Arena Pharmaceuticals, Inc.
ARENA PHARMACEUTICALS INC (Form: 10-Q, Received: 11/15/2002 09:25:09)
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


FORM 10-Q


(Mark One)  

ý

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002

OR

o

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

FOR THE TRANSITION PERIOD FROM                              TO                             

COMMISSION FILE NUMBER 000-31161

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

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

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

 

92121
(ZIP CODE)

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

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

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

COMMON STOCK, $0.0001 PAR VALUE
Class
  27,716,754 SHARES
Outstanding at October 31, 2002




ARENA PHARMACEUTICALS, INC.

INDEX

 
   
  PAGE NO.
PART I. FINANCIAL INFORMATION

Item 1.

 

Financial Statements (Unaudited)

 

3

 

 

Condensed Consolidated Balance Sheets—As of September 30, 2002, and December 31, 2001

 

3

 

 

Condensed Consolidated Statements of Operations—Three and Nine Months Ended September 30, 2002, and 2001

 

4

 

 

Condensed Consolidated Cash Flow Statements—Nine Months Ended September 30, 2002, and 2001

 

5

 

 

Notes to Condensed Unaudited Consolidated Financial Statements

 

6

Item 2.

 

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

 

9

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

26

Item 4.

 

Controls and Procedures

 

27

PART II. OTHER INFORMATION

Item 2.

 

Changes in Securities and Use of Proceeds

 

28

Item 6.

 

Exhibits and Reports on Form 8-K

 

28

Signatures

 

29

2



PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS


Arena Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

 
  September 30,
2002

  December 31,
2001

 
 
  (unaudited)

  (Note)

 
ASSETS              
Current assets:              
  Cash and cash equivalents   $ 75,760,278   $ 176,676,669  
  Short-term investments, available-for-sale     120,342,707     50,247,624  
  Accounts receivable     2,342,520     3,481,250  
  Prepaid expenses and other current assets     6,207,303     2,903,281  
   
 
 
    Total current assets     204,652,808     233,308,824  

Land, property and equipment, net

 

 

34,596,065

 

 

23,268,567

 
Acquired technology, net     12,944,457     14,097,204  
Deposits, restricted cash, investments and other assets     4,568,672     6,299,115  
   
 
 
    Total assets   $ 256,762,002   $ 276,973,710  
   
 
 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 
Current liabilities:              
  Accounts payable and accrued expenses   $ 2,920,402   $ 2,329,426  
  Accrued compensation     860,026     620,404  
  Current portion of deferred revenues     1,543,376     2,386,029  
  Current portion of obligations under capital leases     456,606     499,387  
   
 
 
    Total current liabilities     5,780,410     5,835,246  

Deferred revenues, less current portion

 

 

190,106

 

 

390,827

 
Obligations under capital leases, less current portion     80,584     402,092  
Deferred rent     910,306     871,867  

Stockholders' equity:

 

 

 

 

 

 

 
  Common stock     2,772     2,759  
  Additional paid-in capital     301,060,856     300,649,789  
  Accumulated other comprehensive income     2,159,950     6,790  
  Deferred compensation     (1,797,860 )   (3,611,933 )
  Accumulated deficit     (51,625,122 )   (27,573,727 )
   
 
 
    Total stockholders' equity     249,800,596     269,473,678  
   
 
 
    Total liabilities and stockholders' equity   $ 256,762,002   $ 276,973,710  
   
 
 

Note:  The balance sheet at December 31, 2001, has been derived from the audited financial statements at that date but, since this is an interim statement, it does not include all of the information and footnotes required by accounting principles generally accepted in the Unites States for complete financial statements.

See accompanying notes to condensed consolidated financial statements.

3



Arena Pharmaceuticals, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

 
  Three months ended
September 30,

  Nine months ended
September 30,

 
 
  2002
  2001
  2002
  2001
 
Revenues                          
  Total revenues   $ 2,987,741   $ 3,472,338   $ 13,057,541   $ 12,194,928  

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

12,001,252

 

 

6,230,959

 

 

31,138,313

 

 

15,375,823

 
General and administrative     1,842,302     1,462,779     5,463,786     3,820,335  
Amortization of deferred compensation     463,931     1,071,653     1,820,412     3,413,050  
Amortization of acquired technology and other intangibles     405,305     384,249     1,180,822     896,581  
   
 
 
 
 
  Total operating expenses     14,712,790     9,149,640     39,603,333     23,505,789  

Interest income and other, net

 

 

1,543,823

 

 

3,657,748

 

 

4,281,194

 

 

7,230,621

 
Investment write-down     (86,797 )       (1,786,797 )    
   
 
 
 
 
Net loss   $ (10,268,023 ) $ (2,019,554 ) $ (24,051,395 ) $ (4,080,240 )
   
 
 
 
 

Net loss per share, basic and diluted

 

$

(0.37

)

$

(0.07

)

$

(0.88

)

$

(0.17

)
   
 
 
 
 
Shares used in calculating net loss per share, basic and diluted     27,514,085     27,236,326     27,464,983     24,194,049  
   
 
 
 
 

See accompanying notes to condensed consolidated financial statements.

4



Arena Pharmaceuticals, Inc.

Condensed Consolidated Cash Flow Statements

(Unaudited)

 
  Nine months ended September 30,
 
 
  2002
  2001
 
Operating Activities              
Net loss   $ (24,051,395 ) $ (4,080,240 )

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 
  Depreciation and amortization     2,427,482     1,085,031  
  Minority interest in TaiGen     686,714     183,000  
  Amortization of acquired technology and other intangibles     1,180,822     896,581  
  Amortization of deferred compensation     1,820,412     3,413,050  
  Amortization of short-term investment premium/discount     1,068,356      
  Deferred rent     38,439     200  
  Loss on disposal of equipment     7,066      
  Investment write-down     1,786,797      
  Changes in operating assets and liabilities:              
    Accounts receivable     1,138,730     (970,937 )
    Prepaid expenses and other current assets     (3,332,097 )   (1,127,594 )
    Deferred revenues     (1,043,374 )   169,405  
    Accounts payable and accrued expenses     830,597     894,065  
   
 
 
Net cash provided by (used in) operating activities     (17,441,451 )   462,561  

Investing Activities

 

 

 

 

 

 

 
  Purchases of short-term investments, available-for-sale     (178,952,466 )    
  Proceeds from sales/maturities of short-term investments     110,003,647      
  Acquisition of Bunsen Rush         (15,000,000 )
  Purchases of land, property and equipment     (13,767,946 )   (11,255,876 )
  Proceeds from sale of equipment     5,900      
  Deposits, restricted cash and other assets     (804,528 )   (1,855,791 )
   
 
 
Net cash used in investing activities     (83,515,393 )   (28,111,667 )

Financing Activities

 

 

 

 

 

 

 
  Principal payments under capital lease obligations     (364,288 )   (421,904 )
  Proceeds from issuance of common stock     404,741     123,204,141  
   
 
 
Net cash provided by financing activities     40,453     122,782,237  
   
 
 
Net increase (decrease) in cash and cash equivalents     (100,916,391 )   95,133,131  
Cash and cash equivalents at beginning of period     176,676,669     144,413,176  
   
 
 
Cash and cash equivalents at end of period   $ 75,760,278   $ 239,546,307  
   
 
 

See accompanying notes to condensed consolidated financial statements.

5



NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

        The accompanying unaudited financial statements of Arena Pharmaceuticals, Inc. (together with its subsidiary, BRL Screening, Inc., the "Company") have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, since this is an interim statement, they do not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying unaudited financial statements reflect all adjustments, consisting of normal recurring adjustments, that are, in the opinion of management, necessary for a fair statement of the results of operations for the interim period presented. Interim results are not necessarily indicative of results for a full year.

        The balance sheet at December 31, 2001, has been derived from the audited financial statements at that date but, since this is an interim statement, it does not include all of the information and footnotes required by GAAP for complete financial statements. These financial statements should be read in conjunction with the audited financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001, (the "2001 Annual Report"), as filed with the Securities and Exchange Commission (the "SEC").

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

2. Net Loss Per Share

        The Company computes net loss per share in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," and SEC Staff Accounting Bulletin ("SAB") No. 98. Basic net loss per share was computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period after subtracting shares subject to repurchase. Diluted net loss per share was computed by dividing the net loss for the period by the weighted average number of common shares and common share equivalents (to the extent they are dilutive) outstanding during the period. Common share equivalents consist of outstanding options under the Company's employee stock option plans, potential issuances of stock under the employee stock purchase plan and shares issued upon exercise of unvested options that are subject to repurchase by the Company until vested.

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

3. Comprehensive Loss

        Comprehensive loss is calculated in accordance with SFAS No. 130, "Reporting Comprehensive Income." Comprehensive loss is comprised of net loss and other comprehensive income. Other comprehensive income includes certain changes in equity that are excluded from net income, including unrealized holding gains and losses on short-term investments, available-for-sale. Comprehensive loss for the three months ended September 30, 2002, and 2001 was $8.7 million and $2.0 million, respectively. Comprehensive loss for the nine months ended September 30, 2002, and 2001 was $21.9 million and $4.1 million, respectively.

6



4. Deferred Stock Compensation

        For the year ended December 31, 2001, in connection with the grant of stock options to employees, the Company recorded deferred stock compensation totaling $226,000, representing the difference between the exercise price and the estimated market value of the Company's common stock as determined by the Company, or quoted market value after July 28, 2000, on the date such stock options were granted. Deferred compensation is included as a reduction of stockholders' equity and is being amortized to expense over the vesting period of the options in accordance with Financial Accounting Standards Board ("FASB") Interpretation No. 28, which permits an accelerated amortization methodology. For the nine months ended September 30, 2002, and 2001, the Company recorded amortization of deferred compensation expense of $1.8 million and $3.4 million, respectively. At September 30, 2002, total charges to be recognized in future periods from amortization of deferred stock compensation are anticipated to be $455,000 for the remaining three months of 2002, $967,000 for the year ending December 31, 2003, and $107,000 for the year ending December 31, 2004.

5. Short-Term Investments, Available-for-Sale

        At September 30, 2002, the Company held securities, classified as available-for-sale, with a market value of $120.3 million. These securities consist primarily of investment-grade mortgage-backed securities and corporate debt securities, federal agency notes and U.S. Treasury securities. The Company's primary interest rate exposure results from changes in short and intermediate-term interest rates. The Company does not purchase financial instruments for trading or speculative purposes.

6. Investment in Axiom Biotechnologies, Inc. and Subsequent Acquisition by Sequenom, Inc.

        In April 2001, the Company signed a binding letter of intent with Axiom Biotechnologies, Inc. ("Axiom") for a collaborative research program involving Axiom's proprietary RHACE™ Technology and Human Cell Bank, as well as for the Company's purchase of $2.0 million of Axiom's preferred stock. The Axiom stock purchase was completed in August 2001 and was accounted for under the cost method of accounting. The Company periodically reviews the valuation and recoverability of its investments. Realized gains and losses and impairments in value judged to be other than temporary are included in the statement of operations. The Company determined that its investment in Axiom was impaired and accordingly recorded a $1.7 million write-down during the quarter ended June 30, 2002. On September 3, 2002, Axiom was acquired by Sequenom, Inc. ("Sequenom"), and the Company further wrote down its investment by $87,000 to its fair value, less a discount for restrictions on the sale of Sequenom stock, on the date of acquisition of Axiom by Sequenom. At September 30, 2002, the Company valued its investment in Sequenom at its fair value as quoted on the NASDAQ national market, less a discount for restrictions on the sale of Sequenom stock.

