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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

For the Fiscal Year Ended December 31, 2001

Commission File Number: 0-27188

PHARMACOPEIA, INC.
(Exact name of Registrant as specified in its charter)

CN 5350, Princeton, New Jersey 08543-5350
(Address of principal executive offices and zip code)

(609) 452-3600
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock $.0001 Par Value

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

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

        The approximate aggregate market value of voting stock held by non-affiliates of the Registrant was $192,259,608 based on the last sale price of Common Stock reported on The Nasdaq National Market on January 31, 2002. 9,228,498 shares of Common Stock held by officers, directors, and holders of 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

        As of January 31, 2002, the number of outstanding shares of the Registrant's Common Stock was 23,859,833.

DOCUMENTS INCORPORATED BY REFERENCE

        Certain information required by Part III of Form 10-K is incorporated by reference to the Registrant's Proxy Statement for the Annual Stockholders Meeting to be held May 8, 2002.

PHARMACOPEIA, INC. AND SUBSIDIARIES

2001 Form 10-K

Table of Contents

PART I

ITEM 1. BUSINESS

        Pharmacopeia, Inc. ("Pharmacopeia" or the "Company") designs, develops, markets and supports science and technology-based products and services intended to improve and accelerate the processes of drug discovery and chemical development. Accelrys Inc. ("Accelrys"), the Company's software segment, provides molecular modeling and simulation, bioinformatics, and cheminformatics software and consulting that facilitates the discovery and development of new drug and chemical products and processes in the pharmaceutical, biotechnology, chemical, petrochemical and materials industries. The Company's Drug Discovery Services segment provides drug discovery services to pharmaceutical and biotechnology companies based on proprietary combinatorial chemistry and high throughput screening technologies.

        When used anywhere in this Report, the words "expects", "believes", "anticipates", "estimates" and similar expressions are intended to identify forward-looking statements. The Company has based these forward-looking statements on its current expectations about future events. Such statements are subject to the legal and business risks described in this document, including the qualifications described below in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Important Risk Factors Regarding Forward Looking Statements".

        Pharmacopeia was incorporated in Delaware in 1993.

        Following are more detailed descriptions of each of the Company's two business segments. Certain financial information for these segments is described in the Notes to the Financial Statements included in this report.

PHARMACOPEIA'S SOFTWARE SEGMENT—ACCELRYS

        Pharmacopeia's Software Segment is Accelrys. Accelrys' human resources, products, and intellectual property have been assembled from companies acquired by Pharmacopeia over the last few years—Molecular Simulations Incorporated ("MSI") acquired in June 1998, Synopsys Scientific Systems, Ltd. ("Synopsys") acquired in March 2000, the software subsidiaries of Oxford Molecular Group plc acquired in September 2000, and Synomics Ltd. ("Synomics") acquired in June 2001. In 2001, these subsidiaries were merged together and renamed Accelrys.

ACCELRYS OVERVIEW

        For companies in the pharmaceutical, biotechnology, chemical, petrochemical and materials industries, innovation in the discovery and development of new products and the rapid, cost-effective commercialization of these products is crucial to success. Companies in these industries invest considerable resources in technologies that suggest productive new pathways for research projects, increase the efficiency of discovery and development processes, or enable them to maximize the use of corporate data, information, and knowledge. One such technology is software-based computation, analysis, informatics and knowledge management tools. These tools allow users to simulate processes, predict the outcome of product designs, manage data and turn it into useful information, support decisions, and manage workflows.

        Accelrys designs, develops, markets, and supports software and provides consulting services that facilitate the discovery and development of new products and processes in the pharmaceutical, biotechnology, chemical, petrochemical and materials industries. Using Accelrys' software products, researchers may increase the speed and efficiency of the research and development cycle, thereby reducing product development costs and shortening the time to market for new product introductions and process improvements. Accelrys' customers include leading commercial, governmental and academic organizations. Many of the largest pharmaceutical, biotechnology, chemical, petroleum and semiconductor companies worldwide use Accelrys software. Accelrys markets its products and services worldwide, principally through its global direct sales force.

        Following are brief descriptions of Accelrys' software product lines.

        Molecular Modeling and Simulation Software.    Many factors that affect a molecule, including activity, bioavailability, toxicity, shelf life and environmental impact, are governed by fundamental, atomic level properties such as shape, structure and reactivity. Molecular simulation was developed to predict these molecular properties and help researchers discover new products, sharpen the focus of experimental activities and improve ultimate product performance. Accelrys is a leading provider of molecular modeling, simulation, and information management software.

        Accelrys has a broad product suite consisting of over 100 application modules based on proprietary technologies that employ fundamental scientific principles, advanced computer visualization, molecular modeling techniques and computational chemistry. These application products allow scientists to perform molecular level computations of chemical, biological and materials properties, to simulate, visualize and analyze chemical and biological systems, and to communicate the results to other scientists. Accelrys' products are based upon advanced software architectures that facilitate the development, integration and deployment of new software products. Accelrys also offers open access to its core software development environment, within which customers and third-party licensees can develop, integrate and distribute their own software applications for computational chemistry, biology and materials research.

        Accelrys plans to continue enhancing its software product and service offerings for simulation specialists, who are the principal users of molecular modeling and simulation products. In addition, Accelrys is broadening its user base by enabling straightforward access to these methods from personal computers to a much larger population of experimentalists, laboratory scientists and engineers.

        Bioinformatics Software.    Accelrys is a leading provider of tools for gene sequence analysis and bioinformatics. Accelrys provides a suite of programs enabling molecular biologists to search, edit, compare, map, and align sequence data. Researchers use these to enable the analysis of DNA and protein sequences and structure, predict RNA secondary structure, and annotate protein sequences. Such capabilities help them to use the genomic data that is being made available by projects such as the Human Genome Project. In addition, Accelrys provides enterprise-wide data management and analysis tools that assist in the management of this data. These are based on the Oracle architecture. Data visualization and analysis capabilities allow this data to be viewed and understood on standard desktop computers.

        Cheminformatics Software.    Accelrys is a leading provider of tools to manage and analyze chemical information. These tools are based on standard database architectures such as Oracle and Access. Accelrys provides data visualization and analysis software to search, retrieve, and use chemical structures, biological and chemical data, experimental data, and registration information. Many of these tools use industry standard software components and are compliant with applications such as Microsoft Excel, allowing chemists to interact with chemical data within familiar productivity tools. Accelrys also uses this component technology and its database architectures to build customized enterprise-wide systems for client companies.

ACCELRYS BUSINESS STRATEGY

        Accelrys' objective is to strengthen its position as a leading provider of software-based computation, analysis, informatics and knowledge management products and services worldwide by providing a comprehensive set of integrated productivity tools that are integral to the enterprise-wide research and development activities of its customers. The key elements of the strategy to achieve this objective include:

        Expand User Base.    Accelrys plans to increase sales to its key software accounts and pursue new software customers within existing markets. In addition, software will be targeted not only at a growing

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number of molecular modeling and simulation and gene sequence analyses specialists, but also at the much larger group of experimentalists (scientists and engineers). Accelrys believes it can leverage its strong relationships with modeling, simulation and analysis specialists to help promote use of modeling, simulation and analyses methods by other scientists working in the same organization as the specialists.

        Leverage Core Computational Technology and Maintain Technology Leadership.    Accelrys believes that its core molecular modeling and simulation and gene sequence analysis technologies have helped position Accelrys at the forefront of computational methods technology providers. Accelrys intends to continue to make significant investments in research and development in order to improve the efficiency and predictive accuracy of this core technology and to maintain its technology leadership.

        Enhance Technology Position.    Accelrys will strengthen its scientific and technical expertise through acquisitions and consortia, and through joint development projects with leading academic, governmental and industrial researchers. Accelrys may continue to pursue acquisitions and strategic relationships with third parties in order to provide it with early access to new technologies, facilitate market acceptance of new products and reduce internal research and development investment.

        Expand Informatics Market Share.    Accelrys' customers will need more sophisticated data and knowledge management tools as the use of molecular modeling and simulation, gene sequence analysis and other computational methods expand, especially to the experimentalists, and as the amount of data about drug discovery and chemical development activities also continues to expand. Accelrys will continue to improve and integrate its bioinformatics and cheminformatics offerings, and to leverage its relationships with customers, in order to expand its sales of data and knowledge management products.

        Create Collaborative Systems and Environments.    Accelrys believes that the desire amongst its customer base to increase process efficiency across diverse workgroups and disciplines while managing and using enormous quantities of data and information has created a need for enterprise workflow and project management tools that help researchers to better collaborate and manage projects. Accelrys will continue to improve its offerings to include workflow and project management capabilities. As these product offerings expand, Accelrys also expects increased opportunities to tailor and customize work group and enterprise-wide solutions for customers. The integration of informatics capabilities and provision of collaborative enterprise environment is being pursued through the development of an integrated software platform for discovery research, known as Discovery Studio. Accelrys will develop its key modeling and informatics capabilities such that they are compatible with this platform.

