PATHOGENESIS CORP, SC 14D9, 2000-08-21

PATHOGENESIS CORP
SC 14D9, 2000-08-21
PHARMACEUTICAL PREPARATIONS

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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SCHEDULE 14D-9

SOLICITATION/RECOMMENDATION
STATEMENT UNDER SECTION 14(D)(4) OF THE
SECURITIES EXCHANGE ACT OF 1934

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PATHOGENESIS CORPORATION

(Name of Subject Company)

PATHOGENESIS CORPORATION

(Name of Person Filing Statement)

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COMMON STOCK, $0.001 PAR VALUE

(Title of Class of Securities)

70321E 10 4

(CUSIP Number of Class of Securities)

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WILBUR H. GANTZ
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
PATHOGENESIS CORPORATION
201 ELLIOTT AVENUE WEST
SEATTLE, WASHINGTON 98119
(206) 467-8100

(Name, Address and Telephone Number of Person Authorized to Receive Notice and
Communications on Behalf of the Person Filing Statement)

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COPY TO:

DAVID M. SILK, ESQ.
WACHTELL, LIPTON, ROSEN & KATZ
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019
(212) 403-1000

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/ / CHECK THE BOX IF THE FILING RELATES SOLELY TO PRELIMINARY COMMUNICATIONS
MADE BEFORE THE COMMENCEMENT OF A TENDER OFFER.

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ITEM 1. SUBJECT COMPANY INFORMATION.

The name of the subject company is PathoGenesis Corporation, a Delaware
corporation (the "Company"). The address of the principal executive offices of
the Company is 201 Elliott Avenue West, Seattle, Washington 98119. The telephone
number of the Company at its principal executive offices is (206) 467-8100.

The title of the class of equity securities to which this
Solicitation/Recommendation Statement on Schedule 14D-9 (together with any
Exhibits or Annexes hereto, this "Statement") relates is the Common Stock, par
value $0.001 per share, of the Company (the "Common Stock") and the associated
preferred share purchase rights (the "Rights") issued pursuant to the Rights
Agreement, dated as of June 26, 1997, and amended on March 8, 1998, April 13,
1999 and August 18, 2000 (the "Rights Agreement"), by and between the Company
and Harris Trust and Savings Bank, as Rights Agent (the "Rights Agent"). As of
August 18, 2000, there were 16,627,661 shares of Common Stock outstanding.

ITEM 2. IDENTITY AND BACKGROUND OF FILING PERSON.

The filing person is the subject company. The Company's name, business
address and business telephone number are set forth in Item 1 above.

This Statement relates to the tender offer by Picard Acquisition Corp. (the
"Purchaser"), a Delaware corporation and a wholly owned subsidiary of Chiron
Corporation, a Delaware corporation ("Chiron"), to purchase all of the
outstanding shares of Common Stock and the associated Rights (shares of Common
Stock together with any associated Rights are referred to in this Statement as
the "Shares"), at a purchase price of $38.50 per Share (the "Offer Price"), net
to the seller in cash, upon the terms and subject to the conditions set forth in
the Purchaser's Offer to Purchase, dated August 21, 2000 (the "Offer to
Purchase"), and in the related Letter of Transmittal (the "Letter of
Transmittal" which, together with the Offer to Purchase and any amendments or
supplements thereto, collectively constitute the "Offer"). The Offer is
described in a Tender Offer Statement on Schedule TO (as amended or supplemented
from time to time, the "Schedule TO"), filed by the Purchaser with the
Securities and Exchange Commission on August 21, 2000.

The Offer is being made pursuant to the Agreement and Plan of Merger, dated
August 13, 2000, by and among Chiron, the Purchaser and the Company (the "Merger
Agreement"). The Merger Agreement provides that, subject to the satisfaction or
waiver of certain conditions, following completion of the Offer, and in
accordance with the Delaware General Corporation Law (the "DGCL"), the Purchaser
will be merged with and into the Company (the "Merger"). Following the
consummation of the Merger, the Company will continue as the surviving
corporation and will be a direct wholly owned subsidiary of Chiron. At the
effective time of the Merger (the "Effective Time"), each issued and outstanding
Share (other than Shares owned by Chiron, any of its subsidiaries (including the
Purchaser), the Company (as treasury stock), and Shares held by stockholders who
properly demand appraisal and comply with the provisions of Section 262 of the
DGCL relating to dissenters' rights of appraisal) will be converted into the
right to receive the same amount in cash per Share that is paid pursuant to the
Offer (the "Merger Consideration"). The Merger Agreement is summarized in
Section 11 of the Purchaser's Offer to Purchase.

The Schedule TO states that the principal executive offices of Chiron and
the Purchaser are located at 4560 Horton Street, Emeryville, California 94608.

ITEM 3. PAST CONTACTS, TRANSACTIONS, NEGOTIATIONS AND AGREEMENTS.

Certain contracts, agreements, arrangements or understandings between the
Company or its affiliates and certain of its directors and executive officers
are, except as noted below, described in the Information Statement (the
"Information Statement") pursuant to Rule 14f-1 under the Securities

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Exchange Act of 1934 that is attached as Annex B to this Statement and is
incorporated herein by reference. Except as described in this Statement
(including in the Exhibits hereto and in Annex B hereto) or incorporated herein
by reference, to the knowledge of the Company, as of the date of this Statement
there exists no material agreement, arrangement or understanding or any actual
or potential conflict of interest between the Company or its affiliates and
(1) the Company's executive officers, directors or affiliates or (2) the
Purchaser, Chiron or their respective executive officers, directors or
affiliates.

THE MERGER AGREEMENT. The summary of the Merger Agreement and the
description of the conditions of the Offer contained in Sections 11 and 13,
respectively, of the Offer to Purchase and filed as an exhibit to the Schedule
TO, which is being mailed to stockholders together with this Statement, are
incorporated herein by reference. Such summary and description are qualified in
their entirety by reference to the Merger Agreement, which has been filed as
Exhibit (e)(1) hereto and is incorporated herein by reference.

THE CONFIDENTIALITY AGREEMENT. The summary of the confidentiality agreement
(the "Confidentiality Agreement") dated August 8, 2000, contained in Section 11
of the Offer to Purchase and filed as an exhibit to the Schedule TO, which is
being mailed to stockholders together with this Statement, is incorporated
herein by reference. Such summary is qualified in its entirety by reference to
the Confidentiality Agreement, which has been filed as Exhibit (e)(3) hereto and
is incorporated herein by reference.

THE COLLABORATION AGREEMENT. The summary of the Collaboration Agreement
dated as of December 15, 1999 by and between Chiron and the Company, contained
in Section 11 of the Offer to Purchase and filed as an exhibit to the
Schedule TO which is being mailed to stockholders together with this Statement,
is incorporated herein by reference. Such summary is qualified in its entirety
by reference to the Collaboration Agreement, which has been filed as
Exhibit (e)(2) hereto and is incorporated herein by reference.

EFFECTS OF THE OFFER AND THE MERGER UNDER COMPANY STOCK PLANS AND AGREEMENTS
BETWEEN THE COMPANY AND ITS EXECUTIVE OFFICERS.

OPTIONS. Pursuant to the terms of the Company's stock option plans and
related option agreements, all options to purchase Shares (each, a "Company
Option") granted to employees and directors under these plans will vest upon
acceptance for payment of Shares pursuant to the Offer (the "Acceptance Date").
The Merger Agreement provides that at the Effective Time, each holder of an
outstanding and unexercised Company Option will have the right to receive, in
full satisfaction of each Company Option, cash in an amount equal to the number
of Shares subject to such Company Option times the excess, if any, of the Offer
Price over the exercise price per Share of the Company Option (the "Option
Cash-Out Right"), less applicable withholding taxes. The values, based upon the
Offer Price, of Company Options held by Wilbur H. Gantz, A. Bruce Montgomery,
Alan R. Meyer, Marc F. Wipperman, William R. Baker, and Dinendra M. Sen that are
expected to vest on the Acceptance Date are $6,142,204, $1,771,891, $1,562,500,
$1,227,188, $1,363,344 and $1,381,250.

In the Merger Agreement, Chiron has agreed that prior to the Effective Time,
each holder of a Company Option shall have the right to elect, in lieu of such
Option Cash-Out Right, to cause each and every Company Option held by such
holder to be converted, at the Effective Time, into options (each, a "Chiron
Option") to purchase a number of shares of common stock of Chiron, par value
$0.01 per share ("Chiron Shares"), equal to the number of Shares subject to the
original Company Option times the Conversion Ratio (as defined below), at a per
Chiron Share exercise price equal to the per share exercise price of the
original Company Option divided by the Conversion Ratio (as defined below) (the
"Option Rollover Right"). However, (1) any holder who elects the Option Rollover
Right will be required to waive such holder's right to accelerated vesting of
all of the Company Options held

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by such holder on the Acceptance Date and the Effective Time or as a result of
any other event contemplated by the Merger Agreement, and any Chiron Options
issued upon the conversion of Company Options held by such holder that had not
become vested and exercisable prior to the Acceptance Date will vest and become
exercisable only in accordance with the original terms of such Company Options
and (2) at the Effective Time Chiron will grant to such holder an option (each,
a "New Chiron Option") to purchase a number of Chiron Shares equal to the
product of (x) the number of Chiron Shares subject to Chiron Options issued upon
conversion of all unvested and unexercisable Company Options held by such holder
and (y) 0.30. The New Chiron Options will have a vesting schedule and a per
Chiron Share exercise price determined as of the Effective Time in accordance
with the Chiron 1991 Stock Option Plan, as amended; provided, that such New
Chiron Options shall vest and become exercisable with respect to no less than
25% of the Chiron Shares subject to such option on each anniversary of the grant
date and shall have an exercise price per share of no more than the fair market
value per share of Chiron Shares on the grant date.

In the event that any holder of Company Options is terminated within twelve
months after the Effective Time other than for cause or terminates within
thirteen months following the Effective Time pursuant to "good reason" (as
defined in any applicable employment or severance agreement), then each Chiron
Option received upon conversion of a Company Option will immediately become
exercisable and vested and will be converted into the right to receive cash in
an amount equal to the product of (x) the number of Chiron Shares subject to
such Chiron Option and (y) the excess, if any, of the Average Chiron Price (as
defined below) over the exercise price per Chiron Share for such Chiron Option.
As used herein, the term "Conversion Ratio" means the ratio of the Offer Price
to the average (the "Average Chiron Price") of the closing prices per Chiron
Share on the NASDAQ Stock Market ("Nasdaq") for the five consecutive trading
days immediately preceding the Effective Time.

EMPLOYEE STOCK PURCHASE PLAN. Prior to entering into the Merger Agreement,
the Company amended its Employee Stock Purchase Plan to provide that
participants in the plan will not be allowed to make new deposits in their
accounts following the Acceptance Date. Participants will be deemed to have
exercised their rights to purchase Shares with amounts remaining in their
accounts immediately prior to the Effective Time and the Employee Stock Purchase
Plan will terminate immediately prior to the Effective Time.

INTERESTS OF CERTAIN PERSONS. Certain members of the Company's management
and the Board of Directors of the Company (the "Board" or the "Board of
Directors") may be deemed to have interests in the transactions contemplated by
the Merger Agreement that are in addition to their interests as Company
shareholders and option holders generally. The Board was aware of these
interests and considered them, among other matters, in approving the Merger
Agreement and the transactions contemplated thereby.

CHANGE IN CONTROL AGREEMENTS. Messrs. Gantz, Montgomery, Meyer, Wipperman,
Baker and Sen and certain other officers are each a party to a Change in Control
Employment Agreement (the "Change in Control Agreements") with the Company. A
"change in control" for purposes of the Change in Control Agreements will occur
on the Acceptance Date and Chiron has acknowledged that the purchase of Shares
will constitute "Good Reason" for Messrs. Gantz and Meyer and one other officer
under their Change in Control Agreements.

Under the Change in Control Agreements, benefits will become payable if,
within two years following a "change in control," the executive's employment
terminates and the termination was by the Company without cause, or by the
executive for "good reason" (which includes assignment to the executive of any
duties inconsistent with such executive's position, authority or
responsibilities or actions that result in a diminution in such position,
authority, duties or responsibilities, relocation, loss of benefits or other
changes and any termination by the executive for any reason during the 30-day
period immediately following the first anniversary of the Acceptance Date). The
principal benefits to be

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provided to the executives under the Change in Control Agreements are a lump-sum
payment equal to two years (three years in the case of Mr. Gantz) base salary
and annual bonus, a pro rata annual bonus for the year of termination, and
certain other benefits, including immediate vesting of all unvested options, two
years of welfare benefit continuation and outplacement assistance. In addition,
the agreements provide that if the executive would be subject to any excise tax
under the Internal Revenue Code of 1986, as amended on excess parachute
payments, the Company shall provide the executive with a tax reimbursement
payment to make the executive whole on an after-tax basis for such excise tax.
Assuming that the Acceptance Date occurs on September 30, 2000, the severance
benefits (any lump sum payment payable and any pro-rata bonus, but excluding the
value attributable to welfare benefit continuation, outplacement assistance and
other benefits and without taking into account the amount, if any, of any tax
reimbursement payment) that would be payable to Mr. Gantz, Dr. Montgomery,
Mr. Meyer, Mr. Wipperman, Dr. Baker and Mr. Sen if their employment were
terminated in accordance with the terms of their respective Change in Control
Agreements would be approximately $2,007,574, $905,820, $759,190, $682,520,
$615,850 and $646,683, respectively.

EMPLOYEE BENEFITS. The Merger Agreement provides that through December 31,
2001, Chiron will provide, or will cause to be provided, to current and former
employees of the Company and its subsidiaries ("Company Employees") compensation
and employee benefits that are, in the aggregate, not less favorable than those
provided to Company Employees immediately before the Acceptance Date. The Merger
Agreement also provides that for purposes of eligibility and vesting and levels
of benefits under the employee benefit plans of Chiron and its affiliates
providing benefits to any Company Employee after the Acceptance Date, each
Company Employee will be credited with his or her years of service with the
Company and its affiliates before the Effective Time, to the same extent as such
Company Employee was credited before the Effective Time under similar benefit
plans of the Company.

