COMBICHEM INC, S-1/A, 1998-05-07

COMBICHEM INC
S-1/A, 1998-05-07
COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 7, 1998
REGISTRATION NO. 333-37981
================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

AMENDMENT NO. 10

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

COMBICHEM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C> <C>
DELAWARE 8731 33-0617379
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>

9050 CAMINO SANTA FE, SAN DIEGO, CALIFORNIA 92121
(619) 530-0484
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

DR. VICENTE ANIDO, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
9050 CAMINO SANTA FE
SAN DIEGO, CALIFORNIA 92121
(619) 530-0484
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:

<TABLE>
<S> <C>
FAYE H. RUSSELL, ESQ. FREDERICK T. MUTO, ESQ.
THOMAS E. HORNISH, ESQ. ERIC J. LOUMEAU, ESQ.
LANCE S. KURATA, ESQ. CHRISTOPHER W. KRUEGER, ESQ.
BROBECK, PHLEGER & HARRISON LLP COOLEY GODWARD LLP
550 WEST "C" STREET, SUITE 1300 4365 EXECUTIVE DRIVE, SUITE 1100
SAN DIEGO, CALIFORNIA 92101 SAN DIEGO, CA 92121
(619) 234-1966 (619) 550-6000
</TABLE>

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
---------------

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
--------------

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED MAY 7, 1998

[COMBICHEM LOGO]
2,250,000 SHARES

COMMON STOCK

All of the 2,250,000 shares of Common Stock offered hereby are being sold
by CombiChem, Inc. ("CombiChem" or the "Company"). Prior to this offering, there
has been no public market for the Common Stock of the Company. It is currently
estimated that the initial public offering price will be between $8.00 and
$10.00 per share. See "Underwriting" for information relating to the method of
determining the initial public offering price. The Company has applied for
quotation of the Common Stock on the Nasdaq National Market under the symbol
"CCHM."

Elan International Services Ltd., a stockholder of CombiChem, and a wholly
owned subsidiary of Elan Corporation, plc (whose wholly owned subsidiary, Athena
Neurosciences, Inc. is a collaborative partner of CombiChem), has expressed an
interest in acquiring approximately $2 million of the shares of Common Stock
offered hereby at the initial public offering price.

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

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<S> <C> <C> <C>
============================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- ------------------------------------------------------------------------------------------------------------
Per Share................................. $ $ $
Total(3).................................. $ $ $
============================================================================================================
</TABLE>

(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."

(2) Before deducting expenses payable by the Company estimated at $1,000,000.

(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 337,500 shares of Common Stock, solely to cover
over-allotments if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $ , $ and $ ,
respectively.

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

The Common Stock is offered by the Underwriters as stated herein, subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of BancAmerica Robertson Stephens, San Francisco, California
on or about , 1998.

BANCAMERICA ROBERTSON STEPHENS

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

SALOMON SMITH BARNEY
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE> 3

[DEPICTIONS OF COMBICHEM'S DISCOVERY PROCESS]

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

2
<PAGE> 4

NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER
TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION IN WHICH SUCH AN OFFER
OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.

UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
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<S> <C>
Summary..................................................... 4
Risk Factors................................................ 6
Use of Proceeds............................................. 16
Dividend Policy............................................. 16
Capitalization.............................................. 17
Dilution.................................................... 18
Selected Financial Data..................................... 19
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 20
Business.................................................... 26
Management.................................................. 43
Certain Transactions........................................ 56
Principal Stockholders...................................... 59
Description of Capital Stock................................ 61
Shares Eligible for Future Sale............................. 64
Underwriting................................................ 66
Legal Matters............................................... 68
Experts..................................................... 68
Additional Information...................................... 68
Index to Financial Statements............................... F-1
</TABLE>

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

CombiChem was incorporated in California in May 1994 and subsequently
reincorporated in Delaware in October 1997. The Company's executive offices are
located at 9050 Camino Santa Fe, San Diego, California 92121, and its telephone
number is (619) 530-0484.

The Company intends to furnish to its stockholders annual reports
containing audited financial statements certified by an independent public
accounting firm and quarterly reports containing unaudited interim financial
information for each of the first three fiscal quarters of each fiscal year of
the Company.

The Company has filed, or plans to file, for trademark protection for the
following: Discovery Engine(TM), Universal Informer Library(TM) and
Cascader(TM). All other trademarks or service marks appearing in this Prospectus
are the property of their respective holders.

3
<PAGE> 5

SUMMARY

The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors," and the Financial Statements and Notes
thereto, appearing elsewhere in this Prospectus. This Prospectus may contain
forward-looking statements which involve risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth under "Risk Factors" and elsewhere in this Prospectus.

THE COMPANY

CombiChem, Inc. is a computational drug discovery company that is applying
its proprietary design technology and rapid synthesis capabilities to accelerate
the discovery process for new drugs. The Company believes its approach offers
pharmaceutical and biotechnology companies the opportunity to conduct their drug
discovery efforts in a more productive and cost-effective manner. Using its
proprietary Discovery Engine(TM) process, the Company focuses on the generation,
evolution and optimization of potential new lead candidates for its
collaborative partners, who will then develop, manufacture, market and sell any
resulting drugs. CombiChem believes that its process is widely applicable to a
variety of disease targets and therapeutic indications. To date, the Company has
established collaborative agreements with Teijin Limited ("Teijin"), Roche
Bioscience, a division of Syntex (U.S.A.) Inc. ("Roche Bioscience"), Sumitomo
Pharmaceuticals Co., Ltd. ("Sumitomo"), ImClone Systems Incorporated
("ImClone"), Athena Neurosciences, Inc., a wholly owned subsidiary of Elan
Corporation, plc ("Elan/Athena") and ICOS Corporation ("ICOS"). In addition, the
Company intends to use its approach on internal programs to discover new lead
candidates and then to outlicense them to third parties, retaining a larger
economic interest.

During March 1998 there were several developments which further validate the
Company's technology and business strategy:

(i) The achievement of a research milestone in CombiChem's collaboration
with Roche Bioscience triggering a cash milestone payment. This stems
from the identification, in less than one year, of novel drug
development candidates for a potential new treatment for respiratory
disease.

(ii) The expansion of its existing collaboration with Elan/Athena whereby
Elan/Athena authorized an additional project and purchased an option
for an additional target not previously covered by the agreement. In
addition, Elan International Services Ltd., a stockholder of
CombiChem, and a wholly owned subsidiary of Elan Corporation, plc
(whose wholly owned subsidiary, Athena Neurosciences, Inc. is a
collaborative partner of CombiChem), has expressed an interest in
acquiring approximately $2 million of the shares of Common Stock
offered hereby at the initial public offering price.

(iii) The establishment of a new agreement on an identified, undisclosed
target with ICOS, bringing the number of its collaborative partners
to a total of six.

The Company's proprietary Discovery Engine is a convergent, iterative
process for drug discovery based on libraries (collections of compounds)
designed for information rather than merely diversity. The design of such
libraries requires the use of various computational and combinatorial chemistry
technologies to select molecules that collectively probe the biological target
in a systematic way to determine the chemical characteristics required for
binding to such target. By identifying features that discriminate between active
and inactive compounds, the computer constructs predictive models, called
hypotheses, and then uses those models to select a more focused library of
compounds. The computer selects compounds from the Company's proprietary Virtual
Library, a computational representation of more than 1 trillion drug-like
molecules chosen for ease of laboratory synthesis. CombiChem believes that, by
repeating this process of selecting, synthesizing and screening informative
compounds and analyzing the resulting data, the Discovery Engine quickly
converges on the most predictive hypothesis. This hypothesis describes the
characteristics a compound must possess to be active against the target and,
thus, is used to select a variety of potent lead candidates.

CombiChem is applying its drug discovery approach to three important types
of programs: (i) lead generation, where the goal is to find lead candidates
against new biological targets; (ii) lead evolution, where the goal is to
develop alternative structural series with the same biological activity profile;
and (iii) lead optimization, where the goal is to modify a specific drug
template to improve its biological activity. For novel targets where little or
no information is available as well as those targets for which no suitable leads
have been identified, the Company initiates the Discovery Engine process by
making available for screening its Universal Informer Library(TM), which
consists of a computer-designed, proprietary collection of approximately 10,000
physical compounds.

CombiChem believes that its Discovery Engine has the following advantages:
(i) generating lead candidates from multiple structural series that exhibit the
same biological activity; (ii) generating lead structures against a wide range
of targets including those for which little or no information is available;
(iii) achieving rapid generation, evolution and optimization of lead candidates;
and (iv) reducing synthesis and screening costs. The Company's design technology
facilitates the use of small, informative libraries. The efficiency provided by
the use of such informative libraries is expected to shorten the time required
for the identification of lead candidates to less than two years.

The Company's objective is to be the industry leader in the generation,
evolution and optimization of novel lead candidates. The Company intends to
utilize its scientific and technology assets in the discovery process through a
mix of collaborative and internal programs by applying the following business
strategies: (i) to establish multiple collaborations with large pharmaceutical
and biotechnology companies focused on biological targets chosen by the
collaborators; (ii) to partner with companies to apply discovery technologies to
jointly agreed-upon biological targets; (iii) to conduct internal discovery
efforts aimed at selected biological targets, retaining a larger economic
interest in the subsequently outlicensed lead candidates; (iv) to expand
collaborative opportunities in alternative industries such as the agrochemical
field; and (v) to maintain technology leadership in both software development
and rapid synthesis capabilities.

4
<PAGE> 6

THE OFFERING

<TABLE>
<S> <C>
Common Stock Offered by the Company.................. 2,250,000 shares
Common Stock Outstanding after the Offering.......... 13,231,938 shares(1)
Use of Proceeds...................................... To fund research and development, expansion of laboratory
and office facilities, potential technology acquisitions and
general corporate purposes. See "Use of Proceeds."
Proposed Nasdaq National Market Symbol............... CCHM
</TABLE>

SUMMARY FINANCIAL DATA
(in thousands, except per share data)

<TABLE>
<CAPTION>
PERIOD FROM
MAY 23, 1994 THREE MONTHS ENDED
(INCEPTION) TO YEAR ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------------------ ------------------
1994 1995 1996 1997 1997 1998
--------------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total revenue.......... $ -- $ 50 $ 2,967 $ 7,471 $ 491 $ 2,622
Total operating
expenses............ 711 6,763 8,085 12,004 2,247 4,130
----- ------- ------- -------- ------- -------
Loss from operations... (711) (6,713) (5,118) (4,533) (1,756) (1,508)
Net loss............... $(706) $(6,675) $(5,118) $ (4,322) $(1,627) $(1,424)
===== ======= ======= ======== ======= =======
Pro forma basic net
loss per share(2)... $ (0.49) $ (0.19) $ (0.14)
======== ======= =======
Shares used in
computing pro forma
basic net loss per
share(2)............ 8,804 8,429 10,202
======== ======= =======
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1998
------------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA(3) ADJUSTED(3)(4)
-------- ------------ --------------
(unaudited)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 3,914 $ 3,914 $ 21,747
Short-term investments............................. 10,575 10,575 10,575
Working capital.................................... 10,567 10,567 28,399
Total assets....................................... 25,926 25,926 43,759
Long-term obligations, including current portion... 5,441 5,441 5,441
Redeemable convertible preferred stock............. 23,130 -- --
Accumulated deficit................................ (18,244) (18,244) (18,244)
Total stockholders' equity (deficit)............... (7,612) 15,518 33,350
</TABLE>

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

(1) Based on the number of shares outstanding as of March 31, 1998. Includes:
(i) 7,754,933 shares of Common Stock to be issued upon conversion of
redeemable convertible preferred stock, par value $0.001 per share (the
"Preferred Stock"), of the Company; and (ii) 779,625 shares of Common Stock
which are currently subject to repurchase by the Company. Excludes: (i)
535,596 shares of Common Stock issuable upon the exercise of stock options
outstanding as of March 31, 1998, with a weighted average exercise price of
$3.95 per share, all of which are exercisable and 49,415 of which are
vested; (ii) 139,478 shares of Common Stock issuable upon the exercise of
outstanding warrants, with a weighted average exercise price of $2.27 per
share; and (iii) 58,125 shares of Common Stock issuable upon the exercise
and conversion of Series J convertible preferred stock options, all of which
are exercisable and vested with an exercise price of $0.40 per share. See
"Capitalization."

(2) Computed on the basis described for pro forma basic net loss per share in
Note 1 of Notes to Financial Statements.

(3) Gives effect to the conversion of the Preferred Stock into Common Stock
effective upon the closing of this offering.

(4) Adjusted to reflect the sale of 2,250,000 shares of Common Stock offered
hereby, assuming a public offering price of $9.00 per share (the mid-point
of the range set forth on the front cover) less estimated underwriting
discounts and commissions and other expenses of this offering, resulting in
net proceeds to the Company of $17.8 million. See "Use of Proceeds."

Except as otherwise indicated herein, all information contained in this
Prospectus (i) gives effect to a one-for-four reverse split of the Common Stock,
(ii) reflects the conversion of all outstanding shares of Preferred Stock into
an aggregate of 7,754,933 shares of Common Stock, effective upon the closing of
this offering, and (iii) assumes no exercise of the Underwriters' over-allotment
option.

5
<PAGE> 7

RISK FACTORS

In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing shares of the Common Stock offered hereby. The
Prospectus may contain forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the following risk factors and elsewhere in this
Prospectus.

NEW AND UNCERTAIN TECHNOLOGY AND BUSINESS

The Company's Discovery Engine process is novel and has not yet been shown
to be successful in the discovery of lead candidates that have been subsequently
developed into commercialized drugs. Furthermore, the Company's drug discovery
efforts are focused on some targets the functions of which are not yet known.
Development of new pharmaceutical products is highly uncertain, and no assurance
can be given that the Company's drug discovery process will result in lead
candidates that will be safe or efficacious or commercially successful as
products. Failure to validate the Company's technology through the successful
discovery of lead candidates would have a material adverse effect on the
Company's business, financial condition and results of operations.

The Company's strategy, which is unproven, is to use its proprietary design
technology for the purpose of rapidly identifying, optimizing and obtaining
proprietary rights to as many lead candidates and development candidates as
possible. The Company's ability to achieve profitability in the near term
depends entirely on its ability to enter into additional collaborative
agreements with third parties and to maintain the agreements it currently has in
place. The pricing and nature of the Company's collaborative relationships is
such that there may only be a limited number of pharmaceutical, biotechnology
and agrochemical companies that will be its potential customers. The Company's
ability to succeed is also dependent upon the acceptance by potential customers
of its Discovery Engine process as an effective tool in new drug discovery.
Historically, pharmaceutical, biotechnology and agrochemical companies have
conducted lead candidate identification and optimization within their own
research departments, due to the highly proprietary nature of the activities
being conducted, the central importance of these activities to their drug
discovery and development efforts and the desire to obtain maximum patent and
other proprietary protection on the results of their internal programs. In order
to achieve its business objectives, the Company must convince these companies
that its technology and capabilities justify the outsourcing of their programs
to the Company. There can be no assurance that the Company will be able to
attract any future customers on acceptable terms for its products and services
or develop a sustainable, profitable business. Failure to do so will have a
material adverse effect on the Company's business, financial condition and
results of operations.

The Company's collaborative agreements are structured in a way that
provides the Company with payments for (i) initiating the collaboration, (ii)
providing research for a specified period, typically over a one- to two-year
period for each project undertaken under the collaboration, (iii) attaining
specifically negotiated milestones, and (iv) royalties from the sale of any drug
successfully developed under each collaborative agreement. Whereas a significant
portion of the Company's revenue to date has been related to the research phase
of each of its collaborative agreements which is for a specified period and is
generally offset by corresponding research costs, the Company expects any profit
to result primarily from project initiation fees, milestone payments and
royalties. Following the completion of the research phase of each collaborative
agreement, the Company may receive additional revenue under each respective
collaborative agreement only from milestones and royalties. As of March 31,
1998, the Company had completed the research phase of its collaborative
agreement with Teijin. There can be no assurance that the Company will receive
any additional milestone or royalty payments from any of its collaborative
agreements. Failure to do so could have a material adverse effect on the
Company's business, financial condition and results of operation. See
"-- Dependence of Company's Strategy on Third Parties" and "Business."

6
<PAGE> 8

LIMITED OPERATING HISTORY; HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE
PROFITABILITY

The Company has had a limited operating history. For the years ended
December 31, 1995, 1996 and 1997 and the three months ended March 31, 1998, the
Company had net losses of approximately $6.7 million, $5.1 million, $4.3 million
and $1.4 million, respectively. As of March 31, 1998, the Company had an
accumulated deficit of approximately $18.2 million. The Company's expansion of
its operations and enhancements to its Discovery Engine and related drug
discovery technology will result in significant expenses over the next several
years that may not be offset by significant revenue. The Company's ability to
achieve profitability in the near term depends entirely on its ability to enter
into additional collaborative agreements with third parties and to maintain the
agreements it currently has in place. To date, substantially all revenue
received by the Company has been from project initiation fees and research
funding paid pursuant to existing collaborative agreements with third parties.
The Company has not yet received any revenue from royalties for the sale of a
commercial drug by a customer, and there can be no assurance when the Company
will receive such revenue, if at all. An element of the Company's
commercialization strategy is the potential development and licensing to others
of lead compounds or drug development candidates identified by the Company
through its internal programs, at its own expense, for potential pharmaceutical
development. To date, no such license has been entered into, and there can be no
assurance that any such license will be entered into on acceptable terms in the
future, if at all. The Company is unable to predict when, or if, it will become
profitable. See "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

DEPENDENCE OF COMPANY'S STRATEGY ON THIRD PARTIES

The Company's strategy depends upon the formation of multiple collaborative
arrangements with third parties on a regular basis. To date, the Company has
entered into six such arrangements, and substantially all of its revenue has
been from its collaborative arrangements. There can be no assurance that the
Company will be able to continue to establish additional collaborative
arrangements, that any such arrangements will be on terms favorable to the
Company, or that current or any future collaborative arrangements will
ultimately be successful. Failure to enter into additional collaborative
agreements on favorable terms would have a material adverse effect on the
Company's business, financial condition and results of operations. Whereas a
significant portion of the Company's revenue to date has been related to the
research phase of each of its collaborative agreements, which is for a specified
period and is generally offset by corresponding research costs, the Company
expects any profit to result primarily from project initiation fees, milestone
payments and royalties. Following the completion of the research phase of each
collaborative agreement, the Company may receive additional revenue under each
respective collaborative agreement only from milestones and royalties, which may
not be paid, if at all, until some time well into the future. Further,
CombiChem's receipt of revenue from collaborative arrangements is affected by
the timing of efforts expended by the Company and its collaborators and the
timing of lead compound identification by the Company. Milestone payments may be
earned for different events or achievements from agreement to agreement and, for
certain collaborations, such fees may not be earned until the collaborator has
advanced products into clinical testing, until some time well into the future.
The Company's products and services will only result in commercialized
pharmaceutical products generating milestone payments and royalties upon the
successful outcome of significant preclinical and clinical development, the
procurement of requisite regulatory approvals, the establishment of
manufacturing, sales and marketing capabilities and the achievement of
successful marketing. The Company does not currently intend to perform any of
these activities. Therefore, the Company will be dependent upon the expertise
and dedication of sufficient resources by third parties to develop and
commercialize products based on library compounds produced and lead compounds
discovered or optimized by the Company. In addition, there can be no assurance
that any such development or commercialization efforts by third parties would be
successful. Should a collaborative partner fail to develop or commercialize a
compound or product to which it has rights from the Company, the Company may not
receive any future milestone payments and will not receive any royalties
associated with such compound or product. In addition, the

7
<PAGE> 9

Company's collaborative arrangements with its partners do not obligate the
partners to develop or commercialize lead compounds discovered or optimized by
the Company. Each collaborative partner may independently move forward with a
competing lead candidate developed either by such partner internally or in
collaboration with others, including the Company's competitors. The potential
drugs developed by a collaborative partner may be derivatives of the lead
compounds provided to the customer by the Company. While the Company's existing
collaborative agreements provide that the Company retain milestone and royalty
payment rights with respect to drugs developed from certain derivative
compounds, there can be no assurance that disputes will not arise over the
application of payment provisions to such drugs. There can be no assurance that
current or future collaborative partners, if any, will not pursue alternative
technologies or develop alternative products either on their own or in
collaboration with others, including the Company's competitors, as a means for
developing treatments for the diseases targeted by collaborative arrangements
with the Company. Furthermore, there can be no assurance that conflicts will not
arise between collaborative partners as to proprietary rights to particular
compounds. The amount and timing of resources that current and future
collaborators, if any, devote to collaborations with the Company are not within
the control of the Company. There can be no assurance that such collaborators
will perform their obligations as expected. Further, the Company's
collaborations generally may be terminated by its collaborators upon short
notice and following an uncured material breach, which terminations would result
in a loss of anticipated revenue. Termination of the Company's existing or
future collaborative agreements, if any, could have a material adverse effect on
the Company's business, financial condition and results of operations.

The Company's strategy also involves conducting its own internally funded
discovery programs by choosing biological targets of current scientific interest
and working in collaboration with screening companies. There can be no assurance
that the Company will continue to have access to such targets, novel or
otherwise, on an ongoing basis. Furthermore, despite the Company's installation
of independent teams to conduct each collaborative project, there can be no
assurance that conflicts will not arise among collaborators as to the rights to
overlapping lead candidate compounds developed independently as a result of
being identified through the use of the Company's technologies. Failure to
manage multiple existing and future collaborator relationships successfully,
maintain confidentiality among such relationships or prevent the occurrence of
such conflicts could lead to disputes that result in, among other things, a
significant strain on management resources, legal claims involving significant
time and expense and loss of reputation, a loss of capital or a loss of current
or future collaborators, any of which could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business -- Strategy" and "Business -- CombiChem's Collaborative Arrangements."

SIGNIFICANT FLUCTUATIONS IN QUARTERLY RESULTS

To date, substantially all revenue received by the Company has been from
the receipt of project initiation fees, research funding and a milestone fee
paid pursuant to collaborative agreements. The Company expects that a
significant portion of its revenue for the foreseeable future will be comprised
of such payments. The timing of certain revenue in the future will depend upon
the completion of certain milestones as provided for in the Company's
collaborative agreements. In any one fiscal quarter the Company may receive
multiple or no payments from its several collaborators. Operating results may
therefore vary substantially from quarter to quarter and will not necessarily be
indicative of results in subsequent periods. There can be no assurance that such
quarterly fluctuations in revenue or financial results will not have a material
impact on the Company's stock price.

COMPANY'S SUCCESS DEPENDENT ON INTELLECTUAL PROPERTY RIGHTS

8
<PAGE> 10

Company, are uncertain and involve complex legal and factual questions for which
important legal principles are largely unresolved. The Company has pending
United States and foreign patent applications relating to various aspects of its
technology, certain systems, materials and methods used in screening compounds
and the libraries or compounds contained therein. These patent applications are
either owned or co-owned by the Company or rights under them are licensed to the
Company. To date, one foreign patent owned by the Company has issued and notices
of allowance for two United States patent applications owned by the Company have
been received. To the extent that any foreign patent application filed in the
European Patent Office or the Japanese Patent Office issues as a patent, a
challenge to the validity of such patent may be presented in an opposition
proceeding. There can be no assurance that patents will issue as a result of any
such pending applications or that, if issued, such patents will be sufficiently
broad to afford protection against competitors with similar technologies. The
Company is aware of five United States patents issued to third parties that
claim proprietary rights; two of these patents are entitled "System and method
for automatically generating chemical compounds with desired properties", the
third is entitled "System, method, and computer program for at least partially
automatically generating chemical compounds having desired properties" and the
fourth and fifth are entitled "Method of generating a plurality of chemical
companies in a spatially arranged array." Although the Company believes that its
current activities do not infringe these patents or the patents of other third
parties, the Company continually assesses its position with respect to such
patents and there can be no assurance that the Company's belief would be
affirmed in any litigation over patents or that the Company's future
technological developments would be outside the scope of these patents or the
patents of other third parties. Further, there can be no assurance that any
third party will not seek to assert such patent rights against the Company,
which would result in significant legal costs and require substantial management
resources, and there can be no assurance that the Company would be able to
obtain a license from any third party, if required, on commercially reasonable
terms, if at all. From time to time the Company receives correspondence from
third parties to license patents owned or controlled by third parties and has
recently received such correspondence. The Company's inability to obtain or
maintain patent protection or necessary licenses could have a material adverse
effect on the business, financial condition and results of operations of the
Company. The inability of the Company either to demonstrate non-infringement of
these and other current and future patents, whether issued in the United States
or overseas, or to obtain the appropriate licenses, would have a material
adverse effect on the Company's business, financial condition and operations.
Moreover, there can be no assurance that the Company or its customers will be
able to obtain patent protection for lead compounds or pharmaceutical products
based upon the Company's or such customers' technologies. There can be no
assurance that any patents issued to the Company or its collaborative partners,
or for which the Company has license rights, will not be challenged, invalidated
or circumvented, or that the rights granted thereunder will provide competitive
advantages to the Company. To the extent that the Company or its consultants or
collaborators use intellectual property owned by others in their work for the
Company, disputes may also arise as to the rights in related or resulting
know-how and inventions. Litigation may be necessary to enforce the Company's
patent and license rights or to determine the scope and validity of others'
proprietary rights. Any such litigation whether or not the outcome thereof is
favorable to the Company, could result in substantial cost to and diversion of
effort by the Company. Further, United States patents do not provide any
remedies for infringement that occurred before the patent is issued. The
commercial success of the Company will also depend upon successfully avoiding
the infringement of current and future patents issued to competitors and upon
maintaining the technology licenses upon which certain of the Company's current
products are, or any future products under development might be, based. If
competitors of the Company prepare and file patent applications in the United
States that claim inventions also claimed by the Company or its collaborators,
the Company or its collaborators may have to participate in interference
proceedings declared by the United States Patent and Trademark Office ("PTO") to
determine the priority of invention, which could result in substantial cost to
the Company, even if the outcome is favorable to the Company. An adverse outcome
could subject the Company to significant liabilities to third parties and
require the Company to license disputed rights from third parties or cease using
the technology.

9
<PAGE> 11

A United States patent application is maintained under conditions of
confidentiality while the application is pending in the PTO, so that the Company
cannot determine the inventions being claimed in pending patent applications
filed by its competitors in the PTO. A number of pharmaceutical and
biotechnology companies and research and academic institutions have developed
technologies, filed patent applications or received patents on various
technologies that may be related to the Company's business. Some of these
technologies, applications or patents may conflict with the Company's
technologies or patent applications. Such conflict could limit the scope of the
patents, if any, that the Company may be able to obtain, or result in the denial
of the Company's patent applications. In addition, there can be no assurance
that the Company would be able to obtain licenses to patents held by third
parties that may cover the Company's activities at a reasonable cost, if at all,
or that the Company would be able to develop or obtain any alternative
technologies. The Company currently has certain licenses from third parties and
in the future may require additional licenses from other parties in order to
refine its Discovery Engine further and to allow its collaborators to develop,
manufacture and market commercially viable products effectively. There can be no
assurance that (i) such licenses will be obtainable on commercially reasonable
terms, if at all, (ii) any patents underlying such licenses will be valid and
enforceable or (iii) the proprietary nature of any patented technology
underlying such licenses will remain proprietary. The Company relies
substantially on certain technologies that are not patentable or proprietary and
are therefore available to the Company's competitors. The Company also relies on
certain proprietary trade secrets and know-how that are not patentable. Although
the Company has taken steps to protect its unpatented trade secrets and
know-how, in part through the use of confidentiality agreements with its
employees, consultants and certain of its contractors, there can be no assurance
that (i) these agreements will not be breached, (ii) the Company would have
adequate remedies for any breach or (iii) the Company's trade secrets will not
otherwise become known or be independently developed or discovered by
competitors. Failure by the Company to protect all or part of its patents, trade
secrets and know-how could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Patents and Proprietary Information."

COMPETITIVE NATURE OF COMPANY'S INDUSTRY AND RISKS OF OBSOLESCENCE OF TECHNOLOGY

Many organizations are actively attempting to identify, optimize and
generate lead compounds for potential pharmaceutical development. The Company
competes with the research departments of pharmaceutical companies,
biotechnology companies, combinatorial chemistry companies and research and
academic institutions as well as other computationally based drug discovery
companies. Many of these competitors have greater financial and human resources
and more experience in research and development than the Company. Historically,
large pharmaceutical companies have maintained close control over their research
activities, including the synthesis, screening and optimization of chemical
compounds. Many of these companies, which represent one of the largest potential
markets for CombiChem's products and services, are internally developing
combinatorial and computational approaches and other methodologies to improve
productivity, including major investments in robotics technology to permit the
automated parallel synthesis of compounds. In addition, these companies may
already have large collections of compounds previously synthesized or ordered
from chemical supply catalogs or other sources against which they may screen new
targets. Other sources of compounds include compounds extracted from natural
products, such as plants and microorganisms, and compounds created using
rational drug design. Academic institutions, governmental agencies and other
research organizations are also conducting research in areas in which the
Company is working, either on their own or through collaborative efforts. The
Company anticipates that it will face increased competition in the future as new
companies enter the market and advanced technologies become available. The
Company's processes may be rendered obsolete or uneconomical by technological
advances or entirely different approaches developed by one or more of the
Company's competitors. The existing approaches of the Company's competitors or
new approaches or technology developed by the Company's competitors may be more
effective than those developed by the Company. See "Business -- Competition."

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<PAGE> 12

SUCCESS OF COMPANY DEPENDENT ON SCALE-UP AND MANAGEMENT OF GROWTH

The Company's success will depend on the expansion of its operations to
service additional collaborative arrangements and the management of these
expanded operations. To be cost-effective in its delivery of services and
products, the Company must enhance productivity through further automation of
its processes and improvements to its technology generally. In addition, the
Company must successfully structure and manage multiple additional collaborative
relationships, including maintaining the confidentiality of the research being
provided to multiple customers. There can be no assurance that the Company will
be successful in adding technical personnel as needed to meet the staffing
requirements of any additional collaborative relationship. In addition, there
can be no assurance that the Company will be successful in its engineering
efforts to automate its processes further or in its initiatives to improve its
technology. Failure to achieve any of these goals could have a material adverse
effect on the Company's business, financial condition or results of operations.
See "Business -- CombiChem's Collaborative Arrangements" and
"Business -- Employees."

DEPENDENCE OF COMPANY ON KEY EMPLOYEES

The Company is highly dependent on the principal members of its scientific
and management staff. The loss of one or more key members of the Company's
scientific or management staff could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company's
future success will also depend in part on the continued service of its key
design engineering, scientific, software and management personnel and on its
ability to identify, hire and retain any additional personnel. There is intense
competition for such qualified personnel in the areas of the Company's
activities, and there can be no assurance that the Company will be able to
continue to attract and retain such personnel necessary for the development of
the Company's business. Failure to attract and retain key personnel could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Employees" and "Management."

GOVERNMENT REGULATION

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<PAGE> 13

products. Clinical trials are normally done in three phases and generally take
two to five years but may take longer to complete. After completion of clinical
trials of a new product, FDA and foreign regulatory authority marketing approval
must be obtained. If the product is classified as a new drug, the Company or its
customer will be required to file a New Drug Application (an "NDA") and receive
approval before commercial marketing of the drug. The testing and approval
processes require substantial time and effort, and there can be no assurance
that any approval will be granted on a timely basis, if at all. NDAs submitted
to the FDA can take, on average, two to five years to obtain approval. If
questions arise during the FDA review process, approval can take more than five
years. Even if FDA regulatory clearances are obtained, a marketed product is
still subject to continual review, and later discovery of previously unknown
problems or failure to comply with the applicable regulatory requirements may
result in restrictions on the marketing of a product or withdrawal of the
product from the market, as well as possible civil or criminal sanctions.
Domestic manufacturing facilities of the Company or its customers are subject to
biannual inspections by the FDA and must comply with the FDA's current Good
Manufacturing Practices regulations. To comply with such regulations, a
manufacturer must spend funds, time and effort in the areas of production and
quality control to ensure full technical compliance. The FDA stringently applies
regulatory standards for manufacturing. For marketing outside the United States,
the Company or its customer will also be subject to foreign regulatory
requirements governing human clinical trials and marketing approval for
pharmaceutical products. The requirements governing the conduct of clinical
trials, product licensing, pricing and reimbursement vary widely from country to
country.

FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING

Although the Company anticipates that its existing capital resources,
including the net proceeds from this offering, will be adequate to fund the
Company's operations at least through the next 12 months, there can be no
assurance that changes will not occur that would consume available capital
resources before such time. The Company may be required to raise additional
capital over a period of several years in order to continue to conduct its
operations. Such capital may be raised through additional public or private
financings, as well as collaborative arrangements, borrowings and other
available sources. There can be no assurance that the Company's collaborative
arrangements will produce revenue adequate to fund the Company's operating
expenses. The Company's capital requirements depend on numerous factors,
including the ability of the Company to enter into additional collaborative
arrangements, competing technological and market developments, changes in the
Company's existing collaborative relationships, the cost of filing, prosecuting,
defending and enforcing patent claims and other intellectual property rights,
the purchase of additional capital equipment, the progress of the Company's drug
discovery programs and the progress of the commercialization of milestone- and
royalty-bearing compounds by the Company's customers. The Company does not
currently plan independently to develop, manufacture or market any drugs it
discovers. To the extent that additional capital is needed, it may be raised
through the sale of equity or convertible debt securities, and the issuance of
such securities could result in dilution to the Company's existing stockholders.
There can be no assurance that additional funding, if necessary, will be
available on favorable terms, if at all. If adequate funds are not available,
the Company may be required to curtail operations significantly or to obtain
funds through entering into arrangements with collaborative partners or others
that may require the Company to relinquish rights to certain of its
technologies, product candidates, products or potential markets that the Company
would not otherwise relinquish. The failure to receive additional funding would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

UNCERTAINTY OF PHARMACEUTICAL PRICING AND HEALTH CARE REFORM

The Company expects that substantially all of its revenue in the
foreseeable future will be derived from products and services provided to the
pharmaceutical and biotechnology industries. Accordingly, the Company's success
in the foreseeable future is directly dependent upon the success of the

12
<PAGE> 14

companies within those industries and their continued demand for the Company's
products and services. The level of revenue and profitability of pharmaceutical
companies may be affected by the continuing efforts of governmental and
third-party payors to contain or reduce the costs of health care through various
means and the initiatives of third-party payors with respect to the availability
of reimbursement. For example, in certain foreign markets, pricing or
profitability of prescription pharmaceuticals is subject to governmental
control. In the United States, there have been, and the Company expects that
there will continue to be, a number of federal and state proposals to implement
similar governmental control. It is uncertain what legislative proposals may be
adopted or what actions federal, state or private payors for health care goods
and services may take in response to any health care reform proposals or
legislation. To the extent that such proposals or reforms have a material
adverse effect on the business, financial condition and profitability of
pharmaceutical and biotechnology companies that are actual or prospective
collaborators for certain of the Company's products and services, the Company's
business, financial condition and results of operations may be adversely
affected.