ACCELRYS SCIENCE AND TECHNOLOGY

        Following are more detailed descriptions of the science and technology supporting each of Accelrys' various software product lines.

        Molecular Modeling and Simulation.    Accelrys' molecular modeling and simulation technology delivers predictive models of chemical, biological and materials phenomena within an open environment. This technology simulates subatomic, interatomic and intermolecular interactions, and a wide range of corresponding properties, including molecular structure, activity, diversity, stability, morphology, solubility, adhesion, adsorption, diffusion, color, analytical spectra, and optical, electrical and mechanical properties. There are five primary classes of molecular and materials simulation methods, all of which are found in Accelrys' products:

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Quantum Methods. Quantum methods, the most fundamental of Accelrys' simulation methods, compute interactions at the level of electrons and nuclei. These methods are capable of simulating which chemical entities are stable, how chemical reactions occur, and properties such as reactivity, color and magnetism. These methods are computationally demanding. Historically, they have been applied to small, carefully selected models. Technological advances, many driven

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by Accelrys and its partners, are now allowing quantum methods to be applied more generally and to larger materials and systems.

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Molecular Methods. Molecular methods probe molecular conformations and the interactions between molecules based on simplified analytical expressions. These methods include automated procedures for probing how a drug molecule binds to an active site, what conformations a polymer chain may adopt, and what similarities exist between a new amino acid sequence and protein sequences for which tertiary structures are known. They also include tools used to determine structure based on x-ray diffraction or nuclear magnetic resonance data. Such methods contain more approximations than quantum methods but can be applied to much larger and more complex systems, supporting insight into many chemical processes.



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Mesoscale Methods. Mesoscale methods study processes above the molecular scale that are critical to materials and chemical engineering properties. These methods are particularly suited to predicting the properties and mixing behaviours of polymer mixtures, complex fluids, detergents, and soft materials.



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Correlative Methods. Correlative methods identify interrelationships between structure and properties that can be used predictively. In many cases, macroscopic properties are known to be determined by molecular-level behavior, but the analytical details of these relationships are not known. The quantitative structure activity relationship methods ("QSAR") provide a framework in which to correlate molecular attributes and macroscopic properties. The framework can predict, to a reasonable degree of confidence, the properties of molecules that are comparable with a control set for which properties have been measured.



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Statistical Methods. Statistical methods are needed when many different configurations must be sampled or when macroscopic properties reflect an averaging over many different states. These include methods for modeling complex polymer structures, computing thermodynamic parameters and conducting statistical analyses of real and virtual molecular libraries.



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Open Architecture. Accelrys has pioneered an open molecular simulation software architecture, Cerius2, which includes an efficient data model; libraries of mathematical, chemical and graphical utilities; and a client/server data and communications management layer. Cerius2, a modular, object-oriented system, is written principally in C++ and uses industry-standard protocols such as MOTIF and TCP/IP. This modular architecture is designed to provide streamlined access to the various methods described above, allowing their use in discrete, combined and packaged ways. The Cerius2 application programming interfaces ("APIs") are used by Accelrys' internal developers to create products. The same APIs are made available through the Cerius2 SDK to customers and third-party licensees.



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Desktop and Enterprise-Wide access. Discovery Studio is the platform technology that will provide a common data architecture and project management system for its pharmaceutical-focused products. Discovery Studio combines new technology, components from the MSI architecture, and technology and expertise acquired along with Synomics in June 2001. It is also the medium by which Accelrys can deliver molecular modeling and simulation desktop products for life sciences experimentalists, through client-server computing. The server will be a workstation accessed through a corporate Intranet. The client browser application is created using industry-standard languages and protocols on a personal computer ("PC"). The ViewerPro, a helper application, enables the display and manipulation of molecular structures and other data on the PC. Versions of the ViewerPro have been released for PCs running under Windows 95, Windows 98, Windows 2000 and Windows NT.

Materials Studio is a client-server architecture that enables Accelrys' materials modeling and simulation codes to be used on desktop personal computers. The client software provides a

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PC-based modeling and visualization environment from which users can set up, run, and analyze computations on more powerful computer servers on their Intranet. The servers can be UNIX workstations, Linux servers, or Windows NT/2000. The client software runs on Windows 95, Windows 98, Windows 2000, Windows NT, and Windows Me.

Accelrys' Cerius2 architecture, graphics and interface subsystems are supported on Silicon Graphics and IBM UNIX workstations. Certain of the methods are also supported on vector supercomputers and on shared and distributed memory parallel architectures. Existing and planned Discovery Studio server products will run on IBM and Silicon Graphics UNIX workstations. Existing and planned Materials Studio server codes run on Silicon Graphics and Compaq UNIX workstations and Windows platforms.

        Bioinformatics Software.    Accelrys' bioinformatics solutions enable the management and analysis of biological data and provide a wide range of gene sequence analysis capabilities.

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Gene Sequence Analysis. The core technology serving the bioinformatics and gene sequence analysis market is contained within a suite of programs called the GCG Wisconsin Package. This contains over 130 programs covering the research needs of molecular biologists. Based on published algorithms from the fields of mathematical and computational biology, the Package includes sequence comparison, database searching and retrieval, DNA/RNA secondary structure prediction, editing and publication, evolutionary analysis, fragment assembly, gene finding and pattern recognition, importing and exporting, mapping, primer selection, protein analysis, and translation.

The computational and analysis capabilities of the GCG Wisconsin Package run on UNIX workstations. They can be accessed through a variety of client user interfaces, enabling broad access to this technology. These include SeqWeb, a web browser-based interface that allows researchers to access the technology across corporate intranets; SeqLab enabling X-Windows-based access; and OMIGA, which provides access to users of Windows operating systems. MacVector provides gene sequence analysis capabilities to users of Macintosh computers.

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Relational Databases. SeqStore, Accelrys' Oracle database technology, allows researchers to collect, organize, and maintain genomic data and the results of analyses in in-house corporate databases. The SeqStore data warehouse makes data from separate groups available across the corporate structure. Dynamic update technology allows new data to be continually and automatically added to the database.

In-house developers can access the Oracle data from popular development tools across multiple platforms and multiple networks, including Microsoft's VisualTools, Open Database Connectivity (ODBC), Java, Java Database Connectivity (JDBC), and Oracle Objects for OLE.

GCG Wisconsin Package analyses can be applied to SeqStore databases—a process that can be automated as the data is updated, creating an automated sequence analysis pipeline that alerts the researcher to potentially valuable information as it is created.

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Data Content. Accelrys provides its users with a wide range of public databases in convenient formats that can be updated at regular intervals through its Data Update Services. These include GenBank and EMBL for nucleic acid sequences, SP-TREMBL protein translations of coding sequences, PIR protein sequences, NRL      3D sequence and three-dimensional structure, GenPept unannotated translations of GenBank sequences, REBASE restriction enzyme data, including restriction enzyme, SWISS-PROT well-annotated protein sequences, and PROSITE protein sequence motifs.

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        Cheminformatics Software.    Accelrys provides software to manage chemical information, such as 2D chemical structure diagrams and associated property data. This software ranges from chemical data management and analysis technology integrated with standard desktop productivity tools to enterprise-wide informatics systems. Accelrys also provides a number of software packages focused on particular applications of interest to the chemist, and a range of useful data content.

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Core databases. Much of Accelrys' cheminformatics technology is founded on its two Oracle databases, RS³ and Accord for Oracle. These allow chemical objects to be stored, manipulated, and searched using industry standard query languages and tools. Accelrys is engaged in the creation of a single, integrated "chemistry engine" based on these technologies.



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Productivity tools. The Accord for Excel, Accord for Access, and RS³ for Excel software packages allow chemical objects to be stored and manipulated within these standard Microsoft desktop productivity tools. This means that the researcher can view and analyze chemical data without the need to learn new software systems, and that the wide range of calculation and data management features available in these applications can be easily applied to chemical data without the need for Accelrys to develop and maintain specialist tools. The DIVA technology provides desktop decision support capabilities, allowing users to work with chemical structures, assay results and other chemical and biological data in one spreadsheet.



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Application-focused tools. Accelrys offers tailored products that apply its database and data management technology to specific problems in high throughput screening. RS³ HTS is a data management system based on the RS³ database that is designed to assist biologists and chemists to track the workflow of high-throughput screening. OMM is a flexible screening management and data processing solution for plate-based biological assays.



