10-K

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

ý Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Fiscal Year Ended December 31, 2001

o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from                          to                         .

Commission File Number: 0-27188

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

Delaware
(State or other jurisdiction of incorporation or organization) 33-0557266
(I.R.S. employer identification number)

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

			Page
PART I			1
	ITEM 1.	BUSINESS	1
	ITEM 2.	PROPERTIES	27
	ITEM 3.	LEGAL PROCEEDINGS	27
	ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	27
	ITEM 4A.	EXECUTIVE OFFICERS OF THE REGISTRANT	27
PART II			30
	ITEM 5.	MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS	30
	ITEM 6.	SELECTED FINANCIAL DATA	30
	ITEM 7.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	31
	ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	39
	ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	40
	ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	61
PART III			61
	ITEM 10.	DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT	61
	ITEM 11.	EXECUTIVE COMPENSATION	61
	ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT	61
	ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS	61
PART IV			61
	ITEM 14.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K	61
SIGNATURES			67

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.

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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 Pharmacopeia. In addition, there can be no assurance that Pharmacopeia will not be required to incur significant costs to comply with environmental laws and regulations in the future.

DRUG DISCOVERY SERVICES SEGMENT—SOURCES OF SUPPLY

        Pharmacopeia currently relies on two suppliers to provide plastic filter bottom microtiter plates that are used in the assay plate preparation process. Should Pharmacopeia be unable to obtain an adequate supply of these or comparable filter bottom plates at commercially reasonable rates, its ability to continue to prepare assay plates would be materially and adversely affected.

DRUG DISCOVERY SERVICES SEGMENT- PHARMACEUTICAL MANUFACTURING AND MARKETING

        Pharmacopeia does not expect to directly manufacture or market any pharmaceutical products that may be developed under its collaborative arrangements. However, Pharmacopeia may, in the future, consider undertaking such activities if it believes they are appropriate under the circumstances. Pharmacopeia has no experience in developing pharmaceutical products or in manufacturing or marketing products on a commercial scale. Pharmacopeia may not have the resources to develop or to manufacture or market by itself on a commercial scale any products identified by it. In the event Pharmacopeia decides to establish a manufacturing facility, Pharmacopeia will require substantial additional funds, and will be required to hire and train significant additional personnel and comply with the extensive FDA "good manufacturing practice" regulations applicable to such a facility.

RISKS ASSOCIATED WITH CONSOLIDATED INTERNATIONAL OPERATIONS

        In 2001, approximately 37% of the Company's consolidated revenue was derived from customers outside the United States both through international subsidiaries and on an export basis. Approximately

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24% of the Company's consolidated revenue was derived from customers in Europe and approximately 13% was derived from customers in the Asia/Pacific region. In 2000, approximately 33% of the Company's consolidated revenue was derived from customers outside the United States both through international subsidiaries and on an export basis. Approximately 20% of the Company's consolidated revenue was derived from customers in Europe and approximately 13% was derived from customers in the Asia/Pacific region. In 1999, approximately 33% of the Company's consolidated revenue was derived from customers outside the United States both through international subsidiaries and on an export basis. Approximately 22% of the Company's consolidated revenue was derived from customers in Europe and approximately 11% was derived from customers in the Asia/Pacific region. The Company anticipates that international revenue will continue to account for a significant percentage of revenue in the future.

        In 2001, approximately 78% of the Company's long-lived assets were located in the United States, 21% were located in Europe, and the balance in the Asia/Pacific region. In 2000, approximately 77% of the Company's long-lived assets were located in the United States, 22% were located in Europe, and the balance in the Asia/Pacific region. In 1999, approximately 95% of the Company's long-lived assets were located in the United States, 4% were located in Europe, and the balance in the Asia/Pacific region.

        The Company's international operations are subject to risks inherent in the conduct of international business, including unexpected changes in regulatory requirements, longer payment cycles, exchange rate fluctuations, export license requirements, tariffs and other barriers, political and economic instability, limited intellectual property protection, difficulties in collecting trade receivables, difficulties in managing distributors or representatives, difficulties in staffing and managing foreign subsidiary or joint venture operations, and potentially adverse tax consequences. There can be no assurance that the Company will be able to sustain or increase international revenue and there can be no assurance that any of the foregoing factors will not have a material adverse effect on the Company's international operations and therefore its business, financial condition and results of operations. The Company's direct international sales generally are denominated in local currencies. Fluctuations in the value of currencies in which the Company conducts business relative to the United States dollar result in currency transaction gains and losses, and the impact of future exchange rate fluctuations cannot be accurately predicted. There can be no assurance that future fluctuations in currency exchange rates will not have a material adverse impact on revenue from international sales, and thus the Company's business, financial condition and results of operations. There can be no assurance that any currency hedging policies will be successful, or that they will not increase the negative impact of exchange rate fluctuations.

CONSOLIDATED RESEARCH AND DEVELOPMENT

        Pharmacopeia's consolidated expenses for research and development activities were as follows:

	Years Ended December 31,
	2001		2000		1999
	(in thousands)
Proprietary Research and Development	$	32,529	$	25,205	$	26,368

        The decrease in research and development from 1999 to 2000 resulted from the Company's decision to cease investment in self-funded drug discovery programs, offset by increases due to acquisitions. The increase in research and development from 2000 to 2001 resulted primarily from acquisitions. The 2000 amount excludes an $8,740 charge for in-process research and development identified in the acquisitions of Oxford and Synopsys, collectively, as described in the Notes to Consolidated Financial Statements.

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CONSOLIDATED EMPLOYEES

        As of December 31, 2001, the Company had 800 regular employees, 328 of whom were in research and development, including 288 chemists, biologists and engineers holding doctorate degrees. None of the Company's employees are covered by collective bargaining agreements. Management believes its relations with its employees are good.

IMPORTANT RISK FACTORS REGARDING FORWARD LOOKING STATEMENTS

        Certain discussions set forth above regarding the Company's strategy for the development and commercialization of its products and services as well as its ability to sustain profitability in the near term are forward-looking statements.

        The Company's success is dependent on the results of operations of Accelrys. The ability of Accelrys to increase revenue from the licensing of its products is dependent upon increased market acceptance of its software products and services. Accelrys' products are used primarily by molecular modeling and simulation and gene sequence analyses specialists. Accelrys' strategy is to expand use of its products and services by marketing and distribution of its software, in part through its desktop-based products, to experimentalists, such as scientists and engineers. If Accelrys cannot expand its customer base to include experimentalists, or if it otherwise cannot successfully market and sell its desktop-based products and related services, Accelrys may not be able to increase its revenue, or its revenue may decline. In general, increased market acceptance and greater market penetration of Accelrys' products are dependent upon several factors including the overall product performance, ease of implementation and use, accuracy of simulation, breadth and integration of product offerings, and the extent to which users achieve the intended benefit from their use of the products and services. There can be no assurance that Accelrys' products and services will achieve increased market acceptance or penetration in Accelrys' target industries or other industries. Failure to increase market acceptance or penetration would restrict substantially the future growth of Accelrys and may have a material adverse effect on the Company.

        In the Drug Discovery Services Segment, the strategy depends upon the acceptance by potential customers of combinatorial chemistry and analysis of compounds provided by the Company as an effective tool in drug discovery and the Company's ability to maintain the arrangements it currently has in place. Historically, pharmaceutical companies have conducted lead compound identification and optimization within their own research departments due to the highly proprietary nature of the activities being conducted, the central importance of these activities to their drug discovery and development efforts, and the desire to obtain maximum patent and other proprietary protection on the results of their internal programs. In order to achieve its business objectives, the Company must convince these companies that the Company's technology and expertise justify the outsourcing of these programs to the Company. There can be no assurance that the Company will be able to attract customers on acceptable terms for its products and services or to develop a sustainable profitable business. Moreover, the pricing and nature of the Company's combinatorial libraries is such that there may only be a limited number of pharmaceutical companies that are potential customers for such libraries. There can be no assurance that the Company will be able to establish additional collaborative or licensing arrangements, that any such arrangements or licenses will be on terms favorable to the Company, or that current or future collaborative or licensing arrangements will ultimately be successful.

        Further, the Company's receipt of revenues from collaborative arrangements is affected by the timing of efforts expended by the Company and the timing of lead compound identification. The Company's products and services will only result in commercialized pharmaceutical products generating milestone payments and royalties upon significant preclinical and clinical development, requisite regulatory approvals, the establishment of manufacturing capabilities and successful marketing. The Company does not currently intend to perform any of these activities, other than in some instances

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pre-clinical work. Therefore, the Company will be dependent upon the expertise and dedication of sufficient resources by third parties to develop and commercialize products based on library compounds produced and lead compounds discovered by the Company. Should a collaborative partner fail to develop or commercialize a compound or product to which it has rights from the Company, the Company may not receive any future milestone payments or royalties associated with such compound or product. The Company's contractual arrangements with its customers do not obligate the customers to develop or commercialize lead compounds discovered by the Company.

        In addition, there can be no assurance that any such development or commercialization would be successful. The compound basis for drugs developed by a customer may be a derivative or optimized version of the lead compound provided to the customer by the Company. While the Company's existing collaborative agreements provide that the Company will receive milestone payments and royalties with respect to certain products developed from certain derivative compounds, there can be no assurance that disputes will not arise over the application of payment provisions to such products. There can be no assurance that current or future collaborative partners will not pursue alternative technologies, or develop alternative products either on their own or in collaboration with others, including the Company's competitors, as a means for developing treatments based on the targets which are the subject of the collaborative arrangements with the Company.

        The Company's success will also depend upon certain issues arising in connection with the Company's patents and proprietary technology. See "Business—Accelrys Intellectual Property and Other Proprietary Rights" and "Business—Drug Discovery Services Patents and Proprietary Information."

CONSOLIDATED SEGMENT INFORMATION

        See Notes to Consolidated Financial Statements included elsewhere in this report.

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ITEM 2. PROPERTIES

        Pharmacopeia currently leases and occupies approximately 144,000 square feet in two facilities near Princeton, New Jersey. These leases expire at various dates through 2006. Accelrys' principal administrative, sales, support, marketing and product development facilities and corporate headquarters are located in San Diego, California, where Accelrys has leased 76,635 square feet through December 2006. Accelrys' European headquarters, along with administrative, sales, support, marketing and product development functions, are located in Cambridge, England, where Accelrys has leased 6,545 square feet through December 31, 2008 and has subleased an additional 4,952 square feet on a month-to-month basis. Additionally, Accelrys has leased 38,501 square feet with a proposed occupancy date of April 2002. Accelrys has two additional R&D centers located in the US and in England. In Madison, Wisconsin, Accelrys has leased 19,058 square feet through March 2004; and in Leeds, England, Accelrys has leased 5,500 square feet through November 2002 and owns 5,100 square feet.

ITEM 3. LEGAL PROCEEDINGS

        The Company is not a party to any material legal proceedings.

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

        Not applicable.

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

        The Executive Officers of the Company are as follows:

Name	Age	Position
Joseph A. Mollica, Ph.D.	61	Chairman of the Board, President and Chief Executive Officer of the Company
John J. Baldwin, Ph.D.	67	Chief Science and Technology Officer
Bruce C. Myers	46	Chief Financial Officer, Executive Vice President
Michael G. Lenahan	42	General Counsel, Executive Vice President
William J. DeLorbe	53	Executive Vice President, Human Resources
Stephen A. Spearman, Ph.D.	52	Chief Operating Officer, Executive Vice President of Drug Discovery Services
Michael R. Stapleton, Ph.D.	37	Chief Operating Officer, Executive Vice President of Software
Scott Kahn, Ph.D	42	Senior Vice President, General Manager, Life Science
Robert J. White	39	Senior Vice President, Worldwide Sales and Consulting
John Delli Santi	37	Vice President, General Manager, Material Sciences
Arthur E. Roke, CPA	36	Vice President, Finance

        Dr. Mollica has served as the Chairman of the Board of Directors and Chief Executive Officer of the Company since February 1994 and was appointed President in August 1996. From 1987 to

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December 1993, Dr. Mollica was employed initially by the DuPont Company and then by The DuPont Merck Pharmaceutical Company, most recently as President and Chief Executive Officer. Dr. Mollica is a director of Nexell Therapeutics (resigned in December 2001), Genencor Inc., ImPath, Inc. and Neurocrine BioSciences, Inc. Dr. Mollica received a Ph.D. from the University of Wisconsin, and a Doctor of Science, h.c., from the University of Rhode Island.

        Dr. Baldwin has served as Vice President of Chemistry since July 1993, was appointed Senior Vice President of Chemistry in August 1996 and was appointed Chief Science and Technology Officer in June 1998. For a period of thirty years, prior to joining the Company, Dr. Baldwin held a variety of scientific and management positions with Merck Sharp & Dohme Research Laboratories, most recently as Distinguished Senior Scientist. Dr. Baldwin holds more than 140 US patents and is the inventor of Trusopt, a drug for preventing glaucoma. Dr. Baldwin received a Ph.D. in Organic Chemistry from the University of Minnesota. Dr. Baldwin will retire from the Company on March 31, 2002.

        Mr. Myers was named Chief Financial Officer and Executive Vice President in 1999. Prior to that he had served the Company as Senior Vice President of Finance, Administration and Strategic Planning at Accelrys since December 1998. Mr. Myers served as Chief Financial Officer and Secretary to the Board for GTI Corporation from January 1997 to December 1998. From June 1989 to December 1996, Mr. Myers was with Photomatrix, Inc. and served as Chief Financial Officer, Chief Operating Officer and Secretary to the Board. Prior to joining Photomatrix, Mr. Myers spent eleven years with Arthur Andersen & Company. Mr. Myers holds a B.S. in Commerce from the University of Virginia and is a Certified Public Accountant. In February 2002, Mr. Myers provided notice of his intention to voluntarily terminate his employment with the Company effective May 15, 2002.

        Mr. Lenahan has served as Executive Vice President and General Counsel since 2001. Mr. Lenahan has been a practicing attorney for over 17 years, specializing in corporate and transactional matters in the in-house, law firm and venture capital/private equity settings. Most recently, Mr. Lenahan served as Executive Vice President and General Counsel of Tricordia Health, a venture company which developed healthcare investment opportunities. Previously, Mr. Lenahan was Executive Vice President and General Counsel of Merit Behavioral Care Corporation, a leading provider of behavioral health managed care services. Mr. Lenahan also spent more than eight years at Shearman & Sterling, focusing on mergers and acquisitions and corporate finance matters. Mr. Lenahan is a member of the New York State Bar, and received his B.A. from the State University of New York at Binghamton and his J.D. from New York University School of Law.

        Dr. DeLorbe has served as Executive Vice President, Human Resources since 2001. Dr. DeLorbe has more than 20 years experience in human resources, executive leadership, and life science research. Dr. DeLorbe brings to Pharmacopeia nearly 10 years experience in Senior Management and Human Resource positions from The Dupont Merck Pharmaceutical Company and The Dupont Pharmaceutical Company. He also held various senior level research and management positions at several life science companies. Most recently, Dr. DeLorbe served as President of Venn Works RTP, a company engaged in the creation, development, and operation of market-leading technology companies in the life science sector. Dr. DeLorbe holds a Ph.D. from the University of Iowa and a B.A. in Biology from Loras College.

        Dr. Spearman was named Chief Operating Officer and Executive Vice President of Drug Discovery Services in February 2001. Previously, he had served the Company as Executive Vice President, Operations since August 1996 and was appointed Executive Vice President, Discovery Technology in June 1998. From 1975 to August 1996, Dr. Spearman held several positions at CIBA-GEIGY Corporation, most recently as Project Leader. Dr. Spearman received his Ph.D. and M.S. from Emory University. Dr. Spearman also holds a M.B.A. in Finance from Bryant College.

        Dr. Stapleton was named Chief Operating Officer and Executive Vice President at Accelrys in February 2001. Since 1990, he has served the Company including its predecessors in various

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management roles, most recently as Executive Vice President, Software Operations, and prior to that as Vice President, Worldwide Marketing, and General Manager of the Materials Science Business unit. Dr. Stapleton earned his Ph.D. in Chemical Physics from Southampton University in the United Kingdom and performed post-doctoral research in computational chemistry at the School of Chemical Engineering at Cornell University.

        Dr. Kahn has served as General Manager and Senior Vice President, Life Science at Accelrys since January 2002, and immediately prior to that as Senior Vice President, Modeling and Simulations at Accelrys since March 2000. He also served as Vice President of Research and Development in 1999, and Director of Marketing from 1995 through 1998. From 1991 until joining Accelrys, Dr. Kahn was employed by BioCAD, a molecular modeling start-up company in Silicon Valley, CA. Dr. Kahn earned his Ph.D. in Theoretical Organic Chemistry at the University of California, Irvine and performed post-doctoral research at Cambridge University in England. Dr. Kahn also spent four years as an Assistant Professor of Chemistry at the University of Illinois at Urbana-Champaign.

        Mr. White has served as Senior Vice President, Worldwide Sales and Consulting Services at Accelrys since March 2001. Prior to joining Accelrys, Mr. White was Vice President, Worldwide Sales and Supplier Solutions, for Chemdex, a pioneering B2B marketplace for the life sciences industry. In this capacity he was responsible for developing significant customer partnerships with leading pharmaceutical and life science corporations. During fifteen years at IBM, Mr. White held a variety of senior executive and sales management roles. These included Global Marketing Executive for IBM's $2.5 billion dollar Healthcare Industry, with responsibility for marketing, business development and strategy. He also led IBM's worldwide channel efforts in Healthcare, as the senior executive responsible for an $800 million P&L.

        Mr. Delli Santi has served as General Manager and Vice President, Material Science at Accelrys since January 2002, and immediately prior to that as General Manager and Vice President, Bioinformatics at Accelrys since March 2001. Previously he held a series of senior business development and sales management roles focused on delivering customer satisfaction and sustained business growth at Accelrys, and prior to that he spent four years as an industrial medicinal chemist. Mr. Delli Santi holds both a BS in Chemistry and an MBA from Fordham University.

        Mr. Roke has served as Vice President, Finance since September 2000. From April 1991 through September 2000, Mr. Roke served in various management positions, most recently as Chief Financial Officer and Vice President-Finance, at CN Biosciences, Inc, a division of Merck KGaA. Mr. Roke also spent three years with Arthur Andersen & Company. Mr. Roke holds a B.S. in Business Administration from Georgetown University in Washington D.C. and is a Certified Public Accountant.

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PART II

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

MARKET FOR COMMON STOCK

        The Company's Common Stock has traded on the Nasdaq National Market tier of The Nasdaq Stock Market under the symbol PCOP since the Company's initial public offering on December 5, 1995. The following table sets forth for the periods indicated the range of high and low sale prices of the Common Stock.

	2001				2000
	High		Low		High		Low
First Quarter	$	30.00	$	13.00	$	104.00	$	21.50
Second Quarter		25.25		16.75		60.25		17.75
Third Quarter		20.94		10.95		49.00		22.44
Fourth Quarter		16.99		12.60		30.50		17.25

HOLDERS OF RECORD

        As of January 31, 2002 there were approximately 436 holders of record of Pharmacopeia's Common Stock.

DIVIDENDS

        No cash dividends have been paid on the Common Stock to date.

ITEM 6. SELECTED FINANCIAL DATA

        The following selected consolidated financial data have been derived from the Company's audited Consolidated Financial Statements. This data should be read in conjunction with "Management's

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Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and related notes thereto included elsewhere in this Report.

	Years Ended December 31,
	2001			2000			1999			1998			1997
	(in thousands, except per share data)
Statement of Operations Data:
Total revenue (1)	$	122,303		$	114,436		$	95,524		$	84,097		$	73,631
Operating loss from continuing operations (1)		(19,950	)		(7,262	)		(672	)		(14,393	)		(3,777	)
Income (loss) from continuing operations (2)		(14,741	)		677			2,950			(11,100	)		(2,481	)
Net income (loss) (3)		(14,320	)		1,175			3,771			(10,163	)		(1,728	)
Basic net income (loss) per common share		(0.60	)		0.05			0.19			(0.54	)		(0.09	)
Diluted net income (loss) per common share		(0.60	)		0.05			0.19			(0.54	)		(0.09	)
Shares used in computing basic net income (loss) per common share		23,729			22,659			19,684			18,916			18,445
Shares used in computing diluted net income (loss) per common share		23,729			24,453			20,294			18,916			18,445
Cash dividends declared per common share		—			—			—			—			—

	As of December 31,
	2001			2000			1999			1998			1997
	(in thousands)
Balance Sheet Data:
Cash, cash equivalents and marketable securities	$	155,828		$	165,178		$	69,032		$	81,098		$	84,775
Total assets		270,398			284,766			126,259			127,865			140,051
Notes payable, deferred revenue, and other long-term liabilities		4,555			4,553			5,121			3,332			6,194
Accumulated deficit		(82,194	)		(67,874	)		(69,049	)		(72,820	)		(62,657	)
Total stockholders' equity		197,989			209,867			78,746			72,217			80,596

(1)

Revenue and Operating loss from continuing operations exclude hardware revenue and related costs. In 2001, Accelrys discontinued hardware re-sale operations effective December 31, 2001.

(2)

Net income (loss) from continuing operations is derived from net income (loss) excluding net hardware revenue and related costs.

(3)

Net income (loss) includes $3.0 million of discontinued acquisition costs, $7.6 million of acquisition related goodwill amortization and $6.8 million of acquisition related intangible asset amortization in 2001; $8.7 million of acquisition related write-offs of in-process R&D, $3.8 million of acquisition related goodwill amortization, and $3.3 million of acquisition related intangible asset amortization in 2000; $0.4 million of acquisition related goodwill amortization in 1999; and $8.0 million of merger related expenses in 1998.

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

        The following discussion and analysis of the financial condition and results of operations should be read in conjunction with "Selected Consolidated Financial Data" and the Consolidated Financial Statements and related notes included elsewhere in this Report.

        This Report, including, without limitation, this section regarding Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements regarding the Company and its business, financial condition, results of operations and prospects. Words

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such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this Report. Additionally, statements concerning future matters such as the development of new products, enhancements or technologies, possible changes in legislation, and other statements regarding matters that are not historical are forward-looking statements.

        Although forward-looking statements in this Report reflect the good faith judgment of the Company's management, such statements can only be based on facts and factors currently known by the Company. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those discussed in "Significant Risks, Trends and Uncertainties" below, and in "Business—Important Risk Factors Regarding Forward Looking Statements" above, such as uncertain revenue levels, rapidly changing technologies, acquisition-related uncertainties, stock price volatility, and other factors as discussed elsewhere in this Report. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report. The Company undertakes no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Report. Readers are urged to carefully review and consider the various disclosures made in this Report, which attempt to advise interested parties of the risks and factors that may affect the Company's business, financial condition, results of operations and prospects.

BUSINESS OVERVIEW

        Pharmacopeia 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. The Company's Software Segment, Accelrys Inc. ("Accelrys"), provides molecular modeling and simulation, bioinformatics and cheminformatics software solutions, and related consulting services that facilitate 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 and Accelrys technologies. Segment and geographical data are included in the Notes to Consolidated Financial Statements.

RESULTS OF OPERATIONS

2001 Compared to 2000

        Total revenue grew 7% to $122.3 million in 2001 compared to $114.4 million in 2000, excluding hardware re-sale revenue. Hardware re-sale operations were discontinued in 2001.

        Accelrys software license, service and other revenue increased 26% to $95.1 million in 2001 compared to $75.4 million in 2000. This increase includes revenues generated from sales of products and services added through the acquisitions of Synopsys Scientic Systems Limited and the software subsidiaries of Oxford Molecular Group Plc in 2000 and the acquisition of Synomics Limited in 2001 (hereinafter collectively "the Acquisitions"; see Note 3 of the Notes to Consolidated Financial Statements). Excluding the effect of the Acquisitions, software license, service and other revenue increased 10% in 2001 compared to 2000.

        Accelrys software license, service, and other revenue increased 32% to $79.1 million in 2001 in the European and US region combined, including the effect of the Acquisitions. Excluding the effect of the Acquisitions, organic European and US region software license, service, and other revenue increased

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13%. Accelrys software license, service, and other revenue decreased 4% to $16.0 million in the Asia region. The decrease was due to a renegotiated minimum volume commitment with Accelrys' distribution partner, under which 2001 modeling and simulation software revenues in Japan were not expected to increase beyond the level achieved in 2000. This minimum volume commitment and related distribution agreement terminated December 31, 2001 and as such, Accelrys is in the process of reorganizing its distribution channel in Japan. As a result, revenues in this region are not expected to increase in 2002.

        Drug Discovery Services revenue decreased 30% to $27.2 million in 2001 compared to $39.0 million in 2000. The 2000 results included an aggregate $5.5 million from a non-recurring technology out-license fee, and a contract termination fee. The 2001 and 2000 results also included milestone revenue of $1.6 million and $2.3 million, respectively. In addition, the 2000 results included $3.6 million of revenue from a drug discovery collaboration that terminated in June 2000. Excluding the non-recurring technology out-license fee, the revenue and fees from the terminated collaboration, and the milestone revenues, drug discovery services revenue declined by 7% primarily due to declines in general economic conditions and competitive pressures. In 2001 and 2000, one Drug Discovery Services' customer accounted for 11% of consolidated revenue.

        Accelrys gross margin increased 18% to $76.1 million (80% of related revenues) in 2001 compared to $64.5 million (86% of related revenues) in 2000. The increase in the amount of gross margin dollars resulted from the increase in software license, service, and other revenue as described above. The decrease in gross margin as a percentage of related revenues is primarily due to the amortization of the developed technology intangible asset identified in the Acquisitions. Excluding this amortization, gross margin as a percentage of related revenues for 2001 would have been approximately equal to gross margin as a percentage of related revenues in 2000.

        Drug Discovery Services gross margin decreased 57% to $6.8 million (25% of related revenues) in 2001 compared to $15.9 million (41% of related revenues) in 2000. The decrease in gross margin dollars resulted primarily from the decrease in revenue described above. The decrease in Drug Discovery Services gross margin as a percentage of related revenue is due to the non-recurring technology out-license revenue, the contract termination revenue and the milestone revenues which carried no associated cost of revenue, and to the decreased volume of work which caused fixed costs to be spread over the lower revenue level.

        Research and development expenses increased 29% to $32.5 million in 2001 compared to $25.2 million in 2000 including the effect of the Acquisitions. Research and development costs include costs associated with internal drug discovery programs and software development. All of the increase in research and development costs occurred at Accelrys, and resulted both from the Acquisitions and from increased costs associated with the further development of modeling, simulation, analysis, informatics and workflow software. Accelrys increased its software and informatics research and development staff in response to the anticipated product integration needs of its expanded software product line.