COMPANY'S USE OF HAZARDOUS MATERIALS

The research and development processes of the Company involve the
controlled use of hazardous materials. The Company is subject to federal, state
and local laws and regulations governing the use, manufacture, storage, handling
and disposal of such materials and certain waste products. Although the Company
believes that its activities currently comply with the standards prescribed by
such laws and regulations, the risk of accidental contamination or injury from
these materials cannot be completely eliminated. In the event of such an
accident, the Company could be held liable for any damages that result, and any
such liability could exceed the resources of the Company. In addition, there can
be no assurance that the Company will not be required to incur significant costs
to comply with environmental laws and regulations in the future. The occurrence
of any such event could have a material adverse effect on the Company's
business, financial condition and results of operations.

SHARES ELIGIBLE FOR FUTURE SALE

Future sales of Common Stock in the public market following this offering
could adversely affect the market price of the Common Stock. Based on the number
of shares outstanding as of March 31, 1998, upon completion of this offering,
the Company will have 13,231,938 shares of Common Stock outstanding, assuming no
exercise of currently outstanding options. Of these shares, the 2,250,000 shares
sold in this offering (plus any additional shares sold if the Underwriters
exercise their over-allotment option) will be freely transferable without
restriction under the Securities Act of 1933, as amended (the "Securities Act"),
unless they are held by "affiliates" of the Company as that term is used under
the Securities Act and the regulations promulgated thereunder. Each holder who
signed a lock-up agreement has agreed, subject to certain limited exceptions,
not to sell or otherwise dispose of any of the shares held by them as of the
date of this Prospectus for a period of 180 days after the date of this
Prospectus without the prior written consent of BancAmerica Robertson Stephens.
At the end of such 180-day period, approximately 8,980,000 shares of Common
Stock (including approximately 121,000 shares issuable upon exercise of vested
options) will be eligible for immediate resale, subject to compliance with Rule
144 and Rule 701. The remainder of the approximately 4,252,000 shares of Common
Stock outstanding or issuable upon exercise of options held by existing
stockholders or option holders will become eligible for sale at various times
over a period of less than two years and could be sold earlier if the holders
exercise any available registration rights or upon vesting pursuant to the
Company's standard four year vesting schedule. The holders of 7,754,933 shares
of Common Stock have the right in certain circumstances to require the Company
to register their shares under the Securities Act for resale to the public. If
such holders, by exercising their demand registration rights, cause a large
number of shares to be registered and sold in the public market, such sales
could have an adverse effect on the market price for the Company's Common Stock.
If the Company were required to include in a Company-initiated registration
shares held by such holders pursuant to the exercise of their piggyback
registration rights, such sales may have an adverse effect on the Company's
ability to

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<PAGE> 15

raise needed capital. In addition, the Company expects to file immediately upon
the effective date of this registration statement, a registration statement on
Form S-8 registering a total of approximately 1,222,170 shares of Common Stock
including those outstanding shares which may be repurchased by the Company and
shares issuable upon exercise of outstanding stock options or reserved for
issuance under the Company's stock incentive plan and employee stock purchase
plan. See "Management -- Benefit Plans," "Description of Capital
Stock -- Registration Rights," "Shares Eligible for Future Sale" and
"Underwriting."

CONTROL BY MANAGEMENT AND EXISTING STOCKHOLDERS

Upon completion of this offering, the Company's executive officers,
directors and affiliated entities together will beneficially own approximately
30.8% of the outstanding shares of Common Stock (approximately 30.0% if the
Underwriters' overallotment option is exercised in full). As a result, these
stockholders will be able to exercise control over matters requiring stockholder
approval, including the election of directors and mergers, consolidations and
sales of all or substantially all of the assets of the Company. This may prevent
or discourage tender offers for Common Stock unless the terms are approved by
such stockholders. See "Principal Stockholders."

NO PRIOR PUBLIC MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE

Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active public market for the Common
Stock will develop or be sustained after the offering. The initial offering
price will be determined by negotiations between the Company and the
Underwriters and is not necessarily indicative of the market price at which the
Common Stock of the Company will trade after this offering. The market prices
for securities of life sciences companies have been highly volatile, and the
market has experienced significant price and volume fluctuations that are
unrelated to the operating performance of particular companies. Announcements of
technological innovations or new commercial products by the Company or its
competitors, developments concerning proprietary rights, including patents and
litigation matters, publicity regarding actual or potential results with respect
to products or compounds under development by the Company or its strategic
partners, regulatory developments in both the United States and foreign
countries, public concern as to the efficacy of new technologies, general market
conditions, as well as quarterly fluctuations in the Company's revenue and
financial results among other factors, may have a significant impact on the
market price of the Common Stock. In particular, the realization of any of the
risks described in these "Risk Factors" could have a dramatic and adverse impact
on such market price. See "Underwriting."

ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BY-LAW PROVISIONS AND DELAWARE LAW

The Company's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") authorizes the Board of Directors to issue,
without stockholder approval, 5,000,000 shares of Preferred Stock with voting,
conversion and other rights and preferences that could adversely affect the
voting power or other rights of the holders of Common Stock. Although the
Company has no current plans to issue any shares of Preferred Stock, the
issuance of Preferred Stock or of rights to purchase Preferred Stock could be
used to discourage an unsolicited acquisition proposal. In addition, the
possible issuance of Preferred Stock could discourage a proxy contest, make more
difficult the acquisition of a substantial block of the Company's Common Stock
or limit the price that investors might be willing to pay in the future for
shares of the Company's Common Stock. The Company's Certificate of Incorporation
provides for staggered terms for the members of the Board of Directors. A
staggered Board of Directors and certain provisions of the Company's by-laws and
of Delaware law applicable to the Company could delay or make more difficult a
merger, tender offer or proxy contest involving the Company. Further, the
Company's stock option plans generally provide for the acceleration of vesting
of options granted under such plans in the event of certain transactions which
result in a change of control of the Company. In addition, the Company is
subject to Section 203 of the General Corporate Law of Delaware which, subject
to certain exceptions, restricts certain transactions

14
<PAGE> 16

and business combinations between a corporation and a stockholder owning 15% or
more of the corporation's outstanding voting stock (an "interested stockholder")
for a period of three years from the date the stockholder becomes an interested
stockholder. These provisions may have the effect of delaying or preventing a
change of control of the Company without action by the stockholders and,
therefore, could adversely affect the price of the Company's Common Stock. See
"Management," "Description of Capital Stock -- Preferred Stock" and "Description
of Capital Stock -- Possible Anti-Takeover Effect of Certain Charter
Provisions -- Delaware Anti-Takeover Statute."

BROAD MANAGEMENT DISCRETION IN USE OF PROCEEDS

The Company's management will have broad discretion to allocate proceeds of
this offering to uses that it believes are appropriate. There can be no
assurance that the proceeds of this offering can or will be invested to yield a
positive return. See "Use of Proceeds."

RISK OF IMMEDIATE AND SUBSTANTIAL DILUTION

Purchasers of the shares of Common Stock offered hereby will experience
immediate and substantial dilution estimated at $6.48 per share in the net
tangible book value of their investment from the initial offering price.
Additional dilution will occur upon exercise of outstanding options and
warrants. See "Dilution" and "Shares Eligible for Future Sale."

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<PAGE> 17

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,250,000 shares of
Common Stock offered hereby are estimated to be approximately $17.8 million
($20.7 million if the Underwriters' over-allotment option is exercised in full),
assuming a public offering price of $9.00 per share (the mid-point of the range
set forth on the front cover) and after deducting the estimated underwriting
discounts and commissions and other estimated offering expenses.

The principal purposes of this offering are to increase the Company's
equity capital and to create a public market for the Company's Common Stock in
order to facilitate future access by the Company to public equity markets as
well as to create liquidity for its existing stockholders. The Company intends
to use the net proceeds of this offering, together with its existing cash and
cash equivalents and short-term investments, to fund research and development
(approximately $10.0 million), expansion of laboratory and office facilities
(approximately $5.0 million) and the remainder for general corporate purposes.
The Company may also use a portion of the net proceeds for the acquisition of
businesses, technologies or products complementary to those of the Company.
There are no present arrangements or agreements for any such acquisitions.

The amounts actually expended for each purpose may vary significantly
depending upon numerous factors, including the amount and timing of additional
collaborative agreements, the progress of the Company's development,
technological advances, the commercial potential of the Company's services and
the status of the Company's competitors. The Company believes that its existing
cash, cash equivalents and short-term investments, combined with the net
proceeds of this offering, projected funding from equipment leases and interest
income will be adequate to satisfy its capital requirements and fund operations
at least through the next 12 months. Pending application of the net proceeds as
described above, the Company intends to invest the net proceeds of this offering
in short-term investment-grade securities.

DIVIDEND POLICY

The Company has never declared or paid dividends on its capital stock. The
Company does not anticipate paying any cash dividends in the foreseeable future.
Payments of future dividends, if any, will be at the discretion of the Company's
Board of Directors after taking into account various factors, including the
Company's financial condition, operating results, current and anticipated cash
needs and plans for expansion. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."

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<PAGE> 18

CAPITALIZATION

The following table sets forth as of March 31, 1998 (i) the actual
capitalization of the Company, (ii) the pro forma capitalization of the Company,
after giving effect to the conversion of all outstanding shares of Preferred
Stock into Common Stock effective upon the closing of this offering, and (iii)
pro forma as adjusted to give effect to the sale by the Company of 2,250,000
shares of Common Stock offered hereby, assuming a public offering price of $9.00
per share (the mid-point of the range set forth on the front cover) less
estimated underwriting discounts and commissions and other expenses of this
offering.

<TABLE>
<CAPTION>
MARCH 31, 1998
------------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA(2) ADJUSTED(2)(3)
-------- ------------ --------------
(in thousands)
<S> <C> <C> <C>
Long-term obligations, including current portion..... $ 5,441 $ 5,441 $ 5,441
Redeemable convertible preferred stock:
Preferred Stock, $0.001 par value; 63,196,296
shares authorized and 31,019,635 shares issued
and outstanding actual; 5,000,000 shares
authorized and no shares issued and outstanding
pro forma and pro forma as adjusted............. 23,130 -- --
Stockholders' equity (deficit):
Common Stock, $0.001 par value; 80,000,000 shares
authorized actual; 3,227,005 shares issued and
outstanding actual; 40,000,000 shares authorized
pro forma and pro forma as adjusted; 10,981,938
shares issued and outstanding pro forma; and
13,231,938 shares issued and outstanding pro
forma as adjusted(1)............................ 3 11 13
Additional paid-in capital......................... 12,520 35,642 53,472
Notes receivable from stockholders................. (419) (419) (419)
Deferred compensation.............................. (1,472) (1,472) (1,472)
Accumulated deficit................................ (18,244) (18,244) (18,244)
-------- -------- --------
Total stockholders' equity (deficit)............ (7,612) 15,518 33,350
-------- -------- --------
Total capitalization....................... $ 20,959 $ 20,959 $ 38,791
======== ======== ========
</TABLE>

- ---------------
(1) Includes 779,625 shares of Common Stock which are currently subject to
repurchase by the Company. Excludes: (i) 535,596 shares of Common Stock
issuable upon the exercise of stock options outstanding as of March 31,
1998, with a weighted average exercise price of $3.95 per share, all of
which are exercisable and 49,415 of which are vested; (ii) 139,478 shares of
Common Stock issuable upon the exercise of outstanding warrants, with a
weighted average exercise price of $2.27 per share and (iii) 58,125 shares
of Common Stock issuable upon the exercise and conversion of Series J
convertible preferred stock options, all of which are exercisable and vested
with an exercise price of $0.40 per share.

(2) Gives effect to the conversion of the Preferred Stock into 7,754,933 shares
of Common Stock effective upon the closing of this offering.

(3) Adjusted to reflect the sale of 2,250,000 shares of Common Stock offered
hereby, assuming a public offering price of $9.00 per share (the mid-point
of the range set forth on the front cover) less estimated underwriting
discounts and commissions and other expenses of this offering, resulting in
net proceeds to the Company of $17.8 million. See "Use of Proceeds."

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<PAGE> 19

DILUTION

The pro forma net tangible book value of the Company at March 31, 1998 was
$15,518,000 or $1.41 per share of Common Stock. Pro forma net tangible book
value per share of Common Stock represents the amount of total tangible assets
of the Company less total liabilities divided by the number of shares of the
Common Stock outstanding after giving effect to the conversion of all
outstanding shares of Preferred Stock into 7,754,933 shares of Common Stock upon
the completion of this offering. After giving effect to the sale of the
2,250,000 shares of Common Stock offered hereby assuming a public offering price
of $9.00 per share, the mid-point of the range set forth on the front cover,
less estimated underwriting discounts and commissions and other expenses of this
offering, the Company's net tangible book value as of March 31, 1998 would have
been $33,350,000 or $2.52 per share of Common Stock. This represents an
immediate increase in pro forma net tangible book value per share of Common
Stock of $1.11 to existing stockholders and immediate dilution in pro forma net
tangible book value of $6.48 per share to new investors purchasing Common Stock
in this offering. The following table illustrates the per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $ 9.00
Pro forma net tangible book value of Common Stock as of
March 31, 1998....................................... $1.41
Increase attributable to new investors................. 1.11
Pro forma net tangible book value of Common Stock after this
offering.................................................. 2.52
------
Dilution to new investors(1)................................ $ 6.48
======
</TABLE>

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

(1) If the Underwriters' over-allotment option is exercised in full, dilution
per share to new investors would be $6.33.

The following table summarizes, on a pro forma basis as of March 31, 1998,
the number of shares of Common Stock purchased from the Company, the total
consideration paid (based on value received by the Company at the time of
issuance) and the average price per share paid by the existing stockholders and
by new investors purchasing shares in this offering (before deduction of
estimated underwriting discounts and commissions and other expenses of this
offering):

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 10,981,938 83.0% $34,005,799 62.7% $ 3.10
New investors............... 2,250,000 17.0 20,250,000 37.3 9.00
---------- ------ ----------- -----
Total..................... 13,231,938 100.0% $54,255,799 100.0%
========== ====== =========== =====
</TABLE>

All of the above computations assume no exercise of outstanding options or
warrants to purchase Common Stock. The shares purchased and total consideration
paid by existing shareholders does not include costs incurred by the Company to
issue Common and Preferred Stock. As of March 31, 1998, options to purchase
535,596 shares of Common Stock were outstanding at a weighted average exercise
price of approximately $3.95 per share under the Company's stock option plan,
warrants to purchase 139,478 shares of Common Stock were outstanding at a
weighted average exercise price of approximately $2.27 per share and options to
purchase 58,125 shares of Common Stock issuable upon the exercise and conversion
of Series J convertible Preferred Stock, all of which are exercisable and vested
with an exercise price of $0.40 per share. To the extent these options or
warrants are exercised, there will be further dilution to new investors.

18
<PAGE> 20

SELECTED FINANCIAL DATA

The selected financial data set forth below with respect to the Company's
statements of operations for the years ended December 31, 1995, 1996 and 1997,
and with respect to the Company's balance sheets at December 31, 1996 and 1997,
are derived from the financial statements of the Company that have been audited
by Ernst & Young LLP, which are included elsewhere herein and are qualified by
reference to such financial statements. The Company's statement of operations
data for the period from May 23, 1994 (inception) to December 31, 1994 and the
balance sheet data at December 31, 1994 and 1995 have been derived from the
financial statements audited by Ernst & Young LLP, which are not included
herein. The statement of operations data for the three months ended March 31,
1997 and 1998 and the balance sheet data at March 31, 1998 have been derived
from unaudited financial statements also appearing herein which, in the opinion
of management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the financial position and
results of operations for the unaudited interim periods. The operating results
for the three months ended March 31, 1998 are not necessarily indicative of the
results that may be expected for the full fiscal year ending December 31, 1998
or for any subsequent period. The selected financial data set forth below should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's financial statements and
notes thereto appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
PERIOD FROM
MAY 23, 1994 YEAR ENDED THREE MONTHS
(INCEPTION) TO DECEMBER 31, ENDED MARCH 31,
DECEMBER 31, --------------------------- -----------------
1994 1995 1996 1997 1997 1998
-------------- ------- ------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Project initiation fees and milestone
payments.............................. $ -- $ -- $ 2,500 $ 3,333 $ -- $ 750
Research and development funding........ -- -- 420 4,138 491 1,872
Grant revenue........................... -- 50 47 -- -- --
----- ------- ------- ------- ------- -------
-- 50 2,967 7,471 491 2,622
Expenses:
Research and development:
Collaborative......................... -- -- 420 4,317 138 1,923
Proprietary........................... 413 4,763 4,820 4,400 1,237 1,315
----- ------- ------- ------- ------- -------
413 4,763 5,240 8,717 1,375 3,238
General and administrative.............. 298 2,000 2,845 3,287 872 892
----- ------- ------- ------- ------- -------
Total operating expenses.................. 711 6,763 8,085 12,004 2,247 4,130
Loss from operations...................... (711) (6,713) (5,118) (4,533) (1,756) (1,508)
Interest income, net...................... 5 38 -- 411 129 114
Foreign tax expense....................... -- -- -- (200) -- (30)
----- ------- ------- ------- ------- -------
Net loss.................................. $(706) $(6,675) $(5,118) $(4,322) $(1,627) $(1,424)
===== ======= ======= ======= ======= =======
Pro forma basic net loss per share(1)..... $ (0.49) $ (0.19) $ (0.14)
======= ======= =======
Shares used in computing pro forma basic
net loss per share(1)................... 8,804 8,429 10,202
======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------- MARCH 31,
1994 1995 1996 1997 1998
-------- -------- -------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................... $ 1,622 $ 3,136 $ 367 $ 5,867 $ 3,914
Short-term investments...................... -- -- 12,166 11,055 10,575
Working capital............................. 1,420 1,990 8,946 12,896 10,567
Total assets................................ 1,796 4,150 16,658 25,526 25,926
Long-term obligations, including current
portion................................... -- 584 2,541 4,944 5,441
Redeemable convertible preferred stock...... 2,250 9,650 23,107 23,130 23,130
Accumulated deficit......................... (706) (7,381) (12,499) (16,821) (18,244)
Total stockholders' equity (deficit)........ (682) (7,261) (12,363) (6,299) (7,612)
</TABLE>

- ---------------
(1) See Note 1 of Notes to Financial Statements for information concerning the
computation of pro forma net loss per share and shares used in computing pro
forma basic net loss per share.

19
<PAGE> 21

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management's Discussion and Analysis of Financial Condition
and Results of Operations may contain forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under "Risk Factors" and elsewhere in
this Prospectus.

OVERVIEW

CombiChem is a computational drug discovery company that is applying its
proprietary design technology and rapid synthesis capabilities to accelerate the
discovery process for new drugs. The Company believes its approach offers
pharmaceutical and biotechnology companies the opportunity to conduct their drug
discovery efforts in a more productive and cost-effective manner. Using its
proprietary Discovery Engine process, the Company focuses on the generation,
evolution and optimization of potential new lead candidates for its
collaborative partners, who will then develop, manufacture, market and sell any
resulting drugs. CombiChem believes that its process is widely applicable to a
variety of disease targets and therapeutic indications. Through March 31, 1998,
the Company has established collaborative agreements with Teijin, Roche
Bioscience, Sumitomo, ImClone, Elan/Athena and ICOS. In addition, the Company
intends to use its approach on internal programs to discover new lead candidates
and then to outlicense them to third parties, while retaining a larger economic
interest. Since inception in May 1994, the Company has raised $34.0 million
through private sales of equity securities.

The Company's revenue to date is primarily attributable to the receipt of
project initiation fees and research funding. Project initiation fees are
received from the Company's collaborators upon, or shortly following, execution
of the collaborative agreement. Research funding is received by the Company in
connection with the performance of research services under the collaborative
agreement. Such funding typically will be received only during the life of the
research program under the particular collaboration. In addition, the Company
has received advance payments under certain of its collaborations and in
connection with a feasibility study, which require the Company to complete
certain performance obligations. Such payments have been recorded as deferred
revenue and will be recognized as revenue when the Company's performance
obligations have been met, as evidenced by the collaborator's written approval
and acceptance. The collaborative activities under these agreements for which
the Company receives revenue typically occur over a one- to three-year period,
although the agreements provide for earlier termination in certain
circumstances. See "Business -- CombiChem's Collaborative Arrangements." The
Company expects that a significant portion of its revenue for the foreseeable
future will be comprised of such payments, although the receipt of project
initiation fees will be dependent on the Company's ability to enter into
additional collaborative agreements which provide for such fees and the timing
of such payments will be difficult to predict. In addition, the timing of
certain revenue in the future will depend upon the completion of certain
milestones as provided for in the Company's collaborative agreements, which are
contingent and uncertain. Milestone fees may be earned for different events or
achievements from agreement to agreement, and for certain collaborations, such
fees may not be earned until the collaborator has advanced products into
clinical testing. In any one fiscal quarter the Company may earn multiple or no
payments from its several collaborators. Operating results may therefore vary
substantially from period to period and will not necessarily be indicative of
results in subsequent periods. Completion of the research phase of a single
project collaboration or a single project within a broad multiple project
collaboration is not expected to have a material adverse effect on the Company's
financial condition and results of operations. However, the termination or
conclusion of any collaborative agreement could have a material adverse effect
on the Company's financial condition and results of operations, and the failure
of the Company to enter into additional collaborative agreements on favorable
terms would have a material adverse effect on the Company's financial condition
and results of operations.

20
<PAGE> 22

The research phase of the collaborative agreement with Teijin was completed
as of March 31, 1998, and the research phase of three projects under the
collaborative agreement with Roche Bioscience are scheduled to end in 1998. The
Company expects that the completion of the research phases of the collaborative
agreement with Teijin and three projects under the collaborative agreement with
Roche Bioscience or any of its other collaborative agreements will not have a
material adverse impact on its financial condition and results of operations,
although the failure of the Company to enter into additional collaborative
agreements on favorable terms would have a material adverse effect on the
Company's financial condition and results of operations.

The Company's revenue to date is primarily attributable to its corporate
collaborations: Teijin, entered into in March 1996, Roche Bioscience, entered
into in October 1996, Sumitomo, entered into in August 1997, ImClone, entered
into in October 1997, and Elan/Athena, also entered into in October 1997. Under
its collaborations, the Company has received aggregate payments, excluding
equity purchases, of $14.2 million through March 31, 1998 and has recognized an
aggregate of $13.1 million as revenue. Substantially all of the $2.9 million
revenue recognized under collaborative agreements in 1996 was due to project
initiation fees, and a significant portion of the $7.5 million revenue
recognized in 1997 was due to project initiation fees. Revenue in the first
quarter of 1998 includes $0.8 million in milestone revenue. The remaining
portion of the Company's revenue during such periods was from ongoing research
funding from collaborators which is generally offset by corresponding research
costs. The Company is also entitled to receive royalty payments if any product
is commercialized under the collaborations. Project initiation fees, milestone
and royalty payments generally have no associated cost of services. Milestone
and royalty payments under individual agreements may not be paid until sometime
well into the future. As of March 31, 1998, the Company has earned revenue from
project initiation fees, research funding and milestone payments, but has not
earned any royalty revenue, and such revenue is not expected for the next few
years, if at all.

The Company has not been profitable since inception and has incurred a
cumulative net loss of $18.2 million through March 31, 1998. Losses have
resulted principally from costs incurred in research and development activities
related to the Company's efforts to develop its technologies and from the
associated administrative costs required to support these efforts. The Company's
ability to achieve profitability is dependent on its ability to market its
technology to pharmaceutical and biotechnology companies.

RESULTS OF OPERATIONS

Three Months Ended March 31, 1998 and 1997

Revenue

The Company's revenue for the three months ended March 31, 1998 was $2.6
million compared to $0.5 million for the three months ended March 31, 1997. The
first quarter 1998 revenue resulted from $1.9 million in research funding under
the Company's various collaborative agreements, as well as a milestone fee of
$0.8 million earned under the collaborative agreement with Roche. Revenues from
collaborators exceeding 10% of total revenues for the three months ended March
31, 1998 was 57% from Roche, 24% from Sumitomo, and 10% from Elan/Athena. For
the three months ended March 31, 1997, Roche was 68% of revenues, and Teijin was
32% of revenues.

Operating Expenses

Research and development expenses for the quarter ended March 31, 1998
totalled $3.2 million compared to $1.4 million for the same period in 1997. The
$1.8 million increase was primarily attributable to research and development
costs incurred on behalf of its collaborators ("collaborative research and
development"). Cost of services under the Company's collaborative agreements
approximated the research funding earned under the agreements. Research and
development costs incurred on behalf of the Company's proprietary projects
increased to $1.3 million in 1998 from $1.2 million in 1997 as the Company
continued investing in its proprietary technologies.

21
<PAGE> 23

Net Loss

The Company's net loss for the three months ended March 31, 1998 decreased
$0.2 million to $1.4 million from $1.6 million for the same period in 1997. The
decrease is primarily attributable to increased revenue, of which $0.8 million
was a milestone fee under the collaborative agreement with Roche. This increase
in revenue was partially offset by increased collaborative research and
development expenses.

Years Ended December 31, 1997 and 1996

Revenue

The Company's revenue for the year ended December 31, 1997 increased $4.5
million to $7.5 million from $3.0 million for the same period in 1996. The
revenue for the year ended December 31, 1997 included $4.1 million in research
support and $3.3 million in project initiation fees compared to $0.4 million in
research support and $2.5 million in project initiation fees for 1996. Revenues
from collaborators exceeding 10% of total revenues for the year ended December
31, 1997 was 39% from Sumitomo, 30% from Roche, and 18% from Elan/Athena.

Operating Expenses

The Company's research and development expenses for the year ended December
31, 1997 increased $3.5 million to $8.7 million from $5.2 million for the same
period in 1996. This increase reflects increased research and development
expenses incurred both on behalf of collaborators through the addition of
chemists and software application staff for each project team and in support of
the development of the Company's technology including the addition of software
development and analytical staff, the depreciation of laboratory equipment and
the establishment of an advanced technology group. The Company has the ability
to direct its scientific personnel to work either on its collaborative
agreements or on its internal research projects as needs arise. The Company
expects research and development spending to increase over the next several
years due to increased activities related to collaborations, internal programs
and technology development.

The Company's general and administrative expenses for the year ended
December 31, 1997 increased $0.5 million to $3.3 million from $2.8 million for
the same period in 1996. This increase reflects increased business development
activities, including outside consulting fees and increased travel costs, and
administrative support for the Company's expansion in 1997. These expenses will
likely continue to increase in future periods to support the projected growth of
the Company.

Net Loss

The Company's net loss for the year ended December 31, 1997 decreased $0.8
million to $4.3 million from $5.1 million for the same period in 1996. The
decrease is primarily attributable to additional revenue generated from
corporate collaborations during 1997.

Years Ended December 31, 1996 and 1995

Revenue

The Company's revenue for the year ended December 31, 1996 increased to
$3.0 million from $50,000 for the same period in 1995. This increase was
attributable to revenue related to the Company's collaborative agreements with
Teijin and Roche Bioscience which were entered into during 1996. The revenue for
the year ended December 31, 1996 included $0.4 million in research support and
$2.5 million in project initiation fees. No revenue was received from the
Company's collaborators for the year ended December 31, 1995. Revenues from
collaborators exceeding 10% of revenues for the year ended December 31, 1996 was
67% from Roche and 31% from Teijin.

22
<PAGE> 24

Operating Expenses

The Company's research and development expenses for the year ended December
31, 1996 increased $0.4 million to $5.2 million from $4.8 million for the same
period in 1995. This increase reflects increased research and development
expenses on behalf of collaborators and for the development of the Company's
technology, including investment in the Company's discontinued automated
synthesis instruments. The Company discontinued development of its automated
synthesis instruments in the second quarter of 1996, after incurring expenses of
approximately $4.0 million from inception of the Company through discontinuance.

The Company's general and administrative expenses for the year ended
December 31, 1996 increased $0.8 million to $2.8 million from $2.0 million for
the same period in 1995. This increase was primarily due to costs associated
with increased business development activities and administrative support, which
accompanied the Company's expansion during 1996.

Net Loss

The Company's net loss for the year ended December 31, 1996 decreased $1.6
million to $5.1 million from $6.7 million for the same period in 1995. The
decrease was primarily attributable to the increase in revenue generated from
the Teijin and Roche Bioscience collaborations.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 1998, the Company held cash and cash equivalents and
short-term investments with a value of $14.5 million. The Company's working
capital at March 31, 1998 was $10.6 million. The Company has funded operations
to date with sales of preferred stock and common stock totaling $34.0 million,
payments from corporate collaborators totaling $14.2 million, and the
utilization of capital equipment lease financing totaling $7.2 million. The
Company has maintained capital lease arrangements since 1994. Under these
arrangements, the Company has funded certain capital expenditures with lease
terms ranging from 36 to 48 months in duration. As of March 31, 1998, the
Company had utilized $7.2 million of the available $7.9 million financing
facility.

The Company's accounts receivable balance increased from $0.5 million at
December 31, 1997 to $1.9 million at March 31, 1998. The $1.9 million is
comprised of $1.5 million due from customers and approximately $0.4 million due
from a leasing company. The $1.4 million increase was primarily attributable to
$0.8 million receivable from Roche for a milestone fee earned in March 1998,
approximately $0.4 million receivable from ICOS as an advance payment under the
collaboration agreement, and $0.3 million receivable from an unnamed
pharmaceutical company for an advance payment related to a feasibility study. In
April 1998, the Company collected all of the amounts due from customers and a
portion of the amounts due from the leasing company.

Prepaid expenses and other current assets increased $0.1 million to $0.9
million at March 31, 1998 from $0.8 million at December 31, 1997. The change is
primarily attributable to increases in prepaid expenses and interest receivable.

Deposits and other assets increased from $0.9 million at December 31, 1997
to $1.0 million at March 31, 1998 as a result of additional costs incurred
directly related to the proposed offering.

Net cash provided by financing activities for the three months ended March
31, 1998 and 1997 was $0.5 million and $0.1 million, respectively, due to
advances under the Company's capital lease line. Net cash provided by financing
activities for the year ended December 31, 1997 was $12.6 million, primarily
reflecting the issuance of Common Stock to ImClone and Elan/Athena. Net cash
provided by financing activities for the year ended December 31, 1996 was $14.5
million, largely due to the issuance of $13.0 million in Preferred Stock sold to
various investors. Net cash provided by financing activities for the year ended
December 31, 1995 was $8.0 million, resulting mainly from capital contributions
and proceeds from bridge financing.

Net cash used in operating activities for the three months ended March 31,
1998 and 1997 was $1.1 million and $2.4 million, respectively, reflecting the
decreased net loss in the first quarter of 1998.

23
<PAGE> 25

Net cash used in operating activities for the years ended December 31, 1997,
1996 and 1995 was $3.5 million, $2.4 million, and $5.7 million, respectively,
primarily due to the Company's scale-up of research and development activities.

Net cash used in investing activities during the year ended December 31,
1997 and the three months ended March 31, 1998 was $3.6 million and $1.3
million, respectively, resulting primarily from purchases of short-term
investments and property and equipment. Net cash used in investing activities
for the year ended December 31, 1996 was $14.9 million as compared to $0.8
million for the year ended December 31, 1995. This increase primarily reflects
purchases of short-term investments and property and equipment. Net cash
provided by investing activities for the three months ended March 31, 1997 was
$4.0 million, due to maturities of short-term investments.

Although the Company anticipates that its existing capital resources,
including the net proceeds from this offering, will be adequate to fund the
Company's operations at least through the next 12 months, there can be no
assurance that changes will not occur that would consume available capital
resources before such time. The Company may be required to raise additional
capital over a period of several years in order to continue to conduct its
operations. Such capital may be raised through additional public or private
financings, as well as collaborative arrangements, borrowings and other
available sources. The Company expects that a significant portion of its revenue
for the foreseeable future will be comprised of project initiation fees and
research funding paid pursuant to its collaborative agreements, although the
receipt of project initiation fees will be dependent on the Company's ability to
enter into additional collaborative agreements for which such fees are due. In
addition, the Company may from time to time earn milestone fees under its
collaborations. However, there can be no assurance that any such fees will be
earned, and, in addition, milestone fees may be earned for different events or
achievements from agreement to agreement. Furthermore, for certain
collaborations, such fees may not be earned until the collaborator has advanced
products into clinical testing. Such milestones may not be earned for several
years, if at all. During such period, there can be no assurance that the
Company's collaborative arrangements will produce revenue adequate to fund the
Company's operating expenses. The Company's capital requirements depend on
numerous factors, including the ability of the Company to enter into additional
collaborative arrangements, competing technological and market developments,
changes in the Company's existing collaborative relationships, the cost of
filing, prosecuting, defending and enforcing patent claims and other
intellectual property rights, the purchase of additional capital equipment, the
progress of the Company's drug discovery programs and the progress of the
commercialization of milestone- and royalty-bearing compounds by the Company's
customers. The Company does not currently plan independently to develop,
manufacture or market any drugs it discovers. To the extent that additional
capital is needed, it may be raised through the sale of equity or convertible
debt securities, and the issuance of such securities could result in dilution to
the Company's existing stockholders. There can be no assurance that additional
funding, if necessary, will be available on favorable terms, if at all. If
adequate funds are not available, the Company may be required to curtail
operations significantly or to obtain funds through entering into arrangements
with collaborative partners or others that may require the Company to relinquish
rights to certain of its technologies, product candidates, products or potential
markets that the Company would not otherwise relinquish. The failure to receive
additional funding would have a material adverse effect on the Company's
business, financial condition and results of operations.

NET OPERATING LOSSES

At December 31, 1997, the Company had federal and California income tax net
operating loss carryforwards of approximately $15.4 million and $15.5 million,
respectively. The federal and California tax loss carryforwards will begin to
expire in 2009 and 2002, respectively, unless previously utilized. The Company
also has federal and California research tax credit carryforwards of
approximately $379,000 and $275,000, respectively, which will begin to expire in
2010 unless previously utilized. The Company also has a federal foreign tax
credit carryforward of approximately $200,000, which will expire in 2002 unless
previously utilized.

24
<PAGE> 26

Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use
of approximately $7 million and $200,000 of the Company's net operating loss and
credit carryforwards, respectively, may be limited because of cumulative changes
in ownership of more than 50% which occurred during 1995. However, the annual
limitation will not prevent the entire amount of the net operating loss and
credit carryforwards from being used during the carryforward period. Therefore,
the Company does not believe such limitation will have a material effect upon
the utilization of these carryforwards.