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Prediction engines. Diamond Discovery is an enterprise-wide decision support system, based on an open Oracle architecture, that works with current corporate chemical and biological database systems providing a range of tools to predict key properties based on the available data. These properties include molecular descriptors to aid profiling of compound sets, physicochemical properties to improve screening selection, and the toxicity of compounds.



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Data content. Accelrys delivers a range of chemical databases. These include the Failed Reactions Database offering data on reactions that afford unexpected results, Solid-Phase Synthesis designed for chemists engaged in the design of combinatorial libraries, Metabolism and Biotransformations providing data on the metabolic fate of organic molecules, Methods in Organic Synthesis (MOS) containing over 3,000 new reactions each year, BioCatalysis covering biomolecule-mediated organic synthesis, Protecting Groups providing chemists with ready access to selected information on the full range of protecting group chemistry, and BIOSTER that provides a critical compilation of thousands of bio-analogous molecule pairs.



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Developer tools. Accelrys enables application developers to build on its database technologies through the RS³ IAB (Intranet Application Builder) and Accord SDK (Software Developer's Kit) products.

ACCELRYS PRODUCTS AND SERVICES

        Accelrys offers a broad suite of software products and services designed to enable its customers to shorten product lead times, reduce research and development costs, improve product and process performance, manage and analyze chemical and biological data and information, and communicate more effectively both inside and outside an organization. These products and services incorporate the following attributes:

        Validated Core Modeling Technology.    The core technology underlying Accelrys' modeling and simulation products consists of a number of fundamental, scientifically proven methods for conducting

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predictive computer modeling and analyses of chemical, biological and materials phenomena at the atomic and molecular level. This core technology is validated by over a decade of industrial use and by the publication of hundreds of presentations, papers and articles citing applications of this technology.

        Broad Applicability.    The validated core technology underlying Accelrys' products enables Accelrys to offer a wide range of products and services to a variety of industries, including the pharmaceutical, biotechnology, chemical, petrochemical, electronics, food, paper, agrochemical, aerospace, plastics, paint and natural gas industries. Accelrys' products simulate and analyze both small molecules that may be candidates for new drugs and more complex molecular structures such as proteins or the polymers found in advanced materials. These products are used in research applications as diverse as drug discovery, protein design and structure determination, crystallization and formulation, polymer property prediction, catalysis and development of electronic materials.

        Data Management Compliant with Industry Standards.    Accelrys' data management and analysis solutions are based on industry-standard technologies such as Oracle. This means that they are compliant with other corporate systems and retain the maximum openness and flexibility. Accelrys' technology ensures that these standards are enabled for chemical and biological data.

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        Open Architecture.    Many of Accelrys' products are based upon open architectures that allow customers, collaborators and third parties to develop software applications in the same development environment used internally by Accelrys. Core molecular modeling functions are included in this open environment, which permits developers to focus on their particular scientific interests and increase the power and utility of their programs by integrating them with Accelrys' products.

        Ease of Use.    Accelrys' software products are integrated, modular, focused on specific research areas or techniques, and accessible by intuitive graphical user interfaces ("GUI"). These enable experimentalists to use molecular simulation in a manner consistent with established analytical and laboratory techniques, in a user-friendly computational environment.

        Increased Access.    Accelrys has developed desktop product lines that target a broader group of users, including laboratory scientists and engineers. Software products running in the Microsoft Windows environment are used increasingly by scientific researchers on desktop computers to search for, analyze and communicate scientific data, particularly within corporate Intranets. Accelrys' desktop products use familiar technology and are built upon Accelrys' open architecture and validated core technology.

        Based upon the science, technology and attributes described above, Accelrys provides a broad suite of software products used throughout the research and development cycle. Accelrys believes that offering a "single-shop," integrated drug discovery and chemical development solution will be a significant benefit to its customers. In addition to these software modules, Accelrys also offers the following:

        Integration Products and Services.    With most software modules Accelrys offers customers and third-party licensees a standard environment in which to develop and integrate their own applications. These integration products provide an external developer with access to APIs used by Accelrys' own internal development staff. As a result, a developer can employ most of the functions, subsystems or methods embodied in or accessible through Accelrys' products to integrate an external program or to create additional application functionality, with a corresponding GUI.

        Databases.    Databases are a close adjunct to Accelrys' software products. Accelrys creates, maintains and sells a database of chemical reactions in connection with its cheminformatics product line. Accelrys also resells a number of scientific databases created by third parties.

        Consulting Services.    Accelrys offers consulting, contract research, custom development and systems integration services, with a particular emphasis on the development of enterprise-wide informatics and decision support systems. These services allow customers to benefit from Accelrys' facilities and the expertise of Accelrys' staff in outsourcing these types of specialist functions.

        Computer Hardware.    As a convenience to its customers, Accelrys acted as a value-added reseller ("VAR") of computer hardware through 2001. Accelrys purchased substantially all of its hardware for from a Silicon Graphics, Inc. ("SGI") authorized distributor. Accelrys terminated its VAR relationship with SGI in 2001 and discontinued computer hardware re-sale operations effective December 31, 2001.

ACCELRYS PRODUCT USES

        Accelrys' software products are used in a variety of research areas within a number of industries. The principal research and development areas in which Accelrys' software products are used include the following:

        Sequence to Structure.    Accelrys' bioinformatics and structural biology software provides tools that enable researchers to tackle the range of problems inherent in moving from gene sequence data to fully characterized targets for drug discovery projects. This range of activities represents the early stages of the drug discovery process and is an essential pre-requisite for the structure-based route to drug discovery. Relevant problems include finding interesting sequences within the huge quantities of

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available genetic data, characterizing those sequences and relating them to particular functions, determining the secondary structure of DNA and RNA, determining the three dimensional molecular structure of proteins (often using data from analytical techniques such as NMR and X-ray diffraction), and understanding the relationship between this structure and function. The key product for gene sequence analysis is the GCG Wisconsin Package. Products used in macromolecular structure determination and subsequent protein modeling include X-PLOR, Insight II application modules, QUANTA, Discover, CHARMm and Felix.

        Lead Identification and Optimization.    The next step in drug discovery is the development and optimization of potential small molecule drugs based on these targets. Accelrys' rational drug design products allow the design of small organic therapeutics, based on a protein active site model or on activity data for a set of compounds. Related techniques are used to design and assess combinatorial molecular libraries that are screened for desired activity using high throughput experimentation. Accelrys thus brings together the worlds of computation and experiment. The large quantities of data generated by such activities can be managed and analyzed using Accelrys' informatics tools—the results inform more focused testing and design. Rational drug design and combinatorial chemistry products include Catalyst, Cerius2 and Insight II application modules, QSAR and Discover, and MedChem explorer. Cheminformatics tools applied to manage relevant data are based on the RS3 and Accord databases, with application-specific informatics tools and decision support capabilities provided by products such as RS3 HTS and Diva.

        Development and Formulation.    Following the discovery process, a drug must be delivered successfully—administered as a crystalline solid in a pill, or through some other mechanism such as a patch or spray. Accelrys' crystallization software solves a range of problems that are important to the development and formulation of pharmaceuticals—for example, establishing possible crystalline structures for the solid material of a pill. Such problems are critical across the chemicals industries, affecting products such as paints, pigments, and petrochemicals. Accelrys' crystallization products are delivered as Cerius2 and Materials Studio application modules. Development of new and improved products is also achieved through formulation—varying the process and proportions in which known components are combined. Accelrys' software can optimize this process for products including drugs, foods, cosmetics, personal care products, detergents, plastics, and specialty chemicals. Accelrys serves formulators through the FAST informatics software and the systems integration services of the Formulations Consortium.

        Improving Materials and Processes in the Chemicals Industry.    Many of Accelrys' other solutions support the design of improved products and processes across the chemicals industry. Two key technology areas in this respect are polymer science and catalysis. Polymer modeling products are used by researchers in the chemical, plastics, rubber, adhesives, petrochemical, aerospace and automotive industrial sectors to analyze and predict polymer properties and establish the link between these properties and the molecular-level structure of the material. Accelrys' polymer software products allow these researchers to construct and characterize models of polymers and predict key properties, such as blend compatibility, mechanical behavior, cohesion and adhesion to surfaces. Accelrys' polymer products include Cerius2, Materials Studio, and Insight II application modules, QSAR and Discover. Accelrys' catalysis products are used by companies in the chemical, petrochemical, natural gas and plastics industries and by catalyst manufacturers to characterize catalysts and sorbent materials, to simulate thermodynamic and reactivity data, and to understand and control chemical reactions. Accelrys' products are used to characterize and design metallocene catalysts, zeolites and other molecular sieves, and metal oxides. These products include Cerius2 and Insight II application modules, Discover, DMol and CASTEP.

