COMBICHEM INC, S-1/A, 1998-05-04

COMBICHEM INC
S-1/A, 1998-05-04
COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 4, 1998

REGISTRATION NO. 333-37981
================================================================================

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

AMENDMENT NO. 8

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 4, 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
----
<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
--------------- ------- ------- -------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total revenue.......... $ -- $ 50 $ 2,967 $ 7,471 $ 491 $ 3,372
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) (758)
Net loss............... $(706) $(6,675) $(5,118) $ (4,322) $(1,627) $ (674)
===== ======= ======= ======== ======= =======
Pro forma basic net
loss per share(2)... $ (0.49) $ (0.07)
======== =======
Shares used in
computing pro forma
basic net loss per
share(2)............ 8,804 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.................................... 11,317 11,317 29,150
Total assets....................................... 25,926 25,926 43,759
Long-term obligations, less current portion........ 3,566 3,566 3,566
Redeemable convertible preferred stock............. 23,130 -- --
Accumulated deficit................................ (17,494) (17,494) (17,494)
Total stockholders' equity (deficit)............... (6,862) 16,268 34,101
</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 $0.7 million, respectively. As of March 31, 1998, the Company had an
accumulated deficit of approximately $17.5 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 and
development 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. 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 and
royalties under individual agreements may not be paid, if at all, 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 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 indepen-

7
<PAGE> 9

dently 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, all revenue received by the Company has been from the receipt of
project initiation fees and research funding 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

in screening compounds and the libraries or compounds contained therein. These
patent applications are either 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 three United States patents issued to a
third party that claim proprietary rights; two of the three patents are entitled
"System and method for automatically generating chemical compounds with desired
properties" and the third is entitled "System, method, and computer program for
at least partially automatically generating chemical compounds having desired
properties." Although the Company believes that its current activities do not
infringe these patents, there can be no assurance that the Company's belief
would be affirmed in any litigation over the patents or that the Company's
future technological developments would be outside the scope of these patents.
Further, there can be no assurance that the 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 the third
party, if required, on commercially reasonable terms, if at all. 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

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."

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

10
<PAGE> 12

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

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 United States
Food and Drug Administration (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 Investigational New Drug application (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 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

11
<PAGE> 13

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
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

12
<PAGE> 14

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 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."

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<PAGE> 15

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 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."

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<PAGE> 16

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 $6.42 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, less current portion.......... $ 3,566 $ 3,566 $ 3,566
Redeemable convertible preferred stock:
Preferred Stock, $0.001 par value; 63,196,296
shares authorized and 7,754,933 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 53,473
Notes receivable from stockholders................. (419) (419) (419)
Deferred compensation.............................. (1,472) (1,472) (1,472)
Accumulated deficit................................ (17,494) (17,494) (17,494)
-------- -------- --------
Total stockholders' equity (deficit)............ (6,862) 16,268 34,101
-------- -------- --------
Total capitalization....................... $ 19,834 $ 19,834 $ 37,667
======== ======== ========
</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 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
$16,268,000 or $1.48 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 $34,101,000 or $2.58 per share of Common Stock. This represents an
immediate increase in pro forma net tangible book value per share of Common
Stock of $1.10 to existing stockholders and immediate dilution in pro forma net
tangible book value of $6.42 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....................................... $1.48
Increase attributable to new investors................. 1.10
Pro forma net tangible book value of Common Stock after this
offering.................................................. 2.58
------
Dilution to new investors(1)................................ $ 6.42
======
</TABLE>

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

(1) If the Underwriters' over-allotment option is exercised in full, dilution
per share to new investors would be $6.28.

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) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Project initiation fees and milestone
payments.............................. $ -- $ -- $ 2,500 $ 3,333 $ -- $ 1,500
Research and development funding........ -- -- 420 4,138 491 1,872
Grant revenue........................... -- 50 47 -- -- --
----- ------- ------- ------- ------- -------
-- 50 2,967 7,471 491 3,372
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) (758)
Interest income, net...................... 5 38 -- 411 129 114
Foreign tax expense....................... -- -- -- (200) -- (30)
----- ------- ------- ------- ------- -------
Net loss.................................. $(706) $(6,675) $(5,118) $(4,322) $(1,627) $ (674)
===== ======= ======= ======= ======= =======
Pro forma basic net loss per share(1)..... $ (0.49) $ (0.07)
======= =======
Shares used in computing pro forma basic
net loss per share(1)................... 8,804 10,202
======= =======
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------------------------------- -----------
1994 1995 1996 1997 1998
-------- -------- -------- -------- -----------
(in thousands) (unaudited)
<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 11,317
Total assets.............................. 1,796 4,150 16,658 25,526 25,926
Long-term obligations, less current
portion................................. -- 424 1,753 3,283 3,566
Redeemable convertible preferred stock.... 2,250 9,650 23,107 23,130 23,130
Accumulated deficit....................... (706) (7,381) (12,499) (16,821) (17,494)
Total stockholders' equity (deficit)...... (682) (7,261) (12,363) (6,299) (6,862)
</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. 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. 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.

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

20
<PAGE> 22

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, Elan/Athena, also entered into in October 1997, and ICOS,
entered into in March 1998. 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 $13.8 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 $1.5 million in project
initiation fees and 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 $17.5 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 $3.4
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 collaborative agreements as well as one time project initiation
fees and milestone revenue totalling $1.5 million, primarily under collaborative
agreements with ICOS and Roche. Revenues from collaborators exceeding 10% of
total revenues for the three months ended March 31, 1998 was 44% from Roche, 19%
from Sumitomo, 10% from Elan/ Athena, and 10% from ICOS. 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.

Net Loss

The Company's net loss for the three months ended March 31, 1998 decreased
$1.0 million to $0.7 million from $1.6 million for the same period in 1997. The
decrease is primarily attributable to

21
<PAGE> 23

increased revenue, of which $1.5 million was for one time milestone and project
initiation fees, primarily under collaborative agreements with ICOS and 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.

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 develop-

22
<PAGE> 24

ment 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
marketable securities with a value of $14.5 million. The Company's working
capital at March 31, 1998 was $11.3 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 $0.4 million due from a leasing
company. The $1.4 million increase was primarily attributable to amounts
receivable from customers for milestone and project initiation fees earned in
March 1998. 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. 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.

23
<PAGE> 25

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.
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.

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.

24
<PAGE> 26

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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<PAGE> 30

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 500 billion 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 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 a
project initiation fee, which CombiChem collected in April 1998, research
funding, payments upon achievement of certain milestones and royalty payments on
any product sales. 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 $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,

37
<PAGE> 39

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 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 three United States patents issued
to a third party that claim proprietary rights; two of the three patents are
entitled "System and method for automatically generating chemical compounds with
desired properties" and the third is entitled "System, method, and computer
program for at least partially automatically generating chemical compounds
having desired properties." Although the Company believes that its current
activities do not infringe these patents, there can be no assurance that the
Company's belief would be affirmed in any litigation over the patents or that
the Company's future technological developments would be outside the scope of
these patents. Further,

38
<PAGE> 40

there can be no assurance that the 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 the third party, if required,
on commercially reasonable terms, if at all. 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.

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

39
<PAGE> 41

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 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.

40
<PAGE> 42

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.

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.

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

41
<PAGE> 43

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.

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<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.

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<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.

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<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 1,916,666
Current portion of obligations under
capital leases........................... 758,085 1,569,197 1,770,746
------------ ------------ ------------
Total current liabilities........... 4,131,224 5,320,431 5,988,406
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;
7,696,808, 7,754,933 and 7,754,933 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) (17,494,318) (17,494,318)
------------ ------------ ------------ ------------
Total stockholders' equity
(deficit)......................... (12,363,004) (6,298,944) (6,862,111) $ 16,267,857
------------ ------------ ------------ ============
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 $ -- $ 1,500,000
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 3,371,586
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) (758,033)
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) (673,576)
=========== =========== =========== =========== ===========
Pro forma basic net loss per
share......................... $ (0.49) $ (0.07)
=========== ===========
Shares used in computing pro
forma basic net loss per
share......................... 8,804,000 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....... 850,000 $ 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.......................... 6,669 20,000 -- -- -- -- --
Sale of Series C preferred
stock.......................... 2,808,702 6,877,749 -- -- -- -- --
Conversion of notes payable and
interest into Series C
preferred stock................ 202,692 502,676 -- -- -- -- --
Repurchase and cancelation of
common stock................... -- -- (67,710) (68) (2,640) -- --
Net loss......................... -- -- -- -- -- -- --
--------- ----------- --------- ------ ----------- ----------- ---------
Balance at December 31, 1995....... 3,868,063 9,650,425 660,165 660 119,057 -- --
Sale of common stock............. -- -- 74,000 74 22,126 -- --
Sale of Series C preferred
stock.......................... 1,278,240 3,142,045 -- -- -- -- --
Sale of Series D preferred
stock.......................... 2,467,310 9,853,345 -- -- -- -- --
Conversion of notes payable and
interest into Series Z
preferred stock................ 83,195 460,913 -- -- -- -- --
Repurchase and cancellation of
common stock................... -- -- (22,560) (22) (5,843) -- --
Net loss......................... -- -- -- -- -- -- --
--------- ----------- --------- ------ ----------- ----------- ---------
Balance at December 31, 1996....... 7,696,808 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.......................... 58,125 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....... 7,754,933 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)...................... 7,754,933 $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)............. (673,576) (673,576)
------------ ------------
Balance at March 31, 1998
(unaudited)...................... $(17,494,318) $ (6,862,111)
============ ============
</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) $ (673,576)
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) 440,917
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) 25,512
----------- ------------ ----------- ----------- -----------
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>
YEAR ENDED DECEMBER 31, THREE MONTHS
----------------------------- ENDED
1995 1996 1997 MARCH 31, 1998
------- ------- ------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net loss............................... $(6,675) $(5,118) $(4,322) $ (674)
======= ======= ======= =======
Weighted average shares of Common Stock
outstanding (shares used in computing
basic net loss per share)............ 348 453 1,075 2,447
======= ======= ======= =======
Basic net loss per share............... $(19.18) $(11.30) $ (4.02) $ (0.28)
======= ======= ======= =======
Shares used in computing basic net loss
per share............................ 1,075 2,447
Adjustment to reflect the effect of the
assumed conversion of preferred
stock................................ 7,729 7,755
------- -------
Shares used in computing pro forma
basic net loss per share............. 8,804 10,202
======= =======
Pro forma basic net loss per share..... $ (0.49) $ (0.07)
======= =======
</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 nonrefundable, and the Company has no future performance
obligations related to such fees.

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 accounts receivable consist of amounts earned, 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)

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.......................................... -- -- -- -- 10%
Imclone....................................... -- -- * -- *
Roche......................................... -- 67% 30% 68% 44%
Sumitomo...................................... -- -- 39% -- 19%
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.

Reclassification

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

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)

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 and $1,331 as of December 31, 1996 and 1997,
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 and $11,053,394 at December 31, 1996 and 1997,
respectively. Actual maturities may differ from contractual maturities because
the issuers of the securities may have the right to prepay obligations without
prepayment penalties.

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>

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.

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)

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.

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

Changes in Capitalization

In September 1997, the Company's Board of Directors approved the
reincorporation of the Company in 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. Subsequent to the reincorporation, the Company
effected a one-for-four reverse stock split of the Common Stock which resulted
in each share of Preferred Stock being convertible into one fourth share of
Common Stock. The number of authorized shares of the new Delaware corporation
are 40,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock.
All share and per share amounts and stock option data have been restated to
retroactively give effect to the reincorporation, the reverse stock split and
the related change in shares outstanding.

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)

Redeemable Convertible Preferred Stock

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

<TABLE>
<CAPTION>
LIQUIDATION
SHARES PREFERENCE
--------- -----------
<S> <C> <C>
Series A............................................ 250,000 $ 500,000
Series B............................................ 556,669 1,670,000
Series C............................................ 4,289,634 10,638,261
Series D............................................ 2,467,310 9,869,205
--------- -----------
7,563,613 $22,677,466
========= ===========
</TABLE>

In 1994, the Company issued Series A and B redeemable convertible preferred
stock for cash at $2.00 and $3.00 per share, respectively. In October 1994, the
Company acquired certain intellectual property rights in exchange for 50,000
shares of the Company's Series Z convertible preferred stock valued at $2.00 per
share. During 1996, the Company converted two outstanding notes and related
accrued interest totalling $460,913 into 83,195 shares of Series Z convertible
preferred stock.

In August 1995, the Company received approximately $6.9 million in net
proceeds from the issuance of 2,808,702 shares of Series C redeemable
convertible preferred stock at $2.48 per share. Pursuant to the terms of certain
promissory notes, the Company converted $502,676 of principal and accrued
interest into 202,692 shares of Series C redeemable convertible preferred stock
at $2.48 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 1,278,240 shares of Series C redeemable convertible
preferred stock at $2.48 per share.

In November 1996, the Company received approximately $9.9 million in net
proceeds from the issuance of 2,467,310 shares of Series D redeemable
convertible preferred stock at $4.00 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
7,563,613 shares of common stock for issuance upon conversion of the Series A,
B, C and D redeemable convertible 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 $0.16, $0.24, $0.20, $0.32 and $0.16 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.

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 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 58,125 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.

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.

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)

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.

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.

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)

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.

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 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Adjusted pro forma net loss........ $(6,678,067) $(5,137,253) $(4,376,686) $ (706,366)
Adjusted pro forma basic net loss
per share........................ $ (2.93) $ (0.92) $ (0.50) $ (0.07)
</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.

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)

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 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 collaborative agreement with
Athena Neurosciences, Inc. (Elan/Athena), 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. Additionally, in March 1998,
Elan/Athena purchased an option for an additional target not previously covered
by the agreement. 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. In connection
with the 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 ex-

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)

pressed 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.

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.

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)

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.

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.

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)

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.

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 a project initiation fee, due in April 1998, research funding,
payments upon achievement of certain milestones and royalty payments on any
product sales. The lead evolution project terminates on August 31, 2000. The
agreement may be terminated by either party 90 days following an uncured
material breach.

F-20
<PAGE> 90

[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> 91

[CombiChem Logo]
<PAGE> 92

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> 93

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> 94

(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> 95

(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> 96

<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> 97

<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> 98

* 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> 99

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Amendment No. 8 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 4th 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 4, 1998
- -------------------------------------- Director (Principal Executive Officer)
(Vicente Anido, Jr.)

Vice President of May 4, 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 4, 1998
- --------------------------------------
(Pierre Lamond)

* Director May 4, 1998
- --------------------------------------
(Peter L. Myers)

* Director May 4, 1998
- --------------------------------------
(Philippe O. Chambon)

* Director May 4, 1998
- --------------------------------------
(Arthur Reidel)

* Director May 4, 1998
- --------------------------------------
(William Scott)
</TABLE>

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

II-8
<PAGE> 100

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> 101

<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> 102

<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 10.23

COLLABORATIVE RESEARCH AND LICENSE AGREEMENT

BETWEEN

COMBICHEM, INC.

AND

ATHENA NEUROSCIENCES, INC.

OCTOBER 15, 1997

<PAGE> 2

COLLABORATIVE RESEARCH AND LICENSE AGREEMENT

THIS COLLABORATIVE RESEARCH AND LICENSE AGREEMENT (the
"Agreement") is entered into and made effective as of October 15, 1997 (the
"Effective Date"), by and between COMBICHEM, INC., a Delaware corporation having
its principal offices at 9050 Camino Santa Fe, San Diego, California 92121
("CombiChem") and ATHENA NEUROSCIENCES, INC., a Delaware corporation and a
wholly-owned subsidiary of Elan Corporation, plc ("Elan"), having its principal
offices located at 800 Gateway Boulevard, South San Francisco, California 94080
("Athena").

WHEREAS, CombiChem has developed and owns certain drug discovery
technology and intellectual property rights, including chemical library design
software, multi-parallel synthesis and purification methods, chemical libraries
suitable for high throughput biological screening assays and medicinal chemistry
(collectively, "CombiChem Technology");

WHEREAS, as of the Effective Date, Elan, Athena and their
Affiliates have developed and own certain drug discovery and intellectual
property rights, including certain assays, methods and know how regarding the
Initial Targets and the Optional Targets, among other things (collectively
"Athena Technology");

WHEREAS, Athena desires to utilize CombiChem Technology for its
drug discovery activities under Athena know-how concerning the identification
and characterization of novel small molecule inhibitors for development as
therapeutics for treatment of central nervous system conditions in humans;

WHEREAS, the parties wish to collaborate in a Research Program
against Collaboration Target(s) ("Collaboration");

WHEREAS, during the Research Period and for purposes of the
Collaboration, the Parties intend to focus on up to six (6) Collaboration
Targets;

NOW, THEREFORE, the Parties agree as follows:

1. DEFINITIONS

1.1 "Abandoned Target" shall have the meaning given in Section
4.1.

1.2 "Abandoned Compound" shall have the meaning given in Section
4.1.

1.3 "Active Compound(s)" means a compound (or compounds) which

(a) (i) is selected by the RMC under the Research
Program from Collaboration Compounds under
Section 4.2, or

<PAGE> 3

(ii) is a Derivative of a Collaboration Compound
which is so selected by the RMC; and

(b) shows In Vitro Activity.

1.4 "Affiliate" of a Party means any corporation or other
business entity controlled by, controlling or under common control with, such
Party. For this purpose "control" shall mean direct or indirect beneficial
ownership of more than fifty percent (50%) of the voting securities or income
interest in such corporation or other business, or if not meeting the preceding
requirements, any company owned or controlled by or owning or controlling such
Party at the maximum control or ownership right permitted in the country where
such company exists.

1.5 "Athena Compound" means a chemical compound that is
proprietary to Athena or whose use or manufacture is proprietary to Athena or
its Affiliates.

1.6 "Athena Technology" shall have the meaning set forth in the
preamble of this Agreement.

1.7 "Collaboration" has the meaning set forth in the preamble.

1.8 "Collaboration Compound(s)" means a compound (or compounds)
which (a) is synthesized following the Effective Date for screening against a
Collaboration Target under the Research Program, (b) is a pre-existing or
hereafter acquired CombiChem compound which CombiChem desires to designate as a
Collaboration Compound, or (iii) is a pre-existing or hereafter acquired Athena
compound which Athena desires to designate as a Collaboration Compound.

1.9 "Collaboration Library" means a library synthesized under the
direction of the RMC, containing compounds designed to provide information
regarding activity against a specific Collaboration Target.

1.10 "Collaboration Target(s)" means either an Initial Target or
an Optional Target.

1.11 "CombiChem Compound" means a chemical compound that is
proprietary to CombiChem, or whose use or manufacture is proprietary to
CombiChem.

1.12 "CombiChem Technology" has the meaning set forth in the
preamble.

1.13 "Confidential Information" includes, but is not limited
to,

(a) all information and materials received by either
Party from the other Party pursuant to this
Agreement which is confidential under Article 11;

2
<PAGE> 4

(b) all information and materials by either Party
arising out of the Collaboration during the
Research Period;

(d) the financial terms of this Agreement.

1.14 "Daughter Libraries" shall mean the compound libraries which
are designed and synthesized as a part of the Collaboration.

1.15 "Derivative" shall mean a compound (or compounds) which has
resulted from subsequent chemical synthesis to generate an Active Compound or
Development Compound in support of the Research Program.

1.16 "Development Compound(s)" means a compound (or
compounds) which

(a) (i) is an Active Compound or (ii) is a
Derivative of an Active Compound; and

(b) is determined by Athena to be appropriate for
preclinical studies for the purpose of IND filing
by Athena.

1.17 "Due Diligence" means the use of by a Party of its or its
Affiliates' resources in a manner which is consistent with the exercise of
reasonable and prudent scientific and business judgment as applied to other
programs of Athena or CombiChem, as the case may be, targeting products aimed at
markets or patient groups of similar sizes and of similar scientific and
commercial potential. With respect to any Development Compound, "Due Diligence"
shall also require Athena or its Affiliates to use commercially reasonable
efforts to conduct all necessary preclinical studies and to file an IND for such
Development Compound within two (2) years from the date upon which Athena has
designated such Development Compound from any Active Compound or its
Derivatives. For purposes of this Agreement, failure to exercise Due Diligence
by any Party shall be established if such Party receives written notice
describing such failure and does not cure such failure within ninety (90) days
of the receipt of such notice.

1.18 "Exclusivity Period" means the Research Period plus
twelve (12) months.

1.19 "Field" means all therapeutic and diagnostic indications in
humans for any target against which an Active Compound, Development Compound or
Products may be directed.

1.20 "First Commercial Sale" of a Product shall mean the first
sale for use or consumption of such Product in a country after required
marketing and pricing approval has been granted by the governing health
regulatory authority of such country. Sale to an Affiliate shall not constitute
a First Commercial Sale unless the Affiliate is the end user of the Product.

3
<PAGE> 5

1.21 "FTE" shall mean a full-time equivalent employee of
CombiChem. For purposes of this Agreement, the FTEs shall include synthetic and
analytical chemists, compound control scientists and computational scientists.

1.22 "Inactive Compound(s)" means a Collaboration Compound(s)
which does not have the In Vitro Activity required for an Active Compound.

1.23 "In Vitro Activity" shall mean the observation of *** in
assays as described by Athena in the Research Plan for each Collaboration
Target.

1.24 "Initial Target" shall have the meaning set forth in
Section 3.1 hereof.

1.25 "Net Sales" means the gross sales invoiced by Athena or its
Affiliates for Products to non-Affiliated Third Parties (and to Affiliates who
are the end users of such Products) less actual deductions or returns (including
withdrawals and recalls), rebates (price reductions, including formulary or
Medicaid and similar types of rebates, e.g. chargebacks), cash, trade or volume
(quantity) discounts, discounts granted at the time of invoicing, the cost of
transport, insurance, delivery, sales taxes and use, tariff, excise or other
taxes (other than income taxes) directly linked to and included in the gross
sales amount as computed on a product-by-product basis for the countries
concerned, whereby the amount of such sales in foreign currencies is converted
into United States dollars at the exchange rate of the last business day for
each calendar month as reported in The Wall Street Journal.

1.26 "Optional Target(s)" means a Target that is added to the
Collaboration in accordance with Section 3.2.

1.27 "Patent" means (a) valid and enforceable Letters Patent, and
any non-U.S. equivalent, including any extension (including Supplemental
Protection Certificates), registration, confirmation, reissue, continuation,
divisionals, continuation-in-part, reexamination or renewal thereof, or (b)
pending applications for any of the foregoing, whether filed or issued before or
after the Effective Date of this Agreement.

1.28 "Party" means CombiChem or Athena, as the case may be,
including their respective Affiliates, permitted successors and assigns.

1.29 "Product(s)" means any product containing an Active Compound
or Development Compound with such compound as the active ingredient and which is
granted regulatory approval by the governing health regulatory authority of the
applicable country for marketing in the Field.

1.30 "Project Team" shall have the meaning set forth in Section
2.1(c).

1.31 "Proposed Targets" shall have the meaning given in Section
3.1.

*** Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the Commission.

<PAGE> 6

1.32 "Related Target(s)" shall mean those targets identified by
Athena in writing to CombiChem as having a direct relationship to Collaboration
Targets or Proposed Targets, which will provide Athena exclusivity as outlined
in Section 4.5.

1.33 "Research Management Committee" or "RMC" has the meaning set
forth in Article 6 below.

1.34 "Research Period" means the initial term of the
Collaboration commencing on the Effective Date and ending on December 31, 2000,
unless earlier terminated, which can be extended in accordance with Section 7.1
below.

1.35 "Research Plan" means the research plan to be agreed in
writing between the Parties, which describes the research activities to be
performed for each Collaboration Target.

1.36 "Research Program" means the research to be conducted for
the Collaboration including, without limitation, the activities described in the
Research Plan and set forth in Sections 2.1 and 2.2 of this Agreement.

1.37 "Returned Compound" shall have the meaning set forth in
Section 9.2.

1.38 "Royalty Term" means, in the case of any Product, in any
country, the period of time commencing on the First Commercial Sale and ending
upon the later of (a) ten (10) years from the date of First Commercial Sale in
such country; or (b) the expiration of the last-to-expire Patent resulting from
the Research Program filed in the Field during the Exclusivity Period with
claims covering that Product in the relevant country.

1.39 "Target" means a biomolecular entity that a small molecule
is synthesized against wherein the small molecule demonstrates relevant
activity.

1.40 "Territory" means the entire world.

1.41 "Third Party" means an entity other than CombiChem or Athena
or their respective Affiliates.

1.42 "UIL" means CombiChem's proprietary Universal Informer
Library(TM).

2. RESEARCH COLLABORATION

2.1 CombiChem Responsibilities. CombiChem shall with Due
Diligence provide the following resources to Athena and conduct the following
activities under the Research Program and as more fully described in the
Research Plan:

(a) During the Research Period, CombiChem shall (i)
review data and information regarding the
Collaboration Targets provided by Athena; (ii)
based on such data and information and using the

<PAGE> 7

CombiChem Technology, design Daughter Libraries;
and (iii) supply all lead chemistries and
synthesize compounds as provided in Section 5.4
below.

(b) During the Research Period, CombiChem shall keep
Athena informed of its activities performed in
connection with the Collaboration, including,
without limitation, providing Athena with data and
information (and, upon Athena's request, reasonable
quantities of samples pursuant to Section 5.4)
regarding the status of all Collaboration Compounds
prior to the meetings of the Research Management
Committee.

(c) Subject to Section 2.3, Article 3 and Section 8.3,
and at all times during the Research Period,
Combichem shall dedicate, in separate laboratory
facilities as to its chemistry efforts, one or more
project team(s) ("Project Team"), each consisting
of such number of FTEs as determined by the RMC to
conduct all of CombiChem's activities in connection
with the collaboration at a per annum rate of U.S.
*** to be paid by Athena. The initial Project Team
shall consist of a minimum of five (5) CombiChem
FTEs, unless the RMC determines other use.