INDEMNIFICATION; DIRECTORS' AND OFFICERS' INSURANCE. The Merger Agreement
provides that the indemnification provisions of the Company's Certificate of
Incorporation or By-laws as in effect at the Acceptance Date will not be
amended, repealed or otherwise modified for a period of six years from the
Effective Time in any manner that would adversely affect the rights thereunder
of individuals who at the Effective Time were directors, officers, employees or
agents of the Company. From and after the Acceptance Date, each of Chiron and
the Company and, from and after the Effective Time, the Company, will, to the
fullest extent permitted under applicable law, indemnify and hold harmless each
present and former director, officer, employee and agent of the Company or any
of its subsidiaries against any costs or expenses, judgments, fines, losses,
claims, damages, liabilities and amounts paid in settlement in connection with
any actual or threatened claim, action, suit, proceeding or investigation,
whether civil, criminal, administrative or investigative, arising out of,
relating to or in connection with any action or omission occurring or alleged to
occur prior to the Effective Time or the Merger or the other transactions
contemplated by the Merger Agreement or arising out of or pertaining to the
transactions contemplated by the Merger Agreement to the fullest extent that the
Company would have been permitted under Delaware law and the Company's
Certificate of Incorporation and By-laws in effect on the date of the Merger
Agreement.

For a period of six years after the Effective Time, Chiron will cause to be
maintained in effect the current (or comparable) policies of directors' and
officers' liability insurance maintained by the Company and its subsidiaries
with respect to matters arising on or before the Effective Time, but if the
existing current policies expire, are terminated or cancelled during such
six-year period, Chiron will obtain as much coverage as can be obtained for the
remainder of such period for a premium not in excess (on an annualized basis) of
two times the premiums paid by the Company as of the date of the Merger
Agreement.

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ITEM 4. THE SOLICITATION OR RECOMMENDATION.

(a) RECOMMENDATION OF THE BOARD.

The Board, at a meeting held on August 13, 2000, unanimously approved and
declared advisable the Offer, the Merger, the Merger Agreement and the
transactions contemplated thereby, approved the acquisition of the Shares by the
Purchaser pursuant to the Offer and the other transactions contemplated by the
Merger Agreement and exempted the Merger Agreement and the transactions
contemplated thereby from the restrictions of Section 203 of the DGCL
("Section 203"). At this meeting, the Board unanimously recommended that the
Company's stockholders accept the Offer and tender their shares pursuant to the
Offer.

(b) (i) BACKGROUND OF THE OFFER; CONTACTS WITH CHIRON.

On December 15, 1999, Chiron and the Company entered into the Collaboration
Agreement described under Item 3 above to collaborate on drug discovery and
development, focusing on development of new antibiotics.

In early January 2000, Wilbur H. Gantz, Chairman and Chief Executive Officer
of the Company, was invited to a breakfast meeting with Sean Lance, Chairman and
Chief Executive Officer of Chiron. At that meeting, Mr. Lance discussed Chiron's
desire to expand into the antibiotic field and suggested to Mr. Gantz that
PathoGenesis would be a good strategic fit with Chiron and that Chiron was
interested in pursuing a combination of the two companies. Mr. Gantz explained
to Mr. Lance that while the Company valued Chiron as a collaboration partner and
recognized that Chiron's size and financial strength could be important
components in growth, particularly in research, at that time he believed that
the Company was not interested in pursuing a combination of the two companies
and that the Company's pursuit of its business plan was the best way for the
Company to maximize value for the Company's shareholders.

On January 18, 2000, Mr. Lance sent the following letter to Mr. Gantz:

[CHIRON LETTERHEAD]
Sean P. Lance
Chairman and Chief Executive Officer

January 18, 2000

VIA FEDERAL EXPRESS

Mr. Wilbur H. Gantz
Chairman and Chief Executive Officer
PathoGenesis Corporation
5215 Old Orchard Road, Suite 900
Skokie, Illinois 60077

Dear Bill:

Thank you for making the time to meet with me on Tuesday and
sharing your thoughts on PathoGenesis so candidly.

The mutual respect of our research teams paved the way for
Chiron's view that a combination between our companies would be
very compelling. As you know, Chiron has taken several measures to
focus its business on three strategically important therapeutic
areas: infectious disease, cancer and cardiology. We have reviewed
the idea with our Executive Committee and key Board Members and
believe an acquisition of PathoGenesis would play a significant
role in building a

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leading franchise in infectious disease with powerful revenue and
earnings growth, fueled by a focused, significant product pipeline
and research engine.

Over the last twelve months, we have substantially increased
our financial resources and continued to strengthen our profit
position, while putting our strategic vision into practice. As a
result, an acquisition by Chiron would provide PathoGenesis with
significant financial and strategic resources to enable you to
expand and accelerate your company's commercial and clinical
output. Access to Chiron's strong balance sheet and financing
capabilities and the combined companies' strategic resources would
fuel further growth, making us together an attractive strategic
partner for future licensing and acquisition activities.

Bill, we thought that it might be helpful to put our proposal
in writing so that you can give our general economic outline
careful consideration.

As discussed, we are prepared to offer a significant premium
to the current trading price of PathoGenesis's stock. We are open
to discuss the form of consideration for the purchase including
cash, stock or any combination.

I am sure you will agree acquisitions of this kind must be
undertaken on a merger basis. Your key employees are critical to
ensuring the future success of this transaction for Chiron,
particularly in the R&D and sales and marketing functions. We
would like to work with you to develop an employment plan for the
members of both organizations including location and function. In
addition, we would be open to discuss a plan for the issuance of
stock options to PathoGenesis employees. We believe the support of
PathoGenesis's senior management will be critical to the
successful integration of our two companies. We would like to
create combined integration teams, with significant contributions
from you and your management team.

In order to allow you an opportunity to consider this proposal
carefully, we want to emphasize that this letter does not
constitute a formal offer or a binding obligation of either party.
I would appreciate very much that this letter and our discussions
would remain in your confidence.

Bill, as you know, we are very excited about the prospect of
combining our two companies. Together, we believe we can
aggressively build upon the impressive accomplishments of
PathoGenesis and Chiron to become a major player in the
anti-infective market. This is an important strategic opportunity
that we should not pass up.

As I discussed, I would very much like to get together to
present our strategic vision for the next 5 to 7 years. We could
meet sometime in early February, perhaps the week of February 7th
to 11th. As I will be out of the office for the next two weeks, I
would suggest Joyce Lonergan, our Vice President of Corporate
Development, call you to arrange a meeting. I look forward to
speaking with you soon.

Sincerely,

/s/ Sean P. Lance
Sean P. Lance
Chairman and Chief Executive Officer

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A regularly scheduled meeting of the Board of Directors of the Company was
held on January 26, 2000, at which representatives from Goldman, Sachs & Co.
("Goldman Sachs"), the Company's financial advisor, and Wachtell, Lipton,
Rosen & Katz, the Company's legal advisors, were present. At this meeting,
Mr. Gantz advised the Board of the verbal and written overtures from Chiron.
Management and the representatives from Goldman Sachs discussed with the Board
certain publicly available information concerning Chiron, as well as potential
strategies that could be followed if the Board determined to pursue a sale of
the Company or a strategic business combination involving the Company, and the
Company's legal advisors reviewed with the directors their fiduciary duties
under Delaware law. After a discussion of alternatives, the Board unanimously
authorized Mr. Gantz to send the following letter to Mr. Lance:

[PATHOGENESIS LETTERHEAD]

Wilbur H. Gantz
Chairman and Chief Executive Officer

January 27, 2000

VIA FEDERAL EXPRESS

Mr. Sean P. Lance
Chairman and Chief Executive Officer
Chiron Corporation
4560 Horton Street
Emeryville, CA 94608-2916

Dear Sean:

I have received your letter of January 18, 2000. As I told you
when we had breakfast on January 11, PathoGenesis Corporation is
not interested in pursuing a combination of our two companies. We
are confident that pursuit of our business plan as an independent
company is the best way for us to maximize value for our
shareholders. We are beginning to see the results of our
significant investments, and we do not believe that this is the
best time, from the perspective of our shareholders, to engage in
a process to sell the company. If and when we reach any different
conclusion, we would expect to explore the full range of options
available to us before engaging in any transaction. I have
discussed this matter and your letter with my board of directors.
The board fully supports this conclusion.

Let me note, however, that we at PathoGenesis view Chiron as
an important business partner. We are excited about the
collaboration agreement that we reached just last month, and we
view our collaboration as an important part of our efforts to
increase shareholder value. We trust that you place similar
importance on our collaboration, and that our mutual efforts
contemplated by that agreement will result in a fruitful
relationship. In that regard, let me remind you of your
confidentiality obligations under that agreement, and specifically
of your obligations, among other things, to use information
learned in connection with the collaboration solely in connection
with the collaboration.

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Sean, we have carefully considered your letter. From
PathoGenesis' perspective, this is simply not the time to engage
in the type of discussions that you suggested. I trust that this
will conclude the matter.

Sincerely yours,

/s/ Wilbur H. Gantz
Wilbur H. Gantz

On February 7, 2000, Mr. Lance sent the following letter to Mr. Gantz:

[CHIRON LETTERHEAD]

Sean P. Lance
Chairman and Chief Executive Officer

February 7, 2000

VIA FEDERAL EXPRESS

Mr. Wilbur H. Gantz
Chairman and Chief Executive Officer
PathoGenesis Corporation
5215 Old Orchard Road, Suite 900
Skokie, Illinois 60077

Dear Bill:

Thank you for your letter of last week, I appreciate your
candor in communicating PathoGenesis' view on a potential
acquisition by Chiron.

Given your confident outlook, we understand your feeling that
PathoGenesis has significant potential as an independent company.
Indeed, we share the view that this is an exciting inflection
point for you and your team. We continue to feel that there is a
strong rationale for expanding our strategic partnership, perhaps
in some other capacity.

In 1998, we carefully reviewed our businesses and the industry
environment and developed a statement of strategic intent that is
the unifying principle of our future business plan. In summary,
our core business will be novel therapeutics, vaccines, and blood
testing, focusing on three therapeutic areas--infectious disease,
oncology, and interventional cardiology. We will execute our
strategy through an increased commercial orientation for our
operating businesses, clinical candidates and research programs.
We will focus our resources in areas where we can be most
competitive and optimally leverage our scientific and
technological assets. As you can see, infectious disease is a
cornerstone of our strategy. We would very much like to share our
vision and walk you through the thought process that drives our
belief that a strategic relationship could be extremely profitable
for both our companies.

Specifically, we have taken many important steps towards
building an Infectious Disease franchise over the last two years,
including:

- Signing of our valued research collaboration for
anti-infectives;

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- Expanding our small molecule and chemistry research
expertise to leverage combinatorial chemistry and
high-throughput screening technologies;

- Further developing and leveraging of Chiron's U.S. and
European sales and marketing infrastructure to market and
deliver Proleukin (IL-2) for HIV therapy; and

- In-licensing of the MIV-150 compound for the treatment of
HIV.

We believe all of these events will contribute greatly to our
success in infectious disease. As you can see, our research
collaboration is an important part of this strategy and we will
continue to make every effort to ensure its success. However, we
recognize an on-going need to combine strengths with companies
that have a common strategic mission, complementary technologies
and capabilities.

Bill, we are enthusiastic about the prospects to build on our
collaboration and maximize the shareholder value of both companies
through additional strategic partnerships. I would like to build
on the discussion we started at breakfast on January 11 and share
in greater detail Chiron's strategic vision. I look forward to
speaking with you soon.

Yours sincerely,

/s/ Sean P. Lance
Sean P. Lance
Chairman and Chief Executive Officer

On February 14, 2000, a telephonic meeting of the Executive Committee of the
Board of Directors of the Company was held, at which representatives from
Goldman Sachs and the Company's legal advisors were present. Mr. Gantz advised
the committee about the February 7, 2000 letter from Chiron. The Executive
Committee discussed the exchange of correspondence and the advantages and
disadvantages of the proposed dialog and authorized Mr. Gantz to send the
following letter to Mr. Lance:

[PATHOGENESIS LETTERHEAD]

Wilbur H. Gantz
Chairman and Chief Executive Officer

February 15, 2000

VIA FEDERAL EXPRESS

Mr. Sean P. Lance
Chairman and Chief Executive Officer
Chiron Corporation
4560 Horton Street
Emeryville, CA 94608-2916

Dear Sean:

I have received your letter of February 7 and am pleased that
you acknowledge our significant potential as an independent
company.

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As I have previously expressed to you in person and by letter,
PathoGenesis is not interested in pursuing a combination of our
two companies or any other type of relationship beyond the
collaboration that we put in place last December.

Again, I trust that this exchange will conclude this matter.

Sincerely yours,

/s/ Wilbur H. Gantz
Wilbur H. Gantz

At a regularly scheduled meeting on June 1, 2000, the Board discussed the
possibility of the Company undertaking a strategic review of various options for
enhancing shareholder value. The Board considered the volatility of the prices
of the Shares and the then-current market price of the Shares; the difficulty of
being a stand-alone company with only a single drug in the marketplace but
various promising drug candidates in its pipeline; the resources and critical
mass necessary to fully develop the Company's drug pipeline, as well as the
risks inherent in such development; and the potential benefits of a combination
with another company, including increased size and resources. In light of all
these factors, the Board decided to engage Goldman Sachs and other advisors to
explore strategic options for enhancing shareholder value. The Company announced
this decision publicly on June 5, 2000.