7. Concentration of Credit Risk

        The Financial instruments used by the Company potentially subject it to concentrations of credit risk and consist primarily of cash and cash equivalents and short-term investments, available-for-sale. The Company limits its exposure to credit risk by investing its cash pursuant to an investment policy that: (i) emphasizes preservation of principal over other portfolio considerations; (ii) requires investments to be placed with high credit quality financial institutions; (iii) establishes guidelines for the diversification of its investment portfolio; and (iv) requires investments to be placed with maturities that maintain safety and liquidity. The Company has a concentration of credit risk in securities of the U.S. Government and its agencies.

7



        The Company relies on a small number of collaborators for a significant portion of its revenues. For the nine months ended September 30, 2002, revenues from one collaborator accounted for 77.2% of total revenues and for the nine months ended September 30, 2001, revenues from two collaborators accounted for 90.9% of total revenues.

8. Effect of New Accounting Standards

        In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS 145 rescinds FASB Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and an amendment of that Statement, FASB Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." SFAS 145 also rescinds FASB Statement No. 44, "Accounting for Intangible Assets of Motor Carriers." SFAS 145 amends FASB Statement No. 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of SFAS 145 are effective for financial statements issued on or after May 15, 2002. The adoption of SFAS 145 has not had a material effect on the Company's financial statements.

        In July 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized at its fair market value when the liability is incurred, rather than at the date of an entity's commitment to an exit plan. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS 146 is not expected to have a material effect on the Company's financial statements.

8



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

        This discussion and analysis should be read in conjunction with our financial statements and accompanying footnotes included in this report and the audited financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2001 (the "2001 Annual Report"), as filed with the Securities and Exchange Commission (the "SEC"). Operating results are not necessarily indicative of results that may occur in future periods.

        This Quarterly Report on Form 10-Q (this "Quarterly Report") includes forward-looking statements. These forward-looking statements involve a number of risks and uncertainties. Such forward looking statements include statements about our strategies, our objectives, our discoveries, our collaborations, our internal programs, and other statements that are not historical facts, including statements which are preceded by the words "hopes," "intends," "will," "can," "plans," "expects," "anticipates," "estimates," "aims," and "believes" or similar words. For such statements, we claim the protection of the Private Securities Litigation Reform Act of 1995. Readers of this Quarterly Report are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update publicly or revise any forward-looking statements. Actual events or results may differ materially from our expectations. Important factors that could cause actual results to differ materially from those stated or implied by our forward looking statements include, but are not limited to, the risk factors identified in our SEC reports, including this Quarterly Report.

Certain Recent Events

        In October 2002, we entered into a research and licensing agreement with Merck & Co., Inc. ("Merck") to collaborate on validating and developing therapeutics on three GPCRs of interest to Merck. Under the collaboration, we received an upfront payment of $4.0 million as well as research funding from Merck for our internal resources committed under this agreement. We will receive additional preclinical, clinical and marketing milestone payments and royalties on sales of products discovered from this collaboration, if any.

        In October 2002, J. Clayburn La Force, Jr., Ph.D. and Duke K. Bristow, Ph.D. were appointed to our Board of Directors, filling the vacancies created by the resignations of John P. McAlister, III, Ph.D. and Michael Steinmetz, Ph.D.

        In October 2002, our Board of Directors adopted a stockholders' rights plan designed to guard against abusive takeover tactics, including "creeping" tender offers, by enabling all of our stockholders to realize the full value of their investment and providing for fair and equal treatment for all stockholders in the event that an unsolicited attempt is made to acquire us.

        In October 2002, our Board of Directors adopted an amendment to our by-laws requiring advance notice of stockholder proposals to be submitted at an annual meeting, including nominations for election as directors, which will give our Board of Directors the opportunity to consider the qualifications of any nominees and the merits of any proposals before stockholders are asked to vote on them.

        In November 2002, Eli Lilly and Company ("Eli Lilly") notified us that it would not continue our research collaboration after April 14, 2003. After the end of the research collaboration, we will no longer have Arena personnel working on this project and, accordingly, will no longer receive research

9



funding from Eli Lilly for such personnel. We will, however, continue to be eligible to receive preclinical, clinical and marketing milestone payments and royalties on sales of products discovered by Eli Lilly as a result of this collaboration, if any.

        In November 2002, our Board of Directors adopted standardized change of control arrangements for certain key executives and employees designed to help ensure the continuity of our operations and allow our employees to focus on meeting our business objectives in the face of any potential change of control transaction. These arrangements include:

    Change of control severance agreements for one group of key executives and employees, providing for, among other things, a payment equal to the employee's base salary and accelerated vesting of equity grants if the employee is terminated within two years following a change of control; and

    A change of control severance plan for the other group of key executives and employees, providing for, among other things, a payment equal to one-half of the employees' annual base salary and accelerated vesting of equity grants if the employee is terminated within two years following a change of control.

        Please refer to our discussion below and our recent reports filed with the SEC on Forms 8-K and 8-A for additional information about the foregoing events.

Overview

        We were incorporated on April 14, 1997, in the state of Delaware and commenced operations in July 1997. We are an emerging biopharmaceutical company focused principally on discovering and developing drugs that act on an important class of drug targets called G protein-coupled receptors, or GPCRs. We have developed a technology called Constitutively Activated Receptor Technology, or CART™, that we apply to GPCRs to identify drug leads.

        In early 2001, we initiated Project Genesis, an internal drug discovery program using a combination of CART, our Melanophore technology, which is a screening technology that detects cellular signals generated by receptors, and other technologies that we believe will allow us to discover a substantial number of unique small molecule drug leads and drug candidates. With the completion of the sequencing of the human genome, we view Project Genesis as a strategic extension of our scientific and business capabilities that will allow us to discover new drug leads at therapeutically relevant GPCRs.

        Project Genesis is comprised of the following steps:

    Acquiring Therapeutically Relevant GPCRs.   We expect to acquire these GPCRs through our own internal research efforts as well as from outside sources. To date, we have identified and analyzed over 700 GPCR sequences and identified over 500 GPCRs that we believe may be therapeutically relevant because of their tissue expression. We continue to employ our proprietary algorithmic approaches to genomic databases in order to complete GPCR identification across the entire human genome.

    Determining the Location and Relative Expression Levels of GPCRs.   Utilizing a proprietary, custom-designed oligonucleotide "GPCR chip," we have identified the relative expression levels of more than 700 GPCRs across 90 human tissues and over 50 human cell lines. These data indicate that a large number of GPCRs are expressed in tissues of high therapeutic importance,

10


      including approximately 300 GPCRs in endocrine/metabolic systems, over 225 GPCRs within major systems of the central nervous system, and approximately 180 GPCRs localized to various cardiovascular tissues. We are now extending the analysis to examine GPCR expression levels in a variety of human diseased tissues and biopsy samples with the aim of prioritizing GPCRs for small molecule drug discovery.

    Preparing the GPCRs for Screening.   Having identified the GPCR sequences, our scientists use our technologies to prioritize selected GPCRs and prepare large quantities of receptor cDNA for small molecule screening. We continue to expand the number of GPCRs prepared for screening as receptors are prioritized .

    Screening the Therapeutically Relevant GPCRs.   We employ high-throughput screening approaches, including CART and Melanophore technologies, to screen GPCRs across our in-house chemical library.

    Identifying Potential Drug Candidates.   Small molecule leads, which have been identified from our chemical library screens, are optimized for potency and selectivity by our in-house medicinal chemists.

        We may enter into collaborative arrangements at any stage of Project Genesis with respect to CART-activated receptors, drug leads or drug candidates that we discover. Alternatively, we may choose to develop the drug candidates ourselves.

        We have focused our target identification and functional genomics efforts in four major therapeutic areas: central nervous system; metabolic diseases; cardiovascular and inflammation. We have established databases related to GPCR expression levels in relevant tissues associated with each of these areas and established in vitro and, where appropriate, in vivo models. We continue to discover and develop small molecules at identified GPCR targets in each of these therapeutic areas as a pipeline for both internal drug development and as a basis for collaborative arrangements.

        We plan to pursue several specific objectives during the remainder of 2002 and in 2003, including: establishing additional collaborations with pharmaceutical and biotechnology companies; mapping human GPCRs in normal and diseased tissues to create an expression database; pursuing other objectives as part of Project Genesis; filing an Investigational New Drug Application (an "IND"); and increasing our internally funded drug discovery and development efforts, including expansion of our capabilities.

        We incur significant research and development expenses. We track personnel expenses related to our collaborations and internal projects, and track laboratory-related expenses by type of costs incurred. We believe that continued investment in research and development is important to attaining our strategic objectives. We expect that the implementation and continuation of Project Genesis as well as the initiation of clinical trials could significantly increase our research and development expenses.

        Our ability to achieve our identified objectives depends upon many factors, some of which are out of our control, and we may not achieve our identified objectives. Our operating results will depend upon many factors, including the expiration or termination of our collaborations, 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.

11



Critical Accounting Policies and Management Estimates

        The SEC defines critical accounting policies as those that are, in management's view, most important to the portrayal of our financial condition and results of operations and most demanding of their judgment. Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We base our estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Under different assumptions, actual results may differ from these estimates.

        Our significant accounting policies include:

        Revenue Recognition.     Our revenue recognition policies are in accordance with the Securities and Exchange Commission Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," which provides guidance on revenue recognition in financial statements, and is based on the interpretations and practices developed by the SEC. Many of our agreements contain multiple elements, including technology access fees, research funding, milestones and royalty obligations.

        Revenue from milestones is recognized when earned, as evidenced by acknowledgment from our collaborator, provided that: (i) the milestone event is substantive and its achievability was not reasonably assured at the inception of the agreement, (ii) the milestone represents the culmination of an earnings process, and (iii) our performance obligations after the milestone achievement will continue to be funded by our collaborator at a comparable level to the level before the milestone achievement. If all of these criteria are not met, the milestone payment is recognized over the remaining minimum period of our performance obligations under the agreement. Upfront fees under our collaborations are 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 performed, as long as the amounts received are not refundable based on the results of the research project.

        Goodwill and Intangibles.     Purchase accounting requires estimates and judgments to allocate the purchase price to the fair market value of the assets received and liabilities assumed. In February 2001, we acquired Bunsen Rush, Inc. for $15.0 million in cash. We allocated $15.4 million to the patented Melanophore technology acquired in such transaction, and assumed $430,000 in liabilities. The Melanophore technology is being amortized over its estimated useful life of 10 years, which was determined based on an analysis, as of the acquisition date, of conditions in, and the economic outlook for, the pharmaceutical and biotechnology industries and the patent life of the technology. As with any intangible asset, we will continue to evaluate the value of the Melanophore technology, and we will have a future write-down of the carrying value of the technology if we determine that the technology has become impaired or we will accelerate the amortization if we determine that the technology life has been shortened.