2.2 Athena Responsibilities. Athena shall with Due Diligence
provide the following resources to CombiChem and conduct the following
activities under the Research Program as more fully described in the Research
Plan:

(a) Athena shall provide CombiChem with funding for the
Collaboration as set forth in Article 8, provide
screening, biological and structural data and
information (including leads and/or screening hits
and assay methods relating to Collaboration
Compounds) to CombiChem with respect to the
Collaboration necessary for CombiChem to perform
its duties under this Agreement, and will assume
scientific, financial and administrative
responsibility for screening and biological support
activities, drug development and regulatory filings
during and after the term of the Collaboration on
the terms set forth below. At its option, Athena
may also provide pre-existing screening data and
related information for the Collaboration.

(b) During the Research Period, Athena shall provide
CombiChem with data and information regarding
Collaboration Compounds and the Collaboration
Target assays developed by Athena under the
Research Program prior to the meetings of the
Research Management Committee.

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<PAGE> 8

(c) During the Exclusivity Period, Athena shall screen
Collaboration Compounds for In Vitro Activity and,
where appropriate, in vivo activity against the
Collaboration Target.

(d) During the Exclusivity Period, with respect to any
Collaboration Target against which an Active
Compound has designated by the RMC, Athena shall
(i) screen Active Compound, (ii) endeavor to
determine Development Compounds, and (iii) endeavor
to develop Products. At any time during the
Collaboration, Athena may apply chemistry effort to
any Collaboration Compound, including synthesis, as
coordinated by the RMC.

(e) Following the first IND filing through First
Commercial Sale, Athena shall provide CombiChem
with an annual report summarizing Athena's
activities in developing Development Compounds.

2.3 Conduct of Research Program. The Parties hereby agree that
the Research Programs shall be carried out in accordance with the Research Plan,
as amended from time to time. The Research Management Committee shall review the
Research Plan on an ongoing basis and may make changes to the Research Plan so
long as such changes are mutually agreed to by CombiChem and Athena. For each
Research Program, the RMC will determine the appropriate size and composition of
the Project Team (i.e., the identity and number of CombiChem FTEs in each
relevant scientific discipline), and shall prioritize the activities of the
Project Team against such Collaboration Target(s) within the scope of that
Research Program.

Athena shall designate the first Collaboration Target from
the Proposed Targets by notice in writing to CombiChem. The Research Program
against that Target shall commence *** against the *** Collaboration Target. The
commencement date of the Research Program(s) for the subsequent Initial Targets
(other than the first Collaboration Target) and any Optional Targets shall be as
set forth in Section 3.1.

2.4 Third Party Licenses. Each Party shall be solely responsible
for any Third Party license fees required to perform its obligations under this
Agreement.

3. TARGETS

3.1 Initial Targets. During the Research Period, Athena may
designate *** "Proposed Targets" (with the right of substitution) as "Initial
Targets" to be worked on by Project Teams for purposes of the Collaboration. The
Proposed Targets and the Initial Targets shall be those designated in writing by
the Chief Operating Officer of Elan within *** of the Effective Date. No
activity with respect to any Initial Targets shall be conducted by the Project
Teams until a date to be mutually agreed upon by the Parties. The Project Teams

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<PAGE> 9

shall work on Initial Targets as directed by the RMC. The project fee set forth
in Section 8.1(a) shall include all *** Initial Targets.

3.2 Optional Targets. Subject to timely payment of its
obligations set forth in Article 8 (including the project initiation fee set
forth in Section 8.1(b) and the payments required in Sections 8.3, 8.4, 8.5 and
9.3) and provided that all *** Initial Targets have been designated by Athena
and the Research Programs covering such Initial Targets are or have been active,
during the Research Period, Athena may designate (by providing written notice in
the manner described in Section 3.1) *** additional Proposed Targets (or other
Targets as may be mutually agreed) as Optional Targets, with the Research
Program for each such Optional Target to begin within ninety (90) days of such
written notification or as mutually agreed by the parties; it being understood
that the Project Teams shall work on Optional Targets as directed by the RMC.
The project initiation fee set forth in Section 8.1(b) shall include ***
Optional Targets. Upon such designation, the RMC shall establish the specific
scientific achievements (to be mutually agreed between CombiChem and Athena) for
such Optional Target and the same shall be designated as an Optional Target for
the Collaboration and subject to the terms (including the commercial terms) of
this Agreement.

4. EXCLUSIVITY

4.1 Collaboration Target Exclusivity. Prior to designating a
Collaboration Target for an active Research Program under Article 3, and
thereafter so long as Athena or its Affiliates are proceeding with Due Diligence
for that Target, CombiChem shall not knowingly work on or knowingly provide
information regarding a Collaboration Target with or to any Third Parties,
except (a) as provided for in Section 12.2 with regard to any Public Statements,
and (b) with respect to any Third Parties who are collaborators or proposed
collaborators of CombiChem, CombiChem shall have the right, consistent with its
corporate policy (but without identifying any Collaboration Target), to notify
any such Third Party of its decision and/or inability to work on such Target
with that Third Party. In the event that Athena or its Affiliates have not
transferred or assigned control of its program for that Target to a Third Party
under due diligence obligations no less stringent than those set forth herein
and have failed to exercise Due Diligence with respect to, or notifies CombiChem
in writing that it has abandoned work on, any Collaboration Target (an
"Abandoned Target") and any Collaboration Compound associated with such
Abandoned Target (together with all Derivatives of such Collaboration Compound,
an "Abandoned Compound"), then such Abandoned Target and/or Abandoned Compound
shall be available to CombiChem (excluding any Athena Compounds and Athena
Technology) and to Athena for any purpose thereafter.

4.2 Active Compounds. Following the designation of any
Collaboration Compound as an Active Compound, such Active Compound shall be
exclusively available to Athena for research or application to any Target,
within or outside the Collaboration, during the Exclusivity Period and CombiChem
shall not knowingly work on or knowingly provide information regarding such
Active Compound to any Third Party, except to reject and take any steps
necessary to protect Athena's exclusivity hereunder. Following the expiration of
the Exclusivity Period Active Compounds for that Target upon which a Patent has
not been filed

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<PAGE> 10

within ninety (90) days following the Research Period shall be deemed to be
Inactive Compounds for all purposes hereunder; provided, that any Active
Compound which is the subject of claim(s) under a pending Patent shall continue
to be treated as Active Compounds until a Patent is issued with respect to one
or more of such claims; or until all of such Patent claims have been denied, at
which time the compounds which are the subject to those claims shall be Inactive
Compounds hereunder.

4.3 Inactive and Returned Compounds. Any Inactive Compounds and
Returned Compounds shall be available to CombiChem (except for any pre-existing
Athena Compound) and Athena for any purpose following the designation of a
Collaboration Compound as an Inactive Compound or Returned Compound.

4.4 Duration of Exclusivity for Collaboration Targets.
Notwithstanding any other provision of this Agreement, it is understood and
agreed that once a research Program has been initiated by the RMC for a
Collaboration Target, CombiChem's obligations under Section 4.1 shall continue
until Athena has (a) released CombiChem from the effect of this Section 4.4 by
written notice from the Chief Operating Officer of Elan, or (b)(i) failed to
exercise Due Diligence with respect to that Target, and (ii) has not transferred
or assigned its control of the development of its program for that Target to a
Third Party with due diligence requirements no less stringent than those set
forth in this Agreement. In the event of such transfer or assignment to a Third
Party, the Exclusivity Period provided in this Section 4.4 with respect to such
Target shall continue until the earlier of (a) receipt by CombiChem of a written
release from such Third Party or (b) the failure of such Third Party to exercise
Due Diligence with respect to that Target.

4.5 Exclusivity of Related Targets. (a) During the Research
Period (and thereafter, as provided in Section 4.5(c) below), CombiChem shall
not knowingly work on or knowingly provide information regarding a Related
Target with or to any Third Party, except (i) as provided for in Section 12.2
with regard to any Public Statements, and (ii) with respect to any Third Parties
who are collaborators or proposed collaborators of CombiChem, CombiChem shall
have the right, consistent with its corporate policy (but without identifying
any Collaboration Target or Related Target) to notify any such Third Party of
its decision and/or inability to work on such Target with that Third Party.

(b) *** *** has conducted scientific inquiry or research
regarding that Target. The RMC may from time to time discuss the status
of Athena's inquiry or research into any such additional Related
Targets. Athena shall notify CombiChem in writing if it abandons its
inquiry or research regarding any additional Related Targets, at which
point it shall no longer be a Related Target.

(c) The exclusivity provided in Section 4.5(a) shall be
extended for an additional year following the Research Period upon the
initiation of a Research Program for each of the *** Collaboration
Targets, for a maximum extension of three years following the Research
Period.

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<PAGE> 11
(d) If a Related Target or additional Related Target
becomes a Collaboration Target, then all of the other provisions of
this Agreement (including without limitation the exclusivity provisions
of this Article 4) shall apply to such Collaboration Target.

4.6 Survival. This Article 4 shall survive termination or
expiration of this Agreement.

5. COLLABORATION COMPOUNDS

5.1 Pre-Existing Compounds. Neither Party shall have any rights
to any pre-existing compound of the other Party unless and until such compound
is designated as a Collaboration Compound by such Party. Additionally, CombiChem
may decline (after informing Athena) to synthesize a particular compound or
library of compounds by reason of existing Patents or contractual obligations.

5.2 Intellectual Property Rights; License to Athena. Subject to
Section 9.2, and except as set forth in this Section 5.2, Athena shall own and
have exclusive rights in all Patents and intellectual property (whether or not
patentable) relating to Active Compounds and the subject matter contained
therein and resulting from the Research Program during the Exclusivity Period
and thereafter so long as Athena continues to show Due Diligence for that
Target. Notwithstanding the foregoing, Athena acknowledges and agrees that
CombiChem reserves the right to assign or grant exclusive rights to any compound
to a third party collaborator who completes an act of invention with regard to
such compound to the extent CombiChem is obligated to do so under CombiChem's
existing contractual obligations and further provided that CombiChem has timely
(but in any event within *** after notification from Athena that such compound
shows In Vitro Activity) notified Athena in writing of such assignment or grant
and its designation as an unavailable compound. Athena shall be responsible for
filing, maintaining and prosecuting all Patents relating to Active Compounds at
its sole expense. Prior to the filing of any such Patent applications, CombiChem
shall assign to Athena or its designee all intellectual property rights it may
have in the Active Compounds and the subject matter claimed therein which are
necessary for the development and commercialization by Athena or its designee.
If Athena fails to so file, maintain or prosecute such Patent, CombiChem shall
have the right to request Athena to do so. If Athena elects not to file,
maintain or prosecute such Patent, on a country-by-country basis, CombiChem
shall have the right to take over such filing, maintenance or prosecution of
such Patent, at its sole expense, and, as a result, *** shall be entitled to
recover from the proceeds of any infringement action brought by CombiChem in any
such country (i) *** , and (ii) *** , with the remainder to be paid *** .

5.3 Structural Information. Neither Party shall disclose the
structure of any Active Compound to any Third Party without the other Party's
written permission, unless required to do so by law, in which case such Party
shall promptly notify the other Party of such required disclosure. If a subpoena
or other legal process concerning the same is served upon either Party, the
other Party shall cooperate with the Party served in any effort to contest the
validity of such subpoena or other legal process.

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<PAGE> 12

5.4 Supply of Collaboration Compounds. Aliquots of at least ***
milligrams of any Collaboration Compound that has been synthesized will be
prepared and given to Athena. CombiChem shall replenish that amount upon
Athena's reasonable request. CombiChem shall maintain aliquots of any
Collaboration Compound that has been synthesized by CombiChem. CombiChem shall
also provide Athena with additional requirements of samples at CombiChem's cost.

6. RESEARCH MANAGEMENT COMMITTEE

The design, review and conduct of the Research Program will be
coordinated by the Research Management Committee, which will meet regularly on a
mutually-agreeable schedule. Each Party shall bear its own expenses related to
such meetings. The Research Management Committee may establish and amend or
revise the Research Plan as reasonable and necessary to reflect the scientific
progress and work performed under the Research Program, such amendments to be
mutually agreed to in writing by Athena and CombiChem. The Research Management
Committee will consist of an equal number of members from Athena and CombiChem
and will include appropriate representatives from Athena and CombiChem as
mutually agreed. The co-chairs of the Research Management Committee will
initially be the Vice President, Chemistry of CombiChem and the Vice President,
Research of Athena and subsequently may change as each Party determines for its
co-chair. Decisions of the Research Management Committee shall be by consensus.
If Athena elects not to file, maintain or prosecute such Patent, on a
country-by-country basis, CombiChem shall have the right to take over such
filing, maintenance or prosecution of such Patent, at its sole expense, and, as
a result, CombiChem shall be entitled to recover from the proceeds of any
infringement action brought by CombiChem in any such country (i) 200% of its
out-of-pocket costs, and (ii) 50% of the balance of the proceeds of such action,
with the remainder to be paid to Athena.

7. RESEARCH PERIOD; TERMINATION OF RESEARCH PROGRAM

7.1 Research Period: Option to Extend the Research Period. The
initial term of the Collaboration shall be the Research Period subject to
extension upon mutual agreement. To extend the Research Period, Athena must
notify CombiChem no later than ninety (90) days prior to the then-current
expiration date and the Parties shall negotiate in good faith the terms and
conditions of any such extension.

7.2 Termination of Research Program Upon Breach. The Research
Program and/or this Agreement may be terminated by a Party for the material
breach by the other Party as provided by Section 10.2.

7.3 Termination by Athena. Athena may terminate this Agreement
effective at any time after one (1) year from the Effective Date, in its sole
discretion, upon ninety (90) days' prior written notice. Athena may also
terminate any part of the Research Program directed at one or more of the
Collaboration Targets, also upon ninety (90) days' prior written notice, at any
time during the Collaboration, in which case the RMC shall reallocate the FTEs
affected to any of the other Collaboration Targets.

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<PAGE> 13

8. CONSIDERATION

8.1 Project Initiation Fee. Athena shall pay CombiChem (a) within
ten (10) days following the Effective Date a non-refundable, noncontingent
project initiation fee of U.S. $1,333,333 in cash to initiate the Research
Program for the Initial Targets (Collaboration Targets *** ) and (b) upon the
designation of any Optional Target (Collaboration Targets *** ), a
non-refundable project initiation fee of U.S. *** per Optional Target (for a
total of *** ), payable upon the later of (i) the date of commencement of a
Research Program with respect to such Optional Target, or (ii) *** .

8.2 Equity Purchase. Elan International Services, Ltd. ("EIS"),
an Affiliate of Athena, shall purchase shares of Common Stock of CombiChem
pursuant to the terms of that certain Common Stock Purchase Agreement, dated as
of the Effective Date, by and between CombiChem and EIS (the "Stock Purchase
Agreement"). In the event that CombiChem closes an initial public offering of
its common stock at a sales price per share to the public (the "IPO Price")
which is less than $2.50 per share (on a pre-split basis), then, upon the
closing of such initial public offering, CombiChem shall issue to ImClone,
without further consideration other than the purchase price paid by ImClone
pursuant to the Stock Purchase Agreement, such additional number of shares of
CombiChem common stock equal to:

2,000,000
--------- = 1,000,000
Adjusted Price

wherein the "Adjusted Price" = the IPO Price X .80 if the IPO Price is less
than $2.50 per share. All shares of CombiChem common stock issued pursuant to
this Section 8.1 shall be deemed to be "Shares" within the meaning of the Stock
Purchase Agreement.

8.3 Program Funding.

(a) Research Support for Project Team. At all times
during the Research Period, Athena shall make payments to CombiChem for direct
research support for its Project Team, which shall consist of a minimum of five
(5) full time employees ("FTEs") of CombiChem, unless the RMC determines
otherwise. The total amount payable per FTE shall be U.S. *** . All payments for
direct research support shall be paid by Athena to CombiChem, quarterly in
advance, and adjusted as necessary in subsequent quarters, of such amounts as
are equal to the product of (i) the number of CombiChem FTEs (a minimum of five
(5) FTEs at all times unless the RMC determines otherwise) allocated to the
Research Program by the RMC for the calendar quarter to which each such payment
applies, multiplied by (ii) U.S. *** (i.e., the quarterly amount per Combichem
FTE on the basis of U.S. *** ). All such FTEs shall be CombiChem's employees.
Athena shall not be responsible for, and CombiChem shall indemnify and hold
Athena harmless from, any salary, benefits, or employment-related claims of any
kind asserted by CombiChem's employees.

(b) Expansion of Project Team. Athena may request that
CombiChem expand its Project Team during the Research Period in order to
accelerate work on Collaboration Targets and/or to add Optional Targets. In such
event, the RMC shall promptly confer as to the appropriate number of FTEs to be
added to the Project Team, at a cost to Athena of U.S. *** per FTE to be paid as
specified in Section 8.3(a).

8.4 Milestone Payments. Within thirty (30) days of the occurrence
of a development milestone triggered by the activities of Athena or its
Affiliates as shown on Appendix A, Athena shall pay CombiChem the related
milestone payment in U.S. dollars as set forth on Appendix A. Such payments
shall apply to any milestone reached by an Active Compound, Development Compound
or Product, whether the Target is within or outside the Collaboration.

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<PAGE> 14

8.5 Royalties. During the Royalty Term, Athena will pay CombiChem
a *** of Net Sales of Products sold by Athena or its Affiliates in all countries
in the Territory. Each payment of royalties shall be accompanied by a report of
Net Sales of Products in sufficient detail to permit confirmation of the
accuracy of the royalty payment made.

8.6 Manner and Place of Payment. Royalty payments and reports for
Net Sales of Products shall be calculated in local currencies and reported for
each calendar quarter. All royalty payments owed under this Agreement shall be
made by wire transfer to the bank account to be designated by CombiChem within
sixty (60) days following the end of each such calendar quarter.

8.7 Records and Audit. During the term of this Agreement and for
a period of three (3) years thereafter, Athena shall keep complete and accurate
records pertaining to the sale or other disposition of Products in sufficient
detail to permit CombiChem to confirm the accuracy of all payments due
hereunder. CombiChem shall have the right to cause an independent certified
public accounting firm reasonably acceptable to Athena to audit such records to
confirm Athena's Net Sales for the preceding year. Any information obtained
during such audit shall be treated as Confidential Information. Such audits may
be exercised after reasonable notice during normal business hours of Athena no
more than once each year. CombiChem shall bear the full cost of such audit
unless such audit discloses a deficiency of the greater of *** or more than ***
from the amount of the Net Sales reported by Athena for such audited period. In
such case, Athena shall bear the reasonable cost of such audit.

8.8 Taxes. All income and other taxes levied on account of the
royalties and other payments accruing to CombiChem under this Agreement shall be
paid by CombiChem, including taxes levied thereon as income to CombiChem. If
provision is made in law or regulation for withholding, such tax shall be
deducted from the royalty or other payment made by Athena to the proper taxing
authority and a receipt of payment of the tax secured and promptly delivered to
CombiChem. Each Party agrees to assist the other Party reasonably in claiming
exemption from such deductions or withholdings under any double taxation or
similar agreement or treaty from time to time in force.

9. LICENSE GRANTS; OUTLICENSE

9.1 CombiChem License Grant to Athena. Subject to the terms and
conditions of this Agreement, CombiChem hereby grants to Athena an exclusive,
royalty-free, worldwide license, with the right to sublicense to use such
CombiChem Technology as is necessary to make, have made, use, have used, sell,
have sold, import and export Collaboration Compounds or Products in the
Territory. Such license shall remain exclusive (including as to CombiChem) in
relation to each Active Compound, Development Compound and/or Product so long as
Athena or its licensee continues to develop and commercialize such Active
Compound, Development Compound and/or Product against a Collaboration Target
with Due Diligence.

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9.2 Athena License Grant to CombiChem. Subject to Article 4 and
following the failure of Athena or its licensee to develop and commercialize
with Due Diligence an Active Compound, a Development Compound or Product, as the
case may be (collectively, and together with all Abandoned Compounds, "Returned
Compounds"), Athena shall grant to CombiChem a non-exclusive, royalty-free
license, with the right to sublicense, under those Athena Patents and know-how
which are resulting from the Research Program and related exclusively to the
Returned Compound, to make, have made, use, have used, sell, have sold, import
and export such Returned Compound in the Territory.

9.3 Athena Outlicense. Athena shall have the right to transfer,
assign or outlicense to a Third Party the Products or Patents covering the
Products, subject to CombiChem's right to receive (a) royalties as provided in
Appendix A, and (b) the percentage of the Third Party Payments set forth in
Appendix A. For purpose of this Section 9.3, "Third party Payments" shall mean
all payments **** *** , which shall include, but not be limited to, *** *** ***
. All Payments shall be made to CombiChem by wire transfer to such bank account
designated by CombiChem within five (5) business days after receipt by Athena or
its Affiliates of such Payments from the Third Party. As an express condition of
any such outlicense, any such licensee shall be required to agree in writing to
be bound by due diligence, royalty reporting and recordkeeping and inspection
provisions no less stringent than those contained in this Agreement. In
addition, CombiChem shall have the right to receive all audit reports relating
to sales of Products of Athena's licensees, and to cause Athena or its
Affiliates or successors to have an independent certified public accounting firm
(reasonably acceptable to Athena) audit such licensee's records on the same
terms as those specified in Section 8.6. Failure of such licensee to make any
milestone or royalty payment in respect of such Product shall not relieve Athena
of its obligations to make royalty and milestone payments to CombiChem
hereunder.

9.4 Rights to Inactive Compounds. Except for any Athena Compounds
(which remain proprietary to Athena), each of Athena and, subject to Athena's
Patent rights, CombiChem shall have rights to make, have made, use, have used,
sell, have sold, import and export Inactive Compounds or products containing
Inactive Compounds. Specifically, each party shall be free to screen Inactive
Compounds against any target other than the Collaboration Targets. In the event
that either Athena or CombiChem shall develop, market and/or sell, or enter into
a binding agreement with a Third Party to develop, market and/or sell, any
product containing the Inactive Compound as an active ingredient, then the other
Party hereto shall not be entitled to any payments, milestones, royalties, fees
or compensation of any kind.

10. TERM AND TERMINATION OF THE AGREEMENT

10.1 Term. The term of this Agreement shall commence upon the
Effective Date of this Agreement, and unless earlier terminated as provided in
this Agreement, shall expire on December 31, 2000.

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<PAGE> 16

10.2 Termination by Athena or CombiChem. If either Party
materially breaches this Agreement and fails to remedy that breach within ninety
(90) days of receiving written notice thereof from the other Party, or enters
into any arrangement of composition with its creditors or goes into liquidation,
insolvency, bankruptcy, receivership or reorganization proceedings, whether
voluntarily or compulsorily which is not dismissed within ninety (90) days, then
the other Party may at any time, by notice in writing or by telefax, terminate
this Agreement. Within sixty (60) days following termination for any Research
Program and/or research related to any Target under this Agreement, the RMC
shall prepare a detailed, final written report to each Party, and provide any
remaining supply of compounds in synthesis to date, for each Target or Research
Program being terminated.

10.3 After Termination. Any termination of this Agreement or the
Research Program shall be without prejudice to the accrued rights of either
Party prior to the termination. In case of termination of this Agreement or the
Research Program pursuant to Section 10.2 above, all royalty, milestone, Payment
and confidentiality obligations set forth in Sections 8.1, 8.4, 8.5, 9.3, 9.4
and Articles 11 and 12 shall survive any such termination. Moreover, Athena
shall not be entitled to any refund of any payments made to CombiChem hereunder
upon the expiration of the term of this Agreement or earlier termination
pursuant to this Article 10.

10.4 Effect of Termination on Licensees. In the event or any
termination of this Agreement pursuant to this Article 10 where such termination
shall not have been caused by the action of inaction on the part of any
respective licensee of Athena or CombiChem, or by any breach by such licensee of
its obligations under its licensee from Athena or CombiChem, as appropriate,
such termination of this Agreement shall be without prejudice to the rights of
each non-breaching licensee and such licensee shall be deemed to be a direct
licensee hereunder.

11. CONFIDENTIAL INFORMATION

11.1 Nondisclosure. During the term of this Agreement and for a
period of *** *** after termination thereof, each Party will maintain all
Confidential Information in trust and confidence and will not disclose any
Confidential Information to any third party or use any Confidential Information
for any purpose except (i) as expressly authorized by this Agreement, (ii) as
required by law or court order, after as much advance notice as is practical to
the other Party, (iii) to its consultants, subcontractors or agents who need to
know to accomplish the purposes of this Agreement and who are bound by
equivalent written confidentiality obligations. Each Party may use the other
Party's Confidential Information only to the extent required to accomplish the
purposes of this Agreement. Each Party will use at least the same standard of
care as it uses to protect proprietary or confidential information of its own to
ensure that its Affiliates, employees, agents, consultants and other
representatives do not disclose or make any unauthorized use of the Confidential
Information. Each Party will promptly notify the other upon discovery of any
unauthorized use or disclosure of the Confidential Information.

11.2 Exceptions. Confidential Information shall not include any
information which the receiving Party can prove by competent evidence: (a) is
now, or hereafter becomes, through no act or failure to act on the part of the
receiving Party, generally known or available;

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<PAGE> 17

(b) is known by the receiving Party at the time of receiving such information,
as evidenced by its records; (c) is hereafter disclosed to the receiving Party
by a Third Party, as a matter of right and without restriction on disclosure;
(d) is independently developed by the receiving Party without the aid,
application or use of Confidential Information; or (e) is the subject of a
written permission to disclose provided by the disclosing Party.