        Selling, general, and administrative expenses increased 25% to $62.6 million in 2001 compared to $49.9 million in 2000. The increase in sales', general, and administrative expenses is primarily attributable to the Acquisitions, including amortization of certain acquired intangible assets identified in the Acquisitions, and increases in the depth and breath of skills in the sales force required in order to sell the combined product line.

        Goodwill amortization increased to $7.6 million for 2001 compared to $3.8 million for 2000. The increase is attributable to the timing of the Acquisitions. Goodwill will not be amortized in the future due to Recently Issued Accounting Standards described below.

        A write-off of $8.7 million of in-process research and development was recorded for 2000 and was related to the Acquisitions. No comparable write-offs were made in 2001.

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        Discontinued acquisition costs of $3.0 million were written off in 2001. No comparable write-offs were made in 2000.

        Net interest income decreased 1% to $9.1 million in 2001 compared to $9.2 million in 2000. The decrease is due to increases in average investment balances offset by decreases in market interest rates.

        The provision for income taxes decreased 29% to $0.9 million in 2001 compared to $1.3 million in 2000. The tax provisions are primarily due to foreign taxable income generated at Accelrys. These provisions differ from the expected tax rate primarily because of the effect of net operating loss carryforwards and carrybacks.

        As a result of the increased revenue and gross margin, increased operating expenses and one-time charges, and the other matters described above, the Company incurred a loss from continuing operations of $14.7 million, or $0.62 per basic and diluted share in 2001, as compared to income from continuing operations of $0.7 million, or $0.03 per basic and diluted share in 2000.

        Income from the re-sale of computer hardware decreased by 15% to $0.4 million, or $0.02 per basic and diluted share in 2001, as compared to $0.5 million, or $0.02 per basic and diluted share in 2000. These hardware re-sale operations were discontinued in 2001.

        Net loss was $14.3 million, or $0.60 per basic and diluted share in 2001, as compared to net income of $1.2 million, or $0.05 per basic and diluted share in 2000.

2000 Compared to 1999

        Total revenue grew 20% to $114.4 million in 2000 compared to $95.5 million in 1999, excluding hardware re-sale revenue. Hardware re-sale operations were discontinued in 2001 and historical amounts have been reclassified to conform to the new presentation.

        Accelrys' software license, service, and other revenue increased 24% to $75.4 million in 2000 compared to $60.9 million in 1999. Growth of 14% was generated from sales of products and services added through the 2000 acquisitions of Synopsys and the software subsidiaries of Oxford Molecular Group Plc (hereinafter collectively, "the 2000 Acquisitions"; see Note 3 of the Notes to Consolidated Financial Statements). Excluding the effect of the 2000 Acquisitions, software license, service, and other revenue increased by $6.1 million, or 10%, in 2000 compared to 1999.

        Accelrys software license, service, and other revenue increased in the European and US regions by 10% over the prior year. Almost all of the increase resulted from the 2000 Acquisitions referenced above. Excluding the effects of the 2000 Acquisitions, European and US region software license, service, and other revenue increased only slightly. Management believes that this lack of organic growth was caused primarily by inefficiencies experienced by the combined sales organization as it absorbed sales responsibility for the 2000 Acquisitions. Accelrys revenue in 2000 compared with 1999 for the Asia region increased by 49%. This increase resulted from increased modeling and simulation software orders from Accelrys' distribution partner in Japan pursuant to certain sales order level guarantees.

        Drug Discovery Services revenue increased 13% to $39.0 million in 2000 compared to $34.6 million in 1999. This net increase of $4.4 million was primarily attributable to the receipt of a one-time $3.0 million technology out-license fee in the first quarter of 2000, and a $2.0 million increase in milestone fees received in 2000 compared to 1999. Drug Discovery Services revenue in 1999 did not include technology out-license fees nor significant milestone fees. Excluding the technology out-license fee and the increase in milestone fees, 2000 Drug Discovery Services revenue decreased slightly compared to 1999. This slight decrease consisted of a $2.6 million or 52% decrease in library out-licensing fees offset by an increase in other forms of drug discovery services including a contract which terminated in 2000. In 2000 and 1999, one Drug Discovery Services' customer accounted for 11% and 12% of consolidated revenues, respectively.

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        Accelrys gross margin increased 21% to $64.5 million (86% of related revenues) in 2000 compared to $53.5 million (88% of related revenues) in 1999. The increase in the amount of gross margin dollars resulted from the increase in software license, service and other revenue as described above. The decrease in gross margin as a percentage of related revenues is primarily due to the amortization of the developed technology intangible asset identified in the 2000 Acquisitions. Excluding this amortization, gross margin as a percentage of related revenues for 2001 would have been approximately equal to gross margin as a percentage of related revenues in 2000.

        Drug Discovery Services gross margin increased 16% to $15.9 million (41% of related revenues) in 2000 compared to $13.8 million (40% of related revenues) in 1999. The increase in the amount of gross margin resulted from the increased technology out-license and milestone revenues. Excluding technology out-license and milestone revenues, gross margin as a percent of revenue decreased from 38% in 1999 to 32% in 2000 primarily because more fixed overhead was allocated to funded work while internal research declined.

        Research and development expenses decreased 5% to $25.2 million in 2000 compared to $26.4 million in 1999 including the effect of the 2000 Acquisitions. Research and development costs include costs associated with internal drug discovery programs and software development. The decline in research and development expenses is primarily attributable to the reduction of internally funded drug development activities in the Company's Drug Discovery Services Segment, offset by increases in spending at Accelrys primarily due to the 2000 Acquisitions.

        Selling, general, and administrative expenses increased 21% to $49.9 million in 2000 compared to $41.2 million in 1999. The increase in sales, general, and administrative expenses is attributable to increases in sales and marketing expenses, increases in administrative salaries and overheads, and increased amortization of acquired intangible assets, all primarily due to the 2000 Acquisitions.

        In 2000, the Company recorded one-time charges of $8.7 million related to acquired, in-process research and development, and goodwill amortization related to the 2000 Acquisitions of $3.8 million. In 1999, there were no one-time charges, and goodwill amortization was $0.4 million.

        Net interest income increased 124% to $9.2 million in 2000 compared to $4.1 million in 1999. This increase resulted primarily from the investment of the proceeds from a $110.0 million private placement of the Company's common stock in March 2000.

        The provision for income taxes increased to $1.3 million in 2000 compared to $0.5 million in 1999. The tax provisions are primarily due to foreign taxable income generated at Accelrys. These provisions differ from the expected tax rate primarily because of the effect of net operating loss carryforwards and carrybacks.

        As a result of the increased revenue and gross margins, net of the one-time charges related to acquisitions, the increases in net interest income, and the other matters described above, the Company generated income from continuing operations of $0.7 million or $0.03 per basic and diluted share in 2000, as compared to income from continuing operations of $3.0 million or $0.15 per basic and diluted share in 1999.

        Income from the re-sale of computer hardware decreased by 39% to $0.5 million, or $0.02 per basic and diluted share in 2000, as compared to $0.8 million, or $0.04 per basic and diluted share in 1999. Hardware re-sale operations were discontinued in 2001 and historical amounts have been reclassified to conform to the new presentation.

        Net income was $1.2 million, or $0.05 per basic and diluted share in 2000, as compared to net income of $3.8 million, or $0.19 per basic and diluted share in 1999.

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Liquidity and Capital Resources

        The Company has funded its activities to date primarily through the sale of equity securities, software licenses, software maintenance services, and drug discovery services. As of December 31, 2001, the Company had cash and cash equivalents of $155.8 million compared to $165.2 million as of December 31, 2000. The decrease resulted primarily from cash used for an acquisition at Accelrys, and $4.9 million invested in capital expenditures consisting of computer hardware and laboratory equipment. The decrease was partially offset by financing activities which provided $2.6 million, primarily from sales of common stock from option exercises and employee stock purchase plan participation, net of treasury stock repurchases.

        The Company anticipates that its capital requirements may increase in future periods as the Company expands its research and development activities, expands its facilities, and acquires additional equipment. The Company's capital requirements may also increase in future periods as the Company seeks to expand its technology platform through investments, licensing arrangements, technology alliances, or acquisitions.

        The Company anticipates that its existing capital resources will be adequate to fund the Company's operations at least through 2002. However, there can be no assurance that changes will not occur that would consume available capital resources before such time. The Company's capital requirements depend on numerous factors, including the ability of the Company to continue to generate software sales, the ability of the Company to extend existing Drug Discovery Services agreements, and to enter into additional arrangements, competing technological and market developments, changes in the Company's existing collaborative relationships, the cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights and the outcome of related litigation, the purchase of additional capital equipment, acquisitions of other businesses or technologies, and the progress of the Company's customers' milestone and royalty producing activities. There can be no assurance that additional funding, if necessary, will be available on favorable terms, if at all. The Company's forecasts of the period of time through which its financial resources will be adequate to support its operations is forward looking information, and actual results could vary. The factors described earlier in this paragraph will impact the Company's future capital requirements and the adequacy of its available funds.

Critical Accounting Policies

        The preparation of the Company's consolidated financial statements and disclosures involve the use of judgments and estimates. The Company believes the following critical accounting policies involve the more significant judgments and estimates used.

Revenue Recognition — Revenues are recognized in accordance with the American Institute of Certified Public Accountants ("AICPA") Statement of Position ("SOP") 97-2, as amended by SOP 98-4 and SOP 98-9 and SEC Staff Accounting Bulletin No. 101.

        Accelrys recognizes software license revenues upon delivery if no significant obligations remain deliverable to the customer, the sales contract fee is fixed or determinable, amounts are due within one year and collection is probable, and when no material uncertainties regarding customer acceptance exist. Customer payments received in connection with license sales are recorded as deferred revenue until such time as all of the above criteria are met. Prepaid post-contract support and maintenance ("PCS") revenue bundled with software license agreements is unbundled and deferred based on objective, vendor specific evidence. PCS revenue is recognized pro-rata over the related service period, which is generally one year. Consulting and training fees are recognized upon rendering of service. Database and support revenues are recognized ratably over the applicable contract periods or as services are performed. Amounts billed but not yet recognized as revenue, and other payments received prior to recognition of revenue are recorded as deferred revenue.

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        Accelrys also earns revenue under consortia agreements wherein several unrelated parties enter into a joint software development agreement with the Company. These agreements are generally one to three years in length, require an annual membership fee, and contain best efforts development milestones. Customers receive a consortia membership, a software library, and related software and maintenance support. The portion of consortia fees associated with the initial software library is recognized upon delivery, while consortia fees associated with consortia membership and software maintenance are recognized on a straight-line basis over the term of the agreement. The Company is not required to deliver specified products under the agreements and the consortia fees are generally non-refundable. If the Company is successful in developing software under the consortia agreement described above, a non-transferable license is typically awarded to the consortia members.

        Revenue from Drug Discovery Services is recognized primarily using the percentage-of-completion method. Accordingly, revenue is recognized as service deliverables are expended against a total research and development plan. Payments received prior to the completion of the related work are recorded as deferred revenue. Non-refundable payments are recognized as revenue only when they are not subject to future performance obligations. Otherwise, such payments are deferred and amortized into revenue over the term of the agreement. The Company's revenue recognition policies, in particular as they relate to percentage-of-completion arrangements are based on estimates and assumptions that are subject to change depending on the contract. As such, any change could impact revenue recognition in the future.

Allowance for Doubtful Accounts — The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. This analysis is done on a specific customer basis and an additional allowance is provided for amounts when and if they become uncollectible at a later date. If the financial condition of the Company's customer were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances would be required.

Software Development Costs — The Company capitalizes software development costs in accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Cost of Computer Software to be Sold, Leased or Otherwise Marketed" ("SFAS 86"). Such costs are stated at the lower of cost or net realizable value. Capitalized software costs are comprised of costs incurred in the development of new software products and enhancements to existing software products after technological feasibility has been established. The Company amortizes capitalized costs over the estimated product life, not to exceed three years from the date on which the product is available for general release. The estimated product life may be reduced based on obsolescence or other factors which could affect the carrying value of capitalized software and result in charges to operating results.

Recently Issued Accounting Standards

        In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" ("SFAS 141") and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives (but with no maximum life). The amortization provisions of SFAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, adoption of SFAS 142 is required effective January 1, 2002. The Company plans to adopt SFAS 142 effective January 1, 2002 at which time goodwill and intangible assets will be reviewed for impairment by comparing the carrying value to the fair market value of such assets. Additionally, the Company expects to reclassify $1.8 million of intangibles to goodwill, and expects amortization expense to be reduced by $9.0 million

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to $5.8 million annually, based on the non-amortizable goodwill and the remaining amortizable intangible assets. The Company does not expect the adoption of SFAS 142 to result in any impairment to the carrying value of goodwill and intangible assets.

        In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. Additionally, SFAS 144 promulgates criteria for reporting discontinued operations. This pronouncement is effective for financial statements beginning after December 15, 2001 with early application encouraged. The Company adopted SFAS 144 in the fourth quarter of 2001, and accordingly determined that the discontinuation of the re-sale of computer hardware in the fourth quarter of 2001 qualified as discontinued operations. As such, the revenues net of expenses related to the re-sale of computer hardware have been included in the statement of operations as income from discontinued hardware operations for all periods presented.

Significant Risks, Trends, and Uncertainties

        The following significant risks, trends, and uncertainties, among others, could materially and adversely affect the Company's future financial condition, results of operations, and stock price.

Acquisition Strategy — The success of the Company's business strategy depends, in part, upon the successful acquisition of technologies that supplement and add to the Company's current technologies. However, critical technology may not be available to the Company at affordable prices, the Company may choose the wrong technologies, integration costs may be higher than anticipated, management's time and attention may be unduly diverted, key employees may not be retained, and earnings per share may be temporarily or permanently diluted. In addition, because the Company plans to use its stock, in part, as currency for future acquisitions, volatility in the Company's stock price could adversely affect the Company's acquisition strategy.

Uncertain Revenue and Profit Levels — The Company's future revenue levels depend upon many factors, many of which are beyond the control of management. These factors include changes in the demand for products and services, the introduction of competitive software and drug discovery services, changes in the research and development budgets of customers and potential customers, and the ability to successfully and timely develop, introduce and market new products, services and product enhancements and to gain cooperation of third parties as needed. In recent years, several customers have not renewed research agreements with the Company due to such factors. In addition, future revenue levels, especially Drug Discovery Services revenue levels, are heavily dependent upon the life sciences industry's successful identification of new drug targets from genes and willingness to out-source drug discovery work, and upon the Company's ability to cost effectively develop and identify new drug candidates that interact with those targets.

Rapidly Changing Technologies — Rapid technological change and uncertainty due to new and emerging technologies characterize the drug discovery and chemical development industries. The Company may not be able to develop, integrate and market, on a timely basis, the new and enhanced products and services necessary to keep pace with competitors. Failure to anticipate or to respond to changing technologies, or significant delays in product development or introduction, could cause customers to delay or decide against purchases of the Company's products or services.

Stock Price Volatility — The Company's stock price has experienced significant price volatility that is expected to continue in the future. Factors such as those described above, industry business combinations, quarter-to-quarter variations in operating results, the gain or loss of significant orders, and the ability to meet the operating expectations of analysts, among other things, will likely have a significant impact on the market price of the Company's stock. Further, future fluctuations in the Company's stock price could be unrelated or disproportionate to the operating performance of the Company. There can be no assurance regarding the future market price of the Company's stock.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        The Company is exposed to various market risks consisting primarily of changes in foreign currency exchange rates. The Company's international sales generally are denominated in local currencies. In 2001, 37% of the Company's consolidated revenue was derived from customers outside the United States (including 24% from customers in Europe and 13% from customers in the Asia/Pacific region). The Company's exchange rate risk is greatest for Dollar/Euro and Dollar/Yen fluctuations. When deemed appropriate, the Company engages in exchange rate-hedging transactions in an attempt to mitigate the impact of adverse exchange rate fluctuations. At December 31, 2001, the Company had no hedging transactions in effect.

        The introduction and use of the Euro, which began in 1999, has not had a material effect on the Company's foreign exchange or hedging activities. The Company will continue to evaluate the impact of the Euro however, based on currently available information, the Company does not believe that the introduction of the Euro currency will have a material adverse impact on the consolidated financial condition, cash flows or results of operations.

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

        The Company's exposure to market risks associated with changes in interest rates relates primarily to the increase or decrease in the amount of interest income earned on its investment portfolio since the Company has minimal debt. The Company ensures the safety and preservation of invested funds by limiting default risks, market risk and reinvestment risk. The Company mitigates default risk by investing in investment grade securities. A hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair value of the Company's interest sensitive financial instruments at December 31, 2001. However, declines in interest rates that occurred in 2001 will result in a significant decrease to the Company's interest income in 2002 as compared to the amount earned in 2001. Additional declines in interest rates over time would further reduce the Company's interest income.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Pharmacopeia, Inc.

We have audited the accompanying consolidated balance sheets of Pharmacopeia, Inc. as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. Our audits also included the financial statement schedule listed in the index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Pharmacopeia, Inc. at December 31, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

ERNST & YOUNG LLP

San Diego, California
January 25, 2002

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Pharmacopeia, Inc.

Consolidated Balance Sheets

(in thousands, except per share data)

			December 31,
			2001			2000
ASSETS
Current assets:
	Cash and cash equivalents		$	68,891		$	69,350
	Marketable securities			86,937			95,828
	Trade receivables, net of allowance for doubtful accounts of $914 and $2,305, respectively			43,147			39,017
	Other current assets			7,263			6,823
		Total current assets		206,238			211,018
Property and equipment, net				11,726			12,381
Goodwill, net of accumulated amortization of $11,846 and $4,207, respectively				35,038			39,090
Software development costs, net of accumulated amortization of $15,076 and $8,450, respectively				13,104			16,193
Other intangible assets, net of accumulated amortization of $3,053 and $1,167, respectively				2,807			4,293
Other assets				1,485			1,791
Total assets			$	270,398		$	284,766
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable		$	4,361		$	2,921
	Accrued liabilities			28,884			33,580
	Deferred revenue, current portion			34,565			33,802
	Notes payable, current portion			44			43
		Total current liabilities		67,854			70,346
Notes payable and other long-term liabilities				34			227
Deferred revenue, long-term				4,521			4,326
Commitments and contingencies
Stockholders' equity:
	Preferred stock, $.0001 par value, 2,000 shares authorized, none issued and outstanding			—			—
	Common stock, $.0001 par value, 40,000 shares authorized, 23,956 and 23,411 shares issued and outstanding, respectively			2			2
	Additional paid-in capital			281,553			276,144
	Treasury stock			(1,316	)		—
	Accumulated deficit			(82,194	)		(67,874	)
	Accumulated comprehensive income (loss)			(56	)		1,595
	Total stockholders' equity			197,989			209,867
	Total liabilities and stockholders' equity		$	270,398		$	284,766

See accompanying notes to these consolidated financial statements.

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Pharmacopeia, Inc.

Consolidated Statements of Operations

(in thousands, except per share data)

			Years Ended December 31,
			2001			2000			1999
Revenues:
	Software license, service, and other		$	95,107		$	75,401		$	60,943
	Drug Discovery Services			27,196			39,035			34,581
		Total revenues		122,303			114,436			95,524
Cost of revenues:
	Software license, service, and other			19,046			10,901			7,430
	Drug Discovery Services			20,411			23,100			20,814
		Total cost of revenues		39,457			34,001			28,244
Gross margin				82,846			80,435			67,280
Operating costs and expenses:
	Research and development			32,529			25,205			26,368
	Selling, general, and administrative			62,628			49,914			41,215
	Amortization of goodwill			7,639			3,838			369
	Write-off of in-process research and development			—			8,740			—
		Total operating costs and expenses		102,796			87,697			67,952
Operating loss from continuing operations				(19,950	)		(7,262	)		(672	)
Discontinued acquisition costs				(2,985	)		—			—
Interest and other income, net				9,082			9,194			4,122
Income (loss) from continuing operations before income taxes				(13,853	)		1,932			3,450
Provision for income taxes				888			1,255			500
Income (loss) from continuing operations			$	(14,741	)	$	677		$	2,950
	Discontinued hardware operations			421			498			821
Net income (loss)			$	(14,320	)	$	1,175		$	3,771
Income (loss) per share from continuing operations
	- Basic		$	(0.62	)	$	0.03		$	0.15
	- Diluted		$	(0.62	)	$	0.03		$	0.15
Income per share from discontinued hardware operations
	- Basic		$	0.02		$	0.02		$	0.04
	- Diluted		$	0.02		$	0.02		$	0.04
Net income (loss) per share
	- Basic		$	(0.60	)	$	0.05		$	0.19
	- Diluted		$	(0.60	)	$	0.05		$	0.19
Weighted average shares of common stock outstanding
	- Basic			23,729			22,659			19,684
	- Diluted			23,729			24,453			20,294

See accompanying notes to these consolidated financial statements.

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Pharmacopeia, Inc.

Consolidated Statements of Stockholders' Equity

(in thousands)

		Common Stock					Treasury Stock
														Unrealized gain (loss) on marketable securities
		Number of shares	Amount		Additional paid-in capital		Number of shares	Amount			Accumulated deficit						Cumulative Translation adjustment			Total Stockholders' Equity
Balance at December 31, 1998		19,121	$	1	$	145,499	—	$	—		$	(72,820	)	$	—		$	(463	)	$	72,217
Comprehensive income (loss): Net income												3,771									3,771
	Change in translation adjustment																	(478	)		(478	)
	Change in unrealized gain (loss) on marketable securities														(127	)					(127	)
	Comprehensive income																				3,166
Issuance of common stock for exercise of stock options and warrants		886		—		1,762															1,762
Issuance of common stock in employee stock purchase plan		100		—		767															767
Issuance of common stock for 401(k) matching		76		—		834															834
Balance at December 31, 1999		20,183		1		148,862	—		—			(69,049	)		(127	)		(941	)		78,746
Comprehensive income (loss):
	Net income											1,175									1,175
	Change in translation adjustment																	541			541
	Change in unrealized gain (loss) on marketable securities														2,122						2,122
	Comprehensive income																				3,838
Issuance of common stock in private placement, net		1,860		1		110,149															110,150
Issuance of common stock in connection with business acquisition		19		—		1,199															1,199
Issuance of common stock for exercise of stock options and warrants		1,259		—		14,017															14,017
Issuance of common stock in employee stock purchase plan		62		—		1,044															1,044
Issuance of common stock for 401(k) matching		28		—		873															873
Balance at December 31, 2000		23,411		2		276,144	—		—			(67,874	)		1,995			(400	)		209,867
Comprehensive income (loss):
	Net loss											(14,320	)								(14,320	)
	Change in translation adjustment																	(514	)		(514	)
	Change in unrealized gain (loss) on marketable securities														(1,137	)					(1,137	)
	Comprehensive loss																				(15,971	)
Acquisition of treasury stock							113		(1,316	)											(1,316	)
Issuance of common stock for exercise of stock options		380		—		2,739															2,739
Issuance of common stock in employee stock purchase plan		91		—		1,308															1,308
Issuance of common stock for 401(k) matching		74		—		1,362															1,362
Balance at December 31, 2001		23,956	$	2	$	281,553	113	$	(1,316	)	$	(82,194	)	$	858		$	(914	)	$	197,989

See accompanying notes to these consolidated financial statements

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Pharmacopeia, Inc.

Consolidated Statements of Cash Flows

(in thousands)

					Years Ended December 31,
					2001			2000			1999
CASH FLOWS FROM OPERATING ACTIVITIES
	Net income (loss)				$	(14,320	)	$	1,175		$	3,771
	Adjustments to reconcile net income (loss) to net cash provided by operations:
		Depreciation				5,645			5,314			5,431
		Amortization				16,151			8,860			2,237
		Contribution of stock to 401(k) members				1,362			873			834
		Write-off of in-process research and development				—			8,740			—
		Changes in assets and liabilities:
			Trade receivables			(4,018	)		(8,923	)		(3,529	)
			Other current assets			(294	)		(748	)		(13	)
			Other assets			372			173			(324	)
			Accounts payable			1,369			(1,218	)		(1,679	)
			Accrued liabilities			(5,312	)		(311	)		(3,018	)
			Deferred revenue			958			6,403			(915	)
			Other			—			1,203			(236	)
				Net cash provided by operating activities		1,913			21,541			2,559
CASH FLOWS FROM INVESTING ACTIVITES
	Capital expenditures					(4,864	)		(4,176	)		(3,093	)
	Purchases of marketable securities					(164,051	)		(133,241	)		(66,513	)
	Proceeds from sales of marketable securities					171,796			89,536			58,746
	Acquisition of businesses, net of cash acquired					(3,855	)		(45,084	)		—
	Acquisition of distribution rights and joint venture interest					—			—			(10,566	)
	Increase in capitalized software development costs					(3,537	)		(1,956	)		(1,730	)
				Net cash used in investing activities		(4,511	)		(94,921	)		(23,156	)
CASH FLOWS FROM FINANCING ACTIVITES
	Proceeds from issuance of common stock					4,048			125,210			2,529
	Purchases of treasury stock					(1,316	)		—			—
	Principal payments on notes payable					(95	)		(320	)		(1,311	)
				Net cash provided by financing activities		2,637			124,890			1,218
Exchange rate effect on cash and equivalents						(498	)		683			(327	)
Net increase (decrease) in cash and equivalents						(459	)		52,193			(19,706	)
Cash and equivalents, beginning of period						69,350			17,157			36,863
Cash and equivalents, end of period					$	68,891		$	69,350		$	17,157
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid during the period for:
	Interest				$	30		$	21		$	81
	Income taxes				$	1,007		$	503		$	395

See accompanying notes to these consolidated financial statements.

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Pharmacopeia, Inc.

Notes to Consolidated Financial Statements

1. Organization and Description of Business

        Pharmacopeia 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. The Company's Software Segment, Accelrys Inc. ("Accelrys") provides molecular modeling and simulation, bioinformatics and cheminformatics software solutions and related consulting services that facilitate 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, high-throughput screening and Accelrys technologies.

2. Significant Accounting Policies

Principles of Consolidation

        These consolidated financial statements include the accounts of Pharmacopeia and its subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

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

Cash and Cash Equivalents

        The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company invests its cash with major financial institutions in money market funds, U.S. Treasury securities and other investment grade securities such as prime-rated commercial paper.

