PRAECIS PHARMACEUTICALS INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
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FORM 10-K

(MARK ONE)

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR

/ / 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 000-30289
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PRAECIS PHARMACEUTICALS INCORPORATED

(Exact name of registrant as specified in its charter)

DELAWARE 04-3200305
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
830 WINTER STREET 02451-1420
WALTHAM, MASSACHUSETTS (Zip code)
(Address of principal executive
offices)

(781) 795-4100
(Registrant's telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
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(Title of Class)

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.01 per share
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(Title of Class)

Preferred Stock Purchase Rights
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(Title of Class)

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 period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) 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. / /

The aggregate market value of voting and non-voting stock held by
non-affiliates of the registrant, based upon the last sale price of the common
stock, par value $.01 per share, reported on the Nasdaq National Market on
February 28, 2002, was $207,959,729.

The number of shares of common stock, par value $.01 per share, outstanding
as of February 28, 2002 was 51,528,024.

DOCUMENTS INCORPORATED BY REFERENCE

Specified portions of the definitive Proxy Statement with respect to the
registrant's 2002 Annual Meeting of Stockholders to be filed by the registrant
with the Securities and Exchange Commission are incorporated by reference into
Part III of this Report on Form 10-K.

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FACTORS THAT MAY AFFECT FUTURE RESULTS

The Company's prospects are subject to certain uncertainties and risks. This
Annual Report on Form 10-K also contains certain forward-looking statements
within the meaning of the federal securities laws. The Company's future results
may differ materially from its current results and actual results could differ
materially from those projected in the forward-looking statements as a result of
certain risk factors. READERS SHOULD PAY PARTICULAR ATTENTION TO THE
CONSIDERATIONS DESCRIBED IN THE SECTION OF THIS REPORT ENTITLED "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--RISK
FACTORS THAT MAY AFFECT FUTURE RESULTS." Readers should also carefully review
the risk factors described in the other documents the Company files from time to
time with the Securities and Exchange Commission.

PRAECIS PHARMACEUTICALS INCORPORATED

ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

PART I

ITEM 1. BUSINESS.

OVERVIEW

We are a drug discovery and development company with a lead product
candidate, Plenaxis-TM- (abarelix for injectable suspension), for the treatment
of hormonally responsive advanced prostate cancer. In December 2000, we
submitted to the FDA a new drug application, or NDA, for Plenaxis for the
treatment of hormonally responsive advanced prostate cancer. In response to
concerns raised by the FDA in June 2001, we recently initiated an additional
clinical trial to study the effects of using currently available hormonal
therapies in prostate cancer patients following treatment with Plenaxis. We are
also evaluating the rare allergic reactions that occurred in our clinical
trials. Assuming positive results, we expect to submit to the FDA additional
data by the end of the first quarter of 2003.

We are also developing Plenaxis for the treatment of endometriosis, a
disease that responds to a reduction of the female hormone estrogen. We believe
that patients suffering from endometriosis are not well served by current
methods or remain untreated, and that Plenaxis could fulfill a significant unmet
need. Endometriosis is a long-lasting, often painful condition affecting an
estimated 5.5 million females in the United States and Canada. Patients recently
concluded the final stages of follow-up in a phase II/III clinical study of
Plenaxis for the treatment of endometriosis. We anticipate meeting with the FDA
during mid-year 2002 to discuss the results of this study and the initiation of
additional clinical trials.

We are also developing Apan-TM-, our drug candidate for the treatment of
Alzheimer's disease, a condition that affects more than four million Americans.
Apan is designed to treat what we and others believe to be the underlying cause
of Alzheimer's disease, rather than the symptoms. A hallmark of Alzheimer's
disease is the accumulation of plaque-like deposits in brain tissue. A major
component of this plaque is a small peptide called beta-amyloid. We have
demonstrated in preclinical studies that Apan is able to mobilize beta-amyloid
in the brains of guinea pigs and transgenic mice, and, based on these studies,
we believe that Apan may be facilitating the clearance of beta-amyloid. We are
conducting a phase I dose escalation study of Apan in which we are evaluating
the safety and pharmacokinetics of the compound in normal human subjects. We
anticipate that this study will be completed during the second half of 2002. We
expect to initiate a second phase I study in the first half of 2003 in which we
intend to further evaluate the safety and pharmacokinetics of Apan in
individuals suffering from Alzheimer's disease.

Our proprietary drug discovery technology called Ligand Evolution to Active
Pharmaceuticals, or LEAP-TM-, has been valuable in the development of our
pipeline of product candidates. Because LEAP technology uses biological
molecules as ligands, we believe it can be used to develop efficiently new drugs
against a variety of other disease targets. LEAP was instrumental in the
development of Plenaxis and Apan, and we are using it against targets in other
disease areas, as well.

Our technology platform also includes a proprietary drug delivery system
known as Rel-Ease-TM-. Plenaxis is formulated in Rel-Ease, which allows it to be
administered to prostate cancer patients once every four weeks. We have
demonstrated that Rel-Ease is useful for formulating Plenaxis and various other
molecules in sustained release formulations. We hold a patent that covers the
general application of this technology for a broad range of peptide-based drugs.

We were incorporated in Delaware in July 1993 under the name Pharmaceutical
Peptides, Inc. In June 1997, we changed our name to PRAECIS PHARMACEUTICALS
INCORPORATED.

PRODUCT PIPELINE

We focus our drug development efforts on conditions or diseases where there
are unmet needs creating a potential for significant product revenues. We have
three programs that have moved beyond the research phase into clinical testing,
as well as various research and preclinical programs. We have

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outlined our clinical programs and five of our programs in the research or
preclinical development stage, along with the clinical indications they address,
in the following table:

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* In collaboration with Human Genome Sciences, Inc. Subject to GlaxoSmithKline
option, if exercised, to assume development and commercialization with Human
Genome Sciences, Inc.

PLENAXIS-TM- PROGRAM

Plenaxis (abarelix for injectable suspension) has potential use in treating
diseases that respond to the reduction of testosterone, a male hormone, and
estrogen, a female hormone. Examples of these diseases include prostate cancer,
endometriosis, benign prostatic hypertrophy, uterine fibroids, breast cancer,
polycystic ovarian disease, infertility and precocious puberty. Treatments that
reduce testosterone or estrogen through the use of drugs, known as hormonal
therapy, can result in a therapeutic benefit to patients suffering from these
diseases.

Currently available hormonal therapies, known as LHRH agonists, act by
overstimulating the GnRH receptor, located on the pituitary gland, a small gland
in the center of the brain. Overstimulation of the pituitary GnRH receptor
causes the GnRH receptor to become non-responsive after approximately three
weeks. However, this overstimulation first leads to increased production of two
hormones, luteinizing hormone, or LH, and follicle stimulating hormone, or FSH.
The increased levels of LH cause an initial surge of testosterone from the
testes in males and a surge of estrogen from the ovaries in females. The
temporary surge in hormone levels may result in a worsening, or flare, of the
disease for which the patient takes the therapy. Only after several weeks
following administration of these hormonal therapies does the GnRH receptor
become non-responsive and the desired reduction of hormonal levels occur. Due to
this surge, current LHRH agonists, such as Lupron Depot-Registered Trademark-,
marketed by TAP Pharmaceuticals Inc., and Zoladex-Registered Trademark-,
marketed by AstraZeneca Pharmaceuticals, have precautionary labeling about the
hormone-induced flare. The FDA mandates this precautionary labeling, and the
drug labels and packaging for these currently available drugs must prominently
include the precautionary labeling to protect patients and avoid the use of the
drugs in patients who are at risk for developing life-threatening conditions as
a result of the disease flare.

In contrast, Plenaxis has a blocking, or antagonist, effect on the GnRH
receptor. Plenaxis rapidly shuts off the production of LH and FSH and,
consequently, rapidly reduces the patient's levels of testosterone or estrogen.
With Plenaxis, unlike commercially available LHRH agonists, there is no increase
in hormone levels before achieving the desired hormone level reduction.

Our most advanced programs involve the development of Plenaxis for the
treatment of hormonally responsive advanced prostate cancer and for
endometriosis. In addition, a small, investigator-sponsored study is underway in
which the effects of using Plenaxis to treat hormonally refractory prostate
cancer are being evaluated. We have not begun studies for any of the other
potential indications identified above.

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PLENAXIS--PROSTATE CANCER

BACKGROUND. Prostate cancer is one of the most commonly diagnosed cancers
in men. The American Cancer Society estimates that approximately 189,000 new
diagnoses of, and 30,200 deaths from, prostate cancer will occur in the United
States in 2002. In nearly all newly diagnosed prostate cancer patients, the
cancerous cells require the androgen testosterone, and its derivatives, for
growth. Androgens stimulate the growth of the cancerous cells. Since androgens
stimulate the growth of the cancerous cells, this stage of prostate cancer is
commonly referred to as hormonally responsive prostate cancer. The goal of
hormonal therapies is to reduce testosterone to low, or castrate, levels,
leading to inhibition of prostate cancer cell growth.

To date, we have focused on the development of Plenaxis as a treatment for
hormonally responsive prostate cancer. Plenaxis is a sustained release depot
formulation that enables the drug to be administered once every four weeks.
During the first four weeks of administration, an additional injection is given
on day 15, resulting in two injections during that time period. Our pivotal
phase III studies demonstrate that Plenaxis reduces the time required to achieve
therapeutically low testosterone levels compared to currently available LHRH
agonists and completely avoids the testosterone surge associated with these
therapies.

The surge of testosterone associated with available hormonal therapies may
last as long as three weeks before the intended medical effect of reduced
testosterone levels takes place. In an attempt to mitigate the flare, many
practicing physicians prescribe additional drugs, known as anti-androgens.
Anti-androgens, such as Casodex-Registered Trademark-, marketed by AstraZeneca
Pharmaceuticals, are oral drugs given one-to-three times a day. Anti-androgens
function by interfering with the effect of testosterone at the cellular level,
but do not reduce circulating testosterone levels or the initial surge in
hormone levels associated with currently available LHRH agonists. This
additional therapy may be only partially effective in reducing some of the
undesirable effects of the flare. In addition, anti-androgen therapy may cause
various side effects, including liver damage, breast enlargement, lung
dysfunction and gastrointestinal distress. Finally, Medicare generally does not
reimburse the costs of anti-androgens. This means that patients who pay
out-of-pocket for medications not covered by Medicare may not fill their
prescriptions and, thus, may not receive the potential benefit of
anti-androgens.