On June 23, 2000, Mr. Lance sent the following letter to Mr. Gantz:

[CHIRON LETTERHEAD]

Sean P. Lance
Chairman and Chief Executive Officer

VIA FACSIMILE: (847) 583-5409

June 23, 2000

Mr. Wilbur H. Gantz
Chairman and Chief Executive Officer
PathoGenesis Corporation
5215 Old Orchard Road, Suite 900
Skokie, Illinois 60077

Dear Bill:

Since you and I last corresponded, Chiron has watched with
interest PathoGenesis' progress and accomplishments over the past
few months. We continue to believe that a transaction between
PathoGenesis and Chiron represents a significant opportunity for
both of our companies as well as our respective shareholders. We
note your June 5th announcement regarding the hiring of Goldman,
Sachs & Co. to explore strategic options. We believe that the
value of PathoGenesis may diminish dramatically with the
uncertainty and disruption to the Company's employees and
operations associated with the process apparently contemplated by
your announcement. In order to preserve this value for the benefit
of our respective shareholders, we are prepared to move
immediately to a definitive transaction.

Specifically, we propose a strategic merger between Chiron and
PathoGenesis. In the merger, PathoGenesis' shares would be valued
at $38.50 per share, which represents an aggregate value of
approximately $700 million on a fully diluted basis,

11
<PAGE>
and a significant premium over PathoGenesis' current share price.
The merger consideration would be payable in cash, common stock of
Chiron, or a combination of the two, at your option.

As I mentioned, we believe that it is in our respective best
interests to move quickly. We propose to immediately commence
negotiations with a view toward entering into a definitive
agreement by Friday, June 30. In order to meet this timeline, our
outside counsel have prepared a draft agreement which we believe
you will find quite favorable from your perspective and very
conducive to a prompt conclusion of these matters.

As we have indicated in prior letters, a merger transaction of
this nature requires support and contributions from key employees
of both companies to ensure long-term success. We are prepared to
work in partnership with you and your management team to form an
optimal integration plan for the members of both organizations,
including location and function.

Of course, this letter is an expression of interest and does
not constitute a binding obligation of either party. Any
transaction is subject to negotiation of definitive agreements and
final approval by our Board of Directors. I would appreciate very
much that this letter and our discussions remain in the confidence
of PathoGenesis and its advisors.

We are enthusiastic about the prospects of a merger between
PathoGenesis and Chiron. We look forward to your response no later
than the close of business on Monday, June 26. This proposal will
expire at that time unless we have received your favorable
response and commenced negotiations.

Yours sincerely,

/s/ Sean P. Lance
Sean P. Lance
Chairman and Chief Executive Officer

On June 29, 2000, a special meeting of the Board was held in New York. At
this meeting the Board received a detailed presentation from Goldman Sachs on
the progress of the review of strategic options and a presentation from the
Company's legal advisors on the legal duties of directors in considering a
potential acquisition of the Company. The Board discussed the status of the then
ongoing evaluation of strategic options for enhancing shareholder value,
including the fact that a number of other companies, or their financial
advisors, had contacted Goldman Sachs to express interest in a transaction with
the Company, and that the Company was in the process of developing material that
it intended would be included in a confidential information memorandum to be
shared with parties potentially interested in pursuing a transaction with the
Company. Goldman Sachs reviewed with the Board the companies that had expressed
interest in a potential transaction with the Company, and the Board discussed
the various strategic fits and risks associated with these companies and various
other companies that Goldman Sachs believed might be interested in pursuing such
a transaction. The Board discussed the risks of proceeding with the process of
reviewing strategic options, including the risk that Chiron might withdraw or
reduce the valuation of its proposal. The Board determined that the
consideration offered by Chiron in its June 23rd letter was not sufficient for
the Company to forego completion of a process by which it would determine
whether other parties were interested in acquiring or combining with the
Company, and the value at which those potential transactions might proceed.
However, in light of the Chiron offer, the Board decided that such a process
should be completed promptly, and should focus on those parties that the Board,
with the advice of management and its

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<PAGE>
financial advisors, believed were reasonably likely to be interested in and
capable of pursuing a transaction with the Company in which the Company's
shareholders would receive a premium for their Shares. The Board also decided to
appoint a Strategic Options Committee to address issues that might arise in
connection with the review of strategic options being conducted by the Company,
though approval of any transaction would require approval by the entire Board.

On June 30, 2000 representatives of Goldman Sachs informed representatives
of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") and Chiron that
the consideration offered in the June 23rd letter was not sufficient to persuade
the Board to forego completing the process to determine the level of interest of
other potential acquirors or transaction partners, that the Company intended to
complete that process promptly, and that Chiron would be invited to join in that
process.

During the weeks of July 10 and July 17, several potentially interested
parties executed confidentiality agreements and were provided confidential
information concerning the Company, and those parties so requesting received a
presentation by the Company's management team.

On July 17, 2000, a concurrent telephonic meeting of the Executive Committee
and the Strategic Options Committee was held at which representatives from
Goldman Sachs and the Company's legal advisors were present. The representatives
of Goldman Sachs updated the committees on the companies that had been in
contact with Goldman Sachs and the schedule for the remainder of the process.
The representatives from Goldman Sachs informed the committees that they had
contacted Chiron regarding participation in the Company's process but Chiron
declined to execute a confidentiality agreement, had not been provided
confidential information and had not received a presentation from management.

During the week of July 24, certain potentially interested parties,
including Chiron, were provided with forms of merger agreements, and were
requested to submit offers to acquire the Company, together with any changes
that the offeror would require to the form of merger agreement, on August 3,
2000. Interested parties, including Chiron, submitted proposals on August 3.
Chiron's proposal contemplated the acquisition of the outstanding Shares in a
cash tender offer for $38.25 per share. Chiron's proposal was the only proposal
received by the Board that contemplated a cash transaction, and was the only
proposal that did not contemplate that additional due diligence would be
required to complete the transaction. In addition, no proposal offered
consideration in excess of that offered by Chiron, based on the value of the
consideration offered on the date of the proposals.

On August 7, 2000, a special meeting of the Board was held to consider the
proposals submitted. Representatives of Goldman Sachs provided a detailed
presentation on the companies that were participating in the process and, along
with the Company's legal advisors, reviewed the financial and legal terms of the
written proposals. The Board discussed the relative merits of the proposals,
including the amount and type of consideration offered, the timing of the
proposed transactions and the likelihood of closing under each such proposal.
The Board decided to continue discussions with each party that had submitted a
written proposal and authorized Goldman Sachs to continue discussions with those
parties.

Following the meeting of the Board on August 7, 2000, representatives of
Goldman Sachs telephoned representatives of each party that had submitted a
written proposal, and their financial advisors, to inform them that no offer had
been selected by the Board as the winning offer, and to provide other feedback
on the offers that had been received, including with respect to the changes to
the merger agreement that had been provided by each party submitting a written
proposal. In addition, Mr. Gantz telephoned Mr. Lance and indicated that at that
time the Board of Directors of the Company was not willing to accept Chiron's
proposed price of $38.25 per Share. Mr. Lance indicated that he believed that
Chiron had offered a full price, though Chiron had not seen confidential
information.

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<PAGE>
On August 8, 2000, Mr. Gantz telephoned Mr. Lance and again discussed the
possibility of Chiron entering into a confidentiality agreement in order to
facilitate the exchange of confidential information and the possibility of a
management presentation.

On August 10, 2000, Chiron executed the Confidentiality Agreement and was
provided certain confidential information, and members of Chiron's management
and representatives of DLJ received a presentation concerning the Company from
members of the Company's senior management in San Francisco.

On August 10 and 11, Chiron's General Counsel, along with Chiron's legal
advisors, and the Company's General Counsel, along with the Company's legal
advisors, discussed and negotiated revisions to the form of contract that Chiron
had provided in its proposal. As a result of those negotiations, Chiron agreed
that it would not require certain of the proposed contractual changes that it
had suggested in its original proposal. In particular, Chiron agreed that Chiron
would not have the right to terminate the Merger Agreement solely as a result of
the provision of confidential information by the Company to third parties, that
the taking of other actions by the Company as permitted by the exception to the
"no solicitation" provision of the Merger Agreement (described in Section 11 of
the Offer to Purchase) would not permit Chiron to terminate the Merger
Agreement, and that in the event of termination of the Merger Agreement by
Chiron as a result of the Company Board changing its recommendation of the
Offer, the "termination fee" (described in Section 11 of the Offer to Purchase)
would not be payable unless the Company were to enter into or consummate another
acquisition transaction within twelve months of such termination.

In the evening of August 11, 2000, Mr. Lance informed Mr. Gantz that, after
evaluation of the information that had been made available, Chiron's final offer
to acquire the Company was $38.50 in cash. Representatives of the Company
informed representatives of Chiron that the Company's Board would meet on
Sunday, August 13, to evaluate all final offers, and that all comments to the
Merger Agreement would need to be resolved by that time. Negotiations on the
final language of the Merger Agreement continued on August 12 and the language
was substantially finalized early in the morning of Sunday, August 13.

During the period from August 7 to August 11, one other interested party
increased the consideration that it had originally proposed in a stock
transaction, but noted that its proposal remained conditioned on additional due
diligence. During that time, representatives of Goldman Sachs and senior members
of management met with that bidder, and the Company's General Counsel, along
with representatives from the Company's legal advisors, and that party's legal
advisors discussed the proposed revisions that had been made by that bidder to
the merger agreement that had been proposed by the Company. The increased value
of that bidder's proposal was, as of August 13, 2000, less than $38.50 per
share.

On August 13, 2000, the Board met at the Company's offices in Skokie,
Illinois, to consider the proposals. Goldman Sachs, along with the Company's
legal advisors, gave a presentation on the financial and legal aspects of the
proposals that had been received. At this meeting, Goldman Sachs orally
delivered its opinion to the Board that, as of such date, and based upon and
subject to certain matters and assumptions, the consideration to be received by
holders of Shares pursuant to the Offer and the Merger Agreement is fair from a
financial point of view to such holders. Following such presentations and the
receipt of Goldman Sachs's opinion, the Board unanimously approved the Offer,
the Merger, the Merger Agreement and the transactions contemplated by the Merger
Agreement and determined to recommend that the Company's stockholders accept the
Offer and tender their shares pursuant to the Offer.

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<PAGE>
Following such meeting, the definitive Merger Agreement was executed in the
afternoon of August 13, 2000, and a joint press release announcing the
transaction was issued on August 14, 2000 before the opening of trading.

(ii) REASONS FOR THE RECOMMENDATION OF THE BOARD OF DIRECTORS.

In reaching its recommendation described above in paragraph (a) of this Item
4, the Board of Directors considered a number of factors, including the
following:

1. COMPANY OPERATING AND FINANCIAL CONDITION. The Board considered the current
and historical financial condition and results of operations of the Company,
as well as the prospects and strategic objectives of the Company, including
the risks involved in achieving those prospects and objectives, and the
current and expected conditions in the industries in which the Company's
businesses operate. The Board considered the current conditions and stock
price volatility in the biotechnology field, the risks inherent with only a
single drug in the marketplace and the risks inherent in successfully
developing and introducing new drugs, including the length of time between
development and launch into the market.

2. TRANSACTION FINANCIAL TERMS/PREMIUM TO MARKET PRICE. The Board considered
the relationship of the Offer Price and the Merger Consideration to the
historical market prices of the Shares. The Offer Price represents a 17.6%
premium over the $32.75 closing price of the Shares on Nasdaq on August 11,
2000 (the last trading day prior to the Board meeting at which the Board
approved the Merger Agreement) and a 112.4% premium over the $18.125 closing
price of the Shares on June 2, 2000 (the last trading day prior to the
Board's announcement that it was evaluating strategic options to enhance
shareholder value). The Board also considered the form of consideration to
be paid to holders of Shares in the Offer and the Merger, and the certainty
of value of such cash consideration compared to stock consideration. The
Board was aware that the consideration received by the holders of Shares in
the Offer and Merger would be taxable to such holders for federal income tax
purposes.

3. STRATEGIC ALTERNATIVES. The Board considered the presentation of the
Company's financial advisor and the Board's review with respect to trends in
the industry in which the Company's businesses operate and the strategic
alternatives available to the Company, including the alternative to remain
an independent public company, the possibility of acquisitions of or mergers
with other companies in such industry and other extraordinary corporate
transactions, as well as the risks and uncertainties associated with such
alternatives. The Board considered the results of the process that had been
conducted by Goldman Sachs to assist the Board in its evaluation of
strategic alternatives, including the fact that confidential information had
been provided to six potentially interested parties and that the Company did
not receive any proposal that offered value superior to the Offer or that
the Board believed was more likely to be consummated. The Board also
considered management's belief that the Company and Chiron have similar
corporate cultures, the complementary nature of the two companies' products,
and the experience, size and financial strength of Chiron, including
Chiron's ability to fund the Offer and the Merger with its cash reserves.

4. GOLDMAN SACHS FAIRNESS OPINION. The Board considered presentations from
Goldman Sachs and the opinion of Goldman Sachs, dated August 13, 2000, that,
based upon and subject to certain considerations and assumptions, the
consideration to be received by holders of Shares pursuant to the Merger
Agreement is fair from a financial point of view to such holders. A copy of
the opinion rendered by Goldman Sachs to the Board of Directors, setting
forth the procedures followed, the matters considered and the assumptions
made by Goldman Sachs in arriving at its opinion, is attached as Annex A
hereto and incorporated herein by reference. Stockholders are urged to read
this opinion in its entirety. The Board was aware that Goldman Sachs becomes
entitled to certain fees described in Item 5 upon the consummation of the
Offer.

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<PAGE>
5. TIMING OF COMPLETION. The Board considered the anticipated timing of
consummation of the transactions contemplated by the Merger Agreement,
including the structure of the transactions as a tender offer for all of the
Shares, which should allow stockholders to receive the transaction
consideration earlier than in an alternative form of transaction, followed
by the Merger in which stockholders will receive the same consideration as
received by stockholders who tender their Shares in the Offer.

6. LIMITED CONDITIONS TO CONSUMMATION. Chiron's obligation to consummate the
Offer and the Merger is subject to a limited number of conditions, with no
financing condition. The Board also considered the likelihood of obtaining
required regulatory approvals, and the terms of the Merger Agreement
regarding the respective obligations of Chiron and the Company with respect
to the pursuit of such regulatory approvals.

7. ALTERNATIVE TRANSACTIONS. The Board considered that under the terms of the
Merger Agreement, although the Company is prohibited from soliciting
acquisition proposals from third parties, the Company may engage in
discussions or negotiations with, and may furnish non-public information to,
a third party who makes a written acquisition proposal if, among other
things, the Board determines in good faith after consultation with its
outside legal counsel that such action is necessary in order for its
directors to comply with their fiduciary duties under applicable law, and if
such proposal could reasonably be expected to lead to a proposal that the
Board determines, after consultation with its independent financial advisor
and legal counsel, would if consummated, likely provide greater financial
value to the Company's stockholders than the consideration payable in the
Offer and the Merger. The Board considered that the terms of the Merger
Agreement permit the Company to terminate the Merger Agreement to enter into
such a superior transaction involving the Company if, among other things,
(i) the Company is not in breach of the "no solicitation" provisions of the
Merger Agreement, (ii) the Company gives Chiron notice in writing that it
intends to enter into an agreement for such superior transaction,
(iii) Chiron does not make, within three business days of receipt of such
notification, an offer that the Board determines, in good faith and after
consultation with its financial advisors, is at least as favorable from a
financial point of view, to the stockholders of the Company, as the superior
proposal and (iv) the Company pays Chiron a $25 million termination fee
prior to terminating the Merger Agreement (along with reimbursement for
documented expenses up to $3.1 million). The Board considered that under the
Merger Agreement the Board may withdraw or modify its recommendation of the
Merger Agreement, the Offer or the Merger, if the Board determines in good
faith, after consultation with outside counsel, that its fiduciary
obligations require it to do so, and in the event of termination of the
Merger Agreement by Chiron as a result of the Board changing its
recommendation of the Offer, the $25 million termination fee (along with
reimbursement for expenses up to $3.1 million) would not be payable unless
the Company were to enter into or consummate another acquisition transaction
within twelve months of such termination. The Board considered that these
provisions of the Merger Agreement could deter third parties who might be
interested in exploring an acquisition of the Company. The Board of
Directors also considered the contacts that the Company had had with various
third parties regarding a potential transaction involving the Company, and
the fact that the Company had engaged in a vigorous review of its strategic
options. In addition, after considering the views of management and Goldman
Sachs, the Board concluded that it was unlikely that a third party would be
prepared to pay a higher price for the Shares than the consideration offered
in the Offer and the Merger in a transaction that could be completed on a
timely basis.

8. POTENTIAL CONFLICTS OF INTEREST. The Board was aware of the potential
conflicts of interest between the Company, on the one hand, and certain of
the Company's officers, directors or affiliates, on the other hand, in the
Offer and the Merger (as described under Item 3 "--Effects of the Offer and

16
<PAGE>
the Merger under Company Stock Plans and Agreements between the Company and
its Executive Officers").

The foregoing includes the material factors considered by the Board. In view
of its many considerations, the Board of Directors did not find it practical to,
and did not, quantify or otherwise assign relative weights to the various
individual factors considered. In addition, individual members of the Board may
have given different weights to the various factors considered. After weighing
all of these considerations, the Board unanimously determined to approve the
Merger Agreement and recommend that holders of Shares tender their Shares in the
Offer.

Except as described in this paragraph, after reasonable inquiry and to the
best of the Company's knowledge, each executive officer, director, affiliate and
subsidiary of the Company currently intends to tender all Shares held of record
or beneficially owned by such person or entity to the Purchaser in the Offer,
except that some may be donated to charitable organizations. Sterling
PathoGenesis Company, the beneficial owner of approximately 5% of the Shares,
may distribute Shares held by it to its partners, including a director of the
Company. To the best of the Company's knowledge, all of such Shares held by such
director will be tendered, except that some may be donated to charitable
organizations. Directors and executive officers who hold Company Options may
elect to convert their Company Options into Chiron Options as described above.

ITEM 5. PERSONS/ASSETS RETAINED, EMPLOYED, COMPENSATED OR USED.

On June 5, 2000, the Company announced that it had retained Goldman Sachs to
explore strategic options for enhancing shareholder value. Pursuant to a letter
agreement dated June 23, 2000 (the "Goldman Sachs Agreement"), the Company
memorialized such retention of Goldman Sachs to act as its exclusive financial
advisor in connection with exploring strategic alternatives, including the
potential sale of all or a portion of the Company. The Board retained Goldman
Sachs based upon Goldman Sachs's qualifications, experience and expertise.
Goldman Sachs is an internationally recognized investment banking and advisory
firm. Goldman Sachs, as part of its investment banking and financial advisory
business, is continuously engaged in the valuation of businesses and securities
in connection with mergers and acquisitions, negotiated underwritings,
competitive biddings, secondary distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes. In addition,
Goldman Sachs is a full-service securities firm engaged in securities trading,
brokerage and financing activities and as such may from time to time effect
transactions, for its own account or the account of customers, and hold
positions in the securities and options on securities of the Company and Chiron.
In the past, Goldman Sachs and its affiliates have provided financial advisory
and financing services for the Company.

Pursuant to the terms of the Goldman Sachs Agreement, the Company agreed to
pay Goldman Sachs (i) a cash fee of $250,000, payable on the 90th day following
the date of the Goldman Sachs Agreement (such fee to be applied against any
transaction fee which may become payable pursuant to the Goldman Sachs
Agreement) and (ii) a transaction fee of 1.25% of the aggregate consideration
paid in connection with the Offer and the Merger up to $250 million and 1.35% of
the amount by which the aggregate consideration exceeds $250 million. As defined
in the Goldman Sachs Agreement, "aggregate consideration" includes amounts paid
to holders of options, warrants and convertible securities, plus the principal
amount of all indebtedness for borrowed money as set forth on the most recent
consolidated balance sheet of the Company prior to the Offer.

The Company also has agreed to reimburse Goldman Sachs for its reasonable
out-of-pocket expenses including the fees and disbursements of its counsel and
to indemnify Goldman Sachs and related persons against certain liabilities
related to or arising out of its rendering of services under its engagement as
financial advisor, including liabilities under the Federal securities laws.

17
<PAGE>
Except as described above, neither the Company nor any person acting on its
behalf currently intends to employ, retain or compensate any other person to
make solicitations or recommendations to stockholders on its behalf concerning
the Offer.

Goldman Sachs has consented to the reproduction in full of its fairness
opinion in this Statement. A copy of Goldman Sachs's opinion is attached as
Annex A hereto.

ITEM 6. INTEREST IN SECURITIES OF THE SUBJECT COMPANY.

No transactions in Shares have been effected during the past 60 days by the
Company or, to the knowledge of the Company, by any executive officer, director,
affiliate or subsidiary of the Company, other than the following purchases
through the Company's Employee Stock Purchase Plan and 401(k) plan:

<TABLE>
<S> <C>
Wilbur H. Gantz............................................. 36.03 shares
A. Bruce Montgomery......................................... 12.03 shares
Marc Wipperman.............................................. 768.09 shares
William Baker............................................... 19.07 shares
</TABLE>

ITEM 7. PURPOSES OF THE TRANSACTION AND PLANS OR PROPOSALS.

Except as set forth in this Statement, the Company is not currently
undertaking or engaged in any negotiations in response to the Offer that relate
to (1) a tender offer for or other acquisition of the Company's securities by
the Company, any subsidiary of the Company or any other person; (2) an
extraordinary transaction, such as a merger, reorganization or liquidation,
involving the Company or any subsidiary of the Company; (3) a purchase, sale or
transfer of a material amount of assets of the Company or any subsidiary of the
Company; or (4) any material change in the present dividend rate or policy, or
indebtedness or capitalization of the Company.

Except as set forth in this Statement, there are no transactions,
resolutions of the Board, agreements in principle, or signed contracts in
response to the Offer that relate to one or more of the events referred to in
the preceding paragraph.

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<PAGE>
ITEM 8. ADDITIONAL INFORMATION.

(a) DELAWARE GENERAL CORPORATION LAW.

As a Delaware corporation, the Company is subject to Section 203. In
general, Section 203 would prevent an "interested stockholder" (generally
defined as a person beneficially owning 15% or more of a corporation's voting
stock) from engaging in a "business combination" (as defined in Section 203)
with a Delaware corporation for three years following the date such person
became an interested stockholder unless: (1) before such person became an
interested stockholder, the board of directors of the corporation approved the
transaction in which the interested stockholder became an interested stockholder
or approved the business combination, (2) upon consummation of the transaction
which resulted in the interested stockholder becoming an interested stockholder,
the interested stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced (excluding for
purposes of determining the number of shares of outstanding stock held by
directors who are also officers and by employee stock plans that do not allow
plan participants to determine confidentially whether to tender shares), or
(3) following the transaction in which such person became an interested
stockholder, the business combination is (x) approved by the board of directors
of the corporation and (y) authorized at a meeting of stockholders by the
affirmative vote of the holders of at least 66 2/3% of the outstanding voting
stock of the corporation not owned by the interested stockholder. In accordance
with the provisions of Section 203, the Board of Directors has approved the
Merger Agreement, as described in Item 4 above and, therefore, the restrictions
of Section 203 are inapplicable to the Merger and the transactions contemplated
under the Merger Agreement.

Under the DGCL, if Purchaser acquires, pursuant to the Offer or otherwise,
at least 90% of the Shares, Purchaser will be able to effect the Merger after
consummation of the Offer without a vote of the Company's stockholders. However,
if Purchaser does not acquire at least 90% of the Shares pursuant to the Offer
or otherwise and a vote of the Company's stockholders is required under Delaware
law, a significantly longer period of time will be required to effect the
Merger.

(b) REGULATORY APPROVALS.

UNITED STATES ANTITRUST COMPLIANCE. Under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act") and the rules that have
been promulgated thereunder by the Federal Trade Commission (the "FTC"), certain
acquisition transactions may not be consummated unless certain information has
been furnished to the Antitrust Division of the Department of Justice (the
"Antitrust Division") and the FTC and certain waiting period requirements have
been satisfied. The purchase of Shares pursuant to the Offer is subject to such
requirements.

The Purchaser has advised the Company that it will file a Notification and
Report Form with respect to the Offer and Merger with the Antitrust Division and
the FTC on or about August 21, 2000. As a result, the waiting period applicable
to the purchase of Shares pursuant to the Offer would be scheduled to expire at
11:59 p.m., New York City time, on or about September 5, 2000. However, prior to
such time, the Antitrust Division or the FTC may extend the waiting period by
requesting additional information or documentary material relevant to the Offer
from the Purchaser. If such a request is made, the waiting period will be
extended until 11:59 p.m., New York City time, on the tenth day after
substantial compliance by the Purchaser with such request. Thereafter, such
waiting period can be extended only by court order or by agreement of the
parties.

The Antitrust Division and the FTC scrutinize the legality under the
antitrust laws of transactions such as the acquisition of Shares by the
Purchaser pursuant to the Offer. At any time before or after the consummation of
any such transactions, the Antitrust Division or the FTC could take such action
under the antitrust laws of the United States as it deems necessary or desirable
in the public interest, including seeking to enjoin the purchase of Shares
pursuant to the Offer or seeking divestiture of the

19
<PAGE>
Shares so acquired or divestiture of substantial assets of Chiron or the
Company. Private parties (including individual States of the United States) may
also bring legal actions under the antitrust laws of the United States. The
Company does not, and the Purchaser has advised the Company that it does not,
believe that the consummation of the Offer will result in a violation of any
applicable antitrust laws. However, there can be no assurance that a challenge
to the Offer on antitrust grounds will not be made, or if such a challenge is
made, what the result will be. See Item 3.

GERMAN ANTITRUST. Under the German Act against Restraints of Competition
(the "Act"), certain acquisition transactions may not be consummated in Germany
unless certain information has been furnished to the German Federal Cartel
Office (the "FCO" or BUNDESKARTELLANT) and certain waiting period requirements
have been satisfied without issuance by the FCO of an order to refrain. The
purchase of the Shares by the Purchaser pursuant to the Offer and the
consummation of the Merger may be subject to such requirements. Under such laws,
the FCO has one month (unless earlier terminated by the FCO) from the date of
filing of such information with the FCO to clear the Offer and the Merger or to
advise the parties of its intention to investigate the Offer and the Merger
in-depth, in which case the FCO has four months from the date of filing in which
to take steps to oppose the Offer and the Merger. According to the Act, the
purchase of the Shares pursuant to the Offer may not be consummated before the
end of the one-month period, and, provided that the FCO has informed the parties
about the initiation of an in-depth review within such period, before the end of
the four-month period or its agreed-upon extension, unless the FCO has given its
clearance to the proposed transaction in writing before the end of such periods.
In the course of its reviews, the FCO will examine whether the proposed
acquisition of the Shares by the Purchaser pursuant to the Offer would create a
dominant market position or strengthen an already-existing dominant position in
Germany. If the FCO makes such a finding, it will act to prohibit the
transaction. While Chiron and the Purchaser do not believe that there is any
basis for the FCO to investigate the Offer and the Merger in-depth, there can be
no assurance that the FCO will not investigate or oppose the transactions or
that the FCO will not seek to extend the waiting period.

Chiron and the Company expect to file the information with the FCO as soon
as practicable.

OTHER FILINGS

Chiron and the Company each conduct operations in a number of foreign
countries and filings may have to be made with foreign governments under their
pre-merger notification statutes. The filing requirements of various nations are
being analyzed by the parties, and, where necessary, the parties intend to make
such filings.

The Information Statement attached as Annex B hereto is being furnished in
connection with the possible designation by Chiron, pursuant to the terms of the
Merger Agreement, of certain persons to be elected to the Board of Directors
other than at a meeting of the Company's stockholders.

(d) AMENDMENT TO RIGHTS AGREEMENT.

Each Right issued pursuant to the Rights Agreement entitles the registered
holder thereof to purchase one one-thousandth of a share of Series A Junior
Preferred Stock (the "Preferred Shares"), of the Company at an exercise price of
$250 per one one-thousandth of a Preferred Share, subject to adjustment. On the
earlier of (1) the tenth day following a public announcement that a person or
group of affiliated or associated persons (an "Acquiring Person") has acquired
beneficial ownership of 15% or more of the outstanding Shares or (2) the tenth
business day (or such later date as may be determined by action of the Board of
Directors prior to the time any person becomes an Acquiring Person) following
the commencement of, or announcement of an intention to make, a tender offer or
exchange offer the consummation of which would result in that person becoming an
Acquiring Person

20
<PAGE>
(the earlier of such dates being the "Distribution Date"), the Rights become
exercisable and trade separately from the Common Stock. After the Distribution
Date, each holder of a Right (other than the Acquiring Person) will thereafter
have the right to acquire shares of Common Stock having a market value of two
times the exercise price of the Right; or, in certain circumstances, the right
to acquire shares of the Acquiring Person's capital stock having a market value
of two times the exercise price of the Right. The Rights may be redeemed at a
price of $0.01 per Right at any time prior to the earlier of (i) the time that a
person has become an Acquiring Person or (ii) June 26, 2007.

The Company and the Rights Agent amended the Rights Agreement as of
August 18, 2000 to provide that (1) none of Chiron and its subsidiaries
(including the Purchaser) will become an Acquiring Person and no Stock
Acquisition Date (as defined in the Rights Agreement) will occur as a result of
the execution, delivery and performance of the Merger Agreement and the
consummation of the Offer or the Merger, (2) no Distribution Date will occur as
a result of the announcement of or the execution of the Merger Agreement or any
of the transactions contemplated thereby, (3) each of Chiron and the Purchaser
will not be an Acquiring Person as a result of the transactions contemplated by
the Merger Agreement and (4) the Rights will expire immediately prior to the
Acceptance Date if they have not expired earlier.

(e) SHAREHOLDER LITIGATION.

On August 15, 2000, an action was commenced against the Company and its
directors in the Superior Court of Washington in and for King County by Neil
Baldwin, purporting to bring suit as a shareholder on behalf of a proposed class
of shareholders of the Company. The complaint alleges, among other things, that
the defendants have breached their fiduciary duties of undivided loyalty,
independence and due care with respect to shareholders in connection with the
Offer and the Merger, that individual defendants are engaged in self-dealing in
connection with the Offer and the Merger, and that individual defendants have
breached their fiduciary duty to "secure and obtain the best price reasonable
under the circumstances" in connection with the Offer and the Merger. Plaintiff
generally seeks declaratory and injunctive relief against the Offer and the
Merger, including directing the individual defendants to exercise their
fiduciary duties "to obtain a transaction which is in the best interests of
PathoGenesis' shareholders until the process for the sale or auction of the
Company is completed." While the time for defendants to respond has not yet
elapsed, the Company believes the complaint is without merit.

The complaint filed in the shareholder litigation is included as
Exhibit (a)(6) hereto and is incorporated by reference herein, and the foregoing
description is qualified in its entirety by reference to such Exhibit.

ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.

The following Exhibits are filed herewith:

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--------------------- ------------------------------------------------------------
<C> <S>
(a)(1) Letter to the stockholders of the Company, dated August 21,
2000.*
(a)(2) Sections 11 and 13 of the Offer to Purchase, dated August
21, 2000 (incorporated by reference to Exhibit (a)(1) to the
Schedule TO of the Purchaser filed on August 21, 2000).
(a)(3) Form of Letter of Transmittal (incorporated by reference to
Exhibit (a)(2) to the Schedule TO of the Purchaser filed on
August 21, 2000).
(a)(4) Opinion of Goldman, Sachs & Co., dated August 13, 2000
(included as Annex A to this Statement).*
(a)(5) Joint Press Release issued by Chiron and the Company on
August 14, 2000 (incorporated by reference to press release
under cover of Schedule 14D-9C filed by the Company on
August 14, 2000).
</TABLE>

21
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--------------------- ------------------------------------------------------------
<C> <S>
(a)(6) Complaint for Breach of Fiduciary Duty, dated August 15,
2000, filed in Superior Court of Washington in and for King
County.*
(e)(1) Agreement and Plan of Merger, dated as of August 13, 2000,
among Chiron, the Purchaser and the Company (incorporated by
reference to Exhibit (d)(1) to the Schedule TO of the
Purchaser filed on August 21, 2000).
(e)(2) Collaboration Agreement, dated as of December 15, 2000, by
and between Chiron and the Company.**
(e)(3) Confidentiality Agreement, dated August 8, 2000, between
Chiron and the Company (incorporated by reference to
Exhibit (d)(2) to the Schedule TO of the Purchaser filed on
August 21, 2000).
(e)(4) Information Statement of the Company, dated August 21, 2000
(included as Annex B hereto).*
</TABLE>

------------------------

* Included with this Statement.

** Included with this Statement. Confidential treatment requested; confidential
petition filed separately with the Securities and Exchange Commission.

22
<PAGE>
SIGNATURE

After due inquiry and to the best of my knowledge and belief, I certify that
the information set forth in this statement is true, complete and correct.

<TABLE>
<S> <C> <C>
PATHOGENESIS CORPORATION

By: /s/ WILBUR H. GANTZ
-----------------------------------------
Name: Wilbur H. Gantz
Title: CHAIRMAN AND CHIEF EXECUTIVE
OFFICER
</TABLE>

Dated: August 21, 2000
<PAGE>
ANNEX A

--------------------------------------------------------------------------------

[LOGO]

PERSONAL AND CONFIDENTIAL

--------------------------------------------------------------------------------

August 13, 2000

Board of Directors
PathoGenesis Corporation
201 Elliot Avenue West
Seattle, WA 98119

Ladies and Gentlemen:

You have requested our opinion as to the fairness from a financial point of
view to the holders of the outstanding shares of Common Stock, par value $0.001
per share (the "Shares"), of PathoGenesis Corporation (the "Company") of the
$38.50 per Share in cash to be received by such holders in the Tender Offer and
the Merger (each as defined below) pursuant to the Agreement and Plan of Merger,
dated as of August 13, 2000, among Chiron Corporation ("Buyer"), Picard
Acquisition Corp., a wholly-owned subsidiary of Buyer, and the Company (the
"Agreement"). The Agreement provides for a tender offer to acquire all of the
Shares (the "Tender Offer") pursuant to which Picard Acquisition Corp. will pay
$38.50 per Share in cash for each Share accepted. The Agreement further provides
that following completion of the Tender Offer, Picard Acquisition Corp. will be
merged with and into the Company (the "Merger") and each outstanding Share
(other than Shares already owned by the Company (as treasury stock), Buyer or
any subsidiary of Buyer, including Picard Acquisition Corp.) will be converted
into the right to receive $38.50 in cash.

Goldman, Sachs & Co., as part of its investment banking business, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes. We are
familiar with the Company having acted as its financial advisor in connection
with, and having participated in certain of the negotiations leading to, the
Agreement. We also have provided certain investment banking services to Buyer
from time to time and may provide investment banking services to Buyer in the
future. Goldman, Sachs & Co. provides a full range of financial advisory and
securities services and, in the course of its normal trading activities, may
from time to time effect transactions and hold positions in securities,
including derivative securities, of the Company or Buyer for its own account and
for the accounts of customers.

In connection with this opinion, we have reviewed, among other things, the
Agreement; Annual Reports to Stockholders and Annual Reports on Form 10-K of the
Company for the five years ended December 31, 1999; certain interim reports to
stockholders and Quarterly Reports on Form 10-Q of the Company; certain other
communications from the Company to its stockholders; and certain internal
financial analyses and forecasts for the Company prepared by management of the
Company, including

A-1
<PAGE>
certain risk adjusted forecasts for the Company which reflect the relative
probability of successful introduction of each of the Company's therapies under
development (the "Risk Adjusted Forecasts"). We also have held discussions with
members of the senior management of the Company regarding the past and current
business operations, financial condition and future prospects of the Company. In
addition, we have reviewed the reported price and trading activity for the
Shares, compared certain financial and stock market information for the Company
with similar information for certain other companies the securities of which are
publicly traded, reviewed the financial terms of certain recent business
combinations in the biotechnology industry specifically and in other
biopharmaceutical industries generally and performed such other studies and
analyses as we considered appropriate.

We have relied upon the accuracy and completeness of all the financial and
other information discussed with or reviewed by us and have assumed such
accuracy and completeness for purposes of rendering this opinion. In that
regard, we have assumed with your consent that the Risk Adjusted Forecasts have
been reasonably prepared on a basis reflecting the best currently available
estimates and judgments of the Company. In addition, we have not made an
available estimates and judgments of the Company. In addition, we have not made
an independent evaluation or appraisal of the assets and liabilities of the
Company, and we have not been furnished with any such evaluation or appraisal.
Our advisory services and the opinion expressed herein are provided for the
information and assistance of the Board of Directors of the Company in
connection with its consideration of the transaction contemplated by the
Agreement and such opinion does not constitute a recommendation as to whether or
not any holder of Shares should tender such Shares in connection with the Tender
Offer or how any holder of Shares should vote with respect to the Merger.

Based upon and subject to the foregoing and based upon such other matters as
we consider relevant, it is our opinion that as of the date hereof the $38.50
per Share in cash to be received by the holders of Shares in the Tender Offer
and the Merger is fair from a financial point of view to such holders.

Very truly yours,

/s/ GOLDMAN, SACHS & CO.
--------------------------------------
Goldman, Sachs & Co.

A-2
<PAGE>
ANNEX B

PATHOGENESIS CORPORATION
201 ELLIOTT AVENUE WEST
SEATTLE, WASHINGTON 98119

INFORMATION STATEMENT PURSUANT TO
SECTION 14(F) OF THE SECURITIES EXCHANGE ACT
OF 1934 AND RULE 14F-1 THEREUNDER

This Information Statement is being mailed on or about August 21, 2000 as
part of the Solicitation/Recommendation Statement on Schedule 14D-9 (the
"Statement") of PathoGenesis Corporation (the "Company"). You are receiving this
Information Statement in connection with the possible election of persons
designated by Chiron Corporation ("Chiron") to a majority of seats on the Board
of Directors (the "Board of Directors" or the "Board") of the Company. On
August 13, 2000, the Company entered into an Agreement and Plan of Merger (the
"Merger Agreement") with Picard Acquisition Corp. (the "Purchaser"), a Delaware
corporation and a wholly owned subsidiary of Chiron, pursuant to which the
Purchaser is required to commence a tender offer to purchase all outstanding
shares of Common Stock, par value $0.001 per share, of the Company (the "Common
Stock"), and the associated preferred share purchase rights (shares of Common
Stock together with any associated rights are referred to in this Information
Statement as the "Shares") at a price per Share of $38.50 (the "Offer Price"),
net to the seller in cash, upon the terms and conditions set forth in the
Purchaser's Offer to Purchase, dated August 21, 2000 (the "Offer to Purchase"),
and in the related Letter of Transmittal (which, together with any amendments
and supplements thereto, collectively constitute the "Offer"). Copies of the
Offer to Purchase and the Letter of Transmittal have been mailed to stockholders
of the Company and are filed as Exhibits (a)(1) and (a)(2) respectively, to the
Tender Offer Statement on Schedule TO (as amended from time to time, the
"Schedule TO") filed by the Purchaser with the Securities and Exchange
Commission (the "Commission") on August 21, 2000. The Merger Agreement provides
that, subject to the satisfaction or waiver of certain conditions, following
completion of the Offer, and in accordance with the Delaware General Corporation
Law (the "DGCL"), the Purchaser will be merged with and into the Company (the
"Merger"). Following consummation of the Merger, the Company will continue as
the surviving corporation and will be a wholly owned subsidiary of Chiron. At
the effective time of the Merger (the "Effective Time"), each issued and
outstanding Share (other than Shares owned by Chiron, any of its subsidiaries
(including the Purchaser), the Company, and Shares held by stockholders who
properly demand appraisal and comply with the provisions of Section 262 of the
DGCL relating to dissenters' rights of appraisal) will be converted into the
right to receive the same amount in cash per Share that is paid pursuant to the
Offer (the "Merger Consideration").

The Offer, the Merger, and the Merger Agreement are more fully described in
the Statement, to which this Information Statement forms Annex B, which was
filed by the Company with the Commission on August 21, 2000 and which is being
mailed to stockholders of the Company along with this Information Statement.

This Information Statement is being mailed to you in accordance with
Section 14(f) of the Securities Exchange Act of 1934 ("Exchange Act") and
Rule 14f-1 promulgated thereunder. The information set forth herein supplements
certain information set forth in the Statement. Information set forth herein
related to Chiron, the Purchaser or the Chiron Designees (as defined below) has
been provided by Chiron. You are urged to read this Information Statement
carefully. You are not, however, required to take any action in connection with
the matters set forth herein.

B-1
<PAGE>
Pursuant to the Merger Agreement, the Purchaser commenced the Offer on
August 21, 2000. The Offer is currently scheduled to expire at 12:00 midnight,
New York City time, on Monday, September 18, 2000, unless the Purchaser extends
it.

GENERAL

The Common Stock is the only class of equity securities of the Company
outstanding which is entitled to vote at a meeting of the stockholders of the
Company. As of the close of business on August 18, 2000, there were 16,627,661
outstanding shares of Common Stock, of which Chiron and the Purchaser owned no
shares.

