**UNITED STATES**

**SECURITIESAND 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 March 31, 2003**

 

**or**

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

 

**Commission File Number: 0-27118**

 

**PHARMACOPEIA, INC.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                                        |   | **33-0557266**                       |
|-------------------------------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization)                     |   | (I.R.S. Employer Identification No.) |
|                                                                                |   |                                 |
| **PO Box 5350, Princeton, New Jersey**                                              |   | **08543-5350**                       |
| (Address of principal executive offices)                                            |   | (Zip code)                           |
|                                                                                |   |                                 |
| **(609) 452-3600**                                                                  |
| (Registrant’s telephone number, including area code)                           |
|                                                                                |   |                                 |
| **Not Applicable**                                                                  |
| (Former name, former address and former fiscal year, if changed since  last report) |

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orsuch 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  Noo

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act). Yes ý     Noo

 

Indicate the number of sharesoutstanding of each of the issuer’s classes of common stock, as of the latestpracticable date:

 
| **Class**                      |   | **Outstanding at April 30, 2003** |
|--------------------------------|--------|-----------------------------------|
| Common Stock, $.0001 par value |   | 23,674,401 shares                 |

 

 

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**PHARMACOPEIA, INC.**

 

**Form 10-Q**

 

#### **Table of Contents**

 
| **Item**                            |                                                                                        |   |
|-------------------------------------|---------------------------------------------------------------------------------------------|--------|
|                                |                                                                                        |
| PART I.  FINANCIAL INFORMATION |
|                                |                                                                                        |
| Item 1.                             | Unaudited Consolidated Financial  Statements:                                               |
|                                |                                                                                        |
|                                | Balance Sheets – March 31, 2003 and December 31, 2002                             |
|                                |                                                                                        |
|                                | Statements of Operations – Three Months  Ended March 31, 2003 and 2002                 |
|                                |                                                                                        |
|                                | Statements of Cash Flows – Three Months  Ended March 31, 2003 and 2002                 |
|                                |                                                                                        |
|                                | Notes to Unaudited Consolidated Financial  Statements                                       |
|                                |                                                                                        |
| Item 2.                             | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |
|                                |                                                                                        |
| Item 3.                             | Quantitative and Qualitative Disclosures  about Market Risk                                 |
|                                |                                                                                        |
| Item 4.                             | Controls and Procedures                                                                     |
|                                |
| PART II.  OTHER INFORMATION    |
|                                |
| Item 1.                             | Legal Proceedings                                                                           |
|                                |                                                                                        |
| Item 2.                             | Changes in Securities and Use of Proceeds                                                   |
|                                |                                                                                        |
| Item 3.                             | Defaults upon Senior Securities                                                             |
|                                |                                                                                        |
| Item 4.                             | Submission of Matters to a Vote of Security  Holders                                        |
|                                |                                                                                        |
| Item 5.                             | Other Information                                                                           |
|                                |                                                                                        |
| Item 6.                             | Exhibits and Reports on Form 8-K                                                            |
|                                |
| Signature                           |
|                                |
| Index  to Exhibits                  |

 

2

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#### **PART I - FINANCIALINFORMATION**

 

**Item 1. Unaudited Consolidated Financial Statements**

 

**Pharmacopeia,Inc.**

**ConsolidatedBalance Sheets**

**(Dollars inthousands)**

 
|                                                                                         |   | **March 31,  2003** |    | **December  31,  2002** |   |
|----------------------------------------------------------------------------------------------|--------|---------------------|---------|-------------------------|--------|
|                                                                                         |   | **(Unaudited)**     |    |                    |   |
| **ASSETS**                                                                                   |   |                |    |                    |   |
| Current assets:                                                                              |   |                |    |                    |   |
| Cash and cash equivalents                                                                    |   | $                   | 31,579  |                    | $      | 28,236 |   |
| Marketable securities                                                                        |   | 114,864             |    | 112,835                 |   |
| Trade receivables, net of  allowance for doubtful accounts of $1,045 and $1,634 respectively |   | 14,839              |    | 35,571                  |   |
| Prepaid expenses and other  current assets                                                   |   | 6,209               |    | 5,505                   |   |
| Total current assets                                                                         |   | 167,491             |    | 182,147                 |   |
|                                                                                         |   |                |    |                    |   |
| Property and equipment -  net                                                                |   | 13,396              |    | 14,157                  |   |
| Goodwill - net                                                                               |   | 34,404              |    | 34,404                  |   |
| Capitalized software - net                                                                   |   | 8,048               |    | 8,656                   |   |
| Other intangibles - net                                                                      |   | —              |    | 116                     |   |
| Other assets                                                                                 |   | 567                 |    | 625                     |   |
| Total assets                                                                                 |   | $                   | 223,906 |                    | $      | 240,105 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                               |   |                |    |                    |   |
| Current liabilities:                                                                         |   |                |    |                    |   |
| Accounts payable                                                                             |   | $                   | 2,389   |                    | $      | 2,497 |   |
| Accrued liabilities                                                                          |   | 15,969              |    | 20,429                  |   |
| Deferred revenue, current  portion                                                           |   | 24,079              |    | 29,076                  |   |
| Total current liabilities                                                                    |   | 42,437              |    | 52,002                  |   |
|                                                                                         |   |                |    |                    |   |
| Deferred revenue,  long-term                                                                 |   | 3,206               |    | 4,766                   |   |
|                                                                                         |   |                |    |                    |   |
| Stockholders’ equity:                                                                   |   |                |    |                    |   |
| Capital stock                                                                                |   | 2                   |    | 2                       |   |
| Additional paid-in capital                                                                   |   | 285,079             |    | 284,733                 |   |
| Treasury stock                                                                               |   | (8,340              | )       | (8,340                  | )      |
| Accumulated deficit                                                                          |   | (99,274             | )       | (93,821                 | )      |
| Accumulated comprehensive  income                                                            |   | 796                 |    | 763                     |   |
| Total stockholders’ equity                                                              |   | 178,263             |    | 183,337                 |   |
| Total liabilities and  stockholders’ equity                                             |   | $                   | 223,906 |                    | $      | 240,105 |   |

 

Seeaccompanying notes to these unaudited financial statements.

 

3

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**Pharmacopeia, Inc.**

#### **Consolidated Statements of Operations**

**(Dollars inthousands, except per share data)**

** **
|                                                 |   | **For the  Three Months  Ended March 31,** |   |
|------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                 |   | **2003**                                   |   | **2002** |   |
| Revenue:                                             |   |                                       |   |   |   |
| Software license, service  and other                 |   | $                                          | 17,219 |   | $ | 19,621 |   |
| Drug discovery                                       |   | 7,521                                      |   | 7,219 |   |
| Total revenue                                        |   | 24,740                                     |   | 26,840 |   |
|                                                 |   |                                       |   |   |   |
| Cost of revenue:                                     |   |                                       |   |   |   |
| Software license, service  and other                 |   | 5,169                                      |   | 4,763 |   |
| Drug discovery                                       |   | 5,776                                      |   | 4,854 |   |
| Total cost of revenue                                |   | 10,945                                     |   | 9,617 |   |
|                                                 |   |                                       |   |   |   |
| Gross margin                                         |   | 13,795                                     |   | 17,223 |   |
|                                                 |   |                                       |   |   |   |
| Operating costs and  (benefit):                      |   |                                       |   |   |   |
| Research and development                             |   | 5,733                                      |   | 7,319 |   |
| Sales, general and  administrative                   |   | 14,658                                     |   | 17,066 |   |
| Restructuring                                        |   | (384                                       | )      | — |   |
| Total operating costs and  expenses                  |   | 20,007                                     |   | 24,385 |   |
| Operating loss                                       |   | (6,212                                     | )      | (7,162 | ) |
| Interest and other income,  net                      |   | 1,136                                      |   | 1,280 |   |
| Loss before provision for  income taxes              |   | (5,076                                     | )      | (5,882 | ) |
| Provision for income taxes                           |   | 377                                        |   | 121 |   |
| Net loss                                             |   | $                                          | (5,453 | ) | $ | (6,003 | ) |
|                                                 |   |                                       |   |   |   |
| Net loss per share - Basic                           |   | $                                          | (0.23  | ) | $ | (0.25 | ) |
| Net loss per share -  Diluted                        |   | $                                          | (0.23  | ) | $ | (0.25 | ) |
|                                                 |   |                                       |   |   |   |
| Weighted average number of  common stock outstanding |   |                                       |   |   |   |
| Basic                                                |   | 23,617                                     |   | 23,681 |   |
| Diluted                                              |   | 23,617                                     |   | 23,681 |   |

 

See accompanying notes to these unaudited financial statements.