12. PUBLICATIONS AND PUBLIC STATEMENTS

12.1 Publications. Without affecting obligations under Article 11
above, neither Party shall publish any information with respect to Collaboration
Compounds or Development Compound during the Exclusivity Period without the
prior written permission of the other Party. Such permission shall be approved
or disapproved within thirty (30) days of written request for permission unless
the other Party requests additional time (not to exceed ninety (90) days) for
the purpose of protecting its intellectual property position. Such permission
shall not be unreasonably withheld. The Party proposing to publish such
information shall give the other Party ninety (90) days prior written notice and
an opportunity to review such manuscript in order to determine the patentability
of the information contained therein.

12.2 Public Statements. Neither Party shall use the name of the
other Party in any public statement, prospectus, annual report or press release
or other public communication (collectively "Public Statements") without the
prior written approval of the other Party, which may not be unreasonably
withheld or delayed; provided, however, that both Parties shall endeavor in good
faith to give the other Party a minimum of two (2) business days to review such
Public Statements; provided, further, that, upon approval of any such Public
Statement, both Parties may disclose to Third Parties the information contained
in such Public Statement without the further approval of the other; and
provided, further, that if a Party does not approve such Public Statement,
either Party may still use the name of the other Party in any Public Statement
without the prior written approval of the other Party, if such Party is advised
by counsel that such disclosure is required to comply with applicable law.

13. INDEMNIFICATION

13.1 EACH PARTY HEREBY AGREES TO SAVE, DEFEND AND HOLD THE OTHER
PARTY AND ITS OFFICERS, DIRECTORS, EMPLOYEES, CONSULTANTS AND AGENTS HARMLESS
FROM AND AGAINST ANY AND ALL SUITS, CLAIMS, ACTIONS, DEMANDS, LIABILITIES,
EXPENSES AND LOSSES, INCLUDING REASONABLE LEGAL EXPENSES AND ATTORNEYS' FEES
("LOSSES") RESULTING DIRECTLY OR INDIRECTLY FROM THE INDEMNIFYING PARTY'S ACTS
OR OMISSIONS IN CONNECTION WITH THE MANUFACTURE, DEVELOPMENT, USE, HANDLING,
STORAGE, SALE OR OTHER DISPOSITION OF CHEMICAL AGENTS, COLLABORATION COMPOUNDS,
ACTIVE COMPOUNDS, DEVELOPMENT COMPOUNDS OR PRODUCTS BY SUCH PARTY, ITS
AFFILIATES OR LICENSEES except to the extent such Losses result from the
negligence, breach of this Agreement or willful misconduct of the Party claiming
a right of indemnification under this Article 13.

<PAGE> 18

13.2 Infringement

(a) Subject to Section 13.2(c) below, Athena shall hold
CombiChem and its officers, directors, employees, consultants, and agents
harmless from and against any and all losses resulting from the infringement of
any Third Party's Patent issued as of the Effective Date due to the performance
by Athena or its Affiliates of any activity contemplated hereunder, including,
but not necessarily limited to, Athena's responsibilities under Section 2.2
above, developing Products, and selling Products.

(b) Subject to Section 13.2(c) below, CombiChem shall hold
Athena and its officers, directors, employees, consultants, and agents harmless
from and against any and all losses resulting from the infringement of any Third
Party's Patent issued as of the Effective Date due to the performance by
CombiChem of any activity contemplated hereunder, including, but not necessarily
limited to, CombiChem's responsibilities under Section 2.1 above.

(c) The indemnity provided in Sections 13.2(a) and 13.2(b)
above shall not apply where the loss is due to the breach by the indemnified
Party of a warranty made in Article 19.

13.3 Procedures. If either Party (the "Indemnified Party") seeks
indemnification under this Article 13, it shall inform the other Party (the
"Indemnifying Party") of a claim as soon as reasonably practicable after it
receives notice of the claim, shall permit the Indemnifying Party to assume
direction and control of the defense of the claim (including the right to settle
any claim brought against the Indemnified Party upon prior written consent,
which shall not be unreasonably withheld), and shall give reasonable cooperation
(at the expense of the Indemnifying Party) in the defense of such claim.

14. ASSIGNABILITY

This Agreement may not be assigned by either Party without the
prior written consent of the other Party, not to be unreasonably withheld;
provided, however, that either Party may assign this Agreement, in whole or in
part, to an Affiliate (which may, in Athena's case, include an *** or to a
successor of a Party in connection with the merger, consolidation or sale of all
or substantially all of such Party's assets or that portion of its business
pertaining to the subject matter of this Agreement (and upon doing so will
promptly notify the other Party in writing); provided that the assigning Party
remains fully liable as obligated hereunder.

15. DISPUTE RESOLUTION PROCEDURES

15.1 Senior Executives Discussions. If a decision on a matter
regarding the management of the Research Program as provided herein is not
reached by the RMC, the dispute will be resolved as set forth in Article 6
above. If a dispute arises between CombiChem and Athena with respect to matters
other than the management of the Research Program, either during or after the
Research Period, such dispute will be referred to the appropriate senior
management in the area of the dispute. If such senior management are unable to
resolve such dispute, such

*** Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the Commission.

<PAGE> 19

dispute will be referred to the Chief Operating Officer of Elan and the Chief
Executive Officer of CombiChem. If such officers are unable to reach an
agreement within thirty (30) days following the initiation of discussions
between them, such dispute shall be settled by arbitration as described in
Section 15.2 below.

15.2 Binding Arbitration. If the parties have not been able to
resolve the dispute as provided in Section 15.1 above, the dispute shall be
finally settled by binding arbitration. Any arbitration hereunder shall be
conducted under rules of the American Arbitration Association. The arbitration
shall be conducted before three arbitrators chosen according to the following
procedure: each of the parties shall appoint one arbitrator and the two so
nominated shall choose the third. If the arbitrators chosen by the parties
cannot agree on the choice of the third arbitrator within a period of thirty
(30) days after their appointment, then the third arbitrator shall be appointed
by the Court of Arbitration of the American Arbitration Association. If
CombiChem brings an arbitration action, such arbitration shall occur in San
Francisco, California. If Athena brings an arbitration action, such arbitration
shall occur in San Diego, California. The arbitrators shall have the authority
to grant specific performance, and to allocate between the parties the costs of
arbitration in such equitable manner as they determine. The arbitral award (i)
shall be final and binding upon the parties; and (ii) may be entered in any
court of competent jurisdiction.

15.3 Injunctive Relief. Nothing contained in this Article 15 or
any other provisions of this Agreement shall be construed to limit or preclude a
Party from bringing any action in any court of competent jurisdiction for
injunctive or other provisional relief to compel the other Party to comply with
its obligations hereunder before or during the pendency of arbitration
proceedings.

16. NOTICES

Any notice required or permitted to be given hereunder shall be
deemed sufficient if sent by facsimile letter or overnight courier, or delivered
by hand to Athena or CombiChem at the respective addresses and facsimile numbers
as set forth below or at such other address and facsimile number as either Party
hereto may designate. If sent by facsimile letter, notice shall be deemed given
when the transmission is completed if the sender has a confirmed transmission
report. If a confirmed transmission report does not exist, then the notice will
be deemed given when the notice is actually received by the person to whom it is
sent. If delivered by overnight courier, notice shall be deemed given when it
has been signed for. If delivered by hand, notice shall be deemed given when
received.

if to CombiChem, to:

CombiChem, Inc.
9050 Camino Santa Fe
San Diego, California 92121
Attention: President
Fax number: (619) 530-9998

<PAGE> 20

with a copy to:

Brobeck, Phleger & Harrison LLP
550 South Hope Street, 21st Floor
Los Angeles, California 90071
Attention: Laurie A. Allen, Esq.
Fax number: (213) 239-1324

if to Athena, to:

Athena Neurosciences, Inc.
800 Gateway Boulevard
South San Francisco, California 94080
Attn: General Counsel
Fax number: (415) 875-3620

17. SURVIVAL

The provisions of Sections 2.4, 5.1, 5.2, 5.3, 10.3, 10.4 and Articles
4, 8, 9, 11, 12, 13, 15, and this Article 17 shall survive termination of this
Agreement in addition to those provisions which by their terms survive.

18. ADDITIONAL TERMS

18.1 Entire Agreement. This Agreement and the Common Stock Purchase
Agreement constitute the entire understanding between the Parties with respect
to the subject matter hereto and supersedes and replaces all previous
negotiations, understandings, representations, writings and contract provisions
and rights relating hereof.

18.2 Amendment; No Waiver. No provision of this Agreement may be
amended, revoked or waived except by a writing signed and delivered by an
authorized officer of each Party. Any waiver on the part of either Party of any
breach or any fight or interest hereunder shall not imply the waiver of any
subsequent breach or waiver of any other right or interest.

18.3 Validity. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, each of which shall remain in full force and
effect.

18.4 Headings. The descriptive headings are inserted for convenience of
reference only and are not intended to be part of or to affect the meaning of or
interpretation of this Agreement.

18.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, and all of which
together shall be deemed to be one and the same instrument.

<PAGE> 21

18.6 Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of California, without
regard to conflicts of laws principles.

18.7 Further Assurances. At any time and from time to time after the
Effective Date, the Parties shall each do, execute, acknowledge and deliver, and
cause to be done, executed, acknowledged or delivered, all such further acts,
transfers, conveyances, or assignments as may be reasonably required to carry
out the transactions contemplated by this Agreement

19. REPRESENTATIONS AND WARRANTIES

19.1 Authorization. All action on the part of each of CombiChem, Athena
and their respective officers, directors and stockholders necessary for the
authorization, execution and delivery of this Agreement and the performance of
all obligations of CombiChem, Athena and Athena, respectively, hereunder has
been taken. CombiChem represents that it has no present intention of materially
changing the manner in which it generally conducts its activities which are the
subject of the Collaboration.

19.2 Compliance with Other Instruments. The execution, delivery and
performance by CombiChem of this Agreement and the consummation of the Research
Program hereunder will not result in a violation of, or be in material conflict
with, or constitute a material default, under any agreement in existence as of
the Effective Date between CombiChem and its Third Party Collaborators. Subject
to Section 5.2 and except for the rights expressly reserved by CombiChem
therein, from the Effective Date until the expiration or termination of this
Agreement, CombiChem agrees that it shall not enter into any agreement with any
Third Party collaborator which would be in material conflict with, or cause a
default under, this Agreement.

19.3 Rights to Intellectual Property. Each Party warrants that it has
the power to grant all of the rights granted and make such required assignments,
and to assume all of the obligations required, under this Agreement. Under no
circumstances does CombiChem warrant to Athena that its rights in any Active
Compound, Development Compound or Products are exclusive to the extent such
Active Compound, Development Compound or Products may be covered under the
patent claims of Third Parties wherein such claims are not the direct result of
a collaboration between the Third Party and CombiChem.

<PAGE> 22

IN WITNESS WHEREOF, the parties have executed this Agreement to be
effective as of the Effective Date.

COMBICHEM, INC. ATHENA NEUROSCIENCES, INC.

By: /s/ Vicente Anido By: /s/ Illegible
---------------------- ---------------------

Its: President & CEO Its: Vice President & General Counsel

[SIGNATURE PAGE TO THE COLLABORATIVE
RESEARCH AND LICENSE AGREEMENT]

<PAGE> 23

Appendix A

A. Milestones - Direct Marketing By Athena/Affiliates

Milestone Payments (in U.S. Dollars)

<TABLE>
<CAPTION>
Milestone(1) Milestone Payment(2)
<S> <C>

***
*** in:

*** ***
*** ***
*** ***

***
***

*** ***
*** ***
*** ***

***
***

*** ***
*** ***
*** ***

Total ***
</TABLE>

(1) Based on Athena or its Affiliates having marketing responsibility for
Products

(2) Paid for each Compound which achieves the stated milestone

B. Outlicense By Athena/Affiliates

Royalty: *** of royalties received by Athena or its Affiliates, up to a
maximum of *** of all licensee net sales

Third Party Payments: *** of Third Party Payments received by Athena or
its Affiliates. In the case of outlicensing in *** a maximum of ***
(each), inclusive of any *** .

*** Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the Commission.

<PAGE> 24
STRICTLY CONFIDENTIAL

MARCH 20, 1998

VIA FAX (619) 530-9998 AND
FEDERAL EXPRESS (619) 530-0484

Lee R. McCracken
Vice President, Business Development
CombiChem, Inc.
9050 Camino Santa Fe
San Diego, CA 92121

Dear Lee:

Pursuant to our recent discussions, this will confirm Athena's election to
substitute the [***] for the [***] target, as an Initial Target under our
Collaborative Research and License Agreement of October 15, 1997. You have
previously received John Groom's letter of March 3 to Mr. Anido to that effect.
The [***] target now reverts to Related Target status under the agreement.

We understand that the [***] would be considered a separate target and is not
being substituted by Athena at this time. We have separately agreed that Athena
will have an option, for a [***] period from the date of CombiChem's signature
below, to take the [***] target into our collaboration. In return for that
option Athena will pay CombiChem a nonrefundable option fee of [***], payable
within three business days of our receipt of this letter countersigned by
CombiChem. That fee would be creditable against license fees, if any, associated
with selection of that target under the Agreement (i.e., as an Optional Target).
Of course, CombiChem will not take any action inconsistent with Athena's option
until its expiration or Athena's earlier written release of its option right in
that target.

Please let me know if you believe that more is required in order to accomplish
the formal substitution of the [***] target, so that we can address it
right away. If not, please indicate below CombiChem's acknowledgement of the
substitution and the option, and return an original signed copy to me. Ivan is
fully up to date on this, and is anxious for the RMC to develop and implement a
research plan for this new target as soon as possible.

*** Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the Commission.

<PAGE> 25
Lee McCracken STRICTLY CONFIDENTIAL
CombiChem
March 20, 1998

Thanks for your help on resolving this matter. Hope all goes well for you and
for CombiChem.

Best regards,

/s/ DONALD R. JOSEPH

Donald R. Joseph
Vice President & General Counsel

ACKNOWLEDGED AND AGREED this 20th day of March, 1998.

COMBICHEM, INC.

By: /s/ LEE R. MCCRACKEN
Lee R. McCracken
Vice President, Business Development

<PAGE> 1
EXHIBIT 10.44
COMBICHEM, INC.
1997 STOCK INCENTIVE PLAN

ARTICLE ONE

GENERAL PROVISIONS

I. PURPOSE OF THE PLAN

This 1997 Stock Incentive Plan is intended to promote the interests
of CombiChem, Inc., a Delaware corporation, by providing eligible persons with
the opportunity to acquire a proprietary interest, or otherwise increase their
proprietary interest, in the Corporation as an incentive for them to remain in
the service of the Corporation.

Capitalized terms shall have the meanings assigned to such terms in
the attached Appendix.

II. STRUCTURE OF THE PLAN

A. The Plan shall be divided into five separate equity programs:

- the Discretionary Option Grant Program under which eligible
persons may, at the discretion of the Plan Administrator, be granted options to
purchase shares of Common Stock,

- the Salary Investment Option Grant Program under which
eligible employees may elect to have a portion of their base salary invested
each year in special option grants,

- the Stock Issuance Program under which eligible persons may,
at the discretion of the Plan Administrator, be issued shares of Common Stock
directly, either through the immediate purchase of such shares or as a bonus for
services rendered the Corporation (or any Parent or Subsidiary),

- the Automatic Option Grant Program under which eligible
non-employee Board members shall automatically receive option grants at periodic
intervals to purchase shares of Common Stock, and

- the Director Fee Option Grant Program under which
non-employee Board members may elect to have all or any portion of their annual
retainer fee otherwise payable in cash applied to a special option grant.

<PAGE> 2
B. The provisions of Articles One and Seven shall apply to all
equity programs under the Plan and shall govern the interests of all persons
under the Plan.

III. ADMINISTRATION OF THE PLAN

A. The Primary Committee shall have sole and exclusive authority to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to Section 16 Insiders. Administration of the Discretionary Option Grant
and Stock Issuance Programs with respect to all other persons eligible to
participate in those programs may, at the Board's discretion, be vested in the
Primary Committee or a Secondary Committee, or the Board may retain the power to
administer those programs with respect to all such persons.

B. Members of the Primary Committee or any Secondary Committee shall
serve for such period of time as the Board may determine and may be removed by
the Board at any time. The Board may also at any time terminate the functions of
any Secondary Committee and reassume all powers and authority previously
delegated to such committee.

C. Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, have full power and authority (subject
to the provisions of the Plan) to establish such rules and regulations as it may
deem appropriate for proper administration of the Discretionary Option Grant and
Stock Issuance Programs and to make such determinations under, and issue such
interpretations of, the provisions of such programs and any outstanding options
or stock issuances thereunder as it may deem necessary or advisable. Decisions
of the Plan Administrator within the scope of its administrative functions under
the Plan shall be final and binding on all parties who have an interest in the
Discretionary Option Grant and Stock Issuance Programs under its jurisdiction or
any option or stock issuance thereunder.

D. The Primary Committee shall have the sole and exclusive authority
to determine which Section 16 Insiders and other highly compensated Employees
shall be eligible for participation in the Salary Investment Option Grant
Program for one or more calendar years. However, all option grants under the
Salary Investment Option Grant Program shall be made in accordance with the
express terms of that program, and the Primary Committee shall not exercise any
discretionary functions with respect to the option grants made under that
program.

E. Service on the Primary Committee or the Secondary Committee shall
constitute service as a Board member, and members of each such committee shall
accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any option grants or stock issuances under the
Plan.

F. Administration of the Automatic Option Grant and Director Fee
Option Grant Programs shall be self-executing in accordance with the terms of
those programs, and no

2.
<PAGE> 3
Plan Administrator shall exercise any discretionary functions with respect to
any option grants or stock issuances made under those programs.

IV. ELIGIBILITY

A. The persons eligible to participate in the Discretionary Option
Grant and Stock Issuance Programs are as follows:

(i) Employees,

(ii) non-employee members of the Board or the board of
directors of any Parent or Subsidiary, and

(iii) consultants and other independent advisors who
provide services to the Corporation (or any Parent or Subsidiary).

B. Only Employees who are Section 16 Insiders or other highly
compensated individuals shall be eligible to participate in the Salary
Investment Option Grant Program.

C. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full authority to determine,
(i) with respect to the option grants under the Discretionary Option Grant
Program, which eligible persons are to receive option grants, the time or times
when such option grants are to be made, the number of shares to be covered by
each such grant, the status of the granted option as either an Incentive Option
or a Non-Statutory Option, the time or times when each option is to become
exercisable, the vesting schedule (if any) applicable to the option shares and
the maximum term for which the option is to remain outstanding and (ii) with
respect to stock issuances under the Stock Issuance Program, which eligible
persons are to receive stock issuances, the time or times when such issuances
are to be made, the number of shares to be issued to each Participant, the
vesting schedule (if any) applicable to the issued shares and the consideration
for such shares.

D. The Plan Administrator shall have the absolute discretion either
to grant options in accordance with the Discretionary Option Grant Program or to
effect stock issuances in accordance with the Stock Issuance Program.

E. The individuals who shall be eligible to participate in the
Automatic Option Grant Program shall be limited to (i) those individuals serving
as non-employee Board members on the Underwriting Date who have not previously
received a stock option grant from the Corporation, (ii) those individuals who
first become non-employee Board members after the Underwriting Date, whether
through appointment by the Board or election by the Corporation's stockholders,
and (iii) those individuals who continue to serve as non-employee Board members
at one or more Annual Stockholders Meetings held after the Underwriting Date. A
non-employee Board member who has previously been in the employ of the
Corporation (or any Parent or Subsidiary) shall not be eligible to receive an
option grant under the Automatic Option Grant

3.
<PAGE> 4
Program at the time he or she first becomes a non-employee Board member, but
shall be eligible to receive periodic option grants under the Automatic Option
Grant Program while he or she continues to serve as a non-employee Board member.

F. All non-employee Board members shall be eligible to participate
in the Director Fee Option Grant Program.

V. STOCK SUBJECT TO THE PLAN

A. The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open market. The maximum number of shares of Common Stock
initially reserved for issuance over the term of the Plan shall not exceed
1,072,170 shares, which shall consist of (i) the number of shares which remained
available for issuance, as of the Plan Effective Time, under the Predecessor
Plan as last approved by the Corporation's stockholders, including the shares
subject to outstanding options under that Predecessor Plan, and (ii) an
additional increase of approximately 800,000 shares authorized by the Board and
the stockholders prior to the Section 12 Registration Date. To the extent any
unvested shares of Common Stock outstanding under the Predecessor Plan as of the
Plan Effective Time are subsequently repurchased by the Corporation, at the
option exercise price paid per share, in connection with the holder's
termination of service prior to vesting in the shares, those repurchased shares
shall be added to the reserve of Common Stock available for issuance under the
Plan.

B. No one person participating in the Plan may receive options,
separately exercisable stock appreciation rights and direct stock issuances for
more than 500,000 shares of Common Stock in the aggregate per calendar year,
beginning with the 1997 calendar year.

C. Shares of Common Stock subject to outstanding options (including
options incorporated into this Plan from the Predecessor Plan) shall be
available for subsequent issuance under the Plan to the extent (i) those options
expire or terminate for any reason prior to exercise in full or (ii) the options
are cancelled in accordance with the cancellation-regrant provisions of Article
Two. Unvested shares issued under the Plan and subsequently cancelled or
repurchased by the Corporation (including unvested shares issued under the
Predecessor Plan and repurchased by the Corporation at or after the Plan
Effective Time), at the original issue price paid per share, pursuant to the
Corporation's repurchase rights under the Plan shall be added back to the number
of shares of Common Stock reserved for issuance under the Plan and shall
accordingly be available for reissuance through one or more subsequent option
grants or direct stock issuances under the Plan. However, should the exercise
price of an option under the Plan be paid with shares of Common Stock or should
shares of Common Stock otherwise issuable under the Plan be withheld by the
Corporation in satisfaction of the withholding taxes incurred in connection with
the exercise of an option or the vesting of a stock issuance under the Plan,
then the number of shares of Common Stock available for issuance under the Plan
shall be reduced by the gross number of shares for which the option is exercised
or which vest under the stock issuance, and not by the net number of shares of
Common Stock issued to the holder of such option or stock

4.
<PAGE> 5
issuance. Shares of Common Stock underlying one or more stock appreciation
rights exercised under Section IV of Article Two of the Plan shall NOT be
available for subsequent issuance under the Plan.

D. If any change is made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation's receipt of consideration, appropriate adjustments shall be
made to (i) the maximum number and/or class of securities issuable under the
Plan, (ii) the number and/or class of securities for which any one person may be
granted stock options, separately exercisable stock appreciation rights and
direct stock issuances under the Plan per calendar year, (iii) the number and/or
class of securities for which grants are subsequently to be made under the
Automatic Option Grant Program to new and continuing non-employee Board members,
(iv) the number and/or class of securities and the exercise price per share in
effect under each outstanding option under the Plan and (v) the number and/or
class of securities and price per share in effect under each outstanding option
incorporated into this Plan from the Predecessor Plan. Such adjustments to the
outstanding options are to be effected in a manner which shall preclude the
enlargement or dilution of rights and benefits under such options. The
adjustments determined by the Plan Administrator shall be final, binding and
conclusive.

5.
<PAGE> 6
ARTICLE TWO

DISCRETIONARY OPTION GRANT PROGRAM

I. OPTION TERMS

Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.

A. EXERCISE PRICE.

1. The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the option grant date.

2. The exercise price shall become immediately due upon
exercise of the option and shall, subject to the provisions of Section I of
Article Six and the documents evidencing the option, be payable in one or more
of the forms specified below:

(i) cash or check made payable to the Corporation,

(ii) shares of Common Stock held for the requisite period
necessary to avoid a charge to the Corporation's earnings for financial
reporting purposes and valued at Fair Market Value on the Exercise Date,
or

(iii) to the extent the option is exercised for vested
shares, through a special sale and remittance procedure pursuant to which
the Optionee shall concurrently provide irrevocable instructions to (a) a
Corporation-designated brokerage firm to effect the immediate sale of the
purchased shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased shares plus all applicable
Federal, state and local income and employment taxes required to be
withheld by the Corporation by reason of such exercise and (b) the
Corporation to deliver the certificates for the purchased shares directly
to such brokerage firm in order to complete the sale.

Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.

6.
<PAGE> 7
B. EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable at
such time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option. However, no option shall have a term in excess of ten (10) years
measured from the option grant date.

C. EFFECT OF TERMINATION OF SERVICE.

1. The following provisions shall govern the exercise of any
options held by the Optionee at the time of cessation of Service or death:

(i) Any option outstanding at the time of the Optionee's
cessation of Service for any reason shall remain exercisable for such
period of time thereafter as shall be determined by the Plan Administrator
and set forth in the documents evidencing the option, but no such option
shall be exercisable after the expiration of the option term.

(ii) Any option exercisable in whole or in part by the
Optionee at the time of death may be subsequently exercised by the
personal representative of the Optionee's estate or by the person or
persons to whom the option is transferred pursuant to the Optionee's will
or in accordance with the laws of descent and distribution.

(iii) Should the Optionee's Service be terminated for
Misconduct, then all outstanding options held by the Optionee shall
terminate immediately and cease to be outstanding.

(iv) During the applicable post-Service exercise period,
the option may not be exercised in the aggregate for more than the number
of vested shares for which the option is exercisable on the date of the
Optionee's cessation of Service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term,
the option shall terminate and cease to be outstanding for any vested
shares for which the option has not been exercised. However, the option
shall, immediately upon the Optionee's cessation of Service, terminate and
cease to be outstanding to the extent the option is not otherwise at that
time exercisable for vested shares.