In our pivotal phase III safety and efficacy studies of over 500 patients,
none of the patients treated with Plenaxis experienced a testosterone surge. In
contrast, more than 80% of patients treated with Lupron Depot alone or in
combination with Casodex experienced a testosterone surge. A major reason for
using anti-androgens in clinical practice is to mitigate the effects of the
surge and thereby avoid the resultant flare. We believe that the results of our
clinical studies may lessen the perceived need to use anti-androgens because the
use of Plenaxis alone avoids the surge.

Some patients with advanced-stage hormonally responsive prostate cancer are
at higher risk of serious harm resulting from the testosterone surge. In these
patients, the testosterone surge may lead to urinary blockage, worsening pain,
kidney failure, paralysis and nerve damage due to spinal cord compression, and
even death. FDA mandated drug product labels specifically warn against the use
of available LHRH agonists in patients with the potential for developing
worsening neurologic function, including paralysis, due to spinal metastases,
worsening of kidney and urinary function, and worsening of bone pain due to
secondary bone metastases. In these cases, patients may require immediate
surgical removal of the testes, known as castration, both to rapidly reduce
testosterone levels and avoid the testosterone surge. Based upon our analysis of
our clinical studies, we believe that Plenaxis may have the potential to provide
a non-surgical alternative to castration for these patients. A significant
portion of patients who do not have radiographically confirmed epidural or
spinal metastases or kidney obstruction are still at risk for developing
life-threatening conditions as a result of the disease flare induced by the
testosterone surge. We believe that both physicians and patients will prefer a
treatment option that eliminates the potential risks of a clinical flare
response.

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PROSTATE CANCER--NDA STATUS. We submitted to the FDA an NDA comprised of
comprehensive safety and efficacy data in December 2000 to support marketing
approval of Plenaxis for the treatment of hormonally responsive prostate cancer.
Our submission included data from two pivotal phase III safety and efficacy
studies, one pivotal phase III safety study, a phase II/III study in advanced
metastatic prostate cancer patients, as well as previously completed phase I and
phase I/II pharmacokinetics studies.

In January 2001, the FDA informed us that it had accepted and filed the NDA
and had granted the filing priority review. In June 2001, we received a letter
from the FDA in which the FDA indicated that the information presented in the
NDA was inadequate for approval. In September 2001, we met with the FDA in an
effort to clarify the various deficiencies cited in the FDA's letter, and to
discuss what further steps needed to be taken before the application could be
approved. The FDA recommended that we analyze the allergic reactions that
occurred in a small subset of clinical trial patients. In addition, the FDA
expressed concern that, in a subset of patients treated beyond the three-month
pivotal study time frame, testosterone suppression was not maintained at a
comparable level to that of patients treated with either Lupron Depot or Lupron
Depot plus Casodex. The FDA also indicated that the nature of the testosterone
surge, if any, associated with treating patients with Plenaxis and then
switching them to a currently available therapy should be understood.

We considered various alternatives to address these issues, and in
December 2001 the FDA indicated that we could proceed with our clinical plans to
study the effects of using currently available hormonal therapies in prostate
cancer patients following treatment with Plenaxis. The FDA also indicated that
our plan to further evaluate the rare allergic reactions that occurred in our
clinical trials was acceptable. We recently initiated an additional clinical
trial in accordance with our clinical plan. This trial is summarized below.

Following further review of the proposed protocol for our additional
clinical study, the FDA requested that we extend the treatment period for an
additional month, which will delay our previously announced timeline. Assuming
positive results, we now expect to submit additional data to the FDA by the end
of the first quarter of 2003. However, we can give no assurance that our
additional clinical studies will yield positive results or that the results,
even if positive, will satisfy FDA concerns that have been or may be raised. We
cannot assure investors that we will be successful in obtaining approval for the
commercialization of Plenaxis for the treatment of hormonally responsive
advanced prostate cancer or any other indication.

As discussed above, we have initiated an open-label clinical trial to study
the effects of using currently available hormonal therapies in prostate cancer
patients following treatment with Plenaxis. We intend to enroll up to 140
patients suffering from prostate cancer in this trial. In this study, in which
we have begun patient accrual, patients will receive a three-month treatment of
Plenaxis followed by a two-month treatment of either Lupron Depot or Zoladex.
The goal is to study the nature and magnitude, if any, of the testosterone surge
typically caused by currently available LHRH agonists if patients are initially
treated with Plenaxis and then switched to Lupron Depot or Zoladex.

PROSTATE CANCER CLINICAL STUDIES. In support of our NDA, we previously
submitted data from two pivotal phase III clinical trials of Plenaxis for the
treatment of hormonally responsive prostate cancer. The first phase III clinical
trial was a 269 patient study comparing Plenaxis to Lupron Depot. This study
compared the safety of both drugs and the ability of both drugs to avoid the
testosterone surge, reduce testosterone levels and achieve and maintain
therapeutically low levels of testosterone. The second phase III clinical trial
was a 251 patient study comparing the safety and efficacy of Plenaxis to the
combination therapy of Lupron Depot plus Casodex.

In these clinical trials, zero percent of the patients treated with Plenaxis
experienced a testosterone surge compared to more than 80% of patients treated
with Lupron Depot, or a combination of Lupron Depot and Casodex. Further,
Plenaxis suppressed testosterone levels more rapidly, achieving suppression by
day 8 in 70% of patients compared to zero percent of patients treated with
either Lupron Depot, or Lupron Depot plus Casodex. Each treatment therapy
studied achieved and

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maintained therapeutically low testosterone levels from day 29 through day 85 in
more than 90% of patients.

All of the patients enrolled in these studies were to continue treatment
beyond the three-month pivotal study timeframe for a total of six months. In
addition, physicians could continue to administer treatment to patients for up
to one year. We observed that in a subset of patients treated with Plenaxis for
over six months, testosterone suppression was not maintained at a comparable
level to that of patients treated with either Lupron Depot or Lupron Depot plus
Casodex. As stated above, the FDA raised concerns with these results and,
therefore, we are exploring possible additional studies that could be undertaken
to address this issue and eventually expand the potential treatment time for
Plenaxis.

In further support of the safety of Plenaxis, we included results in our NDA
from a separate pivotal phase III safety study comparing Plenaxis to Lupron
Depot in 582 patients. The primary objective of this study was to gain more
patient exposure to confirm the safety of Plenaxis over a six-month course of
therapy. The results of this safety study were consistent with previous studies
and supplement existing patient drug exposure data.

In addition, we conducted a phase II/III clinical trial to evaluate the use
of Plenaxis in patients with advanced prostate cancer where the use of current
LHRH agonists could result in a life-threatening disease flare. The results of
this study indicated that Plenaxis could provide a medical alternative to
immediate surgical removal of the testes for this high risk population.

Our former European collaborator also conducted a 176 patient study in
Europe comparing the safety and efficacy of Plenaxis to Zoladex plus Casodex.
Based upon our initial analysis, we believe the results of this study are
consistent with the safety and efficacy results we observed in our two pivotal
phase III studies described above. We intend to use the results of this study to
support a regulatory filing for Plenaxis in Europe.

From a safety perspective, patients have generally tolerated treatment with
Plenaxis well to date. However, a small number of patients in our Plenaxis
studies had adverse reactions, including relatively mild allergic reactions and
temporary and reversible elevation of some liver enzymes. We expected these
types of relatively non-severe reactions and observed them with similar
frequency in patients taking Lupron Depot and Lupron Depot plus Casodex in our
clinical studies.

During the clinical studies described above, in which approximately 1,200
patients were treated, 15 patients treated with Plenaxis experienced allergic
reactions that resulted in the discontinuation of trial participation. We
observed a similar frequency of allergic reactions resulting in the
discontinuation of trial participation in patients treated with Lupron Depot,
Lupron Depot plus Casodex or Zoladex plus Casodex. However, of these 15
patients, five patients, or approximately 0.4% of the total patient population,
experienced severe allergic reactions, consisting of either a drop in blood
pressure or temporary syncope (fainting), following the administration of
Plenaxis. None of the patients in these studies treated with Lupron Depot,
Lupron Depot plus Casodex or Zoladex plus Casodex, experienced an allergic
reaction of similar severity. At the recommendation of the FDA, we are
conducting additional analyses of the existing data and samples from these
patients to further characterize these reactions.

PLENAXIS--ENDOMETRIOSIS

BACKGROUND. We also are developing Plenaxis for the treatment of
endometriosis. Endometriosis is a condition where endometrial tissue grows
beyond the uterine lining, most often on the surfaces of organs in the pelvic
cavity. Endometrial tissues, regardless of location in the body, respond to the
normal menstrual cycling of women. When the location of the endometrial tissue
prevents the appropriate sloughing of tissue that normally occurs during
menstruation, inflammation, gastrointestinal symptoms and internal scarring
occurs. This causes, among other things, pain, fatigue, heavy menstrual
bleeding, painful sexual intercourse and infertility. Each year in the United
States, approximately 300,000 females are diagnosed with endometriosis. In
addition, an estimated 5.5 million females in the

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United States and Canada suffer from endometriosis. As a result of increased
awareness of female health, we believe that the number of patients diagnosed
with and treated for endometriosis will increase.

Existing treatments for endometriosis include the use of pain management
medications, birth control pills and hormonal therapies, of which Lupron Depot
and Zoladex are the most commonly used. The use of available hormonal therapies
to suppress estrogen production causes an initial estrogen surge in women.
Lupron Depot, Zoladex and other drugs that act in a similar way include FDA
mandated drug product labels warning against the adverse effects associated with
an estrogen surge. These labels can include warnings for the worsening in the
signs and symptoms of endometriosis, which include pain, cramping and excessive
bleeding, the risk of tumor flare in breast cancer and the development of
ovarian cysts. Our initial studies show that Plenaxis causes a more rapid
reduction of estrogen levels and associated relief of menstrual-related pain
compared to Lupron Depot. In addition, in these initial studies, there has been
no initial estrogen increase associated with the use of Plenaxis.