        Other Materials-based industries.    Accelrys' products find a broad range of applications across industries including electronics, aerospace, structural materials, the automotive industry, and energy. In electronics, for example, the trend toward microminiaturization of electronic devices has created a need

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for improved processes and materials. Accelrys' software products are used by semiconductor and electronics companies to understand surface chemistry, defects, thin oxide layers, magnetic properties and the performance of new packaging materials. These products include Cerius2 and Insight II application modules, Discover, DMol and CASTEP.

ACCELRYS CUSTOMERS

        Accelrys' customer base consists of leading commercial, governmental and academic organizations. No single customer accounted for more than 10% of Accelrys' revenues during the fiscal year ended December 31, 2001.

        Industrial Customers.    Accelrys' industrial customers include many of the largest pharmaceutical, biotechnology, chemical, petroleum and semiconductor companies worldwide. In each of the past three fiscal years, a significant portion of Accelrys' total revenue has been derived from pharmaceutical, biotechnology and chemical companies.

        Governmental Customers.    Many governmental institutions in the United States, Canada, Europe and the Asia/Pacific region use Accelrys' products.

        Academic Customers.    Many universities in the United States, Europe and the Asia/Pacific region use Accelrys' products. This use historically has been for purposes of academic research, but Accelrys believes its products increasingly may be used as a part of formal university teaching curricula.

ACCELRYS STRATEGIC AND ACADEMIC ALLIANCES

        Accelrys has entered into a number of strategic alliances relating to product development, product distribution and joint marketing. Accelrys plans to continue to cultivate relationships with academic, governmental and commercial research organizations for purposes of identifying and licensing new technology to use in product development. In addition, Accelrys plans to maintain and expand its alliances focused on compatibility of Accelrys' products with databases and database management systems, other computational chemistry and molecular simulation products, and products in related markets such as laboratory instrumentation. Accelrys also intends to continue to enter into porting and joint marketing arrangements with hardware vendors on whose systems Accelrys' products operate.

ACCELRYS CONSORTIA

        Since 1986, Accelrys through its predecessor companies has formed a number of consortia with outside parties, commonly for purposes of market expansion. Accelrys believes the formation and management of these consortia helps Accelrys focus on topical industrial needs and establishes the consortia members as an initial customer base for its products. Accelrys believes its consortia help it establish valuable working relationships with leaders in its target markets.

        These consortia bring together groups of industrial researchers, academic experts and Accelrys' scientists that focus on developing, validating and applying simulation to the target industrial research area. Typically, consortia participants provide funds and a liaison to Accelrys. Each consortium generally has a three-year term and has a defined set of objectives and milestones that are updated and re-prioritized annually by the consortium's members. Some of the consortia have been extended beyond their initial terms in order to continue the benefits of the collaborative activities.

        Accelrys has seven active consortia in the following research areas: Polymers, Catalysis, Combinatorial Chemistry, Formulations, Molecular Crystallization, Functional Genomics and High Throughput Crystallography. Consortium members have rights to participate in meetings and non-exclusive licenses to use software products developed as a result of the consortium activities. Members also get to vote on product development priorities.

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ACCELRYS SALES AND MARKETING

        Accelrys markets its products and services worldwide. In the United States, Europe, and Asia, Accelrys has direct sales forces, consisting of field sales and telesales representatives, some of which focus on the life science market and some of which focus on the materials science market.

        North and South America; Europe; Asia.    Accelrys employs direct sales representatives and telesales representatives to market and sell Accelrys' products and services. Certain of the telesales representatives focus exclusively on sales to academic researchers. The direct sales representatives and remaining telesales representatives work in teams selling to commercial and governmental accounts in assigned geographic territories and focus on either the life science market or the materials sciences market. The direct sales representatives typically focus on larger accounts and transactions and work closely with Accelrys' pre-sales support scientists in order to demonstrate Accelrys' products and their applicability to various research and development efforts.

        In support of its sales activities, Accelrys participates in industry trade shows, publishes its own newsletters, places advertisements in other industry publications, publishes articles in industrial and scientific publications, conducts direct mail campaigns, sponsors industry conferences and seminars, and maintains a World Wide Web home page that contains information about Accelrys and its product and service offerings.

        Accelrys' sales efforts have historically resulted in a higher concentration of sales in the last quarter of the calendar year.

ACCELRYS PRODUCT DEVELOPMENT

        Development of Accelrys software is focused on expanding software product lines, designing enhancements to Accelrys' core technology and integrating existing and new products into Accelrys' principal software architectures. Accelrys intends to offer regular updates to its products and to expand its existing product suite. A key component of Accelrys' product development activities is the extension of its core UNIX-based software architecture to accommodate access to Accelrys' products from desktop computers.

        Accelrys licenses software products or otherwise has acquired software products from corporate, governmental and academic institutions. These arrangements sometimes involve joint development efforts and frequently require the payment of royalties by Accelrys. The development and royalty obligations, scope of distribution rights, duration and other terms of these arrangements vary depending on the product, the market, resource requirements, the other parties with which Accelrys contracts and other factors. Accelrys has also developed products with funding and direction from customers through Accelrys' consortia activities. See "Business—Accelrys Consortia." Accelrys intends to continue to license or otherwise acquire technology or products from third parties and to develop products as part of its consortia arrangements with customers.

ACCELRYS CUSTOMER SERVICES AND SUPPORT

        Accelrys is committed to providing customers with superior support including telephone, electronic mail, fax and Internet-based technical support services; training; user group conferences; and targeted contract and consulting services involving application of Accelrys' technology and scientific expertise to particular research needs of customers. Accelrys believes that customer service, support and training are key to the adoption and successful utilization of its products.

        Purchases of multi-year licenses to use Accelrys' software products include one year of maintenance services, consisting of technical support and software upgrades. Thereafter, Accelrys offers renewals of maintenance services on an annual basis for an annual fee. Annual licenses to use Accelrys' software products generally include all maintenance services. Most of Accelrys' customers contract for maintenance and support services. These give customers access to new releases, technical notes,

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documentation addenda and other support which enables customers to utilize Accelrys' products more effectively, including access to Accelrys' technical and scientific support personnel during extended business hours. Through its distribution channels, Accelrys offers training conducted by staff knowledgeable in both the theory and application of molecular simulation. Technical newsletters and bulletins and advance notification about future software releases are sent to customers to keep them informed and to help them with resource allocation and scheduling. To maintain an ongoing understanding of customer requirements, Accelrys sponsors scientific symposia and user group meetings throughout the year.

ACCELRYS COMPETITORS

        The market for Accelrys' products is intensely competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants. Accelrys' competitors offer a variety of products and services to address this market. Accelrys believes that the principal competitive factors in this market are product quality, flexibility, ease-of-use, scientific validation and performance, functionality and features, open architecture, quality of support and service, reputation and price. Competition currently comes from the following principal sources: other software packages for analysis of chemical and biological data; desktop software applications, including chemical drawing, molecular modeling and analytical data simulation applications; consulting and outsourcing services; other types of simulation software provided to engineers; and firms supplying databases, such as chemical or genomic information databases, database management systems and information technology. In addition, certain of Accelrys' licenses grant the right to sublicense Accelrys' software. As a result, Accelrys' customers and third-party licensees could develop specific simulation applications using Accelrys' technology and compete with Accelrys by distributing such programs to potential customers of Accelrys. Customers or licensees could also develop their own modeling, simulation, analyses, bioinformatics or cheminformatics technology and cease using Accelrys' products and services. Further, they may choose to sublicense such technology.

        Certain of Accelrys' competitors and potential competitors have longer operating histories than Accelrys and have greater financial, technical, marketing and other resources. Further, many of Accelrys' competitors offer products and services directed at more specific markets than those targeted by Accelrys, enabling these competitors to focus a greater proportion of their efforts on such markets. Certain offerings that are competitive with Accelrys' products and services are developed and made available by governmental organizations and academic institutions, and these entities may be able to devote substantial resources to product development and also offer their products to users for little or no charge. There can be no assurance that Accelrys' current or potential competitors will not develop products, services or technologies that are comparable to, superior to, or render obsolete, the products, services and technologies offered by Accelrys. There can be no assurance that Accelrys' competitors will not adapt more quickly than Accelrys to technological advances and customer demands, thereby increasing such competitors' market share relative to that of Accelrys. Any material decrease in demand for Accelrys' technologies or services may have a material adverse effect on the business, financial condition and results of operations of Accelrys.

ACCELRYS SOURCES OF SUPPLY

        Accelrys purchased substantially all hardware products that it re-sold to its licensees from a single vendor, or such vendor's distributors. In 2001, Accelrys discontinued operating as a VAR and discontinued hardware re-sale operations effective December 31, 2001, see "Business—Accelrys Products and Services".