YEAR 2000

The Company has determined that its proprietary drug discovery software is
not affected by Year 2000 issues. However, the Company has determined that it
will need to review, modify or replace portions of its or its vendors' standard
operating systems, such as payroll, cash management and other financial systems,
so they will function properly with respect to dates in the year 2000 and
beyond. The Company has initiated discussions with its financial institutions to
ensure that those parties have appropriate plans to remediate Year 2000 issues
where their systems interface with the Company's systems or otherwise impact its
operations. The Company is assessing the extent to which its operations are
vulnerable should those organizations fail to remediate properly their computer
systems. While the Company believes its planning efforts are adequate to address
its Year 2000 concerns, there can be no guarantee that the systems of other
companies on which the Company's systems and operations rely will be converted
on a timely basis and will not have a material effect on the Company. The cost
of the Year 2000 initiatives is not expected to be material to the Company's
results of operations or financial position.

25
<PAGE> 27

BUSINESS

OVERVIEW

CombiChem is a computational drug discovery company that is applying its
proprietary design technology and rapid synthesis capabilities to accelerate the
discovery process for new drugs. The Company believes its approach offers
pharmaceutical and biotechnology companies the opportunity to conduct their drug
discovery efforts in a more productive and cost-effective manner. Using its
proprietary Discovery Engine process, the Company focuses on the generation,
evolution and optimization of potential new lead candidates for its
collaborative partners who will then develop, manufacture, market and sell any
resulting drugs. CombiChem believes that its process is widely applicable to a
variety of disease targets and therapeutic indications. To date, the Company has
established collaborative agreements with Teijin, Roche Bioscience, Sumitomo,
ImClone and Elan/Athena and ICOS. In addition, the Company intends to use its
approach on internal programs to discover new lead candidates and then to
outlicense them to third parties, retaining a larger economic interest in such
candidates.

In the recent months there have been several developments which further
validate the Company's technology and business strategy:

(i) The achievement of a research milestone in CombiChem's
collaboration with Roche Bioscience triggering a cash milestone
payment. This stems from the identification, in less than one
year, of novel drug development candidates for a potential new
treatment for respiratory disease.

(ii) The expansion of its existing collaboration with Elan/Athena
whereby Elan/Athena authorized an additional project and
purchased an option for an additional target not previously
covered by the agreement. In addition, Elan International
Services Ltd., a stockholder of CombiChem, and a wholly owned
subsidiary of Elan Corporation, plc (whose wholly owned
subsidiary, Athena Neurosciences, Inc. is a collaborative
partner of CombiChem), has expressed an interest in acquiring
approximately $2 million of the shares of Common Stock offered
hereby at the initial public offering price.

(iii) The establishment of a new agreement on an identified,
undisclosed target with ICOS, bringing the number of its
collaborative partners to a total of six.

INDUSTRY BACKGROUND

During the past decade, significant advances in life sciences research and
the increasing appreciation of the complexity of biological processes have
highlighted the productivity limitations of traditional approaches to drug
discovery. These limitations, together with increased competition in the
pharmaceutical and biotechnology industries, have created intense pressure on
companies involved with drug development to reconsider the allocation of their
research budgets and to improve the cost-effectiveness of their drug discovery
process.

Between 1976 and 1996, the number of new chemical entities approved by the
FDA remained relatively constant, ranging between 12 to 30 per year, despite a
more than 10-fold increase in research and development spending by
pharmaceutical and biotechnology companies. Furthermore, it typically takes 12
to 15 years from the original concept of modulating the activity of a particular
biological target to the market introduction of a drug that performs such a
function. The average cost of bringing a new drug to market has been estimated
to be in excess of $300 million.

Frustrated with the inefficiencies of traditional drug discovery
approaches, pharmaceutical and biotechnology companies are beginning to embrace
new enabling technologies, such as combinatorial chemistry, genomics,
structure-based drug design, high-throughput screening and information
technologies, in order to gain a competitive advantage by accelerating the time
to develop and commercial-

26
<PAGE> 28

ize new compounds. These technologies also have the potential to reduce
significantly the cost associated with drug discovery.

The Traditional Drug Discovery Process and its Limitations

The traditional path to discovering a therapeutic drug compound typically
begins with the identification of one or more biological targets that are
believed to mediate a disease state. A biological test or assay based on a
target is then developed, predicated on the scientific belief that a compound
binding with this target may have a therapeutic benefit with respect to the
disease under study. Such an assay facilitates the screening (testing to
determine which of the compounds have the desired activity against the target)
of a collection of hundreds to thousands of candidate compounds (a library) that
have been synthesized in the laboratory. Compounds that bind to the target
protein and modulate its activity are referred to as hits. Medicinal chemists
optimize these hits until they have sufficient potency to become lead candidates
and then improve their preclinical characteristics (such as potency, specificity
and in vivo profile) further with the goal of producing drug development
candidates.

In summary, the traditional drug discovery process consists of the
following steps:

[CHART]

The traditional drug discovery process shown above is extremely expensive,
inefficient and unreliable. Failure at any point during this discovery process
would typically force the scientist either to abandon the project or to return
to the initial starting point and repeat the process. As a result, the discovery
of a novel therapeutic agent for a specified target can take years or can fail
entirely.

In recent years, the advent of robotic high-throughput screening and
automated synthesis technologies, such as combinatorial chemistry and parallel
synthesis, has begun to relieve one apparent bottleneck involving screening,
synthesis and purification of compounds in the library. While these technologies
facilitate the mechanics of drug discovery, they address neither the
unreliability of the process nor its principal inefficiency: the number of
iterations required to find a lead candidate. To address these problems, a novel
approach is needed that can provide information to improve the selection of each
subsequent library of compounds to synthesize, potentially reducing the number
of iterations. Only by improving the processes of data analysis and compound
selection can a laborious, iterative procedure be forced to converge on the lead
candidates with the most desirable pharmacological profiles.

Current Combinatorial Chemistry and Computational Approaches and Their
Limitations

Combinatorial chemistry involves the rapid creation of large collections of
chemical compounds for the purpose of identifying hits through random screening.
Combinatorial chemistry has made possible the synthesis of thousands or even
millions of molecules in a short period of time instead of the traditional
approach of synthesizing only one molecule at a time. Over the last decade, the
field of combinatorial chemistry has evolved from only companies that design and
synthesize molecules to include those that develop software and automation to
facilitate design and synthesis. These companies tend to use highly varied
approaches, including: focusing on single, pure compounds versus making
mixtures; building large versus small, focused libraries; automating part versus
all of the process; and using or not using medicinal chemistry as a principal
guiding force.

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Computational methods are also employed in drug discovery. These methods
involve the use of computer-based and information technologies to manage large
chemical databases, to examine X-ray crystal structures of the target when
available (structure-based drug design), to operate the assorted automated
devices available for the synthesis of libraries, to determine how changes in
the structure affect the activity of a molecule (SAR activity) and to generate
"virtual libraries" using chemical building blocks from readily available
sources.

Currently, the dominant method of pursuing drug discovery focuses on
screening large libraries to search for a lead candidate directly in the
library, or at least a hit, which can then be optimized by the more traditional
techniques of medicinal chemistry to generate a development candidate. The
Company believes this brute-force, trial-and-error approach is flawed because
limited or no information has been factored into the library design to force the
iterative drug discovery process to converge. This limitation in current
combinatorial chemistry approaches is underscored by the fact that most compound
libraries used for screening have been constructed with the sole objective of
isolating a development candidate with the highest binding affinity to a target.
In order to achieve this objective against all possible targets, it is believed
such libraries would have to contain in excess of 100 million compounds, which
size is well beyond current synthesis capabilities. In addition, the challenge
of drug discovery is not only to find a lead candidate that exhibits activity
against a biological target. It is also important to ensure that the lead
candidate will have characteristics that will enable it to overcome the more
difficult in vivo hurdles of toxicity, metabolism or problems with oral
administration, none of which will become evident until early preclinical
testing. Unless information can be extracted about which characteristics are
most necessary for binding, it is difficult to know how to modify a compound to
maintain tight binding affinity while overcoming in vivo hurdles. Furthermore,
if no hits are found after the screening of a traditional combinatorial library,
a scientist has no starting point for the drug discovery process.

While both combinatorial chemistry and computational approaches are useful
in drug discovery to some degree, they are severely taxed by the complexity of
properly using the information available for library design, as evidenced by the
following drawbacks: (i) the inability to derive and integrate information both
from compounds that are active and those that are inactive against the target;
(ii) the inability to probe the target in order to compute ways of improving the
predictive models or hypotheses; and (iii) the inability to handle the dual
requirements of speed and quality when large data sets must be analyzed. The
Company believes that these inabilities to use information efficiently
constitute fundamental reasons that current discovery approaches have been only
moderately successful in generating lead candidates and development candidates,
despite the large number of initial hits.

COMBICHEM'S SOLUTION AND ADVANTAGES

The Company believes that it offers a solution to drug discovery by
combining its proprietary design technology and rapid synthesis capabilities in
a unique way. The Company's convergent, iterative process for drug
discovery -- its Discovery Engine (see the following diagram) -- is based on
libraries designed for information.

The design of libraries for information involves the selection of compounds
that collectively probe the biological target in a systematic way to determine
the chemical characteristics required for binding to such target. By identifying
features that discriminate between active and inactive compounds, the computer
constructs predictive models, called hypotheses, and then uses those models to
select a more focused library of compounds. The computer selects compounds from
the Company's proprietary Virtual Library, a computational representation of
more than 1 trillion drug-like molecules chosen for the ease of laboratory
synthesis. CombiChem believes that by repeating this process of selecting,
synthesizing and screening informative compounds and analyzing the resulting
data, the Discovery Engine quickly converges on the most predictive hypothesis.
This hypothesis describes the characteristics a compound must possess to be
active against the target and, thus, is used to select a variety of potent lead
candidates.

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Each cycle of the Discovery Engine refines the computer's definition of the
best hypothesis for the target in question. After several cycles, the resulting
hypothesis can be used to design highly potent compounds from a broad range of
chemical classes including those not readily amenable to combinatorial synthesis
techniques. By facilitating the design of a variety of potent compounds for
preclinical testing, the Discovery Engine has the potential to increase greatly
the likelihood that at least one of these compounds passes the in vivo and other
downstream hurdles and eventually becomes a commercial drug.

[DIAGRAM]

CombiChem believes that the advantages of its Discovery Engine include the
following:

Generating lead candidates from multiple structural series that exhibit the
same biological activity. By using predictive hypotheses to search the more than
1 trillion-molecule Virtual Library, multiple structural series of compounds
that have the same effect on the target can be identified. The availability of
multiple structural series increases the likelihood that at least one of these
molecules will overcome the in vivo hurdles in preclinical development. In
addition, this provides an opportunity for the Company and its collaborators to
enhance the intellectual property position that potentially can be developed
around these compounds by having more than one patentable structural series.

Generating lead structures against a wide range of targets including those
for which little or no information is available. The Universal Informer Library
consists of a computer-designed, proprietary collection of approximately 10,000
physical compounds that can be screened against targets where little or no
information is available about the molecular structures that may be active
against those targets. Once the Universal Informer Library has been screened,
the information obtained can be used to start the Discovery Engine process. In
addition, because the technology is not dependent on having prior knowledge
about the target (e.g., an X-ray crystal structure representative of the
target), it can

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potentially be used to discover drugs against any target the activity of which
could be modified through binding a small molecule.

Achieving rapid generation, evolution and optimization of lead
candidates. By combining flexible design technology and rapid synthesis, the
Company's Discovery Engine can produce lead candidates for any of the three
types of drug discovery programs -- lead generation, lead evolution or lead
optimization -- with less than two years of effort. See "CombiChem's Discovery
Programs."

Reducing synthesis and screening costs. The Company's design technology
facilitates the use of small, informative libraries. Use of these small
libraries decreases the costs associated with synthesis and screening. In
addition, the Virtual Library of drug-like molecules has been explicitly
constructed for the ease of laboratory synthesis.

STRATEGY

To establish multiple collaborations with large pharmaceutical and
biotechnology companies focused on biological targets chosen by the
collaborators. The Company intends to collaborate with large pharmaceutical and
biotechnology companies on fully funded programs aimed at biological targets
chosen by these collaborators. The Company's collaborative efforts are
exclusively focused on the discovery process, with a particular emphasis on the
discovery of novel compounds against biological targets. The Company believes
its technology platform provides it with opportunities to establish multiple
collaborations, which may be for the same disease state, thereby building a
portfolio of opportunities that may include project initiation fees, research
support, milestone payments and royalties.

To partner with companies to apply discovery technologies to jointly
agreed-upon biological targets. In addition to collaborations on designated
biological targets, the Company intends to establish arrangements for jointly
funded discovery programs aimed at jointly agreed-upon biological targets,
typically with biotechnology companies. In these arrangements, the Company and
its partner will choose an appropriate biological target, the Company will apply
its discovery technologies to develop novel compounds against the specific
target, and the partner will fully fund and complete the drug development
process. The Company and its partner will share in the economic interest
resulting from their efforts.

To conduct internal discovery efforts aimed at selected biological targets,
retaining a larger economic interest in the subsequently outlicensed lead
candidates. The Company also intends to conduct its own internally funded
discovery programs by choosing biological targets of current scientific interest
and working in collaboration with genomics, biotechnology or screening
companies. After identifying lead candidates that are ready for development, the
Company intends to outlicense them, retaining a larger economic interest in such
candidates as they are developed and commercialized by a third party.

To expand collaborative opportunities in alternative industries such as the
agrochemical field. The Company has initially targeted large pharmaceutical and
biotechnology companies in its marketing efforts. The Company is considering
additional opportunities in alternative industries, including the agrochemical
field.

To maintain technology leadership in both software development and rapid
synthesis capabilities. The Company intends to continue to extend its technology
leadership through enhancements of existing software, design of future
generations of software and continued advancements of its synthesis
capabilities. The Company believes that these developments will allow it to
decrease the time required to discover lead candidates and to maintain its
technology leadership and competitive advantage.

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COMBICHEM'S PROCESS: THE DISCOVERY ENGINE

The successful implementation of the Company's Discovery Engine process
requires the direct involvement of and interaction between its chemists and its
software applications team. This process consists of the following steps:

Data analysis -- the compilation and analysis of screening data, literature
information and available data about the target. The starting point for a drug
discovery program varies depending on the amount of prior information that is
available. The collaborator may have tested its corporate collection of
compounds or some other chemical library and have information regarding
structures of compounds that are initial hits (moderately active compounds),
information regarding structures that are inactive against the particular target
or prior information about the target structure itself. On the other hand, if
little or no prior information or screening data is available on the initial
hits or target, the Company will make available for screening its proprietary
Universal Informer Library as a way of generating a relevant set of information
with which to initiate the Discovery Engine. See "CombiChem's Proprietary
Technologies -- Universal Informer Library."

The analysis of the available information is a critical step in the process
because it will determine what type of program will be undertaken -- lead
generation, lead evolution or lead optimization -- and the resources that will
be required. See "CombiChem's Discovery Programs."

Hypothesis generation -- the software-based generation of models that
predict the biological activity of molecular structures. Once the analysis of
the available data is completed by the Company's chemists and software
applications team, the information is used as input for hypothesis generation,
the first step of which involves conformational analysis.

- Conformational analysis. Conformational analysis is performed on each
active and inactive molecule to determine which shapes or conformations
such molecules can take. Because it is typically unknown which of these
shapes a particular molecule will assume when it shows its greatest
activity against a biological target, all reasonable conformations are
computationally described and analyzed. The Company's proprietary
technology allows for the analysis of large data sets and complex
molecular structures to be completed with both quality and speed.

- Hypothesis generator. Using the screening data and the results of
conformational analysis, the hypothesis generation software produces
computational models (called hypotheses) that attempt to explain the
observed differences in biological activity between active and inactive
molecules. In the early phases of a discovery program, the hypothesis
generator will often generate many hypotheses that are consistent with
the data, but the repeated application of the Discovery Engine
systematically tests the hypotheses, eliminating some while strengthening
others by providing supporting data. Repeating this procedure quickly
results in predictive hypotheses. The Company believes that its
proprietary design technology differs from others currently in use in
that it (i) includes all of the screening data (including inactives) in
generating hypotheses, (ii) takes into account a much broader
characterization of molecule-target interaction and (iii) forces
convergence to a predictive model of the important binding features by
probing the target systematically using rapid synthesis and screening.

Virtual Library search -- the computational search of the Virtual Library
to find molecular structures that fit the hypotheses. Once the hypotheses have
been generated, they are used to search the Company's proprietary Virtual
Library to identify molecular structures that have the features represented in
the hypotheses. The Virtual Library is a computational representation of more
than 1 trillion drug-like molecules chosen for the ease of laboratory synthesis.
For each hypothesis that is generated, a more focused library of tens to
hundreds of molecules from the Virtual Library will be chosen by the computer
for synthesis in the laboratory. The Virtual Library is generated and searched
by proprietary design technology, which can exploit much larger libraries than
is possible with commercially available tools. See "CombiChem's Proprietary
Technologies -- Virtual Library."

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Library synthesis -- the laboratory synthesis of molecular structures that
are selected from the Virtual Library using a wide range of chemistries. Once
the more focused library of compounds is designed, using molecules chosen from
the Virtual Library, the Company's chemists are responsible for synthesizing the
compounds in the laboratory. Unlike many combinatorial chemistry groups, the
chemists are not restricted to particular chemical reactions or a limited list
of structural templates, thus providing maximum flexibility to synthesize the
libraries quickly. See "CombiChem's Proprietary Technologies -- Synthesis and
Analytical Chemistry Technology."

The above four steps in the Discovery Engine process are completed by
project teams within the Company. Once the molecules are synthesized, those
libraries are then sent to the partner (or a contract group) for screening. Data
from these assays will be available to the Company for the next iteration of the
cycle. With each such iteration, the Discovery Engine provides more information,
improving the hypotheses and increasing the likelihood of discovering active
molecules with desirable pharmacological characteristics. Eventually, the
hypotheses will converge to provide lead compounds that warrant further testing
as development candidates. It currently takes the Company's scientists
approximately three months to advance through the steps in one Discovery Engine
cycle. Depending upon the information available to start a project, it may take
two to four iterations of the cycle to generate strongly predictive hypotheses
that may eventually yield novel and highly active lead candidates.

The Company's Discovery Engine process is being validated by both its
active collaborative programs and retrospective analysis of drug discovery
examples taken from the recent scientific literature. In one such example, the
Company applied its design technology to a project where the data provided was a
compilation of third-party research into the design of HIV protease inhibitors.
The objective was to determine whether CombiChem's process could be used to
discover novel inhibitors for the enzyme given a collection of only weakly
active hits from screening. The Company generated hypotheses with distinct
features by collecting information on eight weakly active HIV protease
inhibitors and 500 randomly selected inactive molecules with the same drug-like
characteristics as the weakly active compounds. Each of these weakly active
compounds was found by either an academic or commercial team in the early phases
of trying to discover an HIV protease drug. To assess whether the generated
hypotheses are, in fact, able to predict the activities of new molecules,
several highly potent HIV protease inhibitors, including currently marketed
drugs, were added to a virtual library of several hundred inactive compounds.
Using the hypotheses, the computer searched the Virtual Library, and the search
produced a list of highly ranked protease inhibitors with a variety of chemical
structures, including some of the highly potent HIV protease inhibitors
currently under development or marketed by major pharmaceutical companies. The
structures selected from the Virtual Library differ significantly from those
used to develop the hypotheses, validating the Company's capabilities in lead
evolution. The Company has similarly validated its technology on over a dozen
other literature data sets and on several programs with collaborators. In one
lead evolution program with a collaborator, for example, the Company has already
been successful in evolving from one structural series to multiple, novel
structural series while improving the biological activity. These results and a
variety of equally successful applications of the Discovery Engine demonstrate
the viability of the Company's computational drug discovery methods and the
strength of its proprietary technology.

COMBICHEM'S PROPRIETARY TECHNOLOGIES

To implement its Discovery Engine process, CombiChem has developed and
assembled an integrated set of proprietary technologies. These include the
following:

Universal Informer Library

The use of many traditional drug discovery approaches presupposes the
existence of prior information to start the process. However, recent efforts
such as the Human Genome Project and others are producing a number of novel
targets about which there is limited prior information. In addition, there are
many known targets for which no suitable leads have been identified. To address

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these situations, CombiChem completed development of a Universal Informer
Library ("UIL") in mid-1997. The UIL consists of a computer-designed,
proprietary collection of approximately 10,000 physical compounds. Unlike other
libraries that are used to identify lead structures directly after screening,
the UIL is used to gather information concerning the relevant binding features
that are important to the target. The compounds in the UIL are highly
promiscuous molecules, which are molecules with the potential to bind to many
different targets. Screening against the UIL is therefore intended to provide a
few, weakly active compounds against the background of many, varied inactive
compounds. Using this data, hypotheses may be extracted, which allow the
Discovery Engine to be initiated.

The UIL was designed to provide hits for virtually all possible targets,
but if there is some reason to expect certain structural features to be relevant
to a particular target, the UIL can be augmented with compounds that contain
those features. In this way, information gained from prior experience can be
incorporated into the UIL; this may improve the hypotheses and therefore reduce
the number of cycles required to converge.

The Company completed validation of its UIL approach by screening a subset
of the UIL against a wide range of targets and achieving an outcome comparable
to that typically seen in the pharmaceutical industry with libraries containing
hundreds of thousands of compounds.

Virtual Library

CombiChem's Virtual Library is a computational representation of more than
1 trillion drug-like molecules chosen for the ease with which they can be
synthesized in the laboratory. To maximize the likelihood that the Virtual
Library will contain potent, patentable compounds active against most targets,
the Company has populated it with hundreds of novel structural templates, each
of which has two to four sites at which a wide variety of structural changes can
be made synthetically using available chemicals. This chemistry can also be
scaled up to give ready access to quantities of each lead candidate sufficient
to perform early preclinical testing. The Virtual Library is generated and
searched by two components of the Company's proprietary software: Virtual
Library Cascader(TM) software and Virtual Library Search software. See
"-- Design Technology."

Synthesis and Analytical Chemistry Technology

Once the Virtual Library is searched for collections of molecules that
match the hypotheses, the Company's chemists initiate synthesis of these
molecules in the laboratory. The challenge for CombiChem's chemists is to select
the technique that will most quickly achieve the synthesis of the library. While
there is considerable debate throughout the industry about the relative merits
of various methods of chemical synthesis (solid versus solution phase, for
example), CombiChem's chemists have the flexibility to use the appropriate
approach for each specific synthesis task. The Company believes it has expertise
in most or all of the readily used techniques and, in addition, has access to a
number of new proprietary methods.

As long as relatively straightforward chemistry is applied to library
production, synthesis is generally not the rate-limiting step. The challenge
lies in the isolation and purification of the library compounds. The Company
applies several approaches, including a number of proprietary semi-automated
techniques, to facilitate these procedures in order to achieve its purity
standards of greater than 85%.

Design Technology

The Company relies on its proprietary design technology in order to
complete several of the key steps in its Discovery Engine. The proprietary
design technology includes:

Conformational analysis software -- a computer program for identifying the
distinct three-dimensional shapes of a molecule. Conformational analysis is
performed on each active and inactive molecule to determine which shapes or
conformations such molecules can take. Because it is typically unknown

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which of these shapes a particular molecule will assume when it shows its
greatest activity against a biological target, all reasonable conformations are
computationally described and analyzed. The Company has developed proprietary
conformational analysis software, which rapidly determines all the distinct,
reasonable shapes each molecule can assume. Both the speed and the thoroughness
of the conformational analysis software distinguish it from commercial chemistry
software and permit the Discovery Engine to handle large data sets.

Hypothesis generation software -- a computer program for analyzing
screening data to identify the requirements a potential drug must satisfy to
bind to this target. Once conformational analysis has been applied to each of
the screened molecules, the Company's proprietary hypothesis generation software
produces computational models that can estimate the biological activity of
chemical structures. These models, called hypotheses, are generated by applying
methods from statistics, information theory, physical chemistry and computer
science to the screening data in order to identify the differences between
active compounds and inactive compounds. The predictive capabilities of the
computational models and the novel algorithms used to produce them distinguish
the Company's hypothesis generator from commercial chemistry software.

Virtual Library Cascader software -- a computer program for conveniently
describing virtual libraries. The Cascader software facilitates the rapid
specification of virtual libraries to the computer. By providing databases of
reagents and descriptions of reactions to the Cascader, a chemist can quickly
describe large libraries of compounds to the computer. The Cascader can use the
resulting description to construct explicit subsets of the large virtual library
and to present the structures to the chemist and to the Virtual Library Search
software.

Virtual Library Search software -- a computer program for selecting
molecules from the Virtual Library that, when synthesized and screened, will
provide the most information about additional binding requirements. The Virtual
Library search software uses hypotheses to estimate computationally the potency
of prospective compounds in order to increase the likelihood that the chemists
devote their synthesis efforts to compounds that fit the hypotheses and are thus
most likely to bind to the target. By using the computer to test the compounds
in the Virtual Library against the hypotheses, the Discovery Engine can rapidly
identify both putatively active compounds (which satisfy several different
hypotheses) and informative ones (which discriminate among hypotheses).
Searching virtual libraries with billions of compounds has generally not been
possible with commercial chemistry software.

Each cycle of the Discovery Engine refines the computer's assessment of the
best hypothesis for the target in question. After several cycles, the resulting
hypothesis can be used to design highly potent compounds from a broad range of
chemical classes including those not readily amenable to combinatorial synthesis
techniques. By facilitating the design of a variety of potent compounds for
preclinical testing, the Discovery Engine has the potential to increase greatly
the likelihood that at least one of these compounds passes the in vivo and other
downstream hurdles and eventually becomes a commercial drug.

COMBICHEM'S DISCOVERY PROGRAMS

The Company has applied, and intends to continue to apply, its technology
to discover lead compounds for biological targets chosen by its collaborators.
In addition, the Company will select, either jointly with a partner (most likely
a biotechnology company) or on its own, a biological target of interest.

In the first instance, where the Company is working on a target chosen by a
collaborator, the commercial terms are negotiated based on a number of factors,
including the number of targets to be included in the collaboration and the type
of program -- lead generation, lead evolution or lead optimization. Depending
upon the type of program, CombiChem will work on the program for a period of one
to two years. A dedicated project team, funded by the collaborator, consisting
of applications scientists and synthetic, medicinal and analytical chemists will
be assigned. The team composition and size is dependent upon the type of program
and its objectives. To ensure confidential-

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ity, the Company provides target exclusivity to each of its collaborators, and
each team works in a dedicated laboratory. At the conclusion of the program,
assuming its objectives have been met, the program team will transfer the lead
structure(s) to the collaborator. At this point, the work at CombiChem will be
completed, but the partner will continue to develop the lead candidate. As the
collaborator develops the lead candidate and reaches certain agreed-to
objectives, the Company will receive milestone payments. Eventually, when the
lead candidate becomes a marketed drug, the Company will receive royalties on
the sales of the drug.

In the jointly funded programs or the internal programs, the Company will
pay for all or part of the work to be completed and, either jointly or on its
own, will outlicense the lead structures to a partner for the development and
commercialization phases.

Depending upon the data available, the Discovery Engine can be applied to
three types of discovery programs undertaken by the Company: lead generation,
lead evolution and lead optimization. Lead generation uses the UIL to generate
information for the Discovery Engine in situations where little or no prior
information is known about the target. Lead evolution begins with existing
information (either from the collaborator or from the scientific literature)
regarding a lead candidate with the objective of identifying different
structural series that can provide either other development options or an
enhanced patent position. The evolution path may be chosen either as an
outgrowth of a lead optimization program or directly from a collaborator's
established lead candidate series. Lead optimization involves a lead candidate
provided by a collaborator that requires improvement prior to being identified
as a drug development candidate. Using CombiChem's computational drug discovery
approach, initial libraries are constructed around a given template. Using a
convergent, iterative process, subsequent libraries are increasingly focused as
increased activity (e.g., affinity, selectivity) is achieved.

Current Collaborative Discovery Programs

The Company's current collaborative discovery programs are as follows:

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
COMPANY NAME TARGET OR THERAPEUTIC AREA OF FOCUS TYPE OF PROGRAM
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Teijin G-protein coupled receptor Lead evolution(1)

Roche Bioscience Protein-Protein interaction Lead optimization
Enzyme Lead evolution
Receptor Lead optimization

Sumitomo Target implicated in osteoarthritis Lead evolution
and rheumatoid arthritis

ImClone Multiple targets in oncology Lead generation, lead evolution

Elan/Athena Multiple targets in central nervous Lead generation, lead evolution,
system conditions lead optimization

ICOS Identified, undisclosed target Lead evolution
- ----------------------------------------------------------------------------------------------
</TABLE>

(1) Started as a lead optimization program.

Internal Discovery Programs

The Company intends to conduct its own internally funded discovery programs
by choosing biological targets of current scientific interest and working in
collaboration with genomics, biotechnology or screening companies. After
identifying lead candidates that are ready for development, the Company intends
to outlicense them, retaining a larger economic interest in such candidates as
they are developed and commercialized by a third party.

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COMBICHEM'S COLLABORATIVE ARRANGEMENTS

The Company's business model is to enter into collaborative arrangements
focused on drug discovery efforts to improve the Company's chances of achieving
profitability and to minimize its financing requirements. Commercial terms of a
collaborative arrangement are driven by the number and nature of the targets.
The key components of the commercial terms typically contained in the Company's
collaborations include project initiation fees, research funding, milestone
payments and royalties.

The Company has the following completed or active collaborative
arrangements:

Teijin Limited

In March 1996, the Company entered into a collaborative agreement with
Teijin providing for a one-year research program on a G-protein coupled receptor
target. In March 1997, the Company and Teijin amended their agreement to extend
the research phase of the collaborative agreement for an additional year. While
the initial focus of the collaboration was lead optimization, the effort was
redirected to lead evolution during the course of the research. Under the
agreement, Teijin paid a project initiation fee to CombiChem and agreed to
provide research funding and milestone payments upon the achievement of certain
preclinical and clinical milestones. Teijin also committed internal resources to
the discovery effort. Teijin will make royalty payments on products resulting
from the collaboration. CombiChem retains the rights to the compounds arising
under this collaboration in North and South America; Teijin has rights to these
compounds in Asia and Europe with a right of first negotiation to acquire
CombiChem's rights. Under the original agreement, either party may terminate the
agreement in the event of a material breach remaining uncured for 60 days. As of
March 31, 1998, the Company has successfully concluded its research phase and
delivered lead candidates to Teijin for further development. As this development
process continues, Teijin will make additional payments if certain milestones
are met.

Roche Bioscience, a division of Syntex (U.S.A.) Inc.

In October 1996, the Company entered into a collaborative agreement with
Roche Bioscience providing for a broad two-year research program to perform
research against three initial targets, including a protein-protein interaction,
an enzyme and a receptor, with an option to add additional targets. Roche
Bioscience can elect one of the approaches -- lead generation, lead evolution or
lead optimization -- for each research program against each collaboration
target. A program may be initiated at any time during the term of the
collaboration, thereby extending the term to allow for completion of each
program. Under the agreement, Roche Bioscience paid a project initiation fee to
CombiChem and agreed to provide research funding and to make milestone payments
upon the achievement of certain preclinical and clinical milestones. Roche
Bioscience will make royalty payments on worldwide sales of products resulting
from the collaboration. Upon completion of the first year of the agreement,
Roche Bioscience may terminate the collaboration at any time upon six months'
prior written notice. Certain special conditions could also allow Roche
Bioscience to terminate with 45 days' prior written notice.

In March 1998, the Company achieved a research milestone in its
collaboration with Roche Bioscience triggering a cash milestone payment. This
stems from the identification, in less than one year, of novel drug development
candidates for a potential new treatment for respiratory disease.

Sumitomo Pharmaceuticals Co., Ltd.

In August 1997, the Company entered into a collaborative agreement with
Sumitomo providing for a two-year lead evolution program on a target that is
believed to play a fundamental role in osteoarthritis and rheumatoid arthritis.
Under the agreement, Sumitomo paid a project initiation fee and agreed to
provide research funding and milestone payments upon the achievement of certain
preclinical and clinical milestones. Sumitomo will make royalty payments on
worldwide sales of products resulting from the collaboration. Sumitomo may
extend the research period for up to four

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successive six-month periods upon mutual agreement. The agreement may be
terminated by either party 90 days following an uncured material breach.

ImClone Systems Incorporated

In October 1997, the Company entered into a collaborative agreement with
ImClone providing for a two-year research program to identify and characterize
novel small molecule inhibitors to multiple targets for development in oncology.
The agreement provides for ImClone's access to the Company's Universal Informer
Library and Virtual Library under the supervision of the research management
committee composed of representatives of the Company and ImClone. Under the
terms of the agreement, ImClone will provide the Company with research support
payments, milestone payments upon the achievement of certain program objectives
and royalties on worldwide product sales of therapeutic products that may arise
out of the collaboration. The agreement may be terminated by either party 90
days following an uncured material breach or by ImClone within 30 days prior to
the one-year anniversary by providing 90 days' prior written notice. In
connection with the collaborative agreement, ImClone purchased 250,000 shares of
Common Stock for $2.0 million.

Athena Neurosciences, Inc., a wholly owned subsidiary of Elan Corporation, plc

In October 1997, the Company entered into a multiple project collaborative
agreement with Athena Neurosciences, Inc., a wholly owned subsidiary of Elan
Corporation, plc providing for a three-year research program to discover novel
therapeutic compounds for treatment of central nervous system conditions. The
first project was initiated upon signing of this collaboration agreement, with a
second project authorized in March 1998, for which Elan/Athena has agreed to
provide additional research funding. The agreement provides for Elan/Athena's
access to the Universal Informer Library as deemed necessary by the research
management committee composed of Elan/Athena and CombiChem representatives.
Under the agreement, Elan/Athena paid a project initiation fee and agreed to
provide research funding and milestone payments upon the achievement of
pre-determined objectives. Elan/Athena will also make royalty payments on
worldwide sales of products resulting from the collaboration. The agreement may
be terminated by either party 90 days following an uncured material breach or by
Elan/Athena after the one-year anniversary upon 90 days prior written notice.
Additionally, in March 1998, Elan/Athena purchased an option for an undisclosed
fee creditable against future project initiation fees, if any, covering an
additional target (for a potential future project) not previously covered by the
initial collaborative agreement. In connection with the initial collaborative
agreement, Elan International Services Ltd., an affiliate of Elan/Athena,
purchased 1,000,000 shares of Common Stock for $8.0 million. In addition, Elan
International Services Ltd., a stockholder of CombiChem, and a wholly owned
subsidiary of Elan Corporation, plc (whose wholly owned subsidiary, Athena
Neurosciences, Inc. is a collaborative partner of CombiChem), has expressed an
interest in acquiring approximately $2 million of the shares of Common Stock
offered hereby at the initial public offering price.