ENDOMETRIOSIS CLINICAL STUDIES. To date, we have completed a phase I/II
study of 40 women with confirmed endometriosis using Plenaxis, and we recently
completed the follow-up phase of a 363 patient, phase II/III study. In both of
these studies, we administered an injection of Plenaxis once every four weeks
for 24 weeks.

In the phase I/II study, we compared various doses of Plenaxis to the
standard dose of Lupron Depot. Patients receiving Lupron Depot therapy
experienced initial estrogen increases, and therapeutically low estrogen levels
were not achieved for several weeks. Patients treated with Plenaxis experienced
a rapid reduction of estrogen levels without the initial increase seen with LHRH
agonist therapy.

Our phase II/III study compares the safety and efficacy of various doses of
Plenaxis to the standard dose of Lupron Depot with respect to pain relief. The
study also seeks to confirm the ability of Plenaxis to rapidly suppress
estrogen, which we initially demonstrated in our phase I/II study. The phase
II/III study includes a 24-week treatment period and a 48-week follow-up period.
Patients recently completed the final stages of follow-up and, following data
analyses and conclusion of this study, we anticipate meeting with the FDA to
discuss the results of the phase II/III study and the initiation of additional
clinical trials in endometriosis.

Patients appear to have generally tolerated treatment with Plenaxis in these
studies. As expected, we observed some adverse reactions in patients during our
studies of Plenaxis and Lupron Depot, including temporary and reversible
irritation at the injection site and temporary and reversible elevation of some
liver enzymes. In addition, the use of hormonal therapies that lower estrogen
levels, including Plenaxis, results in bone mineral density loss. Preliminary
review of the data from our clinical studies indicates that patients treated
with Plenaxis experienced dose-related levels of bone mineral density loss. We
are further evaluating this data in an effort to clarify the extent and
magnitude of this loss. We did not observe any severe allergic reactions in our
endometriosis trials similar to those observed in our prostate cancer trials
described above.

APAN

We are developing Apan for the treatment of Alzheimer's disease. Alzheimer's
disease affects an estimated four million people in the United States, according
to a 1998 report issued by the National Institute of Aging. According to the
Alzheimer's Association, Alzheimer's disease is expected to become increasingly
prevalent as the population ages. Current therapies provide temporary relief for
the symptoms of Alzheimer's disease in some patients, but do not affect the
progression of the disease itself.

A hallmark of Alzheimer's disease is the accumulation of plaque-like
deposits in brain tissue. A major component of this plaque is a small peptide
called beta-amyloid. Over the past several years, a large body of clinical,
biochemical and genetic evidence has emerged suggesting that the aggregation of

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beta-amyloid peptide is the underlying cause of Alzheimer's disease. This body
of evidence has led to the widely held theory that when single beta-amyloid
molecules aggregate they become toxic to nerve cells, and that this toxicity
leads to the development and progression of Alzheimer's disease. We used our
LEAP technology to select Apan to interfere with this aggregation process.

We have shown in IN VITRO experiments that Apan specifically inhibits the
aggregation of beta-amyloid and prevents the associated nerve cell toxicity. In
addition, we have shown in rats and mice that Apan reaches the brain in
quantities that we believe may be sufficient to block the aggregation of
beta-amyloid molecules and alter the course of the disease. Recent studies in
guinea pigs and transgenic mice that develop human Alzheimer's disease plaques
in their brains suggest that Apan can mobilize beta-amyloid. Alzheimer's
disease, and the associated accumulation of beta-amyloid in the brain, is often
thought of as a defect in the ability to clear excess beta-amyloid from the
brain to the cerebro-spinal fluid, or CSF. Both humans and transgenic mice with
Alzheimer's disease-like plaques show increased levels of beta-amyloid in the
brain and decreased levels in the CSF as the disease progresses. In contrast,
transgenic mice treated with Apan show significant increases in beta-amyloid
levels in the CSF, suggesting that Apan is able to mobilize beta-amyloid in the
brain and may be facilitating its clearance.

In March 2001, we began a phase I dose escalation study of Apan in normal
subjects. In this study, we are evaluating the safety and pharmacokinetics of
the compound. To date, we have treated approximately 52 subjects in 12 dosing
groups. We anticipate that this study will be completed during the second half
of 2002. We expect to initiate a second phase I study in the first half of 2003
in which we intend to further evaluate the safety and pharmacokinetics of Apan
in individuals suffering from Alzheimer's disease.

PPI-2458

PPI-2458 is a novel, proprietary molecule that is based on the fumagillin
class of compounds that have been shown to have potent activity in preventing
excessive growth and the formation of new blood vessels. The dose limiting
toxicity associated with fumagillin derivatives have largely prevented the
clinical development of these compounds. PPI-2458 was designed to maintain the
potent anti-growth activity while at the same time improving the toxicity
profile relative to other members of the fumagillin class of compounds.
Therapeutic targets for PPI-2458 include diseases whose underlying pathology is
dependent on inappropriate cell growth and/or new blood vessel formation, such
as rheumatoid arthritis, or RA, and certain types of cancers.

Preclinical studies have demonstrated the efficacy of PPI-2458 in a rodent
model of RA, when administered either by injection or orally. Despite the
availability of several new effective disease-modifying anti-rheumatic drugs,
also known as DMARDs, for the treatment of RA, there remains significant unmet
medical need. We believe that new drugs which could be used alone or in
combination with established DMARDs could be successful.

We are also evaluating through preclinical studies the potential utility of
PPI-2458 for treating certain types of cancer.

We anticipate that, if we continue to meet the goals of our preclinical
pharmacology and toxicology studies of PPI-2458, we would be in the position to
file an investigational new drug application, or IND, for a phase I study of
PPI-2458 during the third quarter of 2002.

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APAN-CH

While our preclinical studies suggest that Apan can mobilize beta-amyloid
and potentially prevent its initial accumulation in the brain, we are also
pursuing a complementary therapeutic strategy aimed at removing existing plaque
and aggregated beta-amyloid molecules from the Alzheimer's disease-affected
brain. Recent published studies using a transgenic mouse model of Alzheimer's
disease show that stimulating an autoimmune response to beta-amyloid through
vaccination can effect the removal of Alzheimer's disease plaques from the
brains of these mice. These studies indicate that cells of the immune system can
function to take up and remove plaques in the brain. Using natural peptide
ligands that bind to Alzheimer's disease plaques, we have created proprietary
fusion proteins between these ligands and sequences from proteins of the immune
system. We have shown that these fusion proteins, that we refer to as Apan-CH,
bind to Alzheimer's disease plaques with high specificity and affinity, and
mediate the uptake of aggregated forms of beta-amyloid in EX VIVO systems.
Studies are ongoing to determine if Apan-CH plays a role in the removal of
amyloid plaque-like deposits in rodent models of Alzheimer's disease.

CCR5 ANTAGONIST

Various studies by others have identified groups of individuals who are
resistant to HIV infection despite multiple exposures to the AIDS virus. Genetic
characterization of these individuals revealed that they have mutations in the
CCR5 gene which prevents the expression of the functional CCR5 protein, yet they
remain healthy. The HIV virus uses the CCR5 protein as a point of entry into
macrophages and T cells, which are cells in the human immune system that are
commonly infected by HIV. Taken together, these studies identify CCR5 as an
ideal drug target for anti-HIV therapy, as CCR5 is necessary for HIV infection,
but appears not to be required for human health. Through our collaboration with
Human Genome Sciences, we have licensed certain rights to CCR5 as a disease
target. We are using our LEAP technology to discover ligands against CCR5 that
may act as inhibitors of HIV entry into T cells.

ANDROGEN RECEPTOR ANTAGONIST

Because testosterone and other hormones are growth factors for prostate
cancer cells, hormone-lowering therapy can be a safe and effective treatment for
patients with hormone-dependent prostate cancer. However, most patients
eventually progress to a condition known as hormone-independent prostate cancer,
where the prostate cancer cells no longer need testosterone and other hormones
to grow and, as a consequence, hormone-lowering therapies are ineffective.
Genetic studies in these patients reveal that most of them have accumulated
mutations in the gene encoding the Androgen Receptor, or AR, allowing it to
function in the absence of testosterone. These studies indicate that the AR is
central to the growth of prostate cancer cells. Using our LEAP technology, we
have discovered ligands that bind to the AR and prevent it from functioning as a
growth stimulatory protein in prostate tumor cells, which could provide the
basis for a new class of drugs to treat hormone-independent prostate cancer. If
successful, the use of these drugs could be expanded to treat prostate cancer at
all stages.

ENDOMETRIOSIS DIAGNOSTIC

Considering that an estimated 5.5 million females in the United States and
Canada suffer from endometriosis, and that only approximately 300,000 females in
the United States and an unknown number in Canada are actually diagnosed with
the disease, we believe a diagnostic test is critical to better identify, assess
and treat those who suffer from the disease. Currently, endometriosis is
diagnosed by a relatively painful and expensive invasive procedure called
laparoscopy. We are developing a simple, non-invasive endometriosis diagnostic
test based on the immune response of disease sufferers. Significant differences
in immune responses have been observed in women with endometriosis, and these
differences are thought to be the underlying cause of the disease. Using the
proteomics component of our LEAP technology, we are seeking to identify proteins
that underlie the

9

differences in immune responses between diseased and non-diseased individuals.
These proteins could prove useful to diagnose individuals with the disease and
identify candidates for treatment with Plenaxis, as well as assisting in the
further understanding of the disease process.

TECHNOLOGY

LEAP

Our proprietary method for discovering drugs is based on a unique system
that combines the power and diversity of biological selection to identify
compounds with potentially favorable drug-like properties with an ability to
enhance and optimize these compounds using medicinal chemistry. We call this
process Ligand Evolution to Active Pharmaceuticals, or LEAP. We believe LEAP is
superior to traditional methods of drug discovery that are limited by the number
of compounds that the traditional methods can synthesize and test manually. In a
typical LEAP selection process, we can examine more than a trillion molecules in
a few months. By contrast, conventional screening and medicinal chemistry
permits the examination of fewer than one million molecules with equivalent
resources and requires more time.

