ALANEX CORP, S-1/A, 1996-10-02

ALANEX CORP
S-1/A, 1996-10-02
COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 2, 1996

REGISTRATION NO. 333-09929
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- --------------------------------------------------------------------------------

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

AMENDMENT NO. 2

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

ALANEX CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C> <C>
CALIFORNIA 8731 33-0599136
(PRIOR TO (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
REINCORPORATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
DELAWARE
(AFTER REINCORPORATION)
(STATE OR JURISDICTION
OF INCORPORATION OR
ORGANIZATION)
</TABLE>

3550 GENERAL ATOMICS COURT
SAN DIEGO, CALIFORNIA 92121
(619) 455-3200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

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

MARVIN R. BROWN, M.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ALANEX CORPORATION
3550 GENERAL ATOMICS COURT
SAN DIEGO, CALIFORNIA 92121
(619) 455-3200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

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

COPIES TO:

FREDERICK T. MUTO, ESQ.
CYDNEY S. POSNER, ESQ.
CARL R. SANCHEZ, ESQ.
COOLEY GODWARD LLP
4365 EXECUTIVE DRIVE, SUITE 1100
SAN DIEGO, CA 92121
(619) 550-6000
WILLIAM H. HINMAN, JR., ESQ.
SHEARMAN & STERLING
555 CALIFORNIA STREET
SAN FRANCISCO, CA 94104
(415) 616-1100

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

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

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 of 1933, 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 THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<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 OFFER 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

PRELIMINARY PROSPECTUS DATED OCTOBER 2, 1996

2,500,000 SHARES

LOGO

COMMON STOCK
------------------------

All the shares of Common Stock offered hereby are being sold by Alanex
Corporation. Prior to this offering, there has been no public market for the
Common Stock. It is currently estimated that the initial public offering price
per share of the Common Stock will be between $10.00 and $12.00. See
"Underwriting."

The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol ALNX.

THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" AT PAGE 6.
------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<S> <C> <C> <C>
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Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
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Per Share............................. $ $ $
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Total................................. $ $ $
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Total Assuming Full Exercise of
Over-Allotment Option(3)............ $ $ $
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</TABLE>

(1) See "Underwriting."
(2) Before deducting expenses estimated at $575,000, which are payable by the
Company.
(3) Assuming exercise in full of the 30-day option granted by the Company to the
Underwriters to purchase up to 375,000 additional shares, on the same terms,
solely to cover over-allotments. See "Underwriting."
------------------------

The shares of Common Stock are offered by the Underwriters, subject to
prior sale, when, as and if delivered to and accepted by the Underwriters, and
subject to their right to reject orders in whole or in part. It is expected that
delivery of the Common Stock will be made in New York City on or about
, 1996.
------------------------

PAINEWEBBER INCORPORATED

NEEDHAM & COMPANY, INC.

SUTRO & CO. INCORPORATED
------------------------

THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE> 3

ALANEX INTEGRATED DRUG DISCOVERY PROCESS

[Diagram illustrating the components of Alanex's drug discovery process. The
diagram reflects six equally sized rectangles arranged in two columns. three per
column, with arrows connecting related subjects. Each rectangle contains text
description of the component and photographs of scientists, computers and
chemist apparatus that pertain to each component. At the bottom of the diagram
is a smaller rectangle that contains an illustration of a drug candidate's
chemical structure.]

<TABLE>
<S> <C> <C> <C> <C>
COMBINATORIAL HIGH
CHEMISTRY THROUGHPUT
SCREENING
EXPLORATORY MOLECULAR
LIBRARY TARGETS
Over 150,000 diverse Screening of
individual drug-like compounds or medically
compounds important targets
</TABLE>

<TABLE>
<S> <C> <C> <C>
LIBRARY COMBINATORIAL
DESIGN CHEMISTRY TARGETED LIBRARIES
VIRTUAL LIBRARY Initial optimization of high
Over 140,000,000 throughput screening "hits"
chemical structures into lead compounds
accessible by
proprietary software
</TABLE>

<TABLE>
<S> <C> <C> <C>
PHARMACOLOGY
MEDICINAL
CHEMISTRY DETAILED
CHARACTERIZATION
ANALOG LIBRARIES of lead compounds:
Conversion of lead potency, selectivity,
compounds into drug stability, toxicity
candidates
</TABLE>

DRUG CANDIDATE

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 STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE> 4

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
Unless otherwise indicated, the information in this Prospectus assumes (i) the
Underwriters' over-allotment option will not be exercised and (ii) the
reincorporation of the Company in the State of Delaware. Investors should
carefully consider the information set forth under the heading "Risk Factors."
This Prospectus contains forward-looking statements that involve certain risks
and uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors" and elsewhere in this Prospectus.