ACCELRYS INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS

        Accelrys relies primarily on a combination of copyright, trademark and trade secret laws, confidentiality procedures and contractual provisions to protect its proprietary rights. Accelrys also has

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two United States patents. Accelrys believes that factors such as the technological and creative skills of its personnel, new product development, frequent product enhancements, name recognition and reliable product maintenance are essential to establishing and maintaining a technological leadership position. Accelrys seeks to protect its software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. Further, there can be no assurance that Accelrys' patents will offer any protection or that they will not be challenged, invalidated or circumvented. Furthermore, there can be no assurance that others will not develop technologies that are similar or superior to Accelrys' technology. Despite Accelrys' efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of Accelrys' products or to obtain and use information that Accelrys regards as proprietary. In limited instances, Accelrys has licensed source codes of certain products to customers or collaborators. For these reasons, policing unauthorized use of Accelrys' products may be difficult. In addition, the laws of some foreign countries do not protect proprietary rights as fully as do the laws of the United States.

        There can be no assurance that Accelrys' means of protecting its proprietary rights in the United States or abroad will be adequate. There can be no assurance that third parties will not claim infringement by Accelrys of their intellectual property rights. From time to time Accelrys receives letters from third parties claiming or suggesting that its products may infringe patents or other intellectual property rights. Accelrys has investigated these matters and believes that they are immaterial to the operations of Accelrys. There can be no assurance, however, that Accelrys' products do not infringe upon the patent or other intellectual property rights of third parties, that Accelrys will not be required to seek licenses for or otherwise acquire rights to technology as a result of claims of infringement or that other companies will not bring infringement suits against Accelrys. Accelrys expects in general that software product developers will increasingly be subject to infringement claims as the number of products and competitors in Accelrys' industry segments grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit, could be time consuming to defend, result in costly litigation, divert management's attention and resources, cause product shipment delays or require Accelrys to enter into royalty or licensing agreements.

        Such royalty or licensing agreements, if required, may not be available on terms acceptable to Accelrys, if at all. In the event of a successful claim of product infringement against Accelrys, the failure or inability of Accelrys to license or design around the infringed technology would have a material adverse effect on Accelrys' business, financial condition and results of operations.

PHARMACOPEIA'S DRUG DISCOVERY SERVICES SEGMENT

        Since its inception in March 1993, Pharmacopeia's Drug Discovery Services segment has primarily focused its research efforts on developing novel, proprietary science and technologies for accelerating the pace of drug discovery for its pharmaceutical and biotechnology customers. Pharmacopeia's Drug Discovery Services segment combines a proprietary combinatorial chemistry technology, high-throughput screening and the use of modeling, simulation and information management software to address key challenges in the drug discovery process.

        One such challenge is the generation and evaluation of large numbers of diverse and readily identifiable small molecule compounds to find new, orally active drugs. Pharmacopeia's encoding technology, Encoded Combinatorial Libraries on Polymeric Support, or ECLiPS™, enables Pharmacopeia to generate hundreds of thousands of small molecule compounds at a fraction of the cost of traditional chemical synthesis methods. Pharmacopeia uses "Direct Divide" combinatorial chemistry to build collections, or libraries, of 10,000 to 500,000 or more small molecule compounds by performing only 50 to 200 individual chemical reactions. Pharmacopeia's ECLiPS technology offers substantial productivity improvements as compared to the 10,000 to 500,000 or more reactions that would be required to prepare similarly sized chemical libraries by synthesizing each compound individually. The ECLiPS productivity advantage results from the synthesis of compounds on tiny plastic beads in large mixtures. After each solid phase synthesis step, proprietary tag sets are attached to the

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beads to indicate the chemical building block and reaction conditions used in that step. These stable, easily detectable tag sets enable the rapid identification from the mixture of any compound that is active in a biological screening assay. This tagging technology is licensed exclusively from Columbia University ("Columbia") and Cold Spring Harbor Laboratory ("Cold Spring").

        Another challenge addressed by Pharmacopeia's Drug Discovery science and technologies is the ability to accurately and rapidly test chemical compounds against biological targets. Pharmacopeia uses 96-well, 384-well, and 1,536-well screening formats to identify compounds active against its partners' drug discovery targets. Pharmacopeia's 384-well and 1,536-well formats offer significant throughput improvements and cost reductions compared to the industry-standard 96-well format.

        To assist in the modeling of potential drugs, the simulation of interactions between chemicals and biological targets and the collection, storage and use of the data generated from its drug discovery activities, the Company's Drug Discovery Services segment makes extensive use of the Accelrys' products, software designed in-house by the Company's Drug Discovery Services segment and software purchased from other vendors.

        Pharmacopeia's Drug Discovery technology supports its pharmaceutical and biotechnology customers in improving their drug discovery productivity. Pharmacopeia's objective is to be among the industry leaders in the discovery and optimization of novel drug candidates on behalf of its customers. Pharmacopeia's commercialization strategy in the Drug Discovery Services segment is to pursue collaborations with pharmaceutical and biotechnology companies. Pursuant to collaborative agreements, Pharmacopeia leverages its multimillion compound sample collection and abilities in high-throughput screening to perform Lead Discovery and Lead Optimization Services for customers. Pharmacopeia's technology strategy in the Drug Discovery Services segment is to enhance productivity through cost reductions and increased throughput, to increase the size and quality of its library compound collection and its high throughput screening capabilities, and to build its knowledge base of the relationships between chemical structures and biological targets for use in future drug discovery programs.

        Focusing on Lead Discovery and Lead Optimization Services for drug discovery, Pharmacopeia seeks customers to develop, manufacture, market and sell resulting drugs. In 2001, Pharmacopeia initiated Lead Discovery Service contracts with several pharmaceutical and biotechnology customers for collaborations using its large collection of novel, small molecules and high-throughput screening including Boehringer Ingelheim, Takeda, Antigenics, Ester Neurosciences, Locomogene and Mitsubishi-Tokyo Pharmaceuticals. In addition, under existing agreements, Pharmacopeia continued peforming such services for N.V. Organon ("Organon"), Otsuka Pharmaceutical Factory ("Otsuka"), Amgen, Progenics and Schering AG. In 2001, Pharmacopeia performed Lead Optimization Services for Schering-Plough Ltd. ("Schering-Plough"), Bristol-Myers Squibb ("BMS"), Otsuka, Organon and Schering AG.

DRUG DISCOVERY SERVICES SEGMENT BUSINESS STRATEGY

        Pharmacopeia's objective is to be an industry leader in the discovery and optimization of novel drug candidates on an outsourced basis. Pharmacopeia seeks to minimize its financing requirements and accelerate profitability by pursuing drug discovery collaborations with multiple pharmaceutical and biotechnology companies. Pharmacopeia does not currently plan to develop, manufacture and sell its own pharmaceutical products. Pharmacopeia's business strategy exploits the emerging trend in the pharmaceutical industry to outsource certain products and services that can be more efficiently provided by third parties. Pharmacopeia's commercialization and technology strategy has several components.

        Commercialization Strategy.    Pharmacopeia's commercialization strategy is to provide lead compounds and optimized lead compounds to multiple pharmaceutical and biotechnology customers. Under these arrangements, Pharmacopeia's customers are responsible for the clinical development and eventual manufacture and sale of any resulting drugs. Generally, customers compensate Pharmacopeia

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through (i) funding or fees during or upon completion of its services and (ii) milestone payments and royalties on any drugs based on Pharmacopeia's technology and developed by Pharmacopeia's customers. Each collaboration is tailored to the individual customer's needs but is developed within two broad frameworks:

•

Lead Discovery Services—Pharmacopeia identifies compounds active against collaborators' targets. In this type of program, Pharmacopeia utilizes its multi-million compound sample collection and expertise in high-throughput and ultra high-throughput screening.


•

Lead Optimization Services—Pharmacopeia performs the optimization of lead compounds against collaborators' targets. In this type of program, Pharmacopeia utilizes its broad base of chemistry expertise, including combinatorial chemistry, medicinal chemistry, and parallel synthesis, together with advanced biological screening to improve potency and other criteria of lead compounds.

        Technology Strategy.    Pharmacopeia's technology strategy is to enhance productivity through cost reductions and increased throughput and to build Pharmacopeia's library collection and its knowledge base of the relationships between chemical structures and biological targets for use in future drug discovery programs.

•

Enhance Productivity. Pharmacopeia seeks to leverage its existing technology by increasing productivity through cost reductions and significant increases in throughput. Pharmacopeia's internal research and development efforts focus on: (i) advances in Pharmacopeia's automated systems; (ii) the development of enhanced software; (iii) the development of new materials and reactions for solid phase synthesis; and (iv) new high throughput screening formats.