Marketable Securities

        Marketable securities consist of fixed-income investments with an original maturity of greater than three months such as US Treasury securities, obligations of US Government agencies and other investment grade securities such as prime-rated commercial paper and corporate bonds. The Company applies Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115) to its investments in marketable securities. The Company's marketable securities are classified as available-for-sale and are recorded at estimated fair value with unrealized gains or losses reported in accumulated comprehensive income in stockholders' equity.

        Included in accumulated comprehensive income as of December 31, 2001 and 2000 is $0.4 and $1.9 million, respectively, of unrealized gain on an investment in the common stock of an unrelated, publicly-traded corporation. The Company included this investment in other current assets.

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        At December 31, 2001, marketable securities consisted of the following (in thousands):

	Amortized Cost		Market Value		Unrealized Gain
US Treasury securities and obligations of US Government agencies	$	45,020	$	45,315	$	295
US Corporate debt securities		41,421		41,622		201
	$	86,441	$	86,937	$	496

        At December 31, 2000, marketable securities consisted of the following (in thousands):

	Amortized Cost		Market Value		Unrealized Gain
US Treasury securities and obligations of US Government agencies	$	59,627	$	59,732	$	105
US Corporate debt securities		36,044		36,096		52
	$	95,671	$	95,828	$	157

        Available-for-sale marketable securities by contractual maturity at December 31, 2001 are as follows (in thousands):

Due within one year	$	58,783
Due after one year through two years		28,154
	$	86,937

Property and Equipment

        Property and equipment is stated at cost. Depreciation is provided on the straight-line method over the estimated useful lives of the related assets, which range from three to ten years. Assets under capital leases are amortized over their estimated useful life or the applicable lease period, whichever period is shorter. The Company amortizes leasehold improvements over the shorter of their estimated useful lives or the remaining term of the related lease. Repair and maintenance costs are charged to expense as incurred.

Software Development Costs

        The Company capitalizes software development costs in accordance with SFAS No. 86, "Accounting for the Cost of Computer Software to be Sold, Leased or Otherwise Marketed" ("SFAS 86"). Such costs are stated at the lower of cost or net realizable value. Capitalized software costs are comprised of costs incurred in the development of new software products and enhancements to existing software products after technological feasibility has been established. The Company amortizes capitalized costs over the estimated product life, not to exceed three years from the date on which the product is available for general release.

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Research and Development Costs

        All research and development costs not subject to capitalization under SFAS 86 are charged to operations as incurred.

Impairment of Long-Lived Assets

        The Company evaluates the recoverability of its long-lived assets in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of" ("SFAS 121"). SFAS 121 requires recognition of impairment of long-lived assets in the event the net book value of these assets exceeds the future undiscounted cash flows attributable to these assets. The Company assesses potential impairments to its long-lived assets when there is evidence that events or changes in circumstances have made recovery of the asset's carrying value unlikely. Should an impairment exist, the impairment loss would be measured based on the excess of the carrying value of the asset over the asset's fair value or discounted estimates of future cash flows. The Company has identified no such impairment losses as of December 31, 2001.

Foreign Currency Translation

        The Company translates certain of its accounts and the financial statements of its foreign operations in accordance with SFAS No. 52, "Foreign Currency Translation" ("SFAS 52"). The financial statements of the Company's international operations are translated into US dollars using period-end exchange rates for assets and liabilities and average exchange rates during the period for revenues and expenses. Cumulative translation gains and losses are excluded from results of operations and recorded as a separate component of comprehensive income (loss) within stockholders' equity. Gains and losses resulting from foreign currency transactions are included in the consolidated statement of operations.

Concentrations of Risk

        Many of the Company's software products operate primarily on the Silicon Graphics version of the Unix operating system. Any disruption of supply could cause a temporary adverse effect in the Company's revenues while its software is ported to alternative systems.

        In 2001 and 2000, one of the Company's Drug Discovery Services customers accounted for 11% of consolidated revenue. In 1999 this customer accounted for 12% of consolidated revenue.

        The Company's international sales are generally denominated in foreign currencies. Conversion of foreign-denominated receivables into US dollars could have a material adverse effect on the Company's results of operations. The Company conducts business in Europe and in the Asia/Pacific region, primarily in Japan. Any significant decline in the economies or the value of the currencies in these regions could have a material adverse impact on the Company.

Revenue Recognition

        The Company recognizes revenue from licenses of computer software provided that the customer has signed a non-cancelable license agreement, the software and related documentation has been shipped, no material uncertainties regarding customer acceptance exist, collection of the resulting

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receivable is deemed probable and no other significant obligations by the Company exist. Prepaid post-contract support and maintenance ("PCS") revenue bundled with software license agreements is unbundled using objective, vendor specific evidence. PCS revenue is recognized pro-rata over the related service period, which is generally one year. Revenue generated from consulting, training and software customization sold separately from license agreements is recognized as the services are performed.

        The Company earns revenue under consortia agreements wherein several unrelated parties enter into a joint software development agreement with the Company. These agreements are generally one to three years in length, require an annual membership fee and contain best efforts development milestones. Customers receive a consortia membership, a software library and related software and maintenance support. The portion of consortia fees associated with the initial software library is recognized upon delivery, while consortia fees associated with consortia membership and software maintenance are recognized on a straight-line basis over the term of the agreement. The Company is not required to deliver specified products under the agreements and the consortia fees are generally non-refundable. If the Company is successful in developing software under the consortia agreement described above, a non-transferable license is typically awarded to the consortia members.

        Under certain circumstances, the Company sold computer hardware to a licensee of the Company's software products. In these instances, the Company typically ordered the hardware from an unrelated vendor and recognized revenue upon shipment of the hardware to the licensee by the vendor. During 2001, the Company discontinued selling computer hardware to licensees. Accordingly, all revenues and expenses related to this operation have been included in income from discontinued hardware operations in the statement of operations for all years presented.

        Revenue from Drug Discovery Services is recognized primarily using the percentage-of-completion method. Accordingly, revenue is recognized as service deliverables are expended against a total research and development plan. Payments received prior to the completion of the related work are recorded as deferred revenue. Non-refundable payments are recognized as revenue only when they are not subject to future performance obligations. Otherwise, such payments are deferred and amortized into revenue over the term of the agreement.

Advertising Expense

        The cost of advertising is expensed as incurred. The Company incurred $1,114,000, $417,000, and $153,000 in advertising costs during 2001, 2000, and 1999, respectively.

Stock Based Compensation

        As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), the Company elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its employee stock option plans. Under APB 25, no compensation expense is recognized at the time of option grant because the exercise price of the Company's employee stock option equals the fair market value of the underlying common stock on the date of grant.

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Net Income (Loss) Per Share

        The Company computes net income (loss) per share pursuant to SFAS No. 128, "Earnings Per Share" ("SFAS 128"). Under the provisions of SFAS No. 128, basic net loss per share is computed by dividing the net income (loss) available to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares, composed of unvested restricted common shares and incremental common shares issuable upon the exercise of stock options, are included in diluted net income (loss) per share to the extent these shares are dilutive.

        The following table sets forth the computation of basic and diluted net income (loss) per share as follows (in thousands, except per share amounts):

		Years Ended December 31,
		2001			2000		1999
Numerator:
Net income (loss):		$	(14,320	)	$	1,175	$	3,771
Denominator:
	Weighted average shares outstanding and Denominator for basic earnings per share		23,729			22,659		19,684
Effect of dilutive securities:
	Employee stock options		—			1,794		610
Denominator for diluted earnings per share			23,729			24,453		20,294
Net income (loss) per share:
Basic		$	(0.60	)	$	0.05	$	0.19
Diluted		$	(0.60	)	$	0.05	$	0.19

        Dilutive common stock equivalents would include the dilutive effects of common stock options, warrants for common stock equivalents, and restricted stock that has not yet fully vested. Potentially dilutive common stock totaled approximately 2,843,000, 626,000, and 1,640,000 shares for the years ended December 31, 2001, 2000, and 1999 respectively. Potentially dilutive common stock was excluded from the 2001 diluted earnings per share denominator because of their anti-dilutive effect.

Comprehensive Income (Loss)

        The Company has adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for reporting comprehensive income (loss) and its components in financial statements. Comprehensive income (loss), as defined, includes all changes in equity (net assets) during a period from non-owner sources. Net income (loss) and other comprehensive income (loss), including foreign currency translation adjustments, and unrealized gains and losses on investments shall be reported, net of their related tax effect, to arrive at comprehensive loss. The Company's net income (loss) and its total comprehensive income (loss) are included in the statement of stockholders' equity.

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Effect of New Accounting Standards

        In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" ("SFAS 141") and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives (but with no maximum life). The amortization provisions of SFAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, adoption of SFAS 142 is required effective January 1, 2002. The Company plans to adopt SFAS 142 effective January 1, 2002 at which time goodwill and intangible assets will be reviewed for impairment by comparing the carrying value to the fair market value of such assets. Additionally, the Company expects to reclassify $1.8 million of intangibles to goodwill, and expects amortization expense to be reduced by $9.0 million to $5.8 million annually, based on the non-amortizable goodwill and the remaining amortizable intangible assets. The Company does not expect the adoption of SFAS 142 to result in any impairment to the carrying value of goodwill and intangible assets.

        In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. Additionally, SFAS 144 promulgates criteria for reporting discontinued operations. This pronouncement is effective for financial statements beginning after December 15, 2001 with early application encouraged. The Company adopted SFAS 144 in the fourth quarter of 2001, and accordingly determined that the discontinuation of the re-sale of computer hardware in the fourth quarter of 2001 qualified as discontinued operations. As such, the revenues net of expenses related to the re-sale of computer hardware have been included in the statement of operations as income from discontinued hardware operations for all periods presented.

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Reclassifications

        Certain amounts in prior periods have been reclassified to conform with current period presentation.

3. Business Combinations

Acquisition of Synomics Limited

        On June 29, 2001, the Company acquired Synomics Limited ("Synomics"), a UK-based company providing middleware technology and consulting expertise. The Company paid $4.0 million for Synomics, consisting of $3.5 million cash and $0.5 million in transaction costs.

        The acquisition has been accounted for by the purchase method of accounting and, accordingly, the assets acquired and liabilities assumed have been recorded at their estimated fair values. The purchase price was allocated $0.3 million to net tangible assets (including cash acquired of $0.1 million) and $3.7 million to goodwill and other intangibles. The goodwill is being amortized over five years. The operating results of Synomics have been included in the Company's results of operations since the acquisition date.

Acquisition of Synopsys Scientific Systems Limited

        On February 29, 2000, the Company acquired Synopsys Scientific Systems Limited ("Synopsys"), a UK-based company providing chemical database software, chemical data content, and system integration services to the pharmaceutical, biotechnology and chemical industries. The Company paid $25.6 million for Synopsys, consisting of $23.7 million in cash, $0.7 million in transaction costs, and 19,142 shares of the Company's common stock valued at $1.2 million.

        The acquisition has been accounted for by the purchase method of accounting and, accordingly, the assets acquired and liabilities assumed have been recorded at their estimated fair values. Based on an independent valuation, the Company recorded a first quarter 2000 charge of $6.4 million related to the write-off of the portion of the purchase price that was allocated to in-process research and development. The remainder of the purchase price was allocated as follows: $0.3 million to net tangible assets (including cash acquired of $0.5 million), $3.0 million to developed software, $3.4 million to customer lists and other identified intangible assets, and $12.5 million to goodwill. The developed software is being amortized over three years within cost of revenues, the customer lists and other identified intangible assets are being amortized over three years within selling, general, and administrative expenses, and initially the goodwill, pending the adoption of SFAS 142, is being amortized over five years. The operating results of Synopsys have been included in the Company's results of operations since the acquisition date.

Acquisition of the software subsidiaries of Oxford Molecular Group, Plc

        On September 6, 2000, the Company acquired the software subsidiaries of Oxford Molecular Group Plc (the "Software Subsidiaries"). The acquired assets of the Software Subsidiaries, constituting plant, equipment, or other physical property were used by the Software Subsidiaries in the design and marketing of bioinformatics and cheminformatics products for the pharmaceutical, biotechnology, and chemical industries. The Company intends to use these assets in the same manner in which they were used prior to the acquisition.

        The Company paid $32.1 million for the Software Subsidiaries, consisting of $18.7 million in cash, $11.9 million in assumed liabilities and $1.5 million in transaction costs. Of the $18.7 million paid in cash, $2.0 million was paid into a one-year escrow account as security against the representations and warranties made by the seller in the related contract. The acquisition has been accounted for by the purchase method of accounting and, accordingly, the assets acquired and liabilities assumed have been recorded at their estimated fair values.

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        Based on an independent valuation, the Company recorded a third quarter 2000 charge of $2.3 million related to the write-off of the portion of the purchase price that was allocated to in-process research and development. The remainder of the purchase price was allocated as follows: $5.3 million to net liabilities (net of cash acquired of $0.2 million), $11.7 million to developed software, $2.1 million to customer lists and other identified intangible assets, and $21.3 million to goodwill. The developed software is being amortized over three years within cost of revenues, the customer lists and other identified intangible assets are being amortized over three years within selling, general and administrative expenses, and initially the goodwill, pending the adoption of SFAS 142, is being amortized over five years. The operating results of the Software Subsidiaries have been included in the Company's results of operations since the acquisition date.

        The Company has included $8.4 million and $10.4 million in accrued liabilities for closure of identified facilities, termination and relocation of employees, and contractual holdbacks as of December 31, 2001 and 2000, respectively. Such accruals were recorded at the time of acquisition based on plans established at that time. During 2001, the Company charged $2.5 million against the 2000 accrual for exit, involuntary employee termination, and relocation costs. In connection with the 2001 acquisition of Synomics, the Company accrued $0.5 million for involuntary employee termination and relocation costs. There have been no adjustments of these accruals to date.

Pro Forma Consolidated Results of Operations

        Assuming that the acquisition of Synopsys, the Software Subsidiaries and Synomics had occurred on January 1 of the respective years, the pro forma consolidated results of operations would be as follows (in thousands, except per share amounts):

		Years Ended December 31,
		2001			2000
Total revenue		$	122,682		$	131,494
Net loss		$	(18,614	)	$	(23,911	)
Net loss per share:
	Basic	$	(0.78	)	$	(1.06	)
	Diluted	$	(0.78	)	$	(1.06	)

        The pro forma revenue amounts exclude revenue from the discontinued hardware operations. The 2000 pro forma results of operations do not give effect to the write-off of allocated in-process research and development of $8.7 million.

Discontinued Acquisitions

        In March 2001 and January 2002, the Company decided to discontinue pursuits of two separate potential acquisitions. Accumulated costs related to these potential acquisitions were expensed during the first and fourth quarters of 2001, respectively, in the total amount of $2,985,000.

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4. Composition of Certain Financial Statement Captions

        Property and equipment consist of the following (in thousands):

	December 31,
	2001			2000
Laboratory equipment	$	11,501		$	10,617
Furniture, fixtures and equipment		5,977			5,744
Computers and software		16,409			13,112
Leasehold improvements		6,955			6,756
Other		610			752
		41,452			36,981
Accumulated depreciation and amortization		(29,726	)		(24,600	)
Property and equipment, net	$	11,726		$	12,381

        Accrued liabilities consist of the following (in thousands):

	December 31,
	2001		2000
Payroll and other compensation	$	10,508	$	13,167
Royalties		1,731		1,088
Merger related and restructuring costs		8,158		10,360
Taxes		4,843		5,685
Other		3,644		3,280
	$	28,884	$	33,580

5. Income Taxes

        The Company accounts for income taxes using the liability method. Under the liability method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial carrying amounts and the tax basis of existing assets and liabilities.

        Significant components of the Company's deferred tax assets and liabilities are as follows (in thousands):

		December 31,
		2001			2000
Deferred tax assets:
	Net operating loss carryforwards	$	30,224		$	33,449
	Unused tax credits		914			914
	Fixed assets		698			—
	Accruals and reserves		12,037			5,225
	Gross deferred tax asset		43,873			39,588
Deferred tax liabilities:
	Tax basis differences for intangible assets		6,137			8,586
Net asset before valuation allowance			37,736			31,002
Valuation allowance			(37,736	)		(31,002	)
Net deferred tax asset		$	—		$	—

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        As of December 31, 2001, approximately $1,910,000 of the valuation allowance for deferred tax assets relates to pre-acquisition tax deductions which, to the extent recognized, will result in a reduction of goodwill.

        Pretax income (loss) from the Company's domestic operations totaled approximately $(12,764,000), $560,000 and $838,000 in 2001, 2000 and 1999, respectively. Pretax income from the Company's foreign operations totaled approximately $(668,000), $1,870,000 and $3,433,000 in 2001, 2000 and 1999, respectively.

        The provision for income taxes consists of the following (in thousands):

		Years Ended December 31,
		2001		2000		1999
Current:
	Federal	$	—	$	—	$	50
	State		183		329		70
	Foreign		705		926		380
Total		$	888	$	1,255	$	500

        The following reconciles income taxes computed at the US statutory federal tax rate to the provision for income taxes (in thousands):

		Years Ended December 31,
		2001			2000			1999
Tax expense (benefit) at US statutory rate		$	(4,710	)	$	826		$	1,495
	State income taxes, net of federal income tax benefit		(766	)		329			70
	Nondeductible merger costs		3,056			5,031			—
	Foreign taxes		1,852			183			380
	Alternative minimum tax		—			—			50
	Change in valuation allowance and other		1,456			(5,114	)		(1,495	)
Provision for income taxes		$	888		$	1,255		$	500

        As of December 31, 2001, the Company has US federal net operating loss carryforwards of approximately $73 million, and credit carryforwards of approximately $1 million. The US federal net operating losses and credits begin to expire in 2008 through 2021, if not fully utilized. Realization is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. A portion of the net operating losses relate to stock option deductions which will result in an increase to paid-in capital and a decrease in income taxes payable at such time that the tax benefit is realized.

        A portion of the Company's US federal net operating loss carryforwards that relate to the acquired companies may be subject to annual usage limitations under Section 382.

6. Stock Plans

        The Company has four Stock Plans, including the 1994 Incentive Stock Plan, the 1995 Employee Stock Purchase Plan, the 1995 Director's Option Plan, and the 2000 Stock Option Plan.

        In accordance with the 1994 Incentive Stock Plan (the "Plan"), the Company may grant up to 4,700,000 shares of both incentive or non-qualified stock options or stock purchase rights to officers, directors, employees, sales representatives, and consultants of the Company. The term of each incentive

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and non-qualified stock option and stock purchase right is generally ten years. Vesting generally occurs over a period of not greater than five years. At December 31, 2001, there were 150,000 shares available for future grants under the 1994 Incentive Stock Plan.

        In 1995, the Company adopted the 1995 Employee Stock Purchase Plan ("ESPP") under Section 423 of the Internal Revenue Code. A total of 750,000 shares of common stock are reserved for offering under the ESPP. In 2001, 91,000 shares of common stock were purchased at prices ranging from $12.61 to $17.00 per share. At December 31, 2001, there were 440,000 shares available for future purchase under the ESPP.

        In accordance with the 1995 Director's Option Plan, the Company may grant up to 300,000 options to purchase shares of common stock to non-employee members of the Board. The exercise price of the stock options shall be equal to the fair market value per share of common stock on the option grant date. Each option has a term of ten years from the option grant date and shall become exercisable in a series of three equal and successive annual installments. In 2001, 30,000 options were granted at an exercise price of $19.91. At December 31, 2001, there were 122,000 shares available for future grants under the Director's Option Plan.

        In accordance with the 2000 Stock Option Plan, the Company may grant up to 1,500,000 shares of non-qualified stock option or stock purchase rights to employees and consultants of the Company. The term of each non-qualified stock option and stock purchase right is ten years. In 2001, 1,215,000 options were granted at exercise prices ranging from $11.67 to $28.31. Vesting generally occurs over a period of not greater than five years. At December 31, 2001, there were 116,000 shares available for future grants under the 2000 Stock Option Plan.

        The Company applies APB 25 in accounting for its stock option programs described above. The exercise price under the option plans equals or exceeds the fair market value of the common shares on the date of grant, and, accordingly, no compensation cost has been recognized under the provisions of APB 25. SFAS 123 requires pro forma information regarding net income and earnings per share as if the Company had accounted for its employee stock options and warrants granted subsequent to December 31, 1994 and shares of common stock purchased by employees in connection with the ESPP ("equity awards") under the fair value method of SFAS 123. The fair value of these equity awards was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 2001, 2000, and 1999, respectively: risk-free interest rates of 4.8%, 5.2%, and 6.5%; expected volatility of 94%, 108%, and 111%; expected option life of 6.8, 5.9, and 4.9 years from vesting and an expected dividend yield of 0.0%.

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        For purposes of pro forma disclosures, the estimated fair value of the equity awards is amortized to expense over the options' vesting period. The Company's pro forma income (loss) and per share information is as follows (in thousands, except per share amounts):

		Years Ended December 31,
		2001			2000			1999
Net income (loss):
	As reported	$	(14,320	)	$	1,175		$	3,771
	Pro forma		(31,899	)		(16,823	)		(6,619	)
Basic net income (loss) per common share:
	As reported	$	(0.60	)	$	0.05		$	0.19
	Pro forma		(1.34	)		(0.74	)		(0.34	)
Diluted net income (loss) per common share:
	As reported	$	(0.60	)	$	0.05		$	0.19
	Pro forma		(1.34	)		(0.74	)		(0.34	)

        A summary of the Company's stock option activity and weighted average exercise prices follows (in thousands, except per share amounts):

		Years Ended December 31,
		2001				2000				1999
		Common Stock Options		Weighted Average Exercise Price		Common Stock Options		Weighted Average Exercise Price		Common Stock Options		Weighted Average Exercise Price
Outstanding at beginning of year		3,383		$	23.33	3,664		$	10.73	3,725		$	9.54
	Granted	2,282			15.48	1,460			42.53	1,270			9.27
	Exercised	(384	)		7.03	(1,259	)		10.93	(886	)		2.70
	Expired	(403	)		23.02	(482	)		19.04	(445	)		13.44
Outstanding at end of year		4,878			21.46	3,383			23.33	3,664			10.73
Exercisable at end of year		1,679				1,223				1,739
Weighted average fair value of options granted during the year				$	18.75			$	35.83			$	8.65

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        A summary of stock options outstanding and exercisable as of December 31, 2001, follows (in thousands, except per share amounts):

			Options Outstanding			Options Exercisable
Range of Exercise Prices		Options Outstanding	Weighted Average Remaining Life (years)	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
$	0.38 — $10.00	724	6.6	$	7.96	492	$	7.52
$	10.01 — $15.00	1,492	8.9		11.88	311		11.72
$	15.01 — $20.00	1,056	8.0		18.03	339		17.38
$	20.01 — $40.00	577	8.4		25.50	144		25.45
$	40.01 — $85.00	1,029	8.3		46.11	393		46.63
$	0.38 — $85.00	4,878	8.2	$	21.46	1,679	$	20.99

7. Deferred Compensation and Retirement Savings Plans

        The Company has an employee savings and retirement plan (the "401(k) Plan") and a deferred compensation plan for certain highly compensated employees.

        The 401(k) Plan is intended to be a tax-qualified plan covering substantially all employees. Under the terms of the 401(k) Plan, employees may elect to contribute up to 20% of their compensation, or the statutory prescribed limit, if less. As part of this plan employees may elect to invest in the stock of the Company. The Company may, at its discretion, match employee contributions up to a maximum of 3% of the employee's compensation. Employer contributions, made up entirely of Company common stock, totaled $1,362,000, $873,000, and $834,000 for the years ended December 31, 2001, 2000, and 1999.

        The Deferred Compensation plan was established in fiscal 2000 and permits selected employees to defer a portion of their compensation (not to exceed 90%). Contributions to this plan are held in a trust account and are invested at the participant's discretion in marketable debt and equity securities. These investments are reflected in other assets on the balance sheet and total $510,000 and $226,000 as of December 31, 2001 and 2000, respectively.

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8. Segment information

        The Company operates in two industry segments. The Company's Software Segment, Accelrys, provides molecular modeling and simulation, bioinformatics and cheminformatics software, and related consulting services 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, high-throughput screening, and Accelrys technologies.

        Summarized financial information concerning the industry segments and geographic revenues follows (in thousands):

	Years Ended December 31,
	Software			2001 Drug Discovery Services			Total			Software			2000 Drug Discovery Services			Total			Software		1999 Drug Discovery Services			Total
Revenues:
Software license, service, and other	$	95,107		$	—		$	95,107		$	75,401		$	—		$	75,401		$	60,943	$	—		$	60,943
Drug Discovery Services		—			27,196			27,196			—			39,035			39,035			—		34,581			34,581
Total revenues	$	95,107		$	27,196		$	122,303		$	75,401		$	39,035		$	114,436		$	60,943	$	34,581		$	95,524
Depreciation and amortization	$	18,899		$	2,897		$	21,796		$	10,764		$	3,410		$	14,174		$	3,798	$	3,870		$	7,668
Operating income (loss) from continuing operations(1)	$	(11,477	)	$	(8,473	)	$	(19,950	)	$	(6,995	)	$	(267	)	$	(7,262	)	$	7,699	$	(8,371	)	$	(672	)
Capital expenditures	$	3,561		$	1,303		$	4,864		$	2,365		$	1,811		$	4,176		$	1,173	$	1,920		$	3,093
Total assets (2)	$	119,538		$	150,860		$	270,398		$	119,386		$	165,380		$	284,766		$	59,985	$	66,274		$	126,259
Revenues (3)
US							$	76,629								$	75,673							$	64,595
Europe								29,659									23,366								20,841
Asia-Pacific								16,015									15,397								10,088
Total							$	122,303								$	114,436							$	95,524

(1)

Includes $8.7 million of write-offs of in process research and development in 2000.

(2)

Includes cash and cash equivalents of $14,614 and $142,042 at Software and Drug Discovery Services, respectively, in 2001; $18,242 and $146,721 at Software and Drug Discovery Services, respectively, in 2000; and $21,508 and $47,524 at Software and Drug Discovery Services, respectively in 1999.

(3)

Revenue in the U.S. category includes export revenue from Drug Discovery Services and Software. Export revenues from the US to Europe totaled $15,081, $15,953 and, $5,485 in 2001, 2000 and 1999, respectively; and export revenues to Asia-Pacific totaled $2,371, $1,170, and, $1,969 in 2001, 2000 and 1999, respectively.

9. Commitments and Contingencies

Operating Leases

        The Company has several operating leases or sub-leases for office and laboratory space, which expire at various dates through 2027. The leases for the Company's primary facilities in Cambridge, UK; CA and NJ, USA, provide generally for scheduled rent increases, options to extend the leases with certain changes to the terms of the lease agreement, and refurbishment allowances. Rent expense under operating leases for 2001, 2000, and 1999 was approximately $6,592,000, $5,741,000, and $4,803,000, respectively.

