such assessments other than the prorated current installment. Any refund in connection with real estate taxes relating to the Property attributable to the period prior to the Closing Date shall be paid to Seller.

9.1.3 OPERATING EXPENSES. Operating expenses payable by the owner of the Real Property and all other customary charges or costs incident to the ownership of the Property (not otherwise payable directly by the tenants) shall be prorated through Escrow as of 12:01 a.m. on the Closing Date. Seller shall be responsible for all operating expenses accruing and attributable to the Property through the day prior to the Closing Date and Buyer shall be responsible for all operating expenses accruing and attributable to the Property commencing as of the Closing Date. Seller, as landlord under the Lease(s), may be currently collecting from tenants under the Lease(s) additional rent to cover taxes, insurance, utilities (to the extent not paid directly by tenants), common area maintenance and other operating costs and expenses (collectively, "OPERATING COSTS") in connection

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with the ownership, operation, maintenance and management of the Property. Seller and Buyer shall each receive a debit or credit, as the case may be, for the difference between the aggregate tenants' current account balances for Operating Costs and the amount of Operating Costs reimbursable to Seller. Operating Costs for Seller's period of ownership shall be reasonably estimated by the parties if final bills are not available. Seller shall not assign to Buyer any deposits which Seller has with any utility companies servicing the Property. Buyer shall arrange with such companies to have accounts open in Buyer's name beginning at 12:01 a.m. on the Closing Date. To the extent possible, Seller and Buyer shall obtain billings and meter readings as of the Closing Date and all operating expenses shall be prorated based upon the information then available. Seller and Buyer shall make any adjustments required to be made subsequent to the Closing in the event the information available at the Closing is incorrect.

9.1.4 SERVICE CONTRACTS. The amounts payable under the Service Contracts which shall be assumed pursuant to the provisions of the Assignment, shall be prorated through Escrow on an accrual basis as of 12:01
a.m. on the Closing Date. Seller shall pay all amounts due thereunder which accrue prior to the Closing Date and Buyer shall pay all amounts accruing on the Closing Date and thereafter. Buyer shall have no responsibility for Service Contracts not specifically being assumed by Buyer pursuant to this Agreement. Those Service Contracts which Buyer elects during the Due Diligence Period not to assume by giving written notice of such election to Seller shall be terminated by Seller as of the Closing, provided, however that with respect to those Service Contracts which require a termination notice longer than that allowed by reason of the date of the Closing (which in all events shall be no greater than thirty (30) days notice) provided that Seller has given notice of termination on or prior to the Closing Date, Buyer shall be responsible for the obligations that relate to such terminated Service Contracts for the period from and after the Closing Date and Seller shall be responsible for the obligations that relate to the period prior to the Closing Date. Buyer shall have no responsibility for Service Contracts which Buyer has elected not to assume for any period in excess of thirty (30) days following the Closing Date. Seller shall not be obligated to terminate the Service Contracts which Buyer has elected not to assume prior to the Closing Date.

9.1.5 CALCULATION OF PRORATIONS. All prorations shall be made on the basis of the actual number of days of the month which have elapsed as of 12:01 a.m. on the Closing Date provided that the cash portion of the Purchase Price is received by Seller's depository bank in time to credit to Seller's account on the Closing Date. If the cash portion of the Purchase Price is not so received by Seller's depository bank on the Closing Date, then the day of Closing shall belong to Seller and such proration shall be made as of the end of the day that is the Closing Date.

9.1.6 PROFORMA CLOSING STATEMENT. Buyer and Seller shall reasonably cooperate to produce at least one business day prior to the Closing Date, a schedule of prorations in accordance with the provisions of this Agreement which is as complete and accurate as is then reasonably possible. All prorations which can be reasonably estimated as of the Closing Date shall be made in Escrow on the Closing Date. All other prorations and any adjustments to the initial estimated prorations, shall be made by Buyer and Seller within thirty (30) days following the Closing or such later time as may be reasonably required, in the exercise of due diligence to obtain the necessary information. Any net credit due one party from the other as the result of such post-Closing prorations and adjustments shall be paid to the other in cash immediately upon the parties' written agreement to a final schedule of post-Closing adjustments and prorations. The provisions of Section 9.1 shall survive the Closing and the recordation of the Deed.

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9.2 CLOSING COSTS.

9.2.1 SELLER'S COSTS. Seller shall pay (i) the premium for the standard coverage CLTA portion of the Buyer's Title Policy; (ii) fifty percent (50%) of all documentary and transfer taxes; (iii) fifty percent (50%) of all escrow fees, costs and recording costs; (iv) fifty percent (50%) of the cost of the Survey, if applicable; and (v) its own attorneys' fees.

9.2.2 BUYER'S COSTS. Buyer shall pay (i) fifty percent (50%) of all escrow fees, costs and recording costs; (ii) the incremental premium for the ALTA portion of Buyer's Title Policy, if applicable, and the premium for any endorsements; (iii) the premium for the Buyer's lender's title policy, if any; (iv) fifty percent (50%) of all documentary and transfer taxes; (v) fifty percent (50%) of the cost of the Survey, if applicable; and
(vi) its own attorneys' fees.

9.3 CREDITS. Buyer shall be credited and Seller shall be debited in an amount equal to all security deposits in Seller's possession paid under the Lease(s), except to the extent that Seller was entitled to and did apply any part of such deposits to tenant obligations under the Lease(s).

9.4 OTHER EXPENSES. Buyer and Seller shall each pay all legal and professional fees and fees of other consultants incurred by Buyer and Seller, respectively.