In the case of Plenaxis, LEAP allowed us to take a peptide ligand encoded in
the human genome and convert that peptide into a drug. GnRH is a natural peptide
ligand that binds to the GnRH receptor on the pituitary gland triggering the
production of LH, which, in turn, triggers the production of testosterone. We
used LEAP to evolve GnRH into Plenaxis, a drug that binds to the same receptor
target, but blocks the production of LH.

If a ligand from the human genome is not available, we can select one
encoded in a synthetic gene library using a process we call biological
evolution. This process involves the natural selection of the best ligand from a
pool containing billions of natural peptides in a biological system. We can
carry out this process in repeated cycles, selecting ligands based on their
functions. We then modify the selected ligand using a unique process that we
call chemical evolution. Chemical evolution is powerful because we can make
pools of thousands of diverse molecules based on the structure of the selected
ligand and composed of synthetic building blocks. We then select the best
molecules from these pools and identify them through our unique application of
proteomics technology and the technology called mass spectrometry. These
molecules can behave like drugs, because they bind to their target like natural
peptides and have the characteristics of an effective drug.

REL-EASE

We can further enhance the potential clinical utility of our drug candidates
by formulating the drugs with our proprietary sustained release technology,
Rel-Ease. For example, using Rel-Ease technology, we are able to formulate
Plenaxis in such a way that a physician only needs to administer it to prostate
cancer patients once every four weeks because Rel-Ease continuously releases the
drug in the body over that period of time. In many cases, infrequent injections
of a drug in a sustained release formulation are more desirable than oral
administration due to patient compliance, convenience or reimbursement issues.
We have formulated a variety of molecules with Rel-Ease technology and believe
that Rel-Ease may be useful for formulating drug candidates we discover and
develop using our LEAP technology. We also intend to explore the use of our
Rel-Ease technology to create improved formulations and sustained release
formulations of approved drugs.

MASTRSCREEN

MASTRscreen is our proprietary screening procedure that rapidly identifies
and evaluates ligands for the most successful class of drug targets, known as
G-protein coupled receptors. The GnRH receptor is a member of this class of
receptors. We developed MASTRscreen in connection with our Plenaxis program, and
it was instrumental in the selection of Plenaxis from pools of modified
peptides. MASTRscreen is useful because of its sensitivity to low concentrations
of screened material, easily measurable endpoints and adaptability to various
screening systems.

10

RESEARCH AND DEVELOPMENT

As of December 31, 2001, we had a total of 104 employees dedicated to
research and development for Plenaxis and our other product candidates. We have
spent substantial funds over the past three years to develop Plenaxis and our
other potential drug candidates and expect to continue to do so in the future.
We spent approximately $48.8 million in 1999, $85.9 million in 2000 and $59.4 in
2001 on research and development activities.

CORPORATE COLLABORATIONS

AMGEN INC.

Effective March 1999, we entered into an agreement with Amgen for the
research, development and commercialization of Plenaxis products in the United
States, Canada, Japan and certain other countries. In September 2001, Amgen
notified us that it was terminating its agreement with us pursuant to the terms
of the agreement. The termination was effective in December 2001. As a result of
the termination, all licenses for Plenaxis granted to Amgen under the agreement,
and all of Amgen's rights in the Plenaxis program, have terminated.

SANOFI-SYNTHELABO S.A.

In May 1997, we entered into a license agreement with Sanofi-Synthelabo for
the development and commercialization of Plenaxis products in specific
territories including Europe, Latin America, the Middle East and various
countries in Africa. In October 2001, Sanofi-Synthelabo notified us that it was
terminating its license agreement with us pursuant to the terms of the
agreement. The termination was effective in December 2001. As a result of the
termination, all licenses for Plenaxis granted to Sanofi-Synthelabo under the
agreement, and all of Sanofi-Synthelabo's rights in the Plenaxis program, have
terminated.

HUMAN GENOME SCIENCES, INC.

In January 2000, we entered into an agreement with Human Genome Sciences for
the discovery, development and commercialization of compounds targeted to two
proprietary genomic targets that Human Genome Sciences has identified. The first
of these targets is CCR5, a human protein the HIV virus uses to enter human
cells. Under the agreement, we will use LEAP to make drugs targeted to these
molecules. We will jointly develop clinical drug candidates with Human Genome
Sciences on an equal cost and profit sharing basis, unless a pre-existing option
that Human Genome Sciences granted to GlaxoSmithKline applies to the drug
candidate and GlaxoSmithKline exercises the option. In that case, or if we so
elect as to a drug candidate as to which the GlaxoSmithKline option does not
apply or has not been exercised, we will have no obligation to participate in
any development costs, and we will be entitled to royalties and
performance-based payments instead of a profit share. If, instead of an equal
share of profits, we are entitled to royalties and performance-based payments,
the performance-based payments would be payable upon occurrence of specified
regulatory approval-related events; the obligation to pay us royalties would
terminate on a country-by-country and product-by-product basis on the later of
the expiration of the last applicable licensed patent in that country or ten
years after the first country-wide launch of the product in that country. We
cannot assure you as to whether or when any drug candidate will be identified
and successfully developed and commercialized under the agreement and,
accordingly, we cannot predict the potential value, if any, of the agreement to
us.

TECHNOLOGY LICENSE

INDIANA UNIVERSITY FOUNDATION

In October 1996, we entered into a license agreement with Indiana University
Foundation. The license agreement was amended in June 1998, and Indiana
University Foundation assigned it to Indiana University's Advanced Research and
Technology Institute, Inc. Under the agreement, we have an

11

exclusive worldwide license under patent applications, future patents and
technology of Indiana University Foundation relating to GnRH antagonist
compounds, including Plenaxis and methods of use for Plenaxis. Through
December 31, 2001, we have paid non-refundable fees of $305,000 and
performance-based payments of $750,000 under this agreement. We have agreed to
make performance-based payments of up to an additional $3.5 million, and to pay
royalties on our net sales of products covered by the license. The license
agreement remains in effect until the last licensed patent expires. Expiration
of the license will not preclude us from continuing to develop and market the
licensed products and use the licensed technology, provided we obtain the
consent of Advanced Research and Technology Institute to extend the license term
past the expiration date. Advanced Research and Technology Institute may not
unreasonably withhold its consent to our request for such an extension. We can
terminate the agreement at any time upon 90 days notice. Advanced Research and
Technology Institute may terminate upon 90 days notice if we materially breach
the agreement or fail to make required payments.

MANUFACTURING

We generally manufacture in-house the drug supply required to support our
early preclinical studies. External contractors provide all of our later-stage
preclinical and clinical supplies and manufacture them in accordance with FDA
and European regulations. Under our collaboration agreement with Amgen, Amgen
had control over certain phases of the manufacturing process for Plenaxis.
Accordingly, Amgen had either entered into or assumed from us agreements with
third parties to perform, or was itself performing, these manufacturing
processes. Due to the termination of our collaboration agreement with Amgen, to
assure an adequate supply of drug product for continued clinical studies and, if
Plenaxis is approved for marketing, for commercial sale, we would necessarily
need to assume these manufacturing contracts from Amgen, enter into new
agreements with third party manufacturers or act as manufacturer ourselves.

In January 2002, we assumed all of Amgen's rights and obligations under its
development and supply agreement with UCB S.A. Under this agreement, UCB will
supply us with commercial volumes of the Plenaxis drug compound. We are
committed to purchase from UCB approximately $16.1 million of pharmaceutical
grade peptide during 2002.

We also have a supply agreement with Salsbury Chemicals, Inc. Under this
supply agreement, Salsbury has agreed to manufacture for us the commercial depot
formulations of Plenaxis. We contributed approximately $6.0 million toward
Salsbury's construction and outfitting of a dedicated manufacturing facility, to
which we will retain manufacturing process rights. We are obligated to pay
Salsbury approximately $634,000 during 2002 towards minimum purchase commitments
and facility maintenance.

We are currently negotiating an agreement with a third-party manufacturer to
provide for the supply of Plenaxis products in finished vials. We cannot assure
you that we will be able to finalize this agreement on reasonable terms or in a
timely manner. In addition, the manufacturer will need to undergo regulatory
review and compliance procedures which could be costly and could further delay
regulatory review and approval, and thus potential commercialization, of
Plenaxis for the treatment of hormonally responsive advanced prostate cancer.

In order to meet potential increases in demand in connection with the
possible commercial launch of Plenaxis for the treatment of hormonally
responsive advanced prostate cancer, we intend to evaluate the need for a second
source for each stage of Plenaxis production.

PATENTS AND PROPRIETARY RIGHTS

Proprietary protection for our products, technology and processes is
essential to our business. We seek proprietary protection predominantly in the
form of patents on our products and the processes which we use to discover them.
With respect to a particular product, we generally seek patent protection on the
compound itself, its commercial formulation, its range of applications and its

12

production. Where possible, we also seek patent coverage that could prevent the
marketing of, or restrict the commercial threat of, competitive products.

We currently have 16 United States patents and exclusive licenses to two
United States patents. These patents have expiration dates from 2012 through
2016. In addition, as of December 31, 2001, we had filed or held exclusive
licenses to 32 United States utility and provisional patent applications, as
well as 152 related foreign patent applications, including both Patent
Cooperation Treaty filings and national filings. We also have non-exclusive
licenses to four United States patents directed to technologies embodied in
LEAP.

In particular, we have United States patents that cover both the Plenaxis
compound and the sustained release formulation enabling its once-per-month
administration. We also have patents covering the use of Plenaxis and any other
GnRH antagonist in a variety of therapeutic settings, including in combination
with surgery or radiation therapy. We intend to file additional United States
and foreign patent applications, where appropriate, relating to new product
discoveries or improvements.

We also rely on trade secrets, know-how and continuing technological
advances to protect various aspects of our core technology. We require our
employees and consultants to execute confidentiality and invention assignment
agreements with us to maintain the confidentiality of our trade secrets and
proprietary information. Our confidentiality agreements generally provide that
the employee, consultant or scientific collaborator will not disclose our
confidential information to third parties, compete with us or solicit our
employees during the course of their employment with us. When appropriate, these
agreements also provide that inventions conceived by the employee, consultant or
scientific collaborator in the course of working for us will be our exclusive
property. Additionally, our employees agree not to solicit our employees for one
year following termination of their employment with us.