 

4

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**Pharmacopeia,Inc.**

**ConsolidatedStatements of Cash Flows**

**(Dollarsin thousands)**

** **
|                                                                  |   | **For the  Three Months  Ended March 31,** |   |
|-----------------------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                                  |   | **2003**                                   |   | **2002** |   |
| CASH FLOWS FROM OPERATING  ACTIVITIES:                                |   |                                       |   |   |   |
| Net loss                                                              |   | $                                          | (5,453 | ) | $ | (6,003 | ) |
| Adjustments to reconcile  net loss to net cash provided by operations |   |                                       |   |   |   |
| Depreciation                                                          |   | 1,586                                      |   | 1,427 |   |
| Amortization                                                          |   | 1,882                                      |   | 1,884 |   |
| Contribution of stock to  401(k) members                              |   | 281                                        |   | 329 |   |
| Non-cash compensation                                                 |   | 10                                         |   | 114 |   |
| Changes in assets and  liabilities:                                   |   |                                       |   |   |   |
| Accounts receivable                                                   |   | 20,732                                     |   | 20,254 |   |
| Prepaid and other current  assets                                     |   | (704                                       | )      | (567 | ) |
| Other assets                                                          |   | 15                                         |   | 321 |   |
| Accounts payable                                                      |   | (113                                       | )      | (1,826 | ) |
| Accrued liabilities                                                   |   | (4,458                                     | )      | (4,024 | ) |
| Deferred revenue                                                      |   | (6,554                                     | )      | (7,341 | ) |
| Net cash provided by operating  activities                            |   | 7,224                                      |   | 4,568 |   |
| CASH FLOWS FROM INVESTING  ACTIVITIES:                                |   |                                       |   |   |   |
| Capital expenditures                                                  |   | (800                                       | )      | (2,018 | ) |
| Purchases of marketable  securities                                   |   | (18,552                                    | )      | (45,935 | ) |
| Proceeds from sales of  marketable securities                         |   | 16,638                                     |   | 15,208 |   |
| Increase in capitalized  software development costs                   |   | (1,158                                     | )      | (605 | ) |
| Net cash used in investing  activities                                |   | (3,872                                     | )      | (33,350 | ) |
| CASH FLOWS FROM FINANCING  ACTIVITIES:                                |   |                                       |   |   |   |
| Proceeds from issuance of  common stock                               |   | 57                                         |   | 155 |   |
| Purchases of treasury  stock                                          |   | —                                     |   | (6,879 | ) |
| Principal payments under  capital lease obligations                   |   | (3                                         | )      | (35 | ) |
| Net cash provided by (used  in) financing activities                  |   | 54                                         |   | (6,759 | ) |
| Exchange rate effect on  cash and equivalents                         |   | (63                                        | )      | (36 | ) |
| Net increase (decrease) in  cash and equivalents                      |   | 3,343                                      |   | (35,577 | ) |
| Cash and equivalents,  beginning of period                            |   | 28,236                                     |   | 68,891 |   |
| Cash and equivalents, end  of period                                  |   | $                                          | 31,579 |   | $ | 33,314 |   |
|                                                                  |   |                                       |   |   |   |
| SUPPLEMENTAL SCHEDULE OF  CASH FLOW INFORMATION:                      |   |                                       |   |   |   |
| Cash paid during the  period for:                                     |   |                                       |   |   |   |
| Interest                                                              |   | $                                          | 5      |   | $ | 20 |   |
| Income taxes                                                          |   | $                                          | 141    |   | $ | 369 |   |

 

See accompanying notes to these unauditedfinancial statements.

 

5

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#### **Pharmacopeia, Inc.**

**Notesto Unaudited Consolidated Financial Statements**

 

**1.  Basis of Presentation**

 

The accompanyingunaudited financial statements have been prepared in accordance with generallyaccepted accounting principles for interim financial information and withinstructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, these unaudited financialstatements do not include all of the information and disclosures required bygenerally accepted accounting principles for complete financialstatements.  In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals) considerednecessary for a fair presentation of the financial statements have beenincluded.

 

Interimresults are not necessarily indicative of the results that may be expected forthe year.  For further information,refer to the financial statements and disclosures thereto included in theCompany’s Annual Report on Form 10-K for the year endedDecember 31, 2002.

 

Certainamounts in prior periods have been reclassified to conform with current periodpresentation.

 

**2.  Net Loss Per Share**

 

The Companycomputes net loss per share in accordance with Statement of FinancialAccounting Standard (SFAS) No. 128, Earnings Per Share.  Under the provisions of SFAS No. 128, basicnet income (loss) per share is computed by dividing the net income (loss) forthe period by the weighted-average number of common shares outstanding duringthe period.  Diluted net income (loss)per share is computed by dividing the net income (loss) for the period by theweighted-average number of common and dilutive common equivalent sharesoutstanding during the period.  Dilutedearnings per share are required to be calculated to include the potentiallydilutive effect of the conversion of outstanding stock options. Because theCompany has a net loss for the periods presented, the inclusion of outstandingstock options would be anti-dilutive and therefore the weighted-average sharesused to calculate both basic and diluted loss per share are the same.

 

6

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**3.  Segment Information**

 

The Companyoperates in two industry segments.  TheCompany’s Software segment, Accelrys Inc. (“Accelrys”), provides molecularmodeling and simulation, bioinformatics and cheminformatics software, andrelated services that facilitate the discovery and development of new drug andchemical products and processes in the pharmaceutical, biotechnology, chemical,petrochemical and materials industries. The Company’s Drug Discovery segment, Pharmacopeia Drug Discovery, Inc.(“PDD”), provides drug discovery services to pharmaceutical and biotechnologycompanies based on proprietary combinatorial chemistry, high-throughputscreening, and Accelrys technologies. The accounting policies of the reportablesegments are the same as those of the Company. Summarized financial informationconcerning the industry segments follows (dollars in thousands):

 
|                                  |   | **Three  Months Ended  March 31, 2003** |   |
|---------------------------------------|--------|-----------------------------------------|--------|
|                                  |   | **Accelrys**                            |   | **PDD** |   | **Total** |   |
| Revenue:                              |   |                                    |   |   |   |   |   |
| Software licenses, service  and other |   | $                                       | 17,219 |   | $ | — |   | $ | 17,219 |   |
| Drug discovery                        |   | —                                  |   | 7,521 |   | 7,521 |   |
| Total revenue                         |   | $                                       | 17,219 |   | $ | 7,521 |   | $ | 24,740 |   |
| Operating loss                        |   | $                                       | (5,372 | ) | $ | (840 | ) | $ | (6,212 | ) |

 
|                                  |   | **Three  Months Ended  March 31, 2002** |   |
|---------------------------------------|--------|-----------------------------------------|--------|
|                                  |   | **Accelrys**                            |   | **PDD** |   | **Total** |   |
| Revenue:                              |   |                                    |   |   |   |   |   |
| Software licenses, service  and other |   | $                                       | 19,621 |   | $ | — |   | $ | 19,621 |   |
| Drug discovery                        |   | —                                  |   | 7,219 |   | 7,219 |   |
| Total revenue                         |   | $                                       | 19,621 |   | $ | 7,219 |   | $ | 26,840 |   |
| Operating loss                        |   | $                                       | (6,343 | ) | $ | (819 | ) | $ | (7,162 | ) |

 
|                              |   | **Accelrys** |    | **PDD** |   | **Total** |   |
|-----------------------------------|--------|--------------|---------|---------|--------|-----------|--------|
| Total assets - March 31,  2003    |   | $            | 92,051  |    | $      | 131,855   |   | $ | 223,906 |   |
| Total assets - December  31, 2002 |   | $            | 104,143 |    | $      | 135,962   |   | $ | 240,105 |   |

 

**4.  Stock-Based Compensation**

 

Statement of FinancialAccounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS123”) encourages, but does not require, companies to record compensation costfor stock-based compensation plans at fair value.  As permitted by SFAS 123, the Company has elected to continuefollowing Accounting Principles Board Opinion No. 25 “Accounting for StockIssued to Employees,” (“APB 25”) and related interpretations, to account forstock-based compensation.  Under APB 25,no compensation expense is recognized at the time of option grant because theexercise price of the Company’s employee stock option equals the fair marketvalue of the underlying common stock on the date of grant.

 

Had the Company followed thefair value measurement provisions of SFAS 123, the following table summarizesthe pro forma net loss and pro forma net loss per share that would have beenrecorded (in thousands, except per share data):

 

7

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|                                                                                                                                          |   | **Three  Months Ended March 31,** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                                                                          |   | **2003**                          |   | **2002** |   |
| Net loss                                                                                                                                      |   |                              |   |   |   |
| As reported                                                                                                                                   |   | $                                 | (5,453 | ) | $ | (6,003 | ) |
| Deduct: total stock-based  employee compensation expense determined under fair value based method for  all awards, net of related tax effects |   | (3,053                            | )      | (3,044 | ) |
| Pro forma                                                                                                                                     |   | $                                 | (8,506 | ) | $ | (9,047 | ) |
| Basic and diluted net loss  per share:                                                                                                        |   |                              |   |   |   |
| As reported                                                                                                                                   |   | $                                 | (0.23  | ) | $ | (0.25 | ) |
| Pro forma                                                                                                                                     |   | $                                 | (0.36  | ) | $ | (0.38 | ) |

 

The fair value of each optiongranted during 2003 and 2002 is estimated on the date of grant using theBlack-Scholes option-pricing model with the following assumptions:

 
|                    |   | **2003** |   | **2002** |   |
|-------------------------|--------|----------|--------|----------|--------|
| Dividend yield          |   | 0        | %      | 0        | %      |
| Expected volatility     |   | 88.28    | %      | 92.29    | %      |
| Risk-free interest rate |   | 3.25     | %      | 4.30     | %      |
| Expected life (years)   |   | 6.5      |   | 5.5      |   |

 

**5.  Treasury Stock**

 

During thethird quarter of 2001, the Company’s Board of Directors authorized a stockrepurchase program under which up to 1,000,000 shares of Pharmacopeia commonstock with a market value up to $16 million be acquired in the open market.  The program has been concluded, and as ofMarch 31, 2003, the Company repurchased a total of 643,900 shares for $8.3million.