10. OPERATION OF PROPERTY PENDING THE CLOSING. Following the Effective Date and pending the Closing, the Seller shall operate the Property in accordance with the following:

10.1 NORMAL COURSE OF BUSINESS. Seller shall use commercially reasonable efforts to continue to operate, manage and maintain the Property in such condition so that the Property shall be in substantially the same condition as of the Closing Date as it is as of the Due Diligence Date, reasonable wear and tear and casualty excepted, provided however, Seller shall not be required to perform any capital repairs or improvements. Seller shall maintain all existing insurance policies in connection with the Property and shall keep in effect and renew without material modification all licenses, permits and entitlements applicable to the Property. Seller's existing liability and property insurance pertaining to the Property may be canceled by Seller as of the Closing Date. After the expiration of the Due Diligence Period, except as may be required by the Lease(s), Seller shall not make any material alterations to the Property or remove any Personal Property without the prior written approval of Buyer, which approval shall not be unreasonably withheld or delayed;

10.2 FURTHER ENCUMBRANCES. Seller shall not execute any documents or otherwise take any action which will have the result of further encumbering the Property in any fashion;

10.3 LEASING. Following the Due Diligence Date, the Seller shall not terminate, amend or otherwise modify the Lease(s), or enter into any new lease without the prior consent of Buyer, which consent shall not be unreasonably withheld or delayed; and

10.4 NEW OBLIGATIONS. Without the prior written consent of Buyer, which consent shall not be unreasonably withheld or delayed, Seller shall not enter into any maintenance contract, service contract or any other contract affecting or relating to the Property or any portion thereof which cannot be canceled upon thirty (30) days (or less) prior written notice. Notwithstanding the above sentence, Seller shall be entitled to enter into any obligations required to be undertaken by

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Seller pursuant to the provisions of the Lease(s) without the prior consent of Buyer provided that Seller shall give Buyer prior written notice of the entry of Seller into any such obligations.

11. REPRESENTATIONS AND WARRANTIES.

11.1 NO REPRESENTATIONS OR WARRANTIES BY SELLER. Except as expressly set forth in this Agreement, Seller has not made any warranty or representation, express or implied, written or oral, concerning the Property.

11.2 SELLER'S REPRESENTATIONS AND WARRANTIES. Seller represents and warrants to Buyer that:

11.2.1 AUTHORITY. This Agreement constitutes the valid and binding obligation of Seller and is enforceable against Seller in accordance with its terms, subject to bankruptcy, insolvency and similar laws affecting the enforcement of creditors' rights generally and general equitable principles. Seller is a corporation, validly formed, duly organized and in good standing under the laws of the State of California. Seller has full power, right and authority to enter into and perform this Agreement. The execution and delivery of this Agreement, delivery of money and all required documents, Seller's performance of this Agreement and the transaction contemplated hereby have been duly authorized by the requisite action on the part of Seller. Neither the execution and delivery of this Agreement, nor the transaction contemplated by this Agreement will conflict in any material respect or constitute a breach under any agreement or instrument by which Seller or the Property is bound;

11.2.2 SERVICE CONTRACTS. To Seller's knowledge, the Service Contracts listed on EXHIBIT 1.3 are all of the agreements concerning the operation and maintenance of the Property entered into by Seller and affecting the Property, except those operating agreements that are not assignable and except any agreement with Seller's property manager, which shall be terminated by Seller as of the Closing;

11.2.3 CONDEMNATION. To Seller's knowledge, Seller has received no written notice of any pending condemnation proceedings relating to the Real Property;

11.2.4 LITIGATION. To Seller's knowledge, Seller has not received written notice of any litigation which has been filed against Seller that arises out of the ownership of the Property and would materially affect the Property or use thereof, or Seller's ability to perform hereunder;

11.2.5 VIOLATIONS. To Seller's knowledge, Seller has not received written notice of any uncured violation of any federal, state or local law relating to the use or operation of the Property which would materially adversely affect the Property or use thereof, or Seller's ability to perform hereunder. To Seller's knowledge, Seller has not received written notice of any alleged building code violations, health and safety code violations, federal, state or local agency actions regarding environmental matters or zoning violations currently affecting the Real Property which remain uncured;

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11.2.6 ACCESS. To the best of Seller's knowledge, no fact or condition exists which may result in the termination or reduction of the current access from the Real Property to existing roads and highways;

11.2.7 FOREIGN PERSON. Seller is not a "foreign person" as defined in Section 1445 of the Internal Revenue Code of 1986, as amended, and the income tax regulations issued thereunder;

11.2.8 LEASE(S). To Seller's knowledge, except as disclosed in writing to Buyer, Seller has not received notice of any claimed default by Seller under the Lease(s) and there are no unperformed obligations of Seller pursuant to the Lease(s); and

11.2.9 LEASING COMMISSIONS. As of the Effective Date, there are no leasing commissions required to be paid in connection with the Lease(s) except as may be related to future renewals, expansions or extensions.

11.3 BUYER'S REPRESENTATIONS AND WARRANTIES. Buyer represents and warrants to Seller that:

11.3.1 AUTHORITY TO EXECUTE; ORGANIZATION. This Agreement constitutes the valid and binding obligation of Buyer and is enforceable against Buyer in accordance with its terms, subject to bankruptcy, insolvency and similar laws affecting the enforcement of creditors' rights generally and general equitable principles. Buyer represents that it is a corporation, is validly formed and duly organized in good standing under the laws of the State of New Jersey and the execution of this Agreement, delivery of money and all required documents, Buyer's performance of this Agreement and the transaction contemplated hereby have been duly authorized by the requisite action on the part of Buyer;

11.3.2 NO ENCUMBRANCE. Prior to Closing, Buyer shall neither encumber nor cause any liens to be created against the Property in any way, nor shall Buyer, at any time, record this Agreement or a memorandum thereof; and

11.3.3 PRINCIPAL; FINANCIAL RESOURCES. Buyer is acting as a principal in connection with the transaction as contemplated by this Agreement and presently possesses, and will possess as of the Closing, the financial resources to timely consummate the purchase and sale transaction contemplated by this Agreement.