        Investment Valuations.     We periodically review the valuation and recoverability of our investments. SAB No. 59, "Accounting for Noncurrent Marketable Equity Securities," sets forth examples of the factors, that, individually or in combination, indicate that a decline is other than temporary and that a write-down of the carrying value is required. These factors are as follows: (i) the length of the time and

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the extent to which the market value has been less than cost; (ii) the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer such as changes in technology that may impair the earnings potential of the investment or the discontinuance of a segment of the business that may affect the future earnings potential; or (iii) the intent and ability of the holder to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value. Any realized gains and losses and impairments in value judged to be other than temporary will be included in the statement of operations.

        Income Taxes.     We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, an adjustment to the deferred tax assets would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made.

        Stock-Based Compensation.     As permitted by the Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," we account for stock options granted to employees using the intrinsic value method in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and the Financial Accounting Standards Board ("FASB") Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation—An Interpretation of APB 25." Pursuant to these guidelines, we measure the intrinsic value of the option on its grant date as the difference between the exercise price of the option and the fair market value of our stock and expense the difference, if any, over the vesting period of the option, on an accelerated basis, in accordance with FASB Interpretation No. 28, "Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans."

        SFAS No. 123 requires stock-based compensation to be accounted for under the fair value method. If we adopted SFAS No. 123 to account for options granted to employees under our stock-based compensation plans, our earnings would have been materially impacted. The impact of this method is disclosed in the 2001 Annual Report.

        Options issued to non-employees are accounted for under the fair value based method in accordance with SFAS No. 123 and Emerging Issues Task Force ("EITF") Issue No. 96-18, "Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods or Services." Under the fair value based method, compensation cost is measured at the grant date of the option based on the value of the award using the Black-Scholes method. Compensation cost is periodically re-measured as the underlying options vest in accordance with EITF Issue No. 98-18 and is recognized over the service period, which is usually the vesting period.

        The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP. There are also areas in which management's judgment in selecting any available alternative would not produce a materially different result. See our audited consolidated financial statements and footnotes thereto included in the 2001 Annual Report which contains accounting policies and other disclosures required by GAAP.

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RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001

Revenues

        Revenues for the quarter ended September 30, 2002, decreased $500,000, or 14%, to $3.0 million from $3.5 million for the quarter ended September 30, 2001. The revenues for the quarter ended September 30, 2002, were primarily comprised of milestone achievements totaling $1.2 million in our collaborations with TaiGen (a related party) and Eli Lilly, and research funding totaling $1.6 million from Eli Lilly and Ferring. Eli Lilly and TaiGen accounted for 68% and 24%, respectively, of the revenues in the quarter ended September 30, 2002. We did not receive any cash payment for the revenues recognized from the TaiGen collaboration in the quarter ended September 30, 2002, but instead we recognized revenues based on the equity in TaiGen we received in July 2001 in exchange for TaiGen receiving the right to select a certain number of receptors. We recognize revenues from the TaiGen collaboration when we are able to develop a screening assay and transfer selected activated receptors to TaiGen. The revenues for the quarter ended September 30, 2001, were primarily comprised of milestone achievements of $1.3 million in our collaboration with Eli Lilly, research funding totaling $1.7 million from Eli Lilly, Taisho and ICI, and recognition of a license and materials transfer fee of $293,000 from Eisai. Eli Lilly accounted for 73% of the revenues in the quarter ended September 30, 2001. Research funding is recognized as revenue when the services are rendered. Revenues from technology access and development fees are recognized over the term of the collaboration. Revenue from milestones is recognized when earned, as evidenced by acknowledgment from our collaborator, provided that: (i) the milestone event is substantive and its achievability was not reasonably assured at the inception of the agreement, (ii) the milestone represents the culmination of an earnings process, and (iii) our performance obligations after the milestone achievement will continue to be funded by our collaborator at a comparable level to the level before the milestone achievement. Our collaborators often pay us before we recognize the revenue, and these payments are classified as deferred revenue until earned. As of September 30, 2002, we had current and long-term deferred revenues totaling $1.7 million.

Research and Development

        Research and development expenses increased $5.8 million, or 94%, to $12.0 million for the quarter ended September 30, 2002, from $6.2 million for the quarter ended September 30, 2001. The increase was primarily due to increases in personnel expenses of $2.5 million and lab supplies and depreciation of laboratory equipment totaling $2.1 million. Through September 30, 2002, research and development costs have been expensed as incurred. We believe that continued investment in research and development is important to attaining our strategic objectives, and expect these expenses to continue and to increase.

General and Administrative

        General and administrative expenses increased $300,000, or 20%, to $1.8 million for the quarter ended September 30, 2002, from $1.5 million for the quarter ended September 30, 2001. The increase was primarily the result of increased personnel added to support the needs of a growing public company. General and administrative expenses consist primarily of salaries and related personnel expenses for executive, finance and administrative personnel, professional fees, and other general corporate expenses. We expect that our general and administrative expenses will continue to increase to support our growth and to comply with our obligations as a public company.

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Amortization of Deferred Compensation

        Deferred compensation for options granted to employees has been determined as the difference between the exercise price and the fair value of our common stock, as estimated by us for financial reporting purposes, or quoted market value after July 28, 2000, on the date options were granted. Compensation expense for options granted to consultants was determined in accordance with SFAS No. 123 and EITF Issue No. 96-18 and is based on the fair value of the options issued using the Black-Scholes method. Compensation expense is periodically re-measured as the underlying options vest in accordance with EITF Issue No. 96-18. For the quarter ended September 30, 2002, we recorded amortization of deferred compensation of $464,000, compared to $1.1 million for the quarter ended September 30, 2001.

Amortization of Acquired Technology and Other Intangibles

        Expenses arising from the amortization of acquired technologies increased $21,000 to $405,000 for the quarter ended September 30, 2002, from $384,000 for the quarter ended September 30, 2001. Substantially all of the amortization of acquired technology is related to our acquisition of Bunsen Rush, which was completed in February 2001.

Interest Income and Other, Net

        Interest income and other (net) decreased $2.2 million, or 59%, to $1.5 million for the quarter ended September 30, 2002, from $3.7 million for the quarter ended September 30, 2001. The decrease was primarily due to $1.3 million less interest income, due to lower interest rates and cash balances, in the quarter ended September 30, 2002, as well as a decrease of $792,000 on gains on the sale of investments in the quarter ended September 30, 2002. Interest income and other (net) included expenses of $309,000 and $183,000 for the quarters ended September 30, 2002, and 2001, respectively, attributable to our share of the net loss of TaiGen, and which we have accounted for by the equity method of accounting.

Investment Write-down

        We recorded an $87,000 write-down of our investment in Axiom Biotechnologies, Inc. ("Axiom"). On September 3, 2002, our investment was converted into restricted shares of Sequenom, Inc. ("Sequenom") upon the closing of the acquisition of Axiom by Sequenom. At September 30, 2002, we valued our investment in Sequenom at its fair value as quoted on the NASDAQ national market, less a discount for restrictions on the sale of Sequenom stock.

NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001

Revenues

        Revenues for the nine months ended September 30, 2002, increased $900,000, or 7%, to $13.1 million from $12.2 million for the nine months ended September 30, 2001. The revenues for the nine months ended September 30, 2002, were primarily comprised of milestone achievements totaling $7.5 million in our collaborations with Eli Lilly, TaiGen (a related party) and Ferring, and research funding totaling $5.0 million from Eli Lilly, Ferring and Taisho. Eli Lilly, and TaiGen accounted for 77% and 11%, respectively, of the revenues in the nine months ended September 30, 2002. We did not receive any cash payment for the revenues recognized from the TaiGen collaboration in the nine months ended September 30, 2002, but instead we recognized revenues based on the equity in TaiGen we received in July 2001 in exchange for TaiGen receiving the right to select a certain number of receptors. We recognize revenues from the TaiGen collaboration when we are able to develop a screening assay and transfer selected activated receptors to TaiGen. The revenues for the nine months ended September 30, 2001, were primarily comprised of milestone achievements totaling $5.6 million in

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our collaborations with Taisho and Eli Lilly, and research funding totaling $5.8 million from Eli Lilly, Taisho and ICI. Taisho and Eli Lilly accounted for 46% and 45%, respectively, of the revenues in the nine months ended September 30, 2001. Research funding is recognized as revenue when the services are rendered. Revenues from technology access and development fees are recognized over the term of the collaboration. Revenue from milestones is recognized when earned, as evidenced by acknowledgment from our collaborator, provided that: (i) the milestone event is substantive and its achievability was not reasonably assured at the inception of the agreement, (ii) the milestone represents the culmination of an earnings process, and (iii) our performance obligations after the milestone achievement will continue to be funded by our collaborator at a comparable level to the level before the milestone achievement. Our collaborators often pay us before we recognize the revenue, and these payments are classified as deferred revenue until earned. As of September 30, 2002, we had current and long-term deferred revenues totaling $1.7 million.

Research and Development

        Research and development expenses increased $15.7 million, or 102%, to $31.1 million for the nine months ended September 30, 2002, from $15.4 million for the nine months ended September 30, 2001. The increase was primarily due to increases in (i) personnel expenses of $6.8 million, (ii) lab supplies and depreciation of laboratory equipment totaling $6.1 million, (iii) pre-clinical study fees of $801,000, and (iv) subscription fees of $299,000 for our three-year subscription to the web-based Celera Discovery System, which we started expensing in the second quarter of 2001. We believe that continued investment in research and development is important to attaining our strategic objectives, and expect these expenses to continue and to increase.

General and Administrative

        General and administrative expenses increased $1.7 million, or 45%, to $5.5 million for the nine months ended September 30, 2002, from $3.8 million for the nine months ended September 30, 2001. The increase was primarily the result of increased personnel added to support the needs of a growing public company and, to a lesser extent, increased legal patent filing fees. General and administrative expenses consist primarily of salaries and related personnel expenses for executive, finance and administrative personnel, professional fees, and other general corporate expenses. We expect that our general and administrative expenses will continue to increase to support our growth and to comply with our obligations as a public company.

Amortization of Deferred Compensation

        Deferred compensation for options granted to employees has been determined as the difference between the exercise price and the fair value of our common stock, as estimated by us for financial reporting purposes, or quoted market value after July 28, 2000, on the date options were granted. Compensation expense for options granted to consultants was determined in accordance with SFAS No. 123 and EITF Issue No. 96-18 and is based on the fair value of the options issued using the Black-Scholes method. Compensation expense is periodically re-measured as the underlying options vest in accordance with EITF Issue No. 96-18. For the nine months ended September 30, 2002, we recorded amortization of deferred compensation of $1.8 million, compared to $3.4 million for the nine months ended September 30, 2001.

Amortization of Acquired Technology and Other Intangibles

        Expenses arising from the amortization of acquired technology increased $303,000 to $1.2 million for the nine months ended September 30, 2002, from $897,000 for the nine months ended September 30, 2001. Substantially all of the amortization of acquired technology is related to our acquisition of Bunsen Rush, which was completed in February 2001.

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Interest Income and Other, Net

        Interest income and other decreased $2.9 million, or 40%, to $4.3 million for the nine months ended September 30, 2002, from $7.2 million for the nine months ended September 30, 2001. The decrease was primarily due to: (i) $1.9 million less interest income as a result of declining interest rates, (ii) $680,000 less in investment gains, and (iii) $504,000 more in expenses attributable to our share of the net loss of TaiGen, which we have accounted for by the equity method of accounting.

