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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

FOR THE TRANSITION PERIOD FROM              TO             

COMMISSION FILE NO. 000-28397

TULARIK INC.

(Exact Name of Registrant as In Its Charter)

1120 Veterans Boulevard

South San Francisco, California 94080

(650) 825-7000

(Address, including zip code, and telephone number,

including area code, of registrant’s principal executive offices)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

COMMON STOCK $.001 PAR VALUE

(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 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.    ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes  x    No  ¨

State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant’s most recently completed second fiscal quarter: $491,728,179*.

The aggregate market value of the voting stock held by non-affiliates of the Registrant based upon the closing price of the common stock listed on the Nasdaq National Market on February 27, 2004 was $913,919,039**.

The total number of shares outstanding of the Registrant’s common stock was 67,008,103 as of February 27, 2004.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Definitive Proxy Statement, to be filed with the Commission pursuant to Regulation 14A in connection with the 2004 Annual Meeting of Stockholders, are incorporated herein by reference into Part II and Part III of this annual report on Form 10-K.

Certain exhibits filed with the Registrant’s prior registration statements, periodic reports and current reports under the Securities Exchange Act of 1934 are incorporated herein by reference into Part IV of this annual report on Form 10-K.

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PART I

Forward-Looking Statements

This annual report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by those sections. These forward-looking statements include, but are not limited to, statements about:

These forward-looking statements are generally identified by words such as “expect,” “anticipate,” “intend,” “believe,” “hope,” “assume,” “estimate,” “plan,” “will” and other similar words and expressions. Discussions containing these forward-looking statements may be found throughout this annual report on Form 10-K, including in the sections entitled “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in the forward-looking statements. The risks discussed in “Risk Factors,” among other things, should be considered in evaluating our prospects and future financial performance. We undertake no obligation to publicly release any revisions to these forward-looking statements or to reflect events or circumstances after the date of this document.

Item 1.    Business

Overview

Tularik Inc. seeks to discover and develop a broad range of novel and superior orally available medicines that act through the regulation of gene expression. Building on our scientific strengths, we intend to become a world-class pharmaceutical company. Our broad scientific platform addresses many human diseases that represent attractive potential commercial markets. We have diversified our drug discovery and development efforts not only across a large number of diseases, but also across multiple targets and drug candidates for these diseases. We currently focus on three therapeutic areas: cancer, immunology and metabolic disease. We were incorporated in California in 1991 and reincorporated in Delaware in 1997. Net losses were $105.1 million in 2003, $93.8 million in 2002 and $48.6 million in 2001.

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The following table represents the current status of our drug discovery and development efforts:

Regulation of Gene Expression

Gene Expression.    The human body is composed of specialized cells that perform different functions and are organized into tissues and organs. All cells in the human body contain the same set of approximately 40,000 genes, referred to as the human genome. Approximately 10% of the total number of genes are activated, or expressed, in an individual human cell, and different subsets of genes are activated in distinct cell types. Most genes direct the production of specific proteins through a two-step decoding process, resulting in the production of approximately 10,000 different proteins in a typical cell. Proteins, such as hormones, enzymes and receptors, carry out critical biological functions. Gene activation is known as gene expression, and the selective activation of different subsets of genes in distinct cell types is referred to as differential gene expression. All functions of cells, tissues and organs are controlled by differential gene expression. As an example, cells in the pancreas known as beta cells make large amounts of the insulin protein, which is secreted and which circulates throughout the body, regulating glucose metabolism. The exclusive production of insulin by these cells reflects the fact that its encoding gene, the insulin gene, is expressed only in these specialized cells. In all other cells of the body, while the insulin gene is present, it is not expressed. Differential gene expression results in the carefully controlled, or regulated, production of functional proteins, such as insulin.

Regulation of Gene Expression.    Central to the process of differential gene expression are the regulatory elements of genes that are responsible for determining when and where in the body a gene is expressed, or switched on. The regulatory elements of genes operate by interacting with a specialized category of proteins called transcription factors, which are responsible for turning the genes on and off. In addition, the activities of transcription factors are themselves controlled by a network of gene regulation pathways composed of proteins.

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Transcription factors and the other proteins in this network of gene regulation pathways represent potential targets for therapeutic intervention, or drug discovery targets, because of their potential to switch genes on and off. These protein targets reside inside the cell.