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        Future minimum lease commitments at December 31, 2001 are as follows (in thousands):

2002	$	6,267
2003		6,276
2004		6,249
2005		5,912
2006		3,520
Thereafter		24,883
	$	53,107

Royalties

        The Company pays royalties to approximately thirty-five partners for worldwide licenses to enhance and market certain software developed at universities, corporations and other institutions. A majority of the royalty agreements are long term or perpetual in nature and the royalty obligations thereunder are generally based on a percentage of revenues derived from certain software licenses plus associated revenues from post-contract support and maintenance. The royalty agreements require quarterly payments and generally do not limit the maximum royalty amount under the agreement. Certain agreements contain provisions for quarterly and annual minimum royalty payments that total approximately $577,000 on an annual basis. In 2001, 2000, and 1999 the Company incurred related royalty expense of $3.0 million, $2.2 million, and $2.3 million, respectively. Based on existing royalty agreements, the Company expects to continue to incur about these levels of annual future royalty obligations.

        Additionally, the Company has a license agreement that grants to the Company an exclusive, worldwide license to certain technology for making and using combinatorial chemical libraries. The agreement requires the Company to pay annual license fees and certain royalties. In 2001, 2000, and 1999 the Company paid related royalties and license fees of $225,000, $236,000, and $100,000, respectively.

Litigation

        In the ordinary course of business, the Company is subject to claims and, from time to time, is named in various legal proceedings. In the opinion of management, the amount of ultimate liability, if any, with respect to any pending actions will not materially affect the financial position or results of operations of the Company.

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10. Selected Quarterly Financial Information (unaudited)

        The following is a summary of the quarterly results of operations for the years ended December 31, 2001 and 2000 (in thousands, except per share amounts):

			2001
			March 31,			June 30,			Sept. 30,			Dec. 31,
Revenues			$	25,563		$	27,218		$	28,500		$	41,022
Cost of revenues			$	9,790		$	9,536		$	9,906		$	10,225
Income (loss) from continuing operations			$	(5,875	)	$	(5,632	)	$	(5,930	)	$	2,696
Net income (loss)			$	(5,780	)	$	(5,408	)	$	(5,953	)	$	2,821
Per common share:
	Income (loss) from continuing operations
		- Basic	$	(0.25	)	$	(0.24	)	$	(0.25	)	$	0.11
		- Diluted	$	(0.25	)	$	(0.24	)	$	(0.25	)	$	0.11
Net income (loss)
		- Basic	$	(0.25	)	$	(0.23	)	$	(0.25	)	$	0.12
		- Diluted	$	(0.25	)	$	(0.23	)	$	(0.25	)	$	0.12

			2000
			March 31,			June 30,		Sept. 30,			Dec. 31,
Revenues			$	22,886		$	26,127	$	25,862		$	39,561
Cost of revenues			$	7,746		$	8,340	$	8,379		$	9,536
Income (loss) from continuing operations			$	(5,836	)	$	2,844	$	(2,106	)	$	5,775
Net income (loss)			$	(5,797	)	$	3,069	$	(1,945	)	$	5,848
Per common share:
	Income (loss) from continuing operations
		- Basic	$	(0.28	)	$	0.12	$	(0.09	)	$	0.25
		- Diluted	$	(0.28	)	$	0.12	$	(0.09	)	$	0.24
Net income (loss):
		- Basic	$	(0.27	)	$	0.13	$	(0.08	)	$	0.25
		- Diluted	$	(0.27	)	$	0.12	$	(0.08	)	$	0.24

11. Related Party Transactions

        A shareholder and member of the Company's Board of Directors is also a partner in the principal outside law firm that provides legal services to the Company. For the years ended December 31, 2001, 2000, and 1999 the Company expended a total of $2,192,000, $1,015,000, and $482,000 in fees related to services provided by such firm.

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

        None

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        The information required by this Item concerning the Company's directors and executive officers, other than as set forth in Item 4A, is incorporated by reference from the Company's Proxy Statement (the "Proxy Statement") related to the 2002 Annual Meeting of Stockholders to be held on May 8, 2002.

ITEM 11. EXECUTIVE COMPENSATION

        The information required by this Item is incorporated by reference from the section entitled "Executive Compensation" in the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The information required by this Item is incorporated by reference from the section entitled "Stock Ownership of Principal Stockholders and Management" in the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The information required by this item is incorporated by reference from the section entitled "Certain Relationships and Related Transactions" in the Proxy Statement.

PART IV

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

(a)(1)    Financial Statements

        The following Consolidated Financial Statements are included:

        Report of Independent Auditors

        Consolidated Balance Sheets as of December 31, 2001 and 2000

        Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999

        Consolidated Statements of Stockholders' Equity for the years ended December 31, 2001, 2000 and 1999

        Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999

        Notes to Consolidated Financial Statements

(a)(2)    Financial Statement Schedules

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Schedule II—Valuation and Qualifying Accounts (in thousands)

			Additions
DESCRIPTION		Balance at Beginning of Period	Charged to Costs and Expenses	Charged to Other Accounts		Deductions		Balance at End of Period
Deducted from receivables:
Allowance for doubtful accounts
	Year ended December 31, 1999	609	311	3	(1)	299	(3)	624
	Year ended December 31, 2000	624	564	1,673	(2)	556	(3)	2,305
	Year ended December 31, 2001	2,305	315	—		1,706	(3)	914

(1)

Represents amounts charged to foreign currency translation adjustment.

(2)

$1,664 represents amount from acquisitions, $9 represents amounts charged to foreign currency translation adjustment.

(3)

Represents write-offs, net of recoveries.

All other schedules are omitted because they are not applicable, or not required, or because the required information is included in the financial statements or notes thereto.

(a)(3)    Exhibits:

3.1		Restated Certificate of Incorporation of the Registrant (incorporated by Reference to Exhibit 3.1 to the Company's Report on Form 10-K for the year ended December 31, 1996).
3.3		Bylaws of the Registrant, as amended (incorporated by Reference to Exhibit 3.3 to the Company's Report on Form 10-K for the year ended December 31, 1996).
3.3(a	)	Amendment to Bylaws of the Registrant dated July 31, 1997 (incorporated by Reference to Exhibit 3.3(a) to the Company's Report on Form 10-Q for the quarter ended September 30, 1997).
3.3(b	)*	Amendment to Bylaws of the Registrant dated January 17, 2002.
10.1#		Amended 1994 Incentive Stock Plan (incorporated by Reference to Exhibit 10.5 to the Company's Report on Form 10-K for the year ended December 31, 1995 (File Number 000-27188)).
10.1(a	)#	Amendment No. 1 to the 1994 Incentive Stock Plan (incorporated by reference to Exhibit 10.1(a) to the Company's Report on Form 10-K for the year ended December 31, 2000).
10.1(b	)#	Amendment No. 2 to the 1994 Incentive Stock Plan (incorporated by reference to Exhibit 10.1(b) to the Company's Report on Form 10-K for the year ended December 31, 2000).
10.1(c	)#	Amendment No. 3 to the 1994 Incentive Stock Plan (incorporated by reference to Exhibit 10.5(a) to the Company's Report on Form 10-Q for the quarter ended June 30, 1997.
10.1(d	)#	Amendment No. 4 to the 1994 Incentive Stock Plan (incorporated by reference to Exhibit 10.1(d) to the Company's Report on Form 10-K for the year ended December 31, 2000).
10.1(e	)#	Amendment No. 5 to the 1994 Incentive Stock Plan (incorporated by reference to Exhibit 10.1(e) to the Company's Report on Form 10-K for the year ended December 31, 2000).
10.1(f	)#	Amendment No. 6 to the 1994 Incentive Stock Plan (incorporated by reference to Exhibit 10.1(f) to the Company's Report on Form 10-K for the year ended December 31, 2000).

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10.1(g	)#	Amendment No. 7 to the 1994 Incentive Stock Plan (incorporated by reference to Exhibit 10.1(g) to the Company's Report on Form 10-K for the year ended December 31, 2000).
10.1(h	)#	Amendment No. 8 to the 1994 Incentive Stock Plan (incorporated by reference to Exhibit 10.54 to the Company's Report on Form 10-Q for the quarter ended June 30, 2000).
10.2#		1995 Employee Stock Purchase Plan (incorporated by Reference to Exhibit 10.6 to the Company's Registration Statement on Form S-1 (Reg. No. 33-98246)).
10.2(a	)#	Amendment No. 1 to the Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.2(a) to the Company's Report on Form 10-Q for the quarter ended March 31, 2001).
10.3#		1995 Director Option Plan (incorporated by reference to Exhibit 10.7 to the Company's Registration Statement on Form S-1 (Reg. No. 33-98246)).
10.3(a	)#	Amendment No. 1 to 1995 Director Option Plan (incorporated by reference to Exhibit 10.3(a) to the Company's report on form 10-K for the year ended December 31, 2000).
10.3(b	)#	Amendment No. 2 to the 1995 Director Option Plan (incorporated by reference to Exhibit 10.3(b) to the Company's report on Form 10-Q for the quarter ended March 31, 2001).
10.4+		Research, License, and Royalty Agreement, dated as of February 15, 1995, between Pharmacopeia and Berlex Laboratories, Inc. (incorporated by Reference to Exhibit 10.9 to the Company's Registration Statement on Form S-1 (Reg. No. 33-98246) ).
10.4(a	)+	Amendment No. 1 to Research, License and Royalty Agreement between the Company and Berlex Laboratories, Inc. dated November 27, 1996 (incorporated by Reference to Exhibit 10.9(a) to the Company's Report on Form 10-Q for the quarter ended June 30, 1997).
10.4(b	)+	Amendment No. 2 to Research, License and Royalty Agreement between the Company and Berlex Laboratories, Inc. dated June 30, 1997 (incorporated by Reference to Exhibit 10.9(b) to the Company's Report on Form 10-Q for the quarter ended June 30, 1997).
10.4(c	)+	Amendment No.3 to Research, License and Royalty Agreement between the Company and Berlex Laboratories, Inc. dated November 21, 1997 (incorporated by Reference to Exhibit 10.9(c) to the Company's Report on Form 10-K for the year ended December 31, 1997).
10.5+		License Agreement, dated as of October 6, 1995, among Pharmacopeia, the Trustees of Columbia University in the City of New York and Cold Spring Harbor Laboratory (incorporated by Reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1 (Reg. No. 33-98246)).
10.6+		Collaboration Agreement, dated as of December 22, 1994, between Pharmacopeia and Schering Corporation and Schering-Plough, Ltd. (incorporated by Reference to Exhibit 10.11 to the Company's Registration Statement on Form S-1 (Reg. No. 33-98246) ).
10.6(a	)+	Amendment No. 2 to Collaboration Agreement and Random Library Agreement between the Company and Schering Corporation and Schering-Plough, Ltd. dated as of April 22, 1996 (incorporated by Reference to Exhibit 10.11(b) to the Company's Report on Form 10-Q for the quarter ended June 30, 1997).
10.6(b	)+	Amendment No. 3 to Collaboration Agreement and Random Library Agreement between the Company and Schering Corporation and Schering-Plough, Ltd. dated as of April 21, 1997 (incorporated by Reference to Exhibit 10.11(c) to the Company's Report on Form 10-Q for the quarter ended June 30, 1997).

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10.7+		Random Library Agreement, dated as of December 22, 1994, between Pharmacopeia and Schering Corporation and Schering-Plough, Ltd. (incorporated by Reference to Exhibit 10.12 to the Company's Registration Statement on Form S-1 (Reg. No. 33-98246) ).
10.8		Lease Agreement between Pharmacopeia and Eastpark at 8A (incorporated by Reference to Exhibit 10.13 to the Company's Registration Statement on Form S-1 (Reg. No. 33-98246)).
10.8(a	)	Amendment dated as of January 22, 1996 to Lease Agreement between Pharmacopeia and Eastpark at 8A (incorporated by reference to Exhibit 10.13(a) to the Company's Report on Form 10-K for the year ended December 31, 1995 (File Number 000-27188) ).
10.8(b	)	Third Amendment to Lease Agreement dated March 31, 1996 between Pharmacopeia and Eastpark at 8A (incorporated by reference to Exhibit 10.13(b) to the Company's Report on Form 10-Q for the quarter ended June 30, 1996).
10.9#		Employment Agreement dated as of February 26, 2001 between the Company and Joseph A. Mollica, Ph.D (incorporated by reference to the Company's Report on form 10-K for the year ended December 31, 2000).
10.10#		Employment Agreement, dated June 3, 1993, between the Company and John J. Baldwin, Ph.D (incorporated by Reference to Exhibit 10.20 to the Company's Registration Statement on Form S-1 (Reg. No. 33-98246)).
10.11#		Employment Agreement, dated June 20, 1996, between the Company and Stephen A. Spearman, Ph.D (incorporated by reference to Exhibit 10.32 to the Company's Report on Form 10-Q for the quarter ended September 30, 1996).
10.12+		Collaboration and License Agreement between Pharmacopeia, Inc. and Bristol-Myers Squibb Company dated November 26, 1997 (incorporated by reference to Exhibit 10.34 to the Company's Report on Form 10-K/A-2 for the year ended December 31, 1997).
10.13+		Collaboration and License Agreement, dated as of October 29, 1998, between Pharmacopeia, Inc. and Schering-Plough Ltd. (incorporated by reference to Exhibit 10.43 to the Company's Report on Form 10-K for the year ended December 31, 1998).
10.14+		Collaboration and License Agreement, dated as of October 29, 1998, between Pharmacopeia, Inc. and Schering Corporation (incorporated by reference to Exhibit 10.44 to the Company's Report on Form 10-K for the year ended December 31, 1998).
10.15		Guarantee, dated as of October 29, 1998, between Pharmacopeia, Inc. and Schering-Plough Corporation (incorporated by reference to Exhibit 10.45 to the Company's Report on Form 10-K for the year ended December 31, 1998).
10.16		Lease dated November 12, 1998 between Molecular Simulations Inc. and San Diego Tech Center, LLC (incorporated by reference to Exhibit 10.47 to the Company's Report on Form 10-K for the year ended December 31, 1998).
10.17#		Form of Indemnity Agreement for Directors and Executive Officers (incorporated by reference to Exhibit 10.48 to the Company's Report on Form 10-K for the year ended December 31, 1998).
10.18		Lease Agreement, dated May 1, 1999, between Pharmacopeia and South Brunswick Rental I, LTD (incorporated by reference to Exhibit 10.49 to the Company's Report on Form 10-Q for the quarter ended June 30, 1999).

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10.19		Amendment No. 1, effective April 15, 1999, to Collaboration and License Agreements, dated as of October 29, 1998, between Pharmacopeia, Inc., Schering-Plough Ltd. And Schering Corporation (incorporated by reference to Exhibit 10.50 to the Company's Report on Form 10-K for the year ended December 31, 1999).
10.20+		Amendment No. 2, effective October 1, 1999, to Collaboration and License Agreements, dated as of October 29, 1998, between Pharmacopeia, Inc., Schering-Plough Ltd. and Schering Corporation (incorporated by reference to Exhibit 10.51 to the Company's Report on Form 10-K for the year ended December 31, 1999).
10.21		Pharmacopeia, Inc. 2000 Stock Option Plan (incorporated by reference to the Company's Report on form 10-K for the year ended December 31, 2000).
10.22#		Pharmacopeia, Inc. Executive Non-Qualified Deferred Compensation Plan (incorporated by reference to Exhibit 10.52 to the Company's Report on Form 10-Q for the quarter ended March 31, 2000).
10.23		Form of Stock Purchase Agreement, dated as of March 8, 2000, among the company and the investors set forth therein (incorporated by reference to Exhibit 10.53 to the Company's Report on Form 10-Q for the quarter ended March 31, 2000.)
10.24#		Consulting Agreement for Founding Members of the Pharmacopeia, Inc. Scientific Advisory Board, between Pharmacopeia, Inc. and Paul A. Bartlett (incorporated by reference to the Company's Report on form 10-K for the year ended December 31, 2000).
10.25#		Employment Agreement dated May 1, 2001 between the Company and Michael R. Stapleton (incorporated by reference to the Company's Report on form 10-Q for the quarter ended September 30, 2001).
10.26#		Employment Agreement dated October 1, 2001 between the Company and Bruce C. Myers (incorporated by reference to the Company's Report on form 10-Q for the quarter ended September 30, 2001).
10.26(a	)#*	Amendment dated December 28, 2001 to Employment Agreement between the Company and Bruce C. Myers.
10.27		Lease Agreement dated July 29, 2001 among the Masters, Fellows and Scholars of Trinity College, Cambridge, Accelrys Limited, and Accelrys Inc. and Trinity College (CJP) Limited (incorporated by reference to the Company's Report on form 10-Q for the quarter ended September 30, 2001).
10.28††*		Collaboration and License Agreement dated February 25, 2002 between the Company and N.V. Organon.
21.1*		Subsidiaries of Pharmacopeia, Inc.
23.1*		Consent of Ernst & Young LLP, Independent Auditors.
24.1*		Powers of Attorney (See signature page)

+

Confidential treatment granted.

††

Confidential treatment requested.

#

Represents a management contract or compensatory plan or arrangement.

*

Filed herewith

(b)

Reports on Form 8-K

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(i)

Current report on Form 8-K filed November 8, 2001 reported under Item 7 relating to required financial statements and pro forma financial information of Synopsys Scientific Systems Limited.

(c)

Exhibits

        See Item 14 (a)(3) above.

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SIGNATURES

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

PHARMACOPEIA, INC.
By:	/s/  BRUCE C. MYERS Bruce C. Myers Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
Date:	March 25, 2002

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POWER OF ATTORNEY

        KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Bruce C. Myers and Joseph A. Mollica, Ph.D., jointly and severally, as his or her attorney-in-fact, each with full power of substitution, for him or her, in any and all capacities, to sign each amendment to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact or his or her substitute or substitutes may lawfully do or cause to be done by virtue hereof.

        Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

Signatures	Title	Date
/s/  JOSEPH A. MOLLICA, PH.D. Joseph A. Mollica, Ph.D.	Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)	March 25, 2002
/s/  BRUCE C. MYERS Bruce C. Myers	Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)	March 25, 2002
/s/  FRANK BALDINO, JR. Frank Baldino, Jr.	Director	March 25, 2002
/s/  PAUL A. BARTLETT, PH.D. Paul A. Bartlett, Ph.D.	Director	March 25, 2002
/s/  GARY E. COSTLEY, PH.D. Gary E. Costley, Ph.D.	Director	March 25, 2002
/s/  RICARDO B. LEVY, PH.D. Ricardo B. Levy, Ph.D.	Director	March 25, 2002
/s/  JAMES J. MARINO James J. Marino	Director	March 25, 2002
/s/  CHARLES A. SANDERS, M.D. Charles A. Sanders, M.D.	Director	March 25, 2002

        [Rest of Page intentionally left blank]

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DOCUMENTS INCORPORATED BY REFERENCE
PHARMACOPEIA, INC. AND SUBSIDIARIES 2001 Form 10-K Table of Contents
PART I
PHARMACOPEIA'S SOFTWARE SEGMENT—ACCELRYS
PHARMACOPEIA'S DRUG DISCOVERY SERVICES SEGMENT
RISKS ASSOCIATED WITH CONSOLIDATED INTERNATIONAL OPERATIONS
CONSOLIDATED RESEARCH AND DEVELOPMENT
CONSOLIDATED EMPLOYEES
IMPORTANT RISK FACTORS REGARDING FORWARD LOOKING STATEMENTS
CONSOLIDATED SEGMENT INFORMATION
PART II
REPORT OF INDEPENDENT AUDITORS
Pharmacopeia, Inc. Consolidated Balance Sheets (in thousands, except per share data)
Pharmacopeia, Inc. Consolidated Statements of Operations (in thousands, except per share data)
Pharmacopeia, Inc. Consolidated Statements of Stockholders' Equity (in thousands)
Pharmacopeia, Inc. Consolidated Statements of Cash Flows (in thousands)
Pharmacopeia, Inc. Notes to Consolidated Financial Statements
PART III
PART IV
SIGNATURES
POWER OF ATTORNEY

EX-3.3(B)

Exhibit 3.3(b)

        RESOLVED, that Article 2, Section 2.6 of the Bylaws of the Company be amended in its entirety to read as follows:

"2.6 QUORUM; ADJOURNMENT

The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business, except as otherwise provided by statute or by the certificate of incorporation. At any meeting of stockholders, annual or special, whether or not there shall be a quorum present, the Chairman of the meeting shall have the power and authority to adjourn the meeting from time to time, without notice other than announcement at the meeting, except as otherwise provided by statute or by the certificate of incorporation, without the consent or approval of the stockholders present. In addition, at any meeting where a quorum is not present, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, except as otherwise provided by statute or by the certificate of incorporation, until a quorum is present or represented. At any adjourned meeting at which any required quorum is present or represented, any business may be transacted that might have been transacted at the meeting as originally noticed."

EX-10.26(A)

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Exhibit 10.26(a)

CONFIDENTIAL

AMENDMENT
TO THE
EMPLOYMENT AGREEMENT
OF BRUCE MYERS

        This Amendment to the Employment Agreement (as defined below) is made and entered into as of December 28, 2001 (this "Amendment") between Pharmacopeia, Inc. (hereinafter the "Company") and Bruce C. Myers (hereinafter "Mr. Myers").

        WHEREAS, the Company and Mr. Myers desire to enter into the amendments set forth herein to the Employment Agreement made and entered into as of October 10, 2001 (the "Employment Agreement") between the Company and Mr. Myers;

        NOW, THEREFORE, in consideration of their mutual promises and intending to be legally bound, the parties agree as follows:

        1.    Early Termination Date.    The first sentence of Section 4(e) of the Employment Agreement is hereby deleted in its entirety and replaced with the following:

        "If, either (i) on or before March 15, 2002, Mr. Myers' employment is terminated involuntarily by the Company, without Cause, as defined in Section 4(c), or (ii) on March 15, 2002, Mr. Myers provides the Company with written notice of his intent to voluntarily terminate this Agreement effective sixty (60) days following the date of notice, Mr. Myers shall receive the benefits set forth in Section 4(a), provided, however, that the Company's obligation to make payments shall continue for twelve (12) months notwithstanding Mr. Myers' subsequent employment status."

        2.    Defined Terms.    Terms defined in the Employment Agreement and not otherwise defined herein shall have the meanings ascribed to such terms in the Employment Agreement.

        3.    Effect of Amendment.    Except as expressly amended by this Amendment, the Employment Agreement shall remain in full force and effect in accordance with its terms.

        4.    Governing Law.    This Amendment shall be governed by and construed in accordance with the laws of the State of New Jersey.

        5.    Counterparts.    This Amendment may be executed in one or more counterparts, each of which shall be an original and all of which taken together shall constitute one and the same instrument.

        IN WITNESS WHEREOF, the Company has caused this Amendment to be executed by its duly authorized officer, and Mr. Myers has executed this Amendment, in each case as of December 28, 2001.

PHARMACOPEIA, INC.
By:	/s/  JOSEPH A. MOLLICA Joseph A. Mollica, Ph.D. Chairman, President and Chief Executive Officer
	/s/  BRUCE C. MYERS Bruce C. Myers

2

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AMENDMENT TO THE EMPLOYMENT AGREEMENT OF BRUCE MYERS

EX-10.28

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*** CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

Exhibit 10.28

COLLABORATION AND LICENSE AGREEMENT

This COLLABORATION AND LICENSE AGREEMENT (the "Agreement"), effective as of the 25^th day of February 2002 (the "Effective Date"), is made by and between Pharmacopeia, Inc., a Delaware corporation, having a principal place of business at 3000 Eastpark Boulevard, Cranbury, New Jersey 08512 ("Pharmacopeia"), and N.V. Organon, a Dutch Company limited by Shares, having a principal place of business at Kloosterstraat 6, 5342 AB Oss, The Netherlands ("Organon").

BACKGROUND

WHEREAS, Pharmacopeia has internal expertise in the screening and optimization of compounds;

WHEREAS, Organon is interested in utilizing the expertise of Pharmacopeia in the identification of Lead Compounds against certain Targets; and

WHEREAS, Organon and Pharmacopeia wish to enter into a Research Collaboration the objective of which will be for Pharmacopeia to deliver eight (8) Lead Series and for Organon to develop market and sell Collaboration Products.

NOW THEREFORE, in consideration of the mutual covenants and conditions hereinafter set forth in this Agreement, the Parties hereto agree as follows:

ARTICLE 1

DEFINITIONS

        As used herein, the following terms shall have the meanings set forth below:

        1.1  "Affiliate" means any Person controlled by, controlling, or under common control with a Party. For the purpose of this Section 1.1 only, "control" shall refer to (a) the possession, directly or indirectly, of the power to direct the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise, or (b) the ownership, directly or indirectly, of at least fifty percent (50%) (or, if less, the maximum ownership interest permitted by law) of the voting securities or other ownership interest of a Person.

        1.2  "Assay" collectively refers to the Primary Assay and the Secondary Assay.

        1.3  "Assay Improvements" have the meaning set forth in Section 2.3.

        1.4  "Collaboration Product" means any therapeutic or prophylactic product that contains a Lead Compound or Derivative Compound thereof.

        1.5  "Columbia License" means that certain license agreement effective as of July 16, 1993, as amended and restated as of October 6, 1995, entered by and between Pharmacopeia and the Trustees of Columbia University in the City of New York and the Cold Spring Harbor Laboratory.

        1.6  "Combination Product" means (1) a Collaboration Product that comprises two (2) or more active ingredients, at least one of which is a Lead Compound or a Derivative Compound thereof.

        1.7  "Confidential Information" as to each Party, means such Party's confidential information, Patent Rights and Know-how, all the data and materials of that Party relating to the Research Collaboration, the Target Information, Lead Compounds, Organon Compounds, Derivative Compounds thereof and Collaboration Products, and including without limitation, all research, technical, clinical development, manufacturing, marketing, financial, personnel, and other business information and plans of such Party, which if disclosed in written, graphic or electronic form, is marked or otherwise

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designated as "confidential" or "proprietary" and, if disclosed orally, is summarized and designated as "confidential" or "proprietary" in a writing provided to the Party receiving it no later than thirty (30) days from such disclosure.

        1.8  "Controls" or "Controlled" means possession of the ability to grant licenses or sublicenses without violating the terms of any agreement or other arrangement with, or the rights of, any Third Party.