ICOS Corporation

In March 1998, the Company entered into a collaborative agreement with ICOS
providing for a lead evolution project on an identified, undisclosed target.
Under the agreement, ICOS receives exclusive global rights to develop and market
any products resulting from the collaboration. ICOS agreed to pay CombiChem an
advance payment of approximately $0.4 million due in April 1998, research
funding, payments upon achievement of certain clinical milestones and royalty
payments on any product sales. The advance payment has been recorded as deferred
revenue and will be recognized when the Company's performance obligations have
been met. The lead evolution project terminates on August 31, 2000. The
agreement may be terminated by either party 90 days following an uncured
material breach.

RESEARCH AND DEVELOPMENT

The Company's expenses for Company-sponsored research and development
activities for the years ended December 31, 1995, 1996 and 1997 and the three
months ended March 31, 1998 and 1997 were

37
<PAGE> 39

$4.8 million, $4.8 million, $4.4 million, $1.3 million and $1.2 million,
respectively. The Company's expenses for collaborator-sponsored research and
development activities for the years ended December 31, 1995, 1996 and 1997 and
the three months ended March 31, 1998 and 1997 were $0, $0.4 million, $4.3
million, $1.9 million and $0.1 million, respectively.

COMPETITION

PATENTS AND PROPRIETARY INFORMATION

The Company's success will depend in large part on its own, its licensees'
and its licensors' ability to obtain and defend patents for each party's
respective technologies and the compounds and other products, if any, resulting
from the application of such technologies, maintain trade secrets and operate
without infringing upon the proprietary rights of others, both in the United
States and in foreign countries. The patent positions of pharmaceutical and
biotechnology companies, including the Company, are uncertain and involve
complex legal and factual questions for which important legal principles are
largely unresolved. The Company has pending United States and foreign patent
applications relating to various aspects of its technology, certain systems,
materials and methods used in screening compounds and the libraries or compounds
contained therein. These patent applications are either owned or co-owned by the
Company or rights under them are licensed to the Company. To date, one foreign
patent owned by the Company has issued and notices of allowance for two United
States patent applications owned by the Company have been received. To the
extent that any foreign patent application filed in the European Patent Office
or the Japanese Patent Office issues as a patent, a challenge to the validity of
such patent may be presented in an opposition proceeding. There can be no
assurance that patents will issue as a result of any such pending applications
or that, if issued, such patents will be sufficiently broad to afford protection
against competitors with similar technologies. The Company is aware of five
United States patents issued to third parties that claim proprietary rights; two
of these patents are entitled "System and method for automatically generating
chemical compounds with desired properties", the third is entitled "System,
method, and computer program for at least partially automatically generating
chemical compounds having desired properties" and the fourth and fifth are
entitled "Method of generating a plurality of chemical compounds in a spatially
arranged

38
<PAGE> 40

array." Although the Company believes that its current activities do not
infringe these patents or the patents of other third parties, the Company
continually assesses its position with respect to such patents and there can be
no assurance that the Company's belief would be affirmed in any litigation over
patents or that the Company's future technological developments would be outside
the scope of these patents or the patents of other third parties. Further, there
can be no assurance that any third party will not seek to assert such patent
rights against the Company, which would result in significant legal costs and
require substantial management resources, and there can be no assurance that the
Company would be able to obtain a license from any third party, if required, on
commercially reasonable terms, if at all. From time to time the Company receives
correspondence from third parties to license patents owned or controlled by
third parties and has recently received such correspondence. The Company's
inability to obtain or maintain patent protection or necessary licenses could
have a material adverse effect on the business, financial condition and results
of operations of the Company. The inability of the Company either to demonstrate
non-infringement of these and other current and future patents, whether issued
in the United States or overseas, or to obtain the appropriate licenses, would
have a material adverse effect on the Company's business, financial condition
and operations. Moreover, there can be no assurance that the Company or its
customers will be able to obtain patent protection for lead compounds or
pharmaceutical products based upon the Company's or such customers'
technologies. There can be no assurance that any patents issued to the Company
or its collaborative partners, or for which the Company has license rights, will
not be challenged, invalidated or circumvented, or that the rights granted
thereunder will provide competitive advantages to the Company. To the extent
that the Company or its consultants or collaborators use intellectual property
owned by others in their work for the Company, disputes may also arise as to the
rights in related or resulting know-how and inventions. Litigation may be
necessary to enforce the Company's patent and license rights or to determine the
scope and validity of others' proprietary rights. Any such litigation, whether
or not the outcome thereof is favorable to the Company, could result in
substantial cost to and diversion of effort by the Company. Further, United
States patents do not provide any remedies for infringement that occurred before
the patent is issued. The commercial success of the Company will also depend
upon successfully avoiding the infringement of current and future patents issued
to competitors and upon maintaining the technology licenses upon which certain
of the Company's current products are, or any future products under development
might be, based. If competitors of the Company prepare and file patent
applications in the United States that claim inventions also claimed by the
Company or its collaborators, the Company or its collaborators may have to
participate in interference proceedings declared by the PTO to determine the
priority of invention, which could result in substantial cost to the Company,
even if the outcome is favorable to the Company. An adverse outcome could
subject the Company to significant liabilities to third parties and require the
Company to license disputed rights from third parties or cease using the
technology.

39
<PAGE> 41

technology underlying such licenses will remain proprietary. The Company relies
substantially on certain technologies that are not patentable or proprietary and
are therefore available to the Company's competitors. The Company also relies on
certain proprietary trade secrets and know-how that are not patentable. Although
the Company has taken steps to protect its unpatented trade secrets and
know-how, in part through the use of confidentiality agreements with its
employees, consultants and certain of its contractors, there can be no assurance
that (i) these agreements will not be breached, (ii) the Company would have
adequate remedies for any breach or (iii) the Company's trade secrets will not
otherwise become known or be independently developed or discovered by
competitors. Failure by the Company to protect all or part of its patents, trade
secrets and know-how could have a material adverse effect on the Company's
business, financial condition and results of operations.

GOVERNMENT REGULATION

Regulation by governmental entities in the United States and other
countries will be a significant factor in the production and marketing of any
pharmaceutical products that may be developed by a customer or collaborator of
the Company or, in the event the Company decides to develop a drug beyond the
preclinical phase, by the Company. The nature and the extent to which such
regulation may apply to the Company's customers will vary depending on the
nature of any such pharmaceutical products. Virtually all pharmaceutical
products developed by the Company's customers will require regulatory approval
by governmental agencies prior to commercialization. In particular, human
pharmaceutical therapeutic products are subject to rigorous preclinical and
clinical testing and other approval procedures established by the FDA and by
foreign regulatory authorities. Various federal and, in some cases, state
statutes and regulations also govern or influence, among other things, the
testing, manufacture, safety, efficacy, labeling, storage, record keeping,
approval, advertising and promotion of such products. Non-compliance with
applicable requirements can result in fines, warning letters, recall or seizure
of products, clinical study holds or delays, total or partial suspension of
production, refusal of the government to grant approvals, and civil and criminal
penalties. The process of obtaining these approvals and the subsequent
compliance with appropriate federal and foreign statutes and regulations are
time-consuming and require the expenditure of substantial resources. Generally,
in order to gain FDA approval, a company first must conduct preclinical studies
in the laboratory and in animal models to gain preliminary information on a
compound's efficacy and to identify any safety problems. Preclinical studies
must be conducted by laboratories that comply with FDA regulations regarding
Good Laboratory Practices. The results of these studies are submitted as a part
of an IND that the FDA must review before human clinical trials of an
investigational drug can begin. In order to commercialize any products, the
Company or its customer will be required to sponsor and file an IND and will be
responsible for initiating and overseeing the clinical studies to demonstrate
the safety and efficacy that are necessary to obtain FDA and foreign regulatory
authority approval of any such products. Clinical trials are normally done in
three phases and generally take two to five years but may take longer to
complete. After completion of clinical trials of a new product, FDA and foreign
regulatory authority marketing approval must be obtained. If the product is
classified as a new drug, the Company or its customer will be required to file
an NDA and receive approval before commercial marketing of the drug. The testing
and approval processes require substantial time and effort, and there can be no
assurance that any approval will be granted on a timely basis, if at all. NDAs
submitted to the FDA can take, on average, two to five years to obtain approval.
If questions arise during the FDA review process, approval can take more than
five years. Even if FDA regulatory clearances are obtained, a marketed product
is still subject to continual review, and later discovery of previously unknown
problems or failure to comply with the applicable regulatory requirements may
result in restrictions on the marketing of a product or withdrawal of the
product from the market, as well as possible civil or criminal sanctions.
Domestic manufacturing facilities of the Company or its customers are subject to
bannial inspections by the FDA and must comply with the FDA's current Good
Manufacturing Practices regulations. To comply with such regulations, a
manufacturer must spend funds, time and effort in the areas of production and
quality control to ensure full technical

40
<PAGE> 42

compliance. The FDA stringently applies regulatory standards for manufacturing.
For marketing outside the United States, the Company or its customer will also
be subject to foreign regulatory requirements governing human clinical trials
and marketing approval for pharmaceutical products. The requirements governing
the conduct of clinical trials, product licensing, pricing and reimbursement
vary widely from country to country.

MARKETING

The Company markets its products directly to customers through
participation in trade conferences and seminars and publications in scientific
and trade journals.

To date, the Company has sold its product offering to its collaborative
partners primarily through the efforts of its senior management and dedicated
business development professionals. In addition, the Company utilizes outside
consultants to supplement its business development activities in targeted
geographies or industries.

FACILITIES

The Company currently leases and occupies approximately 34,000 square feet
of laboratory and office space in San Diego, California. The Company also leases
and occupies approximately 6,000 square feet of office space in Palo Alto,
California. The San Diego lease expires in May 2006; the Palo Alto lease expires
in October 2002.

EMPLOYEES

As of March 31, 1998, the Company had 73 full-time employees, 44 of whom
have Ph.D. degrees. Of these employees, 59 were engaged in research and
development and 14 were engaged in marketing and general administration. None of
the Company's employees is covered by collective bargaining agreements.
Management considers its relations with its employees to be good.

LEGAL PROCEEDINGS

The Company is not a party to any legal proceedings.

SCIENTIFIC ADVISORY BOARD

The Company has formed a Scientific Advisory Board ("SAB"), which consists
of eight individuals with demonstrated expertise in the fields of molecular
biology, medicinal and synthetic chemistry, computer science and biochemistry.

Members of the SAB review the Company's research, development and
operations activities and are available for consultation with the Company's
management and staff relating to their respective areas of expertise. The SAB
holds regular meetings. The Scientific Advisors are reimbursed for their
expenses in connection with their service and are paid for attending meetings.
In addition, the Scientific Advisors either hold options to purchase Common
Stock or own varying amounts of Common Stock of the Company that were purchased
pursuant to their individual consulting agreements with the Company. The
Scientific Advisors are expected to devote only a small portion of their time to
the business of the Company.

41
<PAGE> 43

The Scientific Advisors are all employed by or have consulting agreements
with entities other than the Company. Each Scientific Advisor has entered into a
consulting agreement with the Company that contains confidentiality and
nondisclosure provisions that prohibit the disclosure of confidential
information to anyone outside the Company. Also, the consulting agreements
contain exclusivity provisions restricting the Scientific Advisors from
providing services to or investing in any competitor of the Company without the
Company's consent. All inventions, discoveries or other intellectual
property that comes to the attention of each Scientific Advisor while performing
services under a consulting agreement with the Company will be assigned to the
Company. The current members of the SAB are as follows:

Sydney Brenner, Ph.D. Dr. Brenner is the President and Director of Science
at The Molecular Sciences Institute, Inc. This follows an academic career at the
University of Cambridge, UK, where he pioneered many of the developments in
modern biology and molecular biology.

Dennis Curran, Ph.D. Dr. Curran is the Distinguished Service Professor of
Chemistry and the Bayer Professor of Chemistry at The University of Pittsburgh.
His research focus is fluorous chemistry.

Samuel J. Danishefsky, Ph.D. Dr. Danishefsky holds a Chair in Chemistry at
Columbia University and the Kettering Chair at The Sloan-Kettering Institute for
Cancer Research. Following the award of his Ph.D. by Harvard University in 1962,
he has had a distinguished career in synthetic and medicinal chemistry.

Kim Janda, Ph.D. Dr. Janda is the Ely R. Callaway, Jr., Professor of
Chemistry at The Scripps Research Institute ("TSRI"), Department of Chemistry
and holds a joint appointment with The Skaggs Institute for Chemical Biology at
TSRI. Dr. Janda is widely recognized for his work in combinatorial chemistry and
biochemistry. Dr. Janda received a B.S. in Clinical Chemistry from the
University of South Florida, a M.S. in Organic Chemistry from the University of
Arizona and a Ph.D. in Organic Chemistry with a minor in Medicinal Chemistry
from the University of Arizona.

William Jorgensen, Ph.D. Dr. Jorgensen is the Whitehead Professor of
Chemistry at Yale University, where he has been since 1990. Dr. Jorgensen is
widely known for his work in organic and computational chemistry. He received a
B.A. in Chemistry from Princeton and a Ph.D. in Chemical Physics from Harvard
University.

Richard Lathrop, Ph.D. Dr. Lathrop is an Assistant Professor at the
University of California, Irvine in the Department of Information and Computer
Science, where he has been since July 1995. Dr. Lathrop is widely recognized for
his work in the area of advanced computational techniques with applications in
the domain of molecular biology. Dr. Lathrop received a B.A. in Mathematics from
Reed College in Portland, and an M.S. in Computer Science and a Ph.D. in
Artificial Intelligence from the Massachusetts Institute of Technology. His
research interests are focused on artificial intelligence and advanced
computational techniques.

William Scott, Ph.D. Dr. Scott received a Ph.D. in Biochemistry in 1967
from the California Institute of Technology. His subsequent career has spanned
both academia at Rockefeller University, and industry with Bristol-Myers Squibb.
Dr. Scott is also a Director of the Company. See "Management -- Executive
Officers, Key Employees and Directors."

Chi-Huey Wong, Ph.D. Dr. Wong is a Professor and Ernest W. Hahn Chair in
Chemistry at TSRI, where he has been since 1989, and holds a joint appointment
with The Skaggs Institute for Chemical Biology at TSRI. Dr. Wong has published
numerous papers in the area of Bioorganic and Synthetic Chemistry. Dr. Wong
received a B.S. in Chemistry and Biochemistry and an M.S. in Biochemistry from
National Taiwan University, received a Ph.D. in Organic Chemistry from the
Massachusetts Institute of Technology and was a Postdoctoral Fellow in Chemistry
at Harvard University.

42
<PAGE> 44

MANAGEMENT

EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS

The executive officers, key employees and directors of the Company as of
February 28, 1998, are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Pierre R. Lamond(2)....................... 67 Chairman of the Board and Director
Vicente Anido, Jr., Ph.D.................. 45 President, Chief Executive Officer and
Director
Peter L. Myers, Ph.D...................... 54 Vice President, Chief Scientific Officer,
Chief Operating Officer and Director
Karin Eastham............................. 48 Vice President, Finance and Administration
and Chief Financial Officer
Klaus Gubernator, Ph.D. .................. 44 Vice President, Special Projects
Lee R. McCracken.......................... 40 Vice President, Business Development
John Saunders, Ph.D....................... 50 Vice President, Medicinal Chemistry
Steven L. Teig............................ 36 Vice President, Advanced Technology
Philippe O. Chambon, M.D., Ph.D.(2)....... 39 Director
Arthur Reidel(1).......................... 47 Director
William Scott, Ph.D.(1)................... 57 Director
</TABLE>

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

(1) Member of Compensation Committee.

(2) Member of Audit Committee.

Pierre R. Lamond. Mr. Lamond has served as Chairman of the Board and a
Director of the Company since May 1995. Mr. Lamond is a General Partner of
Sequoia Capital, a venture capital limited partnership with over $500 million
under management. Prior to joining Sequoia Capital in 1981, Mr. Lamond was a
Vice President and Technical Director of National Semiconductor Corporation
("National Semiconductor") from 1976 to 1981. He began his career in 1957 at
Transitron Corporation and joined Fairchild Semiconductor Company in 1961. In
1967, he was one of the co-founders of National Semiconductor where he managed
the semiconductor division until 1974. From 1974 through 1975, he was President
of Coherent, Inc., a laser company. He served as President of Advent, an early
pioneer of projection television from 1975 through 1976. Mr. Lamond is Chairman
of Cypress Semiconductor Corporation and Vitesse Semiconductor Corporation,
Director of CKS Group, and a director of a number of private companies.

Vicente Anido, Jr., Ph.D. Dr. Anido has served as President and Chief
Executive Officer and as a Director of the Company since joining the Company in
March 1996. Prior to that, Dr. Anido served as President of the Americas Region
at Allergan, Inc. from June 1993, where he was responsible for that company's
commercial operations for North and South America with approximately $500
million in revenue. Prior to that, Dr. Anido spent almost 18 years at Marion
Laboratories and Marion Merrell Dow, Inc. and served as Vice President, Business
Management of its U.S. Prescription Products Division from 1991 until June 1993.
Dr. Anido holds a B.S. in Pharmacy from West Virginia University, an M.S. in
Pharmaceutical Sciences from West Virginia University and a Ph.D. in Pharmacy
Administration from the University of Missouri, Kansas City.

Peter L. Myers, Ph.D. Dr. Myers has served as a Director, Vice President
and Chief Scientific Officer of the Company since joining the Company in March
1995. Dr. Myers has also served as Chief Operating Officer of the Company since
September 1995 and served as the acting Chief Executive Officer from September
1995 to March 1996. Prior to joining the Company, Dr. Myers served as Vice
President, Drug Discovery and Development at Onyx Pharmaceuticals Inc. from
November 1993 through March 1995, where he was responsible for all aspects of
drug discovery and development

43
<PAGE> 45

leading to potential novel classes of anti-cancer drugs. Prior to that, Dr.
Myers served as Vice President, Chemistry Research of Glaxo Inc. Research
Institute from January 1991 through December 1993. Dr. Myers holds a B.S. in
Chemistry and a Ph.D. in Organic Chemistry from Leeds University.

Karin Eastham. Ms. Eastham joined the Company as Vice President, Finance
and Administration and Chief Financial Officer in April 1997. Prior to joining
the Company, Ms. Eastham served as Vice President, Finance and Administration
and Chief Financial Officer of Cytel Corporation, a drug research and
development company, from October 1992 through April 1997. Prior to that, Ms.
Eastham was Vice President, Finance and Administration of Pritsker Corporation,
a simulation-based computer software company, from May 1990 through October
1992. Ms. Eastham received a B.S. in Accounting and an M.B.A. from Indiana
University. She is a Certified Public Accountant.

Klaus Gubernator, Ph.D. Dr. Gubernator joined the Company in August 1997 as
Vice President, Special Projects. Prior to joining the Company, he served as
Research Section Head in Pharmaceutical Research at F. Hoffmann-La Roche Ltd. in
Basel, Switzerland from 1987 to 1997, contributing to cardiovascular and
antibacterial projects as well as developing structure-based design and
bioinformatics technologies. Dr. Gubernator received his Ph.D. degree in
Chemistry from the University of Heidelberg.

Lee R. McCracken. Mr. McCracken has served as Vice President, Business
Development since joining the Company in May 1996. Prior to joining the Company,
Mr. McCracken served as Vice President, Business Development at Watson
Laboratories, the operating subsidiary of Watson Pharmaceuticals, from January
1996 through May 1996. Prior to that, Mr. McCracken served as Managing Director
of Pacific Pharma and as Director, Business Development, for the Americas Region
at Allergan, Inc. from May 1992 through December 1995. Prior to entering the
pharmaceutical industry, Mr. McCracken was a venture capitalist with 3i Capital
and Union Venture Corporation. Mr. McCracken received a B.S. in Marketing from
Santa Clara University, an M.S. in Computer Science from the University of
Dayton and an M.B.A. from The Anderson School at UCLA.

John Saunders, Ph.D. Dr. Saunders joined the Company in October 1995 as
Vice President, Medicinal Chemistry. Prior to joining the Company, Dr. Saunders
served as Head of Medicinal Chemistry II from August 1989 through September 1995
and also as Head of the Antiviral Research Management Committee from July 1995
through September 1995 at Glaxo-Wellcome, plc. Dr. Saunders received a first
class honors degree in Chemistry from Newcastle University in England and a
Ph.D. from Cambridge University.

Steven L. Teig. Mr. Teig has served as Vice President, Advanced Technology
since February 1997 and previously served as Vice President, Design Technology
from July 1995. Prior to joining the Company, Mr. Teig co-founded BioCAD Corp.,
a commercial developer of drug discovery software for medicinal chemists, in
June 1989 and served as its Chief Technical Officer until its merger with
Molecular Simulations, Inc. ("MSI"). Thereafter, Mr. Teig served as President
and Chief Technical Officer of Entropix Corporation, a subsidiary of MSI, from
August 1994 through July 1995. Prior to pursuing drug discovery technology, Mr.
Teig co-founded Tangent Systems Corporation, a developer of integrated circuit
design software, which was subsequently acquired by Cadence Design Systems, Inc.
Mr. Teig holds a B.S.E. in Electrical Engineering and Computer Science from
Princeton University.

Philippe O. Chambon, M.D., Ph.D. Dr. Chambon has served as a Director of
the Company since August 1995. Dr. Chambon is a General Partner of the Sprout
Group. He joined Sprout in May 1995. From May 1993 to April 1995, Dr. Chambon
served as Manager in the Healthcare Practice of The Boston Consulting Group, a
leading management consulting firm. Previously, Dr. Chambon was an executive
with Sandoz Pharmaceuticals Corporation, a leading pharmaceutical company, from
September 1987 to April 1993. In his last capacity there, he was the Executive
Director of New Product Management. He is currently a director of Transcend
Therapeutics and of several private companies. Dr. Chambon received an M.D.
(with honors) and Ph.D. from the University of Paris and an M.B.A. from Columbia
University.

44
<PAGE> 46

Arthur Reidel. Mr. Reidel has served as a Director of the Company since
September 1997. He currently serves as President, Chief Executive Officer and
Chairman of the Board of Pharsight Corporation, a privately held software
corporation, a position he has held since April 1996, and as a director from
April 1995. Prior to that, he was a private investor/consultant from April 1995
to March 1996. From October 1994 to March 1995, he served as Vice President,
Business Development of Viewlogic Systems, Inc., a publicly held software firm.
Mr. Reidel has served as a director of MacNeil Schwendler from December 1993 and
as a director of Formation Systems, Inc. from 1996 to the present. Mr. Reidel
has also served as President and Chief Executive Officer, Sunrise Test Systems,
Inc., a privately held software firm, from December 1992 to March 1994
(Viewlogic Systems, Inc. acquired Sunrise Test Systems, Inc. in September 1994),
and Vice President of Weitek Corporation from July 1991 to December 1992. Mr.
Reidel received an B.S. in mathematics from Massachusetts Institute of
Technology.

William Scott, Ph.D. Dr. Scott has served as a Director of the Company
since January 1997. Since March 1997, Dr. Scott has served as the Chief
Executive Officer of Physiome Sciences, Inc. From 1983 until December 1996, Dr.
Scott served in various executive positions with Bristol-Myers Squibb
Pharmaceutical Research Institute and as its Senior Vice President, Drug
Discovery Research since 1991. Dr. Scott received a B.S. in Chemistry from the
University of Illinois and a Ph.D. in Biochemistry from the California Institute
of Technology and was an NIH Postdoctoral Fellow at The Rockefeller University.
Dr. Scott serves on the Board of Directors of a private company.

Members of the Board currently hold office and serve until the next annual
meeting of the stockholders of the Company or until their respective successors
have been elected. The Board is currently comprised of six directors. Under the
Company's Bylaws, as amended, beginning with the next annual meeting of
stockholders the Company's Board will be classified into three classes of
directors serving staggered three-year terms, with one class of directors to be
elected at each annual meeting of stockholders. The classification of directors
has the effect of making it more difficult to change the composition of the
Board. See "Description of Capital Stock -- Possible Anti-Takeover Effect of
Certain Charter Provisions."

All executive officers are appointed annually by and serve at the
discretion of the Board. All of the Company's executive officers are employed by
the Company at will.

Pursuant to the Company's 1997 Stock Incentive Plan, which was adopted by
the Board and approved by the Company's stockholders in October 1997, directors
who are not officers or employees of the Company will receive periodic option
grants beginning with the next annual meeting of stockholders. See "-- Benefit
Plans."

COMMITTEES OF THE BOARD OF DIRECTORS

The Company has a standing Compensation Committee currently composed of Mr.
Reidel and Dr. Scott. The Compensation Committee reviews and acts on matters
relating to compensation levels and benefit plans for executive officers and key
employees of the Company, including salary and stock options. The Compensation
Committee is also responsible for granting stock awards, stock options and stock
appreciation rights and other awards to be made under the Company's existing
incentive compensation plans. The Company also has a standing Audit Committee
composed of Mr. Lamond and Dr. Chambon. The Audit Committee assists in selecting
the Company's independent auditors and in designating services to be performed
by, and maintaining effective communication with, those auditors.

45
<PAGE> 47

EXECUTIVE COMPENSATION

Summary of Cash and Certain Other Compensation

The following table sets forth the aggregate compensation earned by the
Company's President and Chief Executive Officer and each of the other four most
highly compensated executive officers whose salary and bonus for 1997 exceeded
$100,000 (the "Named Executive Officers") for services rendered in all
capacities to the Company for the years ended December 31, 1996 and 1997:

SUMMARY COMPENSATION TABLE(1)

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ---------------
----------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(2) BONUS(3) COMPENSATION OPTIONS/SARS(#) COMPENSATION
--------------------------- ---- --------- -------- ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Vicente Anido, Jr., Ph.D.(4).... 1997 $273,593 $58,227 $ 0 100,001 $ 0
President, Chief Executive 1996 200,417 55,226 0 422,417 0
Officer and Director
Peter L. Myers, Ph.D.(5)........ 1997 225,582 42,297 0 50,001 3,855(6)
Chief Scientific Officer 1996 215,250 43,050 9,983(7) 0 4,960(6)
and Chief Operating Officer
and Director
John Saunders, Ph.D............. 1997 153,700 26,129 15,952(7) 4,192 0
Vice President, 1996 145,000 23,200 27,125(8) 0 0
Medicinal Chemistry
Lee R. McCracken(9)............. 1997 150,510 33,112 59,739(8) 12,500 0
Vice President, 1996 101,740 16,917 3,999(8) 72,500 0
Business Development
Steven L. Teig.................. 1997 143,191 24,342 0 50,001 3,364(6)
Vice President, 1996 137,025 21,924 0 -- 3,364(6)
Advanced Technology
</TABLE>

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

(1) Pursuant to Instruction to Item 402(b) of Regulation S-K promulgated by the
Securities and Exchange Commission (the "Commission"), information with
respect to fiscal years prior to 1996 has not been included as the Company
was not a reporting company pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
information has not been previously reported to the Commission in response
to a filing requirement.

(2) Includes amounts deferred pursuant to the Company's 401(k) Plan.

(3) Includes cash payments for bonuses earned by the Named Executive Officers
during each fiscal year.

(4) Dr. Anido was hired in March 1996.

(5) Dr. Myers served as the Company's Chief Executive Officer from August 1995
until March 1996.

(6) Payments for life insurance premiums.

(7) Amounts reimbursed for the payment of taxes.

(8) Payments to cover relocation expenses.

(9) Mr. McCracken was hired in May 1996.

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<PAGE> 48

Stock Options

The following table sets forth information concerning stock option grants
made to each of the Named Executive Officers for the year ended December 31,
1997. The Company granted no stock appreciation rights ("SARs") to Named
Executive Officers during 1997.

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERMS(3)
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION -----------------------
NAME GRANTED(1) FISCAL YEAR PER SHARE(2) DATE 5% 10%
---- ------------ ------------ ------------ ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Vicente Anido, Jr.,
Ph.D.................... 100,001 13.9% $4.00 09/16/07 $651,564 $1,037,507
Peter L. Myers, Ph.D...... 50,001 6.9 4.00 09/16/07 325,785 518,759
John Saunders, Ph.D....... 4,192 0.6 5.00 10/07/07 34,141 54,365
Lee R. McCracken.......... 12,500 1.7 4.00 09/16/07 81,445 129,687
Steven L. Teig............ 50,001 6.9 4.00 09/16/07 325,785 518,759
</TABLE>

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

(1) The grant dates for these options are as follows: September 17, 1997 for Dr.
Anido's, Dr. Myers', Mr. McCracken's and Mr. Teig's options and October 8,
1997 for Dr. Saunders' option. Each option has a maximum term of 10 years
measured from the grant date, subject to earlier termination upon the
optionee's cessation of service with the Company. Each option is immediately
exercisable for all the option shares; however, any shares purchased under
the option will be subject to repurchase by the Company, at the option
exercise price paid per share, should the optionee leave the Company prior
to vesting in the shares. The shares subject to these options vest as
follows: (a) for Dr. Anido's, Dr. Myers' and Mr. Teig's options, 50% upon
their completion of 24 months of service measured from the grant date with
the remaining 50% upon the completion of an additional 24 months of service,
and (b) for all other optionees, 25% upon completion of one year of service
measured from the grant date and the balance in a series of 36 successive
equal monthly installments over a continued period of service thereafter.
The options were granted under the 1995 Stock Option/Stock Issuance Plan and
will be incorporated into the new 1997 Stock Incentive Plan on the effective
date of the Offering, but will continue to be governed by their existing
terms. See "Benefit Plans -- 1997 Stock Incentive Plan."

(2) The exercise price per share of options granted represented the fair market
value of the underlying shares of Common Stock on the dates the respective
options were granted as determined by the Board, considering all relevant
factors. The exercise price may be paid in cash or in shares of Common Stock
valued at fair market value on the exercise date or a combination of cash
and shares or any other form of consideration approved by the Board. After
the effective date of the Registration Statement of which this Prospectus is
a part, the fair market value of shares of Common Stock will be determined
in accordance with certain provisions of the Company's 1995 Stock
Option/Stock Issuance Plan based on the closing selling price per share of
Common Stock on the date in question on the primary exchange or national
market system on which the Company's common stock is listed or reported. If
shares of the Common Stock are not listed or admitted to trading on any
stock exchange nor traded on the Nasdaq National Market, then the fair
market value shall be determined by the Plan Administrator after taking into
account such factors as the Plan Administrator shall deem appropriate.

(3) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Commission. The price used in this table for
computing this appreciation is the exercise price of the options, not the
price of Common Stock in this offering. There is no assurance provided to
any executive officer or any other holder of the Company's securities that
the actual stock price appreciation over the 10-year option term will be at
the assumed 5% or 10% levels or at any other defined level. Assuming the
fair market value of the Common Stock at the date of grant

47
<PAGE> 49

is an assumed initial public offering price of $9.00, the potential
realizable value of these options (a) at a 5% assumed annual rate of stock
price appreciation would be $1,466,020 for Dr. Anido's options, $733,017 for
Dr. Myers' options, $61,455 for Dr. Saunders' options, $183,251 for Mr.
McCracken's options and $733,017 for Mr. Teig's options and (b) at a 10%
assumed annual rate of stock price appreciation would be $2,334,392 for Dr.
Anido's options, $1,167,207 for Dr. Myers' options, $97,857 for Dr.
Saunders' options, $291,796 for Mr. McCracken's options and $1,167,207 for
Mr. Teig's options.

Option Exercises and Holdings

The following table provides information concerning option exercises during
1997 by the Named Executive Officers and the value of unexercised options held
by each of the Named Executive Officers as of December 31, 1997. No SARs were
exercised during 1997 or outstanding as of December 31, 1997.

AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
ACQUIRED DECEMBER 31, 1997(#) AT DECEMBER 31, 1997(3)
ON VALUE ------------------------------ ------------------------------
NAME EXERCISE(#) REALIZED(1) EXERCISABLE(2) UNEXERCISABLE EXERCISABLE(2) UNEXERCISABLE
---- ----------- ----------- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Vicente Anido, Jr.,
Ph.D. ................... 422,417 $42,242 100,001 -- $400,004 $--
Peter L. Myers, Ph.D....... 135,000 13,500 50,001 -- 200,004 --
John Saunders, Ph.D........ 83,825 12,741 4,192 -- 12,576 --
Lee R. McCracken........... 12,500 0 0 -- 0 --
Steven L. Teig............. 111,250 11,125 50,001 30,625 200,004 241,938
</TABLE>

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

(1) "Value realized" is calculated on the basis of the fair market value of the
Common Stock on the date of exercise minus the exercise price and does not
necessarily indicate that the optionee sold such stock.

(2) The options are immediately exercisable, but any shares purchased thereunder
will be subject to repurchase by the Company, at the original option
exercise price paid per share, should the employee leave the Company prior
to vesting in the shares. As of February 28, 1998, none of these shares had
vested.

(3) "Value" is calculated in this table as the fair market price of the Common
Stock at fiscal year-end ($8.00) less exercise price. Assuming the fair
market value of the Common Stock at December 31, 1997 is an assumed initial
public offering price of $9.00, the value of these options (a) for
exercisable options would be $500,005 for Dr. Anido's options, $250,005 for
Dr. Myers' options, $16,768 for Dr. Saunders' options, $0 for Mr.
McCracken's options, and $250,005 for Mr. Teig's options and (b) for
unexercisable options, $272,563 for Mr. Teig's options.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During the year ended December 31, 1997, the Compensation Committee of the
Company's Board established the levels of compensation for the Company's
executive officers. The current members of the Company's Compensation Committee
are Mr. Reidel and Dr. Scott. See "Certain Transactions."

EMPLOYMENT ARRANGEMENTS AND CHANGE OF CONTROL ARRANGEMENTS

In March 1996, the Company and Dr. Anido entered into an agreement whereby
Dr. Anido is employed as President and Chief Executive Officer of the Company.
Pursuant to his agreement, Dr. Anido receives an annual base salary of $260,000,
which is reviewed annually by the Board of Directors, and is eligible for a
bonus of up to 25% of his annual base salary to be awarded at the discretion of
the Board of Directors. In the event the Company terminates Dr. Anido's
employment

48
<PAGE> 50

without "cause," Dr. Anido will be entitled to receive an aggregate severance
benefit of 12 months of his base salary and benefits less amounts received by
Dr. Anido from other full-time employment during that period. In addition,
pursuant to his employment agreement Dr. Anido received options to purchase
420,000 shares of Common Stock with an exercise price of $0.30 per share. The
shares subject to the option vest over Dr. Anido's four-year period of service
with the Company measured from the option grant date. Dr. Anido's employment
agreement also provides Dr. Anido with a right to maintain his pro rata interest
in the Company by purchasing new securities issued in a financing other than a
public offering, subject to certain exceptions.