The Role of Gene Regulation in Disease.    When one or more steps in a normal cellular pathway is upset or blocked, disrupting the normal balance or function of essential proteins, disease may occur. This disruption can occur because of an intrinsic defect, a harmful environmental stimulus or a combination of both. Intrinsic defects arise from mutations in particular genes, which can either affect the level of gene expression or alter the protein that is produced. Inappropriate gene regulation, resulting in overexpression or underexpression of a protein or group of proteins, plays an important role in numerous diseases, including cardiovascular disease, inflammation, immune disorders and metabolic diseases such as obesity and diabetes. Furthermore, infectious agents, such as bacteria and viruses, rely on gene regulation to survive and proliferate in the human body.

The Tularik Advantage

We are a pioneer in the application of gene regulation biology to drug discovery. Our drug discovery platform is directed toward the discovery of gene regulating pathways and orally available drugs that act on these pathways. We believe that our understanding of gene regulation, the strength of our scientific and management team and the efficiencies captured through our integrated drug discovery and development platform place us in a leading position to discover, develop and commercialize novel, orally available drugs.

Advantages of Gene Regulation Approach.    Approaches to drug discovery that seek drug targets through the random sequencing of portions of the human genome generally do not lead to an understanding of the relevance of discovered genes as drug targets. Similarly, the identification of genes or proteins without an understanding of the pathways by which they operate may not permit identification of the optimal point of pharmaceutical intervention. In contrast, our approach, which involves both the discovery of gene function and the determination of the optimal target for effective therapeutic intervention, is designed to permit the identification of multiple targets within a pathway or subpathway that regulates genes. The potential to regulate the part of the pathway that causes a specific disease without impacting other parts of the same pathway that perform other functions may allow us to develop drugs that have fewer side effects than existing treatments. In addition, we believe that understanding the mechanism of action of drug candidates that act by the regulation of gene expression may allow us to select clinical indications and design clinical trials that have more predictable results than has typically been the case. Finally, gene regulation is fundamental to the development or progression of most diseases and, therefore, has broad applicability.

Integrated Drug Discovery and Development Platform.    We have developed a drug discovery and development infrastructure that we believe positions us to become a leading pharmaceutical company. Our drug discovery and development expertise includes molecular biology, high-throughput and virtual screening, biochemistry, structural biology, chemistry, pharmacology, pre-clinical and clinical testing, biometrics and regulatory affairs. Our management team has extensive drug discovery and development experience with large pharmaceutical companies. To complement our internal capabilities, we collaborate with world-renowned scientists and clinicians and with leading pharmaceutical companies. We believe that our integration of biology, chemistry, pharmacology and clinical development enhances our ability to find novel gene regulating drugs and that our drug discovery and development efforts are highly efficient and productive. To date, we have:

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Pre-clinical Milestones.    We expect to file investigational new drug, or IND, applications with the United States Food and Drug Administration, or FDA, on two of our lead compounds per year over the next several years, including 2004. We have more than 25 drug leads in three different therapeutic areas, with advanced lead compounds in each of our three therapeutic areas. Each of these advanced lead compounds has shown activity in animal models of the relevant disease and represents a new approach to treatment.

Attractive Commercial Opportunities.    Our three therapeutic areas offer potential opportunities to develop drugs for many therapeutic indications. The significant unmet medical and quality-of-life needs for these diseases represent attractive potential commercial markets. We intend to commercialize drugs independently and through collaborations with pharmaceutical partners and, to date, we have retained significant rights to independently market products resulting from most of our programs. The breadth of our current activities and the potential for the application of our platform to additional diseases reduce the risks associated with drug discovery, development and commercialization.

Our Strategy

Our objective is to build a world-class pharmaceutical company that discovers, develops and commercializes novel and superior medicines that act through the regulation of gene expression. The key elements of our scientific and business strategy to achieve our objective are:

Emphasize scientific excellence across our multidisciplinary drug discovery and development platform.    We intend to build on the excellence in biology embodied in our target discovery, assay development and screening capabilities by continuing to integrate high quality efforts in structural biology, chemistry, pharmacology and pre-clinical and clinical development. We plan to add management and technical expertise at each stage of our growth. Important components of our strategy include entering into collaborations with leading pharmaceutical companies and internally developing and in-licensing state-of-the-art technologies as needed.

Focus on diseases representing attractive market opportunities with significant unmet medical needs.    Our drug discovery efforts generally target diseases that represent attractive commercial opportunities and that are underserved by available therapeutic alternatives. Shortcomings of currently available treatments may include limited efficacy, side effects or method of delivery. In particular, we believe that orally available drugs that treat disease with a high degree of specificity without these shortcomings will have strong commercial potential.