        1.9  "Derivative Compound" means a compound which is a chemical modification of a Lead Compound or other active structure disclosed by Pharmacopeia to Organon, having activity against the same Target as such Lead Compound or other active structure, which (i) results from a chemical synthesis program based on Lead Compound or other active structure disclosed by Pharmacopeia to Organon, or (ii) is based on structure-function data relating thereto, or (iii) is based on Developed Technology. For clarification purposes it is understood that Organon can independently find compounds against the Target from its own discovery activities. These compounds will not be designated as Derivative Compounds if Organon, as shown by contemporaneous documentation, has developed these compounds independently of the intellectual property described in subsections (i)-(iii) above. Further, it is understood that Derivative Compounds with respect to a Target shall not include a compound if information about such compound's activity against the Target already was in the public domain.

        1.10 "Developed Technology" means any and all data or information whether tangible or intangible, including without limitation the Parties' Know-how and Patent Rights, which (i) is necessary to make or use Lead Compounds, or to develop, make, use or sell Collaboration Products based thereon, and (ii) which was conceived or reduced to practice during and in the course of the Research Collaboration, by employees or agents of Organon, Pharmacopeia and any of their respective Affiliates, either alone or jointly. Developed Technology shall not include Pharmacopeia Base Technology, Organon Base Technology or Excluded Technology.

        1.11 "Development Candidate" means any Lead Compound or Derivative Compound with respect to which Organon has elected to pursue a GLP Toxicity Study.

        1.12 "Excluded Technology" means any and all technical data or information, whether tangible or intangible, including without limitation Know-how and Patent Rights owned or Controlled by Pharmacopeia or its Affiliates relating to the Columbia License, the creation or use of encoded combinatorial chemical compound libraries, tag or marker compound engineering and decoding, computer software, or high throughput screening assays.

        1.13 "Exclusivity Period" has the meaning set forth in Section 4.1.

        1.14 "Fair Market Value" means the cash consideration, which a willing seller would realize from an unrelated willing buyer in an arm's length sale of an identical item sold in the same quantity and at the same time and place of the transaction.

        1.15 "FDA" means the U.S. Food and Drug Administration, any successor thereto, or any corresponding foreign registration or regulatory authority.

        1.16 "First Commercial Sale" means, with respect to a Collaboration Product in any country, the first sale for use or consumption by the general public of such Collaboration Product in such country after all Regulatory Approvals have been obtained in such country.

        1.17 "FTE" means a full-time equivalent Pharmacopeia or Organon scientist.

        1.18 "Fully Allocated Manufacturing Cost" means the cost of direct materials, direct labor (which includes fringe benefits), other direct manufacturing costs, including but not limited to, factory costs and indirect costs, such as supervisory and support labor, supplies, utilities, machinery and equipment maintenance costs (including associated depreciation) and plant operating and maintenance costs (including associated depreciation).

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        1.19 "Inactive Compound" means a Pharmacopeia Compound that was screened in the Research Collaboration against a Target and was not found to show activity against such Target. This activity can be agonistic or antagonistic or modulatory in nature.

        1.20 "IND" means an Investigational New Drug Application, as defined in the U.S. Food, Drug and Cosmetic Act and the regulations promulgated thereunder for initiating clinical trials in the United States, or any corresponding foreign application, registration or certification.

        1.21 "Initial Research Term" means the period commencing on the Effective Date and ending five (5) years thereafter.

        1.22 "Joint Research Committee" or "JRC" means the entity organized to supervise the Research Collaboration and acting pursuant to Article 3.

        1.23 "Know-how" means all inventions, technology, or other information discovered or developed by or for a Party as of the Effective Date, or in connection with and during the Research Collaboration, whether or not patentable, constituting materials, methods, processes, techniques or data, necessary for the development, manufacture or use of Lead Compounds or Derivative Compounds, or for the manufacture, use or sale of a Collaboration Product.

        1.24 "Lead Compound" means a Pharmacopeia Compound which meets the criteria set forth in Section 2.4 and is available for license to Organon pursuant to the terms and conditions of this Agreement. For clarification purposes it is understood that Organon can independently find compounds against the Target from its own discovery activities. These compounds will not be designated as Lead Compounds if Organon, as shown by contemporaneous documentation, has developed these compounds independently of the intellectual property described in Section 1.9(i)—(iii). Further, it is understood that Lead Compounds with respect to a Target shall not include a compound if information about such compound's activity against the Target already was in the public domain.

        1.25 "Lead Series" has the meaning set forth in Section 2.4.

        1.26 "Library" means any chemical compound library prepared by or on behalf of Pharmacopeia and screened during the Research Term, excluding any chemical compound library used in Pharmacopeia's collaboration with Schering-Plough

        1.27 "Library Compound" means any compound that was, prior to the Effective Date, or is, at any time during the Research Term, contained in a Library.

        1.28 "NDA" means a New Drug Application, as defined in the U.S. Food, Drug and Cosmetic Act and the regulations promulgated thereunder, or any corresponding foreign application, registration or certification.

        1.29 "Net Sales" as to Organon, means the amount invoiced and any other amounts or rebates received by Organon, its Affiliates or Sublicensees for the worldwide sale of Collaboration Products to bona fide independent Third Parties and as to Pharmacopeia, the amount invoiced and any other amounts or rebates received by Pharmacopeia or its Affiliates for the worldwide sale of Collaboration Products to bona fide independent Third Parties less to the extent paid, allowed or given: (i) outer packing, freight or transportation charges and insurance relating thereto, (ii) sales, value added and excise taxes or customs duties paid by the selling party, and any other governmental charges (excluding income taxes) actually imposed upon the sale of the Collaboration Products, (iii) reasonable distributors' fees, rebates or allowances, actually granted, allowed or incurred, (iv) trade and prompt payment discounts, quantity discounts, cash discounts or reasonable charge-backs actually granted, allowed or incurred in the ordinary course of business in connection with the sale of the Collaboration Products, and (v) reasonable allowances or credits to customers, not in excess of the selling price of the Collaboration Products, on account of rejection, outdating, recalls or return of, or price adjustments regarding the Collaboration Products.

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        A "sale" as to Organon shall include any transfer or other disposition for consideration of a Collaboration Product, and Net Sales shall include the fair market value of all other consideration received by Organon, its Affiliates or its Sublicensees from the sale or distribution of a Collaboration Product, whether such consideration is in cash, payment in kind, exchange or another form. In the event that a Collaboration Product is packaged with other Organon products, any discount applied to such Collaboration Product to determine Net Sales shall be no greater than the average discount of the entire package. A "sale" as to Pharmacopeia shall include any transfer or other disposition for consideration of a Collaboration Product, and Net Sales shall include the fair market value of all other consideration received by Pharmacopeia or its Affiliates from the sale or distribution of a Collaboration Product, whether such consideration is in cash, payment in kind, exchange or another form. In the event that a Collaboration Product is packaged with other Pharmacopeia products, any discount applied to such Collaboration Product to determine Net Sales shall be no greater than the average discount of the entire package

        The sale of a Collaboration Product between Organon, its Affiliates or Sublicensees solely for the research or clinical testing of such Collaboration Product or for indigent or similar public support or compassionate use programs shall be excluded from the computation of Net Sales. All sales of Collaboration Products between Organon and its Affiliates or its Sublicensees shall be disregarded for purposes of computing Net Sales, unless such a purchaser is the end-user of such Collaboration Product. The sale of a Collaboration Product between Pharmacopeia or its Affiliates solely for the research or clinical testing of such Collaboration Product or for indigent or similar public support or compassionate use programs shall be excluded from the computation of Net Sales. All sales of Collaboration Products between Pharmacopeia and its Affiliates or its Sublicensees shall be disregarded for purposes of computing Net Sales, unless such a purchaser is the end-user of such Collaboration Product.

        To calculate the value of Net Sales of Combination Products, the gross sales of such Products will be multiplied by the fraction A/(A + B) where A is the fair market value of the Lead Compound or Derivative Compound when sold separately, and B is the fair market value of the other active ingredient when sold separately. Allowed deductions may then be subtracted from the proportion of gross sales attributable to the Lead Compound or Derivative Compound to compute Net Sales.

        1.30 "Non-Designated Lead Compound" has the meaning set forth in Section 2.4(c).

        1.31 "Organon Base Technology" means any and all technical data or information, whether tangible or intangible, including without limitation Organon's know-how and Patent Rights (i) which is necessary to conduct the Research Collaboration, and (ii) which Organon owns or Controls as of the Effective Date or during the Research Term, and conceives or reduces to practice outside the Collaboration, without any intellectual contribution from Pharmacopeia.

        1.32 "Organon Compound" has the meaning set forth in Section 2.5.

        1.33 "Party" means Pharmacopeia or Organon. Pharmacopeia and Organon shall be collectively referred to as the Parties.

        1.34 "Patent Committee" means that committee to be formed pursuant to Section 3.5.

        1.35 "Patent Rights" means any and all patents and patent applications (which shall be deemed to include certificates of invention and applications for certificates of invention) which as of the Effective Date or during the term of this Agreement are owned or Controlled by Pharmacopeia or Organon, that claim a Lead Compound or Derivative Compound, or method of use or process for the synthesis thereof or composition of matter containing such Lead Compound or Derivative Compound and the divisions, continuations, confirmations, re-examinations, any provisional applications, supplementary protection certificates or the like of any such patents and patent applications.

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        1.36 "Person" means any natural person, corporation, firm, business trust, joint venture, association, organization, company, partnership or other business entity, or any government or agency or political subdivision thereof.

        1.37 "Pharmacopeia Compound" means a Library Compound or a compound identified by Pharmacopeia in the Research Collaboration.

        1.38 "Phase I," "Phase II" and "Phase III" means Phase I (or Phase I/II), Phase II (or Phase II/III) and Phase III clinical trials, respectively, in each case as prescribed by applicable FDA IND Regulations, or any corresponding foreign statutes, rules or regulations.

        1.39 "Pharmacopeia Base Technology" means any and all technical data or information, whether tangible or intangible, including without limitation Pharmacopeia's Know-how and Patent Rights (i) which is necessary to conduct the Research Collaboration, to make or use Lead Compounds, or to develop, make, use or sell Collaboration Products, and (ii) which Pharmacopeia owns or Controls as of the Effective Date or during the Research Term, and conceives or reduces to practice outside the Collaboration, without any intellectual contribution from Organon. Pharmacopeia Base Technology shall not include Excluded Technology.

        1.40 "Potential Lead Compound" has the meaning set forth in Section 2.4.

        1.41 "Primary Assay" means on a Target-by-Target basis, the primary assay provided by Organon for screening in the Research Collaboration.

        1.42 "Proposed Target" has the meaning set forth in Section 2.2.

        1.43 "Regulatory Agency" means the FDA or the applicable department, bureau or other governmental regulatory authority in each country in the Territory involved in the granting of Regulatory Approvals.

        1.44 "Regulatory Approval" means any and all approvals (including price reimbursement approvals), licenses, registrations, or authorizations of any Regulatory Agency, necessary for the manufacture, use, storage, import, transport or sale of a Collaboration Product.

        1.45 "Research Collaboration" means the research activities undertaken by the Parties pursuant to Article 2.

        1.46 "Research Plan" on a Target-by-Target basis, means all information relating to the Parties' respective activities with respect to a Target, including but not limited to the Target Information. Minutes of JRC meetings, if signed by a JRC representative of each Party, shall be deemed included within the Research Plan.

        1.47 "Research Term" is defined in Section 15.2.

        1.48 "Research Year One" means the period commencing at the end of the Start-Up Phase and ending twelve (12) months thereafter.

        1.49 "Research Year Two" means the period commencing at the end of Research Year One and ending twelve (12) months thereafter.

        1.50 "Research Year Three" means the period commencing at the end of Research Year Two and ending twelve (12) months thereafter.

        1.51 "Research Year Four" means the period commencing at the end of Research Year Three and ending twelve (12) months thereafter.

        1.52 "Reverted Lead Compound" has the meaning set forth in Section 5.4.2.

        1.53 "Secondary Assay" means on a Target-by-Target basis, one or more assays provided by Organon, such as for example an assay for the characterization of selectivity or in vitro efficacy of a Pharmacopeia Compound against a Target.

-5-

        1.54 "Start-Up Phase" means the period commencing on the Effective Date and ending six (6) months thereafter.

        1.55 "Sublicensee" as to each Party means a Person other than an Affiliate of a Party to whom has been granted sublicense rights under the license granted each Party hereunder, which rights include at least the right to sell a Collaboration Product. As used in this Agreement, "Sublicensee" shall also include a Third Party to whom a Party has granted a sublicense under this Agreement to distribute such Collaboration Product, provided that such Third Party has the primary responsibility for marketing and promotion, at its expense, of such Collaboration Product within countries in the Territory for which such distribution rights are granted, which marketing and promotional activities are not subsidized directly or indirectly by that Party, such as, without limitation, through a specific allowance or a guaranteed selling margin for such Third Party meant to cover its expenses. Third Parties that are permitted to manufacture or finish Collaboration Products for supply to a Party, its Affiliates or Sublicensees are not "Sublicensees."

        1.56 "Sublicense Income" means, as it relates to Pharmacopeia, any consideration paid to Pharmacopeia by each Sublicensee gaining rights pursuant to the provisions of Section 5.6.2, such consideration, including without limitation sublicense initiation fees, milestones and royalties paid by each Sublicensee to Pharmacopeia.

        1.57 "Target" has the meaning set forth in Section 2.2.

        1.58 "Target Information" means on a Target-by-Target basis, all information relating to the identity of the Target, any modifications that Organon proposes to the standard criteria for a Lead Compound set forth in Table 1, the chemistry and protocol of the Primary Assay, any reference standards and Secondary Assay to be run at Organon or transferred to Pharmacopeia as the case may be, and any other enabling information relevant to the conduct of the activities of the Parties hereunder. "Target Information" shall also include on a Target-by-Target basis, any relevant Organon or third party patent application or patent of which Organon is aware, as well as the status of Organon's efforts in connection with its development of compounds against a target. For the avoidance of doubt, compound structure information shall not be part of Target Information.

        1.59 "Territory" means all the countries of the world.

        1.60 "Third Party" means any Person other than Organon, its Affiliates or Sublicensees and Pharmacopeia or its Affiliates.

        1.61 "Wind-Down Phase" means the period commencing at the end of Research Year Four and ending six (6) months thereafter.

ARTICLE 2

RESEARCH COLLABORATION

        2.1    Goals of Research Collaboration.

        2.1.1    General.    Each Party shall (i) undertake an interactive, cooperative role in the Research Collaboration with the other Party as set forth in the Research Plan, and such other activities which from time to time, the JRC decides are necessary for the continuing success of the Research Collaboration; (ii) use commercially reasonable efforts to diligently perform its activities pursuant the Research Plan, including, without limitation, by using personnel with sufficient skills and experience together with sufficient equipment and facilities, to carry out such Party's obligations under the Research Collaboration and to accomplish the objectives of the Research Collaboration; and (iii) conduct the Research Collaboration in good scientific manner, and in compliance in all material respects with all requirements of applicable laws, rules and regulations, and all other requirements of any good laboratory practices to attempt to achieve its objectives efficiently and expeditiously.

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        2.1.2    Activities of Pharmacopeia.    In consideration for the funding provided by Organon, Pharmacopeia shall utilize the appropriate screening and optimization resources to screen an average of not less than five (5) Targets per Research Year and to deliver to Organon not less than eight (8) Lead Series, each series against a distinct Target by the end of the Research Term, such delivery to begin on or about the end of Research Year One. (The delivery of both an antagonist series and agonist series against the same Target they shall be considered two separate Lead Series, to the extent requested by Organon and agreed by Pharmacopeia). It is expected that the foregoing can be accomplished through the screening of Pharmacopeia Compounds against no more than thirty (30) Targets to be supplied by Organon as provided herein. In addition to the foregoing, Pharmacopeia shall provide Organon with the necessary feedback on the progress of its screening and optimization efforts to enable Organon to provide Pharmacopeia the support it requires to conduct its activities hereunder.

        2.1.3    Activities of Organon.    During the Research Term, Organon shall identify and make available to Pharmacopeia at least thirty (30) targets to enable Pharmacopeia to select a subset of such targets that shall become the focus of the activities of Pharmacopeia hereunder. Organon shall begin making such targets available by making available to Pharmacopeia no less than six (6) targets on or about the Effective Date and making available to Pharmacopeia five (5) more targets, prior to the end of the Start-Up Phase. Following the Start-Up Phase, Organon shall continue making available to Pharmacopeia at least eight (8) targets per Research Year, at the rate of no less than two (2) targets per calendar quarter. With each such target, Organon shall also provide to Pharmacopeia all pertinent Target Information and key reagents essential to run the Assay. In addition, with respect to each target, Organon shall make available to Pharmacopeia any Secondary Assay that (i) is required to confirm that a Pharmacopeia Compound potentially meets the criteria for a Lead Compound and (ii) is not already in Pharmacopeia's possession. In addition to the foregoing, Organon shall support the Research Collaboration, by making available to Pharmacopeia any other information, except for the structure information regarding Organon Compounds (as defined in section 2.5) that is essential for Pharmacopeia to continue its activities hereunder, and if requested by Pharmacopeia, Organon shall concurrently apply its resources to conduct all essential testing and confirmation of Pharmacopeia Compounds provided by Pharmacopeia to assist Pharmacopeia in determining whether such Pharmacopeia Compounds potentially meet the criteria for a Lead Compound.

        2.2    Selection of Targets.    As provided in Section 2.1.3, in the course of the Research Collaboration, Organon shall make available to Pharmacopeia at least thirty (30) targets, from which Pharmacopeia shall select a subset that will become the focus of the Parties' activities in the Research Collaboration. At any one time, Organon shall make available such targets in multiples at any one time for consideration by Pharmacopeia. Each target made available to Pharmacopeia shall be referred to as a "Proposed Target." Pharmacopeia shall inform Organon if it has previously screened against a proposed Target, or is prevented from screening a proposed Target pursuant to Third Party obligations. For each Proposed Target, Organon shall make available to Pharmacopeia the Target Information, and such other information as Pharmacopeia may reasonably request. For each Proposed Target, Pharmacopeia shall review and if need be discuss with Organon the Target Information. For each Proposed Target, Pharmacopeia shall assess whether the criteria for Lead Compound designation set forth in Section 2.4(a) is applicable to such Proposed Target and shall determine whether such criteria need to be modified to enable Pharmacopeia to accomplish the goals of the Research Collaboration with respect to such Proposed Target. If the Target Information for any given Target requires a modification of the criteria in Table 1, the JRC shall discuss such modification and shall redefine such criteria. Following such modification, if any, Pharmacopeia shall notify Organon whether it accepts the Proposed Target, and following such acceptance, the Proposed Target shall be deemed a "Target" for purposes of this Agreement. Any target which is not selected by Pharmacopeia as it is made available by Organon may be selected at a later date by Pharmacopeia subject to approval by Organon, which approval shall not be unreasonably withheld, and subject to the procedure set forth in this Section.

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        2.3    Assay Development.    It is anticipated that the Assay has been developed and validated by Organon prior to validation by Pharmacopeia. An Assay shall be considered validated if it meets the criteria set in Exhibit A. On a Target-by-Target basis, Pharmacopeia shall provide up to one (1) FTE month without additional charge to Organon for validation of the Assay for a particular Target. Insofar as the Assay requires additional development by Pharmacopeia or the use of any key reagents that have not been supplied by Organon, the Parties shall mutually agree on the payment of additional fees pursuant to Section 6.2. The Parties agree that all improvements and modifications directly relating to the Assay (collectively the "Assay Improvements") made solely by Pharmacopeia shall be owned by Pharmacopeia. All Assay Improvements that are made jointly by the Parties shall be jointly owned by the Parties. Each Party agrees to grant to the other Party license rights in its interest in Assay Improvements as provided herein.

        2.4    Lead Compounds.

        (a)  For each Target, Pharmacopeia will endeavor to identify those Pharmacopeia Compounds that meet the criteria set forth in Table 1. The Parties agree that the criteria set forth in Table 1 are consistent with the criteria that Organon applies in its internal programs. The Lead Compound criteria in Table 1 shall apply uniformly on a Target-by-Target basis. If the characteristics of the Proposed Target warrant it, the criteria in Table 1 may be amended by the JRC to accommodate such characteristics, provided, however, that on balance the set of criteria for any Lead Compound for a Proposed Target shall not be made more stringent than the criteria set forth in Table 1. In addition, the JRC will determine which criteria are considered to be essential and which criteria need to be substantially met. For those criteria that need to be substantially met, the JRC will define the boundaries within which certain material characteristics of a Lead Compound at least should fall. It is understood by both Parties that the boundaries of one of the criteria might depend on the other criteria. The Parties agree that if a Pharmacopeia Compound meets all the criteria set forth in Table 1 (as it may have been amended by the JRC), such Pharmacopeia Compound shall be automatically designated as a "Lead Compound." Without limitation of the foregoing, the JRC may, at any time, review the progress of the Research Collaboration. In such an event, the JRC may determine that, with respect to the any Pharmacopeia Compound, the Research Collaboration with respect to such Pharmacopeia Compound has, notwithstanding the express criteria set forth in Table 1, on balance achieved a stage of development consistent with such criteria, and therefore, such Pharmacopeia Compound shall be designated as a Lead Compound.

Table 1

Criteria ***
***	***

        (b)  On an on-going basis, throughout the Research Term, Pharmacopeia shall conduct screening of its Libraries and optimization efforts to identify Pharmacopeia Compounds that have the potential to meet the criteria for a Lead Compound (each such Pharmacopeia Compound a "Potential Lead Compound"). On an on-going basis, Organon shall provide to Pharmacopeia technical support, including any and all in vivo testing of a potential Lead Compound, that is reasonably required to enable such Potential Lead Compound to be designated as a Lead Compound. To enable Organon to provide such technical support, Pharmacopeia will provide Organon sufficient quantities of each such Potential Lead Compound. The transfer of such Potential Lead Compound to Organon is solely for the purpose of conducting its activities hereunder and for no other purpose. Following the receipt of a Potential Lead Compound, Organon agrees not to conduct or have conducted any chemical analysis of such Potential Lead Compound and not to use any Potential Lead Compound for any purpose except as set forth herein. Organon shall communicate to Pharmacopeia on an on-going basis, the results of its testing

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or confirmation activities. The Parties agree that if Organon is unable to provide feedback to Pharmacopeia in connection with its confirmation or testing activities relating to a specific Lead Compound criteria within a period of time consistent with the nature of the assay or activities to be conducted by Organon (typically on the order of two (2) months), the Parties shall identify a Third Party to carry out such confirmation or testing activities, at the sole expense of Organon. If no Third Party is able to be identified, such criteria will not apply in the designation of the Lead Compound. On an as needed basis, the Parties may agree on a commercially reasonable set of additional activities to be carried by either or both Parties to enable the designation of one or more such Potential Lead Compounds as a Lead Compound. If a Potential Lead Compound is designated as a Lead Compound, following such designation, Pharmacopeia shall deliver to Organon the structure and enabling synthetic information with respect to such Lead Compound. In addition, Pharmacopeia will provide all data it has developed in the course of developing such Lead Compound which is reasonably required to enable Organon to further optimize such Lead Compound. On a Target-by Target basis, the series of Potential Lead Compounds having activity with respect to a particular Target and that have been designated as a Lead Compound shall form a "Lead Series."

        (c)  At any time during the Research Term, Pharmacopeia may elect to discontinue its activities with respect to a particular Target, and may elect to proceed with its activities with respect to the remainder of the Targets. If Pharmacopeia elects to discontinue its activities with respect to a particular Target, it will notify Organon of its decision not to continue, the reason for discontinuing and the stage of the project at the moment of discontinuation. In the event that prior to discontinuing its activities, Pharmacopeia has identified one or more Potential Lead Compounds with respect to a particular Target and such Potential Lead Compounds failed to meet the criteria for a "Lead Compound," Organon shall acquire no license or other rights with respect to such Potential Lead Compounds and the exclusivity set forth in Section 4.1 with respect to such Target shall expire. Such Potential Lead Compounds shall be referred to as "Non-Designated Lead Compounds" *** In addition, the provisions of Section 5.6.1 shall apply to such Non-Designated Lead Compounds.

        2.5    Organon Compounds.    It is understood that Organon may be conducting its own internal screening and optimization activities with respect to one or more targets which have been selected as a Target as provided hereunder. Organon shall keep Pharmacopeia informed on a consistent basis of the foregoing activities. If Organon elects to develop one or more of its own compounds having activity against such Target, then such compounds shall be designated as an "Organon Compound". On a Target-by-Target basis, the Parties agree that the designation of an Organon Compound shall not preempt the designation of a Lead Compound.

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        2.6    Development Candidate.    During the period that Organon has a license under Section 5.4 to a Lead Compound, Organon may designate any Lead Compound or Derivative Compound as a Development Candidate. Organon shall provide written notice to Pharmacopeia to such effect and such designation shall trigger the milestone payment for initiation of GLP Toxicity Studies set forth in Section 7.1.

        2.7    Third Party Licenses.    Pharmacopeia may request that Organon acquire rights from Third Parties to technology necessary for the conduct of the activities of the Parties with respect to a particular Target. The JRC shall endeavor to minimize the need for such licenses; provided, however, if the JRC is unable to agree whether a particular license is necessary to conduct the activities of the Parties with respect to a particular Target, Pharmacopeia may decline to screen against such Target. If Pharmacopeia declines to screen against such Target, this shall not be considered a breach of this Agreement by Pharmacopeia or a ground for termination of the Research Collaboration by Organon.

        2.8    Records and Reports.    Each Party shall maintain records in sufficient detail and in good scientific manner appropriate for patent and FDA purposes and so as to properly reflect all work done and results achieved in the performance of this Agreement (including all data in the form required under any applicable governmental regulations and as directed by the JRC). Such records shall include applicable books, records, reports, research notes, charts, graphs, comments, computations, analyses, recordings, photographs, computer programs and documentation thereof, samples of materials and other graphic or written data generated in connection with the Research Collaboration, including any data required to be maintained pursuant to applicable governmental regulations. During the Research Term, each Party shall respond to reasonable requests from the other for information based on such records.

ARTICLE 3

JOINT RESEARCH COMMITTEE; JOINT PATENT COMMITTEE

        3.1    Joint Research Committee.    Organon and Pharmacopeia agree to establish a Joint Research Committee ("JRC") to oversee, review, manage and direct the Research Collaboration, and, in coordination with the Patent Committee, provide advice in connection with intellectual property issues relating to the Developed Technology. The responsibilities of the JRC shall include: (i) monitoring and reporting the progress of the Research Collaboration and ensuring open and frequent exchange between the Parties; (ii) establishing criteria for the selection of Lead Compounds for each Target pursuant to section 2.4, (iii) resolving any conflicts between the Parties, (iv) approving and administering the Research Plan, and (v) coordinating with the Patent Committee all patent activities as they relate to the results of the Research Collaboration, and in keeping with the overall patent strategy delineated by the Patent Committee.