 

**6.  Restructuring**

 

During the third quarter of 2002, the Company announced that it wasundertaking various actions to restructure its operations to improve itsoverall financial performance.  Therestructuring effort included a reduction in force of 71 employees, of which 68had been terminated as of March 31, 2003, and the closure of certainfacilities. As a result of this plan, restructuring related charges ofapproximately $4.3 million were recognized as operating expense in the thirdquarter of 2002.  Based on a subsequentanalysis of costs incurred and remaining costs to complete the restructuring,the Company determined that certain costs originally contemplated under theplan would not be incurred, and as such, the related amounts were reversedduring the first quarter of 2003.

 

The following table summarizes the balance of the accrued restructuringreserve, which has been included in accrued liabilities at March 31, 2003(dollars in thousands):

 
|                      |   | **Severance  Costs for Involuntary  Employee Terminations** |   | **Costs to  Exit  Lease Obligations** |   | **Total** |   |
|---------------------------|--------|-------------------------------------------------------------|--------|---------------------------------------|--------|-----------|--------|
| Balance at August 6, 2002 |   | $                                                           | 2,367  |                                  | $      | 1,973     |   | $ | 4,340 |   |
| Utilization of Reserves:  |   |                                                        |   |                                  |   |      |   |
| Cash                      |   | (2,076                                                      | )      | (423                                  | )      | (2,499    | )      |
| Reserve reductions        |   | (95                                                         | )      | (289                                  | )      | (384      | )      |
| Balance at March 31, 2003 |   | $                                                           | 196    |                                  | $      | 1,261     |   | $ | 1,457 |   |

 

8

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**Item 2.**           **Management’s Discussion andAnalysis of Financial Condition and Results****of Operations**

 

The following discussion and analysis offinancial condition and results of operations of Pharmacopeia, Inc.(“Pharmacopeia” or the “Company”) should be read in conjunction with theUnaudited Financial Statements and related notes included elsewhere in thisForm 10-Q, and also in conjunction with the Consolidated Financial Statementsand related notes included in the Company’s Form 10-K for the year endedDecember 31, 2002.

 

This report, including, without limitation,this section regarding Management’s Discussion and Analysis of FinancialCondition and Results of Operations, contains forward-looking statementsregarding the Company and its business, financial condition, results ofoperations, and prospects. Words such as “expects,” “anticipates,” “intends,”“plans,” “believes,” “seeks,” “estimates,” and similar expressions are intendedto identify forward-looking statements, but are not the exclusive means ofidentifying forward-looking statements in this Report.  Additionally, statements concerning futurematters such as the development of new products, enhancements of technologies,possible changes in legislation, and other statements regarding matters thatare not historical are forward-looking statements.

 

Although forward-lookingstatements in this Report reflect the good faith judgment of the Company’smanagement, such statements can only be based on facts and factors currentlyknown by the Company.  Consequently,forward-looking statements are inherently subject to risks and uncertaintiesand actual results and outcomes may differ materially from the results andoutcomes discussed in or anticipated by the forward-looking statements.  The Company undertakes no obligation torevise or update any forward-looking statements in order to reflect any eventor circumstance that may arise after the date of this Report.  Readers are urged not to place unduereliance on these forward-looking statements, which speak only as of the dateof this Report.

 

The Company’s registration statements on FormS-1 (Reg. No. 33-98246), most recent Form 10-K, and this Report, describecertain risk factors and uncertainties that may cause actual results, levels ofactivity, performance, or achievements to be materially different from anyfuture results, levels of activity, performance, or achievements expressed orimplied by such forward-looking statements. These risk factors and uncertainties should be considered in connectionwith any investment in the Company’s common stock.

 

BUSINESS OVERVIEW

 

Pharmacopeiais a leader in enabling science and technology that accelerates and improvesthe drug discovery and chemical development processes. Pharmacopeia’s drugdiscovery subsidiary, Pharmacopeia Drug Discovery, Inc. (“PDD”), integratesproprietary small molecule combinatorial and medicinal chemistry,high-throughput screening, in-vitro pharmacology, computational methods andinformatics to discover and optimize lead compounds.  Pharmacopeia’s software subsidiary, Accelrys Inc. (“Accelrys”),develops and commercializes molecular modeling and simulation software for thelife sciences and materials research markets, cheminformatics and decisionsupport systems, and bioinformatics tools including gene sequence analysis.Pharmacopeia employs approximately 700 people and is headquartered inPrinceton, NJ.

 

RESULTS OF OPERATIONS

 

THREE MONTHS ENDED MARCH 31, 2003 AND 2002

 

Total revenue decreased 8% to $24.7 millionin the first quarter of 2003 compared to $26.8 million in the first quarter of2002.

 

9

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Accelrys software license, service and otherrevenue decreased 12% to $17.2 million in the first quarter of 2003 compared to$19.6 million in the first quarter of 2002. Revenue decreased 21% to $12.9 million in the European and US regions combined,including revenue from a strategic alliance. Excluding the effect of the strategic alliance, revenue decreased9%.  Revenue in Asia increased 32% to$4.3 million from $3.3 million.  The netdecrease in revenue was principally due to the lack of annual license renewalsin the biotech and materials science sectors throughout the world.

 

DrugDiscovery revenue increased 4% to $7.5 million in the first quarter of 2003compared to $7.2 million in the first quarter of 2002.  The increase was primarily due to increasedmilestone revenue partially offset by decreased services revenue.  Milestone revenue recorded in the quartersended March 31, 2003 and 2002 was $1.4 million, and $0.25 million,respectively.  Excluding the revenuefrom milestones, revenue decreased 12% to $6.1 million in the first quarter of2003 compared to $7.0 million in the first quarter of 2002.

 

Accelrys license, service and other grossmargin decreased 19% to $12.1 million (70% of related revenue) in the firstquarter of 2003 compared to $14.9 million (76% of related revenue) in the firstquarter of 2002.  The $2.8 milliondecrease in gross margin resulted from the 12% decrease in revenue, from anincrease in direct costs due to the mix of products sold and additional costsresulting from the release of new products in 2003 which has resulted inincreased capitalized software amortization expense, and additionaldocumentation costs.

 

Gross margin generated from Drug Discoverydecreased 26% to $1.7 million (23% of related revenue) in the first quarter of2003 compared to $2.4 million (33% of related revenue) in the first quarter of2002.  Excluding the effect of theincreased milestone revenue, which carries no significant associated cost ofrevenue, the gross margin decreased substantially due to the mix ofrevenue.  The lower margin resulted fromincreased resources allocated to funded projects, resulting in increased directand allocated fixed costs.

 

Research and development expenses decreasedby 22% to $5.7 million in the first quarter of 2003 compared to $7.3 million inthe first quarter of 2002.  The decreasein research and development expenses is attributable to cost efficienciesrealized at Accelrys due to the consolidation of research efforts andreductions implemented in the prior year, and to the reduction of internallyfunded drug discovery programs in the Drug Discovery business.

 

Sales, general and administrative expensesdecreased by 14% to $14.7 million in the first quarter of 2003 compared to$17.1 million in the first quarter of 2002. The decrease in sales, general and administrative expenses isattributable to the restructuring undertaken in the prior year.

 

During the first quarter of 2003, the Companywas able to terminate a facility lease, the expected remaining obligation underwhich had been included in prior year’s restructuring, and finalized certainother severance obligations.   As such,the Company was able to reverse an excess portion of the restructuringliability during the first quarter of 2003.

 

Net interest and other income decreased 11%to $1.1 million in the first quarter of 2003 compared to $1.3 million in thefirst quarter of 2002.  The decrease isdue to lower average investment balances and decreases in market interestrates.

 

The Company recorded an income tax provisionof $0.4 million for the first quarter of 2003 compared to $0.1 million forfirst quarter of 2002.  The increase isdue to state and foreign taxes. These provisions differ from the Federal tax rateprimarily because of the effect of permanent book-tax differences, netoperating loss carryforwards, and net operating loss carrybacks.