THE COMPANY

Alanex Corporation ("Alanex" or the "Company") is a drug discovery company
that is applying its highly integrated and comprehensive approach to rapidly and
cost-effectively discover and optimize novel, small molecule drug candidates.
The Company's proprietary core drug discovery technology, Pharmacophore Directed
Parallel Synthesis ("PDPS"), accelerates the steps necessary to discover small
molecule drug candidates, from the initial identification of compounds that
exhibit activity against selected biological targets to the progression of these
compounds to drug candidates for human clinical trials. PDPS combines
combinatorial chemistry with computational and medicinal chemistries which, when
used in conjunction with high throughput screening and pharmacology, form an
integrated drug discovery platform that can be broadly applied to a wide array
of biological targets. An important element of the Company's strategy is to
enter into collaborations with pharmaceutical companies. Alanex has
collaboration agreements with Astra Pharma, Inc. ("Astra Pharma"), Novo Nordisk
A/S ("Novo Nordisk") and Roche Bioscience, a division of Syntex (U.S.A.) Inc., a
wholly owned subsidiary of Roche Holding Ltd. ("Roche Bioscience"). To date,
Alanex has used PDPS to identify one preclinical drug development candidate for
the treatment of pain and a number of lead compounds in four other programs that
address diseases or conditions for which existing therapies are inadequate or
unavailable, including diabetes, obesity, depression and anxiety.

A major challenge for the pharmaceutical industry is the rapid and
cost-effective identification of lead compounds and their subsequent development
into drugs. Combinatorial chemistry -- which creates large libraries of
molecules by generating combinations of chemical building blocks -- represents a
significant advance in drug discovery technology, permitting the identification
of lead compounds on a more rapid and cost-effective basis. The Company believes
that a key factor in the successful application of combinatorial chemistry,
however, is the diversity, not simply the number, of compounds comprising a
combinatorial library. Alanex uses its proprietary library design software,
LiBrain, to maximize the diversity of its exploratory library by selecting for
synthesis compounds from Alanex's virtual library of over 140 million chemical
structures. The Company's exploratory library is increasing at an average rate
of 10,000 individual compounds per month and currently consists of over 150,000
synthesized compounds.

Alanex believes that its ability to create a highly diverse library of
individual molecules increases the likelihood of discovering lead compounds. The
Company's drug discovery approach broadens the scope of combinatorial chemistry
to include the transition from lead compound to drug candidate by making
medicinal chemistry an integral part of the PDPS technology and by focusing on
the synthesis of compounds with drug-like structures. Optimization of lead
compounds into drug candidates can be accelerated by Alanex's ability to quickly
design and synthesize thousands of derivatives of a lead compound and purify
them using the Company's proprietary parallel chromatography technology.

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<PAGE> 5

program has produced active lead compounds that are being evaluated for the
treatment of depression and anxiety. Alanex recently initiated a project to
discover drugs that inhibit the action of gonadotropin releasing hormone (GnRH)
for the treatment of endometriosis and sex hormone-dependent tumors. Most
recently, in collaboration with Roche Bioscience, Alanex initiated a project to
discover an antagonist for an undisclosed target for the treatment for pain.
Alanex intends to continue to develop in-house programs for the discovery of new
drugs. The Company will also continue to seek corporate collaborations with
major pharmaceutical companies in order to capitalize on the emerging trend in
the pharmaceutical industry to outsource those components of drug discovery that
can be more efficiently provided by firms with unique or focused technologies.

The Company commenced operations as Alanex, L.P., a California limited
partnership (the "Partnership"), in May 1991. In November 1993, the Partnership
was converted into a California corporation. The Company intends to
reincorporate in Delaware prior to the completion of this offering. The
Company's principal executive offices are located at 3550 General Atomics Court,
San Diego, California 92121, and its telephone number is (619) 455-3200.