        3.2    Membership.    The JRC shall include three (3) voting representatives of each of the Parties, and each Party's representatives shall be selected by that Party. Each Party may replace its representatives at any time, upon written notice to the other Party. From time to time, the JRC may establish subcommittees, to oversee particular projects or activities, and such subcommittees will be constituted as the JRC determines, in its sole discretion.

        3.3    Meetings and Minutes.    During the Research Term, unless otherwise agreed to by the Parties, the JRC shall meet at least quarterly, or more frequently as agreed by the Parties, at such locations or by such teleconferencing means as the Parties may determine from time to time. In addition to regularly scheduled meetings, the JRC representatives will communicate regularly by telephone, electronic mail, facsimile and/or videoconference. Other representatives of Pharmacopeia or Organon may attend JRC meetings as nonvoting observers. Each Party shall be responsible for all of its expenses associated with attending the JRC meetings. Pharmacopeia shall prepare written minutes of each JRC meeting and shall prepare a written record of all JRC voting and decisions, whether made at a JRC

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meeting or otherwise. The written minutes of each JRC meeting and the written record of all JRC voting and decisions shall be submitted to Organon for review, and upon signature by Organon, shall become final.

        3.4    Decision-Making.    Decisions of the JRC shall be made by unanimous vote, and each Party shall have a single vote. In the event that unanimity is not achieved within the JRC, the matter shall be referred to Pharmacopeia's Executive Vice President, Chief Operating Officer (or designee of similar rank) and the Research Director (or designee of similar rank) of Organon, who shall promptly meet and endeavor in good faith to resolve such matter in a timely manner. In the event such individuals are unable to resolve such dispute, the matter shall be referred to the Chief Executive Officer of Pharmacopeia and the Managing Director, Research and Development, of Organon, who shall promptly meet and endeavor to reach consensus in a timely manner. In the event that such individuals are unable to resolve such dispute, the matter shall be referred to the Chairman of Pharmacopeia and the President of Organon, who shall promptly meet and endeavor to reach consensus in a timely manner. If such individuals cannot resolve such dispute, then such dispute shall be subject to the dispute resolution provisions set forth in Section 16.19.

        3.5    Patent Committee.    Upon recommendation of the JRC, the Parties shall form a patent committee ("Patent Committee") to be in existence as long as Patent Rights within the Developed Technology are being filed and/or prosecuted. Each Party shall designate at least one chemist and one patent attorney or equally qualified legally trained personnel, as its representatives on the Patent Committee. The Patent Committee shall be responsible for recommending patent filings and coordinating patent-related matters, including, but not limited to, the determination of inventorship according to U.S. Patent Law, and the preparation, filing and prosecution of patent applications. Any disputes of the Patent Committee during the Research Term shall be handled pursuant to Section 3.4. Any disputes of the Patent Committee after the end of the Research Term shall be handled pursuant to Section 16.19. Unless otherwise agreed by the Parties, the Patent Committee shall meet at least semiannually. Such meetings shall be held at mutually agreed times and locations. Each Party shall bear its own expenses associated with such meetings and the activities of the Patent Committee; provided, however, that each Party shall bear the expense of providing the other Party with copies of all Patent Rights filed pursuant to this Agreement including all correspondence with U.S. and foreign patent offices.

ARTICLE 4

EXCLUSIVITY

        4.1    Target.    During the Exclusivity Period for each Target, Pharmacopeia shall not screen any Library Compound on its own behalf or on behalf of any Third Party against such Target. On a Target-by-Target basis, the "Exclusivity Period" shall mean the period beginning when Pharmacopeia initiates screening against the Target which has been designated pursuant to Section 2.2, and ending ***.

        4.2    Use of Libraries.    Except as provided herein, Organon shall have no exclusivity with respect to any Library or any Pharmacopeia Compound. It is understood that the Libraries are and will be regularly used by Pharmacopeia and may have been or may be provided to Third Parties for screening. Pharmacopeia shall have the right to screen the Libraries during the Research Term or thereafter on its own behalf or on the behalf of Third Parties, subject to the exclusivity provisions in Section 4.1 above.

        4.3    Physical Ownership.    Pharmacopeia shall retain physical ownership of the tangible property embodied in all Libraries. Organon shall retain physical ownership of all tangible material provided by Organon to Pharmacopeia hereunder. Any tangible material provided by Organon to Pharmacopeia shall only be used for the purposes of the Research Collaboration.

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        4.4    Development.    For as long as Organon is using due diligence with respect to the further optimisation and/or development of a Lead Compound or Derivative Compound, Pharmacopeia agrees not to pursue any optimisation and/or development of such Lead Compound or Derivative Compound or compounds falling under Patent Rights within the Developed Technology (i) claiming such Lead Compound or Derivative Compound or methods of making or using the same, and (ii) disclosing the utility of such Lead Compound or Derivative Compound against the Target.

ARTICLE 5

LICENSES

        5.1    Organon Base Technology; Regulatory Filings.    Organon shall own all rights, title and interest in and to Organon Base Technology and in all Regulatory Filings.

        5.2.    Developed Technology.    Subject to the licenses expressly granted hereunder, Organon shall own all rights, title and interest in and to all Organon solely invented Developed Technology and an undivided one-half interest in jointly invented Developed Technology. Pharmacopeia shall own all rights, title and interest in and to all of Pharmacopeia solely invented Developed Technology and an undivided one-half interest in jointly invented Developed Technology.

        5.3    Pharmacopeia Base Technology.    Pharmacopeia shall own all rights, title and interest in and to Pharmacopeia Base Technology.

        5.4.    Licenses and Maintenance Payments.

        5.4.1    Licenses.    Subject to the terms and conditions of this Agreement, upon the designation of a Lead Compound, on a Lead Compound-by-Lead Compound basis, and Target-by-Target basis, Pharmacopeia grants Organon, and Organon accepts, an exclusive, worldwide license under the Pharmacopeia Base Technology and Pharmacopeia's interest in Developed Technology and a non-exclusive, worldwide license under Pharmacopeia's interest in Assay Improvements, to make, have made, and use Lead Compounds in order to make, have made, use, import, offer for sale and sell Collaboration Products based on such Lead Compounds. The foregoing license provides Organon no license under the Pharmacopeia Base Technology and Pharmacopeia's interest in the Developed Technology that relates to targets other than the applicable Target. Unless earlier terminated pursuant to this Agreement, this license grant shall remain in effect for the time period set forth in and subject to the provisions set forth herein, and so long as Organon has made all payments required hereunder.

        5.4.2    License Maintenance Payment. Abandonment.

        (a)  If Organon has not initiated GLP Toxicity Studies with respect to any Lead Compound or corresponding Derivative Compound within *** from the designation of such a Lead Compound, Organon shall, if it so chooses, be entitled to a one-year extension to initiate GLP toxicity studies by making a payment to Pharmacopeia in the amount of *** for such extension;

        (b)  If Organon has not initiated Phase I clinical trials with respect to any Lead Compound or corresponding Derivative Compound within *** from the initiation of GLP toxicity studies with respect thereto, Organon shall, if it so chooses, be entitled to a one year extension to initiate Phase I clinical trials, by making a payment to Pharmacopeia in the amount of *** for such extension;

        (c)  If Organon has not initiated Phase III clinical trials with respect to any Lead Compound or corresponding Derivative Compound within *** from the initiation of Phase I clinical trials with respect thereto, Organon shall, if it so chooses, be entitled to a one-year extension to initiate Phase III clinical trials, by making a payment to Pharmacopeia in the

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amount of *** for such extension, or, if Organon deems it necessary to repeat Phase II trials and has demonstrated appropriate diligence, Organon shall be entitled to an extension of *** at no additional cost; and

        (d)  If Organon has not initiated NDA approval within *** from the initiation of Phase III clinical trials with respect to any Lead Compound or corresponding Derivative Compound, Organon shall, if it so chooses, be entitled to a *** extension to initiate NDA approval by making a payment to Pharmacopeia in the amount of *** for such extension.

        If, at the end of any of the extensions provided in Sections 5.4.2.(a), 5.4.2(b), 5.4.2(c) or 5.4.2(d), Organon has not yet met the applicable development milestone, subject to (1) a review of Organon's progress, and (2) demonstration by Organon of appropriate diligence and commitment to future efforts in connection therewith, Pharmacopeia will agree to extend the applicable extension period to enable Organon to complete its activities upon payment of the applicable fees below. If the parties elect not to extend the respective extension period, or Organon has not diligently pursued development of a program, Pharmacopeia shall have the right to terminate all licenses with respect to the particular Lead Compound and the rights to such

        Lead Compound, together with any corresponding Derivative Compounds and any Know-how associated therewith (cumulatively, a "Reverted Lead Compound"), shall revert back to Pharmacopeia, subject to the provisions of Section 5.6.2. The payments set forth in each of Sections 5.4.2(a), 5.4.2(b), 5.4.2(c) and 5.4.2(d) shall be non-refundable but fifty percent (50%) thereof shall be creditable against the milestone payment due upon actual accomplishment of such milestone.

        (e)  If Organon has not initiated GLP Toxicity Studies with respect to any Lead Compound or corresponding Derivative Compound, Organon shall be entitled to a *** year extension to initiate GLP toxicity studies by making a payment to Pharmacopeia in the amount of *** for such extension;

        (f)    If Organon has not initiated Phase I clinical trials with respect to any Lead Compound or corresponding Derivative Compound, Organon shall be entitled to a *** year extension to initiate Phase I clinical trials by making a payment to Pharmacopeia in the amount of *** for such extension;

        (g)  If Organon has not initiated Phase III clinical trials with respect to any Lead Compound or corresponding Derivative Compound, Organon shall be entitled to a *** year extension to initiate Phase III clinical trials by making a payment to Pharmacopeia in the amount of *** for such extension; and

        (h)  If Organon has not initiated NDA approval with respect to any Lead Compound or corresponding Derivative Compound, Organon shall be entitled to a *** year extension to initiate NDA approval by making a payment to Pharmacopeia in the amount of *** for such extension.

        The payments set forth in each of Sections 5.4.2.(e), 5.4.2(f), 5.4.2(g) or 5.4.2(h) will not be creditable against any milestone payments.

        5.5    Research License.    Subject to the terms and conditions of this Agreement, Organon grants Pharmacopeia a nonexclusive, royalty-free license, in the United States, without the right to sublicense, under all its rights in Developed Technology and Organon Base Technology useful for the conduct of Pharmacopeia's activities pursuant to the Research Plan or as otherwise provided herein.

Subject to the terms and conditions of this Agreement, Pharmacopeia grants Organon a nonexclusive, royalty-free license without the right to sublicense, under all its rights in Developed Technology and

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Pharmacopeia Base Technology useful for the conduct of Organon's activities pursuant to the Research Plan or as otherwise provided herein.

        5.6    Other Licenses.

        5.6.1    License to Non-Designated Lead Compounds and corresponding Products.    Subject to the terms and conditions of this Agreement, Organon grants Pharmacopeia a worldwide, non-exclusive, royalty-free license with the right to sublicense under the Organon Base Technology and a worldwide, exclusive, royalty-free license with the right to sublicense under Organon's interest in the Developed Technology to make, have made, and use Non-Designated Lead Compounds in order to make, have made, use, import, offer for sale and sell products based thereon. The provisions of this Section shall survive termination or expiration of this Agreement. The license granted pursuant to this Section under the Organon Base Technology shall not include any rights to any tangible material which are deemed to be the Confidential Information of Organon and which are transferred to Pharmacopeia by Organon pursuant to the terms of this Agreement. In exchange for the licenses granted by Organon in this Section, in the event that Pharmacopeia seeks to out-license to a third party the rights to any Non-Designated Lead Compound, Pharmacopeia shall notify Organon that it seeks to license such rights (although Pharmacopeia shall not be required to identify any such third party). If a third party has offered Pharmacopeia commercial terms for such a license which Pharmacopeia is prepared to accept, Pharmacopeia shall notify Organon in writing of such terms. Organon shall have the right to obtain such license for itself (and thereby preclude such third party from obtaining such license), if Organon agrees, within fifteen (15) days after receiving such written notice from Pharmacopeia, to match the terms. If Organon does not agree within such fifteen-day period, to match the terms, then Organon shall have no further rights under this Section with respect to such Non-Designated Lead Compound, and Pharmacopeia shall have no obligation to provide any further notice of commercial terms of such license to Organon, and may grant such license to any third party on terms comparable or more favorable to Pharmacopeia than the terms disclosed to Organon.

        5.6.2    License to Reverted Lead Compounds and Corresponding Products.

        (a)  Upon the request of Pharmacopeia and subject to the terms and conditions of this Agreement, Organon grants Pharmacopeia a worldwide, exclusive, license with the right to sublicense under the Organon Base Technology, Organon's interest in the Developed Technology and any other enabling technology Controlled by Organon to make, have made, and use Reverted Lead Compounds in order to make, have made, use, import, offer for sale and sell products based thereon. Such a license shall be subject to the payment obligations provided in Section 8.2.2.

        (b)  If Organon is unable to directly license or sublicense certain enabling technology to Pharmacopeia, Organon will use reasonable efforts to assist Pharmacopeia in obtaining the applicable license from a Third Party. To the extent that there will be an additional financial burden on Pharmacopeia due to the need to obtain from Third Parties such licenses to any enabling technology, the Parties will discuss reducing Pharmacopeia's payment obligations under Section 8.2.2. To the extent that there will be an additional financial burden on Organon due to a (sub)license from Third Parties to any enabling technology, the Parties will discuss increasing Pharmacopeia's payment obligation under Section 8.2.2. Upon Pharmacopeia's written request, not to be unreasonably denied by Organon, Organon shall allow Pharmacopeia access to all data and information (including but not limited to its regulatory filings) reasonably required by Pharmacopeia in connection with its development efforts relating to such Reverted Lead Compound.

        5.7    Sublicenses.    Subject to the terms and conditions of this Agreement and except as set forth herein, Organon shall have the right to sublicense the rights granted to it in Section 5.4, provided that

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Organon shall provide Pharmacopeia with at least the following information with respect to each Sublicensee: (i) the identity of the Sublicensee; (ii) a description of the Collaboration Product, and the rights granted to the Sublicensee; and (iii) the territory in which the Collaboration Product will be sold. Each such sublicense shall be consistent with all the terms and conditions of this Agreement, and shall be subject to the prior consent of Pharmacopeia, which consent shall not be unreasonably withheld. Organon shall remain primarily liable to Pharmacopeia for all of each such Sublicensee's applicable financial and other obligations under the sublicense. No sublicense granted by Organon may be assigned, transferred or further sublicensed to any Third Party without the prior written consent of Pharmacopeia, which consent shall not unreasonably be withheld.

        Subject to the terms and conditions of this Agreement and except as set forth herein, Pharmacopeia shall have the right to sublicense the rights granted to it in Section 5.6, provided that Pharmacopeia shall provide Organon with at least the following information with respect to each Sublicensee: (i) the identity of the Sublicensee; (ii) a description of the Collaboration Product, and the rights granted to the Sublicensee; and (iii) the territory in which the Collaboration Product will be sold. Each such sublicense shall be consistent with all the terms and conditions of this Agreement, and shall be subject to the prior consent of Organon, which consent shall not be unreasonably withheld. Pharmacopeia shall remain primarily liable to Organon for all of each such Sublicensee's applicable financial and other obligations under the sublicense. No sublicense granted by Pharmacopeia may be assigned, transferred or further sublicensed to any Third Party without the prior written consent of Organon, which consent shall not unreasonably be withheld.

        5.8    Third Party Rights.

        5.8.1    Pharmacopeia Third Party Activities.    It is understood that Pharmacopeia is in the business of providing libraries to Third Parties, and that Pharmacopeia will grant such Third Parties rights after the Effective Date to acquire licenses for compounds derived from such libraries similar to Organon's rights under this Article 5. Notwithstanding the licenses granted to Organon hereunder, a Third Party may acquire rights from Pharmacopeia with respect to one or more compounds of which Pharmacopeia is a sole or joint owner, which compounds were identified independently of Pharmacopeia's activities and knowledge gained under the Research Collaboration. Accordingly, Pharmacopeia's grant of rights under Section 5.4 shall be limited, and shall be subject to any grant of rights to a Third Party, to the extent that (i) such Third Party (either alone or jointly with Pharmacopeia) has filed a patent application with respect to such a compound prior to the filing by Organon (either alone or jointly with Pharmacopeia) of a patent application with respect to such a compound, or (ii) Pharmacopeia has previously granted such Third Party a license or other rights with respect to such a compound.

        5.8.2    No Liability.    It is understood and agreed that, even if Pharmacopeia complies with its obligations under this Agreement, compounds provided to Third Parties in the course of Pharmacopeia's other business activities may result in Third Party patent rights, including patent rights owned by such Third Parties, or owned jointly by Pharmacopeia and such Third Parties, which could conflict with Patent Rights owned by Organon, or jointly owned by Organon and Pharmacopeia hereunder. Pharmacopeia shall use its reasonable efforts to avoid such conflict. Notwithstanding the foregoing, it is understood that, unless Organon is damaged as a proximate result of a material breach by Pharmacopeia of Section 4.1, or of any of the representations and warranties contained herein, then Pharmacopeia shall have no liability under this Agreement with respect to any such conflict.

        5.9    Third Party Royalties.    Organon shall be responsible for procuring such licenses as it deems, in its sole discretion, appropriate for the manufacture, use, marketing, sale or distribution of Collaboration Products by Organon, its Affiliates or Sublicensees and the payment of any amount due Third Parties under such licenses.

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        5.10    Third Party Royalties with respect to Reverted Compounds.    Pharmacopeia shall be responsible for procuring such licenses as it deems, in its sole discretion, appropriate for the manufacture, use, marketing, sale or distribution of Collaboration Products by Pharmacopeia, its Affiliates or Sublicensees and the payment of any amount due Third Parties under such licenses.

        5.11    Commercialization Status.    During the period from the end of the Research Term to the First Commercial Sale of a Collaboration Product, Organon or Pharmacopeia, as the case may be, shall keep the other Party informed of its development activities with respect to such Collaboration Product, including without limitation, the achievement of the milestones set forth in Section 7.1 and the commercialization of such Collaboration Product, by semi-annually providing Pharmacopeia with a written report stating the status of development of each such Collaboration Product.

        5.12    No Implied Licenses.    Only the licenses granted pursuant to the express terms of this Agreement shall be of any legal force or effect. No other license rights shall be created by implication, estoppel or otherwise.

ARTICLE 6

FUNDING

        6.1    Funding.    In consideration for Pharmacopeia's activities set forth herein, Organon agrees to pay Pharmacopeia at the rate of *** per Lead Series for a total of ***. Such payments shall be non-refundable and shall be made in *** quarterly installments of ***, on a quarterly basis, following a first installment of *** due within fifteen (15) business days from the Effective Date. In addition, to compensate Pharmacopeia for its efforts to make available resources to be used in the Collaboration in a timely manner, and to fund the start-up costs of the initial three (3) months of the Collaboration, Organon agrees to pay Pharmacopeia a non-refundable one time payment of *** due within fifteen (15) business days from the Effective Date. In the event that, before the end of the Research Term, Pharmacopeia completes its performance hereunder and is able to deliver all eight (8) Lead Series, the remaining payments due pursuant to this Section shall accelerate and shall be due promptly upon completion of performance by Pharmacopeia.

        6.2    Assay Development.    In the event that that Pharmacopeia shall conduct any additional assay validation as provided in Section 2.3, Organon shall pay to Pharmacopeia an amount equal to the number of FTE's to be utilized for such development multiplied by Pharmacopeia's FTE Rate for the agreed period of such development program. Solely for purposes of this Section 6.2, Pharmacopeia's "FTE Rate" shall be ***. In addition, in the event Organon agrees to the modification of an Assay, Organon shall reimburse Pharmacopeia for the cost of any reagents that Pharmacopeia needs to obtain to conduct its activities pursuant to this Section. Payments under this Section shall be made within thirty (30) days of receipt of an invoice.

        6.3    No Withholding.    All amounts paid to Pharmacopeia pursuant to Section 6.1 shall be made without withholding for taxes or other charges.

ARTICLE 7

MILESTONE PAYMENTS

        7.1    Milestone Payments.

        7.1.1    Milestone Payments for a Lead Compound.

        (a)  Organon shall pay to Pharmacopeia the following nonrefundable amounts within thirty (30) days following the first achievement by Organon, its Affiliates, Sublicensees or other designees, as the case may be, of each of the following milestones with respect to any

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Lead Compound, corresponding Derivative Compound (and each corresponding Collaboration Product) with respect to each Target:

Milestones for a Lead Compound	Amount
***	$***
***	$***
***	$***
***	$***

        (b)  It is understood and agreed that Organon shall not be required to pay the milestone payments set forth in this Section more than once for each Target, even if such milestone is achieved with respect to more than one Lead Compound with activity against such Target.

        7.1.2    Delivery Payments.    Organon shall pay to Pharmacopeia the following delivery payments in additions to all the payments accrued hereunder as follows: At the time that Pharmacopeia delivers to Organon the *** Lead Series, Organon shall pay Pharmacopeia a delivery payment of ***, due within thirty (30) days following such delivery. At the time that Pharmacopeia delivers to Organon each of the ***, *** and *** Lead Series, Organon shall pay to Pharmacopeia a delivery payment of ***, due within thirty (30) days following each such delivery.

        7.1.3    No Withholding.    All amounts paid to Pharmacopeia pursuant to this Section 7.1 shall be made without withholding for taxes or other charges.

        7.2    Due Diligence.    For each Lead Compound and corresponding Derivative Compound, Organon will use its diligent efforts, consistent with the usual practices followed by Organon in pursuing the commercialization and marketing of its other compounds of similar market potential, at a similar stage of its product life and deemed to have comparable commercial value by the Parties, at its own expense, to develop and commercialize such Lead Compound and corresponding Collaboration Product. Without limiting any of the foregoing, for each Lead Compound, Organon's efforts shall include without limitation the dedication of at least ten (10) FTE's at each stage of the development of such Lead Compound. In the event that Organon decides to out-license the applicable Lead Compound, rather than proceed with the development activities described in this Section, Organon agrees that Pharmacopeia shall have the right of first refusal to develop and commercialize such Lead Compound as a Reverted Lead Compound. For the avoidance of doubt, out-license shall mean providing a license to a Third Party by which Organon shall have no influence on the further development of the applicable Lead Compound.

7.3

Invoices. Unless otherwise specified in writing, all payments required according to the sections 6 and 7 of this Agreement shall be made by transfer to the bank account nominated by the receiving Party upon timely receipt of an invoice.

If invoice to Organon:	N.V. Organon
	Purchase Accounting (KA1041)
	P.O. Box 20
	5340 BH Oss
	The Netherlands
	Attn: Dr. T. de Boer (Research Alliance Manager)

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ARTICLE 8

ROYALTY PAYMENTS

        8.1    Royalty Term.

        8.1.1    Royalty Term Organon.    Organon shall pay Pharmacopeia royalties on Net Sales of Collaboration Products, on a country-by-country basis, for a period from the date of First Commercial Sale of such Collaboration Product in such country until the date which is the later of (i) ten (10) years from the date of such First Commercial Sale, or (ii) the expiration of the last to expire Patent Rights within the Pharmacopeia Base Technology or the Developed Technology containing any claim which would be infringed by the making, using and selling of the applicable Collaboration Product in the applicable country.

        8.1.2    Royalty Term Pharmacopeia.    Pharmacopeia shall pay Organon royalties on Net Sales or Sublicense Income, as the case may be, of Collaboration Products, on a country-by-country basis, for a period from the date of First Commercial Sale of such Collaboration Product in such country until the date which is the later of (i) ten (10) years from the date of such First Commercial Sale, or (ii) if Pharmacopeia has an exclusive license to the applicable Patent Rights, the expiration of the last to expire Patent Rights within the Organon Base Technology or the Developed Technology containing any claim which would be infringed by the making, using and selling of the applicable Collaboration Product in the applicable country.

        8.1.3    Paid-Up License.    If the licenses granted to either Party pursuant to Section 5.4 or Section 5.6, as the case may be, are still in force with respect to a particular Lead Compound, at the end of the period for which royalties on the corresponding Collaboration Product are due pursuant to this Agreement, such license shall be converted to fully paid-up, nonexclusive, royalty-free licenses, with the right to sublicense, under any Developed Technology, Pharmacopeia Base Technology or Organon Base Technology, as the case may be, necessary to make, have made, use and sell the applicable Collaboration Product on a country-by-country and Collaboration Product-by-Collaboration Product basis.

        8.2    Royalty Rate.

        8.2.1    Royalties on Collaboration Product based on a Lead Compound.    Organon shall pay to Pharmacopeia royalties on Net Sales of each Collaboration Product based on a Lead Compound or Derivative Compound thereof according to the following schedule:

        (a)  for that portion of such Net Sales of a Collaboration Product which is less than or equal to ***, Organon shall pay to Pharmacopeia a royalty rate of ***.

        (b)  for that portion of such Net Sales of a Collaboration Product which is greater than *** and less than or equal to ***, Organon shall pay to Pharmacopeia a royalty rate of ***.

        (c)  for that portion of such Net Sales of a Collaboration Product which is greater than ***, Organon shall pay to Pharmacopeia a royalty rate of ***.

        8.2.2    Royalties of Collaboration Product based on a Reverted Lead Compound.

        (a)  In the event Pharmacopeia sells any Collaboration Product, then Pharmacopeia shall pay to Organon royalties on Net Sales of each Collaboration Product based on a Reverted Lead Compound. according to the following schedule:

          (i)  for a Collaboration Product which is based on a Reverted Lead Compound which has reverted back to Pharmacopeia prior to initiation of GLP Toxicity Studies with respect thereto, Pharmacopeia shall pay to Organon a royalty rate of ***.

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        (ii)  for a Collaboration Product which is based on a Reverted Lead Compound which has reverted back to Pharmacopeia following initiation of GLP Toxicity Studies with respect thereto, but prior to initiation of Phase I clinical trials, Pharmacopeia shall pay to Organon a royalty rate of ***.

        (iii)  for a Collaboration Product which is based on a Reverted Lead Compound which has reverted back to Pharmacopeia following initiation of Phase I clinical trials, but prior to initiation of Phase II clinical trials, Pharmacopeia shall pay to Organon a royalty rate of ***.