 

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As a result of the lower revenues and lowercosts described above, the Company generated a net loss of $5.5 million ($0.23per diluted share) in the first quarter of 2003 compared to a net loss of $6.0million ($0.25 per diluted share) in the first quarter of 2002.

 

LIQUIDITYAND CAPITAL RESOURCES

 

The Company has funded its activities to dateprimarily through the sale of equity securities, software licenses, softwaremaintenance services, and drug discovery services.  As of March 31, 2003, the Company had cash, cash equivalents, andmarketable securities of $146.4 million compared to $141.0 million as of December31, 2002.

 

Cash provided by operations increased by $2.7million in the first quarter of 2003 compared to the first quarter of2002.  The increase is primarilyattributable to the collection of high dollar accounts receivable balancesgenerated during the fourth quarter of 2002. Cash used in investing activities decreased by $29.5 million in thefirst quarter of 2003 compared to the first quarter of 2002 due to the timingof investments and reduced capital purchases. Cash used in financing activities decreased by $6.8 million in the firstquarter of 2003 compared to the first quarter of 2002 due to purchases oftreasury stock in the prior year, which were not duplicated in the currentyear.

 

The Company anticipates that its capitalrequirements may increase in future periods as a result of seasonal salestrends, additional research and development activities, and the acquisition ofadditional equipment.  The Company’scapital requirements may also increase in future periods as the Company seeksto expand its technology platform through investments, licensing arrangements,technology alliances, or acquisitions.

 

TheCompany anticipates that its existing capital resources will be adequate tofund the Company’s operations at least through 2003.  However, there can be no assurance that changes will not occurthat would consume available capital resources before then.  The Company’s capital requirements depend onnumerous factors, including the ability of the Company to continue to generatesoftware sales, the ability of the Company to extend existing Drug Discoveryagreements and to enter into additional arrangements, competing technologicaland market developments, changes in the Company’s existing collaborativerelationships, the cost of filing, prosecuting, defending, and enforcing patentclaims and other intellectual property rights and the outcome of relatedlitigation, the purchase of additional capital equipment, acquisitions of otherbusinesses or technologies, and the progress of the Company’s customers’milestone and royalty producing activities. There can be no assurance that additional funding, if necessary, will beavailable on favorable terms, if at all. The Company’s forecasts of the period of time through which itsfinancial resources will be adequate to support its operations are forwardlooking information, and actual results could vary.  The factors described earlier in this paragraph will impact theCompany’s future capital requirements and the adequacy of its available funds.

 

RISK FACTORS

 

*You should carefully consider the risksdescribed below before investing in our publicly-traded securities.  The risks described below are not the onlyones facing us.  Our business is alsosubject to the risks that affect many other companies, such as competition,technological obsolescence, labor relations, general economic conditions,geopolitical changes and international operations.  Additional risks not currently known to us or that we currentlybelieve are immaterial also may impair our business operations and ourliquidity.*

 

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CERTAINRISKS RELATED TO OUR BUSINESS AS A WHOLE

 

*Our success dependsin part upon the successful implementation of our management’s strategic plan.*Our management has been, and continues to be, engaged in the consideration andexploration of strategic alternatives for our businesses, including thepossible separation by various means of our Drug Discovery business from ourAccelrys software operation.  There canbe no assurance that any such strategic alternative will be implemented or, ifcompleted, that it will enhance the value of either or both of ourbusinesses.  Such alternatives also mayinclude the acquisition of businesses and technologies which complement orsupplement our existing businesses and technologies. However, management may beunable to identify suitable strategic opportunities, choose the wrongtechnologies or businesses to pursue or be unable to negotiate suitable pricesor favorable terms with respect to strategic opportunities.  The occurrence of any of the foregoing mayhave a material adverse effect on our business.

 

*The agreement withour major Drug Discovery customer expires this year.*** **During the year ended December31, 2002, we earned approximately 12% of our consolidated revenue from onemajor customer in our Drug Discovery Segment. The agreement with this key customer expires by its terms in October2003.  We have initiated negotiationswith the customer concerning renewal of this agreement; however, renewal of theagreement, on the same, similar or other favorable terms, or at all, isuncertain.  The termination of thisagreement, without renewal on acceptable terms, will have a material adverseeffect on PDD, and our business as a whole. There can be no assurance we will be able to renew the agreement withthis significant customer on the same, similar or other favorable terms, or atall.

 

*Pharmaceutical andbiotechnology companies may discontinue or decrease their use of our servicesand products.*** **Wedepend on pharmaceutical and biotechnology companies that use our services fora large portion of our PDD revenue. Further, these companies (together withdiversified chemical and other industrial companies) comprise the principalmarket for our Accelrys modeling, simulation, data analysis and relatedsoftware products and services. Although there is a history among pharmaceutical and biotechnologycompanies of outsourcing drug research and development functions, this practicemay not continue. Similarly, these companies have frequently utilized outsidesoftware vendors for key tools used in drug discovery and chemical development,rather than developing needed information and analysis tools internally.  Our revenue depends to a large extent on researchand development expenditures by the pharmaceutical, biotechnology, chemical andagricultural industries, particularly companies in these industries outsourcingresearch and development projects and adding new and improved technologies toaccelerate their drug discovery and chemical development initiatives.  These expenditures are based on a widevariety of factors, including the resources available for purchasing researchequipment, the spending priorities among various types of research, policies regardingexpenditures during recessionary periods and the benefits of new software toolsversus their costs of licensure.  Sincea large proportion of our software customers license our products on an annualbasis or buy maintenance contracts from us annually, if their spendingpriorities shift, our revenues may be impacted.  Also, general economic downturns in our customers’ industries orany decrease in research and development expenditures could harm our operations,as could increased popularity of management theories which counsel againstoutsourcing of critical business functions. In addition, the popularity ofscientific thinking that disfavors expensive products such as large diversitylibraries could negatively impact our revenue or our sales mix. Any decrease indrug discovery spending by pharmaceutical and biotechnology companies, or inchemical or materials spending by chemical and agricultural companies, couldcause our revenues to decline and adversely impact our profitability.

 

*Our ability to increaserevenue and grow our business is dependent upon our success in adding newcustomers and expanding our existing customer relationships.*  In order to generate

 

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the additional revenue neededto continue growth, we must add new customers and retain, and expand upon, ourexisting customer relationships. These efforts depend significantly upon, amongother factors:

 

•                  our successfuldevelopment of new products;

•                  the success ofour business development, sales and marketing efforts;

•                  biotechnologyand pharmaceutical company spending for the outsourcing of chemistry and otherdrug discovery services; and

•                  the willingnessof current and potential biotechnology, pharmaceutical and diversified chemicalcustomers to invest in new modeling, simulation and informatics solutions.

 

If we areunable to add revenues from additional or expanded customer relationships, wemay not be able to grow our business.

 

*Our futureprofitability is uncertain.*We generated a small profit in 2000, and we have generated losses in2001, 2002 and the first quarter of 2003. Our future profitability depends upon many factors, includingseveral that are beyond our control. These factors include:

 

•                  changes in thedemand for our products and services;

•                  the introductionof competitive drug discovery services and software;

•                  our ability tolicense desirable technologies;

•                  changes in theresearch and development budgets of our customers and potential customers; and

•                  our ability tosuccessfully and timely develop, introduce and market new products, servicesand product enhancements cost effectively.

 

*We operate inbusiness lines that change rapidly and in unexpected ways.*Rapid technological change and uncertainty due to new and emerging technologiescharacterize the software, drug discovery and chemical development industries.We may be unable to develop, integrate and market, on a timely basis, the newand enhanced products and services necessary to keep pace with competitors. Ourproducts and services may be rendered obsolete by the offerings of ourcompetitors. Failure to anticipate or to respond to changing technologies, orsignificant delays in the development or introduction of products or services,could cause customers to delay or decide against purchases of our products orservices.

 

*Failure to attractand retain skilled personnel could have a material adverse effect on us.*Our success depends in part on the continued service of key scientific,software, sales, engineering and management personnel and our ability toidentify, hire and retain additional personnel. There is intense competitionfor qualified personnel. In particular, we believe that there is a shortage ofscientists qualified to work in the Drug Discovery segment. The competitionamong drug discovery and development companies to hire such scientists isparticularly intense. Immigration laws may further restrict our ability toattract or hire qualified personnel. We may not be able to continue to attractand retain the personnel necessary for the development of the Drug Discoverysegment. Failure to attract and retain key personnel could have a materialadverse effect on our business, financial condition and results of operations.Further, we are highly dependent on the principal members of our scientific andmanagement staff, including:

 

•                  Joseph A.Mollica, Ph.D., Chairman of the Board, President and Chief Executive Officer;

•                  Mark J. Emkjer,Executive Vice President and President, Accelrys; and

•                  Stephen A.Spearman, Ph.D., Executive Vice President and Chief Operating Officer, PDD,

 

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and the managers reporting tothese senior executives.  One or more ofthese key employees could retire or otherwise leave our employ within theforeseeable future, and the loss of any of these people could have a materialadverse effect on our business, financial condition and results of operations.We do not, and do not intend to, maintain key person life insurance on the lifeof any employee.