11.4 KNOWLEDGE DEFINED. References to the "knowledge" of Seller and phrases of similar import shall refer only to the current actual (not constructive) knowledge of Theodore H. Kruttschnitt, and shall not be construed, by imputation or otherwise, to refer to the knowledge of any affiliate of Seller, to any property manager, or to any other officer, agent, manager, representative or employee of Seller or any affiliate thereof or to impose upon such person any duty to investigate the matter to which such actual knowledge, or the absence thereof, pertains. Seller represents that Theodore H. Kruttschnitt is the President of Seller and is active in the management of the Property.

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12. INDEMNIFICATION.

12.1 INDEMNIFICATION OF BUYER. Seller hereby agrees to indemnify Buyer against, and to hold Buyer harmless from, all losses, damages, costs and expenses whatsoever including without limitation reasonable legal fees and disbursements, incurred by Buyer relating to the Property which arise, result from or relate to (i) acts, occurrences or matters that took place prior to the Closing to the extent that any such claim described in this clause (i) is covered by the commercial general liability insurance policy maintained by Seller or otherwise covered pursuant to applicable insurance coverage maintained by Seller and in this connection Seller represents and warrants that Seller has during the period of its ownership maintained and continues to maintain commercial general liability insurance coverage; or (ii) any material breach of any of the representations or warranties of Seller set forth in Section 11.2 of this Agreement subject, however, to the limitations of Section 16.4.

12.2 DEFENSE OF CLAIMS AGAINST BUYER. With respect to any claim for which Buyer has requested indemnification under Section 12.1, Seller shall be entitled to assume the defense of any related litigation, arbitration or other proceeding, provided that Buyer may at its election and expense, participate in such defense, and provided further that if there is any difference of opinion or strategy with respect to the defense of such action or the assertion of counterclaims to be brought with respect thereto, Seller's counsel will, after consultation with Buyer's counsel, determine the actual strategy, defense or counterclaim to be employed. At Seller's reasonable request, Buyer will cooperate with Seller in the preparation of any defense for any such claim and Seller will reimburse Buyer for any reasonable expenses incurred in connection with such request. If Seller does not elect to assume the defense of any such matter and such matter is defended by Buyer, Seller shall have the right, at its sole expense, to employ separate counsel acceptable to Buyer and participate in such defense, provided that if there is any difference of opinion or strategy with respect to the defense of such action or the assertion of counterclaims to be brought with respect thereto, Buyer's counsel will, after consultation with Seller's counsel, determine the actual strategy, defense and/or counterclaim to be employed.

12.3 INDEMNIFICATION OF SELLER. Buyer hereby agrees to indemnify Seller against, and to hold Seller harmless from, all losses, damages, costs and expenses whatsoever including without limitation reasonable legal fees and disbursements, incurred by Seller relating to the Property which arise, result from or relate to (i) acts, occurrences or matters that take place subsequent to the Closing to the extent that any such claim described in this clause (i) is covered by the commercial general liability insurance policy maintained by Buyer or otherwise covered pursuant to applicable insurance coverage maintained by Buyer and in this connection Buyer represents and warrants that Buyer will during the period of its ownership maintain commercial general liability insurance coverage; or (ii) any material breach of any of the representations or warranties of Buyer set forth in Section 11.3 of this Agreement.

12.4 DEFENSE OF CLAIMS AGAINST SELLER. With respect to any claim for which Seller has requested indemnification under Section 12.3, Buyer shall be entitled to assume the defense of any related litigation, arbitration or other proceeding, provided that Seller may at its election and expense, participate in such defense, and provided further that if there is any difference of opinion or strategy with respect to the defense of such action or the assertion of counterclaims to be brought with respect thereto, Buyer's counsel will, after consultation with Seller's counsel, determine the actual strategy, defense or counterclaim to be employed. At Buyer's reasonable request, Seller will cooperate with Buyer in the preparation of any defense for any such claim and Buyer will reimburse Seller for any reasonable expenses incurred in connection with such request. If Buyer does not elect

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to assume the defense of any such matter, and such matter is defended by Seller, Buyer shall have the right, at its sole expense, to employ separate counsel acceptable to Seller and participate in such defense, provided that if there is any difference of opinion or strategy with respect to the defense of such action or the assertion of counterclaims to be brought with respect thereto, Seller's counsel will, after consultation with Buyer's counsel, determine the actual strategy, defense and/or counterclaim to be employed.

13. CASUALTY OR CONDEMNATION.

13.1 CASUALTY. Prior to the Closing, and notwithstanding the pendency of this Agreement, the entire risk of loss or damage by earthquake, flood, landslide, fire or other casualty shall be borne and assumed by Seller, except as otherwise provided in this Section 13.1. If, prior to the Closing, any part of the Real Property is damaged or destroyed by earthquake, flood, landslide, fire or other casualty, Seller shall immediately notify Buyer of such fact. If such damage or destruction is "material", Buyer shall have the option to terminate this Agreement upon notice to Seller given not later than ten (10) days after receipt of Seller's notice. For purposes of this Section 13.1, "material" shall be deemed to be any damage or destruction (i) where the costs of repair or replacement is estimated to be One Hundred Thousand Dollars ($100,000.00), or more, or (ii) which Seller reasonably estimates shall take more than ninety (90) days to repair. If Buyer does not exercise this option to terminate this Agreement, or the casualty is not material, neither party shall have the right to terminate this Agreement, but Seller shall assign and turn over to Buyer, and Buyer shall be entitled to receive and keep all insurance proceeds payable to it with respect to such destruction (but not in excess of the Purchase Price) and the parties shall proceed to the Closing pursuant to the terms hereof without modification of the terms of this Agreement and without any reduction in the Purchase Price. If Buyer does not elect to terminate this Agreement by reason of any casualty, Buyer shall have the right to participate in any adjustment in the insurance claim. If Buyer does terminate this Agreement pursuant to this Section 13.1, this Agreement shall terminate, all rights and obligations hereunder of each party shall be at an end (except those matters which are specifically stated in this Agreement to survive the termination) and the Title Company is hereby instructed to return promptly to the party which placed such items into Escrow all funds (including the Deposit which is to be promptly returned to Buyer) and documents which are held by the Title Company on the date of termination.