Develop orally available small molecule drugs.    Our drug discovery and development efforts generally focus on orally available small molecule drugs. Small molecules are ideally suited for penetrating cells to reach the gene regulatory mechanisms that are within the cell to stimulate or inhibit the function of targets. The major commercial advantage of small molecule therapeutics is the potential for oral administration. In addition, these drugs can be manufactured by conventional methods, resulting in lower manufacturing costs and higher margins than for other types of drugs, such as protein therapeutics.

Increase likelihood of commercial success through diversification.    To reduce the risks inherent in drug discovery and development and our reliance on any one of our programs, we have diversified our drug discovery

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and development efforts by pursuing a large number of diseases and multiple targets and drug candidates for these diseases. Where appropriate, we will pursue drug candidates that act through mechanisms of action other than through the regulation of gene expression and/or that are not orally available small molecule drugs.

Sustain a pipeline of drug candidates and accelerate drug development.    We expect our productive and efficient drug discovery and development platform, coupled with the breadth of our programs, to consistently yield a large number of drug candidates. We subject each drug candidate to rigorous pre-clinical scrutiny and determine its mechanism of action before we enter clinical trials. This enables us to obtain the best drug candidate for each indication and to focus financial resources only on drug candidates that we believe are the most likely to become approved drugs. We may be able to accelerate approval and commercialization by developing a detailed understanding of our products’ characteristics, which may enable us to select optimal clinical indications and design the most appropriate clinical trials. We intend to augment our internal discovery and development efforts by obtaining licenses to promising clinical candidates, although we have not been successful in these efforts to date.

Retain most attractive commercial rights.    We intend to build a world-class pharmaceutical company with the objective of bringing to market novel and superior medicines. We expect to maximize the value of our drug candidate pipeline by retaining certain commercial rights, especially in geographies where we can develop and market drugs independently. We have retained worldwide rights to five compounds from our programs that are currently in the clinic. In North America, we intend to develop a focused sales force to market products to specialty physicians. We intend to seek corporate collaborations or joint ventures to develop drugs to be prescribed by general practice physicians or a large number of specialists. In addition, we intend to continue to selectively collaborate with pharmaceutical and biotechnology companies to accelerate product commercialization in Asia and possibly Europe. Currently, pursuant to collaboration agreements, three corporate partners fund portions of our research directed to metabolic disease, oncology targets and a class of targets (GPCRs) that has produced a number of successful drugs.

Product Development

Our drug discovery and development system is broadly applicable to a wide range of diseases. We have applied this system to diseases that represent attractive potential markets with significant patient populations that are underserved by current therapeutic products. Our pipeline includes two anti-cancer drug candidates, one drug candidate for the treatment of immune disorders, one anti-diabetic drug candidate and one anti-obesity drug candidate in clinical testing, pre-clinical drug candidates in all three of our therapeutic areas and more than 25 drug leads. In addition, Eli Lilly and Company has in clinical testing a drug candidate that we discovered. The following table summarizes key information about our programs:

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None of our programs are expected to generate commercially available drugs until at least 2006.

Clinical Programs

We currently have five drug candidates in clinical development: two in our cancer program, one in our immunology program and two in our metabolic disease program. The anti-cancer drug candidates are T67 and T607, the immune disorders drug candidate is T487 and the metabolic disease candidates are T131 and T71. In

addition, an oral Factor Xa inhibitor, being developed by our corporate partner Eli Lilly and Company, is

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currently in Phase 2 clinical trials for the prevention and treatment of heart diseases. The compound was a product of our multi-year collaboration with Eli Lilly and Company that was established to design and optimize inhibitors of Factor Xa using Tularik’s computer-aided molecular design (CAMD) technology, as well as to investigate other potential anti-thrombotic targets.

Cancer

T67.    T67 is our most advanced oncology drug candidate. T67 binds irreversibly to tubulin, the building block of microtubules, which are essential to cell division. T67 disrupts microtubule function, causing cancer cells to die and potentially resulting in tumor shrinkage. This concept has been proven clinically by other anti-cancer agents, such as Taxol and vincristine, which also bind to tubulin. However, unlike these agents, T67 targets tubulin through a unique mechanism involving irreversible binding.