•

Develop Collection of Libraries and Knowledge Base. Pharmacopeia is building sets of libraries that will eventually aggregate millions of compounds available for future screening programs. This collection of compounds will increase as new libraries are created and as outlicensed libraries are returned to Pharmacopeia upon the expiration of customers' exclusivity periods. Pharmacopeia believes that this growing library collection will provide a valuable source of leads for future drug discovery programs. Pharmacopeia also intends to build a knowledge base of the relationships between classes of chemical structures and classes of biological targets. This knowledge base will grow as Pharmacopeia designs, synthesizes and screens large numbers of compounds against a growing number of targets. Pharmacopeia believes that this knowledge base will provide a future competitive advantage by enabling Pharmacopeia to more quickly identify active compounds for newly identified targets.

DRUG DISCOVERY SERVICES SEGMENT PROGRAMS

        Pharmacopeia has several active Lead Discovery and Lead Optimization programs for drug discovery underway with its customers. Previously, Pharmacopeia had funded the identification and optimization of lead compounds for targets that it had chosen in various therapeutic areas. In 1999, a strategic decision was made to substantially cease work on self-funded drug discovery programs. Rather, Pharmacopeia is now primarily pursuing only those projects that are funded by its customers. In 2001, Pharmacopeia partnered two of its previously self-funded programs with BMS and Organon.

DRUG DISCOVERY SERVICES SEGMENT CUSTOMERS

        In 2001, Pharmacopeia performed drug discovery services for Schering-Plough, Schering AG, Novartis, Organon, BMS, Otsuka, Boehringer Ingelheim, Progenics, TakedaAntigenics, Ester Neurosciences, Locomogene, Mitsubishi-Tokyo and AstraZeneca. Drug discovery services revenue from Schering-Plough represented approximately 11% of the Company's revenue in 2001. The loss of one or more Drug Discovery Services Segment customers may have a material adverse effect on Pharmacopeia.

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DRUG DISCOVERY SERVICES SEGMENT TECHNOLOGIES

        A major bottleneck in the drug discovery process is the limited number and diversity of available chemical compounds. Using traditional manual chemical synthesis techniques, a chemist is usually able to synthesize only 25 to 50 compounds per year. The low productivity of manual synthesis severely constrains the number of compounds available for screening in order to identify active compounds and provide the basis for initial structure-activity relationships ("SAR") analysis. Manual synthesis also slows the optimization process by limiting the number of analogs synthesized and tested.

        Numerous technologies have been developed to accelerate the synthesis of chemical compounds. Several early methods were based on either automated or combinatorial chemical synthesis of oligonucleotides and peptides, which are not generally useful as oral drugs. Combinatorial chemistry involves the synthesis of large numbers of different chemical compounds by creating all possible combinations of a set of chemical components, or building blocks. More recent methods include robotic synthesis and various combinatorial chemistry approaches to synthesizing libraries of small molecules, which are generally preferred by pharmaceutical companies as drug development candidates.

        Pharmacopeia believes that its drug discovery technology offers a unique solution to the bottleneck that constrains the drug discovery process. Pharmacopeia's combinatorial chemistry technology generates large, diverse libraries of the small molecules favored by pharmaceutical companies for development. Most importantly, Pharmacopeia's technology uses solid phase synthesis and an encoding system to permit rapid identification of compounds synthesized in combinatorial mixtures.

        The ECLiPS technology uses a patented "Direct Divide" approach to combinatorial chemistry to build collections, or libraries, of 10,000 to 500,000 or more small molecule compounds by performing only 50 to 200 individual chemical reactions. This "Direct Divide" approach yields a more controlled distribution of final compounds than does the "pool and split" method currently used by certain other companies in drug discovery and previously practiced by Pharmacopeia. Pharmacopeia is able to synthesize a large number of widely diverse libraries of small molecule compounds because its chemists can combine a nearly unlimited set of chemical building blocks using a wide variety of reactions. Although large libraries of peptides, oligonucleotides and other oligomers can be generated, their diversity is constrained by the limited number of building blocks and the fewer reactions available to combine them.

        Pharmacopeia uses ECLiPS to build libraries of small, low molecular weight (less than 700 Daltons) compounds, predominantly heterocycles. These low molecular weight compounds are preferred by pharmaceutical companies because they are more likely to be orally active (effective as drugs in tablet or capsule form), tend to have longer duration of action and are less expensive to manufacture. In contrast, natural peptide and oligonucleotide drugs are usually degraded by human digestive system enzymes and generally must be administered by injection. In addition, peptide and oligonucleotide drugs are often quickly eliminated from the body, which limits their duration of action.

        The ECLiPS technology allows Pharmacopeia to quickly identify the chemical structure of individual small compounds synthesized in combinatorial mixtures. This identification is made possible through the use of Pharmacopeia's encoded solid phase synthesis technology. Solid phase synthesis generally refers to the synthesis of compounds on tiny plastic beads. Encoding refers to the tag sets that Pharmacopeia attaches to each bead as a compound is synthesized. These tag sets allow Pharmacopeia to rapidly identify the chemical structure of each compound.

        Pharmacopeia's drug discovery approach encompasses its ECLiPS technology, assay technology, production automation, information systems and quality assurance programs, as more fully described below.

        ECLiPS Technology.    The ECLiPS technology is a central component of Pharmacopeia's Drug Discovery Services segment. ECLiPS includes solid phase synthesis, combinatorial chemistry and sets of encoding molecules.

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•

Solid Phase Synthesis. Pharmacopeia has developed proprietary methods and procedures for performing a variety of small molecule chemical reactions on tiny plastic beads. In this approach to chemical synthesis, known as solid phase synthesis, compounds are bound to these tiny plastic beads using special linkers. This approach offers several advantages over solution phase synthesis. Solid phase synthesis can often result in higher yields because the beads can be repeatedly re-exposed to reactants until the desired reaction product has reached a satisfactorily high yield. Solid phase synthesis also facilitates the isolation of individual compounds. Beads can be washed with solvents to remove byproducts, and an individual compound can then be isolated from a mixture by removing a single bead and breaking the linkage to detach the compound from the bead.

Pharmacopeia believes that its experience in solid phase synthesis of diverse, heterocyclic, small compounds is a key competitive advantage. Large, diverse libraries of these small molecules are more difficult to synthesize than libraries of oligonucleotides or peptides. The great diversity of chemical building blocks and the variety of chemical reactions that must be used in synthesizing these small molecules require a wide range of reaction conditions, including temperature, pH, solvents, catalysts and other variables. Each chemical reaction must be optimized to achieve high yields of the desired compound.

•

Combinatorial Chemistry. Pharmacopeia's ECLiPS technology employs "Direct Divide" combinatorial chemistry. For example, a chemist using a five-step reaction sequence and ten building blocks per step can synthesize a mixture of 100,000 different chemicals by performing only 50 chemical reactions. Using larger numbers of building blocks or steps can create larger libraries. This technology offers substantial productivity improvement in comparison to parallel synthesis and other techniques currently employed to generate chemical libraries. Parallel synthesis is the performance of a series of individual chemical reactions, usually several dozen simultaneously, typically using robotics. In parallel synthesis, 111,110 individual chemical reactions would be required to synthesize the same 100,000 compounds that Pharmacopeia's technology can accomplish in 50 reactions. Parallel synthesis requires extensive labor and time and a significant capital investment in robotics. The labor and time disadvantage increases exponentially with library size.


•

Sets of encoding molecules. Pharmacopeia overcomes the challenge of identifying active compounds from combinatorial mixtures through its use of a proprietary collection of chemically stable small molecules, or tag sets, to encode each bead used in solid phase synthesis. This enables Pharmacopeia to quickly identify the structure of an active compound prepared using the "Direct Divide" technique without resorting to deconvolution, a process in which an active compound must be "reverse engineered" by resynthesizing and testing various component combinations until the structure of the active compound is deduced. During each step of Pharmacopeia's solid phase synthesis process, specific tag sets are attached to the beads to indicate the chemical reagent and reaction conditions used in that step. By the end of the synthesis process, each bead has collected tag sets that represent all of the building blocks used to create the compound on that bead. When an active compound is found in an assay, the bead from which the active compound was extracted is analyzed. The tag sets are detached from the bead using specific chemical reactions that break the linkage between the tag sets and the bead. The detached tag sets are read using conventional gas chromatography techniques. The results, which resemble a bar code, are captured in a database that identifies and stores data regarding the active compound.