COMPETITION

A biotechnology company such as ours faces intense competition. Many
companies, both public and private, including large pharmaceutical companies,
chemical companies and biotechnology companies, develop products or technologies
competitive with our products or technologies. In addition, academic, government
and industry-based research is intense, resulting in considerable competition in
obtaining qualified research personnel, submitting patent filings for protection
of intellectual property rights and establishing strategic corporate alliances.

Each of our potential products in research or development will face
competition from other products. For example, if approved for marketing and
sale, our Plenaxis products will compete with numerous established or newly
introduced products on the market, including:

- Lupron Depot, marketed by TAP Pharmaceuticals, Inc., Zoladex, marketed by
AstraZeneca Pharmaceuticals, and other pharmaceuticals approved and
marketed for the treatment of hormonally responsive prostate cancer or
endometriosis in the United States and Europe; and

- Cetrotide-Registered Trademark-, manufactured by ASTA Medica, and
Antagon-Registered Trademark-, manufactured by Organon, approved GnRH
antagonists for use in infertility that are only available as daily
injectable formulations.

For each of our product candidates, we will face increasing competition from
generic formulations of existing drugs whose active components are no longer
covered by patents. Specifically, we are aware of various formulations of
leuprorelin, the active ingredient of Lupron Depot, including Viadur-TM-,
marketed by Bayer as a 12-month hormone therapy implant, and Eligard-TM-, which
is being developed in one, three and four month subcutaneous injections by Atrix
Laboratories, Inc. In January 2002, Atrix received FDA approval for its
one-month depot of Eligard for the treatment of advanced prostate cancer.

We believe that our product candidates will compete favorably in the market
with these and other products, although no assurance can be given in this
regard.

13

GOVERNMENT REGULATION

The manufacture and marketing of pharmaceutical products and our ongoing
research and development activities in the United States require the approval of
numerous governmental authorities, including the FDA. We also must obtain
similar approvals from comparable agencies in most foreign countries. The FDA
has established mandatory procedures and safety standards which apply to the
preclinical testing and clinical trials, as well as to the manufacture and
marketing, of pharmaceutical products. State, local and other authorities also
regulate pharmaceutical manufacturing facilities.

As an initial step in the FDA regulatory approval process, an applicant
typically conducts preclinical studies in animals to assess a drug's efficacy
and to identify potential safety problems. An applicant must conduct specified
preclinical laboratory and animal studies in compliance with the FDA's good
laboratory practice regulations. An applicant must submit the results of these
studies to the FDA as part of an IND. Proposed clinical testing can only begin
if the FDA raises no objections to the IND. We can give no assurance that any
submission of an IND to the FDA relating to our product candidates will result
in the commencement of a clinical trial.

Clinical testing must meet requirements for Institutional Review Board
oversight and informed consent, as well as FDA prior review, oversight and good
clinical practice requirements. Typically, clinical testing involves a
three-phase process. Phase I clinical trials involve a small number of subjects
and are designed to provide information about both product safety and the
expected dose of the drug. Phase II clinical trials generally provide additional
information on dosing and safety in a limited patient population. Occasionally,
phase II trials may provide preliminary evidence of product efficacy. Phase III
clinical trials are large-scale, well-controlled studies. The goal of phase III
clinical trials generally is to provide statistically valid proof of efficacy,
as well as safety, in the target patient population. The company performing the
preclinical testing and clinical trials of a pharmaceutical product then submits
the results to the FDA in the form of an NDA, for approval to commence
commercial sales. Preparing NDA applications involves considerable data
collection, verification, analysis and expense. In responding to an NDA, the FDA
may grant marketing approval for a specific indication, request additional
information or deny the application if it determines that the application does
not satisfy its regulatory approval criteria. In addition, after approval for an
initial indication, further clinical trials would be necessary to gain approval
to promote the use of the product for any additional indication.

Among the conditions for NDA approval is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
on an ongoing basis with good manufacturing practices. In complying with good
manufacturing practices, manufacturers must continue to spend time, money and
effort in the areas of production and quality control to ensure full technical
compliance. Manufacturing facilities are subject to periodic inspections by the
FDA.

The FDA must grant approval of our products, which includes a review of the
manufacturing processes and facilities used to produce these products before we
can market these products in the United States. The process of obtaining
approvals from the FDA can be costly, time consuming and subject to
unanticipated delays. The FDA may refuse to approve an application if it
believes the product does not meet applicable regulatory criteria. The FDA also
may require additional testing for safety and efficacy of the drug. If the FDA
grants approval of a drug product, the approval will be limited to specific
indications.

The FDA has considerable discretion in determining whether to grant
marketing approval for a drug, and may delay or deny approval even in
circumstances where the applicant's clinical trials have proceeded in compliance
with FDA procedures and regulations and have met the established end-points of
the trials. Challenges to FDA determinations are generally time-consuming and
costly. We can give no assurance that we will obtain marketing approval for
Plenaxis or any of our other product candidates.

If we receive marketing approval, we must comply with FDA requirements for
manufacturing, labeling, advertising, record keeping and reporting of adverse
experiences and other information. In

14

addition, we must comply with federal and state anti-kickback and other health
care fraud and abuse laws that pertain to the marketing of drugs. For all drugs,
failure to comply with applicable regulatory requirements after obtaining
regulatory approval could, among other things, result in suspension of
regulatory approval, as well as possible recalls, product seizures, injunctions
and civil and criminal sanctions.

In addition to regulations enforced by the FDA, we also are subject to
various laws and regulations relating to safe working conditions, laboratory and
manufacturing practices, the experimental use of animals and the use and
disposal of hazardous or potentially hazardous substances, including chemicals,
micro-organisms and various radioactive compounds used in connection with our
research and development activities. Although we believe that our safety
procedures for handling and disposing of these materials comply with the
standards prescribed by state and federal regulations, we cannot assure you that
accidental contamination or injury from these materials will not occur.
Compliance with laws and regulations relating to the protection of the
environment has not had a material effect on our capital expenditures or our
competitive position. However, we cannot accurately predict the extent of
government regulation, and the cost and effect thereof on our competitive
position, which might result from any legislative or administrative action.

Additionally, we may have to obtain approval of a product from comparable
regulatory authorities in foreign countries prior to the commencement of
marketing of the product in those countries. The approval procedure varies among
countries, may involve additional testing and the time required may differ from
that required for FDA approval. Although there is now a centralized European
Union approval mechanism in place, each European country may nonetheless impose
its own procedures and requirements, many of which could be time-consuming and
expensive. Thus, substantial delays could occur in obtaining required approvals
from both the FDA and foreign regulatory authorities after the relevant
applications are filed. We expect to rely primarily on corporate partners or
licensees to obtain governmental approval in foreign countries for our products.
Due to the termination of our collaboration agreement with Sanofi-Synthelabo, we
must either contract with another third party to pursue foreign regulatory
approvals for Plenaxis for the treatment of hormonally responsive advanced
prostate cancer or perform this function ourselves. We cannot assure you that we
will be able to establish new arrangements for this function on reasonable terms
or in a timely manner, if at all. Moreover, even after seeking qualified
experience and assistance in dealing with the foreign regulatory processes and
interacting with foreign regulatory authorities, we can not assure you that we
will be successful in filing and obtaining the necessary governmental approvals
for Plenaxis or any of our other product candidates in Europe or any other
foreign country.

PRODUCT LIABILITY INSURANCE

We maintain product liability insurance for clinical trials in the amount of
$15.0 million per occurrence and $15.0 million in the aggregate. We intend to
expand our product liability insurance coverage to include the manufacture,
marketing and sale of commercial products if marketing approval for any of our
products for which marketing approval is obtained. However, insurance coverage
is becoming increasingly expensive, and we may be unable to maintain insurance
coverage at a reasonable cost or in sufficient amounts to protect us against
losses due to liability. In addition, we may be unable to obtain commercially
reasonable product liability insurance for any products approved for marketing.
A successful product liability claim or series of claims brought against us
could result in substantial setbacks for our business.

EMPLOYEES

As of February 28, 2002, we had 127 full-time employees. We also utilize
consultants and independent contractors on a regular basis to assist in the
development of our products. None of our employees are party to a collective
bargaining agreement. We consider our employee relations to be good. We believe
that our future success is dependent in part on our ability to attract and
retain skilled scientific, sales and marketing, and senior management personnel.
Competition in our industry is intense and we cannot assure you that we will be
able to attract and retain these personnel.

15

ITEM 2. PROPERTIES.

Our corporate headquarters and principal research facilities are located in
Waltham, Massachusetts, where we own, through our wholly owned real estate
subsidiary, land and a building of approximately 175,000 square feet. We have
entered into a 15-year lease for this facility with our subsidiary. We currently
occupy approximately 100,000 square feet of this facility and are attempting to
sublease a portion of the remaining space for up to the next five years,
although we have not yet found a tenant.

We believe that our facilities will be adequate for at least the next seven
years and that we will be able to obtain additional space as needed on
commercially reasonable terms.

ITEM 3. LEGAL PROCEEDINGS.

We are not currently a party to any material legal proceedings.

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

No matters were submitted to a vote of security holders of the company
during the last quarter of the fiscal year ended December 31, 2001.

16

PART II

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

(a) Our common stock is traded on the Nasdaq National Market under the
symbol "PRCS." Public trading of our common stock commenced on April 27, 2000.
The following table shows the range of high and low per share sale prices of our
common stock as reported on the Nasdaq National Market for the periods
indicated.

As of February 28, 2002, there were approximately 156 holders of record of
our common stock registered with our transfer agent, American Stock Transfer &
Trust Company.

We have never declared or paid any cash dividends on our capital stock, and
we do not currently intend to pay any cash dividends on the common stock in the
foreseeable future. We expect to retain future earnings, if any, to fund the
development and growth of our business. Our board of directors will determine
future dividends, if any, based upon our financial condition, results of
operations, capital requirements and other factors that the board deems
relevant. Therefore, you will not receive any funds without selling your shares.

(b) On February 8, 2000, we filed a Registration Statement on Form S-1
(Registration No. 333-96351) with the Securities and Exchange Commission to
register under the Securities Act 8,000,000 shares of our common stock (plus an
additional 1,200,000 shares subject to an over-allotment option granted to the
underwriters). The Registration Statement was declared effective by the
Securities and Exchange Commission on April 26, 2000.