 

*We are dependentupon some of our suppliers.* We currently rely on twosuppliers to provide plastic filter bottom microtiter plates that are used inthe assay plate preparation process. We have, over the past year, developed aprocess such that we are not entirely dependent upon these suppliers.  Should we be unable, in some instances, toobtain an adequate supply of these or comparable filter bottom plates atcommercially reasonable rates, our ability to continue to prepare assay platescould be adversely affected, which in turn could harm our business.

 

*We may be unable todevelop strategic relationships with large pharmaceutical, biotechnology,chemical and technology companies.* A component of our business strategy is todevelop strategic relationships with larger pharmaceutical, biotechnology,chemical and technology companies.  Webelieve that through such relationships we can add revenue, expand ourdistribution channels, maximize our research and development resources, improveour competitive position and increase market awareness and acceptance of DrugDiscovery and scientific software products. To date, we have entered intosignificant strategic relationships with such companies as Schering-Plough,IBM, Oracle and HP.  There can be noassurance that any such relationship will continue, that relationships withsimilar large organizations can be developed, or that any such existing or newalliances will produce substantial revenue or profit opportunities.

 

*We are subject torisks associated with the operation of an international business.*In 2002, approximately 53% of our consolidated revenue was derived from customersoutside the United States, both through international subsidiaries and on anexport basis. Approximately 36% of our revenue was derived from customers in Europe andapproximately 17%was derived from customers in the Asia/Pacific region. We anticipate thatinternational revenue will continue to account for a significant percentage ofoverall revenue. Our international operations are subject to risks inherent inthe conduct of international business, including:

 

•                  unexpectedchanges in regulatory requirements;

•                  longer paymentcycles;

•                  currencyexchange rate fluctuations;

•                  import andexport license requirements;

•                  tariffs andother barriers;

•                  political andeconomic instability;

•                  limitedintellectual property protection;

•                  difficulties incollecting trade receivables;

•                  difficulties inmanaging distributors or representatives;

•                  difficulties instaffing and managing foreign subsidiary or joint venture operations; and

•                  potentiallyadverse tax consequences.

 

We may not beable to sustain or increase international revenue. Any of the foregoing factorsmay have a material adverse effect on our international operations and,therefore, our business, financial condition and results of operations. Ourdirect international sales generally are denominated in local currencies.Fluctuations in the value of currencies in which we conduct business relativeto the United States dollar result in currency transaction gains and losses,and the impact of future exchange rate fluctuations cannot be accuratelypredicted. Future fluctuations in currency exchange rates may have a materialadverse impact on revenue from international sales, and thus on our business,financial condition and results of operations. When deemed

 

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appropriate, we may engage incurrency exchange rate hedging transactions in an attempt to mitigate theimpact of adverse exchange rate fluctuations. However, currency hedgingpolicies may not be successful, and they may increase the negative impact ofexchange rate fluctuations.

 

*Investments in SalesEfforts.*  Bothour Drug Discovery and software products and services involve lengthy sales cycles,often requiring us to expend considerable financial and personnel resourceswithout any assurance that revenue will be recognized.  These sales cycles typically are long for anumber of reasons.  In Drug Discovery,factors include the strategic nature of Drug Discovery partnerships, the sizeof many such transactions, the confidential and proprietary nature of thebiological targets against which we screen our chemical compound libraries, andthe unique terms typically found in each services transaction.  With respect to software sales, sales cyclesare impacted by the time and resources required to educate potential customerorganizations as to the value and comparative advantages of our products. As aresult, we may expend substantial funds and effort to negotiate agreements forservices and products in both of our business segments, but may ultimately beunable to consummate a sale. In these circumstances, our results of operationsand ability to achieve profitability are adversely affected.

 

*Consolidation withinthe pharmaceutical and biotechnology industries may lead to fewer potentialcustomers for our products and services. *A significant portion of our customer baseconsists of pharmaceutical and biotechnology companies. Mergers between largemultinational pharmaceutical companies have accelerated in recent years.Continued consolidation within the pharmaceutical and biotechnology industriesmay result in fewer customers for our products and services. If one of theparties to a consolidation uses the products or services of our competitors, wemay lose existing customers as a result of such consolidation.

 

*Our operations maybe interrupted by the occurrence of a natural disaster or other catastrophicevent at our primary facilities.***  **We depend on our laboratories and equipment for the continuedoperation of our business. Our research and development operations andadministrative functions are primarily conducted at our facilities in thePrinceton, New Jersey area, San Diego, California and Cambridge, UnitedKingdom.  Although we have contingencyplans in effect for natural disasters or other catastrophic events,catastrophic events could still disrupt our operations. Even though we carrybusiness interruption insurance policies, we may suffer losses as a result ofbusiness interruptions that exceed the coverage available under our insurancepolicies. Any natural disaster or catastrophic event in our facilities or theareas in which they are located could have a significant negative impact on ouroperations.

 

*Terrorist attacks oracts of war may seriously harm our business.***  **Terrorist attacks or acts of warmay cause damage or disruption to our company, our employees, our facilitiesand our customers, which could significantly impact our revenue, costs andexpenses and financial condition. The terrorist attacks that took place in theUnited States on September 11, 2001 were unprecedented events that have createdmany economic and political uncertainties, some of which may materiallyadversely affect our business, results of operations and financial condition.The long-term effects on our company of the September 11, 2001 attacks areunknown. The potential for future terrorist attacks, the national andinternational responses to terrorist attacks, and other acts of war orhostility have created many economic and political uncertainties, which couldmaterially adversely affect our business, results of operations, and financialcondition in ways that we currently cannot predict.

 

*Because our stockprice may be volatile, our stock price could experience substantial declines.*** **The market price of our commonstock has historically experienced and may continue to experience volatility.Our quarterly operating results, changes in general conditions in the economyor the financial markets and other developments affecting us or our competitorscould cause the market price of our common stock to fluctuate substantially. Inaddition, in recent years,

 

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the stock market hasexperienced significant price and volume fluctuations. During the past twoyears, the stock market, and in particular technology companies, also haveexperienced significant decreases in market value. This volatility and therecent market decline has affected the market prices of securities issued bymany companies, often for reasons unrelated to their operating performance, andmay adversely affect the price of our common stock.

 

*As institutions holdthe majority of our common stock in large blocks, substantial sales by thesestockholders could depress the market price for our shares.*  As of March 31, 2003, our company’s sixlargest stockholders held approximately 53% of our outstanding commonstock.  As a result, if one or more ofthese major stockholders were to sell all or a portion of their holdings, or ifthe market were to perceive that such sale or sales may occur, the market priceof our common stock may fall significantly.

 

*Because we do notintend to pay dividends, you will benefit from an investment in our commonstock only if it appreciates in value.***  **We have never declared or paidany cash dividends on our common stock. We currently intend to retain ourfuture earnings, if any, to finance the expansion of our business and do notexpect to pay any cash dividends in the foreseeable future. As a result, thesuccess of your investment in our common stock will depend entirely upon anyfuture appreciation in its value. There is no guarantee that our common stockwill appreciate in value or even maintain the price at which you purchased yourshares.

 

*Anti-takeoverprovisions under the Delaware general corporation law, provisions in ourcertificate of incorporation and bylaws, and our adoption of a stockholderrights plan may render more difficult the accomplishment of mergers or theassumption of control by a principal stockholder, making more difficult theremoval of management*. Certain provisions of theDelaware General Corporation Law may delay or deter attempts to secure controlof our company without the consent of our management. Also, our governingdocuments provide for a staggered board of directors, which will make it moredifficult for a potential acquiror to gain control of our Board of Directors.In 2002, we adopted a stockholder rights plan, which is triggered uponcommencement or announcement of a hostile tender offer or when any one personor group acquires 15% or more of our common stock. The rights plan, oncetriggered, enables stockholders to purchase our common stock, and the stock ofthe entity acquiring us, at reduced prices. These provisions of our governingdocuments and stockholder rights plan, and of Delaware law, could have theeffect of delaying, deferring or preventing a change of control, includingwithout limitation a proxy contest, making more difficult the acquisition of asubstantial block of our common stock. The provisions could also limit theprice that investors might be willing to pay in the future for shares of ourcommon stock. Further, the existence of these anti-takeover measures may causepotential bidders to look elsewhere, rather than initiating acquisitiondiscussions with us.

 

*If we consume cashmore quickly than expected, we may be unable to raise additional capital and wemay be forced to curtail operations.*We anticipatethat our existing capital resources will be adequate to fund our operations atleast through 2003***.*** However, changes may occur that would consumeavailable capital resources before that time. Our capital requirements willdepend on numerous factors, including:

 

•                  costs associatedwith software sales;

•                  costs associatedwith drug discovery services;

•                  our internalproprietary drug discovery activities;

•                  competingtechnological and market developments;

•                  changes in ourexisting collaborative relationships;

•                  the cost offiling, prosecuting, defending and enforcing patent claims and otherintellectual property rights and the outcome of related litigation;

 

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•                  the purchase ofadditional capital equipment;

•                  acquisitions ofother businesses or technologies; and

•                  the progress ofour milestone and royalty producing activities.