Pharmacopeia's proprietary tag sets have the following important characteristics:

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Stability. Pharmacopeia's proprietary tag sets are relatively unreactive. For this reason the tag sets do not break or decompose as a result of heat, vigorous shaking or other harsh reaction conditions. Thus, the tag sets rarely interfere with or limit the solid phase chemical reactions

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used to create potential new drug compounds. By contrast, the oligonucleotides and peptides used as tags by some companies are more fragile because they are more reactive. These large molecule tags may therefore interfere with chemical reactions or may be decomposed or altered chemically during compound synthesis. These factors constrain the range of chemicals that can be synthesized in solid phase when oligonucleotide or peptide tags are used.

•

Size and Detectability. In contrast to the relatively large size of oligonucleotide and peptide tags, Pharmacopeia's tag sets are small and easy to attach to and detach from the beads. The highly sensitive detection methods available for these tag sets allow Pharmacopeia to use them in extremely small quantities. Pharmacopeia's tag sets do not occupy a significant portion of the beads' capacity and do not interfere with the extraction or testing of detached compounds.

        Thus, using its proprietary ECLiPS technology, Pharmacopeia can synthesize a large combinatorial mixture of compounds and rapidly identify the specific structure of individual active compounds found in the library. As of December 31, 2001, Pharmacopeia had used its ECLiPS technology to synthesize libraries containing an aggregate of more than 7.0 million unique chemical compounds. Many of these libraries have initially been licensed to customers for their exclusive use for varying periods of time.

        Assay Technology.    The second component of Pharmacopeia's drug discovery approach is its proprietary assay technology. Pharmacopeia employs 96-well, 384-well and 1,536-well microtiter plate solution phase assays to evaluate the biological activity of compounds in Pharmacopeia's libraries.

        Each screening well in Pharmacopeia's 1,536-well ultra high-throughput screening ("UHTS") system accommodates a 1-microliter volume for conducting the assay. This compares with a 100-microliter volume required in each well of a 96-well plate. Thus, compound and reagent consumption is reduced by 99%. In addition, each plate represents 1,536 tests rather than 96. Pharmacopeia has been developing this 1,536-well system internally and through contractors, vendors and collaborators since 1996.

        Pharmacopeia has improved the 96-well, the 384-well, and the 1,536-well microtiter plate assays it performs for its collaborators. These improvements include increasing the sensitivity of detection, increasing the number of assays that can be run daily, reducing labor and materials required to execute assays and allowing simultaneous collection of information on the activity of a single compound against multiple targets.

        In 2001, Pharmacopeia completed several million tests of its library compounds for activity against biological targets such as receptors or enzymes. For primary screening, Pharmacopeia often includes 10-20 compounds per well to perform a quick survey of a library's activity. If assay results suggest that some compounds in that library are active, then compounds from that library are tested individually.

        Production Automation.    Production automation technology is another important component of Pharmacopeia's integrated drug discovery approach. Pharmacopeia has developed proprietary instruments and methods for quickly and cost effectively manipulating large numbers of small plastic beads and the compounds that are detached from these beads. Pharmacopeia's proprietary technology includes bead washing and synthesis vessels that support the synthesis process. The production automation technology also includes proprietary engineering methods and automated systems for placing individual compounds in 96 to 1,536-well microtiter plates and processing these plates in preparation for screening. Screening a single 50,000 compound library against 20 or more targets can require the loading, processing and testing of thousands of 96-well microtiter plates.

        Information Systems.    Pharmacopeia has developed proprietary software to support its drug discovery activities. Pharmacopeia's information systems assist Pharmacopeia's scientists in managing the extensive data generated during library production and testing. First, the software tracks the chemical building blocks, reaction steps and tag sets used to create each library. Pharmacopeia's systems then track the thousands of bar-coded microtiter plates filled and processed as libraries are screened. As active compounds are identified and decoded, Pharmacopeia's software integrates the tag

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set decoding results with the original library design database to quickly provide Pharmacopeia's scientists with the specific chemical structure and synthesis steps for the active compound.

        Pharmacopeia's information systems also include analytical and database tools. Databases of available chemical building blocks and reactions are used as reference sources in the library design process. Molecular modeling, structure analysis and statistical programs are available for designing optimization libraries. In addition, analytical and database software is used to collect and analyze the results of individual assays. The Company's Drug Discovery Services Segment uses Accelrys products, thereby significantly enhancing its ability to use informatics in the drug discovery process. See "Pharmacopeia's Software Segment—Accelrys"

        As Pharmacopeia continues to build its chemical libraries and accelerates its high-throughput screening activities a sizable amount of SAR information is emerging from these activities, which is being stored in Pharmacopeia's information systems. Pharmacopeia has the ability to access this SAR information for its own internal use or to assist its existing and new customers in the search of candidate molecules that interact with specific targets.

        Quality Assurance.    Pharmacopeia's drug discovery approach includes an extensive quality assurance program. As libraries are synthesized, representative compounds are analyzed at each reaction step to assure that yields are high and compounds are sufficiently pure. During library production, samples are tested at each reaction step to assure that the tag sets have been satisfactorily attached and can be decoded. Representative compounds are also tested to identify optimal solvents and detachment conditions for removing compounds from beads to perform screening assays. Production plates containing compounds for screening include control samples to further assure that plates to be screened in assays have been prepared appropriately.

DRUG DISCOVERY SERVICES SEGMENT COMPETITORS

        Many organizations are actively attempting to identify and optimize compounds for potential pharmaceutical development. Pharmacopeia competes with the research departments of pharmaceutical companies, biotechnology companies, other combinatorial chemistry companies and research and academic institutions.

        Many of these competitors have greater financial and human resources, and more experience in research and development, than Pharmacopeia. Historically, pharmaceutical companies have maintained close control over their research activities, including the synthesis, screening and optimization of chemical compounds. Many of these companies, which represent the greatest potential market for Pharmacopeia's products and services, are developing combinatorial chemistry and other methodologies to improve productivity, including major investments in robotics technology to permit the automated parallel synthesis of compounds. In addition, these companies may already have large collections of compounds previously synthesized or ordered from chemical supply catalogs or other sources against which they may screen new targets. Other sources of compounds include compounds extracted from natural products such as plants and microorganisms and compounds created using rational drug design. Academic institutions, governmental agencies and other research organizations are also conducting research in areas in which Pharmacopeia is working, either on their own or through collaborative efforts.

        Pharmacopeia competes with several alternative technologies in the design and synthesis of new chemical libraries for drug discovery programs. Combinatorial chemistry libraries of oligonucleotides and peptides can be synthesized in extremely large numbers. These molecules are also sequenceable, making it easy to identify the structure of an individual oligonucleotide or peptide found to be active in an assay. However, oligonucleotides and peptides are not usually effective as oral drugs because they are usually not bioavailable. These molecules are also usually quickly metabolized in the human bloodstream. Other, unnatural oligomer libraries have also been prepared, but these are less easily

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sequenceable than peptides and oligonucleotides. In addition, unnatural oligomer libraries lack the diversity of structures of the small molecule libraries prepared by Pharmacopeia.

        Libraries of small molecule compounds, which are preferred as drug candidates due to their increased potential for oral bioavailability and long duration of action, have recently been developed using competitive techniques. Three such techniques are based on "pool and split" solid phase combinatorial chemistry. The first uses oligonucleotide or peptide tags on each bead to identify each synthesis step. These large molecule tags are relatively fragile, which limits the nature of reaction conditions (temperature, pressure, etc.) and reagents (acids, bases, etc.) that can be used to build compounds. In addition, these large molecule tags complicate the synthesis of compounds or beads. Pharmacopeia's proprietary tag sets, in comparison, are durable, simple to attach and detach, and allow Pharmacopeia to make larger and more diverse libraries of small compounds. The second "pool and split" combinatorial chemistry technique uses deconvolution to identify the chemical structure of compounds found active in assays. Deconvolution is a slow, labor-intensive process, and may require several weeks of scientists' time to determine the structure of a single active compound. Pharmacopeia's tag sets permit hundreds of structures to be determined each day. The third "pool and split" combinatorial chemistry technique uses what are referred to as "hard tags" and is proprietary to a specific large pharmaceutical company.

        A fourth competitive approach is to perform a series of individual chemical reactions, typically using a robotic system. The result of robotic synthesis is compounds in individually labeled vessels. Robotic synthesis also yields larger quantities of each compound than are usually achieved in combinatorial mixtures such as Pharmacopeia's. Using robotic synthesis, however, requires extensive labor and time when compared with Direct Divide combinatorial chemistry. This labor and time disadvantage increases exponentially with library size.