THE OFFERING

<TABLE>
<S> <C>
Common Stock Offered by the Company................... 2,500,000 shares of Common Stock,
$.00l par value ("Common Stock")
Common Stock to be Outstanding after the Offering..... 6,247,635(1) shares
Use of Proceeds....................................... Research and development, facilities
expansion and working capital and
general corporate purposes. See "Use
of Proceeds."
Proposed Nasdaq National Market Symbol................ ALNX
</TABLE>

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(1) Excludes 954,724 shares of Common Stock issuable upon exercise of options
outstanding as of September 1, 1996 with a weighted average exercise price
of $0.21 per share and 450,000 shares of Common Stock issuable upon exercise
of an outstanding warrant at an exercise price of $1.51 per share. See Note
7 of Notes to Consolidated Financial Statements, "Management--Stock Option
and Equity Incentive Plans," "Management--Stock Options Granted Outside of
the 1993 Plan and the 1996 Plan," "Description of Capital Stock--Warrants"
and "Certain Transactions."

4
<PAGE> 6

SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------ ---------------
1993(1) 1994 1995 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Contract research revenue........................... $ 23 $ 50 $ 944 $ 382 $ 946
Contract research revenue from related party........ -- 1,440 2,565 1,215 1,275
Project initiation fees............................. -- 250 250 -- 2,000
Other revenue....................................... 6 16 7 -- 3
------ ------ ------ ------ ------
Total revenue............................. 29 1,756 3,766 1,597 4,224
------ ------ ------ ------ ------
Operating expenses:
Research and development.......................... 816 2,181 3,685 1,522 2,274
General and administrative........................ 162 585 804 387 562
------ ------ ------ ------ ------
Total operating expenses.................. 978 2,766 4,489 1,909 2,836
------ ------ ------ ------ ------
Income (loss) from operations....................... (949) (1,010) (723) (312) 1,388
Interest income..................................... -- 97 180 84 79
Interest expense.................................... (31) (25) (168) (37) (105)
Loss on sale of property and equipment.............. -- -- (49) -- --
------ ------ ------ ------ ------
Income (loss) before income taxes................... (980) (938) (760) (265) 1,362
Income taxes........................................ (1) (1) (2) (2) (2)
------ ------ ------ ------ ------
Net income (loss)................................... $ (981) $ (939) $ (762) $ (267) $1,360
====== ====== ====== ====== ======
Net income (loss) per share(2)...................... $(0.24) $(0.22) $(0.17) $(0.06) $ 0.30
====== ====== ====== ====== ======
Number of shares used in computing net income (loss)
per share(2)...................................... 4,012 4,364 4,504 4,464 4,545
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, 1996
-------------------------
ACTUAL AS ADJUSTED(3)
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<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and debt securities available for sale.......................... $4,343 $ 29,343
Total assets......................................................... 7,745 32,745
Long-term debt, less current maturities.............................. 3,716 3,716
Accumulated deficit.................................................. (444) (444)
Total stockholders' equity........................................... 1,312 26,312
</TABLE>

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(1) Includes operations of the Partnership. See "Certain Transactions."

(2) For an explanation of the determination of the number of shares used in
computing net loss per share, see Note 1 of Notes to Consolidated Financial
Statements.

(3) As adjusted to give effect to the sale of 2,500,000 shares of Common Stock
in this offering assuming an initial public offering price of $11.00 per
share (the midpoint of the range set forth on the cover page of this
Prospectus) and receipt of the net proceeds therefrom. See "Use of Proceeds"
and "Capitalization."
------------------------

Alanet(TM), Alanex(TM), LiBrain(TM), PDPS(TM) and Pharmacophore-Directed
Parallel Synthesis(TM) are trademarks of the Company. The Alanex logo is a
servicemark of the Company. This Prospectus also contains trademarks of other
companies.

5
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RISK FACTORS

An investment in the shares being offered hereby involves a high degree of
risk. Prospective investors should carefully consider the following Risk
Factors, in addition to the other information contained in this Prospectus,
before purchasing the shares of Common Stock being offered hereby. This
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements as a result of certain
factors, including those set forth in the following Risk Factors and elsewhere
in this Prospectus.