 

If wedetermine that we must raise additional capital, the capital could be raisedthrough public or private financings involving debt or equity. However,additional capital may not be available on favorable terms, or at all. Ifadequate funds are not available, we may be required to curtail operationssignificantly or to obtain funds by entering into arrangements with collaborativepartners or others that may require us to relinquish rights to certain of ourtechnologies, products or potential markets that we would not otherwiserelinquish.

 

CERTAINRISKS RELATED TO INTELLECTUAL PROPERTY

 

*Positions taken bythe U.S. patent and trademark office or non-U.S. patent and trademark officialsmay preclude us from obtaining sufficient or timely protection for ourintellectual property.*The patent positions ofpharmaceutical, biotechnology and software companies are uncertain and involvecomplex legal and factual questions. Consequently, some or all of our patentapplications may not issue into patents, and any issued patents may provideineffective remedies or be challenged or circumvented. The coverage claimed ina patent application can be significantly reduced before the patent is issued.There is a significant risk that the scope of a patent may not be sufficient toprevent third parties from marketing other products or technologies with thesame functionality of our products and technologies. Consequently, some or allof our patent applications may not issue into patents, and any issued patentsmay provide ineffective remedies or be challenged or circumvented.

 

*Third parties mayhave filed patent applications of which we may or may not have knowledge, andwhich may adversely affect our business*. Patentapplications in the U.S. are maintained in secrecy for 18 months from filing oruntil a patent issues. Under certain circumstances, patent applications arenever published but remain in secrecy until issuance. As a result, others mayhave filed patent applications for products or technology covered by one ormore pending patent applications upon which we are relying. There may bethird-party patents, patent applications and other intellectual property orinformation relevant to our software, chemical compositions and othertechnologies which are not known to us and that block or compete with oursoftware, chemical compositions or other technologies, or limit the scope ofpatent protection available to us. Moreover, from time to time, patents mayissue which block or compete with our software, chemical compositions or othertechnologies, or limit the scope of patent protection available to us.** **Litigation may be necessary toenforce patents issued to us or to determine the scope and validity of theintellectual property rights of third parties.

 

*We may not be ableto protect adequately the trade secrets and confidential information that wedisclose to our employees*. We rely upon trade secrets,technical know-how and continuing technological innovation to develop andmaintain our competitive position. Competitors through their independentdiscovery (or improper means, such as unauthorized disclosure or industrialespionage) may come to know proprietary information. We generally requireemployees and consultants to execute confidentiality andassignment-of-inventions agreements. These agreements typically provide thatall materials and confidential information developed by or made known to theemployee during the employee’s relationship with us are to be keptconfidential, and that all inventions arising out of the employee’srelationship with us are our exclusive property. Our employees and consultantsmay breach these agreements, and in some instances we may not have an adequateremedy. Additionally, in some instances, we may have failed to require thatemployees and consultants execute confidentiality and assignment-of-inventionsagreements.

 

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*Foreign laws may notafford us sufficient protections for our intellectual property, and we may notseek patent protection outside the United States*. Webelieve that our success depends, in part, upon our ability to obtaininternational protection for our intellectual property. However, the laws ofsome foreign countries may not be as comprehensive as those of the U.S. and maynot be sufficient to protect our proprietary rights abroad. In addition, we maydecide not to pursue patent protection outside the United States, because ofcost and confidentiality concerns. Accordingly, our international competitorscould obtain foreign patent protection for, and market overseas, products andtechnologies for which we are seeking U.S. patent protection.

 

*We may not be ableto adequately defend our intellectual property from third party infringement,and third party challenges to our intellectual property may adversely affectour rights and be costly and time consuming*. Some ofour competitors have, or are affiliated with companies having, substantiallygreater resources than we have, and those competitors may be able to sustainthe costs of complex patent litigation to a greater degree and for longerperiods of time than us. Uncertainties resulting from the initiation andcontinuation of any patent or related litigation could have a material adverseeffect on our ability to compete in the marketplace pending resolution of thedisputed matters. If our competitors prepare and file patent applications inthe United States that claim technology also claimed by us, we may have toparticipate in interference proceedings declared by the U.S. Patent andTrademark Office to determine the priority of invention, which could result insubstantial costs to us, even if the outcome is favorable to us. Similarly,opposition proceedings may occur overseas, which may result in the loss ornarrowing of the scope of claims or legal rights. Such proceedings will atleast result in delay in the issuance of enforceable claims. An adverse outcomecould subject us to significant liabilities to third parties and require us tolicense disputed rights from third parties or cease using the technology.Despite our efforts to protect our proprietary rights, unauthorized parties mayattempt to copy aspects of our products or to obtain and use information thatwe regard as proprietary. In limited instances, we have licensed source codesof certain products to customers or collaborators. For these reasons, policingunauthorized use of our software products may be difficult.

 

*A patent issued tous may not be sufficiently broad to protect adequately our rights inintellectual property to which the patent relates*.Even if patents are issued to us, these patents may not sufficiently protectour interest in our software, chemical compositions or other technologiesbecause the scope of protection provided by any patents issued to or licensedby us are subject to the uncertainty inherent to patent law. Third parties maybe able to design around these patents or develop unique products providingeffects similar to our products. In addition, others may discover uses for oursoftware, chemical compositions or technologies other than those uses coveredin our patents, and these other uses may be separately patentable. A number ofpharmaceutical and biotechnology companies, and research and academicinstitutions, have developed technologies, filed patent applications orreceived patents on various technologies that may be related to our business.Some of these technologies, patent applications or patents may conflict withour technologies, patent applications or patents. These conflicts could alsolimit the scope of patents, if any, that we may be able to obtain, or result inthe denial of our patent applications.

 

*We may be subject toclaims of infringement by third parties*. Third partiesmay claim infringement by us of their intellectual property rights. Inaddition, to the extent our employees are involved in research areas similar tothose areas in which they were involved at their former employers, we may besubject to claims that our employees or we have inadvertently or otherwise usedor disclosed the alleged trade secrets or other proprietary information of aformer employer. From time to time, we have received letters claiming orsuggesting that our products or activities may infringe third party patents orother intellectual property rights. Our products may infringe patent or otherintellectual property rights of third parties. A number of patents may have been

 

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issued or may be issued in thefuture that could cover certain aspects of our technology and that couldprevent us from using technology that we use or expect to use. We may berequired to seek licenses for or otherwise acquire rights to technology as aresult of claims of infringement. We may not possess proper ownership or accessrights to the intellectual property we use. Third parties or other companiesmay bring infringement suits against us. We expect, in general, that software product developers will be subjectto more infringement claims as the number of products and competitors in ourindustry segments grows and the functionality of products in different industrysegments overlaps. Any claims, with or without merit, could be time consumingto defend, result in costly litigation, divert management’s attention andresources, cause product shipment delays or require us to enter into royalty orlicensing agreements. Royalty or licensing agreements, if required, may not beavailable on terms acceptable to us, if at all. In the event of a successfulclaim of product infringement against us, our failure or inability to licenseor design around the infringed technology could have a material adverse effecton our business, financial condition and results of operations.

 

CERTAINRISKS RELATED TO ACCELRYS

 

*Our ability toincrease Accelrys software revenue may depend upon increased market acceptanceof our products and services*. Accelrys products arecurrently used primarily by molecular modeling and simulation and gene sequenceanalyses specialists. Our strategy is to expand usage of our products andservices by marketing and distributing our software, in part through ourdesktop-based products, to a broader, more diversified group ofexperimentalists, such as scientists and engineers. If we cannot expand ourcustomer base to include experimentalists, or if we otherwise cannotsuccessfully market and sell our desktop-based products and related services,we may not be able to increase our software revenue, or such revenue maydecline. In general, increased market acceptance and greater market penetrationof our software products depend upon several factors, including:

 

•                  overall productperformance;

•                  ease of implementationand use;

•                  accuracy ofsimulation;

•                  breadth andintegration of product offerings;

•                  the extent towhich users achieve the intended research and development benefits from theiruse of the products and services; and

•                  willingness ofcustomers to pay for such use.

 

Our softwareproducts and services may not achieve market acceptance or penetration in theirtarget industries or other industries. Failure to increase market acceptance orpenetration may restrict substantially the future growth of our softwarebusiness and may have a material adverse effect on our company as a whole.