        (iv)  for a Collaboration Product which is based on a Reverted Lead Compound which has reverted back to Pharmacopeia following initiation of Phase II clinical trials, but prior to initiation of Phase III clinical trials, Pharmacopeia shall pay to Organon a royalty rate of ***.

        (v)  for a Collaboration Product which is based on a Reverted Lead Compound which has reverted back to Pharmacopeia following initiation of Phase III clinical trials, Pharmacopeia shall pay to Organon a royalty rate of ***. It is understood by both Parties that the royalty rates subject to this section 8.2.2.a reflect the fact that on the Effective Date Pharmacopeia does not have the financial resources for up-front and milestone payments. If in future the financial resources of Pharmacopeia will allow Pharmacopeia to pay up-front and milestone payments, and upon the request of Pharmacopeia, both Parties will enter into good faith negotiations to re-negotiate the financial compensation to Organon, which compensation on balance will not be lower than the compensation described in this section 8.2.2.(a)

        (b)  In the event Pharmacopeia sublicenses its rights pursuant to the provisions of Section 5.6.2, then Pharmacopeia shall pay to Organon a royalty on Sublicense Income of each Collaboration Product based on a Reverted Lead Compound. according to the following schedule:

          (i)  for a Collaboration Product which is based on a Reverted Lead Compound which has reverted back to Pharmacopeia prior to its designation as a Development Candidate, Pharmacopeia shall pay to Organon an amount equal to *** of Sublicense Income received;

        (ii)  for a Collaboration Product which is based on a Reverted Lead Compound which has reverted back to Pharmacopeia following its designation as a Development Candidate, but prior to initiation of Phase I clinical trials, Pharmacopeia shall pay to Organon an amount equal to *** of sublicense Income received;

        (iii)  for a Collaboration Product which is based on a Reverted Lead Compound which has reverted back to Pharmacopeia following initiation of Phase I clinical trials, but prior to initiation of Phase II clinical trials, Pharmacopeia shall pay to Organon an amount equal to *** of Sublicense Income received; and

        (iv)  for a Collaboration Product which is based on a Reverted Lead Compound which has reverted back to Pharmacopeia following initiation of Phase II clinical trials, but prior to initiation of Phase III clinical trials, Pharmacopeia shall pay to Organon an amount equal to *** of Sublicense Income received; and

        (v)  for a Collaboration Product which is based on a Reverted Lead Compound which has reverted back to Pharmacopeia following initiation of Phase III clinical trials, Pharmacopeia shall pay to Organon an amount equal to *** of Sublicense Income received.

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        8.3    Payment of Royalties.

        8.3.1    Royalty Report.    After the First Commercial Sale of a Collaboration Product for which royalties are due and payable by either Party, its Affiliates or Sublicensees hereunder, the paying Party shall provide the other Party a royalty report on a quarterly calendar basis within ninety (90) days after the end of the calendar quarter to which such royalty report applies. Each such report shall state, separately for the paying Party, and each Affiliate and Sublicensee, the number, description, and aggregate Net Sales, on a country- by- country basis, and product-by-product basis during the calendar quarter during which a royalty is payable. Contemporaneously with the submission of the royalty reports, the paying Party shall pay to the other Party all royalties due.

        8.3.2    Records Retention.    Each Party shall keep, and require its Affiliates and Sublicensees to keep, for a period of not less than seven (7) years, complete and accurate records of all Net Sales. Each Party shall have the right, at its sole expense, through a certified public accountant reasonably acceptable to the other Party, and following reasonable notice, to inspect such records during regular business hours, during the life of the paying Party's obligation to pay royalties on Collaboration Products; provided, however, that such inspection shall not (i) take place more often than once a year; and (ii) shall not cover any records which date prior to the date of the last examination, and further provided that, such accountants shall report only as to the accuracy of the royalty statements and payments and the amount of any underpayment. Copies of such reports shall be supplied to the paying Party. In the event that the report demonstrates that the paying Party has underpaid royalties, the paying Party shall promptly pay such royalties together with interest at the prime rate as stated in the Wall Street Journal Europe under "Money Rates" plus two percent (2%) ("Prime Plus 2") applied to the amount unpaid from the date due to the date paid. If the paying Party has overpaid royalties, the paying party may credit such overpayments against future royalties owed to the other Party. The interest available to each Party pursuant to this Section shall in no way limit any other remedies available to each Party.

        8.3.3    Tax on Royalties.    Any tax paid or required to be withheld by a Party for the benefit of the other Party on account of royalties payable under this Agreement shall be deducted from the amount of royalties otherwise due. Each Party shall secure and send to the other Party proof of any such taxes withheld and paid for its benefit of and shall, at the request of the other Party, provide reasonable assistance to other Party in recovering said taxes.

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        8.3.4    Form of Payment.    All payments required according to this Section 8 of the Agreement due Pharmacopeia hereunder shall be made in United States dollars, for Pharmacopeia's account, by wire transfer to a bank in the United States designated in writing by Pharmacopeia; provided, however, that where payments in respect of Net Sales are based on Net Sales in non-U.S. currencies, the amount of Net Sales and any deductions used to calculate Net Sales, if any, shall be converted by Organon, based on the average of the "bid" and "asked" exchange rate provided by the Wall Street Journal Europe, for the last business day of each calendar quarter, into United States Dollars. All payments required according to this Section 8 due Organon hereunder shall be made in Euros, for Organon's account, by wire transfer to a bank in the Netherlands designated in writing by Organon. Any payments that are not paid on the date such payments are due under this Agreement shall bear interest to the extent permitted by applicable law at the prime rate as reported by the Chase Manhattan Bank, New York, New York, on the date such payment is due, plus an additional two percent (2%) calculated on the number of days such payment is delinquent. The interest available to each Party pursuant to this Section shall in no way limit any other remedies available.

ARTICLE 9

REPORTS, BOOKS AND TAX MATTERS

        9.1.    Examination of Books.    Each of the Parties shall keep and maintain complete and accurate books in respect of its activities during the Research Term and the six month period following termination pursuant Section 15.3.3, and with respect to books and records for which payment may be required, in accordance with applicable accounting principles consistently applied and in accordance with local law. Each Party shall provide the other the right to inspect such financial records, and shall provide copies of all requested records, to the extent reasonably related to the performance of the other Party's obligations under this Agreement. The Parties shall retain such records for so long as the Parties shall mutually determine.

        9.2    Tax Matters.    Each Party agrees that the other Party is entitled to all tax benefits, including in particular, tax credits and/or tax deductions attributable to amounts the other Party has paid hereunder. Each Party shall file its federal, state, and local tax returns on a basis consistent with this Agreement, and shall not take any action inconsistent with the other Party's entitlement to such tax benefits. In the event that a Party, in its judgment, determines that it must obtain information and verification regarding the use or application of such expenditures in order to prepare its tax returns or to respond to an inquiry during a tax audit or any other inquiry relating to such treatment of its tax return, or to defend its tax position in any proceeding including litigation, the Parties shall reasonably cooperate with each other and provide such information as the other Party may reasonably require at the request and expense of the requesting Party.

ARTICLE 10

PATENTS

        10.1    Disclosure by Employees, Agents or Independent Contractors.    Organon and Pharmacopeia agree that as to any employees, agents, or independent contractors of Organon and Pharmacopeia presently in their employ or who are hired or retained by Organon or Pharmacopeia to perform, manage performance of, or participate in the research done pursuant to this Agreement, Organon and Pharmacopeia will ensure that such employees, agents, or independent contractors will promptly disclose and assign to the Party engaging them any and all rights to inventions, developments, or improvements, (whether patentable or not) conceived and/or reduced to practice during the course of their duties. Each Party will notify the other Party promptly of any sole or joint inventions within the Developed Technology.

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        10.2    Patent Prosecution and Related Activities.

        10.2.1    Pharmacopeia Base Technology.    Pharmacopeia shall be responsible, at its sole discretion and expense, for preparing, filing, prosecuting and maintaining in such countries it deems appropriate, by itself or with Third Parties, Patent Rights within the Pharmacopeia Base Technology and conducting any interferences, re-examinations, reissues and oppositions relating to such Patent Rights.

        10.2.2    Organon Base Technology.    Organon shall be responsible, at its sole discretion and expense, for preparing, filing, prosecuting and maintaining in such countries it deems appropriate, by itself or with Third Parties, Patent Rights within the Organon Base Technology and conducting any interferences, re-examinations, reissues and oppositions relating to such Patent Rights.

        10.2.3    Developed Technology.

        (a)    Prosecution by Organon.    For as long as its license rights have not expired or been terminated, Organon shall be responsible, at its sole discretion and expense, for preparing, filing, prosecuting and maintaining in such countries it deems appropriate, Patent Rights within the Developed Technology claiming Lead Compounds, Organon Compounds, or methods of making or using the same, and conducting any interferences, re-examinations, reissues and oppositions relating to such Patent Rights. It is understood and agreed that in such Patent Rights Organon may claim any or all Pharmacopeia Compounds with activity against the same Target as the Lead Compound, or based on the Organon Compounds; provided, however, that if such Patent Rights include one or more Inactive Compound, Pharmacopeia shall have the right to require that Organon not disclose nor claim any Inactive Compound and shall provide notice to Organon to that effect. Organon shall have a period of ninety (90) days from the receipt of such notice during which to provide Pharmacopeia with evidence reasonably demonstrating that such Pharmacopeia Compound was in fact synthesized and tested by Organon, and has in fact the utility which is to be disclosed or claimed. In the event that Organon fails to provide such evidence, and Organon claims such Inactive Compound, then Organon agrees to grant, and hereby grants to Pharmacopeia, an exclusive (even as to Organon), worldwide, royalty-free right and license, with the right to grant and authorize sublicenses, under Organon's interest in the Patent Rights claiming such Inactive Compound, to make, have made, use, import, offer for sale, have sold and sell products based thereon, for the life of the applicable Patent Rights.

        (b)    Prosecution by Pharmacopeia.    Except as otherwise provided in Section 10.2.3(a), Pharmacopeia shall be responsible, at its sole discretion and expense, for preparing, filing, prosecuting and maintaining in such countries it deems appropriate, Patent Rights within the Developed Technology and conducting any interferences, re-examinations, reissues and oppositions relating to such patent applications and patents.

        (c)    Cooperation; Request to Responsible Party.    Each of Organon and Pharmacopeia shall keep the other fully informed as to the status of patent matters described in this Section 10.2.3 including, without limitation, by providing the Patent Committee the opportunity to fully review and comment on any documents which will be filed in any patent office as far in advance of filing dates as feasible, and providing the other copies of any documents that such Party receives from such patent offices promptly after receipt, including notice of all interferences, reissues, re-examinations, oppositions or requests for patent term extensions. Organon and Pharmacopeia shall each reasonably cooperate with and assist the other at its own expense in connection with such activities, at the other Party's request. Either Party may request the other Party to file a patent application claiming any invention within the Developed Technology for which the other Party has responsibility as set forth in Sections 10.2.3(a) or 10.2.3(b).

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        10.2.4    Ownership.    Ownership of Patent Rights shall be determined based upon US Patent Laws.

        10.2.5    Election Not to Prosecute.    Upon ninety (90) days written notice to the other Party, the responsible Party may elect to discontinue the prosecution of any patent applications filed pursuant to Sections 10.2.3(a) or (b) and/or not to file or conduct any further activities with respect to the Patent Rights described in such Sections. In the event the responsible Party declines to file or, having filed, fails to further prosecute or maintain any Patent Rights filed pursuant to this Agreement, which relate to the Developed Technology, or to conduct any interferences, re-examinations, reissues, oppositions with respect thereto, the other Party shall have the right to prepare, file, prosecute and maintain such Patent Rights in such countries as it deem appropriate, and conduct any interferences, re-examinations, reissues or oppositions at its sole expense. The other Party agrees to cooperate in any manner reasonably requested in connection with any such actions by such Party, at the expense of the requesting Party, and shall assign all right, title and interest in and to such Patent Rights to the Party continuing such activities.

        10.3    Permitted Disclosures.    Following a written notice from the other Party hereto, the Parties shall in good faith grant each other permission, not to be unreasonably withheld, to disclose in the specification of a patent application filed by the other Party pursuant to this Agreement, any Pharmacopeia Base Technology, Organon Base Technology, or Developed Technology necessary to support and enable claims in such patent applications.

        10.4    Third Party Infringement.

        10.4.1    Developed Technology.    Organon and Pharmacopeia shall have the right to initiate legal action to enforce the Patent Rights within the Developed Technology against infringement or misappropriation by Third Parties or defend any declaratory judgment action relating thereto. A Party shall have the initial right, but not the obligation, to initiate and conduct legal proceedings to enforce against any infringement or defend any declaratory judgment action involving a Patent Right within the Developed Technology licensed to such Party hereunder at its sole expense.

        10.4.2    Failure to Enforce.    If within sixty (60) days following receipt of written notice of an infringement or misappropriation of Developed Technology which a Party has the right to enforce pursuant to Section 10.4.1 above (or written notice of a declaratory judgment action alleging invalidity or unenforceability of such Developed Technology), the Party fails to take action to halt such alleged infringement or misappropriation or defend such a declaratory judgment action, the other Party may, at its expense, take such legal action as it deems appropriate, in its own name, to halt such an alleged infringement or misappropriation or defend such a declaratory judgment action. Each Party agrees to render such reasonable assistance as the prosecuting Party may request.

        10.4.3    Base Technology.    In the event that any Pharmacopeia Base Technology or Organon Base Technology is infringed or misappropriated by a Third Party, or is subject to a declaratory judgement action arising from such infringement or misappropriation, Pharmacopeia and Organon shall promptly notify the other Party. It is understood and agreed that Pharmacopeia shall have the sole right to initiate and conduct legal proceedings to enforce the Pharmacopeia Base Technology against any infringement or misappropriation or defend any declaratory judgment action relating thereto, at its sole expense, and that Organon shall have the sole right to initiate and conduct legal proceedings to enforce the Organon Base Technology against any infringement or misappropriation or defend any declaratory judgment action relating thereto, at its sole expense.

        10.4.4    No Settlement Without Consent.    Neither Party shall enter into any settlement of any claim, suit or proceeding under Sections 10.4.1, or 10.4.3 above which admits or concedes that any

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aspect of the Developed Technology or Base Technology licensed from the other Party is invalid or unenforceable without the prior written consent of such other Party.

        10.4.5    Cooperation.    Each Party shall keep the other reasonably informed of the progress of any claim, suit or proceeding subject to this Section 10.4 and cooperate reasonably in connection with such activities at the request and expense of the Party involved in such claim, suit or proceeding.

        10.4.6    Division of Recoveries.

        (a)  Any recovery received in connection with a suit brought by a Party pursuant to Section 10.4.1 shall be used first to reimburse the Party for expenses (including attorneys, professional and expert fees) incurred in such suit, and any remainder shall be treated as Net Sales..

        (b)  Any recovery received in connection with a suit brought by Organon or Pharmacopeia solely pursuant to Section 10.4.3 shall be retained by the Party initiating such suit.

        10.5    Infringement Claims by Third Parties.    If the manufacture, sale or use of any Collaboration Product pursuant to this Agreement results in any claim, suit or proceeding alleging patent infringement against a first Party (or its Sublicensees), such first Party shall promptly notify the other Party in writing setting forth the facts of such claim in reasonable detail. The first Party shall have the exclusive right to defend and control the defense of any such claim, suit or proceeding, at its own expense, using counsel of its own choice; provided, however, it shall not enter into any agreement or settlement which admits or concedes that any aspect of the Developed Technology, the Pharmacopeia Base Technology, the Organon Base Technology or the Excluded Technology is invalid, unenforceable or not infringed, without the prior written consent of the other Party. The first Party shall keep the other Party reasonably informed of all material developments in connection with any such claim, suit or proceeding, and the other Party shall have the right (but not the obligation) to be separately represented, at its expense, by counsel of its own choice and to advise the first Party on the defense of such claim, suit or proceeding.

ARTICLE 11

CONFIDENTIALITY

        11.1    Confidentiality.

        11.1.1.    Term of Confidentiality.    Except as otherwise provided in this Section 11.1, the Party receiving Confidential Information (the "Receiving Party") shall keep all Confidential Information disclosed to it by the disclosing Party (the "Disclosing Party") confidential for the Research Term and ten (10) years thereafter. Without the prior written consent of the Disclosing Party, the Receiving Party shall not disclose any Confidential Information to any Third Party, except to the officers, employees, agents, or representatives of the Receiving Party or the Receiving Party's Affiliates (collectively the "Representatives"), who, in each case, have a need to know any such Confidential Information for purposes of the implementation and performance by the Receiving Party of its obligations pursuant to this Agreement, and will use the Confidential Information provided by the Disclosing Party only for such limited purposes.

        11.1.2.    Warranty of Obligation.    Each Party warrants that each of its Representatives to whom any Confidential Information is disclosed shall previously have been informed of the confidential nature of the Confidential Information and shall have agreed to be bound by the terms and conditions of this Agreement. The Receiving Party shall ensure that the Confidential Information provided by the Disclosing Party shall not be used or disclosed by such Representatives except as

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permitted by this Agreement. The Receiving Party shall stand responsible for any breach by its Representatives of the confidentiality provisions set forth in this Agreement.

        11.1.3.    Ownership of Confidential Information.    Except as provided herein with respect to the ownership of Developed Technology, all Confidential Information disclosed by the Disclosing Party shall remain the property of the Disclosing Party. Upon the written request of the Disclosing Party (i) all tangible Confidential Information provided by the Disclosing Party (including, but not limited to all copies thereof and all unused samples of materials provided by the Disclosing Party) except for Confidential Information consisting of analyses, studies and other documents prepared by or for the benefit of the Receiving Party, shall be promptly returned to the Disclosing Party, and (ii) all portions of such analyses, studies and other documents prepared by or for the benefit of the Receiving Party (including all copies thereof) which are within the definition of Confidential Information shall be destroyed, and the Receiving Party shall certify such destruction in writing to the Disclosing Party.

        11.1.4.    Permitted Disclosures.    The obligations of confidentiality and non-use set forth in this Agreement shall not apply to any portion of the Confidential Information which:

        (a)  is or becomes public or available to the general public otherwise than through the wrongful act or default of the Receiving Party or its Representatives; or

        (b)  is obtained by the Receiving Party from a Third Party who is lawfully in possession of such Confidential Information and is not subject to an obligation of confidentiality or non-use owed to the Disclosing Party; or

        (c)  is previously known to the Receiving Party prior to disclosure by the Disclosing Party, as shown by written evidence, and is not obtained or derived directly or indirectly from the Disclosing Party; or

        (d)  is independently developed by the Receiving Party without the use of or reliance on any Confidential Information provided by the Disclosing Party hereunder, as shown by contemporaneous written evidence.

        11.1.5.    Legal Disclosure.    The Receiving Party may disclose the Confidential Information of the Disclosing Party to the extent reasonably necessary in prosecuting or defending litigation, complying with applicable laws, governmental regulations or court order, or otherwise submitting required information to tax or other governmental authorities. If the Receiving Party intends to so disclose any such Confidential Information, the Receiving Party shall provide the Disclosing Party prompt prior notice of such fact so that the Disclosing Party may seek to obtain a protective order or other appropriate remedy concerning any disclosure of such Confidential Information. The Receiving Party will reasonably cooperate with the Disclosing Party in connection with the Disclosing Party's efforts to obtain any such order or other remedy. If any such order or other remedy does not fully preclude the disclosure of such Confidential Information, the Receiving Party will make such disclosure only to the extent that such disclosure is legally required and will use its reasonable efforts to have confidential treatment accorded to the disclosed Confidential Information.

        11.1.6.    No Warranty As To Reliability.    Each of the Parties acknowledges that neither Party makes any representation or warranty as to the reliability, accuracy or completeness of any of the Confidential Information disclosed hereunder, except for any specific representation or warranty made in other sections of this Agreement. The Receiving Party agrees that neither the Disclosing Party nor any of the Disclosing Party's Representatives shall have any liability to the Receiving Party arising from the disclosure of Confidential Information by the Disclosing Party except as otherwise provided herein.

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        11.1.7.    No Implied License.    Except as otherwise expressly set forth in this Agreement, nothing herein shall be construed as giving the Receiving Party any right, title and interest in and to the Confidential Information of the Disclosing Party.

        11.1.8.    Public Domain.    For the purpose of this Agreement, specific information disclosed as part of the Confidential Information shall not be deemed to be in the public domain or in the prior possession of the Receiving Party merely because it is embraced by more general information in the public domain or by more general information in the prior possession of the Receiving Party.

        11.2.    Publications.    The Patent Committee will discuss and review proposed publications describing the scientific results of the Research Collaboration. Either Party may, in its sole discretion, decide not to permit publication by the other Party of any scientific results related to any results of the Research Collaboration.

ARTICLE 12

REPRESENTATIONS AND WARRANTIES OF PHARMACOPEIA

        12.1 Pharmacopeia represents and warrants to Organon as follows:

        12.1.1    Organization.    It is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware.

        12.1.2    Authority.    It has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. All corporate acts and other proceedings required to authorize such execution, delivery, and consummation have been duly and properly taken and obtained.

        12.1.3    Enforceability.    This Agreement has been duly executed and delivered by Pharmacopeia and constitutes legal, valid, and binding obligations of Pharmacopeia enforceable against Pharmacopeia in accordance with its terms.

        12.1.4    Approvals and Consents.    No approval, authorization, consent, or other order or action of or filing with any court, administrative agency or other governmental authority is required for the execution and delivery by Pharmacopeia of this Agreement or the consummation by Pharmacopeia of the transaction contemplated hereby (other than contemplated Collaboration Product regulatory approvals).

        12.1.5    No Conflicts.    None of the execution, delivery, or performance of this Agreement by Pharmacopeia (i) conflicts with or results in a breach under the charter documents or any material contractual undertaking of Pharmacopeia, or its Affiliates or (ii) conflicts with or results in a violation of any of the laws of the jurisdiction of incorporation of Pharmacopeia. Pharmacopeia has not, to the best of its knowledge entered into, nor will Pharmacopeia, after the Effective Date, knowingly enter into any written or oral agreement that is or would be inconsistent with its obligations under this Agreement or deprives or would deprive Organon of the benefits of this Agreement.

        12.1.6    Title.    As of the Effective Date, it has good title to or valid leases or licenses for all its properties, rights, and assets necessary for the fulfillment of its obligations and responsibilities under this Agreement.

        12.1.7    Disclaimer.    Except as provided herein, Pharmacopeia specifically disclaims any guarantee that the Research Collaboration will be successful, in whole or in part. The failure of Pharmacopeia to successfully identify Lead Compounds will not, of itself, constitute a breach of any representation or warranty or other obligation under this Agreement. Pharmacopeia does not

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make any representation or warranty or guaranty that the Research Collaboration will be sufficient for the successful completion of the research. EXCEPT AS OTHERWISE EXPRESSLY SET FORTH HEREIN, PHARMACOPEIA MAKES NO REPRESENTATIONS AND EXTENDS NO WARRANTIES OR CONDITIONS OF ANY KIND, EITHER EXPRESS OR IMPLIED, WITH RESPECT TO THE DEVELOPED TECHNOLOGY, LEAD COMPOUNDS, ORGANON COMPOUNDS PHARMACOPEIA COMPOUNDS OR LIBRARIES INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, VALIDITY OF PHARMACOPEIA BASE OR DEVELOPED TECHNOLOGY, PATENTED OR UNPATENTED, OR NON-INFRINGEMENT OF THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES.

        12.1.8    Sufficient Rights.    As of the Effective Date, it owns or Controls its Patent Rights, to conduct the Research Collaboration and to grant the rights and licenses to Organon, and to fulfill its duties and obligations pursuant to this Agreement. To the knowledge of Pharmacopeia, as of the Effective Date the rights and licenses granted to Organon hereunder do not violate the rights of any Third Party to which Pharmacopeia has granted a license.

        12.1.9    No Prior Grant or Patents.    As of the Effective Date, Pharmacopeia has not (i) knowingly granted any licenses to Third Parties, or (ii) knowingly filed any patent application, in either case inconsistent with the licenses granted or to be granted to Organon hereunder.

ARTICLE 13

REPRESENTATIONS AND WARRANTIES OF ORGANON

        13.1 Organon represents and warrants to Pharmacopeia as follows:

        13.1.1    Organization.    It is a corporation duly organized, validly existing and in good standing under the laws of the Netherlands.

        13.1.2    Authority.    It has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. All corporate acts and other proceedings required to authorize such execution, delivery, and consummation have been duly and properly taken and obtained.

        13.1.3    Enforceability.    This Agreement has been duly executed and delivered by Organon and constitutes the legal, valid, and binding obligations of Organon enforceable against Organon in accordance with its terms.

        13.1.4    Approvals and Consents.    No approval, authorization, consent, or other order or action of or filing with any court, administrative agency or other governmental authority is required for the execution and delivery by Organon of this Agreement or the consummation by Organon of the transaction contemplated hereby (other than contemplated Regulatory Approvals).

        13.1.5    No Conflicts.    None of the execution, delivery, or performance of this Agreement by Organon (i) conflicts with or results in a breach under the charter documents or any material contractual undertaking of Organon, or its Affiliates or (ii) conflicts with or results in a violation of any of the laws of the jurisdiction of incorporation of Organon. Organon has not, to the best of its knowledge entered into, nor will Organon, after the Effective Date, knowingly enter into any written or oral agreement that is or would be inconsistent with its obligations under this Agreement or deprives or would deprive Pharmacopeia of the benefits of this Agreement.

        13.1.6    Title.    As of the Effective Date, it has good title to or valid leases or licenses for all its properties, rights, and assets necessary for the fulfillment of its obligations and responsibilities under this Agreement.

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        13.1.7    Sufficient Rights.    As of the Effective Date, it owns or Controls its Patent Rights, to conduct the Research Collaboration and to grant the rights and licenses to Pharmacopeia, and to fulfill its duties and obligations pursuant to this Agreement. To the knowledge of Organon, as of the Effective Date the rights and licenses granted to Pharmacopeia hereunder do not violate the rights of any Third Party to which Organon has granted a license.

        13.1.8    No Prior Grant or Patents.    As of the Effective Date, Organon has not (i) knowingly granted any licenses to Third Parties, or (ii) knowingly filed any patent application, in either case inconsistent with the licenses granted or to be granted to Pharmacopeia hereunder.