EARLY STAGE OF PRODUCT DEVELOPMENT; LACK OF COMMERCIAL PRODUCTS; NO ASSURANCE OF
SUCCESSFUL PRODUCT DEVELOPMENT

The Company was founded in 1991 to discover novel small molecule
therapeutics for the treatment of diseases for which existing therapies are
inadequate or unavailable. To achieve profitable operations, the Company,
independently or in collaboration with others, must successfully identify,
develop and market proprietary products. The Company does not have any products
available for sale nor does it expect that any drug development candidates
identified by the Company will become commercially available as approved
pharmaceutical products for at least the next several years, if at all. The
Company's potential products are at very early stages of research and
development, with only one preclinical drug development candidate identified to
date. Under the terms of a collaboration agreement between the Company and Astra
Pharma, Astra Pharma owns all rights to compounds being developed for the
treatment of pain on behalf of Astra Pharma and the Company will not receive any
royalties on the sale of any products developed under the agreement.

The Company's potential products will require significant additional
preclinical and clinical development, regulatory approval and additional
investment prior to commercialization, either by the Company independently or by
others through collaborative arrangements. Potential products that appear to be
promising at early stages of development may be ineffective or be shown to cause
harmful side effects during preclinical testing or clinical trials, fail to
receive necessary regulatory approvals, be difficult to manufacture, be
uneconomical to produce, fail to achieve market acceptance or be precluded from
commercialization by proprietary rights of others. There can be no assurance
that any potential products will be successfully developed, prove to be safe and
efficacious in clinical trials, meet applicable regulatory standards, be capable
of being produced in commercial quantities at acceptable costs or achieve
commercial acceptance.

NEW AND UNCERTAIN TECHNOLOGY AND BUSINESS

The Company's integrated approach to drug discovery and its PDPS technology
are largely new approaches to drug discovery. There can be no assurance that the
Company will be able to employ its methods of drug discovery successfully or
that its technologies and methodologies will lead to the discovery or
development of commercial pharmaceutical products. Although the Company has
developed a number of potential lead compounds, to date, the Company has
developed only one preclinical drug development candidate. There can be no
assurance that any of the Company's product development efforts will be
successfully completed or that any product developed using the Company's
technology will achieve market acceptance. See "Business."

DEPENDENCE ON COLLABORATORS

The Company's strategy involves the formation of collaboration agreements,
principally with pharmaceutical and biotechnology companies. The Company
currently has three such collaboration agreements. Historically, pharmaceutical
and biotechnology companies have conducted lead compound identification and
optimization within their own research departments due to the highly proprietary
nature of the activities, 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.
Pharmaceutical and biotechnology companies must be persuaded that the Company's
drug discovery technology and expertise justify entering into collaboration
agreements with the Company. There can be no assurance that the Company will be
able to negotiate additional collaboration agreements in the future on
acceptable terms, if at all, or that such current or future collaboration
agreements will be successful. To the extent that the Company

6
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chooses not to or is unable to establish such agreements, it will require
substantially greater capital to undertake the research, development and
marketing of products at its own expense. In addition, in the absence of such
collaboration agreements, the Company may be required to delay or curtail its
research and development activities to a significant extent.

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 or that the Company will derive any additional
revenue from such agreements. Moreover, the Company's collaborations may be
terminated by its collaborators upon three to six months' notice, which
terminations could result in the Company's relinquishing rights to products
developed jointly with its collaborators. In June 1996, the collaboration
agreement between the Company and Amgen Inc. ("Amgen") was terminated by Amgen.
In connection with the termination, the Company redeemed 2,978,182 shares of
Series A Preferred Stock held by Amgen by issuance to Amgen of an unsecured,
non-interest bearing promissory note in the principal amount of $4,500,000, due
June 28, 2001, and issued to Amgen a warrant to purchase 450,000 shares of
Common Stock of the Company at an exercise price of $1.51 per share. In
addition, pursuant to the termination agreement, Alanex is obligated to provide
to Amgen, on a non-exclusive basis, certain compounds that were included in the
Alanex technology licensed to Amgen under the collaboration agreement. In
exchange for such compounds, Amgen agreed to pay Alanex $400,000. Any future
termination of the Company's existing or future collaboration agreements could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Collaboration Agreements and
Licenses" and "Certain Transactions."