From April 26, 2000 through December 31, 2001, we used approximately
$38.0 million of the net proceeds from our initial public offering for the
purchase and build-out of our new facility. Due to increased construction costs,
the total amount of net proceeds from our initial public offering that was used
for the purchase and build-out of our new facility exceeded our original
estimates by approximately $8.0 million. Pending use of the remaining net
proceeds of our initial public offering, we have invested these funds in
short-term, interest-bearing, investment-grade securities. Our management will
continue to have broad discretion over the actual use of these proceeds.

17

ITEM 6. SELECTED FINANCIAL DATA.

You should read the following selected financial data in conjunction with
our consolidated financial statements and the related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this report. We have derived our statement of operations
data for each of the three years in the period ended December 31, 2001, and our
balance sheet data at December 31, 2000 and 2001, from our financial statements
that have been audited by Ernst & Young LLP, independent auditors, and which we
include elsewhere in this report. We have derived the statement of operations
data for the years ended December 31, 1997 and 1998 and the balance sheet data
at December 31, 1997, 1998 and 1999 from our audited financial statements, which
we do not include in this report.

18

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

GENERAL

The following discussion and analysis of our financial condition and results
of operations should be read in conjunction with "Selected Financial Data" and
our consolidated financial statements and notes thereto appearing elsewhere in
this report. This discussion and analysis contains forward-looking statements
that involve risks, uncertainties and assumptions. Our actual results may differ
substantially from those anticipated in these forward-looking statements.

OVERVIEW

Since our inception, we have been engaged in developing drugs for the
treatment of a variety of human diseases. Our lead program is the development of
Plenaxis-TM- (abarelix for injectable suspension), a drug for the treatment of
diseases that respond to the lowering of hormone levels. We are developing
Plenaxis for the treatment of hormonally responsive advanced prostate cancer and
endometriosis.

We had entered into collaborations with Amgen and Sanofi-Synthelabo to
develop and commercialize our Plenaxis products. In September 2001, Amgen
notified us that it was terminating its agreement with us. In October 2001,
Sanofi-Synthelabo gave us notice that it was terminating its agreement with us.
Both terminations were effective in December 2001. As a result, all of the
licenses for Plenaxis granted to Amgen and Sanofi-Synthelabo under these
agreements, and all rights of Amgen and Sanofi-Synthelabo in the Plenaxis
program, have terminated. In this connection we are finalizing agreements with
Amgen and Sanofi-Synthelabo in an effort to assure a successful transition of
the rights and responsibilities for the continued development and
commercialization of Plenaxis and to provide for, among other things, final cash
payments and mutual releases.

We are also conducting clinical trials of Apan, our proprietary drug
candidate for the treatment of Alzheimer's disease. In addition, we have a
number of other product candidates in the research or preclinical development
stage.

In September 2001, we decided not to proceed with additional clinical trials
of Latranal, our in-licensed drug candidate being developed for the relief of
musculoskeletal pain, due to the lack of efficacy observed in a phase II
clinical trial.

Since our inception, we have had no revenues from product sales. We have
received revenues in the form of signing, performance-based, cost sharing and
contract services payments from corporate collaborations. We will receive no
additional revenues under the Amgen and Sanofi-Synthelabo agreements, other than
a potential final reimbursement payment from Sanofi-Synthelabo. Accordingly, for
the foreseeable future, we do not expect to have any revenues other than
interest income and the potential payment from Sanofi-Synthelabo.

Our accumulated deficit as of December 31, 2001 was approximately
$84.4 million.

At December 31, 2001, we had 127 full-time employees, 99 of whom were
engaged in research and development activities, compared to 120 full-time
employees at December 31, 2000, 93 of whom were engaged in research and
development activities. Substantially all of our expenditures to date have been
for drug development and commercialization activities and for general and
administrative expenses.

Due to the high costs associated with continued development, and preparing
for the possible commercial launch, of Plenaxis for the treatment of hormonally
responsive advanced prostate cancer, as well as other research and development
and general and administrative expenses, we had a net operating loss for 2001.
We expect to have net operating losses for the next several years, due, in part,
to our assumption of all Plenaxis program costs as of the effective dates of the
Amgen and Sanofi-Synthelabo terminations. We do not expect to generate operating
income unless, and not until several years after, we receive FDA approval to
market Plenaxis for the treatment of hormonally responsive

19

advanced prostate cancer. We will need to receive regulatory approval to market
all of our future products.

Through December 31, 2001, we have recognized an aggregate of approximately
$24.7 million in non-refundable fees and performance-based payments, and
approximately $10.7 million in reimbursement for ongoing development costs,
under the Sanofi-Synthelabo agreement. Of this amount, we recognized the
$4.7 million initial non-refundable signing fee payment through December 31,
2001, the effective date of termination of the Sanofi-Synthelabo agreement,
which was the period during which we were obligated under the agreement to
participate on a continuing and substantial basis in the research, development
and manufacturing process development of Plenaxis products. As noted above, we
are finalizing an agreement with Sanofi-Synthelabo regarding the termination of
its license agreement, which we expect will be executed during the second
quarter of 2002.

In addition, through December 31, 2001, we have recognized an aggregate of
approximately $121.7 million of revenues under the Amgen agreement. We received
a $10.0 million signing fee under the Amgen agreement which we recognized as
revenue through December 17, 2001, the effective date of termination of the
Amgen agreement, which was the period during which we were obligated under the
agreement to participate on a continuing and substantial basis in the research,
development and manufacturing process development of Plenaxis products.

Under the Amgen agreement, Amgen paid the first $175.0 million of all
authorized costs and expenses associated with the research, development and
commercialization of Plenaxis products in the United States. Amgen's initial
$175.0 million funding commitment was fulfilled during the third quarter of
2000. Following Amgen's completion of this funding, we became responsible for
one-half of all subsequent United States research and development costs for
Plenaxis products. Additionally, the agreement provided that following Amgen's
completion of its $175.0 million funding commitment, we must reimburse Amgen for
one-half of the costs associated with establishing a sales and marketing
infrastructure for Plenaxis products in the United States. As noted above, we
are finalizing an agreement with Amgen regarding the termination of its
agreement with us, which we expect will be executed during the second quarter of
2002.

CRITICAL ACCOUNTING POLICIES

In December 2001, the Securities and Exchange Commission requested that all
registrants discuss their most "critical accounting policies" in Management's
Discussion and Analysis of Financial Condition and Results of Operations. The
Commission indicated that a "critical accounting policy" is one which is both
important to the portrayal of the company's financial condition and results and
requires management's most difficult, subjective or complex judgments, often as
a result of the need to make estimates about the effect of matters that are
inherently uncertain. While our significant accounting policies are more fully
described in Note 2 to our consolidated financial statements appearing elsewhere
in this report, we believe the following accounting policies to be critical:

REVENUE RECOGNITION. We have previously entered into corporate
collaborations with other pharmaceutical companies. These agreements provided
for the partitioning of the development, manufacturing and commercialization
responsibilities related to potential drug candidates. Under these arrangements,
we were obligated to participate in several aspects of the remaining development
and manufacturing of our drug candidate, Plenaxis. Our collaborations generally
have provided for our partners to make up-front payments and additional payments
upon the achievement of specific research and product development milestones,
share in the costs of development and/or pay royalties, and in some cases,
profit-sharing payments to us based upon any product sales resulting from the
collaboration.

We recognize revenue in accordance with Staff Accounting Bulletin No. 101,
REVENUE RECOGNITION IN FINANCIAL STATEMENTS. Under this accounting method, we
recognize revenue when it is earned, that is when all of the following have
occurred: all of our obligations relating to the revenue have been met

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and the earning process is complete; the monies received or receivable are not
refundable irrespective of research results; and there are neither future
obligations nor future milestones to be met by us with respect to such revenue.
In general, collaboration revenues are earned based upon research expenses
incurred and milestones achieved. Non-refundable payments upon initiation of
contracts are deferred and amortized over the period in which we are obligated
to participate on a continuing and substantial basis in the research and
development activities outlined in each contract. We continually review these
estimates, which could result in a change in the deferral period. Amounts
received in advance of reimbursable expenses are deferred and only recognized
when the related expenses have been incurred. Milestone payments are recognized
as revenue in the period in which the parties agree that the milestone has been
achieved and it is deemed that no further obligations exist.

USE OF ESTIMATES. We prepare our financial statements in accordance with
accounting principles generally accepted in the United States. These principles
require that we make estimates and use assumptions that affect the reporting of
our assets and our liabilities as well as the disclosures that we make regarding
assets and liabilities and income and expense that are contingent upon uncertain
factors as of the reporting date. As discussed in Note 8 to our consolidated
financial statements, we have accrued an estimate of our potential liability as
of December 31, 2001 under our agreement with Amgen which has been terminated.
The actual payments, and thus our actual results, could differ from our
estimates.

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2001 AND 2000

Revenues for the year ended December 31, 2001 decreased 84% to approximately
$9.9 million, from approximately $61.2 million in 2000. The decrease in revenues
was the result of decreases in both the amount and rate of reimbursement of
Plenaxis expenses from our former collaborators, as well as the one-time sale of
materials inventory to Amgen during the fourth quarter of 2000. We will receive
no additional revenues under the Amgen or Sanofi-Synthelabo agreements, other
than a possible final reimbursement payment from Sanofi-Synthelabo.

Research and development expenses for the year ended December 31, 2001
decreased 31% to approximately $59.4 million, from approximately $85.9 million
in 2000. This decrease in expenses was due primarily to the one-time sale of
materials inventory to Amgen during the fourth quarter of 2000 combined with
reduced clinical spending during the second half of 2001 as we repositioned the
Plenaxis program in response to issues raised by the FDA in June 2001. As we
initiate new clinical trials for Plenaxis for the treatment of hormonally
responsive advanced prostate cancer and endometriosis, continue our Apan
clinical program and add new clinical programs, we expect our research and
development expenses will increase during 2002 and thereafter.