 

*We may be unable todevelop and market new Accelrys products that are necessary to increase revenue*.The success of our software business plan depends heavily upon increases inrevenue. Our strategy is to increase software revenue in a number of ways,including:

 

•                  adding morecomputational modeling, simulation, and analyses tools to our current portfolioof tools for chemists and biologists;

•                  offering morebioinformatics and cheminformatics database software that captures and managesthe data created by customers’ drug discovery and chemical developmentactivities, including the data created by the use of computational modeling,simulation, and analyses software;

 

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•                  creating andmarketing genomic, biological and/or chemical data content for use inconjunction with the software offered to support customers’ drug discoveryactivities; and

•                  developing moreknowledge management workflow software to automate the flow of genomic,biological and chemical data and information and project status between andamong workgroups and the enterprise.

 

We do not havesufficient historical or comparative sales data to rely upon to indicate thatour new products or data content services will achieve the desired level ofcommercial success.

 

*We face strongcompetition in the scientific software sector*. Themarket for our software products is intensely competitive, subject to rapidchange and significantly affected by new product introductions and other marketactivities of industry participants. Competition currently comes from thefollowing principal sources:

 

•                  other molecularsimulation software packages and software for analysis of chemical andbiological data;

•                  desktop softwareapplications, including chemical drawing, molecular modeling and analyticaldata simulation applications;

•                  consulting andoutsourcing services;

•                  other types ofsimulation software provided to engineers; and

•                  firms supplyingdatabases, such as chemical or genomic information databases, databasemanagement systems and information technology.

 

In addition,some of our software licenses grant the right to sublicense our software. As aresult, our software customers and third-party licensees could develop specificsimulation applications using our software developer’s kit and compete with usby distributing these programs to our potential customers. Customers orlicensees could also develop their own simulation technology or informaticssoftware and cease using our software products and services. Some of ourcompetitors and potential competitors in this sector have longer operatinghistories than us and have greater financial, technical, marketing, researchand development and other resources. Many of our software competitors offerproducts and services directed at more specific markets than those we target,enabling these competitors to focus a greater proportion of their efforts onthese markets. Some offerings that compete with our software products aredeveloped and made available at lower cost by governmental organizations andacademic institutions, and these entities may be able to devote substantialresources to product development and also offer their products to users forlittle or no charge.

 

*If we are unable tolicense software to, or collect receivables from, our early stage biotechnologycustomers, it may have a material adverse effect on our operating results.*  We frequently license our modeling,simulation, data analysis and informatics software to smaller, developmentstage biotechnology customers. Often these customers have limited or nooperating history, and require considerable funding to launch their businesses.As we have experienced in recent quarters, they often significantly scale back,or altogether cease, operations. Therefore, there is considerable risk in counting on these types ofentities for revenue growth.  Forentities that remain in business, transactions with these customers carry a higherdegree of financial risk. Our customers, particularly our development stagecustomers, are vulnerable to, and may be impacted by, the current tightening ofavailable credit and capital, and general economic slowdown occurring in theUnited States and our other key markets. As a result of these conditions, ourcustomers may be unable to license or, if under a license, may be unable to payfor, Accelrys software products. If we are not able to collect such amounts, wemay be required to write-off significant accounts receivable and recognize baddebt expense. We recorded a provision for doubtful accounts of $1.3 million infiscal 2002 compared to $0.3 million in fiscal

 

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2001.  Failure of these businesses, and write-offs and difficultiesassociated with collection of receivables from these customers, couldmaterially adversely affect our operating results.

 

*Defects ormalfunctions in our software products, or in the products of our softwaretechnology partners, could hurt our reputation among software customers andexpose us to liability.* Our software business and thelevel of customer acceptance of our products depend upon the continuous,effective and reliable operation of our computer software and related tools andfunctions. Defects could occur in current or future Accelrys products. To theextent that our software malfunctions and our customers’ use of our products isinterrupted, our software reputation and business could suffer. We may also besubject to liability for the defects and malfunctions of third party technologypartners and others with whom our software products and services areintegrated.

 

*Our quarterlyoperating results in the software business could vary significantly*. We have historically experiencedstronger financial performance in the third and fourth calendar quarters ofeach year followed by a comparative decline in the first and second quarters.Quarterly operating results may continue to fluctuate as a result of a numberof factors, including lengthy sales cycles, market acceptance of new productsand upgrades, timing of new product introductions, changes in pricing policies,changes in general economic and competitive conditions, seasonal slowdowns, andthe timing and integration of acquisitions. We also expect to continue toexperience fluctuations in quarterly operating results due to general andindustry specific economic conditions that may affect the research anddevelopment expenditures of pharmaceutical and biotechnology companies. Due tothe possibility of fluctuations in our revenues and expenses, we believe thatquarter-to-quarter comparisons of our operating results are not a goodindication of our future performance.

 

CERTAINRISKS RELATED TO PHARMACOPEIA DRUG DISCOVERY, INC.

 

*The agreement with asecond key PDD customer is terminable under certain circumstances.*** **During the year ended December31, 2002, we earned approximately 10% of our PDD revenue, and 2% of ourconsolidated revenue, from a second key customer in our Drug Discoverybusiness.  The agreement with thissignificant customer has a stated term of five years; however, the customer hasthe right to terminate the agreement as early as the first quarter of 2005 inthe event we are unable to deliver to the customer a lead compound meetingcriteria specified in the agreement by a certain deadline.  Thereafter, the customer again has the rightto terminate the agreement prior to the expiration of its stated term if wecannot deliver additional lead compounds meeting these criteria prior to datesset forth in the agreement.  Thecustomer also has the right to terminate the agreement in the event that webreach the agreement.  The terminationof this agreement will have a material adverse effect on PDD, and may have a materialadverse effect on our company’s business as a whole. There can be no assurancethat we will be able to deliver compliant compounds to the customer before theenumerated dates.

 

*Some of thedevelopment and marketing activities of PDD are, or will be, conducted by thirdparties. If these third parties fail to perform their functions satisfactorily,our revenue and earnings from PDD could be delayed, reduced or eliminated.* The ultimate success of the business plan forour Drug Discovery subsidiary heavily depends upon the successful discovery,development and commercialization of pharmaceutical products. Our drugdiscovery endeavors will result in commercialized pharmaceutical products, ifat all, only after significant pre-clinical and clinical development, requisiteregulatory approvals, establishment of manufacturing capabilities andsuccessful marketing. We do not currently have the technology, facilities,personnel or experience to accomplish all of these tasks on our own, and wewill likely not have all the necessary resources in the foreseeable future.Therefore, we continue to depend heavily upon the expertise and dedication ofsufficient resources by collaborative partners and/or by third

 

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parties under service contractsto develop and commercialize products primarily based on therapeutic antibodiesand lead compounds discovered by us. If a third party working for us under aservice contract fails to perform the contracted services adequately, ourefforts with respect to the drug candidate under contract could be delayed orterminated. Further, if a collaborative partner fails to develop orcommercialize a compound or product with respect to which it has rights fromus, we may not receive any future milestone payments or royalties associatedwith that compound or product. Similarly, because we rely heavily on ourstrategic collaborators and service providers, our revenue could be adverselyaffected if our collaborators and/or service providers:

 

•                  fail to select atarget or product candidate we have identified for subsequent development;

•                  fail to gain therequisite regulatory approvals of product candidates;

•                  do notsuccessfully commercialize products that we originate;

•                  do not conducttheir service or collaborative activities in a timely manner;

•                  do not devotesufficient time or resources to our partnered programs or potential products;

•                  terminate theiralliances or arrangements with us;

•                  develop, eitheralone or with others, products that may compete with our product candidates;

•                  dispute ourrespective allocations of rights to any products or technology developed duringour collaborations; or

•                  merge with athird party that may wish to terminate our collaboration or service contract.

 

*Disputes may arisebetween our collaborative partners and us as to royalties and milestones towhich we are entitled.*  The compound basis for drugs developed by a customer may be aderivative or optimized version of the compound provided to the customer by us.While our existing collaborative agreements provide that we will receivemilestone payments and royalties with respect to certain products developedfrom certain derivative compounds, there can be no assurance that disputes willnot arise over the application of payment provisions to such products. Therecan be no assurance that current or future collaborative partners will notpursue alternative technologies, or develop alternative products either ontheir own or in collaboration with others, including our competitors, as ameans for developing treatments based on the targets which are the subject ofthe collaborative arrangements with us.

 

*There may be only alimited market for PDD’s drug discovery services.*  The pricing and nature of PDD’s drugdiscovery services are such that there may only be a limited number ofpotential customers for these services. Continued consolidation in thepharmaceutical and biotechnology industries may further decrease the number ofpotential customers. The acceptance by potential customers of our services isimportant in determining profitability. Historically, pharmaceutical companieshave conducted lead compound identification and optimization within their ownresearch departments due to the highly proprietary nature of the activitiesbeing conducted, the central importance of these activities to their drugdiscovery and development efforts, and the desire to obtain maximum patent andother proprietary protection on the results of their internal programs. Inorder to achieve our business objectives for PDD, we must convince thesecompanies that our technology and expertise justify the outsourcing of theseprograms to us. There can be no assurance that we will be able to attractcustomers on acceptable terms for our products and services or to develop asustainable profitable business. Moreover, the pricing and nature of ourcombinatorial libraries is such that there may only be a limited number ofpharmaceutical companies that are potential customers for such libraries. Therecan be no assurance that we will be able to establish additional collaborativeor licensing arrangements, that any such arrangements or licenses will be onterms favorable to us, or that current or future collaborative or licensingarrangements will ultimately be successful.