2. The Plan Administrator shall have complete discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:

(i) extend the period of time for which the option is to
remain exercisable following the Optionee's cessation of Service from the
limited exercise period otherwise in effect for that option to such
greater period of time as the Plan Administrator shall deem appropriate,
but in no event beyond the expiration of the option term, and/or

7.
<PAGE> 8
(ii) permit the option to be exercised, during the
applicable post-Service exercise period, not only with respect to the
number of vested shares of Common Stock for which such option is
exercisable at the time of the Optionee's cessation of Service but also
with respect to one or more additional installments in which the Optionee
would have vested had the Optionee continued in Service.

D. STOCKHOLDER RIGHTS. The holder of an option shall have no
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.

E. REPURCHASE RIGHTS. The Plan Administrator shall have the
discretion to grant options which are exercisable for unvested shares of Common
Stock. Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the exercise price paid per
share, any or all of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right.

F. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the
Optionee, Incentive Options shall be exercisable only by the Optionee and shall
not be assignable or transferable other than by will or by the laws of descent
and distribution following the Optionee's death. Non-Statutory Options shall be
subject to the same restrictions, except that a Non-Statutory Option may, in
connection with the Optionee's estate plan, be assigned in whole or in part
during the Optionee's lifetime to one or more members of the Optionee's
immediate family or to a trust established exclusively for one or more such
family members. The assigned portion may only be exercised by the person or
persons who acquire a proprietary interest in the option pursuant to the
assignment. The terms applicable to the assigned portion shall be the same as
those in effect for the option immediately prior to such assignment and shall be
set forth in such documents issued to the assignee as the Plan Administrator may
deem appropriate.

II. INCENTIVE OPTIONS

The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Seven shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options when
issued under the Plan shall not be subject to the terms of this Section II.

A. ELIGIBILITY. Incentive Options may only be granted to Employees.

B. EXERCISE PRICE. The exercise price per share shall not be less
than one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the option grant date.

8.
<PAGE> 9
C. DOLLAR LIMITATION. The aggregate Fair Market Value of the shares
of Common Stock (determined as of the respective date or dates of grant) for
which one or more options granted to any Employee under the Plan (or any other
option plan of the Corporation or any Parent or Subsidiary) may for the first
time become exercisable as Incentive Options during any one calendar year shall
not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the
Employee holds two (2) or more such options which become exercisable for the
first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.

D. 10% STOCKHOLDER. If any Employee to whom an Incentive Option is
granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date, and the option term shall not exceed five
(5) years measured from the option grant date.

III. CORPORATE TRANSACTION/CHANGE IN CONTROL

A. In the event of any Corporate Transaction, each outstanding
option shall automatically accelerate so that each such option shall,
immediately prior to the effective date of the Corporate Transaction, become
fully exercisable with respect to the total number of shares of Common Stock at
the time subject to such option and may be exercised for any or all of those
shares as fully vested shares of Common Stock. However, an outstanding option
shall NOT become exercisable on such an accelerated basis if and to the extent:
(i) such option is, in connection with the Corporate Transaction, to be assumed
by the successor corporation (or parent thereof) or (ii) such option is to be
replaced with a cash incentive program of the successor corporation which
preserves the spread existing at the time of the Corporate Transaction on any
shares for which the option is not otherwise at that time exercisable and
provides for subsequent payout in accordance with the same exercise/vesting
schedule applicable to those option shares or (iii) the acceleration of such
option is subject to other limitations imposed by the Plan Administrator at the
time of the option grant.

B. All outstanding repurchase rights shall automatically terminate,
and the shares of Common Stock subject to those terminated rights shall
immediately vest in full, in the event of any Corporate Transaction, except to
the extent: (i) those repurchase rights are to be assigned to the successor
corporation (or parent thereof) in connection with such Corporate Transaction or
(ii) such accelerated vesting is precluded by other limitations imposed by the
Plan Administrator at the time the repurchase right is issued.

C. Immediately following the consummation of the Corporate
Transaction, all outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).

D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the

9.
<PAGE> 10
number and class of securities which would have been issuable to the Optionee in
consummation of such Corporate Transaction had the option been exercised
immediately prior to such Corporate Transaction. Appropriate adjustments to
reflect such Corporate Transaction shall also be made to (i) the exercise price
payable per share under each outstanding option, provided the aggregate exercise
price payable for such securities shall remain the same, (ii) the maximum number
and/or class of securities available for issuance over the remaining term of the
Plan and (iii) the maximum number and/or class of securities for which any one
person may be granted stock options, separately exercisable stock appreciation
rights and direct stock issuances under the Plan per calendar year.

E. The Plan Administrator shall have the discretionary authority to
provide for the automatic acceleration of one or more outstanding options under
the Discretionary Option Grant Program upon the occurrence of a Corporate
Transaction, whether or not those options are to be assumed in the Corporate
Transaction, so that each such option shall, immediately prior to the effect
date of such Corporate Transaction, become fully exercisable with respect to the
total number of shares of Common Stock at the time subject to that option and
may be exercised for any or all of those shares as fully vested shares of Common
Stock. In addition, the Plan Administrator shall have the discretionary
authority to structure one or more of the Corporation's repurchase rights under
the Discretionary Option Grant Program so that those rights shall not be
assignable in connection with such Corporate Transaction and shall accordingly
terminate upon the consummation of such Corporate Transaction, and the shares
subject to those terminated rights shall thereupon vest in full.

F. The Plan Administrator shall have full power and authority,
exercisable either at the time the option is granted or at any time while the
option remains outstanding, to provide for the automatic acceleration of one or
more outstanding options under the Discretionary Option Grant Program in the
event the Optionee's Service is subsequently terminated by reason of an
Involuntary Termination within a designated period (not to exceed eighteen (18)
months) following the effective date of any Corporate Transaction in which those
options are assumed and do not otherwise accelerate. Any options so accelerated
shall remain exercisable for fully vested shares until the earlier of (i) the
expiration of the option term or (ii) the expiration of the one (1) year period
measured from the effective date of the Involuntary Termination. In addition,
the Plan Administrator may provide that one or more of the Corporation's
outstanding repurchase rights with respect to shares held by the Optionee at the
time of such Involuntary Termination shall immediately terminate, and the shares
subject to those terminated repurchase rights shall accordingly vest in full.

G. The Plan Administrator shall have the discretionary authority to
provide for the automatic acceleration of one or more outstanding options under
the Discretionary Option Grant Program upon the occurrence of a Change in
Control so that each such option shall, immediately prior to the effect date of
such Change in Control, become fully exercisable with respect to the total
number of shares of Common Stock at the time subject to that option and may be
exercised for any or all of those shares as fully vested shares of Common Stock.
In addition, the Plan Administrator shall have the discretionary authority to
structure one or more of the

10.
<PAGE> 11
Corporation's repurchase rights under the Discretionary Option Grant Program so
that those rights shall terminate automatically upon the consummation of such
Change in Control, and the shares subject to those terminated rights shall
thereupon vest in full. Alternatively, the Plan Administrator may condition the
automatic acceleration of one or more outstanding options under the
Discretionary Option Grant Program and the termination of one or more of the
Corporation's outstanding repurchase rights under such program upon the
subsequent termination of the Optionee's Service by reason of an Involuntary
Termination within a designated period (not to exceed eighteen (18) months)
following the effective date of such Change in Control. Each option so
accelerated shall remain exercisable for fully vested shares until the earlier
of (i) the expiration of the option term or (ii) the expiration of the one (1)
year period measured from the effective date of Optionee's cessation of Service.

H. The portion of any Incentive Option accelerated in connection
with a Corporate Transaction or Change in Control shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
($100,000) limitation is not exceeded. To the extent such dollar limitation is
exceeded, the accelerated portion of such option shall be exercisable as a
Nonstatutory Option under the Federal tax laws.

I. The outstanding options shall in no way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.

IV. CANCELLATION AND REGRANT OF OPTIONS

The Plan Administrator shall have the authority to effect, at any
time and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Discretionary Option
Grant Program (including outstanding options incorporated from the Predecessor
Plan) and to grant in substitution new options covering the same or different
number of shares of Common Stock but with an exercise price per share based on
the Fair Market Value per share of Common Stock on the new grant date.

V. STOCK APPRECIATION RIGHTS

A. The Plan Administrator shall have full power and authority to
grant to selected Optionees tandem stock appreciation rights and/or limited
stock appreciation rights.

B. The following terms shall govern the grant and exercise of tandem
stock appreciation rights:

(i) One or more Optionees may be granted the right,
exercisable upon such terms as the Plan Administrator may establish, to
elect between the exercise of the underlying option for shares of Common
Stock and the surrender of that option in exchange for a distribution from
the Corporation in an amount equal to the excess of (a) the Fair Market
Value (on the option

11.
<PAGE> 12
surrender date) of the number of shares in which the Optionee is at the
time vested under the surrendered option (or surrendered portion thereof)
over (b) the aggregate exercise price payable for such shares.

(ii) No such option surrender shall be effective unless it
is approved by the Plan Administrator, either at the time of the actual
option surrender or at any earlier time. If the surrender is so approved,
then the distribution to which the Optionee shall be entitled may be made
in shares of Common Stock valued at Fair Market Value on the option
surrender date, in cash, or partly in shares and partly in cash, as the
Plan Administrator shall in its sole discretion deem appropriate.

(iii) If the surrender of an option is not approved by the
Plan Administrator, then the Optionee shall retain whatever rights the
Optionee had under the surrendered option (or surrendered portion thereof)
on the option surrender date and may exercise such rights at any time
prior to the later of (a) five (5) business days after the receipt of the
rejection notice or (b) the last day on which the option is otherwise
exercisable in accordance with the terms of the documents evidencing such
option, but in no event may such rights be exercised more than ten (10)
years after the option grant date.

C. The following terms shall govern the grant and exercise of
limited stock appreciation rights:

(i) One or more Section 16 Insiders may be granted limited
stock appreciation rights with respect to their outstanding options.

(ii) Upon the occurrence of a Hostile Take-Over, each
individual holding one or more options with such a limited stock
appreciation right shall have the unconditional right (exercisable for a
thirty (30)-day period following such Hostile Take-Over) to surrender each
such option to the Corporation, to the extent the option is at the time
exercisable for vested shares of Common Stock. In return for the
surrendered option, the Optionee shall receive a cash distribution from
the Corporation in an amount equal to the excess of (A) the Take-Over
Price of the shares of Common Stock which are at the time vested under
each surrendered option (or surrendered portion thereof) over (B) the
aggregate exercise price payable for such shares. Such cash distribution
shall be paid within five (5) days following the option surrender date.

(iii) The grant of such limited stock appreciation right
shall automatically constitute pre-approval by the Plan Administrator of
any subsequent exercise of that right in accordance with the terms of this
Paragraph C. Accordingly, no further approval of the Plan Administrator or
the Board shall be required at the time of the actual option surrender and
cash distribution.

12.
<PAGE> 13
(iv) The balance of the option (if any) shall remain
outstanding and exercisable in accordance with the documents evidencing
such option.

13.
<PAGE> 14
ARTICLE THREE

SALARY INVESTMENT OPTION GRANT PROGRAM

I. OPTION GRANTS

The Primary Committee shall have the sole and exclusive authority to
determine the calendar year or years (if any) for which the Salary Investment
Option Grant Program is to be in effect and to select the Section 16 Insiders
and other highly compensated Employees eligible to participate in the Salary
Investment Option Grant Program for those calendar year or years. Each selected
individual who elects to participate in the Salary Investment Option Grant
Program must, prior to the start of each calendar year of participation, file
with the Plan Administrator (or its designate) an irrevocable authorization
directing the Corporation to reduce his or her base salary for that calendar
year by an amount not less than Ten Thousand Dollars ($10,000.00) nor more than
Fifty Thousand Dollars ($50,000.00). The Primary Committee shall have complete
discretion to determine whether to approve the filed authorization in whole or
in part. To the extent the Primary Committee approves the authorization, the
individual who filed that authorization shall automatically be granted an option
under the Salary Investment Grant Program on the first trading day in January of
the calendar year for which the salary reduction is to be in effect.

II. OPTION TERMS

Each option shall be a Non-Statutory Option evidenced by one or more
documents in the form approved by the Plan Administrator; provided, however,
that each such document shall comply with the terms specified below.

A. EXERCISE PRICE.

1. The exercise price per share shall be thirty-three and
one-third percent (33-1/3%) of the Fair Market Value per share of Common Stock
on the option grant date.

2. The exercise price shall become immediately due upon
exercise of the option and shall be payable in one or more of the alternative
forms authorized under the Discretionary Option Grant Program. Except to the
extent the sale and remittance procedure specified thereunder is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.

B. NUMBER OF OPTION SHARES. The number of shares of Common Stock
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):

14.
<PAGE> 15
X = A / (B x 66-2/3%), where

X is the number of option shares,

A is the dollar amount of the approved reduction in the
Optionee's base salary for the calendar year, and

B is the Fair Market Value per share of Common Stock on the
option grant date.

C. EXERCISE AND TERM OF OPTIONS. The option shall become exercisable
in a series of twelve (12) successive equal monthly installments upon the
Optionee's completion of each calendar month of Service in the calendar year for
which the salary reduction is in effect. Each option shall have a maximum term
of ten (10) years measured from the option grant date.

D. EFFECT OF TERMINATION OF SERVICE. Should the Optionee cease
Service for any reason while holding one or more options under this Article
Three, then each such option shall remain exercisable, for any or all of the
shares for which the option is exercisable at the time of such cessation of
Service, until the earlier of (i) the expiration of the ten (10)-year option
term or (ii) the expiration of the three (3)-year period measured from the date
of such cessation of Service. Should the Optionee die while holding one or more
options under this Article Three, then each such option may be exercised, for
any or all of the shares for which the option is exercisable at the time of the
Optionee's cessation of Service (less any shares subsequently purchased by
Optionee prior to death), by the personal representative of the Optionee's
estate or by the person or persons to whom the option is transferred pursuant to
the Optionee's will or in accordance with the laws of descent and distribution.
Such right of exercise shall lapse, and the option shall terminate, upon the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the three
(3)-year period measured from the date of the Optionee's cessation of Service.
However, the option shall, immediately upon the Optionee's cessation of Service
for any reason, terminate and cease to remain outstanding with respect to any
and all shares of Common Stock for which the option is not otherwise at that
time exercisable.

III. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-
OVER

A. In the event of any Corporate Transaction while the Optionee
remains in Service, each outstanding option held by such Optionee under this
Salary Investment Option Grant Program shall automatically accelerate so that
each such option shall, immediately prior to the effective date of the Corporate
Transaction, become fully exercisable with respect to the total number of shares
of Common Stock at the time subject to such option and may be exercised for any
or all of those shares as fully-vested shares of Common Stock. Each such
outstanding option shall be assumed by the successor corporation (or parent
thereof) in the Corporate

15.
<PAGE> 16
Transaction and shall remain exercisable for the fully-vested shares until the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the
expiration of the three (3)-year period measured from the date of the Optionee's
cessation of Service.

B. In the event of a Change in Control while the Optionee remains in
Service, each outstanding option held by such Optionee under this Salary
Investment Option Grant Program shall automatically accelerate so that each such
option shall immediately become fully exercisable with respect to the total
number of shares of Common Stock at the time subject to such option and may be
exercised for any or all of those shares as fully-vested shares of Common Stock.
The option shall remain so exercisable until the earlier of (i) the expiration
of the ten (10)-year option term, (ii) the expiration of the three (3)-year
period measured from the date of the Optionee's cessation of Service or (iii)
the surrender of the option in connection with a Hostile Take-Over.

C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each
outstanding option granted him or her under the Salary Investment Option Grant
Program. The Optionee shall in return be entitled to a cash distribution from
the Corporation in an amount equal to the excess of (i) the Take-Over Price of
the shares of Common Stock at the time subject to the surrendered option
(whether or not the Optionee is otherwise at the time vested in those shares)
over (ii) the aggregate exercise price payable for such shares. Such cash
distribution shall be paid within five (5) days following the surrender of the
option to the Corporation. The Primary Committee shall, at the time the option
with such limited stock appreciation right is granted under the Salary
Investment Option Grant Program, pre-approve any subsequent exercise of that
right in accordance with the terms of this Paragraph C. Accordingly, no further
approval of the Primary Committee or the Board shall be required at the time of
the actual option surrender and cash distribution.

D. The grant of options under the Salary Investment Option Grant
Program shall in no way affect the right of the Corporation to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.

III. REMAINING TERMS

The remaining terms of each option granted under the Salary
Investment Option Grant Program shall be the same as the terms in effect for
option grants made under the Discretionary Option Grant Program.

16.
<PAGE> 17
ARTICLE FOUR

STOCK ISSUANCE PROGRAM

I. STOCK ISSUANCE TERMS

Shares of Common Stock may be issued under the Stock Issuance
Program through direct and immediate issuances without any intervening option
grants. Each such stock issuance shall be evidenced by a Stock Issuance
Agreement which complies with the terms specified below.

A. PURCHASE PRICE.

1. The purchase price per share shall be fixed by the Plan
Administrator, but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the issuance date.

2. Subject to the provisions of Section I of Article Seven,
shares of Common Stock may be issued under the Stock Issuance Program for any of
the following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:

(i) cash or check made payable to the Corporation, or

(ii) past services rendered to the Corporation (or any
Parent or Subsidiary).

B. VESTING PROVISIONS.

1. Shares of Common Stock issued under the Stock Issuance
Program may, in the discretion of the Plan Administrator, be fully and
immediately vested upon issuance or may vest in one or more installments over
the Participant's period of Service or upon attainment of specified performance
objectives. The elements of the vesting schedule applicable to any unvested
shares of Common Stock issued under the Stock Issuance Program, namely:

(i) the Service period to be completed by the Participant
or the performance objectives to be attained,

(ii) the number of installments in which the shares are
to vest,

(iii) the interval or intervals (if any) which are to lapse
between installments, and

17.
<PAGE> 18
(iv) the effect which death, Permanent Disability or other
event designated by the Plan Administrator is to have upon the vesting
schedule,

shall be determined by the Plan Administrator and incorporated into the Stock
Issuance Agreement.

2. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant's unvested shares of Common Stock and
(ii) such escrow arrangements as the Plan Administrator shall deem appropriate.

3. The Participant shall have full stockholder rights with
respect to any shares of Common Stock issued to the Participant under the Stock
Issuance Program, whether or not the Participant's interest in those shares is
vested. Accordingly, the Participant shall have the right to vote such shares
and to receive any regular cash dividends paid on such shares.

4. Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock issued under the Stock
Issuance Program or should the performance objectives not be attained with
respect to one or more such unvested shares of Common Stock, then those shares
shall be immediately surrendered to the Corporation for cancellation, and the
Participant shall have no further stockholder rights with respect to those
shares. To the extent the surrendered shares were previously issued to the
Participant for consideration paid in cash or cash equivalent (including the
Participant's purchase-money indebtedness), the Corporation shall repay to the
Participant the cash consideration paid for the surrendered shares and shall
cancel the unpaid principal balance of any outstanding purchase-money note of
the Participant attributable to the surrendered shares.

5. The Plan Administrator may in its discretion waive the
surrender and cancellation of one or more unvested shares of Common Stock which
would otherwise occur upon the cessation of the Participant's Service or the
non-attainment of the performance objectives applicable to those shares. Such
waiver shall result in the immediate vesting of the Participant's interest in
the shares of Common Stock as to which the waiver applies. Such waiver may be
effected at any time, whether before or after the Participant's cessation of
Service or the attainment or non-attainment of the applicable performance
objectives.

18.
<PAGE> 19
II. CORPORATE TRANSACTION/CHANGE IN CONTROL

A. All of the Corporation's outstanding repurchase rights under the
Stock Issuance Program shall terminate automatically, and all the shares of
Common Stock subject to those terminated rights shall immediately vest in full,
in the event of any Corporate Transaction, except to the extent (i) those
repurchase rights are to be assigned to the successor corporation (or parent
thereof) in connection with such Corporate Transaction or (ii) such accelerated
vesting is precluded by other limitations imposed in the Stock Issuance
Agreement.

B. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase rights remain outstanding under the Stock Issuance
Program, to provide that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest, in the event the Participant's Service should subsequently
terminate by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any
Corporate Transaction in which those repurchase rights are assigned to the
successor corporation (or parent thereof).

C. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase rights remain outstanding under the Stock Issuance
Program, to provide that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest, in the event the Participant's Service should subsequently
terminate by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any Change
in Control.

III. SHARE ESCROW/LEGENDS

Unvested shares may, in the Plan Administrator's discretion, be held
in escrow by the Corporation until the Participant's interest in such shares
vests or may be issued directly to the Participant with restrictive legends on
the certificates evidencing those unvested shares.

19.
<PAGE> 20
ARTICLE FIVE

AUTOMATIC OPTION GRANT PROGRAM

I. OPTION TERMS

A. GRANT DATES. Option grants shall be made on the dates specified
below:

1. Each individual serving as a non-employee Board member on
the Underwriting Date shall automatically be granted at that time a
Non-Statutory Option to purchase 20,000 shares of Common Stock, provided that
individual has not previously been in the employ of the Corporation or any
Parent or Subsidiary and has not previously received a stock option grant from
the Corporation.

2. Each individual who is first elected or appointed as a
non-employee Board member at any time after the Underwriting Date shall
automatically be granted, on the date of such initial election or appointment, a
Non-Statutory Option to purchase 20,000 shares of Common Stock, provided that
individual has not previously been in the employ of the Corporation or any
Parent or Subsidiary.

3. On the date of each Annual Stockholders Meeting held after
the Underwriting Date, each individual who is to continue to serve as an
Eligible Director, whether or not that individual is standing for re-election to
the Board at that particular Annual Meeting, shall automatically be granted a
Non-Statutory Option to purchase 5,000 shares of Common Stock, provided such
individual has served as a non-employee Board member for at least six (6)
months. There shall be no limit on the number of such 5,000-share option grants
any one Eligible Director may receive over his or her period of Board service,
and non-employee Board members who have previously been in the employ of the
Corporation (or any Parent or Subsidiary) or who have otherwise received a stock
option grant from the Corporation prior to the Underwriting Date shall be
eligible to receive one or more such annual option grants over their period of
continued Board service.

B. EXERCISE PRICE.

1. The exercise price per share shall be equal to one hundred
percent (100%) of the Fair Market Value per share of Common Stock on the option
grant date.

2. The exercise price shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.

C. OPTION TERM. Each option shall have a term of ten (10) years
measured from the option grant date.

20.
<PAGE> 21
D. EXERCISE AND VESTING OF OPTIONS. Each option shall be immediately
exercisable for any or all of the option shares. However, any shares purchased
under the option shall be subject to repurchase by the Corporation, at the
exercise price paid per share, upon the Optionee's cessation of Board service
prior to vesting in those shares. Each initial 20,000-share automatic option
grant shall vest, and the Corporation's repurchase right shall lapse, as
follows: (i) twenty-five percent (25%) upon Optionee's completion of one (1)
year of Board service measured from the grant date and (ii) the balance in a
series of thirty-six (36) successive equal monthly installments upon the
Optionee's completion of each additional month of Board service over the
thirty-six (36)-month period measured from the first anniversary of the option
grant date. Each annual 5,000-share automatic option shall vest, and the
Corporation's repurchase right shall lapse, upon the Optionee's completion of
one (1) year of Board service measured from the grant date.

E. TERMINATION OF BOARD SERVICE. The following provisions shall
govern the exercise of any options held by the Optionee at the time the Optionee
ceases to serve as a Board member:

(i) The Optionee (or, in the event of Optionee's death,
the personal representative of the Optionee's estate or the person or
persons to whom the option is transferred pursuant to the Optionee's will
or in accordance with the laws of descent and distribution) shall have a
twelve (12)-month period following the date of such cessation of Board
service in which to exercise each such option.

(ii) During the twelve (12)-month exercise period, the
option may not be exercised in the aggregate for more than the number of
vested shares of Common Stock for which the option is exercisable at the
time of the Optionee's cessation of Board service.

(iii) Should the Optionee cease to serve as a Board member
by reason of death or Permanent Disability, then all shares at the time
subject to the option shall immediately vest so that such option may,
during the twelve (12)-month exercise period following such cessation of
Board service, be exercised for all or any portion of those shares as
fully-vested shares of Common Stock.

(iv) In no event shall the option remain exercisable after
the expiration of the option term. Upon the expiration of the twelve
(12)-month exercise period or (if earlier) upon the expiration of the
option term, the option shall terminate and cease to be outstanding for
any vested shares for which the option has not been exercised. However,
the option shall, immediately upon the Optionee's cessation of Board
service for any reason other than death or Permanent Disability, terminate
and cease to be outstanding to the extent the option is not otherwise at
that time exercisable for vested shares.

21.
<PAGE> 22
II. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-
OVER

A. In the event of any Corporate Transaction, the shares of Common
Stock at the time subject to each outstanding option but not otherwise vested
shall automatically vest in full so that each such option shall, immediately
prior to the effective date of the Corporate Transaction, become fully
exercisable for all of the shares of Common Stock at the time subject to such
option and may be exercised for all or any portion of those shares as
fully-vested shares of Common Stock. Immediately following the consummation of
the Corporate Transaction, each automatic option grant shall terminate and cease
to be outstanding, except to the extent assumed by the successor corporation (or
parent thereof).

B. In connection with any Change in Control, the shares of Common
Stock at the time subject to each outstanding option but not otherwise vested
shall automatically vest in full so that each such option shall, immediately
prior to the effective date of the Change in Control, become fully exercisable
for all of the shares of Common Stock at the time subject to such option and may
be exercised for all or any portion of those shares as fully-vested shares of
Common Stock. Each such option shall remain exercisable for such fully-vested
option shares until the expiration or sooner termination of the option term or
the surrender of the option in connection with a Hostile Take-Over.

C. All outstanding repurchase rights shall automatically terminate,
and the shares of Common Stock subject to those terminated rights shall
immediately vest in full, in the event of any Corporate Transaction or Change in
Control.

D. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each of
his or her outstanding automatic option grants. The Optionee shall in return be
entitled to a cash distribution from the Corporation in an amount equal to the
excess of (i) the Take-Over Price of the shares of Common Stock at the time
subject to each surrendered option (whether or not the Optionee is otherwise at
the time vested in those shares) over (ii) the aggregate exercise price payable
for such shares. Such cash distribution shall be paid within five (5) days
following the surrender of the option to the Corporation. No approval or consent
of the Board or any Plan Administrator shall be required in connection with such
option surrender and cash distribution.

E. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
payable for such securities shall remain the same.

22.
<PAGE> 23
F. The grant of options under the Automatic Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.

III. REMAINING TERMS

The remaining terms of each option granted under the Automatic
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.

23.
<PAGE> 24
ARTICLE SIX

DIRECTOR FEE OPTION GRANT PROGRAM

I. OPTION GRANTS

Each non-employee Board member may elect to apply all or any portion
of the annual retainer fee otherwise payable in cash for his or her service on
the Board to the acquisition of a special option grant under this Director Fee
Option Grant Program. Such election must be filed with the Corporation's Chief
Financial Officer prior to first day of the calendar year for which the annual
retainer fee which is the subject of that election is otherwise payable. Each
non-employee Board member who files such a timely election shall automatically
be granted an option under this Director Fee Option Grant Program on the first
trading day in January in the calendar year for which the annual retainer fee
which is the subject of that election would otherwise be payable in cash.

II. OPTION TERMS

Each option shall be a Non-Statutory Option governed by the terms
and conditions specified below.

A. EXERCISE PRICE.

1. The exercise price per share shall be thirty-three and
one-third percent (33-1/3%) of the Fair Market Value per share of Common Stock
on the option grant date.

B. NUMBER OF OPTION SHARES. The number of shares of Common Stock
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):

X = A / (B x 66-2/3%), where

X is the number of option shares,

A is the portion of the annual retainer fee subject to the
non-employee Board member's election, and

24.
<PAGE> 25
B is the Fair Market Value per share of Common Stock on the
option grant date.

C. EXERCISE AND TERM OF OPTIONS. The option shall become exercisable
in a series of twelve (12) equal monthly installments upon the Optionee's
completion of each month of Board service over the twelve (12)-month period
measured from the grant date. Each option shall have a maximum term of ten (10)
years measured from the option grant date.

D. TERMINATION OF BOARD SERVICE. Should the Optionee cease Board
service for any reason (other than death or Permanent Disability) while holding
one or more options under this Director Fee Option Grant Program, then each such
option shall remain exercisable, for any or all of the shares for which the
option is exercisable at the time of such cessation of Board service, until the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the
expiration of the three (3)-year period measured from the date of such cessation
of Board service. However, each option held by the Optionee under this Director
Fee Option Grant Program at the time of his or her cessation of Board service
shall immediately terminate and cease to remain outstanding with respect to any
and all shares of Common Stock for which the option is not otherwise at that
time exercisable.

E. DEATH OR PERMANENT DISABILITY. Should the Optionee's service as a
Board member cease by reason of death or Permanent Disability, then each option
held by such Optionee under this Director Fee Option Grant Program shall
immediately become exercisable for all the shares of Common Stock at the time
subject to that option, and the option may be exercised for any or all of those
shares as fully-vested shares until the earlier of (i) the expiration of the ten
(10)-year option term or (ii) the expiration of the three (3)-year period
measured from the date of such cessation of Board service.

Should the Optionee die after cessation of Board service but while
holding one or more options under this Director Fee Option Grant Program, then
each such option may be exercised, for any or all of the shares for which the
option is exercisable at the time of the Optionee's cessation of Board service
(less any shares subsequently purchased by Optionee prior to death), by the
personal representative of the Optionee's estate or by the person or persons to
whom the option is transferred pursuant to the Optionee's will or in accordance
with the laws of descent and distribution. Such right of exercise shall lapse,
and the option shall terminate, upon the earlier of (i) the expiration of the
ten (10)-year option term or (ii) the three (3)-year period measured from the
date of the Optionee's cessation of Board service.

III. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-
OVER

A. In the event of any Corporate Transaction while the Optionee
remains a Board member, each outstanding option held by such Optionee under this
Director Fee Option Grant Program shall automatically accelerate so that each
such option shall, immediately prior to the effective date of the Corporate
Transaction, become fully exercisable with respect to the

25.
<PAGE> 26
total number of shares of Common Stock at the time subject to such option and
may be exercised for any or all of those shares as fully-vested shares of Common
Stock. Each such outstanding option shall be assumed by the successor
corporation (or parent thereof) in the Corporate Transaction and shall remain
exercisable for the fully-vested shares until the earlier of (i) the expiration
of the ten (10)-year option term or (ii) the expiration of the three (3)-year
period measured from the date of the Optionee's cessation of Board service.

B. In the event of a Change in Control while the Optionee remains in
Service, each outstanding option held by such Optionee under this Director Fee
Option Grant Program shall automatically accelerate so that each such option
shall immediately become fully exercisable with respect to the total number of
shares of Common Stock at the time subject to such option and may be exercised
for any or all of those shares as fully-vested shares of Common Stock. The
option shall remain so exercisable until the earlier or (i) the expiration of
the ten (10)-year option term or (ii) the expiration of the three (3)-year
period measured from the date of the Optionee's cessation of Service.

C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each
outstanding option granted him or her under the Director Fee Option Grant
Program. The Optionee shall in return be entitled to a cash distribution from
the Corporation in an amount equal to the excess of (i) the Take-Over Price of
the shares of Common Stock at the time subject to each surrendered option
(whether or not the Optionee is otherwise at the time vested in those shares)
over (ii) the aggregate exercise price payable for such shares. Such cash
distribution shall be paid within five (5) days following the surrender of the
option to the Corporation. No approval or consent of the Board or any Plan
Administrator shall be required in connection with such option surrender and
cash distribution.

D. The grant of options under the Director Fee Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.

IV. REMAINING TERMS

The remaining terms of each option granted under this Director Fee
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.

26.
<PAGE> 27
ARTICLE SEVEN

MISCELLANEOUS

I. FINANCING

The Plan Administrator may permit any Optionee or Participant to pay
the option exercise price under the Discretionary Option Grant Program or the
purchase price of shares issued under the Stock Issuance Program by delivering a
full-recourse, interest bearing promissory note payable in one or more
installments. The terms of any such promissory note (including the interest rate
and the terms of repayment) shall be established by the Plan Administrator in
its sole discretion. In no event may the maximum credit available to the
Optionee or Participant exceed the sum of (i) the aggregate option exercise
price or purchase price payable for the purchased shares plus (ii) any Federal,
state and local income and employment tax liability incurred by the Optionee or
the Participant in connection with the option exercise or share purchase.

II. TAX WITHHOLDING

A. The Corporation's obligation to deliver shares of Common Stock
upon the exercise of options or the issuance or vesting of such shares under the
Plan shall be subject to the satisfaction of all applicable Federal, state and
local income and employment tax withholding requirements.

B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options or unvested shares of Common Stock under the
Plan (other than the options granted or the shares issued under the Automatic
Option Grant or Director Fee Option Grant Program) with the right to use shares
of Common Stock in satisfaction of all or part of the Taxes incurred by such
holders in connection with the exercise of their options or the vesting of their
shares. Such right may be provided to any such holder in either or both of the
following formats:

Stock Withholding: The election to have the Corporation
withhold, from the shares of Common Stock otherwise issuable upon the exercise
of such Non-Statutory Option or the vesting of such shares, a portion of those
shares with an aggregate Fair Market Value equal to the percentage of the Taxes
(not to exceed one hundred percent (100%)) designated by the holder.

Stock Delivery: The election to deliver to the Corporation, at
the time the Non-Statutory Option is exercised or the shares vest, one or more
shares of Common Stock previously acquired by such holder (other than in
connection with the option exercise or share vesting triggering the Taxes) with
an aggregate Fair Market Value equal to the percentage of the Taxes (not to
exceed one hundred percent (100%)) designated by the holder.

27.
<PAGE> 28
III. EFFECTIVE DATE AND TERM OF THE PLAN

A. The Plan shall become effective immediately at the Plan Effective
Time. However, the Salary Investment Option Grant Program shall not be
implemented until such time as the Primary Committee may deem appropriate.
Options may be granted under the Discretionary Option Grant or Automatic Option
Grant Program at any time at or after the Plan Effective Time. However, no
options granted under the Plan may be exercised, and no shares shall be issued
under the Plan, until the Plan is approved by the Corporation's stockholders. If
such stockholder approval is not obtained within twelve (12) months after the
Plan Effective Time, then all options previously granted under this Plan shall
terminate and cease to be outstanding, and no further options shall be granted
and no shares shall be issued under the Plan.

B. The Plan shall serve as the successor to the Predecessor Plan,
and no further option grants or direct stock issuances shall be made under the
Predecessor Plan after the Section 12 Registration Date. All options outstanding
under the Predecessor Plan on the Section 12 Registration Date shall be
incorporated into the Plan at that time and shall be treated as outstanding
options under the Plan. However, each outstanding option so incorporated shall
continue to be governed solely by the terms of the documents evidencing such
option, and no provision of the Plan shall be deemed to affect or otherwise
modify the rights or obligations of the holders of such incorporated options
with respect to their acquisition of shares of Common Stock.

C. One or more provisions of the Plan, including (without
limitation) the option/vesting acceleration provisions of Article Two relating
to Corporate Transactions and Changes in Control, may, in the Plan
Administrator's discretion, be extended to one or more options incorporated from
the Predecessor Plan which do not otherwise contain such provisions.

D. The Plan shall terminate upon the earliest to occur of (i)
October 31, 2007, (ii) the date on which all shares available for issuance under
the Plan shall have been issued as fully-vested shares or (iii) the termination
of all outstanding options in connection with a Corporate Transaction. Should
the Plan terminate on October 31, 2007, then all option grants and unvested
stock issuances outstanding at that time shall continue to have force and effect
in accordance with the provisions of the documents evidencing such grants or
issuances.

IV. AMENDMENT OF THE PLAN

A. The Board shall have complete and exclusive power and authority
to amend or modify the Plan in any or all respects. However, no such amendment
or modification shall adversely affect the rights and obligations with respect
to stock options or unvested stock issuances at the time outstanding under the
Plan unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
pursuant to applicable laws or regulations.

28.
<PAGE> 29
B. Options to purchase shares of Common Stock may be granted under
the Discretionary Option Grant and Salary Investment Option Grant Programs and
shares of Common Stock may be issued under the Stock Issuance Program that are
in each instance in excess of the number of shares then available for issuance
under the Plan, provided any excess shares actually issued under those programs
shall be held in escrow until there is obtained stockholder approval of an
amendment sufficiently increasing the number of shares of Common Stock available
for issuance under the Plan. If such stockholder approval is not obtained within
twelve (12) months after the date the first such excess issuances are made, then
(i) any unexercised options granted on the basis of such excess shares shall
terminate and cease to be outstanding and (ii) the Corporation shall promptly
refund to the Optionees and the Participants the exercise or purchase price paid
for any excess shares issued under the Plan and held in escrow, together with
interest (at the applicable Short Term Federal Rate) for the period the shares
were held in escrow, and such shares shall thereupon be automatically cancelled
and cease to be outstanding.

V. USE OF PROCEEDS

Any cash proceeds received by the Corporation from the sale of
shares of Common Stock under the Plan shall be used for general corporate
purposes.

VI. REGULATORY APPROVALS

A. The implementation of the Plan, the granting of any stock option
under the Plan and the issuance of any shares of Common Stock (i) upon the
exercise of any granted option or (ii) under the Stock Issuance Program shall be
subject to the Corporation's procurement of all approvals and permits required
by regulatory authorities having jurisdiction over the Plan, the stock options
granted under it and the shares of Common Stock issued pursuant to it.

B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any stock exchange (or the Nasdaq National Market, if applicable) on which
Common Stock is then listed for trading.

VII. NO EMPLOYMENT/SERVICE RIGHTS

Nothing in the Plan shall confer upon the Optionee or the
Participant any right to continue in Service for any period of specific duration
or interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.

29.
<PAGE> 30
APPENDIX

The following definitions shall be in effect under the Plan:

A. AUTOMATIC OPTION GRANT PROGRAM shall mean the automatic option grant
program in effect under the Plan.

B. BOARD shall mean the Corporation's Board of Directors.

C. CHANGE IN CONTROL shall mean a change in ownership or control of the
Corporation effected through either of the following transactions:

(i) the acquisition, directly or indirectly by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation), of beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than
fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities pursuant to a tender or exchange
offer made directly to the Corporation's stockholders, or

(ii) a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of the
Board members ceases, by reason of one or more contested elections for
Board membership, to be comprised of individuals who either (A) have been
Board members continuously since the beginning of such period or (B) have
been elected or nominated for election as Board members during such period
by at least a majority of the Board members described in clause (A) who
were still in office at the time the Board approved such election or
nomination.

D. CODE shall mean the Internal Revenue Code of 1986, as amended.

E. COMMON STOCK shall mean the Corporation's common stock.

F. CORPORATE TRANSACTION shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:

(i) a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or
persons different from the persons holding those securities immediately
prior to such transaction, or

A-1.
<PAGE> 31
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation.

G. CORPORATION shall mean CombiChem, Inc., a Delaware corporation, and its
successors.

H. DIRECTOR FEE OPTION GRANT PROGRAM shall mean the special stock option
grant in effect for non-employee Board members under Article Six of the Plan.

I. DISCRETIONARY OPTION GRANT PROGRAM shall mean the discretionary option
grant program in effect under the Plan.

J. ELIGIBLE DIRECTOR shall mean a non-employee Board member eligible to
participate in the Automatic Option Grant Program in accordance with the
eligibility provisions of Article One.

K. EMPLOYEE shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.

L. EXERCISE DATE shall mean the date on which the Corporation shall have
received written notice of the option exercise.

M. FAIR MARKET VALUE per share of Common Stock on any relevant date shall
be determined in accordance with the following provisions:

(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price is
reported by the National Association of Securities Dealers on the Nasdaq
National Market. If there is no closing selling price for the Common Stock
on the date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation exists.

(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price
per share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for
the Common Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which such
quotation exists.

A-2.
<PAGE> 32
(iii) For purposes of any option grants made on the Underwriting
Date, the Fair Market Value shall be deemed to be equal to the price per
share at which the Common Stock is to be sold in the initial public
offering pursuant to the Underwriting Agreement.

N. HOSTILE TAKE-OVER shall mean the acquisition, directly or indirectly,
by any person or related group of persons (other than the Corporation or a
person that directly or indirectly controls, is controlled by, or is under
common control with, the Corporation) of beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly to
the Corporation's stockholders which the Board does not recommend such
stockholders to accept.

O. INCENTIVE OPTION shall mean an option which satisfies the requirements
of Code Section 422.

P. INVOLUNTARY TERMINATION shall mean the termination of the Service of
any individual which occurs by reason of:

(i) such individual's involuntary dismissal or discharge by the
Corporation for reasons other than Misconduct, or

(ii) such individual's voluntary resignation following (A) a
change in his or her position with the Corporation which materially
reduces his or her duties and responsibilities or the level of management
to which he or she reports, (B) a reduction in his or her level of
compensation (including base salary, fringe benefits and target bonus
under any corporate-performance based bonus or incentive programs) by more
than fifteen percent (15%) or (C) a relocation of such individual's place
of employment by more than fifty (50) miles, provided and only if such
change, reduction or relocation is effected by the Corporation without the
individual's consent.

Q. MISCONDUCT shall mean the commission of any act of fraud, embezzlement
or dishonesty by the Optionee or Participant, any unauthorized use or disclosure
by such person of confidential information or trade secrets of the Corporation
(or any Parent or Subsidiary), or any other intentional misconduct by such
person adversely affecting the business or affairs of the Corporation (or any
Parent or Subsidiary) in a material manner. The foregoing definition shall not
be deemed to be inclusive of all the acts or omissions which the Corporation (or
any Parent or Subsidiary) may consider as grounds for the dismissal or discharge
of any Optionee, Participant or other person in the Service of the Corporation
(or any Parent or Subsidiary).

R. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended.

A-3.
<PAGE> 33
S. NON-STATUTORY OPTION shall mean an option not intended to satisfy the
requirements of Code Section 422.

T. OPTIONEE shall mean any person to whom an option is granted under the
Discretionary Option Grant, Salary Investment Option Grant, Automatic Option
Grant or Director Fee Option Grant Program.

U. PARENT shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.

V. PARTICIPANT shall mean any person who is issued shares of Common Stock
under the Stock Issuance Program.

W. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the inability
of the Optionee or the Participant to engage in any substantial gainful activity
by reason of any medically determinable physical or mental impairment expected
to result in death or to be of continuous duration of twelve (12) months or
more. However, solely for purposes of the Automatic Option Grant and Director
Fee Option Grant Programs, Permanent Disability or Permanently Disabled shall
mean the inability of the non-employee Board member to perform his or her usual
duties as a Board member by reason of any medically determinable physical or
mental impairment expected to result in death or to be of continuous duration of
twelve (12) months or more.

X. PLAN shall mean the Corporation's 1997 Stock Incentive Plan, as set
forth in this document.

Y. PLAN ADMINISTRATOR shall mean the particular entity, whether the
Primary Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to one or more classes of eligible persons, to the extent such entity is
carrying out its administrative functions under those programs with respect to
the persons under its jurisdiction.

Z. PLAN EFFECTIVE TIME shall mean the time at which the Underwriting
Agreement is executed and finally priced.

AA. PREDECESSOR PLAN shall mean the Corporation's pre-existing Stock
Option Plan in effect immediately prior to the Plan Effective Time hereunder.

AB. PRIMARY COMMITTEE shall mean the committee of two (2) or more
non-employee Board members appointed by the Board to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to Section
16 Insiders and to administer the Salary Investment

A-4.
<PAGE> 34
Option Grant Program solely with respect to the selection of the eligible
individuals who may participate in such program.

AC. SALARY INVESTMENT OPTION GRANT PROGRAM shall mean the salary
investment option grant program in effect under the Plan.

AD. SECONDARY COMMITTEE shall mean a committee of one or more Board
members appointed by the Board to administer the Discretionary Option Grant and
Stock Issuance Programs with respect to eligible persons other than Section 16
Insiders.

AE. SECTION 12 REGISTRATION DATE shall mean the date on which the Common
Stock is first registered under Section 12 of the 1934 Act.

AF. SECTION 16 INSIDER shall mean an officer or director of the
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.

AG. SERVICE shall mean the performance of services for the Corporation (or
any Parent or Subsidiary) by a person in the capacity of an Employee, a
non-employee member of the board of directors or a consultant or independent
advisor, except to the extent otherwise specifically provided in the documents
evidencing the option grant or stock issuance.

AH. STOCK EXCHANGE shall mean either the American Stock Exchange or the
New York Stock Exchange.

AI. STOCK ISSUANCE AGREEMENT shall mean the agreement entered into by the
Corporation and the Participant at the time of issuance of shares of Common
Stock under the Stock Issuance Program.

AJ. STOCK ISSUANCE PROGRAM shall mean the stock issuance program in effect
under the Plan.

AK. SUBSIDIARY shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.

AL. TAKE-OVER PRICE shall mean the greater of (i) the Fair Market Value
per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting such
Hostile Take-Over. However, if the surrendered option is an Incentive Option,
the Take-Over Price shall not exceed the clause (i) price per share.

A-5.
<PAGE> 35
AM. TAXES shall mean the Federal, state and local income and employment
tax liabilities incurred by the holder of Non-Statutory Options or unvested
shares of Common Stock in connection with the exercise of those options or the
vesting of those shares.

AN. 10% STOCKHOLDER shall mean the owner of stock (as determined under
Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).

AO. UNDERWRITING AGREEMENT shall mean the agreement between the
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.

AP. UNDERWRITING DATE shall mean the date on which the Underwriting
Agreement is executed and priced in connection with an initial public offering
of the Common Stock.

A-6.

<PAGE> 1
EXHIBIT 10.45

COMBICHEM, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN

I. PURPOSE OF THE PLAN

This Employee Stock Purchase Plan is intended to promote the
interests of CombiChem, Inc. by providing eligible employees with the
opportunity to acquire a proprietary interest in the Corporation through
participation in a payroll-deduction based employee stock purchase plan designed
to qualify under Section 423 of the Code.

Capitalized terms herein shall have the meanings assigned to such
terms in the attached Appendix.

II. ADMINISTRATION OF THE PLAN

The Plan Administrator shall have full authority to interpret and
construe any provision of the Plan and to adopt such rules and regulations for
administering the Plan as it may deem necessary in order to comply with the
requirements of Code Section 423. Decisions of the Plan Administrator shall be
final and binding on all parties having an interest in the Plan.

III. STOCK SUBJECT TO PLAN

A. The stock purchasable under the Plan shall be shares of
authorized but unissued or reacquired Common Stock, including shares of Common
Stock purchased on the open market. The maximum number of shares of Common Stock
which may be issued over the term of the Plan shall not exceed One Hundred Fifty
Thousand (150,000) shares.

B. Should any change be made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to (i) the maximum number and class of securities issuable under
the Plan, (ii) the maximum number and class of securities purchasable per
Participant on any one Purchase Date and (iii) the number and class of
securities and the price per share in effect under each outstanding purchase
right in order to prevent the dilution or enlargement of benefits thereunder.

IV. OFFERING PERIODS

A. Shares of Common Stock shall be offered for purchase under the
Plan through a series of successive offering periods until such time as (i) the
maximum number of shares of Common Stock available for issuance under the Plan
shall have been purchased or (ii) the Plan shall have been sooner terminated.

<PAGE> 2

B. Each offering period shall be of such duration (not to exceed
twelve (12) months) as determined by the Plan Administrator prior to the start
date of such offering period. However, the initial offering period shall
commence at the Effective Time and terminate on the last business day in July
1999. The next offering period shall commence on the first business day in
August 1999, and subsequent offering periods shall commence as designated by
the Plan Administrator.

C. Each offering period shall be comprised of a series of one or
more successive Purchase Intervals. Purchase Intervals shall run from the first
business day in February each year to the last business day in July of the same
year and from the first business day in August each year to the last business
day in January of the following year. However, the first Purchase Interval in
effect under the initial offering period shall commence at the Effective Time
and terminate on the last business day in January 1999.

D. Should the Fair Market Value per share of Common Stock on any
Purchase Date within an offering period be less than the Fair Market Value per
share of Common Stock on the start date of that offering period, then that
offering period shall automatically terminate immediately after the purchase of
shares of Common Stock on such Purchase Date, and a new offering period shall
commence on the next business day following such Purchase Date. The new offering
period shall have a duration of twelve (12) months, unless a shorter duration is
established by the Plan Administrator within five (5) business days following
the start date of that offering period.

V. ELIGIBILITY

A. Each individual who is an Eligible Employee on the start date of
any offering period under the Plan may enter that offering period on such start
date or on any subsequent Semi-Annual Entry Date within that offering period,
provided he or she remains an Eligible Employee.

B. Each individual who first becomes an Eligible Employee after the
start date of an offering period may enter that offering period on any
subsequent Semi-Annual Entry Date within that offering period on which he or she
is an Eligible Employee.

C. The date an individual enters an offering period shall be
designated his or her Entry Date for purposes of that offering period.

D. To participate in the Plan for a particular offering period, the
Eligible Employee must complete the enrollment forms prescribed by the Plan
Administrator (including a stock purchase agreement and a payroll deduction
authorization) and file such forms with the Plan Administrator (or its
designate) on or before his or her scheduled Entry Date.

2.
<PAGE> 3
VI. PAYROLL DEDUCTIONS

A. The payroll deduction authorized by the Participant for purposes
of acquiring shares of Common Stock during an offering period may be any
multiple of one percent (1%) of the Base Salary paid to the Participant during
each Purchase Interval within that offering period, up to a maximum of ten
percent (10%). The deduction rate so authorized shall continue in effect
throughout the offering period, except to the extent such rate is changed in
accordance with the following guidelines:

(i) The Participant may, at any time during the offering
period, reduce his or her rate of payroll deduction to become effective as
soon as possible after filing the appropriate form with the Plan
Administrator. The Participant may not, however, effect more than one (1)
such reduction per Purchase Interval.

(ii) The Participant may, prior to the commencement of any
new Purchase Interval within the offering period, increase the rate of his
or her payroll deduction by filing the appropriate form with the Plan
Administrator. The new rate (which may not exceed the ten percent (10%)
maximum) shall become effective on the start date of the first Purchase
Interval following the filing of such form.

B. Payroll deductions shall begin on the first pay day following the
Participant's Entry Date into the offering period and shall (unless sooner
terminated by the Participant) continue through the pay day ending with or
immediately prior to the last day of that offering period. The amounts so
collected shall be credited to the Participant's book account under the Plan,
but no interest shall be paid on the balance from time to time outstanding in
such account. The amounts collected from the Participant shall not be required
to be held in any segregated account or trust fund and may be commingled with
the general assets of the Corporation and used for general corporate purposes.

C. Payroll deductions shall automatically cease upon the termination
of the Participant's purchase right in accordance with the provisions of the
Plan.

D. The Participant's acquisition of Common Stock under the Plan on
any Purchase Date shall neither limit nor require the Participant's acquisition
of Common Stock on any subsequent Purchase Date, whether within the same or a
different offering period.

3.
<PAGE> 4
VII. PURCHASE RIGHTS

A. GRANT OF PURCHASE RIGHT. A Participant shall be granted a
separate purchase right for each offering period in which he or she
participates. The purchase right shall be granted on the Participant's Entry
Date into the offering period and shall provide the Participant with the right
to purchase shares of Common Stock, in a series of successive installments over
the remainder of such offering period, upon the terms set forth below. The
Participant shall execute a stock purchase agreement embodying such terms and
such other provisions (not inconsistent with the Plan) as the Plan Administrator
may deem advisable.