Members of our research and development team typically work on a number of
projects concurrently. In addition, a substantial amount of our fixed costs such
as facility depreciation, utilities and maintenance are shared by our various
programs. Accordingly, we have not and do not plan to separately track the costs
for each of our research and development programs. During 2001 and 2000, we
estimate that the majority of our research and development expense was related
to clinical trial costs, manufacturing and materials inventory costs, salaries
and lab supplies related to our prostate cancer and endometriosis clinical
programs. The remaining research and development costs were incurred in our Apan
clinical program, as well as our preclinical research programs.

We began our clinical program to develop Plenaxis for the treatment of
prostate cancer during 1996. In December 2000, we submitted an NDA to the FDA
for Plenaxis for the treatment of hormonally responsive advanced prostate
cancer. However, the FDA raised certain concerns over the results of the data
submitted to them and, therefore, we recently initiated an additional clinical
trial in an effort to respond to those concerns. In 1998, we began our clinical
program to develop Plenaxis for the treatment of endometriosis. We recently
completed the follow-up phase of a phase II/III study in this program.

21

We expect to submit additional data to the FDA for Plenaxis for the
treatment of hormonally responsive advanced prostate cancer by the end of the
first quarter of 2003. With respect to our endometriosis program, we expect to
meet with the FDA mid-year 2002 to discuss the results of our phase II/III study
and the timing and scope of additional clinical trials.

We began our clinical program for Apan in 2000. We are currently conducting
a phase I study of Apan which we anticipate will be completed during the second
half of 2002. We expect to initiate a second phase I study in the first half of
2003 in which we intend to evaluate the safety and pharmacokinetics of Apan in
individuals suffering from Alzheimer's disease.

We anticipate that the substantial majority of our research and development
costs over the next few years will be focused on the development of Plenaxis for
the treatment of hormonally responsive advanced prostate cancer and
endometriosis. In addition, as discussed above, we currently have several other
ongoing research and development programs. Using industry estimates, typical
drug development programs may last for ten or more years and may cost hundreds
of millions of dollars to complete. As our programs progress, we will assess the
possibility of entering into corporate collaborations to offset a portion of
development costs. The ultimate success of our research and development programs
and the impact of these programs on our operations and financial results cannot
be accurately predicted and will depend, in large part, upon the outcome and
timing of many variables outside of our control.

Sales and marketing expenses for the year ended December 31, 2001 increased
36% to approximately $8.7 million, from approximately $6.4 million in 2000. The
increase in expenses was primarily the result of our obligation under our
agreement with Amgen, beginning in the third quarter of 2000, to pay one-half of
all subsequent costs associated with establishing a sales and marketing
infrastructure in the United States for Plenaxis through the launch period.
These increases were partially offset by decreased spending on marketing and
sales for the Plenaxis program during the second half of 2001. In response to
issues raised by the FDA. Due to the termination of the Amgen and
Sanofi-Synthelabo agreements, which provided for the sharing of the costs
associated with commercialization, our sales and marketing expenses may increase
as we incur costs related to preparing for the possible launch of Plenaxis for
the treatment of hormonally responsive advanced prostate cancer.

General and administrative expenses for the year ended December 31, 2001
increased 32% to approximately $7.0 million, from approximately $5.3 million in
2000. The increase was due to an increase in personnel-related operating costs
and increased use of professional services. We expect that general and
administrative expenses will continue to increase as we hire additional
administrative personnel to support continued growth of our research,
development and pre-commercialization initiatives and incur increased operating
costs related to our new facility.

Net interest income for the year ended December 31, 2001 increased 16% to
approximately $9.1 million, from approximately $7.8 million in 2000. The
increase in interest income was due to increased cash and investment balances
from our follow-on public offering in February 2001, offset by lower interest
rates. The increase in interest expense was due to a higher average principal
balance outstanding for a full year under our loan agreement during 2001.

The provision for income taxes for the years ended December 31, 2001 and
2000 was zero and $0.1 million, respectively. The provision for income taxes
during 2000 was primarily for state income taxes. We anticipate that we will
continue to be in a net operating loss carryforward position during 2001 and for
several years thereafter. Therefore, as in 2000, no benefit from our operating
losses has been recognized. We account for income taxes under Statement of
Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES. Realization
of deferred tax assets is dependent on future earnings, if any, the timing and
amount of which are uncertain. Accordingly, valuation allowances, in amounts
equal to the net deferred tax assets as of December 31, 2001 and 2000, have been
established in each period to reflect these uncertainties.

22

At December 31, 2001, we had federal net operating loss carryforwards of
$51.6 million that will expire in varying amounts through 2021, if not utilized.
Utilization of net operating loss and tax credit carryforwards will be subject
to substantial annual limitations under the Internal Revenue Code of 1986, as
amended. The annual limitations may result in the expiration of the net
operating loss and tax credit carryforwards before full utilization.

YEARS ENDED DECEMBER 31, 2000 AND 1999

Revenues for the year ended December 31, 2000 decreased 1% to approximately
$61.2 million, from approximately $61.5 million in 1999. The decrease in
revenues was the result of a decrease in reimbursable Plenaxis expenses, offset
by the one-time sale of materials inventory to Amgen during the fourth quarter
of 2000.

Research and development expenses for the year ended December 31, 2000
increased 76% to approximately $85.9 million, from approximately $48.8 million
in 1999. The increase in expenses was primarily attributable to the cost of the
inventory associated with the one-time sale of materials inventory to Amgen
during the fourth quarter of 2000, combined with increased expenses related to
our Plenaxis clinical development program for hormonally responsive advanced
prostate cancer. This increase also was partially due to increased spending
related to our Plenaxis clinical development program for endometriosis, our
Latranal and Apan clinical development programs, and discovery research
initiatives. Amgen's initial funding commitment was completed during the third
quarter of 2000, after which we became responsible for one-half of all
subsequent United States research and development costs for Plenaxis products
through the launch period.

Sales and marketing expenses for the year ended December 31, 2000 increased
148% to approximately $6.4 million, from approximately $2.6 million in 1999.
Following the completion of Amgen's initial funding commitment, we became
responsible for one-half of all subsequent costs associated with establishing a
sales and marketing infrastructure in the United States for Plenaxis through the
launch period.

General and administrative expenses for the year ended December 31, 2000
increased 48% to approximately $5.3 million, from approximately $3.6 million in
1999. The increase was due to an increase in personnel and compensation costs,
an increased use of professional services and other costs associated with being
a public company.

Net interest income for the year ended December 31, 2000 increased 75% to
approximately $7.8 million, from approximately $4.5 million in 1999. The
increase in interest income was due to increased cash and investment balances
from our initial public offering in May 2000 and an increase in interest rates
from the same period in the prior year.

The provision for income taxes for the years ended December 31, 2000 and
1999 was $0.1 million and $1.8 million, respectively. Our effective tax rate was
approximately 16.3% during 1999. The provision for income taxes during 2000 was
primarily for state income taxes. We were in a net operating loss carryforward
position in 2000 and, therefore, no benefit from our operating losses was
recognized.

SELECTED QUARTERLY OPERATING RESULTS

The following table sets forth our unaudited statement of operations data
for the eight quarters ended December 31, 2001. This information has been
derived from our unaudited financial statements. The unaudited financial
statements have been prepared on the same basis as the audited financial
statements appearing in this report and include all adjustments, consisting only
of normal recurring accruals, that we consider necessary for a fair presentation
of such information when read in

23

conjunction with our annual audited financial statements and notes thereto
appearing elsewhere in this report. You should not draw any conclusions from the
operating results for any quarter.

We expect to experience significant fluctuations in our quarterly operating
results in the future, and, therefore, we will continue to have difficulty
providing an accurate forecast of our quarterly revenues and operating results.
We believe that period-to-period comparisons of our operating results may not be
meaningful, and you should not rely upon them as any indication of future
performance. It is likely that our operating results in one or more future
quarters may be below the expectations of securities analysts and investors. In
that event, the trading price of our common stock would almost certainly
decline.

LIQUIDITY AND CAPITAL RESOURCES

We have financed our operations since inception principally through private
placements of equity securities and the proceeds from our public offerings.
Prior to our initial public offering, we had received aggregate net proceeds of
approximately $88.5 million from various private placements of our securities.
In May 2000, we completed our initial public offering in which we sold a total
of 9,200,000 shares of common stock at a price of $10 per share, raising a total
of approximately $84.3 million, net of underwriting discounts and commissions
and offering expenses. In February 2001, we completed a follow-on public
offering in which we sold a total of 7,587,500 shares of common stock at a price
of $24.5625 per share, raising a total of approximately $175.9 million, net of
underwriting discounts and commissions and offering expenses.

Additionally, we have received a total of approximately $185.0 million from
one-time signing payments and performance-based payments, cost reimbursements
and contract service payments under our collaboration agreements. We have also
received approximately $29.8 million from interest on invested cash balances,
and paid approximately $2.6 million in interest associated with building and
equipment financing.

At December 31, 2001, we had cash, cash equivalents and marketable
securities of approximately $266.2 million and working capital of approximately
$229.0 million, compared to approximately $132.2 million and $115.7 million,
respectively, at December 31, 2000. During 2002, we expect to spend in the range
of approximately $40,000,000 to $45,000,000 on operations and approximately
$45,000,000 to $55,000,000 on development programs. We believe that our existing
cash and investments will be sufficient to meet our working capital and capital
expenditure needs for approximately the next three years.

For the year ended December 31, 2001, net cash of approximately
$31.6 million was used in operating activities, compared to approximately
$20.0 million used in operating activities during 2000. During the year ended
December 31, 2001, our use of cash in operations was due principally to our net
loss, partially offset by an increase in accounts payable consisting principally
of our share of accrued Plenaxis program expenses pursuant to the Amgen
agreement. Our investing activities during the year ended December 31, 2001
consisted of the purchase, sale and maturity of marketable securities, as well
as $23.9 million of additional spending toward the build-out of our new
corporate headquarters and other fixed asset additions. Our financing activities
for the year ended December 31, 2001 consisted principally of the
$175.9 million of proceeds from our follow-on public offering and $2.4 million
of

24

proceeds received from the exercise of common stock options, as well as advances
of $9.0 million under an acquisition and construction loan agreement.