ARTICLE 14

SURVIVAL AND INDEMNIFICATION

        14.1    Survival of Representations, Warranties, Covenants, and Agreement.    The representations, warranties, covenants, and agreements contained in this Agreement shall survive the Research Term and the completion of the other actions set forth herein and shall remain in full force and effect. Except as expressly provided herein, the Parties confirm that they have not relied upon any other representations, warranties, covenants, and agreements as an inducement to enter into this Agreement or the other agreements and instruments to be executed and delivered by the Parties pursuant to this Agreement.

        14.2    Indemnification by Pharmacopeia.    Pharmacopeia hereby agrees to indemnify and hold Organon, its Affiliates and their respective officers, directors, stockholders, employees, agents, and representatives (collectively, the "Organon Indemnitees") harmless on an after-tax basis from and against any and all claims, liabilities, losses, damages, costs and expenses in respect of claims against the Organon Indemnitees by Third Parties other than the Organon Indemnitees, including fees and disbursements of counsel and expenses of reasonable investigation (collectively, "Organon Losses"), arising out of, based upon or caused by: (i) the inaccuracy of any representation or the breach of any warranty, covenant or agreement of Pharmacopeia contained in this Agreement or in any other agreement or instrument delivered by Pharmacopeia pursuant to this Agreement; (ii) any failure by Pharmacopeia, its Affiliates or designee to conduct the research pursuant to the Research Plans in a diligent and professional manner and in accordance with applicable laws and regulations; (iii) any negligence or intentional wrongdoing by Pharmacopeia, its Affiliates or designees in the performance of the research hereunder (except in each case to the extent that any Organon Loss is due to the negligence or willful misconduct of Organon Indemnitees); or (iv) the development, preclinical and clinical testing, manufacture, distribution, sale and/or use (including but not limited to product liability claims) of any Reverted Lead Compound or non-Designated Lead Compound (except in each case to the extent that any Organon Loss is due to the negligence or willful misconduct of Organon Indemnitees).

        14.3    Indemnification by Organon.    Organon hereby agrees to indemnify and hold Pharmacopeia, its Affiliates, subcontractors and their respective officers, directors, stockholders, employees, agents, and representatives (collectively, the "Pharmacopeia, Indemnitees") harmless on an after-tax basis from and against any and all claims, liabilities, losses, damages, costs and expenses in respect of claims against the Pharmacopeia Indemnitees by Third Parties other than the Pharmacopeia Indemnitees, including fees and disbursements of counsel and expenses of reasonable investigation (collectively, "Pharmacopeia Losses"), arising out of, based upon or caused by: (i) the inaccuracy of any representation or the breach of any warranty, covenant or agreement of Organon contained in this Agreement or in any other agreement or instrument delivered by Organon pursuant to this Agreement; (ii) any failure by Organon, its Affiliates or designee to conduct the research pursuant to the Research Plans in a diligent and professional manner and in accordance with applicable laws and regulations; (iii) the use of any Target, or any Assay, including but not limited to patent infringement claims in

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connection with the use of any Assay, any Target or of any materials relating to any Assay or any Target, (iv) any negligence or intentional wrongdoing by Organon, its Affiliates or designees in the performance of the research hereunder; or (v) the development, preclinical and clinical testing, manufacture, distribution, sale and/or use (including but not limited to product liability claims) of any Lead Compound, Derivative Compound or Collaboration Product (except in each case to the extent that any Pharmacopeia Loss is due to the negligence or willful misconduct of Pharmacopeia Indemnitees).

        14.4    Notices.    Each indemnified Party agrees to give the indemnifying Party prompt written notice of any action, claim, demand, discovery of fact, proceeding or suit (collectively, "Claims") for which such indemnified Party intends to assert a right to indemnification under this Agreement; provided however, that failure to give such notification shall not affect the indemnified Party's entitlement to indemnification hereunder except to the extent that the indemnifying Party shall have been prejudiced as a result of such failure. The indemnifying Party shall have the initial right (but not the obligation) to defend, settle or otherwise dispose of any Claim for which the indemnified Party intends to assert a right to indemnification under this Agreement as contemplated in the preceding sentence if and so long as the indemnifying Party has recognized in a written notice to the indemnified Party provided within thirty (30) days of such written notice its obligation to indemnify the indemnified Party for any Pharmacopeia Losses or Organon Losses (as the case may be) relating to such Claim; provided however that if the indemnifying Party assumes control of the defense, settlement, or disposition of a Claim, the indemnifying Party shall obtain the written consent of the indemnified Party prior to ceasing to defend, settling or otherwise disposing of the Claim. If the indemnifying Party fails to state in a written notice during such thirty (30) day period its willingness to assume the defense of such a Claim, the Pharmacopeia or Organon Indemnitee, as the case may be, shall have the right to defend, settle or otherwise dispose of such claim, subject to the applicable provisions of Sections 14.2 and 14.3 above.

ARTICLE 15

TERM, TERMINATION, AND EXPIRATION

        15.1.    Term of Agreement.    The term of this Agreement shall commence on the Effective Date and shall continue in full force and effect on a country-by-country and Collaboration Product-by-Collaboration Product basis until Organon and its Sublicensees have no remaining royalty obligations in a country, unless terminated earlier as provided in this Article 15.

        15.2    Research Term.    The Research Collaboration shall commence on the Effective Date and terminate on the last day of the Initial Research Term, unless extended by mutual agreement of the Parties, upon twelve (12) months written notice from Organon before the last day of the Initial Research Term, in which case the Research Collaboration shall terminate on the last day of such extension.

        15.3    Termination.

        15.3.1    Breach.    Except as provided in Section 15.3.3, if either Party breaches, or defaults in the performance of, or fails to be in compliance with, any material warranty, representation, agreement or covenant of this Agreement, including any payment obligations, and such default or noncompliance shall not have been substantially remedied, or steps initiated to substantially remedy the same to the other Party's reasonable satisfaction, within sixty (60) days after receipt by the defaulting Party of a written notice thereof and demand to cure such default from the other Party (or, in the case of a failure to pay any amount due hereunder, within ten (10) business days after receipt of such notice), the Party not in default or breach may terminate this Agreement subject to the provisions herein.. Such termination shall be effective only after submission of the

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dispute to arbitration as set forth in Section 16.19 and a determination by the arbitrators that there has been a material breach or default.

        15.3.2    Bankruptcy.    Either Party may, subject to the provisions herein, terminate the Research Collaboration and this Agreement if, at any time, the other Party shall file in any court pursuant to any statute, a petition in bankruptcy or insolvency or for reorganization in bankruptcy or for an arrangement or for the appointment of a receiver or trustee of such Party or of its assets, or if such Party proposes a written agreement of composition or extension of its debts, or if such Party shall be served with an involuntary petition against it, filed in any insolvency proceeding, and such petition shall not be dismissed within sixty (60) days after the filing thereof, or if such Party shall propose or be a party to any dissolution, or if such Party shall make an assignment for the benefit of creditors.

        15.3.3    Termination of Research Collaboration.

        (a)  At the end of each of Research Year One, Research Year Two and Research Year Three, the Parties shall meet to review the progress of the Research Collaboration. If the JRC determines that Organon and Pharmacopeia have each exercised commercially reasonable efforts, but Pharmacopeia has failed to deliver the following number of Lead Series per Research Year, Organon shall have the right to terminate the Research Collaboration at the end of each of Research Year Two or Research Year Three upon six (6) months notice to Pharmacopeia in the event that (i) in the case of Research Year Two, Pharmacopeia has failed to deliver one (1) Lead Series (with demonstrated progress towards one additional Lead Series) by the end of Research Year Two; or (ii) in the case of Research Year Three, Pharmacopeia has failed to deliver a cumulative total of three (3) Lead Series (with demonstrated progress towards one additional Lead Series) by the end of Research Year Three. In the event of that Organon elects to terminate the Research Collaboration as provided in this Section, all payments made to Pharmacopeia as of the date of the termination shall be non-refundable, provided, however, that during the six (6) months notice period, Organon shall have no obligation to provide further funding under Section 6.1, and Pharmacopeia shall provide thirty (30) FTE-months of effort in the Research Collaboration, at its own expense.

        (b)  In the event that Pharmacopeia determines that (1) Organon has not provided Pharmacopeia with targets in the number and frequency set forth herein, (2) Pharmacopeia is not able to accept the targets for screening in the Research Collaboration, provided that the inability of Pharmacopeia is due to conditions relating to such targets which are outside of Pharmacopeia's control, or (3) Organon is not diligently carrying its activities hereunder (including but not limited to, failing to provide Pharmacopeia on a Target-by-Target basis with enabling Target Information, key reagents and the Assay and providing the resources to conduct in vivo models), then Pharmacopeia shall have the right upon six (6) months written notice to Organon, to terminate the Research Collaboration or to continue its activities hereunder on the Targets that have been accepted before the occurrence of any of the foregoing. In the event that Pharmacopeia elects to terminate the Research Collaboration as provided in this Section, all payments made to Pharmacopeia hereunder as of the date of the termination shall be non-refundable, provided, however, that during the six (6) months notice period, the Parties shall continue their respective activities in the Research Collaboration. In the event that Pharmacopeia elects to continue its activities hereunder on the Targets that have been accepted prior to the occurrence of any of the foregoing, then Pharmacopeia's obligation to provide Lead Series shall be reduced in proportion to the reduction in the number of the targets made available to Pharmacopeia and that Pharmacopeia is able to accept pursuant to the terms set forth herein. (By way of example, the number of Lead Series to be delivered by Pharmacopeia is expected to be approximately about 25% of the number of

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targets made available by Organon. If the number of targets proposed by Organon is reduced to twenty (20) targets, then Pharmacopeia shall deliver no more than five (5) Lead Series to Organon). The Parties agree that notwithstanding any reduction in the Lead Series to be delivered, Organon shall continue funding Pharmacopeia as provided herein.

        15.3.4    Rights in Law or Equity.    Except as otherwise expressly provided herein, termination by either Party pursuant to this Section 15.3 shall not prejudice any other remedy that a Party might have in law or equity, except that neither Party may claim compensation for lost opportunity or like consequential damages arising out of the fact of such termination.

        15.4    Effect of Breach or Termination.

        15.4.1    Accrued Obligations.    Termination of this Agreement for any reason shall not release any Party hereto from any liability which, at the time of such termination, has already accrued to the other Party or which is attributable to a period prior to such termination.

        15.4.2    Return of Materials.    Upon any termination of this Agreement, Organon and Pharmacopeia shall promptly return to the other Party all Confidential Information received from the other Party (except one copy of which may be retained for archival purposes).

        15.4.3    Effect of Termination of Research Collaboration.    After the effective date of any termination of the Research Collaboration, subject to the provisions of Sections 7.1.2, 15.3.3 and 15.3.4, Organon shall have no obligation to fund further research activities in the Research Collaboration, and Pharmacopeia shall have no further obligation to conduct such research activities after such date.

        15.4.4    Licenses.

        (a)    Termination by Pharmacopeia Pursuant to Section 15.3.1 and 15.3.2.    In the event of termination by Pharmacopeia pursuant to Sections 15.3.1 or 15.3.2, all exclusivity periods, rights and licenses granted hereunder shall terminate, and any licenses granted by Organon to Pharmacopeia hereunder shall terminate, except for any license granted to Pharmacopeia under Sections 10.2.3(a) and 5.6, which shall remain in effect, subject to the terms and conditions of this Agreement applicable thereto, including the applicable provisions of Articles 4, 8 and 9, which shall survive and be applicable to such licenses in addition to the provisions which survive pursuant to Section 15.5.

        (b)    Termination by Organon Pursuant to Sections 15.3.1 or 15.3.2.    In the event of termination by Organon pursuant to Sections 15.3.1 or 15.3.2, the licenses granted by Organon hereunder shall terminate concurrently, except for any license under Sections 5.6.1 and 10.2.3(a) which shall remain in effect, and any licenses granted by Pharmacopeia hereunder shall remain in effect, subject to the terms and conditions of this Agreement applicable thereto, including the applicable provisions of Articles 4, 7, 8 and 9, which shall survive and be applicable to such licenses in addition to the provisions which survive pursuant to Section 15.5.

        (c)    Termination Pursuant to Section 15.3.3.    In the event of termination by either Party pursuant to Sections 15.3.3, the licenses granted by Organon hereunder shall terminate concurrently, except for any license under Sections 10.2.3(a) and 5.6 which shall remain in effect, and any licenses granted by Pharmacopeia hereunder shall remain in effect, subject to the terms and conditions of this Agreement applicable thereto, including the applicable provisions of Articles 4, 6 (as applicable), 7, 8 and 9, which shall survive and be applicable to such licenses in addition to the provisions, which survive pursuant to Section 15.5.

        15.5    Survival.    The provisions of Sections 3.5, 4.3, 5.6.1, 5.8, 5.9, 5.10, 8.3.2 and Articles 9, 10, 11, 14, 15, and 16 shall survive the expiration or termination of this Agreement.

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ARTICLE 16

MISCELLANEOUS

        16.1    Notices.    Any notice or other communication required or permitted to be given by either Party under this Agreement shall be effective when delivered, if delivered by hand or by electronic facsimile or five days after mailing if mailed by registered or certified mail, postage prepaid and return receipt requested, and shall be addressed to each Party at the following addresses or such other address an may be designated by notice pursuant to this Section:

If to Pharmacopeia:	If to Organon:
Pharmacopeia, Inc. CN 5350 Princeton, NJ 08543-5350 Attn: Chief Executive Officer	N.V. Organon Kloosterstraat 6 5349 AB Oss The Netherlands Attn: President Fax #: 31-412-646293
With a copy to:	with a copy to:
Pharmacopeia, Inc. CN 5350 Princeton, NJ 08543-5350 Attn: General Counsel Fax: (609) 452-3655	Akzo Nobel Nederland B.V. Wethouder va Eschstraat 1 5342 AV Oss The Netherlands
	Attn: Legal Affairs Department Fax#: 31-412-666373

        16.2    Amendments.    No amendment, modification or addition hereto shall be effective or binding on either Party unless set forth in writing and executed by duly authorized representatives of both Parties.

        16.3    Waiver.    No waiver of any rights under this Agreement shall be deemed effective unless contained in writing signed by the Party charged with such waiver, and no waiver of any breach or failure to perform shall be deemed a waiver of any future breach or failure to perform or any other right arising under this Agreement.

        16.4    Headings.    The section headings contained in this Agreement are included for convenience only and form no part of the agreement between the Parties.

        16.5    Applicable Law.    This Agreement shall be governed by, subject to and construed in accordance with the laws of the State of Delaware and the Parties consent to the jurisdiction of the State and Federal Courts of Delaware.

        16.6    Severability.    If any provision of this Agreement is held to be invalid, void or unenforceable for any reason, it shall be adjusted, if possible, rather than voided in order to achieve the intent of the Parties to the maximal extent possible. In any event, all other provisions of this Agreement shall be deemed valid and enforceable to the fullest extent possible.

        16.7    Assignment: Binding Effect.    Neither this Agreement, nor any obligations or rights hereunder, shall be assignable by any Party hereto without the prior written consent of the other Party; provided however, that either Party may assign this Agreement without the consent of the other Party to its Affiliates, if the assigning Party guarantees the full performance of its Affiliates obligations hereunder, or in connection with the sale or transfer of all or substantially all of its assets relating to this Agreement, whether by merger, sale of stock, operation of law or otherwise. Any purported

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assignment in contravention of this Section shall, at the option of the non-assigning Party, be null and void and of no effect.

        16.8    No Implied licenses.    Only the licenses granted expressly herein shall be of legal force and effect. No license rights shall be created hereunder by implication, estoppel or otherwise.

        16.9    Further Assurances.    Each Party agrees to execute, acknowledge and deliver such further instruments, and to do all such other acts as may be necessary or appropriate in order to carry out the purposes and intent of this Agreement.

        16.10    Force Majeure.    No Party shall be liable for any failure or delay in performance under this Agreement to the extent such failure or delay arises from Force Majeure. A Force Majeure is fire, explosion, earthquake, storm, flood, strike, labor difficulties, war, insurrection, riot, act of God or the public enemy, or any law, act, order, export or import control regulations, proclamation, decree, regulation, ordinance, or instructions of local, state, federal or foreign governmental or other public authorities, or judgment or decree of a court of competent jurisdiction (but excluding a court injunction against a Party's performance) and not otherwise arising out of breach by such Party of this Agreement. In the event of the occurrence of such an event, the Party so affected shall give prompt written notice to the other Party, stating the period of time the occurrence is expected to continue and shall use best efforts to end the failure or delay and ensure that the effects of such Force Majeure are minimized.

        16.11    Negation of Agency.    Nothing herein contained shall be deemed to create an agency, joint venture, amalgamation, partnership, or similar relationship between Organon and Pharmacopeia. The relationship between the Parties established by this Agreement is that of independent contractors.

        16.12    Publicity.    No public announcement concerning the existence or the terms of this Agreement shall be made, either directly or indirectly, by Pharmacopeia or Organon, except as may be legally required by applicable laws, regulations, or judicial order, without first obtaining the approval of the other Party and agreement upon the nature, text, and timing of such announcement, which approval and agreement shall not be unreasonably withheld. The Party desiring to make any such public announcement shall provide the other Party with a written copy of the proposed announcement in sufficient time prior to public release to allow such other Party to comment upon such announcement, prior to public release. Neither Party shall issue any press release or make any public announcement, which includes or otherwise uses the name of the other Party in any public statement or document except with the prior written consent of such Party.

        16.13    Registration and Filing of the Agreement.    To the extent, if any, that a Party concludes in good faith that it is required to file or register this Agreement or a notification thereof with any governmental authority, including without limitation the U.S. Securities and Exchange Commission and the Competition Directorate of the Commission of the European Communities, in accordance with applicable laws and regulations, such Party may do so, and the other Party shall cooperate in such filing or notification and shall execute all documents reasonably required in connection therewith at the, expense of the requesting Party. The Parties shall promptly inform each other as to the activities or inquiries of any such governmental authority relating to this Agreement, and shall cooperate, to respond to any request for further information therefrom at the expense of the requesting Party.

        16.14    Entire Agreement.    This Agreement and the Exhibit hereto may be amended from time to time in accordance with this Agreement) contains the entire agreement between the Parties with respect to the subject matter hereof. Any prior agreement, arrangement or undertaking, whether oral or in writing is hereby superseded.

        16.15    Beneficiaries.    No person, other than Organon or Pharmacopeia and their permitted assignees hereunder, shall be deemed an intended beneficiary hereunder or have any right to enforce any obligation of this Agreement.

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        16.16    Affiliates of Parties.    Each Party may perform its obligations hereunder personally or through one or more Affiliates and shall be responsible for the performance of such obligations, and any liabilities resulting therefrom. Neither Party shall permit any of its Affiliates to commit any act (including any act of omission) which such Party is prohibited hereunder from committing directly.

        16.17    Compliance with Laws.    In exercising their rights under this Agreement, the Parties shall fully comply with the requirements of any and all applicable laws, regulations, rules and orders of any governmental body having jurisdiction over the exercise of rights under this Agreement.

        16.18    Patent Marking.    Organon agrees to mark and have its Affiliates and Sublicensees mark all Collaboration Products sold pursuant to this Agreement in accordance with the applicable statute or regulations relating to patent marking in the country or countries of manufacture and sale thereof.

        16.19    Dispute Resolution.

        (a)    Attempt to Settle.    The Parties agree to take all reasonable efforts to resolve any and all disputes between them concerning diligence obligations and/or questions of material breach and default in connection with this Agreement in an amicable manner.

        (b)    Binding Arbitration.    Except in the event of alleged breach, default or lack of diligence by a bankrupt or insolvent Party, the Parties agree that any such dispute that arises in connection with this Agreement and which cannot be amicably resolved by the Parties shall be resolved by binding arbitration as set forth in this Section, conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association (AAA) by three (3) arbitrators.

        (c)    Written Notice.    If a Party intends to begin an arbitration to resolve a dispute, such Party shall provide written notice to the other Party informing the other Party of such intention and the issues to be resolved. Within twenty (20) business days after its receipt of such notice, the other Party may, by written notice to the Party initiating arbitration, add additional issues to be resolved.

        (d)    Selection of Arbitrators.    Within forty-five (45) days following the receipt of the notice of arbitration, the Parties shall agree on the arbitrators, or if the Parties are unable to agree the arbitrators shall be selected as provided in the AAA Commercial Arbitration Rules. The arbitrators shall not be employees, directors or shareholders of either Party or of an Affiliate and shall be selected in accordance with AAA rules. Where applicable, the arbitrators shall be independent experts in pharmaceutical product development (including clinical development and regulatory affairs) in the U.S., Japan and Europe.

        (e)    Hearings.    The arbitrators shall conduct one or more hearings to allow the parties to present their positions regarding the dispute.

        (i)    Discovery.    The arbitrators shall determine what discovery will be permitted, consistent with the goal of limiting the cost and time that the Parties must expend for discovery; provided the arbitrators shall permit such discovery as they deem necessary to permit an equitable resolution of the dispute. Any written evidence originally in a language other than English shall be submitted in English translation accompanied by the original or a true copy thereof. The arbitrators shall have sole discretion with regard to the admissibility of any evidence.

        (ii)    Proposed Ruling.    At least ten (10) business days prior to a hearing, each Party must submit to the arbitrators and serve on the other Party a proposed ruling on each issue to be resolved. Such writings shall be limited to not more than fifty (50) pages.

        (iii)    Time; Testimony.    Each Party shall be entitled to no more than five (5) days of hearing to present testimony or documentary evidence. Such time limitation shall include any direct, cross or rebuttal testimony, but such time limitation shall only be charged against the

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Party conducting such direct, cross or rebuttal testimony. It shall be the responsibility of the arbitrators to determine whether the Parties have had the five (5) days to which each is entitled.

        (iv)    Representation by an Attorney.    Each Party shall have the right to be represented by counsel.

        (v)    Location.    The arbitration shall take place in New York, NY.

        (f)    Costs.    The costs of the arbitration, including administrative and arbitrator fees, shall be shared equally by the Parties. Each Party shall bear its own costs and attorney and witness fees.

        (g)    Written Decision.    The arbitrators shall render a written decision with their resolution of the dispute. The decision of the arbitrators shall be final and not subject to appeal and binding on the Parties hereto.

        (h)    Remedy.    A disputed performance or suspended performances pending the resolution of the arbitration must be completed within thirty (30) days following the final decision of the arbitrators or such other reasonable period as the arbitrators determine in a written opinion.

        (i)    Final Decision Within One Year.    Any arbitration subject to this Section 16.19 shall be completed within one (1) year from the filing of notice of a request for such arbitration.

        16.20    No Trademark Rights.    Except as provided herein, no right, express or implied, is granted by this Agreement to use in any manner the name "Pharmacopeia," "Organon" or any other trade name or trademark of the other Party or its Affiliates in connection with performance of this Agreement.

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IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by their duly authorized representatives as of the Effective Date.

N.V. ORGANON		PHARMACOPEIA, INC
By:	/s/  H J VERGOUWEN	By:	/s/  STEPHEN A. SPEARMAN
Name:	H J Vergouwen	Name:	Stephen A. Spearman
Title:	Managing Director R&D	Title:	Executive Vice President and Chief Operating Officer
Date: February 13, 2002		Date: January 31, 2002
By:	/s/  C D NICHOLSON
Name:	C D Nicholson
Title:	Director Research
Date: February 13, 2002

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EXHIBIT A

Assay Validation Criteria

Generic Validation Criteria for HTS Assays Developed by Organon

        Assay validation is a process that Organon is responsible for conducting prior to delivery of a screen. All work related to assay validation is performed at Organon, with the objective of demonstrating that assay performance meets or exceeds the criteria that has been mutually accepted by both companies. The following are generic validation criteria, which will be dependent and may vary based on the actual assay to be developed.

1)

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*** CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

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COLLABORATION AND LICENSE AGREEMENT
BACKGROUND
ARTICLE 1 DEFINITIONS
ARTICLE 2 RESEARCH COLLABORATION
Table 1
ARTICLE 3 JOINT RESEARCH COMMITTEE; JOINT PATENT COMMITTEE
ARTICLE 4 EXCLUSIVITY
ARTICLE 5 LICENSES
ARTICLE 6 FUNDING
ARTICLE 7 MILESTONE PAYMENTS
ARTICLE 8 ROYALTY PAYMENTS
ARTICLE 9 REPORTS, BOOKS AND TAX MATTERS
ARTICLE 10 PATENTS
ARTICLE 11 CONFIDENTIALITY
ARTICLE 12 REPRESENTATIONS AND WARRANTIES OF PHARMACOPEIA
ARTICLE 13 REPRESENTATIONS AND WARRANTIES OF ORGANON
ARTICLE 14 SURVIVAL AND INDEMNIFICATION
ARTICLE 15 TERM, TERMINATION, AND EXPIRATION
ARTICLE 16 MISCELLANEOUS
EXHIBIT A Assay Validation Criteria

EX-21.1

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Exhibit 21.1

SUBSIDIARIES OF THE REGISTRANT

Chemical Design Holdings plc	(United Kingdom)
Chemical Design Incorporated	(New Jersey)
Chemical Design International Limited	(United Kingdom)
Chemical Design Limited	(United Kingdom)
Chemical Design SARL	(France)
Chemical Design Supplies Limited	(United Kingdom)
Chemical Design West Coast Incorporated	(California)
Genetics Computer Group Incorporated	(Wisconsin)
Health Designs, Incorporated	(New York)
Accelrys GmbH	(Germany)
Accelrys Incorporated	(Delaware)
Accelrys Limited	(United Kingdom)
Accelrys SARL	(France)
Accelrys kk	(Japan)
Oxford Molecular Group, Inc.	(Delaware)
Oxford Molecular Limited	(United Kingdom)
Oxford Molecular SA	(France)
Synopsys Scientific Systems Limited	(United Kingdom)
Synopsys Scientific Systems Incorporated	(New Jersey)
Synomics Limited	(United Kingdom)

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SUBSIDIARIES OF THE REGISTRANT

EX-23.1

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EXHIBIT 23.1

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statements on Forms S-8 (Form S-8 No.'s 333-80341, 333-20883, 333-56883, 333-79577, and 333-39112) pertaining to the 1994 Incentive Stock Plan and 2000 Stock Option Plan and in the Registration Statement on Form S-3 No. 333-34478 and the related prosectus of Pharmacopeia, Inc. of our report dated January 25, 2002, with respect to the consolidated financial statements and schedule of Pharmacopeia, Inc. included in the Annual Report on Form 10-K for the year ended December 31, 2001.

ERNST&YOUNG LLP

San Diego, California
March 25, 2002

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CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS