Breaking up is hard to do, especially when the end comes sooner than expected.

Arena Pharmaceuticals Inc. said Eli Lilly and Co. elected to conclude their research collaboration, effective April 14, two years earlier than called for in the potential five-year agreement entered in April 2000.

"It's been a fine collaboration, but we're disappointed that it's completing next year," Arena President and CEO Jack Lief said during a conference call. "The success rate as measured by the ability to screen has been very, very good. The success rate as measured by the hits rate has also been good, but it's too early to really tell whether any, or how many, drugs are going to emanate out of those screens."

The collaborative work aimed to activate and enable orphan G protein-coupled receptors (GPCRs) using Arena's CART and Melanophore receptor technologies. Arena Chief Financial Officer Joseph Mooney said the program's success in creating more than 30 projects moved Lilly to call for its end.

"We have been informed by Lilly that they have made this decision based on the high productivity of the collaboration, which has given Lilly an abundance of new products that meet Lilly's capacity," he said. "Lilly desires to devote its resources to focusing on moving these projects through the pipeline and creating full value from them."

San Diego-based Arena will receive milestones and royalties on molecules discovered as a result of the alliance as they move through drug development. In the near term, Lief said Arena expects to receive preclinical milestones, with the potential for larger clinical milestones more than three years away.

"The big clinical milestones won't come for a number of years," he told BioWorld Today. "The preclinical milestones - a million here, a couple of million there - we should get a couple of those next year and the year after, in the interim while we're waiting for the clinical milestones. And there are 30 targets, so you would think that some of those would be very interesting."

And while Lilly has yet to advance any receptors into a chemistry program, Arena already has pocketed money based on the tangible results of the collaboration to date.

The agreement called for Arena to receive full-time-equivalent staff funding, money for its staff to work on Lilly receptors. For each receptor chosen by Indianapolis-based Lilly, Arena also would receive payment if it successfully activated a receptor, and again if Arena successfully enabled a screen against which Lilly could screen its chemical library. While a steady source of income, Lief said such payments are small when compared to potential milestone and royalty payouts in the future.

"Many companies that are more interested in near-term revenue will sacrifice downstream royalties," he said. "We never do that - we don't need to do that."

Nevertheless, in 2001 Arena received $8.4 million in staff funding as well as activation/screen and milestone payments. For the first nine months of 2002, Arena said it had received $10 million based on the same criteria. The company said it expects to receive up to $7 million in added funding through the end of the collaboration, assuming it meets the criteria.

Thus far, Arena said it has successfully activated 26 receptors and enabled screens for 15 of them.

"We expect Lilly will pay milestones for four receptors not yet activated if they are successfully activated under the established criteria," Mooney said. "We expect Lilly will pay 13 milestones for delivered screens on those receptors, for which this remains to be done, provided Arena is successful in that effort."

Of the 33 receptors covered in the first two - and only - phases of the agreement, Arena said Lilly would not seek activation of three receptors nor request enabled screens for five others. Arena said Lilly might advance the remainder into drug development in the neuroscience, cardiovascular, oncology and endocrinology therapeutic areas. Had the agreement lasted its full five-year term, Lilly would have selected 59 GPCRs for screening and drug discovery.

Absent the remaining receptors left hanging by the early end of the agreement, Arena will lose out on further research funding - estimated at about $25 million. Arena also loses out on potential clinical milestone and royalty payments on the 26 receptors to have been covered in the third phase, though the company said its financial picture remains optimistic down the road.

Mooney said that Arena's current $185 million in cash and investments would last for at least five years without further capital infusion, given a burn rate of about $30 million per year. His figures take into account the lost funding from Lilly.

Arena remains involved in collaborations with Whitehouse Station, N.J.-based Merck & Co., Tarrytown, N.Y.-based Ferring Pharmaceuticals Inc., Osaka, Japan-based Fujisawa Pharmaceutical Co. Ltd. and Tokyo-based Taisho Pharmaceutical Co., among others. Lief said all such deals are heavily back-loaded in Arena's favor.

"People haven't really seen any of those yet, because we're only a five-year-old company and it takes a while to get those back ends," he said.

The Merck and Ferring arrangements involve chemistry and biology, while the Fujisawa deal involves screening and chemistry.

Internally, Lief said Arena plans to advance in the coming year a number of preclinical candidates toward the investigational new drug application stage. He said such candidates have shown animal efficacy, as well as good safety and bioavailability, in indications such depression, psychosis, obesity and diabetes.

"We certainly expect to move some of our programs forward next year and potentially file an IND next year, and have multiple INDs in 2004," Lief said.

Arena's stock (NASDAQ:ARNA) gained 10 cents Thursday to close at $6.85.