In March 1995, the Company and Dr. Myers entered into an agreement whereby
Dr. Myers is employed as Chief Scientific Officer and Chief Operating Officer of
the Company. Pursuant to his agreement, Dr. Myers (i) received a signing bonus
of $26,250 towards the purchase of Company stock, (ii) receives an annual base
salary of $210,000, which is reviewed annually by the President and Chief
Executive Officer, and (iii) is eligible for a bonus of up to 25% of his annual
base salary to be awarded at the discretion of the Board of Directors. In
connection with the employment agreement, Dr. Myers was provided a home loan. In
the event the Company terminates Dr. Myers' employment without "cause," Dr.
Myers will be entitled to receive an aggregate severance benefit of nine months
of his base salary and benefits, unless he obtains full-time employment prior to
the end of that period, and nine months accelerated vesting to be applied to any
vesting requirements under any stock option or stock purchase agreements
outstanding between Dr. Myers and the Company at the time of his termination
without cause. Simultaneous with the execution of Dr. Myers' employment
agreement, the Company and Dr. Myers entered into a Stock Purchase Agreement
whereby Dr. Myers purchased 87,500 shares of Common Stock at $0.30 per share.
Those shares vest over Dr. Myers' four-year period of service with the Company
measured from the option grant date.

In March 1997, the Company and Ms. Eastham entered into an agreement
whereby she is employed as Vice President, Finance and Administration and Chief
Financial Officer. Pursuant to her agreement, Ms. Eastham (i) receives an annual
base salary of $186,000, which is reviewed annually by the Chief Executive
Officer and Board of Directors, and (ii) is eligible for a bonus of up to 20% of
her annual base salary to be awarded at the discretion of the Board of
Directors. In the event the Company terminates Ms. Eastham's employment without
"cause" within two years after her date of hire, Ms. Eastham will be entitled to
receive an aggregate severance benefit of her base salary and benefits for six
months, unless she obtains full-time employment prior to the end of that
six-month period. Simultaneous with the execution of Ms. Eastham's employment
agreement, the Company and Ms. Eastham entered into a Stock Option Agreement
granting her an option to purchase 87,500 shares of Common Stock with an
exercise price of $0.40 per share. The shares subject to the option vest over
her four-year period of service with the Company measured from the grant date.

In January 1996, the Company and Dr. Saunders entered into an agreement
whereby Dr. Saunders is employed as Vice President, Medicinal Chemistry of the
Company. Pursuant to his agreement, Dr. Saunders receives an annual base salary
of $145,000, which is reviewed annually by the President and Chief Executive
Officer, and is eligible for a bonus of up to 20% of his annual base salary to
be awarded at the discretion of the Board of Directors. Simultaneous with the
execution of the employment agreement, the Company and Dr. Saunders entered into
a stock option agreement granting him an option to purchase 83,825 shares of the
Company's common stock with an exercise price of $0.248 per share. The shares
subject to that option vest over Dr. Saunders' four-year period of service with
the Company measured from the option grant date.

In May 1996, the Company and Mr. McCracken entered into an agreement
whereby he is employed as Vice President, Business Development of the Company.
Pursuant to his agreement, Mr. McCracken received a signing bonus of $10,000 and
receives an annual base salary of $145,000, which is reviewed annually by the
President and Chief Executive Officer. In addition, Mr. McCracken is eligible
for a bonus of up to 20% of his annual base salary. In the event the Company
terminates Mr. McCracken's employment without "cause," Mr. McCracken will be
entitled to receive an aggregate severance benefit of nine months of his base
salary and benefits. Simultaneous with the

49
<PAGE> 51

execution of Mr. McCracken's employment agreement, the Company and Mr. McCracken
entered into a stock option agreement granting Mr. McCracken an option to
purchase 72,500 shares of Common Stock with an exercise price of $0.30 per
share. The shares subject to the option vest over Mr. McCracken's four-year
period of service measured from the option grant date.

In July 1995, the Company and Mr. Teig entered into an agreement whereby he
is employed as Vice President of the Company. Pursuant to his agreement, Mr.
Teig receives an annual base salary of $135,000, which is reviewed annually by
the Board of Directors. In addition, Mr. Teig is eligible for a bonus of up to
20% of his annual base salary to be awarded at the discretion of the Board of
Directors. Simultaneous with the execution of the employment agreement, the
Company and Mr. Teig entered into a stock purchase agreement whereby Mr. Teig
purchased 50,000 shares of Common Stock at $0.30 per share. Under such stock
purchase agreement, the shares will vest, and the Company's repurchase rights
will accordingly lapse over Mr. Teig's four-year period of employment measured
from the date of issuance. Pursuant to his employment agreement, Mr. Teig was
granted an option to purchase 61,250 shares of Company's Series J convertible
preferred stock with an exercise price of $0.40 per share. Those shares vest
over Mr. Teig's four-year period of service beginning on the fifth anniversary
of the option grant date, with provisions for early vesting upon meeting certain
milestones. All of the shares are currently vested.

In connection with an acquisition of the Company by merger or asset sale,
each outstanding option held by the Chief Executive Officer and the other Named
Executive Officers under the Predecessor Plan and any options granted to such
individuals in the future under the 1997 Stock Incentive Plan will automatically
accelerate in full, except to the extent such options are to be assumed by the
successor corporation. See "Benefit Plans -- 1997 Stock Incentive Plan." In
addition, the Compensation Committee as Plan Administrator of the 1997 Stock
Incentive Plan will have the authority to provide for the accelerated vesting of
the shares of Common Stock subject to outstanding options held by the Chief
Executive Officer and the Named Executive Officers, or any unvested shares of
Common Stock subject to direct issuances held by such individuals, in connection
with the termination of the officer's employment following: (i) a merger or
asset sale in which these options are assumed or the repurchase rights
applicable to those shares are assigned or (ii) certain changes in control of
the Company.

DIRECTOR COMPENSATION

The Company reimburses its directors for all reasonable and necessary
travel and other incidental expenses incurred in connection with their
attendance at meetings of the Board. Directors are not currently compensated for
serving on the Board. The Company has previously granted to certain non-
employee Board members an option to purchase 20,000 shares of Common Stock. Each
non-employee Board member who is serving as such on the effective date of the
1997 Stock Incentive Plan will receive a similar 20,000-share option, provided
he or she has not received a prior option grant from the Company. Each
individual who first becomes a non-employee Board member at any time after this
offering will receive a 20,000-share option grant on the date such individual
joins the Board. In addition, beginning with the first annual meeting of
stockholders following this offering, each such non-employee Board member who is
to continue to serve as a non-employee Board member will automatically be
granted an option to purchase 5,000 shares of Common Stock, provided such
individual has served on the Board for at least six months. These options will
have an exercise price equal to 100% of the fair market value of the Common
Stock on the grant date. The shares subject to each 20,000-share automatic
option grant will vest over a four-year period, with 25% of the option shares
vesting upon completion of one year of Board service from the grant date and the
balance of the option shares vesting in equal monthly installments over the
optionee's continued period of Board service over the next three years. The
shares subject to each 5,000-share annual automatic option will vest upon the
optionee's completion of one year of Board service measured from the grant date.
See "-- Benefit Plans -- 1997 Stock Incentive Plan."

50
<PAGE> 52

BENEFIT PLANS

1997 Stock Incentive Plan

The Company's 1997 Stock Incentive Plan (the "1997 Plan") is intended to
serve as the successor equity incentive program to the Company's 1995 Stock
Option/Stock Issuance Plan, as amended (the "Predecessor Plan"). The 1997 Plan
was adopted by the Board and the stockholders on October 7, 1997. The 1997 Plan
is to become effective on the date the Underwriting Agreement for this offering
is executed (the "Plan Effective Date").

A total of 1,072,170 shares of Common Stock have been authorized for
issuance under the 1997 Plan. Such share reserve consists of (i) the number of
shares available for issuance under the Predecessor Plan on the Plan Effective
Date, including the shares subject to outstanding options, and (ii) an
additional increase of approximately 800,000 shares. To the extent any unvested
shares of Common Stock issued under the Predecessor Plan are repurchased by the
Company after the Plan Effective Date, at the exercise price paid per share, in
connection with the holder's termination of service, those repurchased shares
will be added to the reserve of Common Stock available for issuance under the
1997 Plan. In no event may any one participant in the 1997 Plan receive option
grants, separately exercisable stock appreciation rights or direct stock
issuances for more than 500,000 shares of Common Stock in the aggregate per
calendar year.

On the Plan Effective Date, outstanding options and unvested shares issued
under the Predecessor Plan will be incorporated into the 1997 Plan, and no
further option grants will be made under the Predecessor Plan. The incorporated
options will continue to be governed by their existing terms, unless the Plan
Administrator elects to extend one or more features of the 1997 Plan to those
options. Except as otherwise noted below, the incorporated options have
substantially the same terms as will be in effect for grants made under the
Discretionary Option Grant Program of the 1997 Plan.

The 1997 Plan is divided into five separate components: (i) the
Discretionary Option Grant Program under which eligible individuals in the
Company's employ or service (including officers, non-employee Board members and
consultants) may, at the discretion of the Plan Administrator, be granted
options to purchase shares of Common Stock at an exercise price not less than
100% of their fair market value on the grant date, (ii) the Stock Issuance
Program under which such individuals may, in the Plan Administrator's
discretion, be issued shares of Common Stock directly, through the purchase of
such shares at a price not less than 100% of their fair market value at the time
of issuance or as a bonus tied to the performance of services, (iii) the Salary
Investment Option Grant Program which may, in the Plan Administrator's sole
discretion, be activated for one or more calendar years and, if so activated,
will allow executive officers and other highly compensated employees the
opportunity to apply a portion of their base salary to the acquisition of
special below-market stock option grants, (iv) the Automatic Option Grant
Program under which option grants will automatically be made at periodic
intervals to eligible non-employee Board members to purchase shares of Common
Stock at an exercise price equal to 100% of their fair market value on the grant
date and (v) the Director Fee Option Grant Program which may, in the Plan
Administrator's sole discretion, be activated for one or more calendar years
and, if so activated, will allow non-employee Board members the opportunity to
apply a portion of the annual retainer fee, if any, otherwise payable to them in
cash each year to the acquisition of special below-market option grants.

The Discretionary Option Grant Program and the Stock Issuance Program will
be administered by the Compensation Committee. The Compensation Committee as
Plan Administrator will have complete discretion to determine which eligible
individuals are to receive option grants or stock issuances under those
programs, the time or times when such option grants or stock issuances are to be
made, the number of shares subject to each such grant or issuance, the status of
any granted option as either an incentive stock option or a non-statutory stock
option under the Federal tax laws, the vesting schedule to be in effect for the
option grant or stock issuance and the maximum term for which any granted option
is to remain outstanding. The Compensation Committee will also have the
exclusive authority to select the executive officers and other highly
compensated employees who may partici-

51
<PAGE> 53

pate in the Salary Investment Option Grant Program in the event that program is
activated for one or more calendar years, but neither the Compensation Committee
nor the Board will exercise any administrative discretion with respect to option
grants under the Salary Investment Option Grant Program or under the Automatic
Option Grant or Director Fee Option Grant Program for the non-employee Board
members. All grants under those three latter programs will be made in strict
compliance with the express provisions of each such program.

The exercise price for the shares of Common Stock subject to option grants
made under the 1997 Plan may be paid in cash or in shares of Common Stock valued
at fair market value on the exercise date. The option may also be exercised
through a same-day sale program without any cash outlay by the optionee. In
addition, the Plan Administrator may provide financial assistance to one or more
optionees in the exercise of their outstanding options or the purchase of their
unvested shares by allowing such individuals to deliver a full-recourse,
interest-bearing promissory note in payment of the exercise price and any
associated withholding taxes incurred in connection with such exercise or
purchase.

The Plan Administrator will have the authority, with the consent of the
affected option holders, to effect the cancellation of outstanding options under
the Discretionary Option Grant Program (including options incorporated from the
Predecessor Plan) in return for the grant of new options for the same or
different number of option shares with an exercise price per share based upon
the fair market value of the Common Stock on the new grant date.

Stock appreciation rights are authorized for issuance under the
Discretionary Option Grant Program which provide the holders with the election
to surrender their outstanding options for an appreciation distribution from the
Company equal to the excess of (i) the fair market value of the vested shares of
Common Stock subject to the surrendered option over (ii) the aggregate exercise
price payable for such shares. Such appreciation distribution may be made in
cash or in shares of Common Stock. None of the incorporated options from the
Predecessor Plan contain any stock appreciation rights.

In the event that the Company is acquired by merger or asset sale, each
outstanding option under the Discretionary Option Grant Program which is not to
be assumed by the successor corporation will automatically accelerate in full,
and all unvested shares under the Discretionary Option Grant and Stock Issuance
Programs will immediately vest, except to the extent the Company's repurchase
rights with respect to those shares are to be assigned to the successor
corporation. The Plan Administrator will have complete discretion to grant one
or more options under the Discretionary Option Grant Program which will become
fully exercisable for all the option shares in the event those options are
assumed in the acquisition and the optionee's service with the Company or the
acquiring entity terminates within a designated period following such
acquisition. The vesting of outstanding shares under the Stock Issuance Program
may be accelerated upon similar terms and conditions. The Plan Administrator
will also have the authority to grant options which will immediately vest upon
an acquisition of the Company, whether or not those options are assumed by the
successor corporation. The Plan Administrator is also authorized under the
Discretionary Option Grant and Stock Issuance Programs to grant options and to
structure repurchase rights so that the shares subject to those options or
repurchase rights will immediately vest in connection with a change in control
of the Company (whether by successful tender offer for more than 50% of the
outstanding voting stock or a change in the majority of the Board by reason of
one or more contested elections for Board membership), with such vesting to
occur either at the time of such change in control or upon the subsequent
termination of the individual's service within a designated period following
such change in control. The options incorporated from the Predecessor Plan will
similarly accelerate and immediately vest upon an acquisition of the Company by
merger or asset sale, unless those options are assumed by the successor entity.

In the event the Plan Administrator elects to activate the Salary
Investment Option Grant Program for one or more calendar years, each executive
officer and other highly compensated employee of the

52
<PAGE> 54

Company selected for participation may elect, prior to the start of the calendar
year, to reduce his or her base salary for that calendar year by a specified
dollar amount not less than $10,000 nor more than $50,000. If such election is
approved by the Plan Administrator, the individual will automatically be
granted, on the first trading day in January of the calendar year for which that
salary reduction is to be in effect, a non-statutory option to purchase that
number of shares of Common Stock determined by dividing the salary reduction
amount by two-thirds of the fair market value per share of Common Stock on the
grant date. The option will be exercisable at a price per share equal to
one-third of the fair market value of the option shares on the grant date. As a
result, the total spread on the option shares at the time of grant (the fair
market value of the option shares on the grant date less the aggregate exercise
price payable for those shares) will be equal to the amount of salary invested
in that option. The option will vest in a series of 12 equal monthly
installments over the calendar year for which the salary reduction is to be in
effect and will be subject to full and immediate vesting upon certain changes in
the ownership or control of the Company.

The Company has previously granted to certain non-employee Board members an
option to purchase 20,000 shares of Common Stock, and each non-employee Board
member who is serving as such on the Plan Effective Date and who has not
received such a grant will automatically receive an option at that time to
purchase 20,000 shares of Common Stock. Each individual who first becomes a
non-employee Board member at any time after the Plan Effective Date will also
receive a 20,000-share option grant on the date such individual joins the Board.
In addition and on the date of each Annual Stockholders Meeting held after the
Plan Effective Date, each such non-employee Board member who is to continue to
serve as a non-employee Board member will automatically be granted an option to
purchase 5,000 shares of Common Stock, provided such individual has served on
the Board for at least six months.

Each automatic grant for the non-employee Board members will have a term of
10 years, subject to earlier termination following the optionee's cessation of
Board service. Each automatic option will be immediately exercisable for all of
the option shares; however, any unvested shares purchased under the option will
be subject to repurchase by the Company, at the exercise price paid per share,
should the optionee cease Board service prior to vesting in those shares. The
shares subject to each initial 20,000-share automatic option grant will vest
over a four-year period, as follows: (i) 25% of the option shares upon the
optionee's completion of one year of Board service measured from the grant date
and (ii) the balance of the option shares in a series of 36 successive equal
monthly installments upon the optionee's completion of each additional month of
service measured from the first anniversary of the grant date. The shares
subject to each annual 5,000-share grant will vest upon the optionee's
completion of one year of Board service measured from the grant date. However,
the shares subject to each automatic option grant will immediately vest in full
upon certain changes in control or ownership of the Company or upon the
optionee's death or disability while a Board member.

Should the Director Fee Option Grant Program be activated in the future,
each non-employee Board member will have the opportunity to apply all or a
portion of any annual retainer fee otherwise payable in cash to the acquisition
of a below-market option grant. The option grant will automatically be made on
the first trading day in January in the year for which the retainer fee would
otherwise be payable in cash. The option will have an exercise price per share
equal to one-third of the fair market value of the option shares on the grant
date, and the number of shares subject to the option will be determined by
dividing the amount of the retainer fee applied to the program by two-thirds of
the fair market value per share of Common Stock on the grant date. As a result,
the total spread on the option (the fair market value of the option shares on
the grant date less the aggregate exercise price payable for those shares) will
be equal to the portion of the retainer fee invested in that option. The option
will become exercisable for the option shares in a series of 12 equal monthly
installments over the calendar year for which the election is to be in effect.
However, the option will become immediately exercisable for all the option
shares upon (i) certain changes in the ownership or control of the Company or
(ii) the death or disability of the optionee while serving as a Board member.

53
<PAGE> 55

The shares subject to each option under the Salary Investment Option Grant,
Automatic Option Grant and Director Fee Option Grant Programs will immediately
vest upon (i) an acquisition of the Company by merger or asset sale or (ii) the
successful completion of a tender offer for more than 50% of the Company's
outstanding voting stock or a change in the majority of the Board effected
through one or more contested elections for Board membership.

Limited stock appreciation rights will automatically be included as part of
each grant made under the Automatic Option Grant, Salary Investment Option Grant
and Director Fee Option Grant Programs and may be granted to one or more
officers of the Company as part of their option grants under the Discretionary
Option Grant Program. Options with such a limited stock appreciation right may
be surrendered to the Company upon the successful completion of a hostile tender
offer for more than 50% of the Company's outstanding voting stock. In return for
the surrendered option, the optionee will be entitled to a cash distribution
from the Company in an amount per surrendered option share equal to the excess
of (i) the highest price per share of Common Stock paid in connection with the
tender offer over (ii) the exercise price payable for such share.

The Board may amend or modify the 1997 Plan at any time, subject to any
required stockholder approval. The 1997 Plan will terminate on the earliest of
(i) October 31, 2007, (ii) the date on which all shares available for issuance
under the 1997 Plan have been issued as fully vested shares or (iii) the
termination of all outstanding options in connection with certain changes in
control or ownership of the Company.

1997 Employee Stock Purchase Plan

The Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board and approved by the stockholders in October 1997 and will
become effective immediately upon the execution of the Underwriting Agreement
for this offering. The Purchase Plan is designed to allow eligible employees of
the Company and participating subsidiaries to purchase shares of Common Stock,
at semi-annual intervals, through their periodic payroll deductions under the
Purchase Plan, and a reserve of 150,000 shares of Common Stock has been
established for this purpose.

The Purchase Plan will be implemented in a series of successive offering
periods, each with a maximum duration for 12 months. However, the initial
offering period will begin on the execution date of the Underwriting Agreement
and will end on the last business day in January 1999. The next offering period
will commence on the first business day in February 1999, and subsequent
offering periods will commence as designated by the Plan Administrator.

Individuals who are eligible employees (scheduled to work more than 20
hours per week for more than 5 calendar months per year) on the start date of
any offering period may enter the Purchase Plan on that start date or on any
subsequent semi-annual entry date (the first business day of February or August
each year). Individuals who become eligible employees after the start date of
the offering period may join the Purchase Plan on any subsequent semi-annual
entry date within that offering period.

Payroll deductions may not exceed 10% of the employee's base salary, and
the accumulated payroll deductions of each participant will be applied to the
purchase of shares on his or her behalf on each semi-annual purchase date (the
last business day in January and July each year) at a purchase price per share
equal to 85% of the lower of (i) the fair market value of the Common Stock on
the participant's entry date into the offering period or (ii) the fair market
value on the semi-annual purchase date. In no event, however, may any
participant purchase more than 1,250 shares on any one semi-annual purchase
date.

Should the fair market value per share of Common Stock on any purchase date
be less than the fair market value per share on the start date of the two-year
offering period, then that offering period will automatically terminate, and a
new two-year offering period will begin on the next business day, with all
participants in the terminated offering to be automatically transferred to the
new offering period.

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<PAGE> 56

In the event the Company is acquired by merger or asset sale, all
outstanding purchase rights will automatically be exercised immediately prior to
the effective date of such acquisition. The purchase price will be equal to 85%
of the lower of (i) the fair market value per share of Common Stock on the
participant's entry date into the offering period in which such acquisition
occurs or (ii) the fair market value per share of Common Stock immediately prior
to such acquisition.

The Purchase Plan will terminate on the earlier of (i) the last business
day in July 2007, (ii) the date on which all shares available for issuance under
the Purchase Plan shall have been sold pursuant to purchase rights exercised
thereunder or (iii) the date on which all purchase rights are exercised in
connection with an acquisition of the Company by merger or asset sale.

The Board may at any time alter, suspend or discontinue the Purchase Plan.
However, certain amendments to the Purchase Plan may require stockholder
approval.

LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS

The Company's Certificate of Incorporation eliminates, subject to certain
exceptions, directors' personal liability to the Company or its stockholders for
monetary damages for breaches of fiduciary duties. The Certificate of
Incorporation does not, however, eliminate or limit the personal liability of a
director for (i) any breach of the director's duty of loyalty to the Company or
its stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) unlawful payments of
dividends or unlawful stock repurchases or redemptions as provided in Section
174 of the Delaware General Corporation Law or (iv) any transaction from which
the director derived an improper personal benefit.

The Company's Bylaws provide that the Company shall indemnify its directors
and executive officers to the fullest extent permitted under the Delaware
General Corporation Law and may indemnify its other officers, employees and
other agents as set forth in the Delaware General Corporation Law. In addition,
the Company has entered into indemnification agreements with its directors and
officers. The indemnification agreements contain provisions that require the
Company, among other things, to indemnify its directors and executive officers
against certain liabilities (other than liabilities arising from intentional or
knowing and culpable violations of law) that may arise by reason of their status
or service as directors or executive officers of the Company or other entities
to which they provide service at the request of the Company and to advance
expenses they may incur as a result of any proceeding against them as to which
they could be indemnified. The Company believes that these provisions and
agreements are necessary to attract and retain qualified directors and officers.
The Company has obtained an insurance policy covering directors and officers for
claims that such directors and officers may otherwise be required to pay or for
which the Company is required to indemnify them, subject to certain exclusions.

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<PAGE> 57

CERTAIN TRANSACTIONS

In October 1997, the Company effected a one-for-four reverse stock split of
the Common Stock. The following discussion gives effect to such split upon the
conversion of the Preferred Stock into Common Stock upon the completion of this
offering. Since its formation in May 1994, the Company has issued, in private
placement transactions, shares of its Preferred Stock as follows: 250,000 shares
of Series A Preferred Stock at a price of $2.00 per share in August and November
1994; 556,669 shares of Series B Preferred Stock at a price of $3.00 per share
in November 1994; 4,289,634 shares of Series C Preferred Stock at a price of
$2.48 per share in August 1995, September 1995 and April 1996; 2,467,310 shares
of Series D Preferred Stock at a price of $4.00 per share in November 1996;
58,125 shares of Series J Preferred Stock at a price of $0.40 per share in June
1997; 50,000 shares of Series Z Preferred Stock at a price of $2.00 in October
1994; and 83,195 shares of Series Z as consideration pursuant to an asset
purchase agreement. The purchasers of Preferred Stock include, among others, the
following directors, executive officers and holders of more than 5% of the
Company's outstanding stock and their respective affiliates:

<TABLE>
<CAPTION>
PREFERRED STOCK
EXECUTIVE OFFICERS, DIRECTORS ------------------------------------------------------ TOTAL
AND 5% STOCKHOLDERS SERIES A SERIES B SERIES C SERIES D SERIES J CONSIDERATION
----------------------------- -------- -------- --------- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Pierre R. Lamond(1)........................ 100,000 333,335 542,453 237,211 -- $3,494,114
Philippe O. Chambon, M.D., Ph.D.(2)........ -- -- 1,209,679 292,050 -- 4,168,198
Vicente Anido, Jr., Ph.D................... -- -- -- 60,000 -- 240,000
Lee R. McCracken(3)........................ -- -- -- 8,750 -- 35,000
Steven L. Teig............................. -- -- -- 5,000 30,625 32,250
Entities affiliated with Sequoia
Capital(1)............................... 100,000 333,335 542,453 237,211 -- 3,494,114
Entities affiliated with Sprout
Capital(2)............................... -- -- 1,209,679 292,050 -- 4,168,198
Entities affiliated with Sorrento Growth
Partners(4).............................. -- -- 604,841 146,026 -- 2,084,100
Entities affiliated with Brinson Venture
Capital Fund(5).......................... -- -- 806,453 150,000 -- 2,600,000
</TABLE>

- ---------------
(1) Includes 1,087,212 shares purchased by Sequoia Capital VI, 59,738 shares
purchased by Sequoia Technology Partners VI, 32,012 shares purchased by
Sequoia XXIV and 15,780 shares purchased by Sequoia 1995, each of which is
affiliated with Sequoia Partners. Sequoia Partners is the general partner of
Sequoia Capital VI. Sequoia Partners has eight general partners, who are
also the general partners of Sequoia Technology Partners VI. Also includes
18,257 shares issuable to the entities affiliated with Sequoia Partners upon
exercise of warrants at an exercise price of $2.48 per share. In addition,
the entities affiliated with Sequoia Partners purchased 25,000 shares of
Common Stock of the Company in November 1994 (see below). Mr. Lamond is a
Director of the Company and a general partner of Sequoia Partners. Mr.
Lamond disclaims beneficial ownership of such shares except to the extent of
his pecuniary interest therein.

(2) Includes 1,386,331 shares purchased by Sprout Capital VII, L.P. and 115,398
shares purchased by DLJ Capital Corporation. Dr. Chambon is a Director of
the Company and a general partner of Sprout Capital VII, L.P., and DLJ
Capital Corporation is the general partner of Sprout Capital VII, L.P. Dr.
Chambon is a Divisional Vice President of DLJ Capital Corporation. Dr.
Chambon disclaims beneficial ownership of such shares except to the extent
of his pecuniary interest therein.

(3) Held by The Rufus L. McCracken Trust, dated 6/21/91, of which Mr. McCracken
is the sole trustee.

(4) Includes 249,803 shares purchased by Sorrento Ventures II, L.P. and 501,064
shares purchased by Sorrento Growth Partners I, L.P.

(5) Includes 134,113 shares purchased by the First National Bank of Chicago as
Custodian to the Brinson Trust Company as Trustee of the Brinson MAP Venture
Capital Fund III and 822,340 shares

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<PAGE> 58

purchased by the First National Bank of Chicago as Custodian to the Brinson
Venture Capital Fund III, L.P.

Holders of Preferred Stock are entitled to certain registration rights with
respect to the Common Stock issued or issuable upon conversion thereof. See
"Description of Capital Stock -- Registration Rights."

In November 1994, the Company sold the following number of shares of Common
Stock to the respective entities at a price of $0.20 per share: 22,750 shares to
Sequoia Capital VI; 1,250 shares to Sequoia Technology Partners VI; and 1,000
shares to Sequoia XXIV.

In October 1997, the Company sold 1,000,000 shares of its Common Stock to
Elan International Services Ltd. in conjunction with entering into a
collaborative agreement.

In February 1997 as incentive for employment, and in June 1997 under an
employee loan program provided for the exercise of options, the Company made
loans in the amounts of $96,000 and $23,044, respectively, to Dr. Anido, the
President, Chief Executive Officer and a Director of the Company, for an
aggregate indebtedness as of March 31, 1998 of $119,751, which includes accrued
interest. Each loan is secured by shares of Common Stock held by Dr. Anido. The
loan for $96,000 is represented by a promissory note which is due and payable on
the earlier of February 23, 2002 or the occurrence of certain events, such as
the expiration of the 190-day period following the completion of an initial
public offering. This loan bears no interest. The loan for $23,044 is
represented by a promissory note which is due and payable in three annual
installments and is due in full upon the third anniversary of the loan. This
loan bears an interest rate of 6.14%. The aggregate indebtedness of $119,751 at
March 31, 1998 represents the largest amount of indebtedness outstanding since
the beginning of the last fiscal year. At December 31, 1997, 1996 and 1995, Dr.
Anido's outstanding loan balance, including accrued interest, was $119,751, $0
and $0, respectively.

In September 1995 as incentive for employment, and in June 1997 under an
employee loan program provided for the exercise of options, the Company made
loans in the amounts of $150,000 and $30,375, respectively, to Dr. Myers, the
Vice President, Chief Scientific Officer and a Director of the Company, for an
aggregate indebtedness as of March 31, 1998 of $203,749, which includes accrued
interest. Each loan is secured by shares of Common Stock held by Dr. Myers. The
loan for $150,000 is represented by a promissory note which is due and payable
on the earlier of September 5, 2000 or the occurrence of certain events, such as
the expiration of the 180-day period following the completion of an initial
public offering. This loan bears an interest rate equal to the applicable
minimum Federal rate on the date of the loan. The loan for $30,375 is
represented by a promissory note which is due and payable in three annual
installments and is due in full upon the third anniversary of the loan. This
loan bears an interest rate of 6.14%. The aggregate indebtedness of $203,749 at
March 31, 1998 represents the largest amount of indebtedness outstanding since
the beginning of the last fiscal year. At December 31, 1997, 1996 and 1995, Dr.
Myers' outstanding loan balance, including accrued interest, was $201,574,
$161,566 and $152,866, respectively.

In August 1996 as incentive for employment, and in June 1997 under an
employee loan program provided for the exercise of options, the Company made
loans in the amounts of $66,125 and $15,591, respectively, to Dr. Saunders, the
Vice President, Medicinal Chemistry of the Company, for an aggregate
indebtedness as of March 31, 1998 of $60,195, which includes accrued interest.
The loan for $66,125, which is secured by a deed of trust, is represented by a
promissory note which is due and payable on the earlier of August 28, 1999 or
the occurrence of certain events, such as the expiration of the 30-day period
following the date Dr. Saunders ceases to be a full-time employee of the
Company. This loan bears no interest. The loan for $15,591, which is secured by
shares of Common Stock held by Dr. Saunders, is represented by a promissory note
which is due and payable in three annual installments and is due in full upon
the third anniversary of the loan. This loan bears an interest rate of 6.14%.
The largest amount of indebtedness outstanding since the beginning of the last
fiscal year was $81,716. At December 31, 1997, 1996 and 1995, Dr. Saunders'
outstanding loan balance, including accrued interest, was $60,195, $66,125 and
$0, respectively.

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<PAGE> 59

For information regarding employment agreements with Named Executive
Officers, see "Management -- Employment Agreements and Change of Control
Arrangements."

All of the Company's officers are employed by the Company at will. The
Company has entered into indemnification agreements with each of its directors
and executive officers. See "Management -- Limitations on Liability and
Indemnification Matters."

The Company expects that all future transactions between the Company and
its officers, directors and principal stockholders and their affiliates will be
approved in accordance with the Delaware General Corporation Law by a majority
of the Board, as well as by a majority of the independent and disinterested
directors of the Board, and will be on terms no less favorable to the Company
than could be obtained from unaffiliated third parties.

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<PAGE> 60

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of February 28, 1998, after giving effect to
the conversion of all outstanding shares of Preferred Stock into Common Stock
upon the closing of this offering and as adjusted to reflect the sale of the
shares of the Common Stock offered hereby by the Company, by (i) all those known
by the Company to be beneficial owners of more than 5% of its outstanding Common
Stock, (ii) each director of the Company, (iii) each of the Named Executive
Officers of the Company and (iv) all directors and executive officers of the
Company as a group.

<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
SHARES BENEFICIALLY OWNED(2)
BENEFICIALLY ----------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) PRIOR TO OFFERING AFTER OFFERING
------------------------------------ ------------ ----------------- --------------
<S> <C> <C> <C>
Sprout Capital VII, L.P. and affiliated entities(3)..... 1,501,729 13.7% 11.3%
3000 Sand Hill Road
Building 3, Suite 170
Menlo Park, CA 94025
Sequoia Capital VI and affiliated entities(4)........... 1,237,999 11.3% 9.3%
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
Elan International Services Ltd.(5)..................... 1,000,000 9.1% 7.6%
102 St. James Court
Flatts
Smiths, FL04
Bermuda
Brinson MAP Venture Capital Fund III and affiliated
entities(6)........................................... 956,453 8.7% 7.2%
209 S. LaSalle Street
Chicago, IL 60604-1295
Sorrento Growth Partners I, L.P. and affiliated
entities(7)........................................... 750,867 6.8% 5.7%
4370 La Jolla Village Dr., Suite 1040
San Diego, CA 92122
Pierre R. Lamond(4)..................................... 1,237,999 11.3% 9.3%
Vicente Anido, Jr., Ph.D.(8)............................ 582,418 5.3% 4.4%
Peter L. Myers, Ph.D.(9)................................ 272,501 2.5% 2.1%
Philippe O. Chambon, MD., Ph.D.(3)...................... 1,501,729 13.7% 11.3%
Arthur Reidel(10)....................................... 20,000 * *
William Scott, Ph.D.(11)................................ 20,000 * *
Lee R. McCracken(12).................................... 93,750 * *
John Saunders, Ph.D.(13)................................ 88,017 * *
Steven L. Teig(14)...................................... 246,876 2.2% 1.9%
All directors and executive officers
as a group (10 persons)(15)........................... 4,155,165 37.0% 30.8%
</TABLE>

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

* Represents beneficial ownership of less than one percent of the outstanding
shares of the Company's Common Stock.

(1) Except as indicated in the footnotes to this table, the persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock shown as beneficially owned by them. Share ownership in
each case includes shares issuable upon exercise of certain outstanding
options as described in the footnotes below. The address for those
individuals for which an address is not otherwise indicated is: 9050 Camino
Santa Fe, San Diego, CA 92121.

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<PAGE> 61

(2) Percentage of ownership is calculated pursuant to Commission Rule
13d-3(d)(1).

(3) Includes 1,386,331 shares purchased by Sprout Capital VII, L.P. and 115,398
shares purchased by DLJ Capital Corporation. DLJ Capital Corporation is the
managing general partner of Sprout Capital VII, L.P. Dr. Chambon is a
Director of the Company, a general partner of Sprout Capital VII, L.P. and
Divisional Vice President of DLJ Capital Corporation. Dr. Chambon disclaims
beneficial ownership of such shares except to the extent of his pecuniary
interest therein.