Under no circumstances shall purchase rights be granted under the
Plan to any Eligible Employee if such individual would, immediately after the
grant, own (within the meaning of Code Section 424(d)) or hold outstanding
options or other rights to purchase, stock possessing five percent (5%) or more
of the total combined voting power or value of all classes of stock of the
Corporation or any Corporate Affiliate.

B. EXERCISE OF THE PURCHASE RIGHT. Each purchase right shall be
automatically exercised in installments on each successive Purchase Date within
the offering period, and shares of Common Stock shall accordingly be purchased
on behalf of each Participant (other than Participants whose payroll deductions
have previously been refunded pursuant to the Termination of Purchase Right
provisions below) on each such Purchase Date. The purchase shall be effected by
applying the Participant's payroll deductions for the Purchase Interval ending
on such Purchase Date to the purchase of whole shares of Common Stock at the
purchase price in effect for the Participant for that Purchase Date.

C. PURCHASE PRICE. The purchase price per share at which Common
Stock will be purchased on the Participant's behalf on each Purchase Date within
the offering period shall be equal to eighty-five percent (85%) of the lower of
(i) the Fair Market Value per share of Common Stock on the Participant's Entry
Date into that offering period or (ii) the Fair Market Value per share of Common
Stock on that Purchase Date.

D. NUMBER OF PURCHASABLE SHARES. The number of shares of Common
Stock purchasable by a Participant on each Purchase Date during the offering
period shall be the number of whole shares obtained by dividing the amount
collected from the Participant through payroll deductions during the Purchase
Interval ending with that Purchase Date by the purchase price in effect for the
Participant for that Purchase Date. However, the maximum number of shares of
Common Stock purchasable per Participant on any one Purchase Date shall not
exceed One Thousand Two Hundred Fifty (1,250) shares, subject to periodic
adjustments in the event of certain changes in the Corporation's capitalization.

E. EXCESS PAYROLL DEDUCTIONS. Any payroll deductions not applied to
the purchase of shares of Common Stock on any Purchase Date because they are not
sufficient to purchase a whole share of Common Stock shall be held for the
purchase of Common Stock on the next Purchase Date. However, any payroll
deductions not applied to the purchase of

4.
<PAGE> 5
Common Stock by reason of the limitation on the maximum number of shares
purchasable by the Participant on the Purchase Date shall be promptly refunded.

F. TERMINATION OF PURCHASE RIGHT. The following provisions shall
govern the termination of outstanding purchase rights:

(i) A Participant may, at any time prior to the next
scheduled Purchase Date in the offering period, terminate his or her
outstanding purchase right by filing the appropriate form with the Plan
Administrator (or its designate), and no further payroll deductions shall
be collected from the Participant with respect to the terminated purchase
right. Any payroll deductions collected during the Purchase Interval in
which such termination occurs shall, at the Participant's election, be
immediately refunded or held for the purchase of shares on the next
Purchase Date. If no such election is made at the time such purchase right
is terminated, then the payroll deductions collected with respect to the
terminated right shall be refunded as soon as possible.

(ii) The termination of such purchase right shall be
irrevocable, and the Participant may not subsequently rejoin the offering
period for which the terminated purchase right was granted. In order to
resume participation in any subsequent offering period, such individual
must re-enroll in the Plan (by making a timely filing of the prescribed
enrollment forms) on or before his or her scheduled Entry Date into that
offering period.

(iii) Should the Participant cease to remain an Eligible
Employee for any reason (including death, disability or change in status)
while his or her purchase right remains outstanding, then that purchase
right shall immediately terminate, and all of the Participant's payroll
deductions for the Purchase Interval in which the purchase right so
terminates shall be immediately refunded. However, should the Participant
cease to remain in active service by reason of an approved unpaid leave of
absence, then the Participant shall have the right, exercisable up until
the last business day of the Purchase Interval in which such leave
commences, to (a) withdraw all the payroll deductions collected to date on
his or her behalf for that Purchase Interval or (b) have such funds held
for the purchase of shares on his or her behalf on the next scheduled
Purchase Date. In no event, however, shall any further payroll deductions
be collected on the Participant's behalf during such leave. Upon the
Participant's return to active service, his or her payroll deductions
under the Plan shall automatically resume at the rate in effect at the
time the leave began, unless the Participant withdraws from the Plan prior
to his or her return.

G. CORPORATE TRANSACTION. Each outstanding purchase right shall
automatically be exercised, immediately prior to the effective date of any
Corporate Transaction, by applying the payroll deductions of each Participant
for the Purchase Interval in which such

5.
<PAGE> 6
Corporate Transaction occurs to the purchase of whole shares of Common Stock at
a purchase price per share equal to eighty-five percent (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 Corporate Transaction occurs or (ii)
the Fair Market Value per share of Common Stock immediately prior to the
effective date of such Corporate Transaction. However, the applicable limitation
on the number of shares of Common Stock purchasable per Participant shall
continue to apply to any such purchase.

The Corporation shall use its best efforts to provide at least ten
(10)-days prior written notice of the occurrence of any Corporate Transaction,
and Participants shall, following the receipt of such notice, have the right to
terminate their outstanding purchase rights prior to the effective date of the
Corporate Transaction.

H. PRORATION OF PURCHASE RIGHTS. Should the total number of shares
of Common Stock to be purchased pursuant to outstanding purchase rights on any
particular date exceed the number of shares then available for issuance under
the Plan, the Plan Administrator shall make a pro-rata allocation of the
available shares on a uniform and nondiscriminatory basis, and the payroll
deductions of each Participant, to the extent in excess of the aggregate
purchase price payable for the Common Stock pro-rated to such individual, shall
be refunded.

I. ASSIGNABILITY. The purchase right shall be exercisable only by
the Participant and shall not be assignable or transferable by the Participant.

J. STOCKHOLDER RIGHTS. A Participant shall have no stockholder
rights with respect to the shares subject to his or her outstanding purchase
right until the shares are purchased on the Participant's behalf in accordance
with the provisions of the Plan and the Participant has become a holder of
record of the purchased shares.

VIII. ACCRUAL LIMITATIONS

A. No Participant shall be entitled to accrue rights to acquire
Common Stock pursuant to any purchase right outstanding under this Plan if and
to the extent such accrual, when aggregated with (i) rights to purchase Common
Stock accrued under any other purchase right granted under this Plan and (ii)
similar rights accrued under other employee stock purchase plans (within the
meaning of Code Section 423) of the Corporation or any Corporate Affiliate,
would otherwise permit such Participant to purchase more than Twenty-Five
Thousand Dollars ($25,000) worth of stock of the Corporation or any Corporate
Affiliate (determined on the basis of the Fair Market Value per share on the
date or dates such rights are granted) for each calendar year such rights are at
any time outstanding.

B. For purposes of applying such accrual limitations to the purchase
rights granted under the Plan, the following provisions shall be in effect:

6.
<PAGE> 7
(i) The right to acquire Common Stock under each
outstanding purchase right shall accrue in a series of installments on
each successive Purchase Date during the offering period on which such
right remains outstanding.

(ii) No right to acquire Common Stock under any outstanding
purchase right shall accrue to the extent the Participant has already
accrued in the same calendar year the right to acquire Common Stock under
one (1) or more other purchase rights at a rate equal to Twenty-Five
Thousand Dollars ($25,000) worth of Common Stock (determined on the basis
of the Fair Market Value per share on the date or dates of grant) for each
calendar year such rights were at any time outstanding.

C. If by reason of such accrual limitations, any purchase right of a
Participant does not accrue for a particular Purchase Interval, then the payroll
deductions which the Participant made during that Purchase Interval with respect
to such purchase right shall be promptly refunded.

D. In the event there is any conflict between the provisions of this
Article and one or more provisions of the Plan or any instrument issued
thereunder, the provisions of this Article shall be controlling.

IX. EFFECTIVE DATE AND TERM OF THE PLAN

A. The Plan was adopted by the Board on October 7, 1997 and shall
become effective at the Effective Time, provided no purchase rights granted
under the Plan shall be exercised, and no shares of Common Stock shall be issued
hereunder, until (i) the Plan shall have been approved by the stockholders of
the Corporation and (ii) the Corporation shall have complied with all applicable
requirements of the 1933 Act (including the registration of the shares of Common
Stock issuable under the Plan on a Form S-8 registration statement filed with
the Securities and Exchange Commission), all applicable listing requirements of
any stock exchange (or the Nasdaq National Market, if applicable) on which the
Common Stock is listed for trading and all other applicable requirements
established by law or regulation. In the event such stockholder approval is not
obtained, or such compliance is not effected, within twelve (12) months after
the date on which the Plan is adopted by the Board, the Plan shall terminate and
have no further force or effect, and all sums collected from Participants during
the initial offering period hereunder shall be refunded.

B. Unless sooner terminated by the Board, the Plan shall terminate
upon the earliest of (i) the last business day in July 2007, (ii) the date on
which all shares available for issuance under the Plan shall have been sold
pursuant to purchase rights exercised under the Plan or (iii) the date on which
all purchase rights are exercised in connection with a Corporate Transaction. No
further purchase rights shall be granted or exercised, and no further payroll
deductions shall be collected, under the Plan following such termination.

7.
<PAGE> 8
X. AMENDMENT OF THE PLAN

The Board may alter, amend, suspend or discontinue the Plan at any
time to become effective immediately following the close of any Purchase
Interval. However, the Board may not, without the approval of the Corporation's
stockholders, (i) increase the number of shares of Common Stock issuable under
the Plan or the maximum number of shares purchasable per Participant on any one
Purchase Date, except for permissible adjustments in the event of certain
changes in the Corporation's capitalization, (ii) alter the purchase price
formula so as to reduce the purchase price payable for the shares of Common
Stock purchasable under the Plan or (iii) modify eligibility requirements for
participation in the Plan.

XI. GENERAL PROVISIONS

A. All costs and expenses incurred in the administration of the Plan
shall be paid by the Corporation; however, each Plan Participant shall bear all
costs and expenses incurred by such individual in the sale or other disposition
of any shares purchased under the Plan.

B. Nothing in the Plan shall confer upon the Participant any right
to continue in the employ of the Corporation or any Corporate Affiliate for any
period of specific duration or interfere with or otherwise restrict in any way
the rights of the Corporation (or any Corporate Affiliate employing such person)
or of the Participant, which rights are hereby expressly reserved by each, to
terminate such person's employment at any time for any reason, with or without
cause.

C. The provisions of the Plan shall be governed by the laws of the
State of Delaware without resort to that State's conflict-of-laws rules.

8.
<PAGE> 9
SCHEDULE A

CORPORATIONS PARTICIPATING IN
EMPLOYEE STOCK PURCHASE PLAN
AS OF THE EFFECTIVE TIME

CombiChem, Inc.

<PAGE> 10
APPENDIX

The following definitions shall be in effect under the Plan:

A. BASE SALARY shall mean the (i) regular base salary paid to a
Participant by one or more Participating Companies during such individual's
period of participation in one or more offering periods under the Plan plus (ii)
any pre-tax contributions made by the Participant to any Code Section 401(k)
salary deferral plan or any Code Section 125 cafeteria benefit program now or
hereafter established by the Corporation or any Corporate Affiliate. The
following items of compensation shall NOT be included in Base Salary: (i) all
overtime payments, bonuses, commissions (other than those functioning as base
salary equivalents), profit-sharing distributions and other incentive-type
payments and (ii) any and all contributions (other than Code Section 401(k) or
Code Section 125 contributions) made on the Participant's behalf by the
Corporation or any Corporate Affiliate under any employee benefit or welfare
plan now or hereafter established.

B. BOARD shall mean the Corporation's Board of Directors.

C. CODE shall mean the Internal Revenue Code of 1986, as amended.

D. COMMON STOCK shall mean the Corporation's common stock.

E. CORPORATE AFFILIATE shall mean any parent or subsidiary
corporation of the Corporation (as determined in accordance with Code Section
424), whether now existing or subsequently established.

F. CORPORATE TRANSACTION shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:

(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Corporation in complete liquidation
or dissolution of the Corporation.

G. CORPORATION shall mean CombiChem, Inc., a Delaware corporation,
and any corporate successor to all or substantially all of the assets or voting
stock of CombiChem, Inc. which shall by appropriate action adopt the Plan.

A-1.
<PAGE> 11
H. EFFECTIVE TIME shall mean the time at which the Underwriting
Agreement is executed and finally priced. Any Corporate Affiliate which becomes
a Participating Corporation after such Effective Time shall designate a
subsequent Effective Time with respect to its employee-Participants.

I. ELIGIBLE EMPLOYEE shall mean any person who is employed by a
Participating Corporation on a basis under which he or she is regularly expected
to render more than twenty (20) hours of service per week for more than five (5)
months per calendar year for earnings considered wages under Code Section
3401(a).

J. ENTRY DATE shall mean the date an Eligible Employee first
commences participation in the offering period in effect under the Plan. The
earliest Entry Date under the Plan shall be the Effective Time.

K. FAIR MARKET VALUE per share of Common Stock on any relevant date
shall be determined in accordance with the following provisions:

(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price is
reported by the National Association of Securities Dealers on the Nasdaq
National Market or any successor system. If there is no closing selling
price for the Common Stock on the date in question, then the Fair Market
Value shall be the closing selling price on the last preceding date for
which such quotation exists.

(iii) For purposes of the initial offering period which begins at
the Effective Time, the Fair Market Value shall be deemed to be equal to
the price per share at which the Common Stock is sold in the initial
public offering pursuant to the Underwriting Agreement.

L. 1933 ACT shall mean the Securities Act of 1933, as amended.

M. PARTICIPANT shall mean any Eligible Employee of a Participating
Corporation who is actively participating in the Plan.

A-2.
<PAGE> 12
N. PARTICIPATING CORPORATION shall mean the Corporation and such
Corporate Affiliate or Affiliates as may be authorized from time to time by the
Board to extend the benefits of the Plan to their Eligible Employees. The
Participating Corporations in the Plan are listed in attached Schedule A.

O. PLAN shall mean the Corporation's 1997 Employee Stock Purchase
Plan, as set forth in this document.

P. PLAN ADMINISTRATOR shall mean the committee of two (2) or more
Board members appointed by the Board to administer the Plan.

Q. PURCHASE DATE shall mean the last business day of each Purchase
Interval. The initial Purchase Date shall be January 31, 1999.

R. PURCHASE INTERVAL shall mean each successive six (6)-month period
within the offering period at the end of which there shall be purchased shares
of Common Stock on behalf of each Participant.

S. SEMI-ANNUAL ENTRY DATE shall mean the first business day in
February and August each year on which an Eligible Employee may first enter an
offering period.

T. STOCK EXCHANGE shall mean either the American Stock Exchange or
the New York Stock Exchange.

U. UNDERWRITING AGREEMENT shall mean the agreement between the
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.

A-3.

<PAGE> 1
EXHIBIT 10.48

COMBICHEM, INC.
NOTICE OF GRANT OF STOCK OPTION

Notice is hereby given of the following option grant (the
"Option") to purchase shares of the Common Stock of CombiChem, Inc. (the
"Corporation"):

Optionee:_____________________________________________________

Grant Date:___________________________________________________

Vesting Commencement Date:____________________________________

Exercise Price: $__________________________________ per share

Number of Option Shares:_______________________________ shares

Expiration Date:______________________________________________

Type of Option: ______ Incentive Stock Option

______ Non-Statutory Stock Option

Exercise Schedule: The Option shall become exercisable for
twenty-five percent (25%) of the Option Shares upon Optionee's
completion of one (1) year of Service measured from the
Vesting Commencement Date and shall become exercisable for the
balance of the Option Shares in thirty-six (36) successive
equal monthly installments upon Optionee's completion of each
additional month of Service over the thirty-six (36) month
period measured from the first anniversary of the Vesting
Commencement Date. In no event shall the Option become
exercisable for any additional Option Shares after Optionee's
cessation of Service.

Optionee understands and agrees that the Option is granted
subject to and in accordance with the terms of the CombiChem, Inc. 1997 Stock
Incentive Plan (the "Plan"). Optionee further agrees to be bound by the terms
of the Plan and the terms of the Option as set forth in the Stock Option
Agreement, including the Addendum to Stock Option Agreement, attached hereto as
Exhibit A. Optionee hereby acknowledges receipt of a copy of the official
prospectus for the Plan in the form attached hereto as Exhibit B. A copy of the
Plan is available upon request made to the Corporate Secretary at the
Corporation's principal offices.

<PAGE> 2

No Employment or Service Contract. Nothing in this Notice or
in the attached Stock Option Agreement or in the Plan shall confer upon
Optionee any right to continue in Service for any period of specific duration
or interfere with or otherwise restrict in any way the rights of the
Corporation (or any Parent or Subsidiary employing or retaining Optionee) or of
Optionee, which rights are hereby expressly reserved by each, to terminate
Optionee's Service at any time for any reason, with or without cause.

Definitions. All capitalized terms in this Notice shall have
the meaning assigned to them in this Notice or in the attached Stock Option
Agreement.

DATED: _________________________, 199 ___

COMBICHEM, INC.

By:________________________________

Title:_____________________________

___________________________________
OPTIONEE

Address:___________________________

___________________________________

ATTACHMENTS
EXHIBIT A - STOCK OPTION AGREEMENT AND ADDENDUM TO STOCK OPTION AGREEMENT
EXHIBIT B - PLAN SUMMARY AND PROSPECTUS

<PAGE> 3

EXHIBIT A

STOCK OPTION AGREEMENT
AND
ADDENDUM TO STOCK OPTION AGREEMENT

<PAGE> 4
EXHIBIT B

PLAN SUMMARY AND PROSPECTUS

<PAGE> 1

EXHIBIT 10.49

COMBICHEM, INC.
STOCK OPTION AGREEMENT

RECITALS

A. The Board has adopted the Plan for the purpose of retaining
the services of selected Employees, non-employee members of the Board or of the
board of directors of any Parent or Subsidiary and consultants and other
independent advisors who provide services to the Corporation (or any Parent or
Subsidiary).

B. Optionee is to render valuable services to the Corporation (or
a Parent or Subsidiary), and this Agreement is executed pursuant to, and is
intended to carry out the purposes of, the Plan in connection with the
Corporation's grant of an option to Optionee.

C. All capitalized terms in this Agreement shall have the meaning
assigned to them in the attached Appendix.

NOW, THEREFORE, it is hereby agreed as follows:

1. GRANT OF OPTION. The Corporation hereby grants to
Optionee, as of the Grant Date, an option to purchase up to the number of
Option Shares specified in the Grant Notice. The Option Shares shall be
purchasable from time to time during the option term specified in Paragraph 2
at the Exercise Price.

2. OPTION TERM. This option shall have a maximum term
of ten (10) years measured from the Grant Date and shall accordingly expire at
the close of business on the Expiration Date, unless sooner terminated in
accordance with Paragraph 5 or 6.

3. LIMITED TRANSFERABILITY. This option shall be
neither transferable nor assignable by Optionee other than by will or by the
laws of descent and distribution following Optionee's death and may be
exercised, during Optionee's lifetime, only by Optionee. However, if this
option is designated a Non-Statutory Option in the Grant Notice, then this
option may, in connection with the Optionee's estate plan, be assigned in whole
or in part during Optionee's lifetime to one or more members of the Optionee's
immediate family or to a trust established for the exclusive benefit of one or
more such family members. The assigned portion shall be exercisable only by
the person or persons who acquire a proprietary interest in the option pursuant
to such assignment. The terms applicable to the assigned portion shall be the
same as those in effect for this option immediately prior to such assignment.

<PAGE> 2

4. DATES OF EXERCISE. This option shall become
exercisable for the Option Shares in one or more installments as specified in
the Grant Notice. As the option becomes exercisable for such installments,
those installments shall accumulate and the option shall remain exercisable for
the accumulated installments until the Expiration Date or sooner termination of
the option term under Paragraph 5 or 6.

5. CESSATION OF SERVICE. The option term specified in
Paragraph 2 shall terminate (and this option shall cease to be outstanding)
prior to the Expiration Date should any of the following provisions become
applicable:

(a) Should Optionee cease to
remain in Service for any reason (other than death, Permanent
Disability or Misconduct) while holding this option, then Optionee
shall have a period of three (3) months (commencing with the date of
such cessation of Service) during which to exercise this option, but
in no event shall this option be exercisable at any time after the
Expiration Date.

(b) Should Optionee die while
holding this option, then the personal representative of Optionee's
estate or the person or persons to whom the option is transferred
pursuant to Optionee's will or in accordance with the laws of
inheritance shall have the right to exercise this option. Such right
shall lapse, and this option shall cease to be outstanding, upon the
earlier of (i) the expiration of the twelve (12)-month period measured
from the date of Optionee's death or (ii) the Expiration Date.

(c) Should Optionee cease Service
by reason of Permanent Disability while holding this option, then
Optionee shall have a period of twelve (12) months (commencing with
the date of such cessation of Service) during which to exercise this
option. In no event shall this option be exercisable at any time
after the Expiration Date.

(d) During the limited period of
post-Service exercisability, this option may not be exercised in the
aggregate for more than the number of vested Option Shares for which
the option is exercisable at the time of Optionee's cessation of
Service. Upon the expiration of such limited exercise period or (if
earlier) upon the Expiration Date, this option shall terminate and
cease to be outstanding for any vested Option Shares for which the
option has not been exercised. However, this option shall,
immediately upon Optionee's cessation of Service for any reason,
terminate and cease to be outstanding with respect to any Option
Shares in which Optionee is not otherwise at that time vested or for
which this option is not otherwise at that time exercisable.

<PAGE> 3
(e) Should Optionee's Service be
terminated for Misconduct, then this option shall terminate
immediately and cease to remain outstanding.

6. SPECIAL ACCELERATION OF OPTION.

(a) This option to the extent outstanding at the
time of a Corporate Transaction, but not otherwise fully exercisable, shall
automatically accelerate so that this option shall, immediately prior to the
effective date of such Corporate Transaction, become exercisable for all of the
Option Shares at the time subject to this option and may be exercised for any
or all of those Option Shares as fully vested shares of Common Stock. No such
acceleration of this option shall occur, however, if and to the extent: (i)
this option is, in connection with the Corporate Transaction, to be assumed by
the successor corporation (or parent thereof) or (ii) this option is to be
replaced with a cash incentive program of the successor corporation which
preserves the spread existing at the time of the Corporate Transaction on the
Option Shares for which this option is not otherwise at that time exercisable
(the excess of the Fair Market Value of those Option Shares over the aggregate
Exercise Price payable for such shares) and provides for subsequent payout in
accordance with the same option exercise/vesting schedule set forth in the
Grant Notice.

(b) Immediately following the Corporate
Transaction, this option shall terminate and cease to be outstanding, except to
the extent assumed by the successor corporation (or parent thereof) in
connection with the Corporate Transaction.

(c) If this option is assumed in connection with
a Corporate Transaction, then this option shall be appropriately adjusted,
immediately after such Corporate Transaction, to apply to the number and class
of securities which would have been issuable to Optionee in consummation of
such Corporate Transaction had the option been exercised immediately prior to
such Corporate Transaction, and appropriate adjustments shall also be made to
the Exercise Price, provided the aggregate Exercise Price shall remain the
same.

(d) This option may also become exercisable on an
accelerated basis in accordance with the terms and conditions of any special
addendum attached to this Agreement.

(e) This Agreement shall not in any way affect
the right of the Corporation to adjust, reclassify, reorganize or otherwise
change its capital or business structure or to merge, consolidate, dissolve,
liquidate or sell or transfer all or any part of its business or assets.

7. ADJUSTMENT IN OPTION SHARES.

Should any change be made to the Common Stock by
reason of any stock split, stock dividend, recapitalization, combination of
shares, exchange of shares or other change affecting the outstanding Common
Stock as a class without the Corporation's receipt of

<PAGE> 4

consideration, appropriate adjustments shall be made to (i) the total number
and/or class of securities subject to this option and (ii) the Exercise Price
in order to reflect such change and thereby preclude a dilution or enlargement
of benefits hereunder.

8. STOCKHOLDER RIGHTS. The holder of this option shall
not have any stockholder rights with respect to the Option Shares until such
person shall have exercised the option, paid the Exercise Price and become a
holder of record of the purchased shares.

9. MANNER OF EXERCISING OPTION.

(a) In order to exercise this option with respect
to all or any part of the Option Shares for which this option is at the time
exercisable, Optionee (or any other person or persons exercising the option)
must take the following actions:

(i) Execute and deliver to the
Corporation a Notice of Exercise for the Option Shares for which the
option is exercised.

(ii) Pay the aggregate Exercise
Price for the purchased shares in one or more of the following forms:

(A) cash or check made payable to
the Corporation;

(B) a promissory note payable to
the Corporation, but only to the extent authorized by the Plan
Administrator in accordance with Paragraph 13;

(C) shares of Common Stock held by
Optionee (or any other person or persons exercising the
option) for the requisite period necessary to avoid a charge
to the Corporation's earnings for financial reporting purposes
and valued at Fair Market Value on the Exercise Date; or

(D) through a special sale and
remittance procedure pursuant to which Optionee (or any other
person or persons exercising the option) shall concurrently
provide irrevocable instructions (I) to a
Corporation-designated brokerage firm to effect the immediate
sale of the purchased shares and remit to the Corporation, out
of the sale proceeds available on the settlement date,
sufficient funds to cover the aggregate Exercise Price payable
for the purchased shares plus all applicable Federal, state
and local income and employment taxes required

<PAGE> 5

to be withheld by the Corporation by reason of such exercise
and (II) to the Corporation to deliver the certificates for
the purchased shares directly to such brokerage firm in order
to complete the sale.