13.2 CONDEMNATION. In the event that all or any substantial portion of the Real Property shall be taken in condemnation or under the right of eminent domain after the Effective Date and before the Closing, Buyer may, at its option either (a) terminate this Agreement by written notice thereof to Seller and receive an immediate refund of the Deposit, together with any interest earned thereon, or (b) proceed to close the transaction contemplated herein pursuant to the terms hereof in which event Seller shall assign and turn over to Buyer, and Buyer shall be entitled to receive and keep all awards for the taking by eminent domain which accrue to Seller and there shall be no reduction in the Purchase Price. For purposes of this provision, a "substantial portion" of the Real Property shall mean (i) any material portion of the Real Property is taken; (ii) the access to the Real Property or available parking area therefor is materially reduced or restricted; or (iii) any of the rentable square footage of the Improvements is taken. In the event that a portion of the Real Property less than a substantial portion is taken, or Buyer elects not to terminate this Agreement, Buyer shall proceed to close the transaction contemplated herein and there shall be no reduction in the Purchase Price and Seller shall assign and turn over to Buyer and Buyer shall be entitled to receive and keep all awards for the taking by eminent domain which accrue to Seller.

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14. COMMISSIONS.

14.1 PAYMENT OF THE SALES COMMISSION. Seller and Buyer represent to each other that no real estate broker or agent has been authorized to act on their behalf in the contemplated transaction. Buyer and Seller each indemnifies the other party and agrees to defend and hold the other party harmless from any and all demands or claims which now or hereafter may be asserted against the other party for any brokerage fees, commissions or similar types of compensation which may be claimed by any broker as a result of the indemnifying party's acts in connection with this transaction.

14.2 LEASING COMMISSIONS AND LANDLORD TENANT IMPROVEMENTS. Subject to the provisions of Section 10.3 above, Buyer shall pay all leasing commissions and landlord tenant improvement costs relative to any lease(s) made on or after the Effective Date.

15. NOTICES.

All notices, requests or demands to a party hereunder shall be in writing and shall be given or served upon the other party by personal service, by certified return receipt requested or registered mail, postage prepaid, or by Federal Express or other nationally recognized commercial courier, charges prepaid, addressed as set forth below. Any such notice, demand, request or other communication shall be deemed to have been given upon the earlier of personal delivery thereof, three (3) business days after having been mailed as provided above, or one (1) business day after delivery through a commercial courier, as the case may be. Notices may be given by facsimile and shall be effective upon the transmission of such facsimile notice provided that the facsimile notice is transmitted on a business day and a copy of the facsimile notice together with evidence of its successful transmission indicating the date and time of transmission is sent on the day of transmission by recognized overnight carrier for delivery on the immediately succeeding business day. Each party shall be entitled to modify its address by notice given in accordance with this Section 15.

  If to Seller:        Limar Realty Corp. #13
                       c/o Limar Realty Group
                       1730 South El Camino Real, Suite 400
                       San Mateo, California 94402
                       Attention: Theodore H. Kruttschnitt
                       Fax:     (650) 525-9345

With a copy to:        Kay & Merkle
                       100 The Embarcadero, Penthouse
                       San Francisco, CA  94105
                       Attn:  Walter F. Merkle, Esq.

Fax: (415) 512-9277

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If to Buyer:        Jack Lief
                    President & CEO
                    Arena Pharmaceuticals, Inc.
                    6166 Nancy Ridge Drive
                    San Diego, CA 92121
                    Fax: (858) 453-7210

With a copy to:     General Counsel
                    Arena Pharmaceuticals, Inc.
                    6166 Nancy Ridge Drive
                    San Diego, CA 92121
                    Fax: (858) 453-7210

16. LIMITATIONS ON REPRESENTATIONS AND WARRANTIES.

16.1 NO RELIANCE ON DOCUMENTS. Except as expressly stated herein, Seller makes no representation or warranty as to the truth, accuracy or completeness of any materials, data or information delivered by Seller or its agents to Buyer in connection with the transaction contemplated hereby. Buyer acknowledges and agrees that all materials, data and information delivered by Seller to Buyer in connection with the transaction contemplated hereby are provided to Buyer as a convenience only and that any reliance on or use of such materials, data or information by Buyer shall be at the sole risk of Buyer. Neither Seller, nor any affiliate of Seller, nor the person or entity which prepared any report or reports delivered by Seller to Buyer shall have any liability to Buyer for any inaccuracy in or omission from any such reports.

16.2 AS-IS SALE: DISCLAIMERS. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, IT IS UNDERSTOOD AND AGREED THAT SELLER IS NOT MAKING AND HAS NOT AT ANY TIME MADE ANY WARRANTIES OR REPRESENTATIONS OF ANY KIND OR CHARACTER, EXPRESS OR IMPLIED, WITH RESPECT TO THE PROPERTY, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OR REPRESENTATIONS AS TO HABITABILITY, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.