(4) Includes 1,109,962 shares held by Sequoia Capital VI, 60,988 shares held by
Sequoia Technology Partners VI, 33,012 shares held by Sequoia XXIV and
15,780 shares held by Sequoia 1995, each of which is affiliated with
Sequoia Partners. Sequoia Partners is the general partner of Sequoia
Capital VI. Sequoia Partners has eight general partners, who are also the
general partners of Sequoia Technology Partners VI. Also includes 16,613
shares, 913 shares and 731 shares held by Sequoia Capital VI, Sequoia
Technology Partners VI and Sequoia XXIV, respectively, issuable upon
exercise of warrants exercisable within 60 days of February 28, 1998. Mr.
Lamond is a Director of the Company and a general partner of Sequoia
Partners. Mr. Lamond disclaims beneficial ownership of such shares except
to the extent of his pecuniary interest therein.

(5) In the event the expression of interest by Elan International Services Ltd.
in acquiring approximately $2 million of the shares of Common Stock offered
hereby is realized (at an assumed initial public offering price of $9.00
per share), "Shares Beneficially Owned" would be 1,222,222 and "Percentage
of Shares Beneficially Owned After Offering" would be 9.2%.

(6) Includes 134,113 shares purchased by the First National Bank of Chicago as
Custodian to the Brinson Trust Company as Trustee of the Brinson MAP
Venture Capital Fund III and 822,340 shares purchased by The First National
Bank of Chicago as Custodian to the Brinson Venture Capital Fund III, L.P.

(7) Includes 249,803 shares held by Sorrento Ventures II, L.P. and 501,064
shares held by Sorrento Growth Partners I, L.P.

(8) Includes 100,001 shares issuable upon exercise of options exercisable
within 60 days of February 28, 1998.

(9) Includes 50,001 shares issuable upon exercise of options exercisable within
60 days of February 28, 1998.

(10) Includes 20,000 shares issuable upon exercise of options exercisable within
60 days of February 28, 1998.

(11) Includes 20,000 shares issuable upon exercise of options exercisable within
60 days of February 28, 1998.

(12) Includes 8,750 shares held by the Rufus L. McCracken Trust, dated 6/21/91,
of which Mr. McCracken is the sole Trustee.

(13) Includes 4,192 shares issuable upon exercise of options exercisable within
60 days of February 28, 1998.

(14) Includes 50,001 shares issuable upon exercise of options exercisable within
60 days of February 28, 1998.

(15) Includes 262,451 shares issuable upon the exercise of options or warrants
exercisable within 60 days of February 28, 1998.

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<PAGE> 62

DESCRIPTION OF CAPITAL STOCK

Upon completion of this offering, the Company will be authorized to issue
40,000,000 shares of Common Stock, $0.001 par value per share, and 5,000,000
shares of undesignated Preferred Stock, $0.001 par value per share.

COMMON STOCK

As of March 31, 1998, there were outstanding, and held of record by
approximately 130 stockholders, 3,227,005 shares of Common Stock and shares of
Preferred Stock that will be converted into 7,754,933 shares of Common Stock
upon the completion of this offering. The holders of Common Stock are entitled
to one vote for each share held of record on all matters submitted to a vote of
the stockholders. Subject to preferences that may be applicable to any
outstanding shares of Preferred Stock, holders of Common Stock are entitled to
receive ratably such dividends as may be declared by the Board out of funds
legally available. See "Dividend Policy." All outstanding shares of Common Stock
are fully paid and nonassessable.

PREFERRED STOCK

After completion of this offering, the Board will have the authority,
without further action by the stockholders, to issue up to 5,000,000 shares of
Preferred Stock in one or more series and to fix the rights, priorities,
preferences, qualifications, limitations and restrictions, including dividend
rights, conversion rights, voting rights, terms of redemption, terms of sinking
funds, liquidation preferences and the number of shares constituting any series
or the designation of such series, which could decrease the amount of earnings
and assets available for distribution to holders of Common Stock or adversely
affect the rights and powers, including voting rights, of the holders of the
Common Stock. The issuance of Preferred Stock could have the effect of delaying
or preventing a change in control of the Company or make removal of management
more difficult. Additionally, the issuance of Preferred Stock may have the
effect of decreasing the market price of the Common Stock and may adversely
affect the voting and other rights of the holders of Common Stock. There are
currently no shares of Preferred Stock outstanding and the Company has no
current plans to issue any of the Preferred Stock.

WARRANTS

In December 1994, in conjunction with an equipment lease financing, the
Company issued a warrant to Comdisco, Inc. to purchase up to 20,914 shares of
Common Stock at $2.00 per share, exercisable at any time and prior to the
earlier of December 20, 2004 or five years following the Company's initial
public offering. The warrant contains provisions for the adjustment of the
exercise price and the aggregate number of shares issuable upon exercise of the
warrant under certain circumstances, including stock dividends, stock splits,
reorganizations, reclassifications or consolidations. The warrant provides that
the warrant holder may exercise the warrant without payment of cash by
surrendering the warrant and receiving shares of Common Stock equal to the value
of the warrant surrendered.

In June 1995, in connection with a product development collaboration, the
Company issued a warrant to LJL BioSystems, Inc. to purchase 8,750 shares of
Common Stock, exercisable at any time and prior to June 15, 2000, at $0.30 per
share. The warrant contains provisions for the adjustment of the exercise price
and the aggregate number of shares issuable upon exercise of the warrant under
certain circumstances, including stock dividends, stock splits, reorganizations,
reclassifications or consolidations.

In August 1995, in connection with the Series C Preferred Stock private
placement, the Company issued warrants to five investors to purchase an
aggregate of 30,242 shares of Common Stock, exercisable at any time and prior to
August 2000 at $2.48 per share. Each warrant contains provisions for the
adjustment of the exercise price and the aggregate number of shares issuable
upon exercise of the warrant under certain circumstances, including stock
dividends, stock splits, reorganizations,

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<PAGE> 63

reclassifications or consolidations. Each warrant provides that the warrant
holder may exercise the warrant without payment of cash by surrendering the
warrant and receiving shares of Common Stock equal to the value of the warrant
surrendered.

In April 1996, in conjunction with equipment lease financings, the Company
issued warrants to Comdisco, Inc. to purchase up to an aggregate of 35,383
shares of Common Stock at $2.48 per share, exercisable at any time and prior to
the earlier of April 2003 or three years after the Company's initial public
offering. The number of shares issuable pursuant to these warrants was dependent
on the aggregate amount financed with Comdisco, and pursuant to these warrants,
Comdisco has the right to purchase an aggregate of 26,647 shares of the Company.
Each warrant contains provisions for the adjustment of the exercise price and
the aggregate number of shares issuable upon exercise of each warrant under
certain circumstances, including stock dividends, stock splits, reorganizations,
reclassifications or consolidations. Each warrant provides that the warrant
holder may exercise the warrant without payment of cash by surrendering the
warrant and receiving shares of Common Stock equal to the value of the warrant
surrendered.

In May 1996, in conjunction with an equipment lease financing, the Company
issued warrants to Silicon Valley Bank and MMC/GATX Partnership No. 1 to
purchase up to 6,896 and 21,331 shares of Common Stock, respectively, at $2.48
per share, respectively, exercisable at any time and prior to the earlier of May
2006 or five years following the Company's initial public offering. Each warrant
contains provisions for the adjustment of the exercise price and the aggregate
number of shares issuable upon exercise of each warrant under certain
circumstances, including stock dividends, stock splits, reorganizations,
reclassifications or consolidations. Each warrant provides that the warrant
holder may exercise the warrant without payment of cash by surrendering the
warrant and receiving shares of Common Stock equal to the value of the warrant
surrendered.

In June 1996, in conjunction with equipment lease financings, the Company
issued warrants to Comdisco, Inc. to purchase up to an aggregate of 24,698
shares of Common Stock at $2.48 per share, exercisable at any time and prior to
the earlier of June 2003 or three years after the Company's initial public
offering. Each warrant contains provisions for the adjustment of the exercise
price and the aggregate number of shares issuable upon exercise of each warrant
under certain circumstances, including stock dividends, stock splits,
reorganizations, reclassifications or consolidations. Each warrant provides that
the warrant holder may exercise the warrant without payment of cash by
surrendering the warrant and receiving shares of Common Stock equal to the value
of the warrant surrendered.

REGISTRATION RIGHTS

The holders of approximately 7,754,933 shares of Common Stock or their
permitted transferees (the "Holders") are entitled to certain rights with
respect to the registration of such shares under the Securities Act. Under the
terms of agreements between the Company and such Holders, if the Company
proposes to register any of its securities under the Securities Act for its own
account, such Holders are entitled to notice of such registration and are
entitled to include shares of such Common Stock therein, provided, among other
conditions, that the underwriters of any such offering have the right to limit
the number of shares included in such registration. In addition, Holders of at
least 50% of approximately 7,754,933 shares of Common Stock with demand
registration rights may require the Company to prepare and file a registration
statement under the Securities Act with respect to the shares entitled to demand
registration rights, and the Company is required to use its diligent best
efforts to effect such registration, subject to certain conditions and
limitations. The Company is not obligated to effect more than two of these
stockholder-initiated registrations nor to effect such a registration within 180
days following an offering of the Company's securities, including the Offering
made hereby. The Holders may also request the Company to register such shares on
Form S-3 provided the shares registered have an aggregate market value of at
least $500,000. The Company is not obligated to effect more than one of these
registrations pursuant to Form S-3 in any 12-month period. Generally, the
Company is required to bear the expense of all such registrations. The
registration

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<PAGE> 64

rights of each Holder expires at such time after the Offering as all shares held
by such Holder can be sold within any three-month period pursuant to Rule 144.
All rights of the Holders to require registration of the resale of their shares
in connection with this Offering have been waived.

POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS

Certificate of Incorporation and Restated Bylaws

The Company's Certificate of Incorporation authorizes the Board to
establish one or more series of undesignated Preferred Stock, the terms of which
can be determined by the Board at the time of issuance. See "-- Preferred
Stock." The Certificate of Incorporation also provides that all stockholder
action must be effected at a duly called meeting of stockholders and not by a
consent in writing. The Company's Restated Bylaws provide that the Company's
Board will be classified into three classes of directors beginning at the next
annual meeting of stockholders. See "Management -- Executive Officers, Key
Employees and Directors." In addition, the Restated Bylaws do not permit
stockholders of the Company to call a special meeting of stockholders; only the
Company's Chief Executive Officer, President, Chairman of the Board or a
majority of the Board are permitted to call a special meeting of stockholders.
The Restated Bylaws also require that stockholders give advance notice to the
Company's secretary of any nominations for director or other business to be
brought by stockholders at any stockholders' meeting and require a supermajority
vote of members of the Board and/or stockholders to amend certain Restated Bylaw
provisions. These provisions of the Certificate of Incorporation and the
Restated Bylaws could discourage potential acquisition proposals and could delay
or prevent a change in control of the Company. Such provisions may also have the
effect of preventing changes in the management of the Company.

Delaware Anti-Takeover Statute

The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203") which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder (defined as any person or entity that is the beneficial owner of at
least 15% of a corporation's voting stock) for a period of three years following
the time that such stockholder became an interested stockholder, unless: (i)
prior to such time, the board of directors of the corporation approved either
the business combination or the transaction that resulted in the stockholder's
becoming an interested stockholder; (ii) upon consummation of the transaction
that resulted in the stockholder's 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 outstanding, those shares owned (x) by persons
who are directors and also officers and (y) by employee stock plans in which
employee participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer;
or (iii) at or subsequent to such time, the business combination is approved by
the Board and authorized at an annual or special meeting of stockholders, and
not by written consent, by the affirmative vote of at least two-thirds of the
outstanding voting stock that is not owned by the interested stockholder.

Section 203 defines business combination to include:. (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, lease, exchange, mortgage, transfer, pledge or other disposition involving
the interested stockholder and 10% or more of the assets of the corporation;
(iii) subject to certain exceptions, any transaction which results in the
issuance or transfer by the corporation of any stock of the corporation to the
interested stockholder; (iv) any transaction involving the corporation that has
the effect of increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested stockholder; or
(v) the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or through
the corporation.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is American Stock
Transfer and Trust Company.

63
<PAGE> 65

SHARES ELIGIBLE FOR FUTURE SALE

Based upon the number of shares outstanding as of March 31, 1998 upon
completion of this offering, there will be 13,231,938 shares of Common Stock of
the Company outstanding. There were also approximately 49,000 shares covered by
vested options outstanding, which are not considered to be outstanding shares.
Of the outstanding shares, approximately 4,108,000 shares, including the
2,250,000 shares of Common Stock sold in this offering, will be immediately
eligible for resale in the public market without restriction under the
Securities Act, except that any shares purchased in this offering by affiliates
of the Company ("Affiliates"), as that term is defined in Rule 144 under the
Securities Act ("Rule 144"), may generally only be resold in compliance with
applicable provisions of Rule 144. Beginning approximately 90 days after the
date of this Prospectus, approximately 411,000 additional shares of Common Stock
(including approximately 65,000 shares covered by options exercisable within the
90-day period following the date of this Prospectus) will become eligible for
immediate resale in the public market, subject to compliance as to certain of
such shares with applicable provisions of Rules 144 and 701.

The Company, the executive officers and directors of the Company and
certain security holders have agreed pursuant to lock-up agreements that they
will not, without the prior written consent of BancAmerica Robertson Stephens,
offer, sell or otherwise dispose of the shares of Common Stock beneficially
owned by them for a period of 180 days from the date of this Prospectus. Each
holder who signed a lock-up agreement has agreed, subject to certain limited
exceptions, not to sell or otherwise dispose of any of the shares held by them
as of the date of this Prospectus for a period of 180 days after the date of
this Prospectus without the prior written consent of BancAmerica Robertson
Stephens. At the end of such 180-day period, approximately 8,980,000 shares of
Common Stock (including approximately 121,000 shares issuable upon exercise of
vested options) will be eligible for immediate resale, subject to compliance
with Rule 144 and Rule 701. The remainder of the approximately 4,252,000 shares
of Common Stock outstanding or issuable upon exercise of options held by
existing stockholders or option holders will become eligible for sale at various
times over a period of less than two years and could be sold earlier if the
holders exercise any available registration rights or upon vesting pursuant to
the Company's standard four year vesting schedule.

In general, under Rule 144 as recently amended, beginning approximately 90
days after the effective date of the Registration Statement of which this
Prospectus is a part, a stockholder, including an Affiliate, who has
beneficially owned his or her restricted securities (as that term is defined in
Rule 144) for at least one year from the later of the date such securities were
acquired from the Company or (if applicable) the date they were acquired from an
Affiliate is entitled to sell, within any three-month period, a number of such
shares that does not exceed the greater of 1% of the then outstanding shares of
Common Stock (approximately 132,000 shares immediately after the offering) or
the average weekly trading volume in the Common Stock during the four calendar
weeks preceding the date on which notice of such sale was filed under Rule 144,
provided certain requirements concerning availability of public information,
manner of sale and notice of sale are satisfied. In addition, under Rule 144(k),
if a period of at least two years has elapsed between the later of the date
restricted securities were acquired from the Company or (if applicable) the date
they were acquired from an Affiliate of the Company, a stockholder who is not an
Affiliate of the Company at the time of sale and has not been an Affiliate of
the Company for at least three months prior to the sale is entitled to sell the
shares immediately without compliance with the foregoing requirements under Rule
144.

Securities issued in reliance on Rule 701 (such as shares of Common Stock
that may be acquired pursuant to the exercise of certain options granted prior
to this offering) are also restricted securities and, beginning 90 days after
the date of this Prospectus, may be sold by stockholders other than an Affiliate
of the Company subject only to the manner of sale provisions of Rule 144 and by
an Affiliate under Rule 144 without compliance with its one-year holding period
requirement.

Prior to this offering, there has been no public market for the Common
Stock. No prediction can be made as to the effect, if any, that market sales of
shares or the availability of shares for sale will have

64
<PAGE> 66

on the market price of the Common Stock prevailing from time to time. The
Company is unable to estimate the number of shares that may be sold in the
public market pursuant to Rule 144, since this will depend on the market price
of the Common Stock, the personal circumstances of the sellers and other
factors. Nevertheless, sales of significant amounts of the Common Stock of the
Company in the public market could adversely affect the market price of the
Common Stock and could impair the Company's ability to raise capital through an
offering of its equity securities.

In addition, the Company intends to register on the effective date of this
offering 1,072,170 shares of Common Stock subject to outstanding options or
reserved for issuance under the Company's 1997 Stock Incentive Plan plus 150,000
shares of Common Stock reserved for issuance under its 1997 Employee Stock
Purchase Plan. Further, upon expiration of such lock-up agreements, holders of
approximately 7,754,933 shares of Common Stock will be entitled to certain
registration rights with respect to such shares. If such holders, by exercising
their registration rights, cause a large number of shares to be registered and
sold in the public market, such sales could have a material adverse effect on
the market price of the Common Stock.

65
<PAGE> 67

UNDERWRITING

The Underwriters named below, acting through their representatives,
BancAmerica Robertson Stephens, Donaldson, Lufkin & Jenrette Securities
Corporation and Smith Barney Inc. (the "Representatives"), have severally agreed
with the Company, subject to the terms and conditions of the Underwriting
Agreement, to purchase the numbers of shares of Common Stock set forth opposite
their respective names below. The Underwriters are committed to purchase and pay
for all such shares if any are purchased.

<TABLE>
<CAPTION>
NUMBER
OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
BancAmerica Robertson Stephens..............................
Donaldson, Lufkin & Jenrette Securities Corporation.........
Smith Barney Inc............................................
---------
Total............................................. 2,250,000
=========
</TABLE>

The Representatives have advised the Company that the Underwriters propose
to offer shares of the Common Stock to the public at the initial public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession of not in excess of $ per share, of which
$ may be reallowed to other dealers. After the initial public offering,
the public offering price, concession and reallowance to dealers may be reduced
by the Representatives. No such reduction shall change the amount of proceeds to
be received by the Company as set forth on the cover page of this Prospectus.

The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to 337,500
additional shares of Common Stock, at the same price per share as will be paid
for the 2,250,000 shares that the Underwriters have agreed to purchase. To the
extent that the Underwriters exercise such option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage of such
additional shares that the number of shares of Common Stock to be purchased by
it shown in the above table represents as a percentage of the 2,250,000 shares
offered hereby. If purchased, such additional shares will be sold by the
Underwriters on the same terms as those on which the 2,250,000 shares are being
sold.

The Underwriting Agreement contains covenants of indemnity among the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the Underwriting Agreement.

Each officer and director and certain holders of shares of the Company's
Common Stock have agreed with the Representatives, for a period of 180 days
after the date of this Prospectus (the "Lock-Up Period"), subject to certain
exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose
of, loan, pledge or grant any rights with respect to any shares of Common Stock,
any options or warrants to purchase any shares of Common Stock, or any
securities convertible into or exchangeable for shares of Common Stock owned as
of the date of this Prospectus or thereafter acquired directly by such holders
or with respect to which they have or hereafter acquire the power of
disposition, without the prior written consent of BancAmerica Robertson
Stephens. However, BancAmerica Robertson Stephens may, in its sole discretion
and at any time without notice, release all or any portion of the securities
subject to lock-up agreements. There are no agreements between the
Representatives and any of the Company's stockholders providing consent by the
Representatives to the sale of shares prior to the expiration of the Lock-Up
Period. The Company has agreed that during the Lock-Up Period, the Company will
not, subject to certain exceptions, without the prior written consent of
BancAmerica Robertson Stephens, (i) consent to the disposition of any shares
held by stockholders prior to the expiration of the Lock-Up Period or (ii)
issue, sell, contract to sell or otherwise dispose of, any shares of Common
Stock, any options or warrants to purchase any shares of Common Stock or any
securities convertible into, exercisable for or exchangeable for shares of
Common Stock, other than the Company's sale of shares in this offering, the
issuance of Common Stock upon the exercise of

66
<PAGE> 68

outstanding options and warrants and the Company's issuance of options and stock
under the existing stock option and stock purchase plans. See "Shares Eligible
for Future Sale."

The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority in excess of 5% of the number of shares of
Common Stock offered hereby.

Prior to this offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
Common Stock offered hereby will be determined through negotiations between the
Company and the Representatives. Among the factors to be considered in such
negotiations are prevailing market conditions, certain financial information of
the Company, market valuations of other companies that the Company and the
Representatives believe to be comparable to the Company, estimates of the
business potential of the Company, the present state of the Company's
development and other factors deemed relevant.

Certain persons participating in this offering may engage in transactions,
including syndicate covering transactions or the imposition of penalty bids,
which may involve the purchase of Common Stock on the Nasdaq National Market or
otherwise. Such transactions may stabilize or maintain the market price of the
Common Stock at a level above that which might otherwise prevail in the open
market and, if commenced, may be discontinued at any time.

The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in the offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is a
bid for or the purchase of the Common Stock on behalf of the Underwriters for
the purpose of fixing or maintaining the price of the Common Stock. A "syndicate
covering transaction" is the bid for or the purchase of the Common Stock on
behalf of the Underwriters to reduce a short position incurred by the
Underwriters in connection with the offering. A "penalty bid" is an arrangement
permitting the Representatives to reclaim the selling concession otherwise
accruing to an Underwriter or syndicate member in connection with the offering
if the Common Stock originally sold by such Underwriter or syndicate member is
purchased by the Representatives in a syndicate covering transaction and has
therefore not been effectively placed by such Underwriter or syndicate member.
The Representatives have advised the Company that such transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.

The offering is being conducted in accordance with Rule 2720 ("Rule 2720")
of the National Association of Securities Dealers, Inc. (the "NASD") which
provides that, among other things, when an NASD member firm participates in the
offering of equity securities of a company with whom such member has a "conflict
of interest" (as defined in Rule 2720), the initial public offering price can be
no higher than that recommended by a "qualified independent underwriter" (as
defined in Rule 2720) (a "QIU"). BancAmerica Robertson Stephens is serving as
the QIU in the offering and will recommend a price in compliance with the
requirements of Rule 2720. BancAmerica Robertson Stephens has performed due
diligence investigations and reviewed and participated in the preparation of
this Prospectus and the Registration Statement of which this Prospectus forms a
part. BancAmerica Robertson Stephens, in its capacity as QIU, will receive no
additional compensation as such in connection with the offering.

67
<PAGE> 69

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Brobeck, Phleger & Harrison LLP, San Diego, California. Partners of
such firm own 2,500 shares of the Company's Common Stock. Certain legal matters
will be passed upon for the Underwriters by Cooley Godward LLP, San Diego,
California.

EXPERTS

The financial statements of CombiChem for the years ended December 31,
1995, 1996 and 1997 appearing in this Prospectus and the Registration Statement
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon appearing elsewhere herein and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.

ADDITIONAL INFORMATION

The Company has filed with the Commission the Registration Statement under
the Securities Act with respect to the Common Stock offered hereby. This
Prospectus, which is part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement and the exhibits and
schedules filed therewith. For further information with respect to the Company
and the Common Stock offered hereby, reference is hereby made to such
Registration Statement and to the exhibits and schedules filed therewith.
Statements contained in this Prospectus regarding the contents of any contract
or other document are not necessarily complete, and in each instance reference
is made to the copy of such contract or document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respect by
such reference. The Registration Statement, including the exhibits and schedules
thereto, may be inspected without charge at the principal office of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional
offices of the Commission located at Seven World Trade Center, Suite 1300, New
York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and copies of all of any part thereof may be obtained
at prescribed rates from the Commission's Public Reference Section at such
addresses. Also, the Commission maintains a World Wide Web site on the Internet
at http://www.sec.gov that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
Commission. Upon approval of the Common Stock for quotation on the Nasdaq
National Market, such reports, proxy and information statements and other
information also can be inspected at the office of Nasdaq Operations, 1735 K
Street, N.W., Washington, D.C. 20006.

68
<PAGE> 70

COMBICHEM, INC.
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Balance Sheets at December 31, 1996 and 1997 and March 31,
1998 (unaudited).......................................... F-3
Statements of Operations for the years ended December 31,
1995, 1996 and 1997 and the three months ended March 31,
1997 (unaudited) and 1998 (unaudited)..................... F-4
Statements of Redeemable Preferred Stock and Stockholders'
Equity (Deficit) for the three years in the period ended
December 31, 1997 and the three months ended March 31,
1998 (unaudited).......................................... F-5
Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997 and the three months ended March 31,
1997 (unaudited) and 1998 (unaudited)..................... F-6
Notes to Financial Statements............................... F-7
</TABLE>

F-1
<PAGE> 71

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
CombiChem, Inc.

We have audited the accompanying balance sheets of CombiChem, Inc. as of
December 31, 1996 and 1997, and the related statements of operations, redeemable
preferred stock and stockholders' equity (deficit), and cash flows for each of
the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CombiChem, Inc. at December
31, 1996 and 1997, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.

ERNST & YOUNG LLP
San Diego, California
January 13, 1998, except
for Note 10, as to
which the date is
March 31, 1998

F-2
<PAGE> 72

COMBICHEM, INC.
BALANCE SHEETS
ASSETS

<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
--------------------------- MARCH 31, MARCH 31,
1996 1997 1998 1998
------------ ------------ ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.................. $ 366,983 $ 5,866,635 $ 3,913,546
Short-term investments..................... 12,166,132 11,054,725 10,574,926
Accounts receivable........................ 198,419 527,633 1,921,921
Prepaid expenses and other current
assets................................... 345,228 767,594 894,540
------------ ------------ ------------
Total current assets................ 13,076,762 18,216,587 17,304,933
Restricted cash.............................. 325,000 262,143 262,143
Property and equipment, net.................. 2,899,155 5,961,177 7,123,643
Deposits and other assets.................... 138,095 879,845 1,029,431
Notes receivable from
employee/stockholders...................... 218,991 206,303 206,303
------------ ------------ ------------
Total assets........................ $ 16,658,003 $ 25,526,055 $ 25,926,453
============ ============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable........................... $ 508,538 $ 881,436 $ 957,836
Accrued liabilities........................ 734,601 1,394,046 1,343,158
Deferred revenue........................... 2,130,000 1,475,752 2,666,666
Current portion of obligations under
capital leases........................... 758,085 1,569,197 1,770,746
------------ ------------ ------------
Total current liabilities........... 4,131,224 5,320,431 6,738,406
Deferred rent................................ 30,409 91,227 103,863
Obligations under capital leases, less
current portion............................ 1,752,646 3,283,373 3,566,327
Commitments
Redeemable convertible preferred stock, $.001
par value, 63,196,296 shares authorized;
30,787,135, 31,019,635 and 31,019,635
shares issued and outstanding at December
31, 1996 and 1997, and March 31, 1998,
respectively (5,000,000 shares authorized,
no shares issued and outstanding pro
forma)..................................... 23,106,728 23,129,968 23,129,968 $ --
Stockholders' equity (deficit):
Common stock, $.001 par value, 80,000,000
shares authorized; 711,605, 3,227,005 and
3,227,005 shares issued and outstanding
at December 31, 1996 and 1997 and March
31, 1998, respectively, (40,000,000
shares authorized, 10,981,938 shares
issued and outstanding pro forma)........ 712 3,227 3,227 10,982
Additional paid-in capital................. 135,340 12,519,952 12,519,952 35,642,165
Deferred compensation...................... -- (1,582,320) (1,471,911) (1,471,911)
Notes receivable from stockholders......... -- (419,061) (419,061) (419,061)
Accumulated deficit........................ (12,499,056) (16,820,742) (18,244,318) (18,244,318)
------------ ------------ ------------ ------------
Total stockholders' equity
(deficit)......................... (12,363,004) (6,298,944) (7,612,111) $ 15,517,857
------------ ------------ ------------ ============
Total liabilities and stockholders'
equity (deficit).................. $ 16,658,003 $ 25,526,055 $ 25,926,453
============ ============ ============
</TABLE>

See accompanying notes.
F-3
<PAGE> 73

COMBICHEM, INC.
STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Revenue under collaborative
agreements:
Project initiation fees and
milestone payments....... $ -- $ 2,500,000 $ 3,333,331 $ -- $ 750,000
Research and development
funding.................. -- 420,000 4,137,250 490,832 1,871,586
Grant revenue................. 50,440 47,400 -- -- --
----------- ----------- ----------- ----------- -----------
Total revenue......... 50,440 2,967,400 7,470,581 490,832 2,621,586
Operating expenses:
Research and development:
Collaborative.............. -- 420,000 4,316,938 137,484 1,923,191
Proprietary................ 4,763,043 4,820,253 4,399,620 1,237,358 1,314,947
----------- ----------- ----------- ----------- -----------
4,763,043 5,240,253 8,716,558 1,374,842 3,238,138
General and administrative.... 2,000,652 2,845,074 3,286,569 872,413 891,481
----------- ----------- ----------- ----------- -----------
Total operating
expenses............ 6,763,695 8,085,327 12,003,127 2,247,255 4,129,619
Loss from operations............ (6,713,255) (5,117,927) (4,532,546) (1,756,423) (1,508,033)
Interest income................. 94,737 144,639 662,525 189,386 235,706
Interest expense................ (56,040) (145,139) (251,665) (60,168) (121,249)
Foreign tax expense............. -- -- (200,000) -- (30,000)
----------- ----------- ----------- ----------- -----------
Net loss........................ $(6,674,558) $(5,118,427) $(4,321,686) $(1,627,205) $(1,423,576)
=========== =========== =========== =========== ===========
Pro forma basic net loss per
share......................... $ (0.49) $ (0.19) $ (0.14)
=========== =========== ===========
Shares used in computing pro
forma basic net loss per
share......................... 8,804,000 8,429,000 10,202,000
=========== =========== ===========
</TABLE>

See accompanying notes.
F-4
<PAGE> 74

COMBICHEM, INC.

STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
REDEEMABLE ------------------------------------------------------------------
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE
------------------------ ------------------- PAID-IN DEFERRED FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION STOCKHOLDERS
---------- ----------- --------- ------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994....... 3,400,000 $ 2,250,000 433,125 $ 433 $ 23,567 $ -- $ --
Sale of common stock............. -- -- 194,750 195 58,230 -- --
Issuance of common stock for
technology..................... -- -- 100,000 100 39,900 -- --
Sale of Series B preferred
stock.......................... 26,667 20,000 -- -- -- -- --
Sale of Series C preferred
stock.......................... 11,234,809 6,877,749 -- -- -- -- --
Conversion of notes payable and
interest into Series C
preferred stock................ 810,767 502,676 -- -- -- -- --
Repurchase and cancelation of
common stock................... -- -- (67,710) (68) (2,640) -- --
Net loss......................... -- -- -- -- -- -- --
---------- ----------- --------- ------ ----------- ----------- ---------
Balance at December 31, 1995....... 15,472,243 9,650,425 660,165 660 119,057 -- --
Sale of common stock............. -- -- 74,000 74 22,126 -- --
Sale of Series C preferred
stock.......................... 5,112,910 3,142,045 -- -- -- -- --
Sale of Series D preferred
stock.......................... 9,869,205 9,853,345 -- -- -- -- --
Conversion of notes payable and
interest into Series Z
preferred stock................ 332,777 460,913 -- -- -- -- --
Repurchase and cancellation of
common stock................... -- -- (22,560) (22) (5,843) -- --
Net loss......................... -- -- -- -- -- -- --
---------- ----------- --------- ------ ----------- ----------- ---------
Balance at December 31, 1996....... 30,787,135 23,106,728 711,605 712 135,340 -- --
Sale of common stock............. -- -- 1,305,090 1,305 10,071,414 -- --
Sale of Series J preferred
stock.......................... 232,500 23,240 -- -- -- -- --
Deferred compensation related to
stock options.................. -- -- -- -- 1,773,973 (1,773,973) --
Amortization of deferred
compensation................... -- -- -- -- -- 191,653 --
Sale of common stock for notes
receivable..................... -- -- 1,210,310 1,210 539,225 -- (540,435)
Repayment of notes receivable.... -- -- -- -- -- -- 121,374
Net loss......................... -- -- -- -- -- -- --
---------- ----------- --------- ------ ----------- ----------- ---------
Balance at December 31, 1997....... 31,019,635 23,129,968 3,227,005 3,227 12,519,952 (1,582,320) (419,061)
Amortization of deferred
compensation (unaudited)....... -- -- -- -- -- 110,409 --
Net loss (unaudited)............. -- -- -- -- -- -- --
---------- ----------- --------- ------ ----------- ----------- ---------
Balance at March 31, 1998
(unaudited)...................... 31,019,635 $23,129,968 3,227,005 $3,227 $12,519,952 $(1,471,911) $(419,061)
========== =========== ========= ====== =========== =========== =========

<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
--------------------------------
TOTAL
STOCKHOLDERS'
ACCUMULATED EQUITY
DEFICIT (DEFICIT)
------------ ----------------
<S> <C> <C>
Balance at December 31, 1994....... $ (706,071) $ (682,071)
Sale of common stock............. -- 58,425
Issuance of common stock for
technology..................... -- 40,000
Sale of Series B preferred
stock.......................... -- --
Sale of Series C preferred
stock.......................... -- --
Conversion of notes payable and
interest into Series C
preferred stock................ -- --
Repurchase and cancelation of
common stock................... -- (2,708)
Net loss......................... (6,674,558) (6,674,558)
------------ ------------
Balance at December 31, 1995....... (7,380,629) (7,260,912)
Sale of common stock............. -- 22,200
Sale of Series C preferred
stock.......................... -- --
Sale of Series D preferred
stock.......................... -- --
Conversion of notes payable and
interest into Series Z
preferred stock................ -- --
Repurchase and cancellation of
common stock................... -- (5,865)
Net loss......................... (5,118,427) (5,118,427)
------------ ------------
Balance at December 31, 1996....... (12,499,056) (12,363,004)
Sale of common stock............. -- 10,072,719
Sale of Series J preferred
stock.......................... -- --
Deferred compensation related to
stock options.................. -- --
Amortization of deferred
compensation................... -- 191,653
Sale of common stock for notes
receivable..................... -- --
Repayment of notes receivable.... -- 121,374
Net loss......................... (4,321,686) (4,321,686)
------------ ------------
Balance at December 31, 1997....... (16,820,742) (6,298,944)
Amortization of deferred
compensation (unaudited)....... -- 110,409
Net loss (unaudited)............. (1,423,576) (1,423,576)
------------ ------------
Balance at March 31, 1998
(unaudited)...................... $(18,244,318) $ (7,612,111)
============ ============
</TABLE>

See accompanying notes.