Investment Write-down

        We recorded a $1.8 million write-down of our investment in Axiom Biotechnologies, Inc, ("Axiom"). On September 3, 2002, our investment was converted into restricted shares of Sequenom, Inc. ("Sequenom") upon the closing of the acquisition of Axiom by Sequenom. At September 30, 2002, we valued our investment in Sequenom at its fair value as quoted on the NASDAQ national market, less a discount for restrictions on the sale of Sequenom stock.

LIQUIDITY AND CAPITAL RESOURCES

        Liquidity refers to our ability to generate adequate amounts of cash to meet our needs. We have been generating only a portion of the cash necessary to fund our operations from revenues. We have incurred a loss in each year since inception, and we expect to incur substantial losses for at least the next several years. Losses may fluctuate, and such fluctuations may be substantial. At September 30, 2002, we had an accumulated deficit of $51.6 million. Our accumulated deficit is the result of expenses incurred in connection with our research and development activities and general and administrative costs. We have funded our operations primarily through public and private equity financings, and to a lesser extent from cash we have received from our collaborators, together with interest income and gains from our investments.

        Potential immediate sources of liquidity for us include our cash balances and our short-term investments, available-for-sale. Other potential sources of liquidity are the sale of additional shares of our stock and unused borrowing capacity, if any.

        As of September 30, 2002, we had $196.1 million in cash and cash equivalents and short-term investments compared to $226.9 million in cash and cash equivalents and short-term investments as of December 31, 2001. The decrease of $30.8 million for the nine months ended September 30, 2002, was primarily attributable to cash used in operations of $17.4 million as well as the purchases of property and equipment totaling $13.8 million.

        Net cash used in operating activities was $17.4 million during the nine months ended September 30, 2002. The primary use of cash during the nine months ended September 30, 2002, was to fund our net loss in the period, adjusted for non-cash expenses, including amortization of deferred compensation, amortization of acquired technology, our minority interest in TaiGen's operations, an investment write-down and changes in operating assets and liabilities. Net cash provided by operating activities was $463,000 during the nine months ended September 30, 2001. The primary source of cash in the nine months ended September 30, 2001, was related to the net loss for the period, adjusted for non-cash expenses, including amortization of deferred compensation, amortization of acquired technology and other intangibles, and changes in operating assets and liabilities.

        Net cash used in investing activities was $83.5 million during the nine months ended September 30, 2002, and was primarily the result of purchases of short-term investments (net of sales of short-term investments), and the acquisition of laboratory and computer equipment and furniture and fixtures. Net cash used in investing activities was $28.1 million during the nine months ended September 30, 2001, and was primarily the result of the acquisition of Bunsen Rush, laboratory and computer equipment,

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and furniture and fixtures, and leasehold improvements, a facility purchase, and an investment in Axiom.

        Net cash provided by financing activities was $40,000 during the nine months ended September 30, 2002, and was attributable to the net proceeds from the issuance of common stock upon exercise of options offset by principal payments on our capital leases. Net cash provided by financing activities was $122.8 million during the nine months ended September 30, 2001, and was primarily attributable to proceeds received from the issuance of our common stock from our follow-on offering that was completed in June 2001, partially offset by principal payments on our capital leases.

        In addition to two company-owned and occupied buildings, we occupy a corporate research and development facility under a lease that expires in April 2013. The lease provides us with options to extend for two additional five-year periods. We also own two other buildings that we expect to occupy in the next 12 to 18 months. One of these buildings will be a chemical scale-up laboratory. We have paid $3.4 million for the chemical scale-up laboratory building and related improvements through September 30, 2002. Ongoing costs to improve the chemical scale-up laboratory as well as other capital expenditures are estimated to be an additional $7.2 million in the fourth quarter of 2002. Capital improvements to the other building not yet occupied are also expected to be significant.

        We have also entered into capital lease agreements for various lab and office equipment. The terms of these capital lease agreements range from 48 to 60 months. At December 31, 2001, current total minimum annual payments under these capital leases were $574,000 in 2002, $382,000 in 2003 and $44,000 in 2004.

        In March 2002, we signed a lease for an additional 31,000 square feet of laboratory and office space at 6124-6126 Nancy Ridge Drive in San Diego, California. Expiring in March 2012, the lease provides us with an option to buy the entire building comprised of approximately 58,000 square feet at the end of the lease. We started occupying this building in the third quarter of 2002. We continue to evaluate the potential to lease or acquire other facilities.

        In October 2002, we entered into a research and licensing agreement with Merck to collaborate on validating and developing therapeutics on three GPCRs of interest to Merck. Under the collaboration, we received an upfront payment of $4.0 million as well as research funding from Merck for our internal resources committed under this agreement. In addition to the upfront payment, we expect to receive over $10 million during the first year of the collaboration in research funding and milestone payments.

        Eli Lilly, a collaborator that has accounted for a significant portion of our revenues, will not continue our research collaboration after April 14, 2003. If the research collaboration continued past April 14, 2003, Eli Lilly would have been able to select additional receptors, and we estimate that we could have received up to an additional $25.0 million in research funding and preclinical milestones for activation and screen enablement of these new receptors during the two-year period from April 14, 2003 to April 14, 2005. We will continue to receive research funding for Arena personnel working on the research collaboration through April 14, 2003, and be eligible to receive preclinical milestones for applying our technologies to GPCRs added to the collaboration prior to such date. We will continue to look for opportunities to collaborate with Eli Lilly and other entities in order to reduce the significant losses we expect to incur as we continue our internal drug research and development efforts.

        We continue to evaluate potential acquisitions and in-licensing opportunities. Any such transaction may impact our liquidity and affect our revenues and expenses.

        We expect that capital expenditures for the year ended December 31, 2003, which include improvements to the chemical scale-up laboratory building, will equal or exceed capital expenditures for the year ending December 31, 2002.

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        While we believe that our current capital resources and anticipated cash flows from collaborations will be sufficient to meet our capital requirements for more than two years, we may require additional financing before such time. The estimated length of time that our current cash and cash equivalents, short-term investments and available borrowings will sustain our operations is based on estimates and assumptions we have made, regarding, among other things, the scientific progress in our research and development programs, additional personnel costs, progress in pre-clinical and clinical testing, the time and cost related to proposed clinical studies and regulatory approvals, if any, cost associated with securing in-licensing opportunities, if any, and the costs of filing and prosecution of patent applications and enforcing patent claims. These estimates and assumptions are subject to change at any time due to technological advances or competition from other companies. 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.

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RISK FACTORS

         An investment in our stock involves a high degree of risk. Investors evaluating us and our business should carefully consider the factors described below and all other information contained in this Quarterly Report and in our other public filings before purchasing our stock. Any of the following factors could materially harm our business, operating results and financial condition. Additional factors and uncertainties not currently known to us or that we currently consider immaterial could also harm our business, operating results and financial condition. Investors could lose all or part of their investment as a result of these factors.

WE HAVE A HISTORY OF LOSSES AND LIMITED REVENUES

        We were incorporated in April 1997. We had losses of $24.1 million for the nine months ended September 30, 2002. Through September 30, 2002, we had an accumulated deficit of $51.6 million. Our losses have resulted in large part from the significant research and development expenditures we have made in seeking to identify and validate new drug targets and new drug leads. We rely on our collaboration and license agreements for our revenues, and we may continue to experience operating losses even if we or our collaborators successfully identify potential drug targets and drug leads. 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, or significantly curtail, our operations.

MOST OF OUR REVENUES ARE CONTINGENT UPON THE DECISIONS OF OUR COLLABORATORS

        One of our strategies is to use our technologies to generate meaningful revenues from our collaborative and license agreements. Through September 30, 2002, substantially all of our revenues have been derived from one of our collaborators, Eli Lilly. We expect a majority of our revenues through April 14, 2003, to be derived from Eli Lilly and Merck and after April 14, 2003, from Merck. Our ability to generate revenues depends on our ability to enter into additional collaborative and license agreements with third parties and to maintain our existing agreements. We will receive little or no revenues under our agreements if our own or our collaborators' research, development or marketing efforts are unsuccessful, or if our agreements are terminated early.

        Merck can terminate the collaborative research program under the agreement: (i) without cause, at any time on or after the second anniversary of the effective date of the agreement by giving notice at least 90 days prior to such termination date, if certain milestones have been achieved and paid; (ii) without cause, at any time after the second anniversary of the effective date of the agreement by giving notice on or after the second anniversary of the effective date and at least 180 days prior to such termination date; (iii) for certain technical grounds, at any time by giving 30 days prior notice; and (iv) in the event of a change in control of Arena by giving 30 days prior notice. Merck can terminate the agreement at any time after the third anniversary of the effective date of the agreement. Either party can terminate the agreement at any time for cause if the other party breaches its material obligations under the agreement by causes and reasons within its control, has not cured such breach and there is no dispute as to whether such breach has occurred. Additionally, in lieu of terminating the agreement, Merck can terminate certain aspects of the agreement by giving 90 days prior notice if we materially breach our obligations at any time during the period from the effective date of the agreement to the third anniversary of such date (or such earlier date of termination) and fail to cure such breach, if such default can be cured but not within a certain period, or if we do not commence and diligently continue good faith efforts to cure such default during such period.

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        In November 2002, Eli Lilly notified us that it would not continue our research collaboration after April 14, 2003. We expect that our near term revenues will be significantly and adversely impacted by this event.

        Our 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, the timing of the discovery of drug leads and the 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 ever. 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 may 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 receptor targets, drug leads or 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 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 include circumstances that would 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 some circumstances, our collaborators can continue to use our technology after our agreements are terminated.

        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. Also, our existing collaborators may decide to reduce or curtail their collaborations with us because of changes in their research and development budgets.

WE MAY ENGAGE IN STRATEGIC TRANSACTIONS THAT COULD HARM OUR BUSINESS

        From time to time we consider strategic transactions, such as acquisitions of companies, asset purchases and/or out-licensing or in-licensing compounds developed by us or others. 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 transaction will be consummated on favorable terms or at all or will not harm our business. Any such transaction may require us to incur non-recurring or other charges and may pose significant integration challenges or disrupt our management or business, which could harm our business and financial results.

DRUG DISCOVERY AND DEVELOPMENT IS AN INTENSELY COMPETITIVE BUSINESS THAT COULD RENDER OUR TECHNOLOGIES OBSOLETE OR NONCOMPETITIVE

        The main focus of our efforts is 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 GPCRs. Another company, an

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organization or an individual could have, or could develop, a technology using GPCRs to discover and develop drug leads or drug candidates more effectively, more quickly or at a lower cost than our technologies. Such a technology could render our technologies, in particular CART and Melanophore technologies, obsolete or noncompetitive.

        Many of the drugs that we or our collaborators are attempting to discover and develop would compete with existing therapies. In addition, many companies are pursuing the development of drugs that target the same diseases and conditions that we are targeting such as central nervous system disorders, obesity, cardiovascular disease and diabetes. Our competitors may use discovery technologies and techniques or partner with collaborators in order to develop drug leads, drug candidates and drugs 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 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. 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, may not compete successfully with existing products or therapies.