BUYER ACKNOWLEDGES AND AGREES THAT UPON CLOSING SELLER SHALL SELL AND CONVEY TO BUYER AND BUYER SHALL ACCEPT THE PROPERTY "AS IS, WHERE IS, WITH ALL FAULTS", EXCEPT TO THE EXTENT EXPRESSLY PROVIDED OTHERWISE IN THIS AGREEMENT. BUYER HAS NOT RELIED AND WILL NOT RELY ON, AND SELLER IS NOT LIABLE FOR OR BOUND BY, ANY EXPRESS OR IMPLIED WARRANTIES, GUARANTIES, STATEMENTS, REPRESENTATIONS OR INFORMATION PERTAINING TO THE PROPERTY OR RELATING THERETO (INCLUDING SPECIFICALLY, WITHOUT LIMITATION, OFFERING PACKAGES DISTRIBUTED WITH RESPECT TO THE PROPERTY) MADE OR FURNISHED BY SELLER, THE MANAGER OF THE PROPERTY, OR ANY EMPLOYEES OR AGENTS REPRESENTING OR PURPORTING TO REPRESENT SELLER, TO WHOMEVER MADE OR GIVEN, DIRECTLY OR INDIRECTLY, ORALLY OR IN WRITING, UNLESS SPECIFICALLY SET FORTH IN THIS AGREEMENT. BUYER ALSO ACKNOWLEDGES THAT THE PURCHASE PRICE REFLECTS AND TAKES INTO ACCOUNT THAT THE PROPERTY IS BEING SOLD "AS-IS."

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BUYER REPRESENTS TO SELLER THAT BUYER HAS CONDUCTED, OR WILL CONDUCT PRIOR TO CLOSING, SUCH INVESTIGATIONS OF THE PROPERTY, INCLUDING BUT NOT LIMITED TO, THE PHYSICAL AND ENVIRONMENTAL CONDITIONS THEREOF, AS BUYER DEEMS NECESSARY OR DESIRABLE TO SATISFY ITSELF AS TO THE CONDITION OF THE PROPERTY AND THE EXISTENCE OR NONEXISTENCE OR CURATIVE ACTION TO BE TAKEN WITH RESPECT TO ANY HAZARDOUS OR TOXIC SUBSTANCES ON OR DISCHARGED FROM THE PROPERTY, AND WILL RELY SOLELY UPON SAME AND NOT UPON ANY INFORMATION PROVIDED BY OR ON BEHALF OF SELLER OR ITS AGENTS OR EMPLOYEES WITH RESPECT THERETO, OTHER THAN SUCH REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLER AS ARE EXPRESSLY SET FORTH IN THIS AGREEMENT. UPON CLOSING, BUYER SHALL ASSUME THE RISK THAT ADVERSE MATTERS, INCLUDING BUT NOT LIMITED TO, CONSTRUCTION DEFECTS AND ADVERSE PHYSICAL AND ENVIRONMENTAL CONDITIONS, MAY NOT HAVE BEEN REVEALED BY BUYER'S INVESTIGATIONS, AND BUYER, UPON CLOSING (EXCEPT WITH RESPECT TO THE EXPRESS REPRESENTATIONS AND WARRANTIES OF SELLER SET FORTH IN THIS AGREEMENT), SHALL BE DEEMED TO HAVE WAIVED, RELINQUISHED AND RELEASED SELLER (AND SELLER'S OFFICERS, DIRECTORS, SHAREHOLDERS, EMPLOYEES AND AGENTS) FROM AND AGAINST ANY AND ALL CLAIMS, DEMANDS, CAUSES OF ACTION (INCLUDING CAUSES OF ACTION IN TORT), LOSSES, DAMAGES, LIABILITIES, COSTS AND EXPENSES (INCLUDING REASONABLE ATTORNEYS' FEES) OF ANY AND EVERY KIND OR CHARACTER, KNOWN OR UNKNOWN, WHICH BUYER MIGHT HAVE ASSERTED OR ALLEGED AGAINST SELLER (AND SELLER'S OFFICERS, DIRECTORS, SHAREHOLDERS, EMPLOYEES AND AGENTS) AT ANY TIME BY REASON OF OR ARISING OUT OF ANY LATENT OR PATENT CONSTRUCTION DEFECTS OR PHYSICAL CONDITIONS, VIOLATIONS OF ANY APPLICABLE LAWS AND ANY AND ALL OTHER ACTS, OMISSIONS, EVENTS, CIRCUMSTANCES OR MATTERS REGARDING THE PROPERTY. BUYER HEREBY WAIVES THE PROVISIONS OF CALIFORNIA CIVIL CODE SECTION 1542 WHICH PROVIDES THAT:

"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."

         ---------------------------          -------------------------
          RPB                                  THK
         ---------------------------          -------------------------
          BUYER'S INITIALS                     SELLER'S INITIALS
         ---------------------------          -------------------------

16.3 MATERIAL CHANGE. Seller shall promptly notify Buyer of any change in any condition with respect to the Property or any event or circumstance which makes any representation or warranty of Seller as set forth in Section 11.2 of this Agreement materially untrue or misleading or any covenant of Seller under this Agreement incapable of being performed. In no event shall Seller be liable to Buyer for, or be deemed to be in default pursuant to this Agreement by reason of any inaccuracy of a representation or warranty which results from any change that (i) occurs between the Effective Date and the Closing Date; and (ii) is expressly permitted under the terms of this

22

Agreement or is beyond the reasonable control of Seller to prevent; provided, however, that the occurrence of a material change which is not permitted hereunder shall constitute the non-fulfillment of the condition set forth in
Section 7.2.2 hereof. If, in spite of such nonfulfillment of the conditions set forth in such Section 7.2.2 the Closing occurs, Seller's representations and warranties set forth in this Agreement shall be deemed to have been modified by all statements made in any notice or notices of modification as given by Seller to Buyer pursuant to this Section 16.3 prior to the Closing.