RIGHTS TO DESIGNATE DIRECTORS AND CHIRON DESIGNEES

The Merger Agreement provides that, promptly upon the purchase of and
payment for Shares by the Purchaser pursuant to the Offer, Chiron will be
entitled to designate such number of directors (the "Chiron Designees") on the
Board, rounded up to the next whole number, as is equal to the product obtained
by multiplying the total number of directors on the Board by the percentage that
the number of Shares so purchased and paid for bears to the total number of
Shares then outstanding.

The Merger Agreement provides that the Company will, upon request of the
Purchaser, promptly increase the size of the Board of Directors or obtain the
resignations of such number of directors, or both, as is necessary to enable the
Chiron Designees to be elected to the Board and, subject to Section 14(f) of the
Exchange Act and Rule 14f-1 promulgated thereunder, will cause the Chiron
Designees to be so elected.

Notwithstanding the foregoing, if Shares are purchased pursuant to the
Offer, there will be until the Effective Time at least two members of the Board
who were directors on the date of the Merger Agreement and who are not employees
of the Company.

The Chiron Designees will be selected by Chiron from among the individuals
listed below. Each of the following individuals has consented to serve as a
director of the Company if appointed or elected. None of the Chiron Designees
currently is a director of, or holds any positions with, the Company. Chiron has
advised the Company that, to the best of Chiron's knowledge, except as set forth
below, none of the Chiron Designees or any of their affiliates beneficially owns
any equity securities or rights to acquire any such securities of the Company,
nor has any such person been involved in any transaction with the Company or any
of its directors, executive officers or affiliates that is required to be
disclosed pursuant to the rules and regulations of the Commission other than
with respect to transactions between Chiron and the Company that have been
described in the Schedule TO or the Statement.

The name, age, citizenship, present principal occupation or employment and
five-year employment history of each of the individuals who may be selected as
Chiron Designees are set forth below. Unless otherwise indicated, each such
person has held his or her present position as set forth below for the past five
years and each occupation refers to employment with Chiron. Unless otherwise
indicated, each

B-2
<PAGE>
such person is a citizen of the United States, and the business address of each
person listed below is 4560 Horton Street, Emeryville, California 94608.

<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT; MATERIAL
NAME POSITIONS HELD DURING THE PAST FIVE YEARS
---- ----------------------------------------------------
<S> <C> <C>
Raymund Breu............ Age: 55 Director of Chiron since May 1999. Chief Financial
Officer and a Member of the Executive Committee of
Novartis AG since December 1996.

Vaughn D. Bryson........ Age: 62 Director of Chiron since June 1997.

Lewis W. Coleman........ Age: 58 Director of Chiron since 1991.

Rajen K. Dalal.......... Age: 47 Vice President of Chiron since 1991 and President of
Chiron Blood Testing since 1998.

Pierre E. Douaze........ Age: 59 Director of Chiron since 1995. From December 1996
through December 1997, he was a member of the
Executive Committee of Novartis AG and Head of its
Healthcare Division and Pharma Sector. In December
1997, Mr. Douaze retired from Novartis AG.

William G. Green........ Age: 56 Senior Vice President, Secretary and General Counsel
of Chiron since 1990 and Director, Vice President
and Secretary of the Purchaser.

Paul J. Hastings........ Age: 40 Vice President of Chiron and President of Chiron
BioPharmaceuticals since 1999. Prior to joining
Chiron, he was the Presidient, Chief Executive
Officer and member of the board of LXR
Biotechnology. From 1993 to 1998, Mr. Hastings spent
five years at Genzyme Corporation in Cambridge,
Massachusetts, as President of Genzyme Therapeutics.

Paul L. Herrling........ Age: 53 Director of Chiron since 1997, is the Head of
Research at Novartis Pharma AG and a member of the
Novartis Pharma Executive Board.

Peter K. Jensen......... Age: 45 Vice President of Chiron and Head of Development
since 1999. Prior to joining Chiron, he was the
Development Director and Chief Medical Officer of
British Biotech plc from 1998 to 1999 in Oxford,
England, President in Annapolis, Maryland. From 1996
to 1998 he was Vice President, Clinical Research and
Drug Safety of the Schering-Plough Research
Institute.

Sean P. Lance........... Age: 53 President and Chief Executive Officer of Chiron
since May 1998 and Chairman of the Board since May
1999.

Edward E. Penhoet....... Age: 59 Co-founder of Chiron and a Director since its
inception in 1981, Chief Executive Officer of Chiron
until May 1998.

William J. Rutter....... Age: 72 Director of Chiron, Co-founder of Chiron, served as
Chairman of the Board from Chiron's inception in
1981 until May 1999 when he became Chairman of the
Board Emeritus. He served as Director of Novartis AG
from 1995 until April 1999.

Jack W. Schuler......... Age: 59 Director of Chiron since 1990.

Linda W. Short.......... Age: 54 Vice President, Human Resources, of Chiron until
1999. In 1999, she was promoted to Vice President,
Corporate Resources. Prior to joining Chiron, she
was the Director of Human Resources of Industrial
Indemnity from 1994 to 1997.
</TABLE>

B-3
<PAGE>

<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT; MATERIAL
NAME POSITIONS HELD DURING THE PAST FIVE YEARS
---- ----------------------------------------------------
<S> <C> <C>
David V. Smith.......... Age: 41 Vice President, Controller of Chiron since 1999.
Prior to joining Chiron, he was the Vice President,
Finance and Chief Financial Officer of Anergen, Inc.
from 1997 until he joined Chiron. From 1988 to 1997,
he held various financial management positions with
Genentech, Inc.

Pieter J. Strijkert..... Age: 64 Director of Chiron since 1987.

James R. Sulat.......... Age: 50 Vice President and Chief Financial Officer of Chiron
since 1998 and President of Purchaser.

Lewis T. Williams....... Age: 51 Senior Vice President and President of Chiron
Technologies until 1998. In 1998, he was promoted to
Chief Scientific Officer of Chiron. In May 1999, he
was appointed a Director of Chiron.
</TABLE>

OWNERSHIP OF COMMON STOCK BY THE
PRINCIPAL STOCKHOLDERS AND MANAGEMENT

The following table sets forth information as of August 18, 2000 (unless
otherwise indicated), with respect to the beneficial ownership of the Company's
Common Stock by (i) each director of the Company, (ii) each of the Chief
Executive Officer and the other four most highly compensated executive officers
of the Company as of December 31, 1999 ("Named Executive Officers"), (iii) all
directors and executive officers of the Company as a group, and (iv) each person
who, to the best of the Company's knowledge, beneficially owns more than five
percent of any class of the Company's voting securities. Except as otherwise
indicated, persons listed below have sole voting and investment power with
respect to all shares held by them, except to the extent such power may be
shared with a spouse.

<TABLE>
<CAPTION>
COMMON STOCK
BENEFICIALLY OWNED
(1)(2) PERCENT OF CLASS (3)
------------------ --------------------
<S> <C> <C>
DIRECTORS
Wilbur H. Gantz (4)........................................ 835,984 4.89
John L. Gordon............................................. 47,848 *
Elizabeth M. Greetham...................................... 48,771 *
Alan R. Meyer.............................................. 167,558 1.00
Michael J. Montgomery (5).................................. 59,880 *
Arthur W. Nienhuis......................................... 32,000 *
Talat M. Othman............................................ 50,572 *
Eugene L. Step............................................. 66,500 *
James R. Tobin............................................. 46,848 *
Fred Wilpon (6)............................................ 900,598 5.39

NAMED EXECUTIVE OFFICERS (WHO ARE NOT DIRECTORS)
William R. Baker........................................... 60,302 *
A. Bruce Montgomery (7).................................... 197,890 1.18
Marc F. Wipperman.......................................... 85,947 *

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE SECRETARY AS A
GROUP
(15 individuals, including those named above)
(2)(4)(5)(6)(7)(8)....................................... 2,676,046 14.81
</TABLE>

B-4
<PAGE>

<TABLE>
<CAPTION>
COMMON STOCK
BENEFICIALLY OWNED
(1)(2) PERCENT OF CLASS (3)
------------------ --------------------
<S> <C> <C>
PRINCIPAL STOCKHOLDERS

OrbiMed Advisors, Inc. (11)................................ 881,000 5.30
c/o OrbiMed Advisors LLC
767 Third Avenue, 6th Floor
New York, New York 10010
Marvin B. Tepper (8)....................................... 875,348 5.24
c/o Sterling PathoGenesis Company
575 Fifth Avenue
New York, New York 10017
Saul B. Katz (9)........................................... 855,000 5.14
c/o Sterling PathoGenesis Company
575 Fifth Avenue
New York, New York 10017
Lord, Abbett & Co. (10).................................... 822,500 5.01
90 Hudson Street
Jersey City, New Jersey 07302
</TABLE>

------------------------

* Less than one percent.

(1) Unless otherwise indicated, the persons named in the table above have sole
voting and investment power over all shares beneficially owned by them,
subject to applicable community property laws. Beneficially owned shares
include shares subject to options exercisable within 60 days after
August 18, 2000.

(2) Includes shares subject to options that were exercisable within 60 days of
August 18, 2000 as follows: Dr. Baker--59,125; Mr. Gantz--484,999;
Dr. Gordon--42,848; Ms. Greetham--46,000; Mr. Meyer--155,000; Mr. M.
Montgomery--51,098; Dr. Nienhuis--32,000; Mr. Othman--50,572;
Mr. Step--61,500; Mr. Tobin--34,348; Mr. Wilpon--81,598; Dr. A. B.
Montgomery--181,874; Mr. Wipperman--83,750; and Mr. Tepper--75,348.

(3) Based on 16,627,661 shares outstanding as of August 18, 2000, unless
otherwise indicated. In computing the percentages shown in the table, shares
subject to options held by a named person that are exercisable within
60 days after August 18, 2000 are treated as outstanding in determining the
percentage ownership of that person.

(4) Includes (i) 18,750 shares held by The Wilbur H. Gantz 1992 Irrevocable GST
Trust, of which Mr. Gantz is Trustee and (ii) 112,500 shares held by The
Wilbur H. Gantz 1992 Irrevocable Children's Trust. Mr. Gantz disclaims
beneficial ownership as to all of such shares. Also includes 1,875 shares
held by Mr. Gantz's wife and 25,850 shares held by a trust for her benefit,
although Mr. Gantz disclaims beneficial ownership of shares held by
Mrs. Gantz and that trust.

(5) Includes 532 shares owned by Mr. Montgomery's minor children. Does not
include shares beneficially owned by A. Bruce Montgomery.

(6) Includes (i) 800,000 shares held by Sterling PathoGenesis Company, of which
Mr. Wilpon is managing partner; (ii) 9,000 shares held jointly with
Mr. Wilpon's wife; and (iii) 10,000 shares held jointly with a partner in
Sterling PathoGenesis Company. Mr. Wilpon disclaims beneficial ownership of
such 819,000 shares except to the extent of his pecuniary interest.

B-5
<PAGE>
(7) Includes 6,400 shares owned by Dr. Montgomery's wife as custodian for minor
children, as to which Dr. Montgomery disclaims beneficial ownership. Does
not include shares beneficially owned by Michael J. Montgomery.

(8) Includes 800,000 shares held by Sterling PathoGenesis Company, of which
Mr. Tepper is a partner. Mr. Tepper disclaims beneficial ownership of such
shares except to the extent of his pecuniary interest. Mr. Tepper is the
Company's Corporate Secretary.

(9) Based on Amendment No. 1 to Schedule 13D filed on May 12, 1999 by Saul B.
Katz, Fred Wilpon and Marvin Tepper, reporting beneficial ownership as of
May 10, 1999 and includes (i) 5,000 shares owned jointly with Mr. Katz's
spouse, (ii) 800,000 shares held by Sterling PathoGenesis Company, of which
Mr. Katz is a partner (of which Fred Wilpon, one of our directors, and
Marvin B. Tepper, our Corporate Secretary, are also partners), and
(iii) 10,000 shares held jointly with a partner in Sterling PathoGenesis
Company. Mr. Katz disclaims beneficial ownership as to all of such 815,000
shares except to the extent of his pecuniary interest.

(10) Based on a Schedule 13G filed on February 8, 2000 by Lord, Abbett & Co.,
reporting beneficial ownership as of December 31, 1999.

(11) Based on Schedule 13G filed on May 1, 2000 by OrbiMed Advisors, Inc.,
reporting beneficial ownership as of April 20, 2000.

B-6
<PAGE>
BOARD OF DIRECTORS

The Board of Directors is divided into three classes with staggered terms.
At each annual meeting of stockholders, a class of directors will be elected for
a three-year term to succeed the directors of the same class whose terms are
then expiring. Biographical information on each director, including his or her
age, follows:

TERMS EXPIRING IN 2001

TALAT M. OTHMAN, 64 (Director since September 1992). Mr. Othman has been
Chairman and Chief Executive Officer of Grove Financial, Inc. (investment
management company) since September 1995. Previously, he was Chairman, President
and Chief Executive Officer of Dearborn Financial, Inc. (investment management
company). He is a director of the Middle East Policy Council in Washington,
D.C., a member of the Board of Governors of St. Jude Children's Research
Hospital and a trustee of the Center for Excellence in Education in Washington,
D.C. Previously, he was a director of Harken Energy Corporation (oil and gas
exploration company) and Hartmarx Corporation (apparel manufacturer) and
President of the Arab Bankers Association of North America.

EUGENE L. STEP, 71 (Director since April 1992). Mr. Step was Executive Vice
President, a director and a member of the Executive Committee of Eli Lilly and
Company (pharmaceutical company) and President of its Pharmaceutical Division
prior to his retirement in 1992. Since his retirement, Mr. Step has been a
private investor. He is a former Chairman of the Pharmaceutical Manufacturers
Association (now PhRMA) and former President of the International Pharmaceutical
Manufacturers Association. He is a director of CellGenesys Inc. (biotechnology
company), DBT Online, Inc. (data management company), Guidant Corp. (medical
device company), Medco Research Inc. (medical research company) and Scios Inc.
(biotechnology company).

JAMES R. TOBIN, 56 (Director since January 1999). Mr. Tobin is President,
Chief Executive Officer and a director of Boston Scientific Corporation (medical
device manufacturer). He was Chief Executive Officer of Biogen, Inc.
(biopharmaceutical company) from 1997 to 1998, and its President and Chief
Operating Officer from 1994 to 1997. Previously, he was President and Chief
Operating Officer of Baxter International, Inc. (healthcare products company).
He is a director of Creative BioMolecules Inc. (biopharmaceutical company) and
PE Corp. (genomic and sequencing instrumentation company).

FRED WILPON, 63 (Director since January 1992). Mr. Wilpon, a founder of the
Company, was Chairman of the Board from May 1995 to January 1998. He is
co-founder and Chairman of the Board of Sterling Equities, Inc. (real estate
developer) and is President and Chief Executive Officer of the New York Mets
baseball team. He is a director of Bear, Stearns & Co. Inc. (investment bank)
and of Loews Corporation (holding company).

TERMS EXPIRING IN 2002

ELIZABETH M. GREETHAM, 51 (Director since November 1996). Ms. Greetham has
been President of ACCL Financial Consultants Ltd. (pharmaceutical consultants)
and Chief Financial Officer of Drug Abuse Sciences Inc. (pharmaceutical company)
since April 1999. Previously, she was a Portfolio Manager for Weiss, Peck &
Greer, L.L.C. (investment adviser). She is a director of various pharmaceutical
companies, including CliniChem Development Corporation (a Canadian corporation),
Guilford Pharmaceuticals Inc. and SangStat Medical Corporation.

ALAN R. MEYER, 47 (Director since December 1992, Executive Vice President,
Chief Financial Officer, Treasurer and Assistant Secretary). Mr. Meyer joined
the Company in 1992 as Vice President and Chief Financial Officer and a
director. He became Senior Vice President and Chief Financial Officer in
July 1995, when he also assumed the office of Assistant Secretary, and became
Executive

B-7
<PAGE>
Vice President in January 1998 and Treasurer in August 1999. Previously, he was
chief financial officer for several development stage healthcare companies, held
corporate finance and corporate development positions with Baxter Healthcare
Corporation (healthcare products company) and was a management consultant with
Arthur Andersen & Co. (public accounting firm).

MICHAEL J. MONTGOMERY, 45 (Director since July 1995). Mr. Montgomery is a
Co-Managing Director of Digital Coast Partners (merchant bank). Previously, he
was the President and Chief Executive Officer from May 1998 to September 1999,
and President and Chief Operating Officer from September 1996 to May 1998, of
Sega GameWorks L.L.C. (entertainment company). He was a senior executive of
DreamWorks SKG (entertainment company) from 1995 to 1996. Previously, he was
Executive Vice President and Chief Financial Officer of Euro Disney SCA (theme
park operator) and Vice President and Treasurer of The Walt Disney Company
(entertainment company). Mr. Montgomery is a brother of A. Bruce Montgomery,
Executive Vice President, Research and Development, of the Company.

TERMS EXPIRING IN 2003

WILBUR H. GANTZ, 62 (Director since March 1992, Chairman, Chief Executive
Officer and President). Mr. Gantz, a founder of the Company, has been Chief
Executive Officer and President of the Company since 1992 and Chairman since
January 1998. Previously, he was President of Baxter International Inc.
(healthcare products company). He is a director of The Gillette Company
(personal care products company), W.W. Grainger, Inc. (maintenance, repair and
operating supplies and services provider), Harris Bancorp (bank holding company)
and Harris Trust and Savings Bank. He is a former trustee of Princeton
University.

JOHN L. GORDON, PH.D., Sc.D, 56 (Director since November 1997). Dr. Gordon
is founder and Chairman of Quercus Management Limited, a biotechnology support
company based in Oxford, England. He was Chief Executive Officer of Neures
Limited (biotechnology company) from 1994 to 1996, and previously was Director
of Research of Neures' parent company, British Biotech plc. He is a director of
Finsbury Life Sciences Investment Trust PLC, a publicly held company in the U.K.

ARTHUR W. NIENHUIS, M.D., 59 (Director since July 1998). Dr. Nienhuis has
been Director of St. Jude Children's Research Hospital since 1993. Previously,
he was chief of the Clinical Hematology Branch at the National Heart, Lung &
Blood Institute at the National Institutes of Health and held appointments at
Boston's Massachusetts General Hospital and Harvard Medical School. He is a
director of the American Association of Cancer Institutes and the author of more
than 230 published scientific papers.

DIRECTOR COMPENSATION

Directors who are officers or employees of the Company are reimbursed for
out-of-pocket expenses incurred by them in connection with their travel to and
attendance at meetings of the Board of Directors or its committees.

In addition to the reimbursement of expenses, under the Company 1998 Program
for Non-Employee Directors for the years 1998-2002, as amended, each
non-employee director is compensated in cash and options to purchase common
stock as follows:

<TABLE>
<S> <C> <C>
ANNUAL RETAINER: Basic....................................................... $15,000
Executive Committee chair supplement........................ 10,000
Other committee chair supplement............................ 5,000
</TABLE>

Instead of receiving the basic annual retainer for the years 1998-2002 in
cash, each non-employee director may elect, on January 1, 1998 or, if
later, upon initial election to the

B-8
<PAGE>
board, to receive a stock option (in addition to the grant described
below) having an aggregate exercise price equal to four times the amount
of cash retainer waived. The options will vest on the first day of each
year (or portion of a year) through 2002 in which the optionee was a
director, to the extent of a fraction of the entire option whose
numerator is the amount of the basic retainer for such year represented
by the option and whose denominator is the amount of base retainer for
all years during the term of the program. Each option granted to a
director has a ten-year term and is granted at an exercise price equal to
the fair market value of the common stock on the grant date.

<TABLE>
<S> <C> <C>
MEETING FEE: For each board or committee meeting attended in person or by telephone..... $1,000

OPTION GRANT: INITIAL GRANT
20,000 shares upon initial election to the board

SUBSEQUENT ANNUAL GRANT
Basic...................................................................... 6,000 shares
Executive Committee chair supplement....................................... 2,000 shares
Other committee chair supplement........................................... 1,000 shares
</TABLE>

Each such option is fully vested on the date of grant, generally has a
ten-year term and is granted at an exercise price equal to the fair
market value of the common stock on the date of grant.

During 1999, the non-employee directors received grants of fully vested
options to purchase an aggregate of 150,000 shares of common stock at a
weighted average exercise price of $15.81 per share. In addition, on
May 31, 2000, the non-employee directors received annual grants of fully
vested options to purchase an aggregate of 52,000 shares at the
then-market price.

1999 BOARD MEETINGS

During 1999, the Board of Directors held a total of seven meetings. In 1999,
all incumbent directors attended at least 75% percent of the meetings of the
Board and of the Board committees on which they served.

BOARD COMMITTEES

The Board of Directors had three standing committees in 1999 (which
increased to four committees in June 2000), which are described below.

AUDIT/FINANCE COMMITTEE. The Audit/Finance Committee recommends the
appointment of the Company's independent auditors. In addition, it reviews
auditing arrangements with the independent auditors, the scope and results of
their audits, any problems they may identify regarding internal accounting
controls and their recommendations. It also meets with the Company's Chief
Financial Officer to review the Company's programs, policies and procedures on
financial controls and internal auditing. The Audit/Finance Committee also
reviews with the Chief Financial Officer the Company's investment securities and
cash management programs and policies. The Audit/Finance Committee is prepared
to meet at any time at the request of the independent auditors or the Chief
Financial Officer to review any special situation that may arise relating to
audit/finance matters. In 1999, the committee met once.

COMPENSATION COMMITTEE. The Compensation and Nominating Committee
administers the compensation and benefit programs for the Company's officers,
employees and consultants, including the Company's stock option and stock
purchase plans. It determines stock option grants to the Chief

B-9
<PAGE>
Executive Officer and makes recommendations to the full Board on the
compensation of the Chief Executive Officer and non-employee members of the
Board. It also makes recommendations to the Board of Directors on any proposed
plan or program that would benefit the senior executives and regarding
candidates for the board and executive offices.

NOMINATING COMMITTEE. The Nominating Committee makes recommendations to the
Board of Directors regarding candidates for nomination as directors. The
committee would consider candidates for director suggested by shareholders who
comply with the procedures established in the Company's By-Laws. (Prior to June
2000 there was a combined Compensation and Nominating Committee.) The committee
(which until June 2000 was the Compensation and Nominating Committee and also
performed the duties of the current Nominating Committee) held six meetings
during 1999.

EXECUTIVE COMMITTEE. The Executive Committee has the authority to take any
action that the Board of Directors may take, subject to some restrictions
imposed by law. The committee met on nine occasions and acted by written consent
once in 1999.

COMMITTEE MEMBERS. The committee members listed below, with the Chairman
listed first:

<TABLE>
<CAPTION>
AUDIT/FINANCE COMPENSATION EXECUTIVE NOMINATING
------------------------- ------------------------- --------------------- ------------------------
<S> <C> <C> <C>
Eugene L. Step, Chairman Talat M. Othman, Chairman Fred Wilpon, Chairman James R. Tobin, Chairman
Elizabeth M. Greetham John L. Gordon Wilbur H. Gantz Michael J. Montgomery
Fred Wilpon James R. Tobin Talat M. Othman Fred Wilpon
Arthur W. Nienhuis Fred Wilpon Eugene L. Step
</TABLE>

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION IN COMPENSATION DECISIONS

The following are members of the Compensation Committee: Mr. Talat M.
Othman, who serves as Chairman of the Compensation Committee; Mr. John L.
Gordon; Mr. James R. Tobin; and Mr. Fred Wilpon. None of the Company's current
or past executive officers or employees serves on the Compensation Committee.
None of the Company's executive officers serves on the board or the compensation
committee of any entity whose directors or officers serve on the Company's
Compensation Committee.

EXECUTIVE OFFICERS

In addition to Wilbur H. Gantz and Alan R. Meyer, who are directors, the
names, ages and experience of the executive officers of the Company as of August
21, 2000 are as follows.

A. BRUCE MONTGOMERY, M.D., 47 (Executive Vice President, Research and
Development). Dr. Montgomery has been Executive Vice President, Research and
Development since January 1998. He joined the Company in 1993 as Vice President
of Medical and Regulatory Development Affairs and was promoted to Senior Vice
President in July 1995. From 1989 to November 1993, he was Associate Director of
Clinical Research at Genentech, Inc. (biotechnology company), where he was
involved in the clinical development of Pulmozyme, an inhaled drug for cystic
fibrosis patients. Previously, he was Assistant Professor of Medicine and
Director of the Medical Intensive Care Unit, Pulmonary Disease Section,
Department of Medicine, State University of New York, Stony Brook, New York, and
Assistant Professor of Medicine in Residence, University of California, San
Francisco, and Cardiovascular Research Institute, Chest Service, San Francisco
General Hospital. He is co-inventor of two use patents related to aerosolized
pentamidine, a drug for an AIDS-related infection. Dr. Montgomery is a brother
of Michael J. Montgomery, one of the Company's directors.

MARC F. WIPPERMAN, 48 (Senior Vice President, Operations). Mr. Wipperman
joined the Company in 1996 as Vice President, Manufacturing, and was promoted to
Senior Vice President, Operations in January 1998. He oversees the development
and commercialization of manufacturing processes, from the sourcing of raw
materials to production, quality control and distribution. From 1995 to 1996, he
was

B-10
<PAGE>
President of Certified Manufacturing Corporation (pharmaceutical consulting
firm). Previously, he was a consultant to the pharmaceutical industry and held a
variety of management, manufacturing and engineering positions with Johnson &
Johnson (pharmaceutical company).

WILLIAM R. BAKER, PH.D., 48 (Senior Vice President, Research and Preclinical
Development). Dr. Baker was promoted to his current position in November 1999.
He joined the Company in 1993 as Director of Chemistry and was promoted to Vice
President of Research in 1996. Previously, he held various research management
positions in the Pharmaceutical Products Division of Abbott Laboratories
(pharmaceutical company).

DINENDRA M. SEN, 50 (Senior Vice President, Sales and Marketing). Mr. Sen
joined the Company as Senior Vice President, Sales and Marketing in
January 2000. He was Vice President of Sales and Marketing of Schwarz
Pharmaceuticals (U.S. division of a German-based company of the same name) from
1998 to January 2000, Director, Oncology and ID Marketing of Amgen, Inc.
(pharmaceutical company) from 1995 to 1998, and its Marketing Manager, Epogen
from 1992 to 1995. Previously, he was a consultant with The Alexander Group
(marketing consultants) and held a marketing development position in the
pharmaceutical products division of Abbott Laboratories (pharmaceutical
company).

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act, requires the Company's executive officers
and directors, and persons who are holders of more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership on Forms 3, 4, and 5 with the Commission and
the New York Stock Exchange, Inc., and to furnish the Company with copies of
these forms. Based on its review of the copies of Forms 3, 4, and 5 submitted to
the Company, the Company believes that all the executive officers, directors,
and persons who hold more than ten percent of the Common Stock of the Company
complied with all filing requirements imposed by Section 16(a) of the Exchange
Act during 1999.

EXECUTIVE COMPENSATION

COMPENSATION OF NAMED EXECUTIVE OFFICERS

The following table shows information concerning the compensation paid for
services rendered in all capacities to the Company and its subsidiaries for
1997, 1998 and 1999 for Named Executive Officers. The compensation described in
this table was paid by the Company.

B-11
<PAGE>
SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATIONS ------------------
--------------------- SHARES
NAME AND SALARY BONUS UNDERLYING OPTIONS
PRINCIPAL POSITION YEAR ($) ($) (#)
------------------ -------- --------- --------- ------------------
<S> <C> <C> <C> <C>
William H. Gantz............................... 1999 $392,200 $ 0 375,000
Chairman, Chief Executive 1998 370,000 185,000 100,000
Officer and President 1997 302,320 175,000 75,000

A. Bruce Montgomery............................ 1999 278,300 0 90,000
Executive Vice President, 1998 265,000 106,000 30,000
Research and Development 1997 201,660 85,000 80,000

Alan R. Meyer.................................. 1999 233,200 0 90,000
Executive Vice President, 1998 220,000 88,000 30,000
Chief Financial Officer, 1997 187,200 81,000 20,000
Treasurer and Assistant Secretary

Marc F. Wipperman.............................. 1999 227,900 0 75,000
Senior Vice President, 1998 215,000 72,550 20,000
Operations 1997 190,000 66,000 0

William R. Baker............................... 1999 173,333 0 60,000
Senior Vice President,
Research and Preclinical
Development (1)
</TABLE>

------------------------

(1) Dr. Baker became an executive officer when he was elected Senior Vice
President, Research and Preclinical Development in November 1999.

GRANTS OF OPTIONS

The following table provides information related to stock options granted to
the Named Executive Officers during the fiscal year ended December 31, 1999.

B-12
<PAGE>
OPTION GRANTS IN 1999

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF
SHARES TOTAL STOCK PRICE
UNDERLYING OPTIONS APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OR OPTION TERM (2)
GRANTED EMPLOYEES BASE PRICE EXPIRATION ------------------------
NAME (1) IN YEAR ($/SHARE) DATE 5% 10%
---- ---------- ---------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
William H. Gantz................... 125,000 7.6% $50.250 1/26/09 $3,950,244 $10,010,695
250,000 15.3 13.875 8/2/09 2,181,478 5,528,294
A. Bruce Montgomery................ 30,000 1.8 50.250 1/26/09 948,059 2,402,567
60,000 3.7 13.875 8/2/09 523,555 1,326,791
Alan R. Meyer...................... 30,000 1.8 50.250 1/26/09 948,059 2,402,567
60,000 3.7 13.875 8/2/09 523,555 1,326,791
Marc F. Wipperman.................. 25,000 1.5 50.250 1/26/09 790,049 2,002,139
50,000 3.1 13.875 8/2/09 436,296 1,105,659
William R. Baker................... 10,000 0.6 50.250 1/26/09 316,020 800,856
20,000 1.2 13.875 8/2/09 174,518 442,264
30,000 1.8 16.125 11/11/09 304,228 770,973
</TABLE>

------------------------

(1) The exercise price of each option is the fair market value of the common
stock on the date of grant. Other than the option granted to Mr. Gantz on
January 26, 1999, which vested fully on the grant date, these options vest
cumulatively in four equal annual installments beginning on the first
anniversary of the grant date.

(2) These values are calculated using assumed annual rates of stock price
appreciation as required by the rules of the Commission. The actual value of
the options will vary according to the market price of the common stock.
This table does not suggest that any amount shown will be realized.

In addition, in the ordinary course, Messrs. Gantz, Montgomery, Meyer,
Wipperman, Baker and Sen received option grants on June 1, 2000 at the
then-market price in the following amounts, respectively: 50,000, 15,000,
15,000, 12,500, 12,500 and 12,500.

AGGREGATED OPTION EXERCISES IN 1999 AND YEAR-END OPTION VALUES

No options were exercised by any Named Executive Officer in 1999.

<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTION AT IN-THE-MONEY OPTIONS AT
YEAR-END YEAR-END (1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Wilbur H. Gantz............................... 378,750 362,500 $1,674,922 $1,890,625
A. Bruce Montgomery........................... 125,625 158,750 695,117 486,172
Alan R. Meyer................................. 116,250 126,250 1,009,141 473,203
Marc F. Wipperman............................. 46,250 103,750 258,984 464,453
William R. Baker.............................. 43,000 76,500 330,547 333,828
</TABLE>

------------------------

(1) These figures are based on a price of $21.4375 per share, the closing price
of the common stock on December 31, 1999, as quoted on the Nasdaq National
Market, as reported by The Wall Street Journal (Midwest Edition).

B-13
<PAGE>
EMPLOYMENT CONTRACTS, TERMINATION AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS

EMPLOYMENT AND SEVERANCE ARRANGEMENTS WITH THE COMPANY. The Company has a
month-to-month employment agreement with A. Bruce Montgomery, under which
Dr. Montgomery is entitled to receive an annual base salary and bonus (up to 30%
of the annual base salary) as the board of directors determines. He also is
entitled to receive benefits offered to the Company's employees generally. The
agreement permits the Company to terminate Dr. Montgomery's employment for
cause. The agreement also prohibits Dr. Montgomery from competing with the
Company for one year following termination of his employment.

The Company has a quarter-to-quarter employment agreement with Marc F.
Wipperman, under which he is entitled to receive an annual base salary and bonus
(up to 25% of the annual base salary) as the Board of Directors determines. He
also is entitled to receive benefits offered to the Company's employees
generally. The agreement permits the Company to terminate his employment for
cause. The agreement also prohibits him from competing with the Company for one
year following termination of his employment.

The Company has employment agreements with each of the Company's senior
executives, including the Named Executive Officers. Each such agreement provides
for the payment of compensation and benefits if the executive's employment is
terminated following a change in control of the Company. Each executive whose
employment is terminated within two years following a change in control will
receive compensation under the agreement only if the termination was by the
Company without cause or by the executive for good reason. Once effective, the
agreements provide, in addition to unpaid ordinary compensation and benefits, a
lump sum cash payment equal to two times (three times in the case of the Chief
Executive Officer) the executive's annual compensation and certain other
benefits, including assistance in outplacement.

COMPENSATION AND NOMINATING COMMITTEE REPORT ON EXECUTIVE COMPENSATION

The Compensation Committee (known as the Compensation and Nominating
Committee until June 2000) of the Board of Directors is responsible for
determining the compensation of the Company's executive officers, including the
Named Executive Officers. In making its determinations, the committee relies on
input from an independent compensation consultant and reviews appropriate
decisions with all non-employee directors, who constitute a majority of the full
board. Six meetings of the committee were held during 1999.

WHAT IS THE COMPANY'S COMPENSATION PHILOSOPHY?

The Company's executive compensation program reflects the philosophy that
executives' rewards should be structured to closely align their interests with
those of stockholders. The program emphasizes pay for performance, stock-based
incentives and stock ownership. The Company applies the same compensation
philosophy to other employees in the interests of motivation, teamwork and
fairness.

Although individual performance and Company performance are the primary
determinants of individual pay amounts, the committee uses compensation surveys
and external competitiveness as tests for reasonableness in view of the
Company's need to compete for the best talent in the industry segment. The
Company considers the primary competitive market to be other emerging
biopharmaceutical companies of comparable market value, size, operating
complexity and growth potential. Those include some but not all of the companies
that are included in the peer group index used in "Performance Comparison"
below.

WHAT ARE THE ELEMENTS OF EXECUTIVE COMPENSATION?

The Company's executive compensation program in 1999 consisted of base
salaries, annual incentives and long-term incentives in the form of stock
options. The mix of compensation is weighted more heavily toward
performance-based incentives than base salaries as position level advances.

B-14
<PAGE>
BASE SALARIES. The base salaries of the Named Executive Officers are set to
reflect the competitive market and individual responsibilities, experience,
leadership and contributions to the Company's success. In 1999, the Named
Executive Officers received merit increases in base salary of 5% to 6%,
reflecting the committee's subjective assessment of those factors. Dr. Baker
also received an increase based on his promotion to Senior Vice President. The
committee believes that current base salaries of the Named Executive Officers
generally are in the median range for comparable positions, which is in
accordance with the Company's goal to be competitive in recruiting and retaining
talent.

ANNUAL INCENTIVES. Each executive officer is eligible to receive an annual
incentive award based on the committee's assessment of his or her individual
performance and the performance of the Company. At the beginning of each fiscal
year, the committee establishes a target bonus level for each participating
executive to be paid after year-end if individual and Company performance
expectations are fully achieved. In 1999, those target bonus levels ranged from
25% to 50% of base salary, and were intended, when added to base salaries, to
result in total annual compensation approximately comparable to the competitive
market. Following the end of each year, the committee determines the actual
incentive award for each executive, which may be above or below the target level
for that executive, based on the committee's subjective evaluation of individual
and Company performance. The committee does not assign quantitative relative
weights to different factors or follow mathematical formulas. Rather, it makes
its determination in each case after considering the factors it deems relevant
at the time. No cash bonuses were awarded to any of the Named Executive Officers
for 1999 because sales and other Company objectives were not met.

LONG-TERM INCENTIVES. The Company uses stock options as the primary
long-term incentive award to align employee interests with those of
stockholders. Stock options are normally granted annually. In general, they have
ten-year terms and vest cumulatively in equal installments on each of the first
four anniversaries of the grant date. Individual option grants are based on
grant guidelines designed to approximate the present value of median annual
long-term incentives for comparable companies and positions. Individual grants
to the Named Executive Officers have varied above and below the guidelines based
upon the committee's discretionary evaluation of individual performance, past
grant history and other relevant factors.

Regular annual option grants were made to executive officers and other
employees based on the competitive grant guidelines in January 1999, prior to a
significant decline in the Company's stock price. In order to retain
well-qualified employees and provide strong incentives to regain shareholder
value, the committee made special one-time stock option grants to the general
employee population in May 1999. The special grants were for approximately two
times the number of shares under regular annual grants. It followed with similar
grants to executive officers, including each of the Named Executive Officers, in
August 1999.

HOW DOES THE COMPANY COMPENSATE THE CHIEF EXECUTIVE OFFICER?

The committee increased Mr. Gantz's base salary by 6% in 1999. The increase
reflects the critical job responsibilities of the chief executive officer and
his successful contributions toward making the Company a leader in the market
for inhaled drugs to treat lung infections. The committee believes that
Mr. Gantz's salary is in the median range for comparable positions. As noted
above, neither Mr. Gantz nor any of the other Named Executive Officers received
any annual incentive award for 1999, in view of the Company's 1999 performance
relative to its objectives. Based on the same formula as used for the general
employee population and other Named Executive Officers, he received a regular
annual option grant for 125,000 shares in January 1999 and a subsequent special
grant for 250,000 shares in August 1999.

B-15
<PAGE>
IS THE COMPANY SUBJECT TO LIMITS ON TAX DEDUCTIBILITY OF COMPENSATION?

Section 162(m) of the Internal Revenue Code of 1986, as amended, generally
disallows a tax deduction to public companies for compensation in excess of
$1 million to a company's chief executive officer or any of the four other most
highly compensated executive officers. Qualifying performance-based compensation
is not subject to the deduction limit if certain requirements are met. The
committee believes that stock options granted under the Company's 1992 Stock
Option Plan, 1997 Stock Option Plan and 1999 Stock Plan qualify as
performance-based compensation. Currently, none of the Named Executive Officers
earns more than $1 million in combined salary and annual incentives. The
committee's present intention is to comply with Section 162(m) to maximize tax
deductibility to the extent compatible with the Company's pay philosophy and
strategic goals.

PERFORMANCE GRAPH*

The graph below compares the cumulative total return on Company Common Stock
from November 22, 1995 (the date the Common Stock began trading on the Nasdaq
National Market) through June 30, 2000 with the cumulative total return of the
Nasdaq Stock Market Total Return Index and the Nasdaq Pharmaceuticals Stock
Index. Cumulative total return values were calculated assuming an investment of
$100 on November 22, 1995 and reinvestment of dividends. The historical stock
price performance is not necessarily indicative of future results.

CUMULATIVE TOTAL RETURNS,
PATHOGENESIS CORPORATION, NASDAQ STOCK MARKET TOTAL RETURN INDEX,
NASDAQ PHARMACEUTICALS STOCK INDEX

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
PATHOGENESIS NASDAQ STOCK MARKET TOTAL RETURN INDEX NASDAQ PHARMACEUTICALS STOCK INDEX
<S> <C> <C> <C>
11/22/95 $100.00 $100.00 $100.00
12/29/95 110.00 103.29 120.88
3/29/96 163.75 108.13 125.77
6/28/96 155.00 116.94 122.18
9/30/96 177.50 121.12 124.98
12/31/96 217.50 127.09 121.25
3/31/97 250.00 120.20 115.16
6/30/97 291.25 142.22 124.32
9/30/97 355.00 166.28 139.45
12/31/97 371.25 155.72 125.23
3/31/98 335.00 182.25 137.59
6/30/98 290.00 187.25 127.33
9/30/98 333.75 168.97 120.05
12/31/98 580.00 219.57 159.31
3/31/99 133.13 246.09 174.80
6/30/99 141.88 269.28 178.08
9/30/99 153.75 275.80 203.39
12/31/99 214.38 406.34 296.43
3/31/00 227.50 446.50 342.01
6/30/00 260.00 398.30 393.90
</TABLE>

<TABLE>
<CAPTION>
CRSP TOTAL RETURNS FOR: 11/22/95 12/29/95 12/31/96 12/31/97 12/31/98 12/31/99 3/31/2000 6/30/2000
----------------------- -------- -------- -------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PathoGenesis
Corporation......... $100.00 $110.00 $217.50 $371.25 $580.00 $214.38 $227.50 $260.00
Nasdaq Stock Market... 100.00 103.29 127.09 155.72 219.57 406.34 446.50 398.30
Nasdaq Pharmaceuticals
Stock Index......... 100.00 120.88 121.25 125.23 159.31 296.43 342.01 393.90
</TABLE>

------------------------

* Source: Center for Research in Security Prices (CRSP)

B-16