Except to the extent the sale and remittance
procedure is utilized in connection with the option exercise,
payment of the Exercise Price must accompany the Notice of
Exercise delivered to the Corporation in connection with the
option exercise.

(iii) Furnish to the Corporation
appropriate documentation that the person or persons exercising the
option (if other than Optionee) have the right to exercise this
option.

(iv) Make appropriate
arrangements with the Corporation (or Parent or Subsidiary employing
or retaining Optionee) for the satisfaction of all Federal, state and
local income and employment tax withholding requirements applicable to
the option exercise.

(b) As soon as practical after the Exercise Date,
the Corporation shall issue to or on behalf of Optionee (or any other person or
persons exercising this option) a certificate for the purchased Option Shares,
with the appropriate legends affixed thereto.

10. COMPLIANCE WITH LAWS AND REGULATIONS.

(a) The exercise of this option and the issuance
of the Option Shares upon such exercise shall be subject to compliance by the
Corporation and Optionee with all applicable requirements of law relating
thereto and with all applicable regulations of any stock exchange (or the
Nasdaq National Market, if applicable) on which the Common Stock may be listed
for trading at the time of such exercise and issuance.

(b) The inability of the Corporation to obtain
approval from any regulatory body having authority deemed by the Corporation to
be necessary to the lawful issuance and sale of any Common Stock pursuant to
this option shall relieve the Corporation of any liability with respect to the
non-issuance or sale of the Common Stock as to which such approval shall not
have been obtained. The Corporation, however, shall use its best efforts to
obtain all such approvals.

11. SUCCESSORS AND ASSIGNS. Except to the extent
otherwise provided in Paragraphs 3 and 6, the provisions of this Agreement
shall inure to the benefit of, and be binding upon, the Corporation and its
successors and assigns and Optionee, Optionee's assigns and the legal
representatives, heirs and legatees of Optionee's estate.

<PAGE> 6
12. NOTICES. Any notice required to be given or
delivered to the Corporation under the terms of this Agreement shall be in
writing and addressed to the Corporation at its principal corporate offices.
Any notice required to be given or delivered to Optionee shall be in writing
and addressed to Optionee at the address indicated below Optionee's signature
line on the Grant Notice. All notices shall be deemed effective upon personal
delivery or upon deposit in the U.S. mail, postage prepaid and properly
addressed to the party to be notified.

13. FINANCING. The Plan Administrator may, in its
absolute discretion and without any obligation to do so, permit Optionee to pay
the Exercise Price for the purchased Option Shares by delivering a
full-recourse promissory note payable to the Corporation. The terms of any
such promissory note (including the interest rate, the requirements for
collateral and the terms of repayment) shall be established by the Plan
Administrator in its sole discretion.

14. CONSTRUCTION. This Agreement and the option
evidenced hereby are made and granted pursuant to the Plan and are in all
respects limited by and subject to the terms of the Plan. All decisions of the
Plan Administrator with respect to any question or issue arising under the Plan
or this Agreement shall be conclusive and binding on all persons having an
interest in this option.

15. GOVERNING LAW. The interpretation, performance and
enforcement of this Agreement shall be governed by the laws of the State of
California without resort to that State's conflict-of-laws rules.

16. EXCESS SHARES. If the Option Shares covered by this
Agreement exceed, as of the Grant Date, the number of shares of Common Stock
which may without stockholder approval be issued under the Plan, then this
option shall be void with respect to those excess shares, unless stockholder
approval of an amendment sufficiently increasing the number of shares of Common
Stock issuable under the Plan is obtained in accordance with the provisions of
the Plan.

17. ADDITIONAL TERMS APPLICABLE TO AN INCENTIVE OPTION.
In the event this option is designated an Incentive Option in the Grant Notice,
the following terms and conditions shall also apply to the grant:

(a) This option shall cease to
qualify for favorable tax treatment as an Incentive Option if (and to
the extent) this option is exercised for one or more Option Shares:
(A) more than three (3) months after the date Optionee ceases to be an
Employee for any reason other than death or Permanent Disability or
(B) more than twelve (12) months after the date Optionee ceases to be
an Employee by reason of Permanent Disability.

<PAGE> 7
(b) No installment under this
option shall qualify for favorable tax treatment as an Incentive
Option if (and to the extent) the aggregate Fair Market Value
(determined at the Grant Date) of the Common Stock for which such
installment first becomes exercisable hereunder would, when added to
the aggregate value (determined as of the respective date or dates of
grant) of the Common Stock or other securities for which this option
or any other Incentive Options granted to Optionee prior to the Grant
Date (whether under the Plan or any other option plan of the
Corporation or any Parent or Subsidiary) first become exercisable
during the same calendar year, exceed One Hundred Thousand Dollars
($100,000) in the aggregate. Should such One Hundred Thousand Dollar
($100,000) limitation be exceeded in any calendar year, this option
shall nevertheless become exercisable for the excess shares in such
calendar year as a Non-Statutory Option.

(c) Should the exercisability of
this option be accelerated upon a Corporate Transaction, then this
option shall qualify for favorable tax treatment as an Incentive
Option only to the extent the aggregate Fair Market Value (determined
at the Grant Date) of the Common Stock for which this option first
becomes exercisable in the calendar year in which the Corporate
Transaction occurs does not, when added to the aggregate value
(determined as of the respective date or dates of grant) of the Common
Stock or other securities for which this option or one or more other
Incentive Options granted to Optionee prior to the Grant Date (whether
under the Plan or any other option plan of the Corporation or any
Parent or Subsidiary) first become exercisable during the same
calendar year, exceed One Hundred Thousand Dollars ($100,000) in the
aggregate. Should the applicable One Hundred Thousand Dollar
($100,000) limitation be exceeded in the calendar year of such
Corporate Transaction, the option may nevertheless be exercised for
the excess shares in such calendar year as a Non-Statutory Option.

(d) Should Optionee hold, in
addition to this option, one or more other options to purchase Common
Stock which become exercisable for the first time in the same calendar
year as this option, then the foregoing limitations on the
exercisability of such options as Incentive Options shall be applied
on the basis of the order in which such options are granted.

<PAGE> 8
EXHIBIT I
NOTICE OF EXERCISE

I hereby notify CombiChem, Inc. (the "Corporation") that I
elect to purchase _________________ shares of the Corporation's Common Stock
(the "Purchased Shares") at the option exercise price of $
______________________ per share (the "Exercise Price") pursuant to that
certain option (the "Option") granted to me under the Corporation's 1997 Stock
Incentive Plan on _______________________________, 199___.

Concurrently with the delivery of this Exercise Notice to the
Corporation, I shall hereby pay to the Corporation the Exercise Price for the
Purchased Shares in accordance with the provisions of my agreement with the
Corporation (or other documents) evidencing the Option and shall deliver
whatever additional documents may be required by such agreement as a condition
for exercise. Alternatively, I may utilize the special broker-dealer sale and
remittance procedure specified in my agreement to effect payment of the
Exercise Price.

__________________________, 199__
Date

___________________________________
Optionee

Address:___________________________

___________________________________

Print name in exact manner
it is to appear on the
stock certificate: ___________________________________

Address to which certificate
is to be sent, if different
from address above: ___________________________________

___________________________________

Social Security Number: ___________________________________

Employee Number: ___________________________________

<PAGE> 9
APPENDIX

The following definitions shall be in effect under the
Agreement:

A. AGREEMENT shall mean this Stock Option Agreement.

B. BOARD shall mean the Corporation's Board of Directors.

C. COMMON STOCK shall mean shares of the Corporation's common
stock.

D. CODE shall mean the Internal Revenue Code of 1986, as amended.

E. CORPORATE TRANSACTION shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:

(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities are transferred to a
person or persons different from the persons holding those securities
immediately prior to such transaction, or

(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation
or dissolution of the Corporation.

F. CORPORATION shall mean CombiChem, Inc., a Delaware
corporation.

G. EMPLOYEE shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.

H. EXERCISE DATE shall mean the date on which the option shall
have been exercised in accordance with Paragraph 9 of the Agreement.

I. EXERCISE PRICE shall mean the exercise price per Option Share
as specified in the Grant Notice.

J. EXPIRATION DATE shall mean the date on which the option
expires as specified in the Grant Notice.

K. FAIR MARKET VALUE per share of Common Stock on any relevant
date shall be determined in accordance with the following provisions:

(i) If the Common Stock is at the time traded on the
Nasdaq National Market, then the Fair Market Value shall be deemed
equal to the closing selling price per share of Common Stock on the
date in question, as the price is reported

A-1.

<PAGE> 10

by the National Association of Securities Dealers on the Nasdaq
National Market or any successor system. If there is no closing
selling price for the Common Stock on the date in question, then the
Fair Market Value shall be the closing selling price on the last
preceding date for which such quotation exists.

(ii) If the Common Stock is at the time listed on any
Stock Exchange, then the Fair Market Value shall be deemed equal to
the closing selling price per share of Common Stock on the date in
question on the Stock Exchange determined by the Plan Administrator to
be the primary market for the Common Stock, as such price is
officially quoted in the composite tape of transactions on such
exchange. If there is no closing selling price for the Common Stock
on the date in question, then the Fair Market Value shall be the
closing selling price on the last preceding date for which such
quotation exists.

L. GRANT DATE shall mean the date of grant of the option as
specified in the Grant Notice.

M. GRANT NOTICE shall mean the Notice of Grant of Stock Option
accompanying the Agreement, pursuant to which Optionee has been informed of the
basic terms of the option evidenced hereby.

N. INCENTIVE OPTION shall mean an option which satisfies the
requirements of Code Section 422.

O. MISCONDUCT shall mean the commission of any act of fraud,
embezzlement or dishonesty by Optionee, any unauthorized use or disclosure by
Optionee of confidential information or trade secrets of the Corporation (or
any Parent or Subsidiary), or any other intentional misconduct by Optionee
adversely affecting the business or affairs of the Corporation (or any Parent
or Subsidiary) in a material manner. The foregoing definition shall not be
deemed to be inclusive of all the acts or omissions which the Corporation (or
any Parent or Subsidiary) may consider as grounds for the dismissal or
discharge of Optionee or any other individual in the Service of the Corporation
(or any Parent or Subsidiary).

P. NON-STATUTORY OPTION shall mean an option not intended to
satisfy the requirements of Code Section 422.

Q. NOTICE OF EXERCISE shall mean the notice of exercise in the
form attached hereto as Exhibit I.

R. OPTION SHARES shall mean the number of shares of Common Stock
subject to the option as specified in the Grant Notice.

S. OPTIONEE shall mean the person to whom the option is granted
as specified in the Grant Notice.

A-2.

<PAGE> 11
T. PARENT shall mean any corporation (other than the Corporation)
in an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.

U. PERMANENT DISABILITY shall mean the inability of Optionee to
engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which is expected to result in death
or has lasted or can be expected to last for a continuous period of twelve (12)
months or more.

V. PLAN shall mean the Corporation's 1997 Stock Incentive Plan.

W. PLAN ADMINISTRATOR shall mean either the Board or a committee
of the Board acting in its capacity as administrator of the Plan.

X. SERVICE shall mean the Optionee's performance of services for
the Corporation (or any Parent or Subsidiary) in the capacity of an Employee, a
non-employee member of the board of directors or a consultant or independent
advisor.

Y. STOCK EXCHANGE shall mean the American Stock Exchange or the
New York Stock Exchange.

Z. SUBSIDIARY shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in the
unbroken chain owns, at the time of the determination, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.

A-3.

<PAGE> 1

EXHIBIT 10.52

COMBICHEM, INC.

STOCK ISSUANCE AGREEMENT

AGREEMENT made this _____ day of ___________________ 19____,
by and between CombiChem, Inc., a Delaware corporation, and
__________________________________________________, a Participant in the
Corporation's 1997 Stock Incentive Plan.

All capitalized terms in this Agreement shall have the meaning
assigned to them in this Agreement or in the attached Appendix.

A. PURCHASE OF SHARES

1. PURCHASE. Participant hereby purchases _____________
shares of Common Stock (the "Purchased Shares") pursuant to the provisions of
the Stock Issuance Program at the purchase price of $______ per share (the
"Purchase Price").

2. PAYMENT. Concurrently with the delivery of this
Agreement to the Corporation, Participant shall pay the Purchase Price for the
Purchased Shares in cash or check payable to the Corporation and shall deliver
a duly-executed blank Assignment Separate from Certificate (in the form
attached hereto as Exhibit I) with respect to the Purchased Shares.

3. STOCKHOLDER RIGHTS. Until such time as the
Corporation exercises the Repurchase Right, Participant (or any successor in
interest) shall have all the rights of a stockholder (including voting,
dividend and liquidation rights) with respect to the Purchased Shares, subject,
however, to the transfer restrictions of this Agreement.

4. ESCROW. The Corporation shall have the right to hold
the Purchased Shares in escrow until those shares have vested in accordance
with the Vesting Schedule.

5. COMPLIANCE WITH LAW. Under no circumstances shall
shares of Common Stock or other assets be issued or delivered to Participant
pursuant to the provisions of this Agreement unless, in the opinion of counsel
for the Corporation or its successors, there shall have been compliance with
all applicable requirements of Federal and state securities laws, all
applicable listing requirements of any stock exchange (or the Nasdaq National
Market, if applicable) on which the Common Stock is at the time listed for
trading and all other requirements of law or of any regulatory bodies having
jurisdiction over such issuance and delivery.

<PAGE> 2
B. TRANSFER RESTRICTIONS

1. RESTRICTION ON TRANSFER. Except for any Permitted
Transfer, Participant shall not transfer, assign, encumber or otherwise dispose
of any of the Purchased Shares which are subject to the Repurchase Right.

2. RESTRICTIVE LEGEND. The stock certificate for the
Purchased Shares shall be endorsed with the following restrictive legend:

"The shares represented by this certificate are
unvested and subject to certain repurchase rights granted to the
Corporation and accordingly may not be sold, assigned, transferred,
encumbered, or in any manner disposed of except in conformity with the
terms of a written agreement dated ____________, 199__ between the
Corporation and the registered holder of the shares (or the
predecessor in interest to the shares). A copy of such agreement is
maintained at the Corporation's principal corporate offices."

3. TRANSFEREE OBLIGATIONS. Each person (other than the
Corporation) to whom the Purchased Shares are transferred by means of a
Permitted Transfer must, as a condition precedent to the validity of such
transfer, acknowledge in writing to the Corporation that such person is bound
by the provisions of this Agreement and that the transferred shares are subject
to the Repurchase Right to the same extent such shares would be so subject if
retained by Participant.

C. REPURCHASE RIGHT

1. GRANT. The Corporation is hereby granted the right
(the "Repurchase Right"), exercisable at any time during the ninety (90)-day
period following the date Participant ceases for any reason to remain in
Service, to repurchase at the Purchase Price all or any portion of the
Purchased Shares in which Participant is not, at the time of his or her
cessation of Service, vested in accordance with the Vesting Schedule or the
special vesting accleration provisions of Paragraph C.5 of this Agreement (such
shares to be hereinafter referred to as the "Unvested Shares").

2. EXERCISE OF THE REPURCHASE RIGHT. The Repurchase
Right shall be exercisable by written notice delivered to each Owner of the
Unvested Shares prior to the expiration of the ninety (90)-day exercise period.
The notice shall indicate the number of Unvested Shares to be repurchased and
the date on which the repurchase is to be effected, such date to be not more
than thirty (30) days after the date of such notice. The certificates
representing the Unvested Shares to be repurchased shall be delivered to the
Corporation on or before the close of business on the date specified for the
repurchase. Concurrently with the receipt of such stock certificates, the
Corporation shall pay to Owner, in cash or cash equivalent (including the
cancellation of any purchase-money indebtedness), an amount equal to the
Purchase Price previously paid for the Unvested Shares to be repurchased from
Owner.

<PAGE> 3
3. TERMINATION OF THE REPURCHASE RIGHT. The Repurchase
Right shall terminate with respect to any Unvested Shares for which it is not
timely exercised under Paragraph C.2. In addition, the Repurchase Right shall
terminate and cease to be exercisable with respect to any and all Purchased
Shares in which Participant vests in accordance with the following Vesting
Schedule:

(i) Upon Participant's completion of one
(1) year of Service measured from ______________, 199__, Participant
shall acquire a vested interest in, and the Repurchase Right shall
lapse with respect to, twenty-five percent (25%) of the Purchased
Shares.

(ii) Participant shall acquire a vested
interest in, and the Repurchase Right shall lapse with respect to, the
remaining Purchased Shares in a series of thirty six (36) successive
equal monthly installments upon Participant's completion of each
additional month of Service over the thirty-six (36)-month period
measured from the initial vesting date under subparagraph (i) above.

4. RECAPITALIZATION. Any new, substituted or additional
securities or other property (including cash paid other than as a regular cash
dividend) which is by reason of any Recapitalization distributed with respect
to the Purchased Shares shall be immediately subject to the Repurchase Right
and any escrow requirements hereunder, but only to the extent the Purchased
Shares are at the time covered by such right or escrow requirements.
Appropriate adjustments to reflect such distribution shall be made to the
number and/or class of securities subject to this Agreement and to the price
per share to be paid upon the exercise of the Repurchase Right in order to
reflect the effect of any such Recapitalization upon the Corporation's capital
structure; provided, however, that the aggregate purchase price shall remain
the same.

5. CORPORATE TRANSACTION.

(a) Immediately prior to the consummation of any
Corporate Transaction, the Repurchase Right shall automatically lapse in its
entirety and the Purchased Shares shall vest in full, except to the extent the
Repurchase Right is to be assigned to the successor corporation (or parent
thereof) in connection with the Corporate Transaction.

(b) To the extent the Repurchase Right remains in
effect following a Corporate Transaction, such right shall apply to the new
capital stock or other property (including any cash payments) received in
exchange for the Purchased Shares in consummation of the Corporate Transaction,
but only to the extent the Purchased Shares are at the time covered by such
right. Appropriate adjustments shall be made to the price per share payable
upon exercise of the Repurchase Right to reflect the effect of the Corporate
Transaction upon the Corporation's capital structure; provided, however, that
the aggregate purchase price shall remain the same. The new securities or
other property (including cash payments) issued or distributed with respect to
the Purchased Shares in consummation of the Corporate Transaction shall
immediately be

<PAGE> 4

deposited in escrow with the Corporation (or the successor entity) and shall
not be released from escrow until Participant vests in such securities or other
property in accordance with the same Vesting Schedule in effect for the
Purchased Shares.

(c) The Repurchase Right may also be subject to
termination in whole or in part on an accelerated basis, and the Purchased
Shares subject to immediate vesting, in accordance with the terms of the
Addendum to Stock Issuance Agreement attached to this Agreement.

D. SPECIAL TAX ELECTION

1. SECTION 83(b) ELECTION. Under Code Section 83, the
excess of the fair market value of the Purchased Shares on the date any
forfeiture restrictions applicable to such shares lapse over the Purchase Price
paid for such shares will be reportable as ordinary income on the lapse date.
For this purpose, the term "forfeiture restrictions" includes the right of the
Corporation to repurchase the Purchased Shares pursuant to the Repurchase
Right. Participant may elect under Code Section 83(b) to be taxed at the time
the Purchased Shares are acquired, rather than when and as such Purchased
Shares cease to be subject to such forfeiture restrictions. Such election must
be filed with the Internal Revenue Service within thirty (30) days after the
date of this Agreement. Even if the fair market value of the Purchased Shares
on the date of this Agreement equals the Purchase Price paid (and thus no tax
is payable), the election must be made to avoid adverse tax consequences in the
future. THE FORM FOR MAKING THIS ELECTION IS ATTACHED AS EXHIBIT II HERETO.
PARTICIPANT UNDERSTANDS THAT FAILURE TO MAKE THIS FILING WITHIN THE APPLICABLE
THIRTY (30)-DAY PERIOD WILL RESULT IN THE RECOGNITION OF ORDINARY INCOME AS THE
FORFEITURE RESTRICTIONS LAPSE.

2. FILING RESPONSIBILITY. PARTICIPANT ACKNOWLEDGES THAT
IT IS PARTICIPANT'S SOLE RESPONSIBILITY, AND NOT THE CORPORATION'S, TO FILE A
TIMELY ELECTION UNDER CODE SECTION 83(B), EVEN IF PARTICIPANT REQUESTS THE
CORPORATION OR ITS REPRESENTATIVES TO MAKE THIS FILING ON HIS OR HER BEHALF.

E. GENERAL PROVISIONS

1. ASSIGNMENT. The Corporation may assign the
Repurchase Right to any person or entity selected by the Board, including
(without limitation) one or more stockholders of the Corporation.

2. NO EMPLOYMENT OR SERVICE CONTRACT. Nothing in this
Agreement or in the Plan shall confer upon Participant any right to continue in
Service for any period of specific duration or interfere with or otherwise
restrict in any way the rights of the Corporation (or any Parent or Subsidiary
employing or retaining Participant) or of Participant, which rights are hereby
expressly reserved by each, to terminate Participant's Service at any time for
any reason, with or without cause.

<PAGE> 5
3. NOTICES. Any notice required to be given under this
Agreement shall be in writing and shall be deemed effective upon personal
delivery or upon deposit in the U.S. mail, registered or certified, postage
prepaid and properly addressed to the party entitled to such notice at the
address indicated below such party's signature line on this Agreement or at
such other address as such party may designate by ten (10) days advance written
notice under this paragraph to all other parties to this Agreement.

4. NO WAIVER. The failure of the Corporation in any
instance to exercise the Repurchase Right shall not constitute a waiver of any
other repurchase rights that may subsequently arise under the provisions of
this Agreement or any other agreement between the Corporation and Participant.
No waiver of any breach or condition of this Agreement shall be deemed to be a
waiver of any other or subsequent breach or condition, whether of like or
different nature.

5. CANCELLATION OF SHARES. If the Corporation shall
make available, at the time and place and in the amount and form provided in
this Agreement, the consideration for the Purchased Shares to be repurchased in
accordance with the provisions of this Agreement, then from and after such
time, the person from whom such shares are to be repurchased shall no longer
have any rights as a holder of such shares (other than the right to receive
payment of such consideration in accordance with this Agreement). Such shares
shall be deemed purchased in accordance with the applicable provisions hereof,
and the Corporation shall be deemed the owner and holder of such shares,
whether or not the certificates therefor have been delivered as required by
this Agreement.

6. PARTICIPANT UNDERTAKING. Participant hereby agrees
to take whatever additional action and execute whatever additional documents
the Corporation may deem necessary or advisable in order to carry out or effect
one or more of the obligations or restrictions imposed on either Participant or
the Purchased Shares pursuant to the provisions of this Agreement.

7. AGREEMENT IS ENTIRE CONTRACT. This Agreement
constitutes the entire contract between the parties hereto with regard to the
subject matter hereof. This Agreement is made pursuant to the provisions of
the Plan and shall in all respects be construed in conformity with the terms of
the Plan.

8. GOVERNING LAW. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of California without
resort to that State's conflict-of-laws rules.

9. COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.

10. SUCCESSORS AND ASSIGNS. The provisions of this
Agreement shall inure to the benefit of, and be binding upon, the Corporation
and its successors and assigns and upon

<PAGE> 6
Participant, Participant's assigns and the legal representatives, heirs and
legatees of Participant's estate, whether or not any such person shall have
become a party to this Agreement and have agreed in writing to join herein and
be bound by the terms hereof.

IN WITNESS WHEREOF, the parties have executed this Agreement
on the day and year first indicated above.

COMBICHEM, INC.

By:________________________________

Title:_____________________________

Address:___________________________

___________________________________
PARTICIPANT

Address:___________________________

___________________________________

<PAGE> 7
SPOUSAL ACKNOWLEDGMENT

The undersigned spouse of the Participant has read and hereby approves
the foregoing Stock Issuance Agreement. In consideration of the Corporation's
granting the Participant the right to acquire the Purchased Shares in
accordance with the terms of such Agreement, the undersigned hereby agrees to
be irrevocably bound by all the terms of such Agreement, including (without
limitation) the right of the Corporation (or its assigns) to purchase any
Purchased Shares in which the Participant is not vested at the time of his or
her termination of Service.

___________________________________
PARTICIPANT'S SPOUSE

Address:___________________________

___________________________

<PAGE> 8

EXHIBIT I
ASSIGNMENT SEPARATE FROM CERTIFICATE

FOR VALUE RECEIVED ______________________ hereby sell(s),
assign(s) and transfer(s) unto CombiChem, Inc. (the "Corporation"),
__________________(_______) shares of the Common Stock of the Corporation
standing in his or her name on the books of the Corporation represented by
Certificate No. ___________________ herewith and do(es) hereby irrevocably
constitute and appoint _______________________________ Attorney to transfer the
said stock on the books of the Corporation with full power of substitution in
the premises. Dated: ________________, 199__.

Signature__________________________

INSTRUCTION: Please do not fill in any blanks other than the signature line.
Please sign exactly as you would like your name to appear on the issued stock
certificate. The purpose of this assignment is to enable the Corporation to
exercise the Repurchase Right without requiring additional signatures on the
part of Participant.

<PAGE> 9

EXHIBIT II

SECTION 83(b) TAX ELECTION

This statement is being made under Section 83(b) of the Internal Revenue Code,
pursuant to Treas. Reg. Section 1.83-2.

(1) The taxpayer who performed the services is:

Name:
Address:
Taxpayer Ident. No.:

(2) The property with respect to which the election is being made is
____________ shares of the common stock of CombiChem, Inc.

(3) The property was issued on _____________, 199___.

(4) The taxable year in which the election is being made is the calendar
year 199__.

(5) The property is subject to a repurchase right pursuant to which the
issuer has the right to acquire the property at the original purchase
price if for any reason taxpayer's service with the issuer terminates.
The issuer's repurchase right lapses in a series of annual and monthly
installments over a four (4)-year period ending on ______________.