F-5
<PAGE> 75

COMBICHEM, INC.
STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- -------------------------
1995 1996 1997 1997 1998
----------- ------------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................... $(6,674,558) $ (5,118,427) $(4,321,686) $(1,627,205) $(1,423,576)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation of property and
equipment............................ 106,763 310,765 849,285 112,191 330,607
Amortization of premium on short-term
investments.......................... -- -- 92,709 26,230 41,214
Deferred rent........................... -- 30,409 60,818 -- 12,636
Deferred revenue........................ -- 2,130,000 (654,248) (790,832) 1,190,914
In-process research and development
acquired for convertible notes
payable and accrued interest......... 542,676 -- -- -- --
Amortization of deferred compensation... -- -- 191,651 -- 110,409
Stock issued for technology............. 40,000 -- -- -- --
Interest payable converted to preferred
stock................................ -- 20,913 -- -- --
Change in operating assets and
liabilities:
Accounts receivable.................. -- (198,419) (329,214) (89,769) (1,394,288)
Prepaid expenses and other current
assets............................. (164,995) (154,152) (422,366) 47,884 (19,248)
Accounts payable and accrued
liabilities........................ 443,095 607,106 1,032,345 (43,954) 25,515
----------- ------------ ----------- ----------- -----------
Net cash used in operating
activities......................... (5,707,019) (2,371,805) (3,500,706) (2,365,455) (1,125,817)
Cash flows from investing activities:
Purchases of short-term investments......... -- (12,166,132) (6,191,204) -- (2,561,415)
Maturities of short-term investments........ -- -- 7,416,825 4,139,760 3,000,000
Purchases of accrued interest on short-term
investments............................... -- -- (206,913) -- (107,698)
Purchases of property and equipment......... (638,878) (2,575,690) (3,911,307) (150,242) (1,492,794)
Deposits and other assets................... 9,923 (102,077) (741,750) 2,481 (149,587)
Notes receivable from employees............. (152,866) (66,125) 12,688 -- --
----------- ------------ ----------- ----------- -----------
Net cash used in investing
activities......................... (781,821) (14,910,024) (3,621,661) 3,991,999 (1,311,494)
Cash flows from financing activities:
Advances on capital lease obligations,...... 693,102 2,337,375 3,257,645 302,656 871,278
Principal repayments on capital lease
obligations............................... (108,870) (410,876) (915,816) (182,195) (387,056)
Issuance of redeemable convertible preferred
stock, net of issuance costs.............. 6,897,749 12,995,390 23,240 -- --
Issuance of common stock, net of repurchased
shares ................................... 55,717 16,335 10,072,719 -- --
Payments on note payable.................... (35,000) (100,000) -- -- --
Receipt of payment on note from
stockholder............................... -- -- 121,374 -- --
Restricted cash given as collateral for
letter of credit.......................... -- (325,000) 62,857 -- --
Proceeds from convertible notes payable..... 750,000 -- -- -- --
Repayments of convertible notes payable..... (250,000) -- -- -- --
----------- ------------ ----------- ----------- -----------
Net cash provided by financing
activities......................... 8,002,698 14,513,224 12,622,019 120,461 484,222
----------- ------------ ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents................................. 1,513,858 (2,768,605) 5,499,652 1,747,005 (1,953,089)
Cash and cash equivalents at beginning of
period...................................... 1,621,730 3,135,588 366,983 366,983 5,866,635
----------- ------------ ----------- ----------- -----------
Cash and cash equivalents at end of period.... $ 3,135,588 $ 366,983 $ 5,866,635 $ 2,113,988 $ 3,913,546
=========== ============ =========== =========== ===========
Supplemental disclosures of cash flow
information:
Interest paid................................. $ 56,040 $ 124,226 $ 258,109 $ 52,504 $ 120,289
=========== ============ =========== =========== ===========
Supplemental schedule of noncash investing and
financing activities:
Conversion of convertible notes payable and
interest payable to redeemable convertible
preferred stock............................. $ 502,676 $ 440,000 $ -- $ -- $ --
=========== ============ =========== =========== ===========
</TABLE>

See accompanying notes.
F-6
<PAGE> 76

COMBICHEM, INC.
NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1997

(Information subsequent to December 31, 1997 and
pertaining to March 31, 1998 and the three-month periods
ended March 31, 1997 and 1998 is unaudited)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Business

CombiChem, Inc. is a computational drug discovery company that is applying
its proprietary design technology and rapid synthesis capabilities to accelerate
the discovery process for new drugs. The Company believes its approach offers
pharmaceutical and biotechnology companies the opportunity to conduct their drug
discovery efforts in a more productive and cost-effective manner. Using its
Discovery Engine(TM) process, the Company focuses on the generation, evolution
and optimization of potential new lead candidates for its collaborative
partners, who will then develop, manufacture, market and sell any resulting
drugs. CombiChem believes that its process is widely applicable to a variety of
disease targets and therapeutic indications. In addition, the Company intends to
use its approach on internal programs to discover new lead candidates and then
to outlicense them to third parties, retaining a larger economic interest in
such candidates.

Cash, Cash Equivalents and Short-term Investments

Cash and cash equivalents consist of cash and highly liquid investments
with maturities of three months or less when purchased. The Company generally
invests its excess cash in U.S. government securities. Short-term investments
are recorded at amortized cost which approximates market value.

The Company applies Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities (SFAS No. 115),
to its investments. Under SFAS No. 115, the Company classifies its short-term
investments as "Available-for-Sale" and records such assets at estimated fair
value in the balance sheet, with unrealized gains and losses, if any, reported
in stockholders' equity. As of December 31, 1997, the cost of cash equivalents
and short-term investments approximated estimated fair value.

Concentration of Credit Risk

The Company invests its excess cash in debt instruments of financial
institutions and corporations with strong credit ratings. The Company has
established guidelines relative to diversification and maturities that maintain
safety and liquidity. The Company historically has not experienced any material
losses on its cash equivalents or short-term investments.

Property and Equipment

Property and equipment are carried at cost. Depreciation of equipment is
computed using the straight-line method over the estimated useful lives of the
assets, generally three to seven years. Leasehold improvements are amortized
over the shorter of the estimated useful lives of the assets or the remaining
term of the lease. Amortization of equipment under capital leases is reported
with depreciation of property and equipment.

Impairment of Long-Lived Assets

Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
(SFAS No. 121), requires impairment losses to be recorded on long-lived assets
used in operations when indicators of impairment are present and the

F-7
<PAGE> 77
COMBICHEM, INC.
NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1997

(Information subsequent to December 31, 1997 and
pertaining to March 31, 1998 and the three-month periods
ended March 31, 1997 and 1998 is unaudited)

undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. SFAS No. 121 also addresses the accounting for
long-lived assets that are expected to be disposed. There have not been any
impairments of long-lived assets to date.

Basic Net Loss Per Share and Pro Forma Basic Net Loss Per Share

Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 Earnings Per Share ("SFAS No. 128"). SFAS No. 128
requires the presentation of basic earnings (loss) per share and diluted
earnings (loss) per share, if more dilutive, for all periods presented.

In accordance with SFAS No. 128, basic net loss per share has been computed
using the weighted-average number of shares of Common Stock outstanding during
the period, except that pursuant to Securities and Exchange Commission Staff
Accounting Bulletin No. 98, if applicable, common shares issued in each of the
periods presented for nominal consideration have been included in the
calculation as if they were outstanding for all periods presented.

Pro forma basic net loss per share as presented in the Statement of
Operations has been computed as described above and also gives effect to the
conversion of the convertible Preferred Stock that will occur upon completion of
the Company's initial public offering (using the as-if converted method from the
original date of issuance.)

A reconciliation of shares used in the calculation of basic and pro forma
basic net loss per share follows (in thousands, except per share data):

<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------- ------------------------
1995 1996 1997 1997 1998
------- ------- ------- ------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss............................. $(6,675) $(5,118) $(4,322) $(1,627) $(1,424)
======= ======= ======= ======= =======
Weighted average shares of Common
Stock outstanding (shares used in
computing basic net loss per
share)............................. 348 453 1,075 732 2,447
======= ======= ======= ======= =======
Basic net loss per share............. $(19.18) $(11.30) $ (4.02) $ (2.22) $ (0.58)
======= ======= ======= ======= =======
Shares used in computing basic net
loss per share..................... 1,075 732 2,447
Adjustment to reflect the effect of
the assumed conversion of preferred
stock.............................. 7,729 7,697 7,755
------- ------- -------
Shares used in computing pro forma
basic net loss per share........... 8,804 8,429 10,202
======= ======= =======
Pro forma basic net loss per share... $ (0.49) $ (0.19) $ (0.14)
======= ======= =======
</TABLE>

Had the Company been in a net income position, diluted earnings per share
would have been presented and would have included the shares used in the
computation of pro forma basic net loss per share as well as additional
potential common shares related to outstanding options and warrants. The diluted
EPS computation is not included as all potential common shares are antidilutive.

F-8
<PAGE> 78
COMBICHEM, INC.
NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1997

(Information subsequent to December 31, 1997 and
pertaining to March 31, 1998 and the three-month periods
ended March 31, 1997 and 1998 is unaudited)

New Accounting Standards

In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income (SFAS No. 130) and SFAS No. 131, Segment
Information (SFAS No. 131). Both of these standards are effective for fiscal
years beginning after December 15, 1997. SFAS No. 130 requires that all
components of comprehensive income, including net income, be reported in the
financial statements in the period in which they are recognized. Comprehensive
income is defined as the change in equity during a period from transactions and
other events and circumstances from non-owner sources. Net income and other
comprehensive income, including foreign currency translation adjustments, and
unrealized gains and losses on investments, shall be reported, net of their
related tax effect, to arrive at comprehensive income. The Company does not
believe that comprehensive income or loss will be materially different than net
income or loss. SFAS No. 131 amends the requirements for public enterprises to
report financial and descriptive information about its reportable operating
segments. Operating segments, as defined in SFAS No. 131, are components of an
enterprise for which separate financial information is available and is
evaluated regularly by the Company in deciding how to allocate resources and in
assessing performance. The financial information is required to be reported on
the basis that is used internally for evaluating the segment performance. The
Company believes it operates in one business and operating segment and does not
believe adoption of these standards will have a material impact on the Company's
financial statements.

Revenues under Collaborative Agreements and Research and Development Costs

The Company currently generates revenue primarily through its collaborative
agreements, which provide for the analysis of data, design of informative
compound libraries and synthesis of compounds utilizing the Company's
proprietary technology. Contract research revenue is recognized at the time that
research activities are performed under the terms of the research contracts.
Contract payments are generally received in advance of the performance of the
related research activities. Such payments received in excess of amounts earned
are recorded as deferred revenue.

Project initiation fees are recognized as revenue upon contract execution.
These fees are non-refundable and the Company has no future performance
obligations related to such fees.

Advance payments received from collaborators, which require future services
to be performed by the Company, are recorded as deferred revenue. Such payments
are recognized as revenue upon completion by the Company of all related
performance obligations, as evidenced by the collaborator's written approval and
acceptance.

The Company has also received an option payment which is creditable against
future project initiation fees, if any, related to the selection of additional
targets by the collaborator. Such payment will be recognized as revenue upon the
earlier of the collaborator's selection of such additional target or written
confirmation of the collaborator's determination that it will not be selecting
any such additional targets.

The Company's accounts receivable consist of amounts due, which have either
been earned or deferred, but not yet received, under these agreements.
Substantially all of such receivables are expected to be collected within 30
days of the balance sheet date.

F-9
<PAGE> 79
COMBICHEM, INC.
NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1997

(Information subsequent to December 31, 1997 and
pertaining to March 31, 1998 and the three-month periods
ended March 31, 1997 and 1998 is unaudited)

Research and development costs are expensed as incurred. Costs of services
under the Company's collaborative agreements generally approximate the research
revenue under such agreements. Project initiation fees and milestone payments do
not have associated cost of services.

The Company's revenues are concentrated among a small number of customers,
as follows:

<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDING ENDING
DECEMBER 31 MARCH 31
-------------------- ------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Elan/Athena................................... -- -- 18% -- 10%
ICOS.......................................... -- -- -- -- --
Imclone....................................... -- -- * -- *
Roche......................................... -- 67% 30% 68% 57%
Sumitomo...................................... -- -- 39% -- 24%
Teijin........................................ -- 31% * 32% *
Other......................................... -- * -- -- --
</TABLE>

- ---------------
* Amount earned represents less than 10% of revenues for the period.

Stock-Based Compensation

As permitted by Statement of Financial Accounting Standards No. 123 (SFAS
No. 123), the Company has elected to follow Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB 25), and related
Interpretations in accounting for its employee stock options. Under APB 25, when
the exercise price of the Company's employee stock options is not less than the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.

Pro Forma Stockholders' Equity

In September 1997, the Board of Directors authorized management of the
Company to file a Registration Statement with the Securities and Exchange
Commission for the Company to sell shares of its common stock in an initial
public offering. If the initial public offering contemplated by this Prospectus
is consummated under the terms presently anticipated, all outstanding shares of
redeemable convertible preferred stock at March 31, 1998 will convert into
7,754,933 common shares.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Deferred Offering Costs

Included in Deposits and other Assets are approximately $903,000 in costs
incurred by the Company as of March 31, 1998 in conjunction with the
contemplated public offering. These costs will be offset against the proceeds of
the public offering.

F-10
<PAGE> 80
COMBICHEM, INC.
NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1997

(Information subsequent to December 31, 1997 and
pertaining to March 31, 1998 and the three-month periods
ended March 31, 1997 and 1998 is unaudited)

Reclassification

Reclassifications have been made to certain prior period amounts to conform
to the 1997 presentation.

2. BALANCE SHEET INFORMATION

Investments

There were no realized gains or losses on the sale of securities during the
three years ended December 31, 1997 or the three months ended March 31, 1998.
Unrealized losses were $2,224, $1,331 and $803 as of December 31, 1996 and 1997
and March 31, 1998, respectively.

All debt securities held by the Company at March 31, 1998, have a
contractual maturity less than one year. The amortized cost of the debt
securities approximates fair value. The fair value of "Available-for-Sale"
securities was $12,163,908, $11,053,394 and $10,574,123 at December 31, 1996 and
1997 and March 31, 1998, respectively. Actual maturities may differ from
contractual maturities because the issuers of the securities may have the right
to prepay obligations without prepayment penalties.

The Company's short-term investments classified as available for sale are
as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1996 1997 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Corporate bonds...................... $12,166,132 $10,555,534 $10,075,335
Tax exempt municipal bonds........... -- 499,191 499,591
----------- ----------- -----------
$12,166,132 $11,054,725 $10,574,926
=========== =========== ===========
</TABLE>

Property and Equipment

Property and equipment consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------- ------------------------
1996 1997 1997 1998
---------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Laboratory and computer equipment...... $1,759,990 $4,131,762 $2,027,728 $ 5,311,824
Leasehold improvements................. 1,373,465 2,524,919 1,224,400 2,913,293
Office furniture, fixtures and
equipment............................ 188,174 576,255 219,743 498,079
---------- ---------- ---------- -----------
3,321,629 7,232,936 3,471,871 8,723,196
Less accumulated depreciation and
amortization......................... (422,474) (1,271,759) (534,665) (1,599,553)
---------- ---------- ---------- -----------
$2,899,155 $5,961,177 $2,937,206 $ 7,123,643
========== ========== ========== ===========
</TABLE>

F-11
<PAGE> 81
COMBICHEM, INC.
NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1997

(Information subsequent to December 31, 1997 and
pertaining to March 31, 1998 and the three-month periods
ended March 31, 1997 and 1998 is unaudited)

3. NOTES PAYABLE

During 1996, the Company repaid a $100,000 non-interest bearing note with
cash and converted two notes payable totaling $440,000 and the related accrued
interest into 83,195 shares of Series Z convertible preferred stock.

4. COMMITMENTS

Leases

The Company leases its facilities in San Diego and Palo Alto under two
operating lease agreements that expire in May 2006 and October 2002,
respectively. Rent expense was approximately $86,000, $383,000 and $613,000 for
the years ended December 31, 1995, 1996 and 1997 and $115,000 and $187,000 for
the three months ended March 31, 1997 and 1998, respectively. Lease payments
under both agreements are subject to future increases based upon the Consumer
Price Index.

The Company leases certain equipment under capital lease obligations. Cost
and accumulated amortization of equipment under capital leases were $3,054,000
and $349,000 at December 31, 1996, $6,599,000 and $1,140,000 at December 31,
1997 and $7,269,000 and $1,474,000 at March 31, 1998, respectively.

Annual future minimum obligations for operating and capital leases as of
December 31, 1997 are as follows:

<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR ENDING DECEMBER 31: LEASES LEASES
------------------------ ---------- -----------
<S> <C> <C>
1998............................................ $ 662,795 $ 1,961,928
1999............................................ 683,341 1,722,250
2000............................................ 699,778 1,170,132
2001............................................ 712,106 797,403
2002............................................ 682,799 --
Thereafter......................................... 1,837,189 --
---------- -----------
Total minimum lease payments......................... $5,278,008 5,651,713
==========
Less amount representing interest.................... (799,143)
-----------
Present value of obligations under capital leases.... 4,852,570
Less current portion................................. (1,569,197)
-----------
Long-term obligations under capital leases . ........ $ 3,283,373
===========
</TABLE>

Consulting Agreements

The Company has entered into various consulting agreements with members of
its Scientific Advisory Board and others for aggregate minimum annual fees of
approximately $118,000. The agreements are cancelable by either party with
limited notice. During the years ended December 31, 1995, 1996 and 1997 and the
three months ended March 31, 1997 and 1998, the Company expensed approximately
$27,000, $43,000, $61,000, $11,000 and $31,000, respectively, for fees and
expense reimbursements paid to these consultants.

F-12
<PAGE> 82
COMBICHEM, INC.
NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1997

(Information subsequent to December 31, 1997 and
pertaining to March 31, 1998 and the three-month periods
ended March 31, 1997 and 1998 is unaudited)

5. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)

Changes in Capitalization

In September 1997, the Company reincorporated into Delaware which was
accomplished through a merger of the existing California corporation into a new
Delaware corporation. The ratio of exchange was one share of the California
corporation to one share of the Delaware corporation. The number of authorized
shares of the new Delaware corporation is 80,000,000 shares of Common Stock and
63,196,296 shares of Preferred Stock. Subsequent to the reincorporation, the
Company effected a one-for-four reverse stock split of the Common Stock. After
this reverse stock split of the Common Stock and in accordance with the
Company's Certificate of Incorporation, each share of the Preferred Stock is now
convertible into one quarter of a share of Common Stock at the option of the
holder or automatically on the date specified by written consent or agreement of
the holders of at least seventy percent (70%) of the outstanding shares of
Preferred Stock. The Company has received such written consent from the holders
of greater than seventy percent (70%) of the outstanding shares of Preferred
Stock so that the 31,019,635 shares of outstanding shares of Preferred Stock
shall be automatically converted into 7,754,933 shares of Common Stock upon the
closing of this offering. All share and per share amounts and stock option data
have been restated to retroactively give effect to the reincorporation, the
reverse stock split of the Common Stock and the related change in shares
outstanding. The Company intends to file an Amended and Restated Certificate of
Incorporation to become effective immediately prior to the closing of this
offering so that the authorized shares of the Company shall be 40,000,000 shares
of Common Stock and 5,000,000 shares of Preferred Stock.

Redeemable Convertible Preferred Stock

A summary of issued and outstanding preferred stock is as follows:

<TABLE>
<CAPTION>
LIQUIDATION
SHARES PREFERENCE
---------- -----------
<S> <C> <C>
Redeemable convertible preferred stock:
Series A......................................... 1,000,000 $ 500,000
Series B......................................... 2,226,667 1,670,000
Series C......................................... 17,158,486 10,638,261
Series D......................................... 9,869,205 9,869,205
---------- -----------
30,254,358 22,677,466
Convertible preferred stock:
Series J......................................... 232,500 23,240
Series Z......................................... 532,777 560,913
---------- -----------
765,277 584,153
---------- -----------
31,019,635 $23,261,619
========== ===========
</TABLE>

In 1994, the Company issued Series A and B redeemable convertible preferred
stock for cash at $0.50 and $0.75 per share, respectively. In October 1994, the
Company acquired certain intellectual property rights in exchange for 200,000
shares of the Company's Series Z convertible preferred stock valued at $0.50 per
share. During 1996, the Company converted two outstanding notes and related
accrued interest totalling $460,913 into 332,777 shares of Series Z convertible
preferred stock.

F-13
<PAGE> 83
COMBICHEM, INC.
NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1997

(Information subsequent to December 31, 1997 and
pertaining to March 31, 1998 and the three-month periods
ended March 31, 1997 and 1998 is unaudited)

In August 1995, the Company received approximately $6.9 million in net
proceeds from the issuance of 11,234,809 shares of Series C redeemable
convertible preferred stock at $0.62 per share. Pursuant to the terms of certain
promissory notes, the Company converted $502,676 of principal and accrued
interest into 810,767 shares of Series C redeemable convertible preferred stock
at $0.62 per share. In April 1996, upon the achievement of certain milestones,
the Company received an additional $3.1 million in net proceeds from the
issuance of an additional 5,112,910 shares of Series C redeemable convertible
preferred stock at $0.62 per share.

In November 1996, the Company received approximately $9.9 million in net
proceeds from the issuance of 9,869,205 shares of Series D redeemable
convertible preferred stock at $1.00 per share.

At the option of the holder, the shares of Series A, B, C and D redeemable
convertible preferred stock and Series J and Z convertible preferred stock are
convertible at any time into common stock, subject to certain anti-dilution
adjustments. The preferred shares automatically convert into common stock upon
the earlier of: 1) the closing of an underwritten public offering of common
stock at not less than $16.00 per common share and an aggregate offering price
of not less than $12 million or 2) the written election of at least 70% of the
preferred stockholders. The preferred stockholders have voting rights equal to
the common shares they would own upon conversion. The Company has reserved
7,754,933 shares of common stock for issuance upon conversion of the Series A,
B, C, D, J and Z preferred stock.

The Company's Certificate of Incorporation provides for redemption of
Series A, B, C and D redeemable convertible preferred stock at any time after
December 31, 1998, at the request of at least 70% of the holders of such series.
The redemption price is equal to the original issue price plus any declared but
unpaid dividends.

The preferred shareholders are entitled to noncumulative annual dividends
of $0.04, $0.06, $0.05, $0.08 and $0.04 per share of Series A, B, C and D
redeemable convertible preferred stock and Series Z convertible preferred stock,
respectively, if and when such dividends are declared by the Board of Directors.
No dividends have been declared to date.

In connection with employment agreements, certain employees received
options to purchase the Company's Series J convertible preferred stock
exercisable upon the achievement of certain milestones. Some of the milestones
were met during 1997, and the remainder were met in the first quarter of 1998,
and in connection therewith, the Company issued 232,500 shares of Series J
convertible preferred stock to the employees.

1995 Stock Option/Stock Issuance Plan

In 1995, the Board of Directors adopted the 1995 Stock Option/Stock
Issuance Plan (the 1995 Plan), under which 2,355,069 shares of common stock are
reserved for issuance upon exercise of options or stock issuances by the Company
to certain employees of and consultants to the Company. Under the stock option
program, options may be designated as incentive stock options or nonstatutory
stock options. Options under the 1995 Plan have a term of up to ten years from
the date of grant. The exercise price of incentive stock options must equal at
least the fair market value on the date of grant, and the exercise price of
nonstatutory stock options may be no less than 85% of the fair market value on
the date of grant. Options generally vest over four to five years.

F-14
<PAGE> 84
COMBICHEM, INC.
NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1997

(Information subsequent to December 31, 1997 and
pertaining to March 31, 1998 and the three-month periods
ended March 31, 1997 and 1998 is unaudited)

The Company recorded $1,773,973 of deferred compensation for options
granted during the year ended December 31, 1997, representing the difference
between the option exercise price and management's estimate of the fair value
for financial statement presentation purposes. Management's estimate of fair
value of the common stock was based upon the sale of Series D Preferred Stock
completed in November 1996 and the sale of common stock to Elan/Athena and
ImClone in October 1997. Between the dates of these equity sales, management's
estimate of the fair value of common stock was periodically increased as the
Company signed collaborative agreements, hired key personnel, and achieved
scientific progress on its research programs, including the completion of the
Universal Informer Library. The Company is amortizing the deferred compensation
over the vesting period of the options. The Company recorded $191,651 of
compensation expense during the year ended December 31, 1997 and $110,409 during
the three months ended March 31, 1998. Certain employees have elected to
purchase the underlying shares prior to vesting. The Company has the option to
repurchase, at the original issue price, any unvested shares in the event of
termination of service. At March 31, 1998, 779,625 shares were subject to
repurchase by the Company.

1997 Stock Incentive Plan

The Company's 1997 Stock Incentive Plan (the 1997 Plan) is intended to
serve as the successor equity incentive program to the Company's 1995 Plan. The
1997 Plan was adopted by the Board of Directors and the stockholders on October
7, 1997 and will become effective upon completion of the initial public offering
contemplated by this Prospectus. A total of 1,072,170 shares of Common Stock
have been authorized for issuance under the 1997 Plan. Under the 1997 Plan,
options may be designated as incentive stock options or nonstatutory stock
options. Options under the 1997 Plan have a term of up to 10 years from the date
of grant. The exercise price of options shall be fixed by the plan
administrator, but shall not be less than 100% of the fair market value per
share of common stock on the option grant dates. Under the 1997 Plan, selected
employees and consultants may be issued shares of common stock at no less than
100% of the fair market value on the date of grant. The vesting schedule for
each share issuance is determined by the Board of Directors as Plan
Administrator.

1997 Employee Stock Purchase Plan

The 1997 Employee Stock Purchase Plan (the Purchase Plan) was adopted by
the Board of Directors and the stockholders on October 7, 1997 and will become
effective upon completion of the initial public offering contemplated by this
Prospectus. A total of 150,000 shares of Common Stock have been authorized for
issuance under the Purchase Plan. The Purchase Plan permits eligible employees
of the Company to purchase shares of Common Stock, at semi-annual intervals,
through periodic payroll deductions. Payroll deductions may not exceed 10% of
the participant's base salary, and the purchase price will not be less than 85%
of the lower of the fair market value of the stock at either the beginning or
the end of the semi-annual intervals.

F-15
<PAGE> 85
COMBICHEM, INC.
NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1997

(Information subsequent to December 31, 1997 and
pertaining to March 31, 1998 and the three-month periods
ended March 31, 1997 and 1998 is unaudited)

Information with respect to the 1995 Plan is as follows:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
---------- --------------
<S> <C> <C>
Granted........................................... 562,980 $0.30
Exercised....................................... -- --
Canceled........................................ -- --
----------
Balance at December 31, 1995...................... 562,980 0.30
Granted......................................... 531,479 0.30
Exercised....................................... (72,589) 0.30
Canceled........................................ (12,536) 0.30
----------
Balance at December 31, 1996...................... 1,009,334 0.30
Granted......................................... 721,543 2.79
Exercised....................................... (1,210,310) 0.45
Canceled........................................ (32,471) 0.34
----------
Balance at December 31, 1997...................... 488,096 3.56
----------
Granted......................................... 47,500 8.00
Exercised....................................... -- --
Canceled........................................ -- --
---------- -----
Balance at March 31, 1998......................... 535,596 $3.95
========== =====
</TABLE>

At March 31, 1998, options to purchase 535,596 shares were exercisable and
536,574 shares remain available for grant.

Following is a further breakdown of the options outstanding as of March 31,
1998:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
WEIGHTED WEIGHTED EXERCISE
RANGE OF AVERAGE AVERAGE PRICE OF
EXERCISE OPTIONS REMAINING EXERCISE OPTIONS OPTIONS
PRICES OUTSTANDING LIFE IN YEARS PRICE EXERCISABLE EXERCISABLE
-------- ----------- ------------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$0.30 -- $0.40 88,250 7.95 $0.33 88,250 $0.33
$1.00 27,500 9.30 1.00 27,500 1.00
$2.00 -- $3.00 16,875 7.56 2.74 16,875 2.74
$4.00 -- $5.00 315,716 6.15 4.16 315,716 4.16
$8.00 87,255 9.71 8.00 87,255 8.00
------- ---- ----- ------- -----
535,596 7.09 $3.95 535,596 $3.95
======= ==== ===== ======= =====
</TABLE>

Adjusted pro forma information regarding net loss and net loss per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options and stock purchase plan under the fair
value method of SFAS No. 123. The fair value for these options was estimated at
the date of grant using the "Minimum Value" method for option pricing with the
following assumptions for 1995, 1996 and 1997: risk-free interest rates of
6.50%; dividend yield of 0%; and a weighted-average expected life of the options
of five years.

F-16
<PAGE> 86
COMBICHEM, INC.
NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1997

(Information subsequent to December 31, 1997 and
pertaining to March 31, 1998 and the three-month periods
ended March 31, 1997 and 1998 is unaudited)

For purposes of adjusted pro forma disclosures, the estimated fair value of
the options are amortized to expense over the vesting period. The Company's
adjusted pro forma information is as follows:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Adjusted pro forma net
loss.................. $(6,678,067) $(5,137,253) $(4,376,686) $(1,640,955) $(1,456,366)
Adjusted pro forma basic
net loss per share.... $ (2.93) $ (0.92) $ (0.50) $ (0.19) $ (0.14)
</TABLE>

The weighted-average fair value of options granted during 1995, 1996 and
1997 was $0.08, $0.08, and $0.72, respectively and for the first three months of
1998 was $8.00.

The pro forma effect on net loss for 1995, 1996, 1997 and 1998 is not
likely to be representative of the pro forma effects on reported net income or
loss in future years because these amounts reflect less than four years of
vesting.

Warrants

At March 31, 1998, the Company has issued warrants to purchase an aggregate
of 130,728 shares of redeemable convertible preferred stock at prices ranging
from $2.00 to $2.48 per share. The warrants are exercisable in whole or in part
through various dates.

The Company also has issued warrants to purchase 8,750 shares of common
stock at $0.30 per share. The warrants are exercisable in whole or in part at
any time at or prior to June 2000.

6. NOTES RECEIVABLE FROM EMPLOYEE/STOCKHOLDERS

During 1995, the Company lent $150,000 to an employee and stockholder for
the purchase of a residence in connection with the individual's employment
agreement. The note bears interest at approximately 5.8% and matures on the
earlier of (i) September 5, 2000, (ii) 30 days following cessation of
employment, (iii) 180 days following the date at which the Company completes a
successful initial public offering of shares of its common stock, or (iv) the
date on which more than 50% of the Company's outstanding shares of common stock
are acquired by a single purchaser or a group of purchasers. The note is secured
by 87,500 shares of the Company's common stock owned by the employee at the date
of the note, plus any capital stock thereafter acquired.

In August 1996, the Company lent $66,125 to an employee for relocation in
connection with employment, which is secured by a deed of trust. The loan is
represented by a promissory note which is due and payable on the earlier of
August 28, 1999 or the occurrence of certain events, such as expiration of the
30-day period following the date the individual ceases to be a full time
employee of the Company. The loan bears no interest, and principal payments of
$22,000 have been made to date.

During 1997, the Company instituted an employee loan program whereby the
proceeds of the loan are used to purchase common stock from the exercise of the
employee's stock options. Under the program, the employee pays 25% of the total
exercise price, and the Company loans the employee the

F-17
<PAGE> 87
COMBICHEM, INC.
NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1997

(Information subsequent to December 31, 1997 and
pertaining to March 31, 1998 and the three-month periods
ended March 31, 1997 and 1998 is unaudited)

remaining 75% of the purchase price. The loans bear interest at an adjustable
rate that is the minimum rate allowable by the Internal Revenue Service, subject
to quarterly adjustments by the Company. The loans will be repaid through 3
equal payments on the first three anniversary dates of the loan. The Company has
$419,061 in loans outstanding at December 31, 1997 and March 31, 1998.

7. COLLABORATIVE AGREEMENTS

Athena Neurosciences, Inc., a wholly owned subsidiary of Elan Corporation, plc

In October 1997, the Company entered into a multiple project collaborative
agreement with Athena Neurosciences, Inc., a wholly owned subsidiary of Elan
Corporation, plc (Elan/Athena) providing for a three-year research program to
discover novel therapeutic compounds for treatment of central nervous system
conditions. The first project was initiated upon signing of this collaboration
agreement, with a second project authorized in March 1998, for which Elan/Athena
has agreed to provide additional research funding. The agreement provides for
Elan/Athena's access to the Universal Informer Library as deemed necessary by
the research management committee composed of Elan/Athena and CombiChem
representatives. Under the agreement, Elan/Athena paid a project initiation fee
and agreed to provide research funding and milestone payments upon the
achievement of pre-determined objectives. Elan/Athena will also make royalty
payments on worldwide sales of products resulting from the collaboration. The
agreement may be terminated by either party 90 days following an uncured
material breach or by Elan/Athena after the one-year anniversary upon 90 days
prior written notice. Additionally, in March 1998, Elan/Athena purchased an
option for an undisclosed fee creditable against future project initiation fees,
if any, covering an additional target (for a potential future project) not
previously covered by the initial collaborative agreement. In connection with
the initial collaborative agreement, Elan International Services Ltd., an
affiliate of Elan/Athena, purchased 1,000,000 shares of Common Stock for $8.0
million. In addition, Elan International Services Ltd., a stockholder of
CombiChem, and a wholly owned subsidiary of Elan Corporation, plc (whose wholly
owned subsidiary, Athena Neurosciences, Inc. is a collaborative partner of
CombiChem), has expressed an interest in acquiring approximately $2 million of
the shares of Common Stock offered hereby at the initial public offering price.

ImClone Systems Incorporated

In October 1997, the Company entered into a collaborative agreement with
ImClone Systems Incorporated (ImClone) providing for a two-year research program
to identify and characterize novel small molecule inhibitors to multiple targets
for development in oncology. The agreement provides for ImClone's access to the
Company's Universal Informer Library and Virtual Library under the supervision
of the research management committee composed of representatives of the Company
and ImClone. Under the terms of the agreement, ImClone will provide the Company
with research support payments, milestone payments upon the achievement of
certain program objectives and royalties on worldwide product sales of
therapeutic products that may arise out of the collaboration. The agreement may
be terminated by either party 90 days following an uncured material breach or by
ImClone within 30 days prior to the one-year anniversary by providing 90 days'
prior written notice. In connection with the collaborative agreement, ImClone
purchased 250,000 shares of Common Stock for $2.0 million.

F-18
<PAGE> 88
COMBICHEM, INC.
NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1997

(Information subsequent to December 31, 1997 and
pertaining to March 31, 1998 and the three-month periods
ended March 31, 1997 and 1998 is unaudited)

Roche Bioscience, a division of Syntex (U.S.A.) Inc.

Sumitomo Pharmaceuticals Co., Ltd.

In August 1997, the Company entered into a collaborative agreement with
Sumitomo Pharmaceuticals Co. Ltd. (Sumitomo) providing for a two-year lead
evolution program on a target that is believed to play a fundamental role in
osteoarthritis and rheumatoid arthritis. Under the agreement, Sumitomo paid a
project initiation fee and agreed to provide research funding and milestone
payments upon the achievement of certain preclinical and clinical milestones.
Sumitomo will make royalty payments on worldwide sales of products resulting
from the collaboration. Sumitomo may extend the research period for up to four
successive six-month periods upon mutual agreement. The agreement may be
terminated by either party 90 days following an uncured material breach.