16.4 SURVIVAL OF SELLER'S REPRESENTATIONS AND WARRANTIES. The representations and warranties of Seller set forth in Section 11.2 hereof (as such may have been updated as of the Closing in accordance with Section 16.3) in accordance with the terms of this Agreement, shall survive Closing for a period of twelve (12) months. No claim for a breach of any representation or warranty of Seller shall be actionable or payable if the breach in question results from or is based on a condition, state of facts or other matter which was known to Buyer prior to Closing. Seller shall have no liability to Buyer for a breach of any representation or warranty (a) unless the valid claims for all such breaches collectively aggregate more than One Hundred Thousand Dollars ($100,000.00), in which event the amount of such valid claims in excess of One Hundred Thousand Dollars ($100,000.00) shall be actionable, up to the Maximum (as defined in this Section), and (b) unless written notice containing a description of the specific nature of such breach shall have been given by Buyer to Seller prior to the expiration of said twelve (12) month period and any action shall have been commenced by Buyer against Seller within fourteen (14) months of Closing. Buyer agrees to first seek recovery under any insurance policies, Service Contracts and the Lease(s) prior to seeking recovery from Seller, and Seller shall not be liable to Buyer if Buyer's remaining claim after recovery from such insurance policies, Service Contracts and/or Lease(s) is less than One Hundred Thousand Dollars ($100,000.00). As used herein, the term "MAXIMUM" shall mean the total aggregate amount of Five Hundred Thousand Dollars ($500,000.00).

16.5 SURVIVAL OF LIMITATIONS. The provisions of this Article 16 shall survive Closing or any termination of this Agreement.

17. MISCELLANEOUS.

17.1 TIME. Time is of the essence in the performance of each party's obligations hereunder; however, if the final date of any period which is set out in any provision of this Agreement falls on a Saturday, Sunday or legal holiday under the laws of the United States or the State in which the Property is located, then, in such event, the time of such period shall be extended to the next day which is not a Saturday, Sunday or legal holiday.

17.2 ATTORNEYS' FEES. If any legal action, arbitration or other proceeding is commenced to enforce or interpret any provision of this Agreement, the prevailing party shall be entitled to seek an award of its attorneys' fees and expenses. The phrase "prevailing party" shall include a party who receives substantially the relief desired whether by dismissal, summary judgment, judgment or otherwise.

17.3 NO WAIVER. No waiver by any party of the performance or satisfaction of any covenant or condition shall be valid unless in writing and shall not be considered to be a waiver by such party of any other covenant or condition hereunder.

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17.4 ENTIRE AGREEMENT. This Agreement contains the entire agreement between the parties regarding the Property and supersedes all prior agreements, whether written or oral, between the parties regarding the same subject. This Agreement may only be modified in writing.

17.5 SURVIVAL. The provisions of this Agreement shall not merge with the delivery of the Deed but shall, except as otherwise provided in this Agreement, survive the Closing.

17.6 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators and successors and assigns of Seller and Buyer; provided, however, that Buyer shall not assign Buyer's rights and obligations pursuant to this Agreement to any party without the prior written consent of Seller which consent may be withheld in its sole and absolute discretion.

17.7 SEVERABILITY. In the case that any one or more of the provisions contained in this Agreement are for any reason held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision hereof, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein.

17.8 CAPTIONS. Paragraph titles or captions contained in this Agreement are inserted as a matter of convenience only and for reference, and in no way define, limit, extend or describe the scope of this Agreement.

17.9 EXHIBITS. All exhibits attached hereto shall be incorporated herein by reference as if set out herein in full.

17.10 RELATIONSHIP OF THE PARTIES. The parties acknowledge that neither party is an agent for the other party, and that neither party shall or can bind or enter into agreements for the other party.

17.11 GOVERNING LAW. This Agreement and the legal relations between the parties hereto shall be governed by and be construed in accordance with the laws of the State of California.

17.12 REVIEW BY COUNSEL. The parties acknowledge that each party and its counsel have reviewed and approved this Agreement, and the parties hereby agree that the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement or any amendments or exhibits hereto.

17.13 NON-DISCLOSURE. The parties hereto shall not disclose any of the material terms of this Agreement (except to the extent as may be required by law or as required by the Title Company or to the officers, directors, partners and employees of the parties hereto in the ordinary course of business) without the prior written consent of the other party except that each party may make disclosure to its respective lawyers, accountants, advisors and shareholders.

17.14 COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall constitute an original. This Agreement shall only be effective if a counterpart is signed by both Seller and Buyer.

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17.15 FILING OF REPORTS. The Title Company shall be solely responsible for the timely filing of any reports or returns required pursuant to the provisions of Section 6045(e) of the Internal Revenue Code of 1986 as amended (and any similar reports or returns required under any state or local laws) in connection with the Closing.

17.16 1031 EXCHANGE. In connection with the transactions contemplated by this Agreement, Seller may wish to engage in a tax deferred exchange pursuant to Section 1031 of the Internal Revenue Code of 1986 as amended. Buyer agrees to reasonably cooperate with Seller in connection with such exchange, provided, however, that (i) notwithstanding any other provision of this Agreement to the contrary, Seller can elect to delay the Closing for a period of up to thirty (30) business days; (ii) Buyer will not be required to take title to any other real property; (iii) Buyer shall not incur any additional liability by reason of such exchange; (iv) Seller will indemnify and hold Buyer harmless for, from and against any claim, demand, cause of action, liability or expense (including attorney's fees) in connection therewith, including, without limitation, any increase in escrow fees or charges resulting from such exchange; and (v) Seller acknowledges and agrees and that Buyer has not made and will not make any representation or warranty as to the effectiveness for tax purposes of any such exchange. Seller must notify Buyer at least five (5) days before the contemplated date of Closing if Seller intends to proceed pursuant to this Section 17.16.