DRUG DISCOVERY SERVICES SEGMENT—EXCLUSIVE LICENSE WITH COLUMBIA UNIVERSITY AND COLD SPRING HARBOR LABORATORY

        In 1993, the Company entered into an exclusive license agreement with Columbia and Cold Spring (jointly, the "Licensors") covering technology related to tagged combinatorial chemical libraries and methods of preparing and utilizing such libraries. The licensed technology includes patents and patent applications filed by Columbia and Cold Spring covering the use of encoding tag sets to implement the drug discovery process using combinatorial chemistry libraries. The Company is obligated to pay a minimum annual license fee of $100,000. The term of the agreement is the later of (i) 20 years or (ii) the expiration of the last patent relating to the technology, at which time the Company will have a fully paid license to the technology. The Company is also obligated to pay royalties to the Licensors based on net sales of pharmaceutical products developed by the Company as well as a percentage of all other payments and royalties received by the Company from customers where the Company has utilized the technology licensed from the Licensors.

DRUG DISCOVERY SERVICES—PATENTS AND PROPRIETARY INFORMATION

        The Company and its licensors currently have 41 issued US patents and a number of pending US and foreign patent applications relating to various aspects of the Company's technology, including its molecular tag sets, certain screening technologies and its libraries or compounds contained therein. These patents and patent applications are either owned by the Company or rights under them are licensed to the Company. Of particular note, the Company is the exclusive licensee of US patents issued on October 15, 1996, February 24, 1998 and August 4, 1998 which provide broad protection to the Company's use of encoded combinatorial libraries. The Company's success will depend in large part on its ability, and the ability of its licensees and its licensors, to obtain patents for its technologies and the compounds and other products, if any, resulting from the application of such technologies, defend patents once obtained, maintain trade secrets and operate without infringing upon the proprietary rights of others, both in the United States and in foreign countries.

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        The patent positions of pharmaceutical and biotechnology companies, including the Company, are uncertain and involve complex legal and factual questions for which important legal questions are not completely resolved. Certain patent applications, relating to encoded combinatorial libraries, have been filed by others prior to the Company's patent applications. In February of 1997, the European Patent Office (EPO) granted to Affymax Technologies, N.V., a subsidiary of Glaxo, a European Patent which, if valid, would have covered the synthesis of encoded small molecule libraries of the type developed by the Company. On November 12, 1997, the Company filed an Opposition to this European Patent, challenging its validity and, on December 2, 1999, the EPO revoked the Affymax patent in its entirety. Affymax filed an appeal to the decision of the EPO on August 17, 2000. On January 13, 1998, a US patent was issued to Affymax that contains certain claims covering a method of preparing an encoded library of chemical compounds. On December 15, 2000, Affymax and the Company entered into cross-licenses which would allow each of Affymax and the Company to use their respective tags, but not allow each party to use the tags of the other party. The cross-licenses also provide that with respect to the cross-licensed patents, each party will discontinue all patent challenges started against the other party before the effective date of the cross-licenses and neither party will institute any future patent challenges or legal proceedings against the other party. The Company does not know of any patents or patent applications by others that would preclude the Company from practicing its ECLiPS technology or obtaining patent protection in the United States or elsewhere for its ECLiPS technology. However, disputes may arise between the Company and other patent holders as to claims of infringement, which could involve protracted periods of litigation. Some of the Company's competitors have, or are affiliated with companies having, substantially greater resources than the Company, and such competitors may be able to sustain the costs of complex patent litigation to a greater degree and for longer periods of time than the Company. Uncertainties resulting from the initiation and continuation of any patent or related litigation could have a material adverse effect on the Company's ability to compete in the marketplace pending resolution of the disputed matters.

        There can be no assurance that patents will issue as a result of any pending applications or that, if issued, such patents will be sufficiently broad to afford protection against competitors with similar technology. Moreover, there can be no assurance that the Company or its customers will be able to obtain patent protection for compounds or pharmaceutical products based upon the Company's technology. There can be no assurance that any patents issued to the Company or its collaborative partners, or for which the Company has license rights, will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide competitive advantages to the Company. Litigation, which could result in substantial cost to the Company, may be necessary to enforce the Company's patent and license rights or to determine the scope and validity of others' proprietary rights. Furthermore, US patents do not provide any remedies for infringement that occurred before the patent is granted.

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        The commercial success of the Company will also depend upon avoiding the infringement of patents issued to competitors and upon maintaining the technology licenses upon which certain of the Company's current products are, or any future products under development might be, based. If competitors of the Company prepare and file patent applications in the United States that claim technology also claimed by the Company, the Company may have to participate in interference proceedings declared by the US Patent and Trademark Office ("PTO") to determine the priority of invention, which could result in substantial cost to the Company, even if the outcome is favorable to the Company. An adverse outcome could subject the Company to significant liabilities to third parties and require the Company to obtain a license to disputed rights from third parties or cease using the technology. A US patent application is maintained under conditions of confidentiality while the application is pending in the PTO, so that the Company cannot determine which inventions are claimed in pending patent applications filed by its competitors with the PTO.

        The Company currently has certain licenses from third parties and in the future may require additional licenses from other parties to develop, manufacture and market commercially viable products effectively. In performing Lead Discovery Services, the Company or its collaborators may need to obtain licenses to enable the Company to utilize certain assay technology and to screen against certain targets. The commercial success of the Company in its Lead Discovery Services may depend on the ability of the Company or its collaborators to obtain such licenses. There can be no assurance that such licenses will be obtainable on commercially reasonable terms, if at all, that the patents underlying such licenses will be valid and enforceable or that the proprietary nature of the patented technology underlying such licenses will remain proprietary.

        The Company relies substantially on certain technologies that are not patentable or proprietary and are therefore available to the Company's competitors. The Company also relies on certain proprietary trade secrets and know-how, which are not patentable. Although the Company has taken steps to protect its unpatented trade secrets and know-how, in part through the use of confidentiality agreements with its employees, consultants and certain of its contractors, there can be no assurance that these agreements will not be breached, that the Company would have adequate remedies for any breach, or that the Company's trade secrets will not otherwise become known or be independently developed or discovered by competitors.

DRUG DISCOVERY SERVICES SEGMENT—GOVERNMENT REGULATION

        Regulation by governmental entities in the United States and other countries will be a significant factor in the production and marketing of any pharmaceutical products that may be developed by a customer of Pharmacopeia or, in the event Pharmacopeia decides to develop a drug beyond the preclinical phase, by Pharmacopeia. The nature and the extent to which such regulation may apply to Pharmacopeia's customers will vary depending on the nature of any such pharmaceutical products. Virtually all pharmaceutical products developed by Pharmacopeia's customers will require regulatory approval by governmental agencies prior to commercialization. In particular, human pharmaceutical therapeutic products are subject to rigorous preclinical and clinical testing and other approval procedures by the US Food and Drug Administration ("FDA") and by foreign regulatory authorities. Various federal and, in some cases, state statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, record keeping and marketing of such pharmaceutical products. The process of obtaining these approvals and the subsequent compliance with appropriate federal and foreign statutes and regulations are time consuming and require the expenditure of substantial resources.

        Generally, in order to gain FDA approval, a company must conduct preclinical studies in the laboratory and in animal models to gain preliminary information on a compound's efficacy and to identify any safety problems. The results of these studies are submitted as a part of an Investigational New Drug application ("IND") that the FDA must review before human clinical trials of an

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investigational drug can start. In order to commercialize any products, Pharmacopeia or its customer will be required to sponsor and file an IND and will be responsible for initiating and overseeing the clinical studies to demonstrate the safety and efficacy that are necessary to obtain FDA approval of any such products. Clinical trials are normally done in three phases and generally take two to five years, but may take longer, to complete. After completion of clinical trials of a new product, FDA and foreign regulatory authority marketing approval must be obtained. If the product is classified as a new drug, Pharmacopeia or its customer will be required to file a New Drug Application ("NDA") and receive approval before commercial marketing of the drug. The testing and approval processes require substantial time and effort and there can be no assurance that any approval will be granted on a timely basis, if at all. NDAs submitted to the FDA can take, on average, two to five years to obtain approval. If questions arise during the FDA review process, approval can take more than five years. Even if FDA regulatory clearances are obtained, a marketed product is subject to continual review, and later discovery of previously unknown problems or failure to comply with the applicable regulatory requirements may result in restrictions on the marketing of a product or withdrawal of the product from the market as well as possible civil or criminal sanctions. For marketing outside the United States, Pharmacopeia will also be subject to foreign regulatory requirements governing human clinical trials and marketing approval for pharmaceutical products. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary widely from country to country. The research and development processes of Pharmacopeia involve the controlled use of hazardous materials. Pharmacopeia is subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of such materials and certain waste products. Although Pharmacopeia believes that its activities currently comply with the standards prescribed by such laws and regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. In the event of such an accident, Pharmacopeia could be held liable for any damages that result and any liability could exceed the resources of Pharma