 

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*We may be unable tomanage the multiple relationships and interests involved in our collaborativearrangements and drug discovery programs.*  We may need to successfully structure and managemultiple drug discovery programs and collaborative relationships, includingmaintaining confidentiality of the research being performed for multiplecustomers. We may be unable to manage successfully conflicts between competingdrug development programs of third parties to which we offer services.Conflicts also may arise between customers as to proprietary rights toparticular compounds in our libraries or as to proprietary rights to biologicaltargets such as receptors or enzymes against which we screen compounds in ourlibraries. The occurrence of conflicts could have a material adverse effect onour business, financial condition or results of operations.

 

*Our current andpotential customers are primarily from, and are subject to risks faced by, thepharmaceutical, biotechnology and chemical industries*.  For the foreseeable future, we will derive asubstantial portion of our revenue from fees paid by pharmaceutical companies,chemical companies and larger biotechnology companies for our products and services.As a result, we are subject to risks and uncertainties that affect thepharmaceutical, chemical and biotechnology industries and to possible reductionand delays in research and development expenditures by companies in theseindustries. Our revenue may also be adversely affected by mergers andconsolidation in the pharmaceutical, biotechnology and chemical industries,which will reduce the number of potential customers.

 

*We may beunsuccessful in producing and licensing proprietary technology developed fromour internal research and development efforts or acquired from a third party.*** **We have expended and continue toexpend time and money on internal research and development with the intentionof producing proprietary technologies in order to patent and then license themto other companies. However, we may not be successful in producing any valuabletechnology or successful in licensing it to a third party. To the extent we areunable to produce technology that we can license, we may not receive anyrevenue related to our internal research and development efforts.

 

*If we use biologicaland hazardous materials in a manner that causes injury or violates laws, we maybe liable for damages.* Our Drug Discovery activitiesmay involve the use of potentially harmful biological materials as well ashazardous materials, chemicals and various radioactive compounds. We cannotcompletely eliminate the risk of accidental contamination or injury from theuse, storage, handling or disposal of these materials. In the event ofcontamination or injury, we could be held liable for damages that result, andany liability could exceed our resources. We are subject to federal, state andlocal laws and regulations governing the use, storage, handling and disposal ofthese materials and specified waste products. The cost of compliance with theselaws and regulations could be significant.

 

**SHOULD ONE OR MORE OF THE ABOVE-DESCRIBEDRISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD THE UNDERLYING ASSUMPTIONS PROVEINCORRECT, OUR ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE ANTICIPATED.**

 

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**Item 3.Quantitative and Qualitative Disclosures about Market Risk**

 

The Company is exposed to various marketrisks consisting primarily of changes in foreign currency exchange rates.  The Company’s international sales generallyare denominated in local currencies.  Inthe first quarter of 2003, approximately 58% of the Company’s consolidatedrevenue was derived from customers outside the United States (including 36%from customers in Europe and 22% from customers in the Asia/Pacificregion).  As such, the Company’sexchange rate risk is greatest for Dollar/Euro and Dollar/Yen fluctuations.  When deemed appropriate, the Company engagesin exchange rate-hedging transactions in an attempt to mitigate the impact ofadverse exchange rate fluctuations.  AtMarch 31, 2003, the Company had no hedging transactions in effect.

 

The Company does not use derivative financialinstruments for trading or speculative purposes.  However, the Company regularly invests excess cash in overnightrepurchase agreements that are subject to changes in short-term interestrates.  The Company believes that themarket risk arising from holding these financial instruments is minimal.

 

The Company’s exposure to market risks associated with changes ininterest rates relates primarily to the increase or decrease in the amount ofinterest income earned on its investment portfolio since the Company hasminimal debt.  The Company ensures thesafety and preservation of invested funds by limiting default risks, marketrisk, and reinvestment risk.  TheCompany mitigates default risk by investing in investment grade securities.  A hypothetical 100 basis point adverse movein interest rates along the entire interest rate yield curve would notmaterially affect the fair value of the Company’s interest sensitive financialinstruments at March 31, 2003.

 

**Item 4.  Controls and Procedures**

 

Under the supervision and with the participation of our management,including our principal executive officer and principal financial officer, weconducted an evaluation of the effectiveness of the design and operation of ourdisclosure controls and procedures, as such term is defined under Rule13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended,within the 90 days prior to the filing date of this report. Based on theirevaluation, our principal executive officer and principal financial officerconcluded that our disclosure controls and procedures are effective as of theevaluation date.

 

There have been no significant changes (including corrective actionswith regard to significant deficiencies or material weaknesses) in our internalcontrols or in other factors that could significantly affect these controlssubsequent to the date of the evaluation described above.

 

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**PART II - OTHERINFORMATION**

 
| **Item 1.** | Legal  Proceedings                                                                                              |
|-------------|-----------------------------------------------------------------------------------------------------------------|
|        |                                                                                                            |
|        | The Company  is not a party to any material litigation and is not aware of any threatened  material litigation. |
|        |                                                                                                            |
| **Item 2**. | Changes in  Securities and Use of Proceeds - None                                                               |
|        |                                                                                                            |
| **Item 3.** | Defaults  upon Senior Securities – None                                                                    |
|        |                                                                                                            |
| **Item 4.** | Submission  of Matters to a Vote of Security Holders - None                                                     |
|        |                                                                                                            |
| **Item 5.** | Other  Information – None                                                                                  |
|        |                                                                                                            |
| **Item 6.** | Exhibits and  Reports on Form 8-K                                                                               |
|        |                                                                                                            |
|        | (a) Exhibits  – See Exhibit Index                                                                          |
|        |                                                                                                            |
|        | (b) Reports  on Form 8-K                                                                                        |
|        |                                                                                                            |
|        |                                                                                                            | (i) | Current  report on Form 8-K filed March 28, 2003 reported under Item 9 relating to  certifications furnished by the CEO and CFO pursuant Section 906 of the  Sarbanes-Oxley Act of 2002 in connection with the Annual Report of  Pharmacopeia, Inc. for the period ended December 31, 2002. |

 

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**SIGNATURE**

 

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

 

 
|   | PHARMACOPEIA,  INC. |
|--------|---------------------|
|   |                |
|   | By:                 |   | /s/John J.  Hanlon |   |
|   |                |   |
|   |                | John J.  Hanlon |
|   |                | Executive  Vice President and  Chief Financial Officer (Duly Authorized  Officer and Chief Financial Officer) |
|   |                |   |
|   |                | Date:  May 12, 2003 |

 

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**CERTIFICATION OF CHIEF EXECUTIVE OFFICER**

 

I, Joseph A.Mollica, certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q of Pharmacopeia, Inc.;

 

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

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                                       Theregistrant’s other certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

a)                                      designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)                                     evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)                                      presentedin this quarterly report our conclusions about the effectiveness of thesedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)                                      allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                     anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

Date:  May 12, 2003

 

 
|   | /s/Joseph A.  Mollica                                          |   |
|--------|----------------------------------------------------------------|--------|
|   | Joseph A.  Mollica, Ph.D.                                      |
|   | Chairman of  the Board, President  and Chief Executive Officer |

 

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**CERTIFICATION OF CHIEF FINANCIAL OFFICER**

I, John J.Hanlon, certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q of Pharmacopeia, Inc.;

 

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

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                                       Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

a)                                      designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)                                     evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)                                      presentedin this quarterly report our conclusions about the effectiveness of thesedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)                                      allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                     anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

Date:  May 12, 2003

 

 
|   | /s/John J.  Hanlon                                     |   |
|--------|--------------------------------------------------------|--------|
|   | John J.  Hanlon                                        |
|   | Executive  Vice President  and Chief Financial Officer |

 

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**PHARMACOPEIA,INC.**

 

**INDEX TO EXHIBITS**

 
| **No.**  |   | **EXHIBIT**                                                                                                                                                                        |
|----------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |   |                                                                                                                                                                               |
| 10.9(a)# |   | Amendment,  effective as of May 1, 2003, to Employment Agreement between the Company and  Joseph A. Mollica, Ph.D.                                                                 |
|     |   |                                                                                                                                                                               |
| 10.13(a) |   | Amendment  No. 3, effective as of April 17, 2003, to the Collaboration and License  Agreements by and between Pharmacopeia, Inc., Schering Corporation, and  Schering-Plough, Ltd. |
|     |   |                                                                                                                                                                               |
| 99.1     |   | Certification  of Chief Executive Officer                                                                                                                                          |
|     |   |                                                                                                                                                                               |
| 99.2     |   | Certification  of Chief Financial Officer                                                                                                                                          |

 

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| # |   | Represents a  management contract or compensatory plan or arrangement. |
|---|--------|------------------------------------------------------------------------|

 

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