17.17 LICENSED REAL ESTATE BROKERS. Buyer hereby acknowledges that (a) Limar Financial Corporation ("LFC"), an affiliate of Seller, is a licensed real estate broker under the laws of the State of California, (b) Thomas Numainville, Timothy J. Castello and James R. Thomson, officers of LFC and Seller, are similarly so licensed and (c) no agency relationship has been created between Seller and Buyer (or between LFC or Thomas Numainville or Timothy J. Castello or James R. Thomson and Buyer) with respect to the transactions subject to this Agreement.

17.18 THIRD PARTY BENEFICIARIES. This Agreement is for the benefit of Buyer and Seller and their respective agents, employees, shareholders, officers, directors, partners and successors and no third party shall be entitled to the benefit of any of the provisions of this Agreement.

17.19 FACSIMILE SIGNATURES. Seller and Buyer each (a) has agreed to permit the use from time to time, where appropriate, of telecopy signatures in order to expedite the transaction contemplated by this Agreement,
(b) intends to be bound by its respective telecopy signature, (c) is aware that the other will rely on the telecopied signature, and (d) acknowledges such reliance and waives any defenses to the enforcement of this Agreement and the documents affecting the transaction contemplated by this Agreement based on the fact that a signature was sent by telecopy only.

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18. DEFAULT.

18.1 LIQUIDATED DAMAGES. FROM AND AFTER THE EXPIRATION OF THE DUE DILIGENCE PERIOD, IN THE EVENT THE SALE OF THE PROPERTY AS CONTEMPLATED HEREUNDER IS NOT CONSUMMATED DUE TO A DEFAULT OF BUYER, THE DEPOSIT (INCLUDING ALL INTEREST EARNED FROM THE INVESTMENT THEREOF) SHALL BE PAID TO AND RETAINED BY SELLER AS LIQUIDATED DAMAGES. THE PARTIES ACKNOWLEDGE THAT SELLER'S ACTUAL DAMAGES IN THE EVENT THAT THE SALE IS NOT CONSUMMATED WOULD BE EXTREMELY DIFFICULT OR IMPRACTICABLE TO DETERMINE. THEREFORE, BY SEPARATELY EXECUTING THIS
SECTION 18.1 BELOW, THE PARTIES ACKNOWLEDGE THAT THE NONREFUNDABLE DEPOSIT HAS BEEN AGREED UPON, AFTER NEGOTIATION, AS THE PARTIES' REASONABLE ESTIMATE OF SELLER'S DAMAGES AND AS SELLER'S EXCLUSIVE REMEDY AGAINST BUYER IN THE EVENT THE CLOSING DOES NOT OCCUR AND AS SELLER'S SOLE AND EXCLUSIVE REMEDY AGAINST BUYER ARISING FROM SUCH FAILURE OF THE SALE TO CLOSE. IN ADDITION, BUYER SHALL PAY ALL TITLE, SURVEY AND ESCROW CANCELLATION CHARGES. NOTWITHSTANDING THE FOREGOING, IN NO EVENT SHALL THIS SECTION 18.1 LIMIT THE DAMAGES RECOVERABLE BY EITHER PARTY AGAINST THE OTHER PARTY DUE TO (A) THE OTHER PARTY'S OBLIGATION TO INDEMNIFY SUCH PARTY IN ACCORDANCE WITH THIS AGREEMENT, OR (B) THIRD PARTY CLAIMS. BY THEIR SEPARATELY EXECUTING THIS SECTION 18.1 BELOW, BUYER AND SELLER ACKNOWLEDGE THAT THEY HAVE READ AND UNDERSTOOD THE ABOVE PROVISION COVERING LIQUIDATED DAMAGES, AND THAT EACH PARTY WAS REPRESENTED BY COUNSEL WHO EXPLAINED THE CONSEQUENCES OF THIS LIQUIDATED DAMAGES PROVISION AT THE TIME THIS AGREEMENT WAS EXECUTED.

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---------------------------         -------------------------
 RPB                                 THK
---------------------------         -------------------------
 BUYER'S INITIALS                    SELLER'S INITIALS
---------------------------         -------------------------

18.2 DEFAULT BY SELLER. In the event the sale of the Property as contemplated hereunder is not consummated due to Seller's default hereunder, Buyer shall be entitled, as its sole remedy, either (a) to receive the return of the Deposit, which return shall operate to terminate this Agreement and release Seller from any and all liability hereunder, or (b) to enforce specific performance of Seller's obligation to convey the Property to Buyer in accordance with the terms of this Agreement, it being understood and agreed that the remedy of specific performance shall not be available to enforce any other obligation of Seller hereunder. Buyer expressly waives its rights to seek damages in the event of Seller's default hereunder. Buyer shall be deemed to have elected to terminate this Agreement and receive back the Deposit if Buyer fails to file suit for specific performance against Seller in a court having jurisdiction in the county and state in which the Real Property is located, on or before thirty (30) days following the date upon which Closing was to have occurred.