(6) The fair market value at the time of transfer (determined without
regard to any restriction other than a restriction which by its terms
will never lapse) is $_____________per share.

(7) The amount paid for such property is $____________ per share.

(8) A copy of this statement was furnished to CombiChem, Inc. for whom
taxpayer rendered the services underlying the transfer of property.

(9) This statement is executed on ________________________, 199__.

_________________________ ___________________________________
Spouse (if any) Taxpayer

This election must be filed with the Internal Revenue Service Center with which
taxpayer files his or her Federal income tax returns and must be made within
thirty (30) days after the execution date of the Stock Issuance Agreement.
This filing should be made by registered or certified mail, return receipt
requested. Participant must retain two (2) copies of the completed form for
filing with his or her Federal and state tax returns for the current tax year
and an additional copy for his or her records.

<PAGE> 10

APPENDIX

The following definitions shall be in effect under the
Agreement:

A. AGREEMENT shall mean this Stock Issuance Agreement.

B. BOARD shall mean the Corporation's Board of Directors.

C. COMMON STOCK shall mean shares of the Corporation's common
stock.

D. CODE shall mean the Internal Revenue Code of 1986, as amended.

E. CORPORATE TRANSACTION shall mean either of the following
stockholder-approved transactions:

(i) a merger or consolidation in which
securities possessing more than fifty percent (50%) of the total
combined voting power of the Corporation's outstanding securities are
transferred to a person or persons different from the persons holding
those securities immediately prior to such transaction, or

(ii) the sale, transfer or other
disposition of all or substantially all of the Corporation's assets in
complete liquidation or dissolution of the Corporation.

F. CORPORATION shall mean CombiChem, Inc., a Delaware
corporation.

G. OWNER shall mean Participant and all subsequent holders of the
Purchased Shares who derive their chain of ownership through a Permitted
Transfer from Participant.

H. PARENT shall mean any corporation (other than the Corporation)
in an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.

I. PARTICIPANT shall mean the person to whom the Purchased Shares
are issued under the Stock Issuance Program.

A-1.

<PAGE> 11

J. PERMITTED TRANSFER shall mean (i) a gratuitous transfer of the
Purchased Shares, provided and only if Participant obtains the Corporation's
prior written consent to such transfer, (ii) a transfer of title to the
Purchased Shares effected pursuant to Participant's will or the laws of
intestate succession following Participant's death or (iii) a transfer to the
Corporation in pledge as security for any purchase-money indebtedness incurred
by Participant in connection with the acquisition of the Purchased Shares.

K. PLAN shall mean the Corporation's 1997 Stock Incentive Plan.

L. PLAN ADMINISTRATOR shall mean either the Board or a committee
of the Board acting in its administrative capacity under the Plan.

M. PURCHASE PRICE shall have the meaning assigned to such term in
Paragraph A.1.

N. PURCHASED SHARES shall have the meaning assigned to such term
in Paragraph A.1.

O. RECAPITALIZATION shall mean any stock split, stock dividend,
recapitalization, combination of shares, exchange of shares or other change
affecting the Corporation's outstanding Common Stock as a class without the
Corporation's receipt of consideration.

P. REPURCHASE RIGHT shall mean the right granted to the
Corporation in accordance with Article C.

Q. SERVICE shall mean the Participant's performance of services
for the Corporation (or any Parent or Subsidiary) in the capacity of an
employee, subject to the control and direction of the employer entity as to
both the work to be performed and the manner and method of performance, a
non-employee member of the board of directors or a consultant.

R. STOCK ISSUANCE PROGRAM shall mean the Stock Issuance Program
under the Plan.

S. SUBSIDIARY shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in the
unbroken chain owns, at the time of the determination, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.

T. VESTING SCHEDULE shall mean the vesting schedule specified in
Paragraph C.3, subject to the special vesting acceleration provisions of
Paragraph C.5.

U. UNVESTED SHARES shall have the meaning assigned to such term
in Paragraph C.1.

A-2.

<PAGE> 1

EXHIBIT 10.56

COMBICHEM, INC.
AUTOMATIC STOCK OPTION AGREEMENT

RECITALS

A. The Corporation has implemented an automatic option grant
program under the Plan pursuant to which eligible non-employee members of the
Board will automatically receive special option grants at periodic intervals
over their period of Board service in order to provide such individuals with a
meaningful incentive to continue to serve as members of the Board.

B. Optionee is an eligible non-employee Board member, and this
Agreement is executed pursuant to, and is intended to carry out the purposes
of, the Plan in connection with the automatic grant of an option to purchase
shares of Common Stock under the Plan.

C. All capitalized terms in this Agreement shall have the meaning
assigned to them in the attached Appendix.

NOW, THEREFORE, it is hereby agreed as follows:

1. GRANT OF OPTION. The Corporation hereby grants to
Optionee, as of the Grant Date, a Non-Statutory Option to purchase up to the
number of Option Shares specified in the Grant Notice. The Option Shares shall
be purchasable from time to time during the option term specified in Paragraph
2 at the Exercise Price.

2. OPTION TERM. This option shall have a term of ten
(10) years measured from the Grant Date and shall accordingly expire at the
close of business on the Expiration Date, unless sooner terminated in
accordance with Paragraph 5, 6 or 7.

3. LIMITED TRANSFERABILITY. This option may, in
connection with the Optionee's estate plan, be assigned in whole or in part
during Optionee's lifetime to one or more members of the Optionee's immediate
family or to a trust established for the exclusive benefit of one or more such
family members. The assigned portion shall be exercisable only by the person or
persons who acquire a proprietary interest in the option pursuant to such
assignment. The terms applicable to the assigned portion shall be the same as
those in effect for this option immediately prior to such assignment. Should
the Optionee die while holding this option, then this option shall be
transferred in accordance with Optionee's will or the laws of descent and
distribution.

<PAGE> 2
4. EXERCISABILITY/VESTING.

(a) This option shall be immediately exercisable
for any or all of the Option Shares, whether or not the Option Shares are at
the time vested in accordance with the Vesting Schedule, and shall remain so
exercisable until the Expiration Date or sooner termination of the option term
under Paragraph 5, 6 or 7.

(b) Optionee shall, in accordance with the
Vesting Schedule set forth in the Grant Notice, vest in the Option Shares in
one or more installments over his or her period of Board service. Vesting in
the Option Shares may be accelerated pursuant to the provisions of Paragraph 5,
6 or 7. In no event, however, shall any additional Option Shares vest
following Optionee's cessation of service as a Board member.

5. CESSATION OF BOARD SERVICE. Should Optionee's
service as a Board member cease while this option remains outstanding, then the
option term specified in Paragraph 2 shall terminate (and this option shall
cease to be outstanding) prior to the Expiration Date in accordance with the
following provisions:

(a) Should Optionee cease to serve as a Board
member for any reason (other than death or Permanent Disability) while this
option is outstanding, then the period for exercising this option shall be
reduced to a twelve (12)-month period (commencing with the date of such
cessation of Board service), but in no event shall this option be exercisable
at any time after the Expiration Date. During such limited period of
exercisability, this option may not be exercised in the aggregate for more than
the number of Option Shares (if any) in which Optionee is vested on the date of
his or her cessation of Board service. Upon the earlier of (i) the expiration
of such twelve (12)- month period or (ii) the specified Expiration Date, the
option shall terminate and cease to be exercisable with respect to any vested
Option Shares for which the option has not been exercised.

(b) Should Optionee die during the twelve
(12)-month period following his or her cessation of Board service and hold this
option, at the time of his or her death, then the personal representative of
Optionee's estate or the person or persons to whom the option is transferred
pursuant to Optionee's will or in accordance with the laws of descent and
distribution shall have the right to exercise this option for any or all of the
Option Shares in which Optionee is vested at the time of Optionee's cessation
of Board service (less any Option Shares purchased by Optionee after such
cessation of Board service but prior to death). Such right of exercise shall
terminate, and this option shall accordingly cease to be exercisable for such
vested Option Shares, upon the earlier of (i) the expiration of the twelve
(12)- month period measured from the date of Optionee's cessation of Board
service or (ii) the specified Expiration Date.

(c) Should Optionee cease service as a Board
member by reason of death or Permanent Disability, then all Option Shares at
the time subject to this option but not otherwise vested shall vest in full so
that this option may be exercised for any or all of the Option Shares as fully
vested shares of Common Stock at any time prior to the earlier of (i) the

<PAGE> 3
expiration of the twelve (12)-month period measured from the date of Optionee's
cessation of Board service or (ii) the specified Expiration Date, whereupon
this option shall terminate and cease to be outstanding.

(d) Upon Optionee's cessation of Board service
for any reason other than death or Permanent Disability, this option shall
immediately terminate and cease to be outstanding with respect to any and all
Option Shares in which Optionee is not otherwise at that time vested in
accordance with the normal Vesting Schedule or the special vesting acceleration
provisions of Paragraph 6 or 7 below.

6. CORPORATE TRANSACTION.

(a) In the event of a Corporate Transaction, all
Option Shares at the time subject to this option but not otherwise vested shall
automatically vest so that this option shall, immediately prior to the
specified effective date for the Corporate Transaction, become exercisable for
all of the Option Shares at the time subject to this option and may be
exercised for all or any portion of such shares as fully vested shares of
Common Stock. Immediately following the consummation of the Corporate
Transaction, this option shall terminate and cease to be outstanding, except to
the extent assumed by the successor corporation or its parent company.

(b) All outstanding repurchase rights shall also
terminate automatically, and the unvested shares of Common Stock subject to
those terminated rights shall immediately vest in full, in the event of any
Corporate Transaction.

7. CHANGE IN CONTROL/HOSTILE TAKE-OVER.

(a) All Option Shares subject to this option at
the time of a Change in Control but not otherwise vested shall automatically
vest so that this option shall, immediately prior to the effective date of such
Change in Control, become exercisable for all of the Option Shares at the time
subject to this option and may be exercised for all or any portion of such
shares as fully-vested shares of Common Stock. This option shall remain
exercisable for such fully-vested Option Shares until the earliest to occur of
(i) the specified Expiration Date, (ii) the sooner termination of this option
in accordance with Paragraph 5 or 6 or (iii) the surrender of this option under
Paragraph 7(c).

<PAGE> 4
(b) All outstanding repurchase rights shall also
terminate automatically, and the unvested shares of Common Stock subject to
those terminated rights shall immediately vest in full, in the event of any
Change in Control.

(c) Optionee shall have an unconditional right,
exercisable at the time during the thirty (30)-day period immediately following
the consummation of a Hostile Take-Over to surrender this option to the
Corporation in exchange for a cash distribution from the Corporation in an
amount equal to the excess of (i) the Take-Over Price of the Option Shares at
the time subject to the surrendered option (whether or not those Option Shares
are otherwise at the time vested) over (ii) the aggregate Exercise Price
payable for such shares. This Paragraph 7(c) limited stock appreciation right
shall in all events terminate upon the expiration or sooner termination of the
option term and may not be assigned or transferred by Optionee.

(d) To exercise the Paragraph 7(c) limited stock
appreciation right, Optionee must, during the applicable thirty (30)-day
exercise period, provide the Corporation with written notice of the option
surrender in which there is specified the number of Option Shares as to which
the option is being surrendered. Such notice must be accompanied by the return
of Optionee's copy of this Agreement, together with any written amendments to
such Agreement. The cash distribution shall be paid to Optionee within five
(5) business days following such delivery date. The exercise of such limited
stock appreciation right in accordance with the terms of this Paragraph 7 has
been pre-approved pursuant to the express provisions of the Automatic Option
Grant Program, and neither the approval of the Plan Administrator nor the
consent of the Board shall be required at the time of the actual option
surrender and cash distribution. Upon receipt of the cash distribution, this
option shall be cancelled with respect to the shares subject to the surrendered
option (or the surrendered portion), and Optionee shall cease to have any
further right to acquire those Option Shares under this Agreement. The option
shall, however, remain outstanding for the balance of the Option Shares (if
any) in accordance with the terms and provisions of this Agreement, and the
Corporation shall accordingly issue a replacement stock option agreement
(substantially in the same form as this Agreement) for those remaining Option
Shares.

8. ADJUSTMENT IN OPTION SHARES. Should any change be
made to the Common Stock by reason of any stock split, stock dividend,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration, appropriate adjustments shall be made to (i) the
total number and/or class of securities subject to this option and (ii) the
Exercise Price in order to reflect such change and thereby preclude a dilution
or enlargement of benefits hereunder.

9. STOCKHOLDER RIGHTS. The holder of this option shall
not have any stockholder rights with respect to the Option Shares until such
person shall have exercised the option, paid the Exercise Price and become a
holder of record of the purchased shares.

<PAGE> 5
10. MANNER OF EXERCISING OPTION.

(i) To the extent the option is
exercised for vested Option Shares, execute and deliver to the
Corporation a Notice of Exercise for the Option Shares for which the
option is exercised. To the extent this option is exercised for
unvested Option Shares, execute and deliver to the Corporation a
Purchase Agreement for those unvested Option Shares.

(ii) Pay the aggregate Exercise
Price for the purchased shares in one or more of the following forms:

(A) cash or check made payable to
the Corporation,

(B) shares of Common Stock held by
Optionee (or any other person or persons exercising the
option) for the requisite period necessary to avoid a charge
to the Corporation's earnings for financial reporting purposes
and valued at Fair Market Value on the Exercise Date, or

(C) to the extent the option is
exercised for vested Option Shares, through a special sale and
remittance procedure pursuant to which Optionee (or any other
person or persons exercising the option) shall concurrently
provide irrevocable instructions (I) to a
Corporation-designated brokerage firm to effect the immediate
sale of the purchased shares and remit to the Corporation, out
of the sale proceeds available on the settlement date,
sufficient funds to cover the aggregate Exercise Price payable
for the purchased shares plus all applicable Federal, state
and local income and employment taxes required to be withheld
by the Corporation by reason of such exercise and (II) to the
Corporation to deliver the certificates for the purchased
shares directly to such brokerage firm in order to complete
the sale.

(iii) Furnish to the Corporation
appropriate documentation that the person or persons exercising the
option (if other than Optionee) have the right to exercise this
option.

(b) Except to the extent the sale and remittance
procedure is utilized in connection with the option exercise, payment of the
Exercise Price must accompany the Notice

<PAGE> 6

of Exercise (or the Purchase Agreement) delivered to the Corporation in
connection with the option exercise.

(c) As soon after the Exercise Date as practical,
the Corporation shall issue to or on behalf of Optionee (or any other person or
persons exercising this option) a certificate for the purchased Option Shares,
with the appropriate legends affixed thereto. To the extent any such Option
Shares are unvested, the certificates for those Option Shares shall be endorsed
with an appropriate legend evidencing the Corporation's repurchase rights and
may be held in escrow with the Corporation until such shares vest.

(d) In no event may this option be exercised for
any fractional shares.

11. NO IMPAIRMENT OF RIGHTS. This Agreement shall not in
any way affect the right of the Corporation to adjust, reclassify, reorganize
or otherwise make changes in its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets. In addition, this Agreement shall not in any way be
construed or interpreted so as to affect adversely or otherwise impair the
right of the Corporation or the stockholders to remove Optionee from the Board
at any time in accordance with the provisions of applicable law.

12. COMPLIANCE WITH LAWS AND REGULATIONS.

13. SUCCESSORS AND ASSIGNS. Except to the extent
otherwise provided in Paragraph 3 or 6, the provisions of this Agreement shall
inure to the benefit of, and be binding upon, the Corporation and its
successors and assigns and Optionee, Optionee's assigns and the legal
representatives, heirs and legatees of Optionee's estate.

14. NOTICES. Any notice required to be given or
delivered to the Corporation under the terms of this Agreement shall be in
writing and addressed to the Corporation at its principal corporate offices.
Any notice required to be given or delivered to Optionee shall be in writing
and addressed to Optionee at the address indicated below Optionee's signature
line on the

<PAGE> 7

Grant Notice. All notices shall be deemed effective upon personal delivery or
upon deposit in the U.S. mail, postage prepaid and properly addressed to the
party to be notified.

15. CONSTRUCTION. This Agreement and the option
evidenced hereby are made and granted pursuant to the Plan and are in all
respects limited by and subject to the terms of the Plan.

16. GOVERNING LAW. The interpretation, performance and
enforcement of this Agreement shall be governed by the laws of the State of
California without resort to that State's conflict-of-laws rules.

<PAGE> 8
EXHIBIT I

NOTICE OF EXERCISE

I hereby notify CombiChem, Inc. (the "Corporation") that I
elect to purchase __________ shares of the Corporation's Common Stock (the
"Purchased Shares") at the option exercise price of $___________ per share (the
"Exercise Price") pursuant to that certain option (the "Option") granted to me
under the Corporation's 1997 Stock Incentive Plan on ____________________,
199___.

_______________________, 199__
Date

___________________________________
Optionee

Address:___________________________

___________________________________

Print name in exact manner
it is to appear on the
stock certificate: ___________________________________

Address to which certificate
is to be sent, if different
from address above: ___________________________________

___________________________________

Social Security Number: ___________________________________

<PAGE> 9
APPENDIX

The following definitions shall be in effect under the Agreement:

A. AGREEMENT shall mean this Automatic Stock Option Agreement.

B. BOARD shall mean the Corporation's Board of Directors.

C. CHANGE IN CONTROL shall mean a change in ownership or control
of the Corporation effected through either of the following transactions:

(i) the acquisition, directly or indirectly, by
any person or related group of persons (other than the Corporation or
a person that directly or indirectly controls, is controlled by, or is
under common control with, the Corporation) of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities pursuant to a tender
or exchange offer made directly to the Corporation's stockholders, or

(ii) a change in the composition of the Board over
a period of thirty-six (36) consecutive months or less such that a
majority of the Board members ceases, by reason of one or more
contested elections for Board membership, to be comprised of
individuals who either (A) have been Board members continuously since
the beginning of such period or (B) have been elected or nominated for
election as Board members during such period by at least a majority of
the Board members described in clause (A) who were still in office at
the time the Board approved such election or nomination.

D. COMMON STOCK shall mean shares of the Corporation's common
stock.

E. CODE shall mean the Internal Revenue Code of 1986, as amended.

F. CORPORATE TRANSACTION shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:

(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities are transferred to a
person or persons different from the persons holding those securities
immediately prior to such transaction, or

(ii) the sale, transfer or other disposition of
all or substantially all of the Corporation's assets in complete
liquidation or dissolution of the Corporation.

A-2.

<PAGE> 10
G. CORPORATION shall mean CombiChem, Inc., a Delaware
corporation.

H. EXERCISE DATE shall mean the date on which the option shall
have been exercised in accordance with Paragraph 10 of the Agreement.

I. EXERCISE PRICE shall mean the exercise price per share as
specified in the Grant Notice.

J. EXPIRATION DATE shall mean the date on which the option
expires as specified in the Grant Notice.

K. FAIR MARKET VALUE per share of Common Stock on any relevant
date shall be determined in accordance with the following provisions:

(i) If the Common Stock is at the time traded on
the Nasdaq National Market, then the Fair Market Value shall be the
closing selling price per share of Common Stock on the date in
question, as the price is reported by the National Association of
Securities Dealers on the Nasdaq National Market or any successor
system. If there is no closing selling price for the Common Stock on
the date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation
exists.

(ii) If the Common Stock is at the time listed on
any Stock Exchange, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question on the
Stock Exchange which serves as the primary market for the Common
Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price
for the Common Stock on the date in question, then the Fair Market
Value shall be the closing selling price on the last preceding date
for which such quotation exists.

L. GRANT DATE shall mean the date of grant of the option as
specified in the Grant Notice.

M. GRANT NOTICE shall mean the Notice of Grant of Automatic Stock
Option accompanying the Agreement, pursuant to which Optionee has been informed
of the basic terms of the option evidenced hereby.

N. HOSTILE TAKEOVER shall mean the acquisition, directly or
indirectly, by any person or related group of persons (other than the
Corporation or a person that directly or indirectly controls, is controlled by,
or is under common control with, the Corporation) of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities pursuant to a tender or exchange offer
made directly to the Corporation's stockholders which the Board does not
recommend such stockholders to accept.

A-3.

<PAGE> 11

O. 1934 ACT shall mean the Securities Exchange Act of 1934, as
amended.

P. NON-STATUTORY OPTION shall mean an option not intended to
satisfy the requirements of Code Section 422.

Q. NOTICE OF EXERCISE shall mean the notice of exercise in the
form of Exhibit I.

R. OPTION SHARES shall mean the number of shares of Common Stock
subject to the option.

S. OPTIONEE shall mean the person to whom the option is granted
as specified in the Grant Notice.

T. PERMANENT DISABILITY shall mean the inability of Optionee to
perform his or her usual duties as a member of the Board by reason of any
medically determinable physical or mental impairment which is expected to
result in death or has lasted or can be expected to last for a continuous
period of twelve (12) months or more.

U. PLAN shall mean the Corporation's 1997 Stock Incentive Plan.

V. PURCHASE AGREEMENT shall mean the stock purchase agreement (in
form and substance satisfactory to the Corporation) which grants the
Corporation the right to repurchase, at the Exercise Price, any and all
unvested Option Shares held by Optionee at the time of Optionee's cessation of
Board service and which precludes the sale, transfer or other disposition of
any purchased Option Shares while those shares are unvested and subject to such
repurchase right.

W. STOCK EXCHANGE shall mean the American Stock Exchange or the
New York Stock Exchange.

X. TAKE-OVER PRICE shall mean the greater of (i) the Fair Market
Value per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting the
Hostile Take-Over.

Y. VESTING SCHEDULE shall mean the vesting schedule specified in
the Grant Notice, pursuant to which the Option Shares will vest in one or more
installments over the Optionee's period of Board service, subject to
acceleration in accordance with the provisions of the Agreement.

A-4.

<PAGE> 1
EXHIBIT 10.57

COMBICHEM, INC.
STOCK PURCHASE AGREEMENT

I hereby elect to participate in the 1997 Employee Stock Purchase Plan
(the "ESPP") for the offering period specified below, and I hereby subscribe to
purchase shares of Common Stock of CombiChem, Inc. (the "Corporation") in
accordance with the provisions of this Agreement and the ESPP. I hereby
authorize payroll deductions from each of my paychecks following my entry into
the offering period in the 1% multiple of my salary (not to exceed a maximum of
10%) specified in my attached Enrollment Form.

The offering period is divided into a series of consecutive purchase
intervals. With the exception of the initial purchase interval which begins at
the time of the initial public offering of the Common Stock, those purchase
intervals will be of six months duration and begin on the first business day of
February and August each year during the offering period. My participation
will automatically remain in effect from one purchase interval to the next
during the term of the ESPP in accordance with my payroll deduction
authorization, unless I withdraw from the ESPP or change the rate of my payroll
deduction or unless my employment status changes. I may reduce the rate of my
payroll deductions on one occasion per purchase interval and I may increase my
rate of payroll deductions to become effective at the beginning of any
subsequent purchase interval.

My payroll deductions will be accumulated for the purchase of shares
of the Corporation's Common Stock on the last business day of each purchase
interval within the offering period. The purchase price per share will be
equal to 85% of the lower of (i) the fair market value per share of Common
Stock on my entry date into the offering period or (ii) the fair market value
per share on the purchase date. However, the clause (i) amount will in no
event be less than the fair market value per share of Common Stock on the start
date of the offering period. I will also be subject to ESPP restrictions (i)
limiting the maximum number of shares which I may purchase during any purchase
interval and (ii) prohibiting me from purchasing more than $25,000 worth of
Common Stock for each calendar year my purchase right remains outstanding.

I may withdraw from the ESPP at any time prior to the last business
day of a purchase interval and elect either to have the Corporation refund all
my payroll deductions for that interval or to have such payroll deductions
applied to the purchase of Common Stock at the end of such interval. However,
I may not rejoin that particular offering period at any later date. Upon the
termination of my employment for any reason including death or disability or my
loss of eligible employee status, my participation in the ESPP will immediately
cease and all my payroll deductions for the purchase interval in which my
employment terminates or my loss of eligibility occurs will automatically be
refunded.

If I take an unpaid leave of absence, my payroll deductions will
immediately cease, and any payroll deductions for the purchase interval in
which my leave begins will, at my election, either be refunded or applied to
the purchase of shares of Common Stock at the end of that purchase interval.
Upon my return to active service, my payroll deductions will automatically
resume at the rate in effect when my leave began. The Corporation will issue a
stock certificate for the shares purchased on my behalf after the end of each
purchase interval. The certificate will be issued in the name or names I have
selected on the Enrollment Form accompanying this Agreement or will be
deposited directly in my brokerage account. I will notify the Corporation of
any disposition of shares purchased under the ESPP and I will satisfy all
applicable income and employment tax withholding requirements at the time of
such disposition.

The Corporation has the right, exercisable in its sole discretion, to
amend or terminate the ESPP at any time, with such amendment or termination to
become effective immediately following the exercise of outstanding purchase
rights at the end of any current purchase interval. Should the Corporation
elect to terminate the ESPP, I will have no further rights to purchase shares
of Common Stock pursuant to this Agreement.

I have received a copy of the official Plan Prospectus summarizing the
major features of the ESPP. I have read this Agreement and the Prospectus and
hereby agree to be bound by the terms of both this Agreement and the ESPP. The
effectiveness of this Agreement is dependent upon my eligibility to participate
in the ESPP.

Date: ___________________, 199__

___________________________________
Signature of Employee

Printed Name:______________________

Duration of Offering Period: From: __________________, 1998 to
July 31, 1999

Entry Date into Offering Period: _____________________, 1998

<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. 8 to the
Registration Statement (Form S-1) and related Prospectus of CombiChem, Inc. for
the registration of 2,587,500 shares of its common stock.

San Diego, California /s/ Ernst & Young LLP
May 1, 1998