Teijin Limited

In March 1996, the Company entered into a collaborative agreement with
Teijin Limited (Teijin) providing for a one-year research program on a G-protein
coupled receptor target. In March 1997, the Company and Teijin amended their
agreement to extend the research phase of the collaborative agreement for an
additional year. While the initial focus of the collaboration was lead
optimization, the effort was redirected to lead evolution during the course of
the research. Under the agreement, Teijin paid a project initiation fee to
CombiChem and agreed to provide research funding and milestone payments upon the
achievement of certain preclinical and clinical milestones. Teijin also
committed internal resources to the discovery effort. Teijin will make royalty
payments on products resulting from the collaboration. CombiChem retains the
rights to the compounds arising under this collaboration in North and South
America; Teijin has rights to these compounds in Asia and Europe with a right of
first negotiation to acquire CombiChem's rights. Under the original agreement,
either party may terminate the agreement in the event of a material breach
remaining uncured for 60 days. As of March 31, 1998, the Company has
successfully concluded its research phase and delivered lead candidates to
Teijin for further development. As this development process continues, CombiChem
expects to receive additional payments from Teijin if certain milestones are
met.

F-19
<PAGE> 89
COMBICHEM, INC.
NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1997

(Information subsequent to December 31, 1997 and
pertaining to March 31, 1998 and the three-month periods
ended March 31, 1997 and 1998 is unaudited)

8. BENEFIT PLAN

The Company sponsors a benefit plan which covers employees who meet certain
age and service requirements. Employees may contribute a portion of their
earnings each plan year subject to certain Internal Revenue Service limitations.
The Company made no discretionary contributions to the plan for the years ended
December 31, 1995, 1996 and 1997 or the three months ended March 31, 1998.

9. INCOME TAXES

At December 31, 1997, the Company had federal and California income tax net
operating loss carryforwards of approximately $15,411,000 and $15,517,000,
respectively.

The federal and California tax loss carryforwards will begin to expire in
2009 and 2002, respectively, unless previously utilized. The Company also has
federal and California research tax credit carryforwards of approximately
$379,000 and $275,000, respectively, which will begin to expire in 2010 unless
previously utilized. The Company also has a federal foreign tax credit
carryforward of approximately $200,000, which will expire in 2002 unless
previously utilized.

Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use
of approximately $7 million and $200,000 of the Company's net operating loss and
credit carryforwards, respectively, may be limited because of cumulative changes
in ownership of more than 50% which occurred during 1995. However, annual
limitation will not prevent the entire amount of the net operating loss and
credit carryforwards from being used during the carryforward period. Therefore,
the Company does not believe such limitation will have a material effect upon
the utilization of these carryforwards.

Significant components of the Company's deferred tax assets are shown
below. A valuation allowance, which was increased by $2,211,000 in 1997, has
been recognized to offset the deferred tax assets as of December 31, 1996 and
1997 as realization of such assets is uncertain.

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss
carryforwards.................. $ 2,651,000 $ 4,792,000 $ 6,325,000
Research and development
credits........................ 179,000 198,000 558,000
Foreign tax credit................ -- -- 200,000
Other, net........................ 29,000 122,000 240,000
----------- ----------- -----------
Total deferred tax
assets.................. 2,859,000 5,112,000 7,323,000
Valuation allowance for deferred tax
assets............................ (2,859,000) (5,112,000) (7,323,000)
----------- ----------- -----------
Net deferred tax assets............. $ -- $ -- $ --
=========== =========== ===========
</TABLE>

The Company recorded foreign tax expense of $200,000 for the year ended
December 31, 1997 for taxes payable to a Japanese tax authority resulting from
the revenue recognized on the Sumitomo collaboration.

F-20
<PAGE> 90
COMBICHEM, INC.
NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1997

(Information subsequent to December 31, 1997 and
pertaining to March 31, 1998 and the three-month periods
ended March 31, 1997 and 1998 is unaudited)

10. SUBSEQUENT EVENTS

New Collaborative Agreement

In March 1998, the Company entered into a collaborative agreement with ICOS
Corporation (ICOS) providing for a lead evolution project on an identified,
undisclosed target. Under the agreement, ICOS receives exclusive global rights
to develop and market any products resulting from the collaboration. ICOS agreed
to pay CombiChem an advance payment of $350,000, due in April 1998, research
funding, payments upon achievement of certain clinical milestones and royalty
payments on any product sales. The advance payment has been recorded as deferred
revenue and will be recognized when the Company's performance obligations have
been met. The lead evolution project terminates on August 31, 2000. The
agreement may be terminated by either party 90 days following an uncured
material breach.

Feasibility Study

In March 1998, the Company entered into an agreement with an unnamed
pharmaceutical company to allow the pharmaceutical company to perform a
feasibility study, which could lead to a collaborative agreement, in exchange
for an advance payment of $300,000 due in April 1998. The advance payment has
been recorded as deferred revenue and will be recognized when the Company's
performance obligations have been met.

F-21
<PAGE> 91

[DEPICTIONS OF ACTIVE SITES AND COMPOUNDS]

Using only the structures of compounds screened against a known HIV
protease target, CombiChem's Discovery Engine(TM) has generated a hypothesis (a
computational model), as depicted here, which illustrates potentially important
characteristics of the HIV protease active binding site.

X-ray crystallography has determined the actual three-dimensional structure
of the active binding site of the HIV protease target, as shown here.

In this example, CombiChem's computer-generated hypothesis has identified
certain important characteristics of the HIV protease active binding site as
demonstrated by the lock-and-key structural fit depicted in this overlay.
<PAGE> 92

[CombiChem Logo]
<PAGE> 93

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth all expenses, other than underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the Common Stock being registered. All the amounts shown are estimates,
except for the registration fee, the Nasdaq National Market filing fee and the
NASD fee.

<TABLE>
<S> <C>
Registration fee............................................ $ 10,194
Nasdaq National Market fee.................................. 87,000
NASD fee.................................................... 3,864
Blue Sky fees and expenses.................................. 10,000
Printing and engraving expenses............................. 230,000
Legal fees and expenses..................................... 335,000
Accounting fees and expenses................................ 190,000
Transfer Agent and Registrar fees........................... 5,000
Miscellaneous expenses...................................... 128,942
----------
TOTAL............................................. $1,000,000
==========
</TABLE>

ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.

Section 145 of the Delaware General Corporation Law permits indemnification
of officers and directors of the Company under certain conditions and subject to
certain limitations. Section 145 of the Delaware General Corporation Law also
provides that a corporation has the power to purchase and maintain insurance on
behalf of its officers and directors against any liability asserted against such
person and incurred by him or her in such capacity, or arising out of his or her
status as such, whether or not the corporation would have the power to indemnify
him or her against such liability under the provisions of Section 145 of the
Delaware General Corporation Law.

Article VII, Section 1 of the Restated Bylaws of the Company provides that
the Company shall indemnify its directors and executive officers to the fullest
extent not prohibited by the Delaware General Corporation Law. The rights to
indemnity thereunder continue as to a person who has ceased to be a director,
officer, employee or agent and inure to the benefit of the heirs, executors and
administrators of the person. In addition, expenses incurred by a director or
executive officer in defending any civil, criminal, administrative or
investigative action, suit or proceeding by reason of the fact that he or she is
or was a director or officer of the Company (or was serving at the Company's
request as a director or officer of another corporation) shall be paid by the
Company in advance of the final disposition of such action, suit or proceeding
upon receipt of an undertaking by or on behalf of such director or officer to
repay such amount if it shall ultimately be determined that he or she is not
entitled to be indemnified by the Company as authorized by the relevant section
of the Delaware General Corporation Law.

As permitted by Section 102(b)(7) of the Delaware General Corporation Law,
Article V, Section (A) of the Company's Certificate of Incorporation provides
that a director of the Company shall not be personally liable for monetary
damages for breach of fiduciary duty as a director, except for liability (i) for
any breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or acts or omissions that involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the Delaware General Corporation Law or (iv) for any transaction from which the
director derived any improper personal benefit.

The Company has entered into indemnification agreements with each of its
directors and executive officers. Generally, the indemnification agreements
attempt to provide the maximum

II-1
<PAGE> 94

protection permitted by Delaware law as it may be amended from time to time.
Moreover, the indemnification agreements provide for certain additional
indemnification. Under such additional indemnification provisions, however, an
individual will not receive indemnification for judgments, settlements or
expenses if he or she is found liable to the Company (except to the extent the
court determines he or she is fairly and reasonably entitled to indemnity for
expenses), for settlements not approved by the Company or for settlements and
expenses if the settlement is not approved by the court. The indemnification
agreements provide for the Company to advance to the individual any and all
reasonable expenses (including legal fees and expenses) incurred in
investigating or defending any such action, suit or proceeding. In order to
receive an advance of expenses, the individual must submit to the Company copies
of invoices presented to him or her for such expenses. Also, the individual must
repay such advances upon a final judicial decision that he or she is not
entitled to indemnification.

The Company has purchased directors' and officers' liability insurance. The
Company intends to enter into additional indemnification agreements with each of
its directors and executive officers to effectuate these indemnity provisions.

The Underwriting Agreement (Exhibit 1.1 hereto) contains provisions by
which the Underwriters have agreed to indemnify the Company, each person, if
any, who controls the Company within the meaning of Section 15 of the Securities
Act, each director of the Company, and each officer of the Company who signs
this Registration Statement, with respect to information furnished in writing by
or on behalf of the Underwriters for use in the Registration Statement.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES:

Since September 30, 1994, the Company has sold and issued the following
unregistered securities (adjusted to give effect to the reverse stock split in
October 1997):

(1) From September 30, 1994 to March 31, 1998, the Company issued an aggregate
of 1,863,502 options to purchase Common Stock with exercise prices ranging
from $.248 to $8.00 per share under the Predecessor Plan and an aggregate
of 1,282,899 shares of Common Stock were issued through the exercise of
options granted under the Predecessor Plan for an aggregate exercise price
of $527,216. For additional information concerning these transactions,
reference is made to the information contained under the caption
"Management -- Benefit Plans" in the form of the Prospectus included
herein.

(2) On October 14, 1994, the Company issued 50,000 shares of Series Z Preferred
Stock to Sydney Brenner for an aggregate consideration of $100,000.

(3) On October 18, 1994, the Company issued 125,000 shares of Common Stock to
Robert A. Curtis, former Chief Executive Officer of the Company, at $0.04
per share, of which 57,290 were vested as of the date of the termination of
his employment in October 1995.

(4) On October 18, 1994, the Company issued an aggregate of 625 shares of
Common Stock to one investor for an aggregate consideration of $25.

(5) On November 1, 1994, the Company issued an aggregate of 100,000 shares of
Series A Preferred Stock to certain funds advised by Sequoia Capital for an
aggregate consideration of $200,000.

(6) On November 1, 1994, the Company issued an aggregate of 25,000 shares of
Common Stock to certain venture funds advised by Sequoia Capital for an
aggregate consideration of $5,000.

(7) On November 8, 1994, the Company issued an aggregate of 43,750 shares of
Common Stock to one investor for an aggregate consideration of $8,750.

(8) On November 18, 1994, the Company issued an aggregate of 2,500 shares of
Common Stock to one investor for an aggregate consideration of $500.

II-2
<PAGE> 95

(9) From November 23, 1994 through January 15, 1995, the Company issued an
aggregate of 556,669 shares of Series B Preferred Stock to certain funds
advised by Sequoia Capital, Forward Ventures II, L.P. and an individual
investor for an aggregate consideration of $1,670,000.

(10) In December 1994, the Company issued a warrant to purchase 20,914 shares of
Series Z Preferred Stock to Comdisco, Inc. at an exercise price of $2.00
per share in connection with an equipment lease financing.

(11) From January 1, 1995 through April 24, 1995, the Company issued an
aggregate of 32,500 shares of Common Stock to eight investors for an
aggregate consideration of $9,750.

(12) On March 20, 1995, the Company issued an aggregate of 100,000 shares of
Common Stock to The Scripps Research Institute for an aggregate
consideration of $40,000.

(13) From April 25, 1995 through July 30, 1995, the Company issued an aggregate
of 162,500 shares of Common Stock to three investors for an aggregate
consideration of $48,750.

(14) On June 15, 1995, the Company issued a warrant to purchase 8,750 shares of
Common Stock to LJL BioSystems, Inc. at an exercise price of $0.30.

(15) In connection with an asset purchase agreement dated August 4, 1995, the
Company issued an aggregate of 83,195 shares of Series Z Preferred Stock to
Molecular Simulations, Inc. from June 1996 through July 1996 in
consideration for certain technology rights.

(16) On August 5, 1995, the Company issued 1,500 shares of Common Stock to Ken
Rubenstein at $0.30 per share in connection with a consulting agreement.

(17) On August 17, 1995, August 25, 1995 and September 11, 1995, the Company
issued an aggregate of 3,011,402 shares of Series C Preferred Stock to
various venture capital funds and certain other investors for an aggregate
consideration of $7,468,257.

(18) On August 17, 1995, the Company issued warrants to purchase 30,244 shares
of Series C Preferred Stock at an exercise price of $2.48 per share.

(19) On September 7, 1995, the Company issued 2,017 shares of Series C Preferred
Stock to one investor for an aggregate consideration of $5,000.

(20) In December 1995, the Company issued an aggregate of 58,125 shares of
Series J Preferred Stock to three employees upon the exercise of options to
purchase Series J Preferred Stock at an exercise price of $0.40.

(21) On April 9, 1996, the Company issued an aggregate of 1,276,215 shares of
Series C Preferred Stock to various venture capital funds and certain other
investors for an aggregate consideration of $3,165,003.

(22) In April 1996 and June 1996, the Company issued warrants to purchase an
aggregate of 60,082 shares of Series C Preferred Stock to Comdisco, Inc. at
an exercise price of $2.48 per share in connection with an equipment lease
financing.

(23) In May 1996, the Company issued warrants to purchase an aggregate of 28,227
shares of Series Z Preferred Stock to Silicon Valley Bank and MMC/GATX
Partnership No. 1 at an exercise price of $2.48 per share in connection
with an equipment lease financing.

(24) On November 15, 1996, the Company issued an aggregate of 2,467,310 shares
of Series D Preferred Stock to various venture capital funds and certain
other investors for an aggregate consideration of $9,869,205.

(25) On January 23, 1997, the Company issued an aggregate of 1,250 shares of
Common Stock to one investor at $0.40 per share pursuant to a Restricted
Stock Issuance Agreement for an aggregate consideration of $500.

II-3
<PAGE> 96

(26) On June 11, 1997, the Company issued an aggregate of 10,000 shares of
Common Stock to one investor at $0.30 per share for an aggregate
consideration of $4,000.

(27) On July 1, 1997, the Company issued an aggregate of 11,250 shares of Common
Stock to the University of Pittsburgh for technology rights valued at
$11,250.

(28) On October 7, 1997, the Company issued an aggregate of 12,500 shares of
Common Stock to two investors for past services rendered to the Company.

(29) On October 10, 1997, the Company issued an aggregate of 250,000 shares of
Common Stock to ImClone Systems Incorporated in conjunction with a
collaboration agreement.

(30) On October 15, 1997, the Company issued an aggregate of 1,000,000 shares of
Common Stock to Elan International Services Ltd., in conjunction with a
collaboration agreement.

The sales and issuances of securities in the above transactions were deemed
to be exempt under the Act by virtue of Section 4(2) thereof and/or Regulation D
and Rule 701 promulgated thereunder as transactions not involving any public
offering. The purchasers in each case represented their intention to acquire the
securities for investment only and not with a view to the distribution thereof.
Appropriate legends were affixed to the stock certificates issued in such
transactions. Similar representations of investment intent were obtained and
similar legends imposed in connection with any subsequent transfers of any such
securities. The Company believes that all recipients had adequate access,
through employment or other relationships, to information about the Company to
make an informed investment decision.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
<C> <S>
1.1++ Form of Underwriting Agreement.
3.1++ Certificate of Incorporation of the Company, as amended.
3.2++ Form of Amended and Restated Certificate of Incorporation of
the Company to become effective immediately prior to the
Offering.
3.3++ Bylaws of the Company, as amended.
3.4++ Form of Restated Bylaws of the Company to be effective upon
completion of the Offering.
4.1++ Form of Certificate for Common Stock.
5.1++ Opinion of Brobeck, Phleger & Harrison LLP with respect to
the Common Stock being registered.
10.1++ Preferred Stock Purchase Agreement for Series A Preferred
Stock between the Company and Forward Ventures II, L.P.,
dated August 26, 1994.
10.2++ Preferred Stock Purchase Agreement for Shares of Series Z
Preferred Stock between the Company and Sydney Brenner,
dated October 14, 1994.
10.3++ Stock Purchase Agreement for Shares of Series A Preferred
Stock and Common Stock between the Company and the investors
listed on Exhibit A thereto, dated November 1, 1994.
10.4++ Stock Purchase Agreement Series B Preferred Stock between
the Company and the purchasers listed on Exhibit A thereto,
dated November 29, 1994.
10.5++ Series C Preferred Stock Purchase Agreement between the
Company and the purchasers listed on Schedule A thereto,
dated August 17, 1995.
10.6++ Stock Purchase Agreement for Series C Preferred Stock
between the Company and Todd Schmidt dated September 7,
1995.
</TABLE>

II-4
<PAGE> 97

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
<C> <S>
10.7*++ Supplemental Purchase Agreement between the Company and the
purchasers on Schedule A thereto, dated April 8, 1996.
10.8*++ Series D Preferred Stock Purchase Agreement between the
Company and the purchasers listed on Schedule A thereto,
dated November 15, 1996.
10.9++ Amended and Restated Investors' Rights Agreement between the
Company and the stockholders listed on Schedule A thereto,
dated November 15, 1996.
10.10++ Series J Preferred Stock Purchase Agreement between the
Company and Steve Teig, dated June 10, 1997.
10.11++ Series J Preferred Stock Purchase Agreement between the
Company and Jonathan Greene, dated June 11, 1997.
10.12++ Series J Preferred Stock Purchase Agreement between the
Company and Andrew Smellie, dated June 11, 1997.
10.13++ Warrant Agreement to Purchase Shares of the Series Z
Preferred Stock, as amended between the Company and
Comdisco, Inc., dated December 20, 1994.
10.14++ Common Stock Purchase Warrant between the Company and LJL
BioSystems, Inc., dated June 15, 1995.
10.15++ Form of Warrant to Purchase Shares of Series C Preferred
Stock between the Company and the purchasers listed on
Schedule A thereto, dated August 17, 1995.
10.16++ Form of Warrant Agreement to Purchase Shares of Series C
Preferred Stock of the Company, between the Company and
Comdisco, Inc. in the amounts listed on Schedule A thereto.
10.17++ Form of Warrant to Purchase Shares of Series Z Preferred
Stock between the Company and the purchasers listed on
Schedule A thereto, dated May 20, 1996.
10.18++ Master Lease Agreement with the Company and Comdisco Inc.,
dated November 6, 1994, Schedule VL-1, dated November 11,
1994, Schedule VL-2 dated April 15, 1996 and Schedule VL-3
dated April 15, 1996.
10.19*++ Collaboration Agreement between the Company and Teijin
Limited, dated March 29, 1996, as amended.
10.20*++ Collaborative Research and License Agreement between the
Company and Roche Bioscience, dated October 25, 1996.
10.21*++ Research and Technology Development Agreement between the
Company and Sumitomo Pharmaceuticals Co., Ltd., dated August
18, 1997.
10.22*++ Collaborative Research and License Agreement between the
Company and ImClone Systems Incorporated, dated October 10,
1997.
10.23*++ Collaborative Research and License Agreement between the
Company and Athena Neurosciences, Inc., dated October 15,
1997, as amended.
10.24++ Full Recourse Secured Promissory Note and Stock Pledge
Agreement between the Company and Peter Myers, dated
September 5, 1995.
10.25++ Promissory Note Secured by Deed of Trust between the Company
and John Saunders, dated August 30, 1996.
10.26++ Promissory Note between the Company and Vicente Anido, Jr.,
dated February 24, 1997.
10.27++ Pledge Agreement between the Company and Vicente Anido, Jr.,
dated February 24, 1997.
10.28++ Promissory Note Secured by Stock Pledge Agreement between
the Company and Vicente Anido, Jr., dated June 6, 1997
10.29++ Stock Pledge Agreement between the Company and Vicente
Anido, Jr., dated June 6, 1997.
10.30++ Employment Agreement with Peter Myers, dated March 1, 1995.
</TABLE>

II-5
<PAGE> 98

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
<C> <S>
10.31++ Employment Agreement with John Saunders, dated January 1,
1996.
10.32++ Employment Agreement with Steven Teig, dated July 1, 1995.
10.33++ Employment Agreement with Vicente Anido, Jr., dated March
14, 1996.
10.34++ Employment Agreement with Lee R. McCracken, dated May 13,
1996.
10.35++ Employment Letter with Karin Eastham, dated March 14, 1997.
10.36++ Standard Industrial/Commercial Single-Tenant Lease between
the Company and Campson Corporation, dated December 22,
1995.
10.37++ Standard Office Lease-Full Service between the Company and
Nearon Enterprises, LLC, dated October 24, 1996.
10.38++ Lease Agreement between Harbor Investment Partners and the
Company, dated October 6, 1997.
10.39++ 1995 Stock Option/Stock Issuance Plan.
10.40++ 1995 Stock Option/Stock Issuance Plan Form of Notice of
Grant.
10.41++ 1995 Stock Option/Stock Issuance Plan Form of Stock Option
Agreement.
10.42++ 1995 Stock Option/Stock Issuance Plan Form of Stock Purchase
Agreement.
10.43++ 1995 Stock Option/Stock Issuance Plan Form of Restricted
Stock Issuance Agreement.
10.44++ 1997 Stock Incentive Plan.
10.45++ 1997 Employee Stock Purchase Plan.
10.46++ Form of Indemnification Agreement between the Company and
each of its directors.
10.47++ Form of Indemnification Agreement between the Company and
each of its officers.
10.48++ 1997 Stock Incentive Plan Form of Notice of Grant of Stock
Option
10.49++ 1997 Stock Incentive Plan Form of Stock Option Agreement
10.50++ 1997 Stock Incentive Plan Form of Addendum to Stock Option
Agreement (Involuntary Termination Following Corporate
Transaction/Change in Control)
10.51++ 1997 Stock Incentive Plan Form of Addendum to Stock Option
Agreement (Limited Stock Appreciation Right)
10.52++ 1997 Stock Incentive Plan Form of Stock Issuance Agreement
10.53++ 1997 Stock Incentive Plan Form of Addendum to Stock Issuance
Agreement (Involuntary Termination Following Corporate
Transaction/Change in Control)
10.54++ 1997 Stock Incentive Plan Form of Notice of Grant of
Automatic Stock Option (Initial Grant)
10.55++ 1997 Stock Incentive Plan Form of Notice of Grant of
Automatic Stock Option (Annual Grant)
10.56++ 1997 Stock Incentive Plan Form of Automatic Stock Option
Agreement
10.57++ 1997 Employee Stock Purchase Plan Form of Stock Purchase
Agreement
10.58*++ Collaborative Research and License Agreement between the
Company and ICOS Corporation, dated March 30, 1998.
11.1 Statement of Computation of pro forma net loss per share.
23.1++ Consent of Brobeck, Phleger & Harrison LLP (contained in
their opinion filed as Exhibit 5.1).
23.2 Consent of Ernst & Young LLP, Independent Auditors.
24.1++ Power of Attorney (see page II-8).
27.1++ Financial Data Schedule.
</TABLE>

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

++ Previously filed with the Commission.

II-6
<PAGE> 99

* Certain confidential portions of this Exhibit were omitted by means of
redacting a portion of the text (the "Mark"). This Exhibit has been filed
separately with the Secretary of the Commission without the Mark pursuant to
the Company's Application Requesting Confidential Treatment under Rule 406
under the Securities Act.

(b) Financial Statement Schedules included separately in the Registration
Statement.

All other schedules are omitted because they are not required, are not
applicable or the information is included in the Financial Statements or Notes
thereto.

ITEM 17. UNDERTAKINGS.

The undersigned hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the provisions described in Item 14, or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-7
<PAGE> 100

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Amendment No. 10 to this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of San
Diego, County of San Diego, State of California, on the 7th day of May, 1998.

COMBICHEM, INC.

By: /s/ VICENTE ANIDO, JR.
------------------------------------
Vicente Anido, Jr.
President and Chief Executive
Officer

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>

/s/ VICENTE ANIDO, JR. President, Chief Executive Officer and May 7, 1998
- -------------------------------------- Director (Principal Executive Officer)
(Vicente Anido, Jr.)

Vice President of May 7, 1998
/s/ KARIN EASTHAM Finance and Administration and Chief
- -------------------------------------- Financial Officer (Principal Financial
(Karin Eastham) and Accounting Officer)

* Chairman of the Board and Director May 7, 1998
- --------------------------------------
(Pierre Lamond)

* Director May 7, 1998
- --------------------------------------
(Peter L. Myers)

* Director May 7, 1998
- --------------------------------------
(Philippe O. Chambon)

* Director May 7, 1998
- --------------------------------------
(Arthur Reidel)

* Director May 7, 1998
- --------------------------------------
(William Scott)
</TABLE>

By: /s/ VICENTE ANIDO, JR.
----------------------------------
Vicente Anido, Jr.,
Attorney-in-fact

II-8
<PAGE> 101

EXHIBIT INDEX

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- -------- ----------- ------------
<C> <S> <C>
1.1++ Form of Underwriting Agreement.
3.1++ Certificate of Incorporation of the Company, as amended.
3.2++ Form of Amended and Restated Certificate of Incorporation of
the Company to become effective immediately prior to the
Offering.
3.3++ Bylaws of the Company, as amended.
3.4++ Form of Restated Bylaws of the Company to be effective upon
completion of the Offering.
4.1++ Form of Certificate for Common Stock.
5.1++ Opinion of Brobeck, Phleger & Harrison LLP with respect to
the Common Stock being registered.
10.1++ Preferred Stock Purchase Agreement for Series A Preferred
Stock between the Company and Forward Ventures II, L.P.,
dated August 26, 1994.
10.2++ Preferred Stock Purchase Agreement for Shares of Series Z
Preferred Stock between the Company and Sydney Brenner,
dated October 14, 1994.
10.3++ Stock Purchase Agreement for Shares of Series A Preferred
Stock and Common Stock between the Company and the investors
listed on Exhibit A thereto, dated November 1, 1994.
10.4++ Stock Purchase Agreement Series B Preferred Stock between
the Company and the purchasers listed on Exhibit A thereto,
dated November 29, 1994.
10.5++ Series C Preferred Stock Purchase Agreement between the
Company and the purchasers listed on Schedule A thereto,
dated August 17, 1995.
10.6++ Stock Purchase Agreement for Series C Preferred Stock
between the Company and Todd Schmidt dated September 7,
1995.
10.7*++ Supplemental Purchase Agreement between the Company and the
purchasers on Schedule A thereto, dated April 8, 1996.
10.8*++ Series D Preferred Stock Purchase Agreement between the
Company and the purchasers listed on Schedule A thereto,
dated November 15, 1996.
10.9++ Amended and Restated Investors' Rights Agreement between the
Company and the stockholders listed on Schedule A thereto,
dated November 15, 1996.
10.10++ Series J Preferred Stock Purchase Agreement between the
Company and Steve Teig, dated June 10, 1997.
10.11++ Series J Preferred Stock Purchase Agreement between the
Company and Jonathan Greene, dated June 11, 1997.
10.12++ Series J Preferred Stock Purchase Agreement between the
Company and Andrew Smellie, dated June 11, 1997.
10.13++ Warrant Agreement to Purchase Shares of the Series Z
Preferred Stock, as amended between the Company and
Comdisco, Inc., dated December 20, 1994.
10.14++ Common Stock Purchase Warrant between the Company and LJL
BioSystems, Inc., dated June 15, 1995.
10.15++ Form of Warrant to Purchase Shares of Series C Preferred
Stock between the Company and the purchasers listed on
Schedule A thereto, dated August 17, 1995.
</TABLE>
<PAGE> 102

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- -------- ----------- ------------
<C> <S> <C>
10.16++ Form of Warrant Agreement to Purchase Shares of Series C
Preferred Stock of the Company, between the Company and
Comdisco, Inc. in the amounts listed on Schedule A thereto.
10.17++ Form of Warrant to Purchase Shares of Series Z Preferred
Stock between the Company and the purchasers listed on
Schedule A thereto, dated May 20, 1996.
10.18++ Master Lease Agreement with the Company and Comdisco Inc.,
dated November 6, 1994, Schedule VL-1, dated November 11,
1994, Schedule VL-2 dated April 15, 1996 and Schedule VL-3
dated April 15, 1996.
10.19*++ Collaboration Agreement between the Company and Teijin
Limited, dated March 29, 1996, as amended.
10.20*++ Collaborative Research and License Agreement between the
Company and Roche Bioscience, dated October 25, 1996.
10.21*++ Research and Technology Development Agreement between the
Company and Sumitomo Pharmaceuticals Co., Ltd., dated August
18, 1997.
10.22*++ Collaborative Research and License Agreement between the
Company and ImClone Systems Incorporated, dated October 10,
1997.
10.23*++ Collaborative Research and License Agreement between the
Company and Athena Neurosciences, Inc., dated October 15,
1997, as amended.
10.24++ Full Recourse Secured Promissory Note and Stock Pledge
Agreement between the Company and Peter Myers, dated
September 5, 1995.
10.25++ Promissory Note Secured by Deed of Trust between the Company
and John Saunders, dated August 30, 1996.
10.26++ Promissory Note between the Company and Vicente Anido, Jr.,
dated February 24, 1997.
10.27++ Pledge Agreement between the Company and Vicente Anido, Jr.,
dated February 24, 1997.
10.28++ Promissory Note Secured by Stock Pledge Agreement between
the Company and Vicente Anido, Jr., dated June 6, 1997
10.29++ Stock Pledge Agreement between the Company and Vicente
Anido, Jr., dated June 6, 1997.
10.30++ Employment Agreement with Peter Myers, dated March 1, 1995.
10.31++ Employment Agreement with John Saunders, dated January 1,
1996.
10.32++ Employment Agreement with Steven Teig, dated July 1, 1995.
10.33++ Employment Agreement with Vicente Anido, Jr., dated March
14, 1996.
10.34++ Employment Agreement with Lee R. McCracken, dated May 13,
1996.
10.35++ Employment Letter with Karin Eastham, dated March 14, 1997.
10.36++ Standard Industrial/Commercial Single-Tenant Lease between
the Company and Campson Corporation, dated December 22,
1995.
10.37++ Standard Office Lease-Full Service between the Company and
Nearon Enterprises, LLC, dated October 24, 1996.
10.38++ Lease Agreement between Harbor Investment Partners and the
Company, dated October 6, 1997.
10.39++ 1995 Stock Option/Stock Issuance Plan.
10.40++ 1995 Stock Option/Stock Issuance Plan Form of Notice of
Grant.
</TABLE>

<PAGE> 103

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- -------- ----------- ------------
<C> <S> <C>
10.41++ 1995 Stock Option/Stock Issuance Plan Form of Stock Option
Agreement.
10.42++ 1995 Stock Option/Stock Issuance Plan Form of Stock Purchase
Agreement.
10.43++ 1995 Stock Option/Stock Issuance Plan Form of Restricted
Stock Issuance Agreement.
10.44++ 1997 Stock Incentive Plan.
10.45++ 1997 Employee Stock Purchase Plan.
10.46++ Form of Indemnification Agreement between the Company and
each of its directors.
10.47++ Form of Indemnification Agreement between the Company and
each of its officers.
10.48++ 1997 Stock Incentive Plan Form of Notice of Grant of Stock
Option
10.49++ 1997 Stock Incentive Plan Form of Stock Option Agreement
10.50++ 1997 Stock Incentive Plan Form of Addendum to Stock Option
Agreement (Involuntary Termination Following Corporate
Transaction/Change in Control)
10.51++ 1997 Stock Incentive Plan Form of Addendum to Stock Option
Agreement (Limited Stock Appreciation Right)
10.52++ 1997 Stock Incentive Plan Form of Stock Issuance Agreement
10.53++ 1997 Stock Incentive Plan Form of Addendum to Stock Issuance
Agreement (Involuntary Termination Following Corporate
Transaction/Change in Control)
10.54++ 1997 Stock Incentive Plan Form of Notice of Grant of
Automatic Stock Option (Initial Grant)
10.55++ 1997 Stock Incentive Plan Form of Notice of Grant of
Automatic Stock Option (Annual Grant)
10.56++ 1997 Stock Incentive Plan Form of Automatic Stock Option
Agreement
10.57++ 1997 Employee Stock Purchase Plan Form of Stock Purchase
Agreement
10.58*++ Collaborative Research and License Agreement between the
Company and ICOS Corporation, dated March 30, 1998.
11.1 Statement of Computation of pro forma net loss per share.
23.1++ Consent of Brobeck, Phleger & Harrison LLP (contained in
their opinion filed as Exhibit 5.1).
23.2 Consent of Ernst & Young LLP, Independent Auditors.
24.1++ Power of Attorney (see page II-8).
27.1++ Financial Data Schedule.
</TABLE>

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

++ Previously filed with the Commission.

<PAGE> 1
EXHIBIT 11.1

STATEMENT OF COMPUTATION OF NET LOSS PER SHARE
(IN THOUSANDS EXCEPT PER SHARE DATA)

Year Ended Three Months ended
December 31, March 31,
1995 1996 1997 1997 1998
------- ------- ------- -------------- --------------
<S> <C> <C> <C> <C> <C>
NET LOSS PER SHARE:
Net Loss $(6,675) $(5,118) $(4,322) $(1,627) $(1,424)
======= ======= ======= ======= =======

Weighted average common shares
outstanding 348 453 1,075 732 2,447

Adjusted shares outstanding 348 453 1,075 732 2,447
======= ======= ======= ------ ------
Net loss per share -- Basic $(19.18) $(11.30) $ (4.02) $(2.22) $(0.58)
======= ======= ======= ====== ======
</TABLE>

<TABLE>
<CAPTION>
Year Ended Three Months ended
December 31, March 31,
1997 1997 1998
------------ -------------- --------------
<S> <C> <C> <C>
PRO FORMA NET LOSS PER SHARE:
Net loss $(4,322) $(1,627) $(1,424)
======= ======= =======
Weighted average common shares outstanding 1,075 732 2,447

Effect of assumed conversion of preferred
shares 7,729 7,697 7,755
------- ------ -------
Adjusted shares outstanding -- Basic 8,804 8,429 10,202
======= ====== =======
Pro forma net loss per share -- Basic $ (0.49) $(0.19) $(0.14)
======= ====== ======
</TABLE>

<PAGE> 1
EXHIBIT 23.2

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the reference to our firm under the captions "Selected Financial
Data" and "Experts" and to the use of our report dated January 13, 1998, except
for Note 10, as to which the date is March 31, 1998, in Amendment No. 10 to the
Registration Statement (Form S-1) and related Prospectus of CombiChem, Inc. for
the registration of shares of its common stock.

San Diego, California /s/ Ernst & Young LLP
May 7, 1998