19. DEFINITIONS. For ease of reference, the defined terms as employed in this Agreement and as listed below are defined in the designated sections:

19.1     "Agreement" as defined in the first paragraph.
19.2     "Approval Notice" as defined in Section 6.7
19.3     "Assignment" as defined in Section 1.3
19.4     "Bill of Sale" as defined in Section 8.1.2
19.5     "Buyer" as defined in the first paragraph.
19.6     "Buyer's Reports" as defined in Section 6.5
19.7     "Buyer's Representatives" as defined in Section 6.4
19.8     "Buyer's Title Policy" as defined in Section 3.2
19.9     "Closing" as defined in Section 5.1
19.10    "Closing Date" as defined in Section 5.1
19.11    "Deed" as defined in Section 8.1.1
19.12    "Deposit" as defined in Section 2.1
19.13    "Deposit #1" as defined in Section 2.1
19.14    "Deposit #2" as defined in Section 2.1
19.15    "Due Diligence Date" as defined in Section 6.1
19.16    "Due Diligence Materials" as defined in Section 6.2
19.17    "Due Diligence Period" as defined in Section 6.1
19.18    "Effective Date" as defined in the first paragraph.
19.19    "Escrow" as defined in Section 4.1
19.20    "Future Commission Obligations" as defined in
         Section 14.2
19.21    "Improvements" as defined in Section 1.1.2
19.22    "Intangible Property" as defined in Section 1.3
19.23    "LFC" as defined in Section 17.17
19.24    "Land" as defined in Section 1.1.1
19.25    "Lease(s)" as defined in Section 1.3
19.26    "Maximum" as defined in Section 16.4

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19.27    "Permitted Exceptions" as defined in Section 3.3
19.28    "Personal Property" as defined in Section 1.1.3
19.29    "Property" as defined in Section 1.1
19.30    "Purchase Price" as defined in Section 2
19.31    "Real Property"" as defined in Section 1.2
19.32    "Seller" as defined in the first paragraph.
19.33    "Service Contracts" as defined in Section 1.3
19.34    "Subsequent Title Defects Notice" as defined in
         Section 6.3.3
19.35    "Survey" as defined in Section 6.3.1
19.36    "Title Company" as defined in Section 4.1
19.37    "Title Notice" as defined in Section 6.3.2
19.38    "Title Report" as defined in Section 6.3.1
19.39    "Title Review Period" as defined in Section 6.3

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written.

SELLER:                                     BUYER:

Limar Realty Corp. #13,                     Arena Pharmaceuticals, Inc.
a California corporation                    a Delaware corporation


By: /s/ Theodore H. Kruttschnitt            By: /s/ Richard P. Burgoon, Jr.
   ---------------------------------           ---------------------------------
Name: Theodore H. Kruttschnitt              Name: Richard P. Burgoon, Jr.
      ------------------------              Its:  Sr. Vice President, Operations
Its:  President                                   General Counsel & Secretary
      ---------

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LIST OF EXHIBITS

Exhibit 1.1.1              -        Legal Description of Land
Exhibit 1.3 (i)            -        Schedule of Lease(s)
Exhibit 1.3 (ii)           -        Schedule of Service Contracts
Exhibit 6.2.1              -        Delivered Materials
Exhibit 6.7                -        Form of Approval Notice
Exhibit 8.1.1              -        Form of Grant Deed
Exhibit 8.1.2              -        Form of Bill of Sale
Exhibit 8.1.3              -        Form of Assignment and Assumption Agreement
Exhibit 8.2.3              -        Form of Buyer's Affidavit

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Exhibit 21.1

List of Subsidiaries of Arena Pharmaceuticals, Inc.

1. Aressa Pharmaceuticals, Inc. a Delaware corporation, doing business as Aressa Pharmaceuticals.

2. BRL Screening, Inc., a Delaware corporation, doing business as BRL Screening, Inc.


Exhibit 23.1

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statements (Form S-8) pertaining to the Amended and Restated 1998 Equity Compensation Plan and the 2000 Equity Compensation Plan of Arena Pharmaceuticals, Inc., of our report dated January 15, 2001, with respect to the financial statements of Arena Pharmaceuticals, Inc., included in the Annual Report (Form 10-K) for the year ended December 31, 2000.

                                           /s/ Ernst & Young LLP
                                           ERNST & YOUNG LLP


San Diego, California


March 20, 2001


Exhibit 24.1

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that the persons whose signatures appear below have made, constituted and appointed, and by this instrument do make, constitute and appoint Jack Lief and Richard P. Burgoon, Jr., or either one of them, his true and lawful attorney-in-fact and agent, with full powers of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Report and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as they might or could do in person, hereby ratifying and confirming all which said attorneys-in-fact and agent, or any of them, or their substitute or substitutes, may lawfully do, or cause to be done by virtue hereof.

IN WITNESS WHEREOF, this Power of Attorney has been signed at San Diego, California, this 15th day of March, 2001.

Signatures                                          Title
----------                                          -----

By: /s/ Jack Lief                                   President, Chief Executive Officer
    ---------------------------------               and Director
        Jack Lief

By: /s/ Robert Hoffman                              Vice President, Finance, Principal
    ---------------------------------               Financial Officer and Principal Accounting Officer
        Robert Hoffman

By: /s/ Dominic P. Behan                            Vice President, Research and
    ---------------------------------               Director
        Dominic P. Behan, Ph.D.


By: /s/ Derek T. Chalmers                           Vice President, Research and
    ---------------------------------               Director
        Derek T. Chalmers, Ph.D.

By: /s/ John P. Mcalister
    ---------------------------------
        John P. McAlister, III, Ph.D.               Director

By: /s/ Michael Steinmetz
    ---------------------------------
        Michael Steinmetz, Ph.D.                    Director

By: /s/ Stefan Ryser
    ---------------------------------
        Stefan Ryser, Ph.D.                         Director