In July 2000, in connection with the purchase, through our wholly owned real
estate subsidiary, of our new corporate headquarters and research facility in
Waltham, Massachusetts, the subsidiary entered into an acquisition and
construction loan agreement providing for up to $33.0 million in financing for
the acquisition of, and improvements to, the new facility. As of December 31,
2001, $33.0 million was outstanding under the loan agreement. Advances bear
interest at a rate equal to the 30-day LIBOR plus 2.0% (3.87% at December 31,
2001). Interest is payable monthly in arrears. Principal is due and payable in
full on July 30, 2003, subject to two one-year extension options. The loan is
secured by the new facility, together with all fixtures, equipment, improvements
and other related items, and by all rents, income or profits received by our
real estate subsidiary, and is unconditionally guaranteed by us. In addition to
this financing, as of December 31, 2001, we had spent approximately
$38.0 million of our own funds in connection with the build-out and occupancy of
our new facility. We occupied the new facility during May 2001 and as planned,
are actively seeking to sublease a portion of this facility. We do not believe
that there is any impairment issue at this time. We terminated the lease for our
Cambridge, Massachusetts facility effective as of September 1, 2001. In
addition, in connection with our move to the new facility, we consolidated our
Provid Research division with our Massachusetts operations and, effective
October 31, 2001, have assigned to a third party all of our right, title and
interest in and to the lease for the New Jersey facility and the third party has
assumed all of our obligations thereunder.

In addition to our long-term debt, we have fixed contractual obligations
under various supply agreements. These fixed contractual obligations were
comprised of the following as of December 31, 2001:

In January 2002, we assumed all of Amgen's rights and obligations under a
development and supply agreement with UCB. Under the terms of this agreement, we
are committed to pay UCB approximately $16.1 million for the supply of clinical
and commercial volumes of pharmaceutical peptide to be delivered by the end of
2002.

We expect our funding requirements to increase over the next several years
as we prepare for the possible commercial launch of Plenaxis for the treatment
of hormonally responsive advanced prostate cancer, continue with current
prostate cancer and endometriosis clinical trials for Plenaxis and clinical
trials for Apan, initiate preclinical trials for additional product candidates,
continue to improve our facility and expand our research and development
initiatives. The amount of these expenditures will depend on numerous factors,
including:

- the cost, timing and outcomes of FDA and other regulatory reviews;

- decisions relating to the Plenaxis program made by us;

- the effect of the termination of our Plenaxis corporate collaborations and
our ability to assume the responsibilities under these agreements or
contract with other third parties to do so;

- the development of sales and marketing resources by us;

- the establishment, continuation or termination of third-party
manufacturing or sales and marketing arrangements for Plenaxis or our
other potential products;

25

- the establishment of additional strategic or licensing arrangements with,
or acquisitions of, other companies;

- the progress of our research and development activities;

- the scope and results of preclinical testing and clinical trials;

- the rate of technological advances;

- determinations as to the commercial potential of our product candidates
under development;

- the status of competitive products;

- our ability to defend and enforce our intellectual property rights;

- our ability to sublease a portion of our new facility; and

- the availability of additional financing.

At December 31, 2001, we had provided a valuation allowance of
$42.5 million for our deferred tax assets. The valuation allowance represents
the excess of the deferred tax asset over the benefit from future losses that
could be carried back if, and when, they occur. Due to anticipated operating
losses in the future, we believe that it is more likely than not that we will
not realize a portion of the net deferred tax assets in the future and we have
provided an appropriate valuation allowance.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES, or SFAS No. 133, which became effective for fiscal year
2001. SFAS No. 133 requires all derivatives to be carried on the balance sheet
as assets or liabilities at fair value. The accounting for changes in fair value
would depend on the hedging relationship and would be reported in the income
statement or as a component of comprehensive income. The adoption of SFAS
No. 133 did not have a material impact on our consolidated financial position or
consolidated results of operations.

In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
BUSINESS COMBINATIONS, and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS,
effective for fiscal years beginning after December 15, 2001. Under the new
rules, goodwill will no longer be amortized but will be subject to annual
impairment tests in accordance with the statements. Other intangible assets will
continue to be amortized over their useful lives. We will apply the new rules on
accounting for goodwill and other intangible assets beginning in the first
quarter of 2002. Application of the provisions of these statements is not
expected to have a material effect on our consolidated financial position or
consolidated results of operations since we do not have any goodwill or
intangibles at this time.

On October 20, 2001, the Financial Accounting Standards Board issued SFAS
No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, or SFAS
No.144. SFAS No. 144 supersedes SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, however it
retains the fundamental provision of that statement related to the recognition
and measurement of the impairment of long-lived assets to be held and used. In
addition, SFAS No. 144 provides additional guidance on estimating cash flows
when performing a recoverability test, requiring that a long-lived asset to be
disposed of other than by sale be classified as an asset held for sale until it
is disposed of, and establishes more restrictive criteria to classify an asset
as held for sale. SFAS No. 144 will be effective in 2002. Application of SFAS
No. 144 is not expected to have any effect on our consolidated financial
position or consolidated results of operations since we do not believe that we
have any impairments at this time.

26

RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

BECAUSE WE HAVE NOT YET MARKETED OR SOLD ANY PRODUCTS AND ANTICIPATE SIGNIFICANT
INCREASES IN OUR OPERATING EXPENSES OVER THE NEXT SEVERAL YEARS, WE MAY NOT BE
PROFITABLE IN THE FUTURE.

We cannot assure you that we will be profitable in the future or, if we are
profitable, that it will be sustainable. All of our potential products are in
the research or development stage. We have not yet marketed or sold any
products, and we may not succeed in developing and marketing any product in the
future. To date, we have derived substantially all of our revenues from payments
under corporate collaboration and license agreements. Due to the termination of
the Amgen and Sanofi-Synthelabo agreements, for the foreseeable future, we do
not expect to have any revenues, other than interest income and any final
reimbursement payment from Sanofi-Synthelabo. In addition, we expect to continue
to spend significant amounts to continue clinical studies, seek regulatory
approval for our existing product candidates, develop commercial capabilities
and expand our facilities. We also intend to spend substantial amounts to fund
additional research and development for other potential products, enhance our
core technologies, and for general and administrative purposes. As of
December 31, 2001, we had an accumulated deficit of approximately
$84.4 million. We expect that our operating expenses will increase significantly
in the near term, primarily due to the termination of the Amgen and Sanofi-
Synthelabo agreements, resulting in significant operating losses for 2002 and
the next several years.

IF OUR CLINICAL TRIALS ARE NOT SUCCESSFUL, OR IF WE ARE OTHERWISE UNABLE TO
OBTAIN AND MAINTAIN THE REGULATORY APPROVAL REQUIRED TO MARKET AND SELL OUR
POTENTIAL PRODUCTS, WE WOULD INCUR ADDITIONAL OPERATING LOSSES.

The development and sale of our product candidates are subject to extensive
regulation by governmental authorities. Obtaining and maintaining regulatory
approval typically is costly and takes many years. Regulatory authorities, most
importantly, the FDA, have substantial discretion to terminate clinical trials,
delay or withhold registration and marketing approval in the United States, and
mandate product recalls. Failure to comply with regulatory requirements may
result in criminal prosecution, civil penalties, recall or seizure of products,
total or partial suspension of production or injunction, as well as other
actions as to our potential products or against us. Outside the United States,
we can market a product only if we receive marketing authorization from the
appropriate regulatory authorities. This foreign regulatory approval process
includes all of risks associated with the FDA approval process, and may include
additional risks.

To gain regulatory approval from the FDA and foreign regulatory authorities
for the commercial sale of any product, we must demonstrate in clinical trials,
and satisfy the FDA as to, the safety and efficacy of the product in clinical
trials. If we develop a product to treat a long-lasting disease, such as cancer
or Alzheimer's disease, we must gather data over an extended period of time.
There are many risks associated with our clinical trials. For example, we may be
unable to achieve the same level of success in later trials as we did in earlier
ones. Additionally, data we obtain from preclinical and clinical activities are
susceptible to varying interpretations that could impede regulatory approval.
Further, some patients in our prostate cancer and Alzheimer's disease programs
have a high risk of death, age-related disease or other adverse medical events
that may not be related to our products. These events may affect the statistical
analysis of the safety and efficacy of our products. If we obtain regulatory
approval for a product, the approval will be limited to those diseases for which
our clinical trials demonstrate the product is safe and effective.

In addition, many factors could delay or result in termination of our
ongoing or future clinical trials. For example, a clinical trial may experience
slow patient enrollment or lack of sufficient drug supplies. Patients may
experience adverse medical events or side effects, and there may be a real or
perceived lack of effectiveness of, or of safety issues associated with, the
drug we are testing. Future governmental action or existing or changes in FDA
policies or precedents, may also result in delays or rejection of an application
for marketing approval. Accordingly, we may not be able to obtain product
registration or marketing approval for Plenaxis, our drug candidate for the
treatment of hormonally

27

responsive advanced prostate cancer and endometriosis, or for any of our other
product candidates, or regulatory approval may be conditioned upon significant
labeling requirements which could adversely affect the marketability or value of
the product.

To date, none of our product candidates has received regulatory approval for
commercial sale. In June 2001, we received a letter from the FDA with respect to
our NDA for Plenaxis for the treatment of hormonally responsive prostate cancer,
which was submitted in December 2000. The FDA indicated that the information
presented in the NDA was inadequate for approval. In September 2001, we met with
the FDA in an effort to clarify the various deficiencies cited in the FDA's
letter, and to discuss what further steps needed to be taken before the
application could be approved. The FDA recommended that we analyze the allergic
reactions that occurred in a small subset of clinical trial patients. We are
conducting this analysis utilizing existing data and samples. In addition, the
FDA expressed concern that, in a subset of patients treated beyond the
three-month pivotal study time frame, testosterone suppression was not
maintained at a comparable level to that of patients treated with either Lupron
Depot or Lupron Depot plus Casodex. The FDA also indicated that the nature of
the testosterone surge, if any, associated with treating patients with Plenaxis
and then switching them to a currently available therapy should be understood.
We considered various alternatives to address these issues, and in
December 2001 the FDA indicated that we could proceed with our clinical plans to
study the effects of using currently available hormonal therapies in prostate
cancer patients following treatment with Plenaxis. The FDA also indicated that
our plan to further evaluate the rare allergic reactions that occurred in our
clinical trials was acceptable. We can give no assurance tha