We initiated a Phase 2/3 clinical trial in patients with HCC, or liver cancer, in 2003. The primary endpoint of this pivotal study is patient survival. According to the World Health Organization, liver cancer is the third leading cause of cancer death worldwide. Approximately one million new cases of liver cancer are reported annually, according to a presentation at a recent National Institutes of Health conference. Currently, there is no effective therapy for liver cancer, making it an attractive commercial opportunity. In 2003, the FDA approved T67 for the FDA’s fast track program.

T607.    T607 is an analog of T67 and similarly targets tubulin through a unique mechanism involving irreversible binding. Animal studies indicate that T607 is distinct from T67 because T607 has a reduced ability to enter the brain, which may make it suitable for the treatment of different tumor types than T67. We are conducting Phase 2 clinical trials in gastric cancer and esophageal cancer.

Metabolic Diseases

Diabetes:  T131.    Type 2 diabetes is a chronic, progressively debilitating disease and, according to the American Diabetes Association, represents 90% of the total population of people with diabetes. Its prevalence is increasing as a function of the aging population and the increase in obesity. Type 2 diabetes usually develops after the age of 40 and is characterized by the body’s inability to respond to insulin. Recently, a new class of drugs has been introduced that permits type 2 diabetics to make better use of the insulin produced by their bodies or taken by injection. Drugs in this class, including Actos and Avandia, have proven to be effective for the treatment of type 2 diabetes but have also been associated with undesirable side effects, such as weight gain, fluid retention and anemia. T131 is an orally active small molecule drug candidate that binds to the same protein targeted by the insulin sensitizing drugs Actos and Avandia. We believe that T131 may not have the undesirable side effects associated with currently available drugs, which limit the number of eligible patients and increase the costs associated with monitoring for adverse effects after initiation of treatment. We are conducting Phase 2 clinical trials of T131 in patients with type 2 diabetes.

Obesity:  T71.    Body weight is determined and regulated by a variety of genetic and environmental factors. Weight change is influenced by eating behavior and by energy utilization as determined by exercise and metabolic rate. According to the National Institutes of Health, obesity increases the risk of serious human diseases, including type 2 diabetes, coronary artery disease and hypertension. There is a large, unmet need for a treatment for obesity. T71 is an orally active small molecule drug candidate that binds to a central nervous system target. In animal models, T71 decreased appetite and increased metabolic rate. We are conducting Phase 1 clinical trials of T71 in overweight and obese volunteers.

Immunology

Immune Disorders: T487.    While our immune response plays a beneficial role in protecting us from bacterial and viral infections, inappropriate immune responses can cause diseases or lead to conditions such as

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allergy, asthma, type 1 diabetes and multiple sclerosis, as well as rheumatoid arthritis, inflammatory bowel disease and psoriasis. We seek to develop orally administered drugs that work in a new way to selectively inhibit cells that mediate undesirable immune responses. We have focused on inhibiting certain receptors that regulate trafficking and migration of the cells of the immune system. T487 is an orally active small molecule drug candidate that targets a protein involved in the inflammatory response. T487 was discovered by Tularik in collaboration with ChemoCentryx, Inc. We are conducting Phase 2 clinical trials of T487 in patients with moderate to severe psoriasis. We plan to commence a Phase 2 clinical trial of T487 in patients with moderate to severe rheumatoid arthritis in the first quarter of 2004.

Pre-clinical Programs

Metabolic Diseases

Lipid Disorders.    Cardiovascular disease is the leading cause of death in the developed world according to the National Institutes of Health. The most clinically significant diseases, angina and myocardial infarction, are causally related to elevated levels of low-density lipoprotein, or LDL, cholesterol or low levels of high-density lipoprotein, or HDL, cholesterol in the blood stream. The risk of death begins to increase when LDL cholesterol levels rise above 126 mg/dl or when HDL cholesterol levels drop below 35mg/dl. The risk of disease progressively worsens with more pronounced changes in these lipoproteins. To date, statins are the most successful drugs for lowering LDL cholesterol levels. Despite the success of statins, there is a significant patient population, particularly those individuals having low HDL cholesterol, with or without substantially elevated LDL cholesterol, for which these drugs alone are insufficient to achieve the desired efficacy. We believe that a drug that increases HDL cholesterol may show improved efficacy relative to the current agents in selected patients.

