Arena Pharmaceuticals Inc. padded its cash reserves through a $35 million private placement of convertible preferred stock to a pair of undisclosed institutional investors.

The San Diego-based company, which is transitioning from discovery work to internal development activities, said it expects to use net proceeds for working capital and general corporate purposes. In the coming quarter, Arena plans to begin human studies on an internally discovered compound for obesity. Labeled APD356, the highly selective 5HT2C agonist has been shown to reduce body weight and food intake in animal models of obesity. It also has been shown to increase high-density lipoprotein, often referred to as "good" cholesterol.

"Our first compound is scheduled to go into the clinic in February, so we wanted to top off the tank, if you will, and make sure we had sufficient resources," Arena President and CEO Jack Lief told BioWorld Today. "This was something that could be done relatively easily, as the investors came to us and said they were interested in buying our stock."

He added that the buyers, who typically purchase shares at a discount, paid a premium in the transaction, which was disclosed on Dec. 24. Arena's stock (NASDAQ:ARNA) gained 3 cents Monday to close at $6.81.

Arena reported an $11.9 million net loss for the three-month period ended Sept. 30, at which time it had $146 million in cash, cash equivalents and short-term investments. The company also reported 28.6 million shares outstanding through that date.

"I don't believe in debt for companies at our stage, so I didn't want to do a convertible debt offering," Lief said. "In this case, it's a preferred stock issue, so when it's redeemed, it's our choice whether to pay it back in cash or stock. This was a win-win deal for everybody."

The Series B-1 shares are convertible into common stock at a fixed conversion price of $7.50 apiece. If not previously converted, Arena must redeem the stock in five years or earlier, under certain circumstances. Any such redemption may be made by Arena in cash or in common shares, if certain conditions have been met. Dividends are payable at a 4 percent annual rate, either in kind or in common shares.

Arena also issued seven-year warrants to purchase up to about 1.5 million common shares at an exercise price of $10 apiece, as well as warrant units providing the investors a 16-month window to purchase up to $11.5 million of Series B-2 convertible preferred stock and additional seven-year warrants for up to 450,000 common shares exercisable at $10 apiece, as well.

If issued, the Series B-2 shares would be convertible into common stock at a fixed conversion price calculated at 110 percent of the stock's price at the time of issuance, though not less than $7 or greater than $10 per share. Otherwise, the Series B-2 stock has substantially identical terms to the Series B-1 stock.

Arena noted that the buyers agreed to vote in line with its board for as long as they hold the stock. The company also amended its stockholders rights plan, adopted in October 2002, to provide that neither the consummation of the transaction nor the purchase or issuance of common stock pursuant to the transaction will cause any of the purchasers to trigger the plan.

Arena, which is focused on G protein-coupled receptor drug targets, recently reduced its staff by 9 percent, or 30 people, as part of a restructuring of operations. In the process, 12 scientists were transferred from research to development-oriented activities. Founded in 1997, the company's focus includes metabolic and cardiovascular diseases, as well as central nervous system and inflammatory disorders.

Other compounds scheduled to move into clinical studies include a product for sleep disorders, scheduled for its first human trials toward the end of next year, and another for diabetes, slated to enter human trials during the first half of 2005.

"They're all orally bioavailable," Lief said, "and associated with fairly well-validated targets."