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

        Developing drug leads, drug candidates and drugs is highly uncertain and subject to significant risks.

        In order to receive some of the milestone payments under our collaborative agreements, we or our collaborators must successfully complete pre-clinical and clinical trials of drug candidates discovered using our technologies. To date, we have identified only a few drug leads, all of which are in the very early stages of development and none of which have completed the development process.

        Our access to and use of some human or other tissue samples in our research and development efforts is subject to government regulation in the United States and abroad. United States and foreign government agencies may also impose restrictions on the use of data derived from human or other tissue samples.

        We or our collaborators will rely on third-party clinical investigators at medical institutions to conduct our clinical trials, and 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, or be required 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 our technologies. A new drug may not be sold in the United States until the FDA has approved a New Drug Application, or an NDA. When a drug receives an approved NDA, the approval is limited to the labeling approved in the NDA for those disease states and conditions for which the drug candidate has been 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

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requirements necessary to receive marketing approval. We do not expect any drugs resulting from our own or our collaborators' research to be commercially available for many years, if ever.

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 United States and foreign patent applications pending for our technologies, including patent applications on drug lead discovery techniques using CART, genetically altered GPCRs, GPCRs that we have discovered, new uses for previously discovered GPCRs, compounds discovered using CART, and Melanophore technology. 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. Consequently, 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 technologies.

        More consistent policies regarding the breadth of claims allowed in biotechnology patents have begun to emerge in the last few years. For example, on January 5, 2001, the United States Patent and Trademark 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 beginning to be implemented and 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 still do not completely know to what extent these guidelines will ultimately affect our patent applications.

        To date, we, directly or through our wholly owned subsidiary, own or have exclusively licensed the following issued patents: 10 in the U.S., 11 in European countries, and one each in Japan, Australia, New Zealand, and South Africa. These issued patents are directed to our CART technology, Melanophore technology, chemical compositions of matter, or GPCRs. There is no assurance that any issued patent will result in a drug product or other commercial opportunity.

        We also rely on trade secrets to protect our technologies. 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 we 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 technologies 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. With a few exceptions, 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 in-licensed technology as we do over our internally developed technologies. 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 technologies and other confidential information in connection with our collaborations, then our ability to receive patent protection or protect our proprietary information will be impaired.

23



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, companies and individuals 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, companies or individuals consider to be proprietary.

        There could be significant litigation in our 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 ever

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

    consume a substantial portion of our managerial, scientific and financial resources

    result in litigation or administrative proceedings that may be costly, regardless of the outcome

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

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

        Patent law outside the United States is uncertain and in many countries is currently undergoing review and revision, particularly with respect to biotechnology-related inventions. 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.

24



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 the factors described in this section, including:

    entering into new collaborations or modifying or terminating an existing collaboration

    the timing of and receipt by us of milestone and royalty payments

    the timing of discovery of drug leads and the 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 or 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 are not able to control these factors. Period-to-period comparisons of our financial results are not necessarily indicative of our future performance. If our revenues in a particular period do not meet analysts' or stockholders' expectations, our stock price may decline and such decline could be significant.

WE WILL NEED ADDITIONAL CAPITAL IN THE FUTURE TO SUFFICIENTLY FUND OUR OPERATIONS AND RESEARCH AND DEVELOPMENT AND WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL CAPITAL ON TERMS FAVORABLE TO US

        We have consumed substantial amounts of capital to date and we expect to increase our operating expenses over the next several years as we expand our facilities, infrastructure and research and development activities. We also expect that Project Genesis will consume significant amounts of our research and development funds. 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. In addition, if we are successful in developing drug leads, our capital requirements will be much greater than our current capital. Financing may not be available or may not be available on terms that are 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 leads, or grant licenses on terms that are unfavorable to us. Any further equity financing we do obtain could result in dilution to our then existing stockholders. We may also raise additional funds through the incurrence of debt, and the holders of any debt we may issue would have rights superior to your rights. If adequate funds are not available, we may be required to significantly curtail or eliminate one or more of our drug development programs, or to completely discontinue our operations.

OUR LARGEST STOCKHOLDERS MAY TAKE ACTIONS THAT ARE CONTRARY TO YOUR INTERESTS

        Relatively few of our stockholders hold a majority of the voting power of our outstanding stock, and BVF Inc. and its affiliates controls approximately 28% of our stock. These stockholders' interests could differ from the interests of other stockholders, and they could be in a position to influence us to act in a way that is detrimental to the interests of other stockholders. Their actions and votes would be

25



important, and possibly determinative, in the event we consider a transaction that requires stockholder approval or in the event a third party makes a tender offer and/or a hostile take-over offer for outstanding shares. Sales by these stockholders of a large number of shares of our common stock could adversely affect the market price of our stock.

ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND RIGHTS AGREEMENT AND UNDER DELAWARE LAW COULD DELAY OR PREVENT A CHANGE IN MANAGEMENT OR A TAKEOVER ATTEMPT THAT YOU MAY CONSIDER TO BE IN YOUR BEST INTEREST

        We have adopted certain anti-takeover provisions, including a Rights Agreement, dated as of October 30, 2002, between us and Computershare Trust Company, Inc., as Rights Agent. The Rights Agreement is not intended to prevent an acquisition of us at a full and fair price. Rather, it is intended to deter an attempt to acquire us in a manner or on terms not approved by our Board of Directors, and will cause substantial dilution to any person who attempts to acquire us in a manner or on terms not so approved. The issuance of preferred stock under the terms of the Rights Agreement may make it more difficult for a third party to acquire us. Additionally, provisions in our certificate of incorporation and by-laws, as well as some provisions of Delaware law, could delay or prevent the removal of incumbent directors and could make more difficult a merger, tender offer or proxy contest involving us.

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

WE USE BIOLOGICAL AND HAZARDOUS MATERIALS

        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.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        Our management establishes and oversees the implementation of board-approved policies covering our investments. We manage our market risk in accordance with our investment guidelines, which: (i) emphasizes preservation of principal over other portfolio considerations, (ii) requires investments to be placed with high credit quality financial institutions, (iii) establishes guidelines for the diversification of its investment portfolio, and (iv) requires investments to be placed with maturities that maintain safety

26



and liquidity. We target our portfolio to have an average duration of approximately three years with no one instrument having a duration exceeding five years. We do not invest in derivative instruments, or any financial instruments for trading purposes. Our primary market risk exposure as it affects our cash equivalents, short-term investments, and securities held for sale is interest rate risk. We monitor our interest rate risk on a periodic basis and we ensure that our cash equivalents, short-term investments, and securities held for sale are invested in accordance with our investment guidelines. Managing credit ratings and the duration of our financial investments enhances the preservation of our capital.

        We model interest rate exposure by a sensitivity analysis that assumes a hypothetical parallel shift downwards in the U.S. Treasury yield curve of 100 basis points. Under these assumptions, if the yield curve were to shift lower by 100 basis points from the level existing at September 30, 2002, we would expect future interest income from our portfolio to decline by less than $2.0 million over the next 12 months.

        As of December 31, 2001, our estimate for the effect of this same hypothetical reduction in interest rates was a decline in interest income of less than $2.3 million. The difference in these two estimates is due to the difference in the gross amount of our cash and cash equivalents, short-term investments, and securities held for sale between the two periods.

        The model we use is not intended to forecast actual losses in interest income, but is used as a risk estimation and investment management tool. The hypothetical changes and assumptions are likely to be different from what actually occurs in the future. Furthermore, the computations do not incorporate actions our management could take if the hypothetical interest rate changes actually occur. As a result, actual earnings consequences will likely differ from those quantified herein.


ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

        Within the 90 days prior to the date of this report, we carried out an evaluation (the "Evaluation"), under the supervision and with the participation of our management, including our Chief Executive Officer ("CEO"), Chief Financial Officer ("CFO") and Vice President, Finance ("VP, Finance"), of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, our CEO, CFO, and VP, Finance concluded that our disclosure controls and procedures are effective as of the date of the Evaluation in timely alerting them to material information relating to the company (including its wholly owned subsidiary) required to be included in our periodic SEC filings.

Changes in Internal Controls

        There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the Evaluation.

27




PART II. OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

        Our Registration Statement on Form S-1 (File No. 333-35944) relating to the initial public offering of our common stock was declared effective by the SEC on July 27, 2000.

        Our total net proceeds from the initial public offering were $113.9 million. We have used all of the net proceeds as follows: (i) $60.7 million to fund our operating activities (including compensation to our officers and employees); (ii) $5.4 million to acquire facilities at 6138-6150 Nancy Ridge Drive in San Diego, California; (iii) $5.3 million to acquire facilities at 6154 Nancy Ridge Drive in San Diego, California; (iv) $1.2 million to acquire facilities at 6114 Nancy Ridge Drive in San Diego, California; (v) $15.0 million to acquire all of the outstanding stock of Bunsen Rush and $2.0 million to acquire stock in Axiom; (vi) and $24.3 million for lab equipment and furniture and fixture purchases and capital and leasehold improvements. Except for compensation to our officers and employees, the payments listed in this Item 2 were not direct or indirect payments to our directors, officers or affiliates, or to persons owning 10% or more of any class of our equity securities.


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)
Exhibits

3.1

 

Fifth Amended and Restated Certificate of Incorporation of Arena Pharmaceuticals, Inc. (incorporated by reference to Exhibit 3.1 of Arena's Form 10-Q filed on August 14, 2002, Commission File No. 000-31161)

3.2

 

Amended and Restated By-Laws of Arena Pharmaceuticals, Inc.

3.3

 

Certificate of Designations of Series A Junior Participating Preferred Stock of Arena Pharmaceuticals, Inc., dated November 4, 2002.

4.1

 

Rights Agreement, dated October 30, 2002, between Arena Pharmaceuticals, Inc, and Computershare Trust Company, Inc. (incorporated by reference to Exhibit 4.1 of Arena's 8-K filed on November 1, 2002, Commission File No. 000-31161)

99.1

 

Certification of Periodic Financial Reports by Arena Pharmaceuticals, Inc.'s Chief Executive Officer and Chief Financial Officer
(b)
Reports on Form 8-K

        None

28




SIGNATURES

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

Date: November 14, 2002   ARENA PHARMACEUTICALS, INC.

 

 

By:

 

/s/  
JACK LIEF       
Jack Lief
President and Chief Executive Officer

 

 

By:

 

/s/  
ROBERT E. HOFFMAN       
Robert E. Hoffman
Vice President, Finance, Chief Accounting Officer

29


CERTIFICATION

I, Jack Lief, certify that:

1.
I have reviewed this quarterly report on Form 10-Q of Arena Pharmaceuticals, Inc.;

2.
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.
The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)
evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c)
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.
The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.
The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 14, 2002

    /s/   JACK LIEF       
Jack Lief, President and Chief Executive Officer

30


CERTIFICATION

I, Joseph F. Mooney, certify that:

1.
I have reviewed this quarterly report on Form 10-Q of Arena Pharmaceuticals, Inc.;

2.
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.
The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)
evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c)
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.
The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.
The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 14, 2002

    /s/   JOSEPH F. MOONEY       
Joseph F. Mooney, Chief Financial Officer

31


I, Robert E. Hoffman, certify that:

1.
I have reviewed this quarterly report on Form 10-Q of Arena Pharmaceuticals, Inc.;

2.
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.
The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)
evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c)
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.
The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.
The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 14, 2002

    /s/   ROBERT E. HOFFMAN       
Robert E. Hoffman, VP, Finance and Chief Accounting Officer

32



Exhibit Index

Exhibit No.

  Description

3.1

 

Fifth Amended and Restated Certificate of Incorporation of Arena Pharmaceuticals, Inc. (incorporated by reference to Exhibit 3.1 of Arena's Form 10-Q filed on August 14, 2002, Commission File No. 000-31161)

3.2

 

Amended and Restated By-Laws of Arena Pharmaceuticals, Inc.

3.3

 

Certificate of Designations of Series A Junior Participating Preferred Stock of Arena Pharmaceuticals, Inc., dated November 4, 2002.

4.1

 

Rights Agreement, dated October 30, 2002, between Arena Pharmaceuticals, Inc, and Computershare Trust Company, Inc. (incorporated by reference to Exhibit 4.1 of Arena's 8-K filed on November 1, 2002, Commission File No. 000-31161)

99.1

 

Certification of Periodic Financial Reports by Arena Pharmaceuticals, Inc.'s Chief Executive Officer and Chief Financial Officer

33




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Exhibit 3.2


AMENDED AND RESTATED BY-LAWS
OF
ARENA PHARMACEUTICALS, INC.

ARTICLE I

Stockholders

        SECTION 1.     Annual Meeting.    The annual meeting of the stockholders of the Corporation shall be held on such date, at such time and at such place within or without the State of Delaware as may be designated by the Board of Directors, for the purpose of electing Directors and for the transaction of such other business as may be properly brought before the meeting. The Board of Directors may determine that an annual meeting shall not be held at any place, but shall instead be held solely by means of remote communication.

        SECTION 2.     Special Meetings.    Except as otherwise provided in the Certificate of Incorporation, a special meeting of the stockholders of the Corporation may be called at any time by the Board of Directors or the President. Any special meeting of the stockholders shall be held on such date, at such time and at such place within or without the State of Delaware as the Board of Directors or the officer calling the meeting may designate. The Board of Directors may determine that any special meeting of stockholders shall not be held at any place, but shall instead be held solely by means of remote communication. At a special meeting of the stockholders, no business shall be transacted and no corporate action shall be taken other than that stated in the notice of the meeting unless all of the stockholders are present in person or by proxy, in which case any and all business may be transacted at the meeting even though the meeting is held without notice.

        SECTION 3.     Notice of Meetings.    Except as otherwise provided in these By-Laws or by law, a written notice of each meeting of the stockholders shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder of the Corporation entitled to vote at such meeting at his or her address as it appears on the records of the Corporation or by a form of electronic transmission to which the stockholder has consented. The notice shall state the place, date and hour of the meeting, the means of remote communication, if any, by which stockholders and proxy holders may be deemed to be present in person and may vote at such meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called.

        SECTION 4.     Quorum.    At any meeting of the stockholders, the holders of a majority in number of the total outstanding shares of stock of the Corporation entitled to vote at such meeting, present in person or represented by proxy, shall constitute a quorum of the stockholders for all purposes, unless the representation of a larger number of shares shall be required by law, by the Certificate of Incorporation or by these By-Laws, in which case the representation of the number of shares so required shall constitute a quorum; provided that at any meeting of the stockholders at which the holders of any class of stock of the Corporation shall be entitled to vote separately as a class, the holders of a majority in number of the total outstanding shares of such class, present in person or represented by proxy, shall constitute a quorum for purposes of such class vote unless the representation of a larger number of shares of such class shall be required by law, by the Certificate of Incorporation or by these By-Laws.

        SECTION 5.     Adjourned Meetings.    Whether or not a quorum shall be present in person or represented at any meeting of the stockholders, the holders of a majority in number of the shares of stock of the Corporation present in person or represented by proxy and entitled to vote at such meeting may adjourn from time to time; provided, however, that if the holders of any class of stock of the Corporation are entitled to vote separately as a class upon any matter at such meeting, any

1



adjournment of the meeting in respect of action by such class upon such matter shall be determined by the holders of a majority of the shares of such class present in person or represented by proxy and entitled to vote at such meeting. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and the place, if any, thereof, or the means of remote communication, if any, by which stockholders and proxy holders may be deemed to be present in person and may vote at such adjourned meeting, are announced at the meeting at which the adjournment is taken. At the adjourned meeting the stockholders or the holder of any class of stock entitled to vote separately as a class, as the case may be, may transact any business which might have been transacted by them at the original meeting. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the adjourned meeting.

        SECTION 6.     Organization.    The Chairman of the Board, or in the absence of the Chairman of the Board, the President, or in the absence of the Chairman of the Board and the President, a Vice President shall call all meetings of the stockholders to order, and shall act as Chairman of such meetings. In the absence of the Chairman of the Board, the President and all of the Vice Presidents, the holders of a majority in number of the shares of stock of the Corporation present in person or represented by proxy and entitled to vote at such meeting shall elect a Chairman.

        The Secretary of the Corporation shall act as Secretary of all meetings of the stockholders; but in the absence of the Secretary, the Chairman may appoint any person to act as Secretary of the meeting. It shall be the duty of the Secretary to prepare and make, at least ten days before every meeting of stockholders, a complete list of stockholders entitled to vote at such meeting, arranged in alphabetical order and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting or, if not so specified, at the place where the meeting is to be held, for the ten days next preceding the meeting, to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, and shall be produced and kept at the time and place of the meeting during the whole time thereof and subject to the inspection of any stockholder who may be present.

        SECTION 7.     Voting.    Except as otherwise provided in the Certificate of Incorporation or by law, each stockholder shall be entitled to one vote for each share of the capital stock of the Corporation registered in the name of such stockholder upon the books of the Corporation. Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him or her by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. When directed by the presiding officer or upon the demand of any stockholder, the vote upon any matter before a meeting of stockholders shall be by ballot. Except as otherwise provided by law or by the Certificate of Incorporation, Directors shall be elected by a plurality of the votes cast at a meeting of stockholders by the stockholders entitled to vote in the election and, whenever any corporate action, other than the election of Directors is to be taken, it shall be authorized by a majority of the votes cast at a meeting of stockholders by the stockholders entitled to vote thereon.

        Shares of the capital stock of the Corporation belonging to the Corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held, directly or indirectly, by the Corporation, shall neither be entitled to vote nor be counted for quorum purposes.

        SECTION 8.     Inspectors.    When required by law or directed by the presiding officer or upon the demand of any stockholder entitled to vote, but not otherwise, the polls shall be opened and closed, the proxies and ballots shall be received and taken in charge, and all questions touching the qualification of voters, the validity of proxies and the acceptance or rejection of votes shall be decided

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at any meeting of the stockholders by two or more Inspectors who may be appointed by the Board of Directors before the meeting, or if not so appointed, shall be appointed by the presiding officer at the meeting. If any person so appointed fails to appear or act, the vacancy may be filled by appointment in like manner.

        SECTION 9.     Consent of Stockholders in Lieu of Meeting Not Permitted.    The stockholders of the Corporation may not take action by written consent without a meeting. Any such actions must be taken at a duly called annual or special meeting.

        SECTION 10.     Notice of Stockholder Business and Nominations.    

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ARTICLE II

Board of Directors

        SECTION 1.     Number and Term of Office.    The business and affairs of the Corporation shall be managed by or under the direction of a Board of Directors, none of whom need be stockholders of the Corporation. The number of Directors constituting the Board of Directors shall be fixed from time to time by resolution passed by a majority of the Board of Directors. The Directors shall, except as hereinafter otherwise provided for filling vacancies, be elected at the annual meeting of stockholders,

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and shall hold office until their respective successors are elected and qualified or until their earlier resignation or removal.

        SECTION 2.     Removal, Vacancies and Additional Directors.    The stockholders may, at any special meeting the notice of which shall state that it is called for that purpose, remove, with or without cause, any Director and fill the vacancy; provided that whenever any Director shall have been elected by the holders of any class of stock of the Corporation voting separately as a class under the provisions of the Certificate of Incorporation, such Director may be removed and the vacancy filled only by the holders of that class of stock voting separately as a class. Vacancies caused by any such removal and not filled by the stockholders at the meeting at which such removal shall have been made, or any vacancy caused by the death or resignation of any Director or for any other reason, and any newly created directorship resulting from any increase in the authorized number of Directors, may be filled by the affirmative vote of a majority of the Directors then in office, although less than a quorum, and any Director so elected to fill any such vacancy or newly created directorship shall hold office until his or her successor is elected and qualified or until his or her earlier resignation or removal.

        When one or more Directors shall resign effective at a future date, a majority of the Directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each Director so chosen shall hold office as herein provided in connection with the filling of other vacancies.

        SECTION 3.     Place of Meeting.    The Board of Directors may hold its meetings in such place or places in the State of Delaware or outside the State of Delaware as the Board from time to time shall determine.

        SECTION 4.     Regular Meetings.    Regular meetings of the Board of Directors shall be held at such times and places as the Board from time to time by resolution shall determine. No notice shall be required for any regular meeting of the Board of Directors; but a copy of every resolution fixing or changing the time or place of regular meetings shall be sent by mail or by telecopy, telegram, cablegram or other electronic transmission to every Director at least five days before the first meeting held in pursuance thereof.

        SECTION 5.     Special Meetings.    Special meetings of the Board of Directors shall be held whenever called by direction of the President or by any two of the Directors then in office. Notice of the day, hour and place of holding of each special meeting shall be given by mailing the same at least two days before the meeting or by causing the same to be transmitted by telephone, telecopy, telegram, cablegram or other electronic transmission at least one day before the meeting to each Director. Unless otherwise indicated in the notice thereof, any and all business other than an amendment of these By-Laws may be transacted at any special meeting, and an amendment of these By-Laws may be acted upon if the notice of the meeting shall have stated that the amendment of these By-Laws is one of the purposes of the meeting. At any meeting at which every Director shall be present, even though without any notice, any business may be transacted, including the amendment of these By-Laws.

        SECTION 6.     Quorum.    Subject to the provisions of Section 2 of this Article II, a majority of the members of the Board of Directors in office (but in no case less than one-third of the total number of Directors nor less than two Directors) shall constitute a quorum for the transaction of business and the vote of the majority of the Directors present at any meeting of the Board of Directors at which a quorum is present shall be the act of the Board of Directors. If at any meeting of the Board there is less than a quorum present, a majority of those present may adjourn the meeting from time to time.

        SECTION 7.     Organization.    The President shall preside at all meetings of the Board of Directors. In the absence of the President, a Chairman shall be elected from the Directors present. The Secretary of the Corporation shall act as Secretary of all meetings of the Directors; but in the absence of the Secretary, the Chairman may appoint any person to act as Secretary of the meeting.

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        SECTION 8.     Committees.    The Board of Directors may designate one or more committees, each committee to consist of one or more of the Directors of the Corporation. The Board may designate one or more Directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and the affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to approving or adopting, or recommending to the stockholders, any action or matter expressly required by law to be submitted to stockholders for approval, or adopting, amending or repealing these By-laws.

        SECTION 9.     Conference Telephone Meetings.    Unless otherwise restricted by the Certificate of Incorporation or by these By-Laws, the members of the Board of Directors or any committee designated by the Board, may participate in a meeting of the Board or such committee, as the case may be, by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and such participation shall constitute presence in person at such meeting.

        SECTION 10.     Consent of Directors or Committee in Lieu of Meeting.    Unless otherwise restricted by the Certificate of Incorporation or by these By-Laws, any action required or permitted to be taken at any meeting of the Board Directors, or of any committee thereof, may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing or by electronic transmission and the writing or writings or electronic transmission or transmissions are filed with the minutes of proceedings of the Board or committee, as the case may be.


ARTICLE III

Officers

        SECTION 1.     Officers.    The officers of the Corporation shall be a President, one or more Vice Presidents, a Secretary and Chief Financial Officer or Treasurer, and such additional officers, if any, as shall be elected by the Board of Directors pursuant to the provisions of Section 6 of this Article III. The President, one or more Vice Presidents, the Secretary and the Chief Financial Officer or Treasurer shall be elected by the Board of Directors at its first meeting after each annual meeting of the stockholders. The failure to hold such election shall not of itself terminate the term of office of any officer. All officers shall hold office at the pleasure of the Board of Directors. Any officer may resign at any time upon written notice to the Corporation. Officers may, but need not, be Directors. Any number of offices may be held by the same person.

        All officers, agents and employees shall be subject to removal, with or without cause, at any time by the Board of Directors. The removal of an officer without cause shall be without prejudice to his or her contract rights, if any.

        The election or appointment of an officer shall not of itself create contract rights. All agents and employees other than officers elected by the Board of Directors shall also be subject to removal, with or without cause, at any time by the officers appointing them.

        Any vacancy caused by the death, resignation or removal of any officer, or otherwise, may be filled by the Board of Directors, and any officer so elected shall hold office at the pleasure of the Board of Directors.

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        In addition to the powers and duties of the officers of the Corporation as set forth in these By-Laws, the officers shall have such authority and shall perform such duties as from time to time may be determined by the Board of Directors.

        SECTION 2.     Powers and Duties of the President.    The President shall be the chief executive officer of the Corporation and, subject to the control of the Board of Directors, shall have general charge and control of all its business and affairs and shall have all powers and shall perform all duties incident to the office of President. The President shall preside at all meetings of the stockholders and at all meetings of the Board of Directors and shall have such other powers and perform such other duties as may from time to time be assigned by these By-Laws or by the Board of Directors.

        SECTION 3.     Powers and Duties of the Vice Presidents.    Each Vice President shall have all powers and shall perform all duties incident to the office of Vice President and shall have such other powers and perform such other duties as may from time to time be assigned by these By-Laws or by the Board of Directors or the President.

        SECTION 4.     Powers and Duties of the Secretary.    The Secretary shall keep the minutes of all meetings of the Board of Directors and the minutes of all meetings of the stockholders in books provided for that purpose. The Secretary shall attend to the giving or serving of all notices of the Corporation; shall have custody of the corporate seal of the Corporation and shall affix the same to such documents and other papers as the Board of Directors or the President shall authorize and direct; shall have charge of the stock certificate books, transfer books and stock ledgers and such other books and papers as the Board of Directors or the President shall direct, all of which shall at all reasonable times be open to the examination of any Director, upon application, at the office of the Corporation during business hours. The Secretary shall have all powers and shall perform all duties incident to the office of Secretary and shall also have such other powers and shall perform such other duties as may from time to time be assigned by these By-Laws or by the Board of Directors or the President.

        SECTION 5.     Powers and Duties of the Chief Financial Officer or Treasurer.    The Chief Financial Officer or Treasurer shall have custody of, and when proper shall pay out, disburse or otherwise dispose of, all funds and securities of the Corporation. The Chief Financial Officer or Treasurer may endorse on behalf of the Corporation for collection checks, notes and other obligations and shall deposit the same to the credit of the Corporation in such bank or banks or depositary or depositaries as the Board of Directors may designate; shall sign all receipts and vouchers for payments made to the Corporation; shall enter or cause to be entered regularly in the books of the Corporation kept for the purpose full and accurate accounts of all moneys received or paid or otherwise disposed of and whenever required by the Board of Directors or the President shall render statements of such accounts; the Chief Financial Officer or Treasurer shall, at all reasonable times, exhibit the books and accounts to any Director of the Corporation upon application at the office of the Corporation during business hours; and shall have all powers and shall perform all duties incident of the office of Treasurer and shall also have such other powers and shall perform such other duties as may from time to time be assigned by these By-Laws or by the Board of Directors or the President.

        SECTION 6.     Additional Officers.    The Board of Directors may from time to time elect such other officers (who may but need not be Directors), including a Controller, Assistant Treasurers, Assistant Secretaries and Assistant Controllers, as the Board may deem advisable and such officers shall have such authority and shall perform such duties as may from time to time be assigned by the Board of Directors or the President.

        The Board of Directors may from time to time by resolution delegate to any Assistant Treasurer or Assistant Treasurers any of the powers or duties herein assigned to the Chief Financial Officer or Treasurer; and may similarly delegate to any Assistant Secretary or Assistant Secretaries any of the powers or duties herein assigned to the Secretary.

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        SECTION 7.     Giving of Bond by Officers.    All officers of the Corporation, if required to do so by the Board of Directors, shall furnish bonds to the Corporation for the faithful performance of their duties, in such penalties and with such conditions and security as the Board shall require.

        SECTION 8.     Voting Upon Stocks.    Unless otherwise ordered by the Board of Directors, the President or any Vice President shall have full power and authority on behalf of the Corporation to attend and to act and to vote, or in the name of the Corporation to execute proxies to vote, at any meeting of stockholders of any corporation in which the Corporation may hold stock, and at any such meeting shall possess and may exercise, in person or by proxy, any and all rights, powers and privileges incident to the ownership of such stock. The Board of Directors may from time to time, by resolution, confer like powers upon any other person or persons.

        SECTION 9.     Compensation of Officers.    The officers of the Corporation shall be entitled to receive such compensation for their services as shall from time to time be determined by the Board of Directors.


ARTICLE IV

Indemnification of Directors and Officers

        SECTION 1.     Nature of Indemnity.    The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or she is or was or has agreed to become a Director or officer of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as a Director or officer of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action alleged to have been taken or omitted in such capacity, and may indemnify any person who was or is a party or is threatened to be made a party to such an action, suit or proceeding by reason of the fact that he or she is or was or has agreed to become an employee or agent of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person or on his or her behalf in connection with such action, suit or proceeding and any appeal therefrom, if the person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful; except that in the case of an action or suit by or in the right of the Corporation to procure a judgment in its favor (1) such indemnification shall be limited to expenses (including attorneys' fees) actually and reasonably incurred by such person in the defense or settlement of such action or suit, and (2) no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Delaware Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Delaware Court of Chancery or such other court shall deem proper. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful.

        SECTION 2.     Successful Defense.    To the extent that a Director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 1 of this Article IV or in defense of any claim, issue or matter

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therein, he or she shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him or her in connection therewith.

        SECTION 3.     Determination that Indemnification is Proper.    Any indemnification of a Director or officer of the Corporation under Section 1 of this Article IV (unless ordered by a court) shall be made by the Corporation unless a determination is made that indemnification of the Director or officer is not proper in the circumstances because he or she has not met the applicable standard of conduct set forth in Section 1. Any indemnification of an employee or agent of the Corporation under Section 1 (unless ordered by a court) may be made by the Corporation upon a determination that indemnification of the employee or agent is proper in the circumstances because he or she has met the applicable standard of conduct set forth in Section 1. Any such determination shall be made (1) by a majority vote of the Directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (2) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (3) by the stockholders.

        SECTION 4.     Advance Payment of Expenses.    Unless the Board of Directors otherwise determines in a specific case, expenses incurred by a Director or officer in defending a civil or criminal action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the Director or officer to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the Corporation as authorized in this Article IV. Such expenses incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the Board of Directors deems appropriate. The Board of Directors may authorize the Corporation's legal counsel to represent such Director, officer, employee or agent in any action, suit or proceeding, whether or not the Corporation is a party to such action, suit or proceeding.

        SECTION 5.     Survival; Preservation of Other Rights.    The foregoing indemnification provisions shall be deemed to be a contract between the Corporation and each Director, officer, employee and agent who serves in any such capacity at any time while these provisions as well as the relevant provisions of the Delaware General Corporation Law are in effect and any repeal or modification thereof shall not affect any right or obligation then existing with respect to any state of facts then or previously existing or any action, suit, or proceeding previously or thereafter brought or threatened based in whole or in part upon any such state of facts. Such a contract right may not be modified retroactively without the consent of such Director, officer, employee or agent. The indemnification provided by this Article IV shall not be deemed exclusive of any other rights to which a person indemnified may be entitled under any by-law, agreement, vote of stockholders or disinterested Directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a Director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. The Corporation may enter into an agreement with any of its Directors, officers, employees or agents providing for indemnification and advancement of expenses, including attorneys fees, that may change, enhance, qualify or limit any right to indemnification or advancement of expenses created by this Article IV.

        SECTION 6.     Severability.    If this Article IV or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each Director or officer and may indemnify each employee or agent of the Corporation as to costs, charges and expenses (including attorneys' fees), judgment, fines and amounts paid in settlement with respect to any action, suit or proceeding, whether civil, criminal, administrative or investigative, including an action by or in the right of the Corporation, to the fullest extent permitted by any applicable portion of this Article IV that shall not have been invalidated and to the fullest extent permitted by applicable law.

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        SECTION 7.     Subrogation.    In the event of payment of indemnification to a person described in Section 1 of this Article IV, the Corporation shall be subrogated to the extent of such payment to any right of recovery such person may have and such person, as a condition of receiving indemnification from the Corporation, shall execute all documents and do all things that the Corporation may deem necessary or desirable to perfect such right of recovery, including the execution of such documents necessary to enable the Corporation effectively to enforce any such recovery.

        SECTION 8.     No Duplication of Payments.    The Corporation shall not be liable under this Article IV to make any payment in connection with any claim made against a person described in Section 1 of this Article IV to the extent such person has otherwise received payment (under any insurance policy, by-law or otherwise) of the amounts otherwise payable as indemnity hereunder.


ARTICLE V

Stock-Seal-Fiscal Year

        SECTION 1.     Certificates For Shares of Stock.    The certificates for shares of stock of the Corporation shall be in such form, not inconsistent with the Certificate of Incorporation, as shall be approved by the Board of Directors. All certificates shall be signed by the President or a Vice President and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer, and shall not be valid unless so signed. In case any officer or officers who shall have signed any such certificate or certificates shall cease to be such officer or officers of the Corporation, whether because of death, resignation or otherwise, before such certificate or certificates shall have been delivered by the Corporation, such certificate or certificates may nevertheless be issued and delivered as though the person or persons who signed such certificate or certificates had not ceased to be such officer or officers of the Corporation.

        All certificates for shares of stock shall be consecutively numbered as the same are issued. The name of the person owning the shares represented thereby with the number of such shares and the date of issue thereof shall be entered on the books of the Corporation.

        Except as hereinafter provided, all certificates surrendered to the Corporation for transfer shall be cancelled, and no new certificates shall be issued until former certificates for the same number of shares have been surrendered and cancelled.

        SECTION 2.     Lost, Stolen or Destroyed Certificates.    Whenever a person owning a certificate for shares of stock of the Corporation alleges that it has been lost, stolen or destroyed, he or she shall file in the office of the Corporation an affidavit setting forth, to the best of his or her knowledge and belief, the time, place and circumstances of the loss, theft or destruction, and, if required by the Board of Directors, a bond of indemnity or other indemnification sufficient in the opinion of the Board of Directors to indemnify the Corporation and its agents against any claim that may be made against it or them on account of the alleged loss, theft or destruction of any such certificate or the issuance of a new certificate in replacement therefor. Thereupon the Corporation may cause to be issued to such person a new certificate in replacement for the certificate alleged to have been lost, stolen or destroyed. Upon the stub of every new certificate so issued shall be noted the fact of such issue and the number, date and the name of the registered owner of the lost, stolen or destroyed certificate in lieu of which the new certificate is issued.

        SECTION 3.     Transfer of Shares.    Shares of stock of the Corporation shall be transferred on the books of the Corporation by the holder thereof, in person or by his or her attorney duly authorized in writing, upon surrender and cancellation of certificates for the number of shares of stock to be transferred, except as provided in Section 2 of this Article IV.

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        SECTION 4.     Regulations.    The Board of Directors shall have power and authority to make such rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificates for shares of stock of the Corporation.

        SECTION 5.     Record Date.    In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting or to receive payment of any dividend or other distribution or allotment of any rights, or to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, as the case may be, the Board of Directors may fix, in advance, a record date, which shall not be (i) more than sixty (60) nor less than ten (10) days before the date of such meeting, or (ii) in the case of corporate action to be taken by consent in writing without a meeting, prior to, or more than ten (10) days after, the date upon which the resolution fixing the record date is adopted by the Board of Directors, or (iii) more than sixty (60) days prior to any other action.

        If no record date is fixed, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; the record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is necessary, shall be the day on which the first written consent is delivered to the Corporation; and the record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.

        SECTION 6.     Dividends.    Subject to the provisions of the Certificate of Incorporation, the Board of Directors shall have power to declare and pay dividends upon shares of stock of the Corporation, but only out of funds available for the payment of dividends as provided by law.

        Subject to the provisions of the Certificate of Incorporation, any dividends declared upon the stock of the Corporation shall be payable on such date or dates as the Board of Directors shall determine. If the date fixed for the payment of any dividend shall in any year fall upon a legal holiday, then the dividend payable on such date shall be paid on the next day not a legal holiday.

        SECTION 7.     Corporate Seal.    The Board of Directors shall provide a suitable seal, containing the name of the Corporation, which seal shall be kept in the custody of the Secretary. A duplicate of the seal may be kept and be used by any officer of the Corporation designated by the Board of Directors or the President.

        SECTION 8.     Fiscal Year.    The fiscal year of the Corporation shall be such fiscal year as the Board of Directors from time to time by resolution shall determine.


ARTICLE VI

Miscellaneous Provisions.

        SECTION 1.     Checks, Notes, Etc.    All checks, drafts, bills of exchange, acceptances, notes or other obligations or orders for the payment of money shall be signed and, if so required by the Board of Directors, countersigned by such officers of the Corporation and/or other persons as the Board of Directors from time to time shall designate.

        Checks, drafts, bills of exchange, acceptances, notes, obligations and orders for the payment of money made payable to the Corporation may be endorsed for deposit to the credit of the Corporation

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with a duly authorized depository by the Chief Financial Officer or Treasurer and/or such other officers or persons as the Board of Directors from time to time may designate.

        SECTION 2.     Loans.    No loans and no renewals of any loans shall be contracted on behalf of the Corporation except as authorized by the Board of Directors. When authorized to do so, any officer or agent of the Corporation may effect loans and advances for the Corporation from any bank, trust company or other institution or from any firm, corporation or individual, and for such loans and advances may make, execute and deliver promissory notes, bonds or other evidences of indebtedness of the Corporation. When authorized so to do, any officer or agent of the Corporation may pledge, hypothecate or transfer, as security for the payment of any and all loans, advances, indebtedness and liabilities of the Corporation, any and all stocks, securities and other personal property at any time held by the Corporation, and to that end may endorse, assign and deliver the same. Such authority may be general or confined to specific instances.

        SECTION 3.     Contracts.    Except as otherwise provided in these By-Laws or by law or as otherwise directed by the Board of Directors, the President or any Vice President shall be authorized to execute and deliver, in the name and on behalf of the Corporation, all agreements, bonds, contracts, deeds, mortgages, and other instruments, either for the Corporation's own account or in a fiduciary or other capacity, and the seal of the Corporation, if appropriate, shall be affixed thereto by any of such officers or the Secretary or an Assistant Secretary. The Board of Directors, the President or any Vice President designated by the Board of Directors may authorize any other officer, employee or agent to execute and deliver, in the name and on behalf of the Corporation, agreements, bonds, contracts, deeds, mortgages, and other instruments, either for the Corporation's own account or in a fiduciary or other capacity, and, if appropriate, to affix the seal of the Corporation thereto. The grant of such authority by the Board or any such officer may be general or confined to specific instances.

        SECTION 4.     Waivers of Notice.    Whenever any notice whatever is required to be given by law, by the Certificate of Incorporation or by these By-Laws to any person or persons, a waiver thereof in writing, signed by the person or persons entitled to the notice, whether before or after the time stated therein, shall be deemed equivalent thereto.

        SECTION 5.     Offices Outside of Delaware.    Except as otherwise required by the laws of the State of Delaware, the Corporation may have an office or offices and keep its books, documents and papers outside of the State of Delaware at such place or places as from time to time may be determined by the Board of Directors or the President.


ARTICLE VII

Amendments

        These By-Laws and any amendment thereof may be altered, amended or repealed, or new By-Laws may be adopted, by the Board of Directors at any regular or special meeting by the affirmative vote of a majority of all of the members of the Board, provided in the case of any special meeting at which all of the members of the Board are not present, that the notice of such meeting shall have stated that the amendment of these By-Laws was one of the purposes of the meeting; but these By-Laws and any amendment thereof may be altered, amended or repealed or new By-Laws may be adopted by the holders of a majority of the total outstanding stock of the Corporation entitled to vote at any annual meeting or at any special meeting, provided, in the case of any special meeting, that notice of such proposed alteration, amendment, repeal or adoption is included in the notice of the meeting.

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AMENDED AND RESTATED BY-LAWS OF ARENA PHARMACEUTICALS, INC.
ARTICLE I Stockholders
ARTICLE II Board of Directors
ARTICLE III Officers
ARTICLE IV Indemnification of Directors and Officers
ARTICLE V Stock-Seal-Fiscal Year
ARTICLE VI Miscellaneous Provisions.
ARTICLE VII Amendments

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Exhibit 3.3


CERTIFICATE OF DESIGNATIONS

of

SERIES A JUNIOR PARTICIPATING
PREFERRED STOCK

of

ARENA PHARMACEUTICALS, INC.

(Pursuant to Section 151 of the
General Corporation Law of the State of Delaware)

        Arena Pharmaceuticals, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (hereinafter called the " Corporation "), hereby certifies that the following resolution was adopted by consent of the Board of Directors of the Corporation on October 30, 2002, in accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware:

        RESOLVED, that pursuant to the authority granted to and vested in the Board of Directors of this Corporation (hereinafter called the " Board of Directors " or the " Board ") in accordance with the provisions of the Fifth Amended and Restated Certificate of Incorporation of the Corporation, the Board of Directors hereby creates a series of Preferred Stock, par value $.0001 per share (the " Preferred Stock "), of the Corporation and hereby states the designation and number of shares, and fixes the relative rights, preferences, and limitations thereof as follows:

        "Series A Junior Participating Preferred Stock:

        Section 1.     Designation and Amount.     The shares of this series shall be designated as "Series A Junior Participating Preferred Stock" (the " Series A Junior Preferred Stock ") and the number of shares constituting the Series A Junior Preferred Stock shall be three hundred fifty thousand (350,000) shares. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided that no decrease shall reduce the number of shares of Series A Junior Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Series A Junior Preferred Stock.

        Section 2.     Dividends and Distributions.     


        Section 3.     Voting Rights.     The holders of shares of Series A Junior Preferred Stock shall have the following voting rights:


        Section 4.     Certain Restrictions.     

        Section 5.     Reacquired Shares.     Any shares of Series A Junior Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock subject to the conditions and restrictions on issuance set forth herein, in the Certificate of Incorporation, or in any other Certificate of Designations creating a series of Preferred Stock or any similar stock or as otherwise required by law.

        Section 6.     Liquidation, Dissolution or Winding Up.     Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (1) to the holders of shares of stock ranking junior (upon liquidation, dissolution or winding up) to the Series A Junior Preferred Stock unless, prior thereto, the holders of shares of Series A Junior Preferred Stock shall have received $100 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, provided that the holders of shares of Series A Junior Preferred



Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of shares of Common Stock, or (2) to the holders of shares of stock ranking on a parity (upon liquidation, dissolution or winding up) with the Series A Junior Preferred Stock, except distributions made ratably on the Series A Junior Preferred Stock and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Series A Junior Preferred Stock were entitled immediately prior to such event under the proviso in clause (1) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

        Section 7.     Consolidation, Merger, etc.     In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series A Junior Preferred Stock shall at the same time be similarly exchanged or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Junior Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

        Section 8.     No Redemption.     The shares of Series A Junior Preferred Stock shall not be redeemable.

        Section 9.     Rank.     The Series A Junior Preferred Stock shall rank, with respect to the payment of dividends and the distribution of assets, junior to all series of any other class of Preferred Stock.

        Section 10.     Amendment.     The Fifth Amended and Restated Certificate of Incorporation of the Corporation, as amended, shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Junior Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least two-thirds of the outstanding shares of Series A Junior Preferred Stock, voting together as a single class."



        IN WITNESS WHEREOF, Arena Pharmaceuticals, Inc. has caused this Certificate of Designations of Series A Junior Participating Preferred Stock to be duly executed by its Vice President, General Counsel and Secretary this 4th day of November, 2002.

    ARENA PHARMACEUTICALS, INC.
       

 

 

By:

/s/  
STEVEN W. SPECTOR       
Name:  Steven W. Spector
Title:    
Vice President, Secretary and General Counsel



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CERTIFICATE OF DESIGNATIONS of SERIES A JUNIOR PARTICIPATING PREFERRED STOCK of ARENA PHARMACEUTICALS, INC.

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Exhibit 99.1

CERTIFICATION OF CEO AND CFO PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

        In connection with the Quarterly Report on Form 10-Q of Arena Pharmaceuticals, Inc. (the "Company") for the quarterly period ended September 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Jack Lief, as President and Chief Executive Officer of the Company, and Joseph F. Mooney, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:


     
/s/ JACK LIEF
Jack Lief
President and Chief Executive Officer
Date: November 14, 2002
  /s/ JOSEPH F. MOONEY
Joseph F. Mooney
Chief Financial Officer
Date: November 14, 2002



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CERTIFICATION OF CEO AND CFO PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002