Our scientists have extended the understanding of the mechanisms responsible for the body’s metabolism of triglycerides, or fat, and cholesterol. These scientists have studied an important receptor involved in the process of regulating HDL cholesterol blood levels. We have identified compounds that elevate HDL cholesterol levels in animal models.

We have a research collaboration with Professors Michael Brown and Joseph Goldstein of the University of Texas Southwestern Medical School at Dallas to develop a detailed understanding of the intracellular events controlling cholesterol metabolism. Professors Brown and Goldstein won a Nobel Prize for their work in this area. We have been collaborating with Professors Brown and Goldstein since October 1992 and have the exclusive right to license the results of their research in this area.

Obesity.    We have a robust program that currently is focused upon multiple pathways involved in obesity. One of the pathways we are evaluating involves a family of proteins thought to play a role in regulating satiety. Another pathway we are evaluating involves a protein that may play a role in the metabolism of fat. For each of these pathways, our scientists have discovered a series of compounds that block the activity of a promising target within this family of proteins. Compounds from both of these series have been shown to reduce body weight gain in animal models of obesity.

Diabetes.    Our program targeting type 2 diabetes is pursuing pathways involved in the proper production and utilization of insulin. One of the pathways we are researching is involved in the body’s ability to enhance the release of insulin. Another pathway involves a protein that may play a role in treating insulin resistance. For each of these pathways, our scientists have discovered a series of compounds that improve the control of blood sugar in animal models of type 2 diabetes.

Immunology

Inflammation.    Under normal circumstances, inflammation is an important defense response to injury and infection. An early step in the inflammatory response is the recruitment of white blood cells, or leukocytes, from

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the circulatory system to damaged or infected tissue. Excessive or prolonged accumulation of leukocytes can lead to inflammatory conditions, including rheumatoid arthritis, inflammatory bowel disease, psoriasis, multiple sclerosis and asthma. Inflammatory messengers act by binding to specific cell surface receptors that, in turn, set off signaling events culminating in the expression of many inflammatory response genes. The crucial roles played by particular inflammatory messengers in several inflammatory disease states have been clearly demonstrated by studies utilizing antibodies and soluble receptors that neutralize the activities of particular inflammatory messengers. The efficacy demonstrated by Enbrel^®, a soluble inflammatory messenger receptor, has validated this concept for the treatment of rheumatoid arthritis. We believe that an orally available drug of comparable efficacy would represent a competitive advantage over drugs that must be injected, such as Enbrel^®.

Several key inflammatory response genes are regulated by a single transcription factor, NF-kB. Our scientists have discovered numerous novel regulatory proteins in the gene regulation pathways leading from the receptors for particular inflammatory messengers and have elucidated their roles in NF-kB activation. On the basis of these discoveries, our scientists are recognized as leaders in this field of research. Based upon this research, our scientists have determined that some of these regulatory proteins appear to be exclusively dedicated to NF-kB activation and the inflammatory response and therefore represent ideal drug discovery targets. We are engaged in the pre-clinical development of a series of compounds that inhibit one of the key components involved in NF-kB activation and have demonstrated oral activity in animal models of inflammation. We believe that our discoveries and the expertise we have developed in this disease area place us in a leading position to identify the next generation of important anti-inflammatory drugs.

Oncogene Discovery Program

Our Oncogene Discovery Program focuses on the identification of novel cancer genes. To date, Tularik scientists have discovered more than 30 amplified oncogenes using Representational Difference Analysis (RDA) or related microarray technology. These approaches work by sampling DNA from healthy and diseased cells from the same person and rapidly comparing the two samples to identify over-replicated genes potentially involved in cancer. Unlike other genetic approaches, our strategy does not require either prior hereditary clues or an extensive sample collection from high-risk families that have a history of disease. Prior to the time we obtained a license to this technology, RDA was utilized to isolate two tumor suppressor genes, BRCA2 and PTEN. We envision that these proprietary approaches will allow us to identify virtually all remaining amplified oncogenes in the next few years.

Most of the oncogenes identified thus far encode targets suitable for small molecule intervention and/or cell-surface targets suitable for antibody development. We intend to devote our internal drug discovery efforts to small molecule therapeutics. We entered into a collaboration with Amgen Inc. in May 2003 to collaborate on the discovery, development and commercialization of therapeutics aimed at oncology targets. Under the collaboration, Amgen will select oncology targets identified by Tularik, and the companies will jointly embark on multiple drug discovery and development programs over a five-year period. We also have a collaboration with Medarex, Inc. to develop human antibodies against three of our cancer gene targets. We will share clinical development costs and commercialization rights equally with Medarex. See “Corporate Collaborations—Ongoing Collaborations” below.

Drug Discovery and Development

We believe that our integrated drug discovery and development platform places us in a leading position to discover, develop and commercialize novel, orally available drugs. We continually seek to identify and apply novel technologies and methods to our multi-faceted drug discovery effort.

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Target Identification and Validation

A key focus of our scientists is to establish a link between specific genes and diseases. Following the identification of such a link, we seek to identify and characterize important proteins and regulatory pathways responsible for the expression of these genes. Our ability to identify multiple targets within a gene regulatory pathway or subpathway that regulates genes increases the likelihood that we will be able to identify the optimal target for therapeutic intervention.

Our scientists use a combination of biochemical, molecular biological and genetic approaches to discover novel regulatory proteins. Once a regulatory protein has been identified, we clone and express the gene that encodes that protein. Cloning the regulatory protein allows us to conduct target validation, which is the biological evaluation of the protein’s specific function in the disease process. We evaluate the physiological function of potential drug targets that we discover by manipulating their expression in cells, by mapping the pathways by which they interact with other regulatory proteins to regulate genes and by understanding the cell types in which they are expressed. This information can be critical to assessing the suitability of a gene regulatory protein as a target for pharmaceutical intervention.

In our target discovery efforts, we also search publicly available genome databases, including data derived from the Human Genome Project. In the cancer area, we seek to discover novel cancer genes using RDA or related microarray technology. Some of these cancer genes may be targets for small molecule intervention.

Where the target validation process indicates that a particular regulatory protein may not be the most appropriate molecular target for assay development, we use cellular and molecular biology studies to identify other proteins involved in the same biochemical pathway(s) that may be better molecular targets for drug discovery and therapeutic intervention. The target validation process also provides us with opportunities to discover additional components of the cellular pathway that may lead to identification of additional drug discovery targets.

Primary Assays

We use primary assays specific to each target or program to rapidly search our compound screening library for chemical structures that hold promise for further study, or hits. We design and implement two main types of primary assays, as described below. We performed high-throughput screening with approximately 47 assays in 2003.

Biochemical Assays.    Our scientists use the results of target identification efforts to craft specialized biochemical assays in which one or more target proteins are reconstituted in a system that closely mimics their native environment. At this stage, we adapt the assay to an automated format to allow for high-throughput screening. Biochemical assays provide several advantages in the search for new drugs. In a biochemical assay, the components and mechanism of action of the drug candidates are already known. This precision minimizes inaccurate results and false-positive readings, thereby accelerating the discovery process. Additionally, the identification of lead compounds using biochemical assays bypasses the potential problems of false-negative readings associated with the ability of a compound to penetrate a cell or the intrinsic ability of cells to break down chemicals before they reach a target. Once hits are identified, these properties can be subsequently manipulated through chemistry. Since biochemical assays are usually highly amenable to high-throughput screening, results can be obtained rapidly and reproduced consistently.

Cell-based Assays.    High-throughput screening using intact cell-based assays complements and extends our biochemical screening capabilities. A major advantage of cell-based assays over biochemical assays is that cell-based assays allow analysis of sample activity in an environment similar to the one in which a drug would act. In addition, the toxicity of the drug and its ability to penetrate into the cell can be assessed. In contrast to biochemical assays, where the target protein for a drug is known, cell-based assays offer an additional opportunity to discover drugs interacting with novel, previously unknown, target proteins.

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High-throughput Screening

We have developed innovative hardware and software systems to automate the entire drug screening process, from the preparation of solutions of the test substances for screening to the analysis of the data generated from the assays. In our automated screening facilities, we can annually generate more than 20 million sample evaluations in our assays. In 2003, we performed more than 17 million of these sample evaluations. Our automated systems can be configured to run a wide variety of assay formats. Our data management system stores the data for hundreds of thousands of samples, each tested in dozens of assays. This relationally integrated system manages sample inventories through a bar code system, configures plates for a wide variety of experiments and coordinates the screening of large numbers of plates across multiple assays. The data management system electronically recalls and presents data in formats that allow rapid recognition of active compounds or extracts. This gives each of our scientists the ability to analyze the results for a given assay within the context of the entire drug discovery database, including the results of all past screening assays.

Virtual screening is the process by which computers calculate the theoretical binding affinity between a very large number of possible chemical structures and the active site of cellular receptors or enzymes for which the molecular structure has been solved. We added virtual screening to our capabilities in 2001 with the acquisition of the CAMD unit of Protherics PLC, now known as Tularik Ltd. Through this transaction, we acquired proprietary computational chemistry software and a team of experienced software designers, as well as computational chemists and medicinal chemists. The key aspect of the CAMD technology is a set of proprietary computational software tools that facilitate the identification of novel compounds. The use of virtual screening to complement our high-throughput screening capabilities may accelerate the discovery of high-quality leads against our validated targets.

Screening Library

Access to large libraries of highly diverse molecular structures is an important aspect of our drug discovery efforts. We currently have a library of more than 1,000,000 synthetic compounds or natural product extracts. This library includes individual synthetic compounds, combinatorial chemical libraries that contain synthetic compounds incorporating desirable molecular features and also includes a natural product collection of independent samples derived from microbial, plant and marine sources. This library is supplemented with chemical libraries provided by our collaborators for specific programs.

Secondary Assays

Secondary assays are designed to eliminate those “hits” that lack potency or specificity, or have unwanted characteristics. If a compound survives the secondary assay screening process, it is then subjected to further testing and, ultimately, chemistry optimization. Generally, hits with promising results in animal models and desirable chemical characteristics become lead compounds.

Lead Optimization

Regardless of whether a lead compound is obtained from biochemical or cell-based assays, the pharmaceutical properties of that compound must be improved before clinical development. This is the process of lead optimization.

Chemistry.    We carry out traditional structure-activity relationship studies of potential lead compounds and conduct lead optimization utilizing chemistry techniques to synthesize new analogs of a lead compound with improved properties. Our natural products chemists handle the separation, isolation and structure elucidation of bioactive components derived from our natural product extracts. In addition, we have computational chemistry capabilities, including molecular modeling, to support lead optimization.

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We complement this activity with directed combinatorial chemistry, which enables the rapid synthesis of thousands of chemical analogs of lead compounds. We believe that the continued development of combinatorial chemistry technology will streamline the ability of our chemists to improve upon promising lead compounds and facilitate the expansion of our proprietary screening library.

Structural Biology.    Structural biology techniques aid in drug design and optimization by providing molecular “snapshots” that allow scientists to visualize the interactions between a drug or lead and its protein target. These interactions are analogous to the fit between a lock and a key. Nuclear magnetic resonance, spectroscopy and X-ray crystallography comprise the essential techniques of structural biology. We have established state-of-the-art laboratories that allow us to readily utilize these powerful tools for lead optimization. Utilizing structural information, chemists can design and synthesize new analogs of lead compounds that are likely to have a better fit with the target protein, and hence have greater potency. We are applying structural biology broadly and have ongoing efforts in many of our drug discovery programs.

Pharmacology and Pre-clinical Development

We believe that the rapid characterization and optimization of lead compounds identified in high-throughput screening will generate high quality pre-clinical development candidates. Our Pharmacology and Pre-clinical Development groups facilitate lead optimization by characterizing lead compounds with respect to the pharmacokinetic profile, potency, efficacy and selectivity. The generation of proof-of-principle data in animals and the establishment of standard pharmacological models with which to assess lead compounds represent integral components of lead optimization. As programs move through the lead optimization stage, our Pharmacology and Pre-clinical Development groups perform the necessary studies, including toxicology, for IND application submissions.

Clinical Development

We have assembled a team of experts in drug development to design and implement clinical trials and to analyze the data derived from these studies. The Clinical Development group possesses expertise in clinical research, clinical pharmacology, biostatistics and data management, drug safety and surveillance and regulatory affairs.

Research and Development Expenses

Our research and development expenses were $123.7 million in 2003, $108.8 million in 2002 and $91.2 million in 2001.

Corporate Collaborations

To assist in product commercialization and fund research and development activities, we have established and will continue to pursue collaborations with selected pharmaceutical and biotechnology companies. We currently have three research stage collaborations that provide research funding: one with Amgen Inc. relating to oncology targets, one with the pharmaceutical division of Japan Tobacco Inc. relating to metabolic diseases and one with Sankyo Co., Ltd. to jointly discover and develop human therapeutics that act on a class of targets known as orphan G-protein coupled receptors (GPCRs). In addition, we have a collaboration with Medarex, Inc. to develop human antibodies against three of our cancer gene targets. We received $22.4 million, $21.4 million and $18.4 million in research payments for 2003, 2002 and 2001, respectively, from these corporate collaborations as well as other terminated collaborations.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview” for additional details relating to funding received to date and future funding payable under existing corporate collaboration agreements. In addition, we have a number of scientific collaborations with academic and medical

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institutions and biotechnology companies under which we have in-licensed technology. We intend to pursue further collaborations as appropriate.

The table below summarizes the economic rights currently held by us and our corporate collaborators and additional details relating to specific corporate collaboration agreements.

Ongoing Collaborations

Amgen Inc. (Oncology)

In May 2003, we entered into an agreement with Amgen to collaborate on the discovery, development and commercialization of therapeutics aimed at oncology targets. Under the collaboration, Amgen will select oncology targets identified by Tularik, and the companies will jointly embark on multiple drug discovery and development programs over a five-year period. Amgen has exclusive worldwide commercialization rights to Amgen products resulting from the collaboration, with Tularik retaining an option to certain co-promotion rights in the United States on a product-by-product basis.

The terms of the collaboration include milestones payable to Tularik of up to $21.0 million per target, $50.0 million in committed research funding over a five-year period and royalties on net commercial sales of Amgen products resulting from the collaboration. Either party may terminate the agreement upon a material breach by the other party that has not been cured. Through December 31, 2003, Amgen has made payments of $10.4 million to us for research funding and milestones. In June 2003, Amgen purchased $35.0 million worth of newly

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issued Tularik common stock at $10 per share. Over the next three years, subject to certain closing conditions, Amgen is obligated to purchase an additional $40.0 million in newly issued Tularik common stock at then market prices.

The pharmaceutical division of Japan Tobacco (Metabolic Diseases)

In June 2000, we entered into a collaborative agreement with the pharmaceutical division of Japan Tobacco for the discovery, development and commercialization of products against certain targets for the treatment of metabolic diseases. We are responsible for basic research and high-throughput screening, while Japan Tobacco shares responsibility for medicinal chemistry and pre-clinical development. For purposes of the collaboration, we formed a wholly owned subsidiary, Tularik Pharmaceutical Company, which is focused on discovering small molecule, orally available drug candidates useful to treat or prevent metabolic diseases. The subsidiary is located in South San Francisco, California.

In connection with the collaboration, Japan Tobacco has made payments of $62.0 million to us, as of December 31, 2003. Expenses incurred in conjunction with the development and commercialization of any compound identified by the subsidiary will be shared equally by Tularik and Japan Tobacco. We and Japan Tobacco will also share equally all profit and/or revenues from the commercialization of any compound identified by the subsidiary during the collaboration. We retain exclusive marketing and sales rights in the United States and Canada. Japan Tobacco retains exclusive marketing and sales rights in Japan and Korea. Japan Tobacco and Tularik jointly determine marketing strategy in other countries. The marketing and sales rights shall continue until the later of the expiration of all patent rights covering the product or the date at which the product no longer generates sales revenue.

We have been notified that Japan Tobacco will terminate the research support for this collaboration on May 31, 2004. The parties are negotiating revised terms for a research collaboration of reduced scope that includes several of the targets being pursued by the existing collaboration. Our ability to successfully complete this negotiation is uncertain. The development portion of the collaboration will continue irrespective of the results of this negotiation. Each party may elect to terminate its co-development obligations with respect to, and profit sharing interest in, a given collaboration product upon prior written notice to the other party. In such case, the other party may continue to develop and commercialize such product at its expense, subject to an obligation to pay a royalty on sales of such product to the party that terminated its co-development and co-promotion of such product. Either party may terminate the agreement at any time upon a material breach by the other party of its obligations under the agreement. Japan Tobacco and we have agreed not to conduct research on targets that are the subject of the collaboration, or develop compounds against these targets, independently or with any commercial third party, prior to the termination of the collaboration. Following termination of the collaboration, Japan Tobacco and we will jointly own rights in intellectual property relating to compounds created during the collaboration. The parties have agreed to maintain the confidentiality of information produced during the collaboration.

Sankyo (Certain GPCR Targets)

In June 2002, we entered into a collaboration with Sankyo to jointly discover and develop human therapeutics that act on a class of targets known as orphan G-protein coupled receptors (GPCRs). Both Sankyo and we are responsible for high-throughput screening, medicinal chemistry and development of resulting compounds. Under the agreement, Tularik received a $2.0 million cash payment in recognition of its contribu