The Company's agreements with its collaborators do not obligate the
collaborators to develop or commercialize lead compounds discovered by the
Company. Continued collaborator participation will depend not only on the
achievement of research objectives by the Company and its collaborators, which
cannot be assured, but also on each collaborator's own financial, competitive,
marketing and strategic considerations, all of which are outside the Company's
control. Such strategic considerations may include the relative advantages of
alternative products being marketed or developed by others, including relevant
patent and proprietary positions. There can be no assurance that the interests
and motivations of the Company's collaborators are, or will remain, aligned with
those of the Company, that current or future collaborators will not pursue
alternative technology in preference to that of the Company or that such
collaborators will successfully perform their development, regulatory
compliance, manufacturing or marketing functions. Should a collaborator 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 or royalties
associated with such compound or product, and the Company may have only limited
or no rights to commercialize such compounds or products. In addition, there can
be no assurance any product will be developed and marketed as a result of such
collaborations or that any such development or commercialization would be
successful. See "Business -- Collaboration Agreements and Licenses" and
"Business -- Government Regulation."

HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE OPERATING RESULTS

The Company was initially formed as a partnership in May 1991 and was
incorporated in November 1993. Accordingly, the Company has only a limited
operating history upon which an evaluation of the Company and its prospects can
be based. As of June 30, 1996, the Company had an accumulated deficit of
$444,000. The Company incurred net losses for the years ended December 31, 1993,
1994 and 1995 of $981,000, $939,000 and $762,000, respectively. The Company
anticipates that its operating expenses will increase substantially in the
foreseeable future as it expands its operations. The increased expenses
associated with such expansion may not be offset by significant revenue.
Further, the Company's revenue from collaboration agreements is affected by the
timing of efforts expended by the Company and the timing of lead compound
identification. The Company's collaborative agreements provide for milestone
payments and/or royalties only upon significant preclinical and clinical
development, requisite regulatory approvals and successful marketing of
commercialized pharmaceutical products. The Company expects that its ability to
achieve profitability will be dependent upon the success of its current
collaborations as well as its ability to enter into additional collaboration
agreements. The Company has not yet received any significant revenue from the
achievement of milestones, royalties or license fees from the discovery,
development or sale of a commercial drug and, with regard to royalties and
license fees, no such revenue is expected for a number of years, if at all.

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<PAGE> 9

FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING; RISK OF FURTHER
DILUTION TO STOCKHOLDERS

To continue to maintain the competitiveness of its technologies and to
conduct costly and time-consuming research and development, the Company will be
required to raise substantial funds in addition to the proceeds from this
offering. The Company anticipates that the net proceeds from this offering,
together with the Company's existing capital resources, will be adequate to fund
the Company's operations through 1998. The Company's forecast of the period of
time through which its financial resources will be adequate to support its
operations is a forward-looking statement that involves risks and uncertainties,
and actual results could vary as a result of a number of factors, including
those described in these Risk Factors and elsewhere in this Prospectus.

There can be no assurance that the Company's collaboration agreements will
produce revenue adequate to fund the Company's operating expenses. Moreover, the
Company's future capital requirements will depend on many factors, including,
among others, (i) continued scientific progress in its research and development
programs, (ii) the ability of the Company to establish and maintain
collaboration agreements, (iii) the costs involved in developing new
combinatorial chemistry and other capabilities, (iv) the costs involved in
preparing, filing, prosecuting, maintaining and enforcing patent claims, (v)
competing technological and market developments, (vi) progress of preclinical
and clinical trials and (vii) in the long term, effective commercialization
activities and arrangements.

As of June 30, 1996, the Company had aggregate outstanding indebtedness of
approximately $6,507,000, consisting of an unsecured, non-interest bearing
promissory note in the principal amount of $4,500,000 (not discounted for
imputed interest) due June 28, 2001, $715,000 outstanding on its existing line
of credit and a term loan in the principal amount of $1,240,000 and $52,000 of
other indebtedness. The Company anticipates that it will need to raise
additional capital in order to conduct its operations and repay such
indebtedness. Such additional capital may be raised through additional public or
private financings, as well as collaboration agreements, borrowings and other
resources. To the extent that additional capital is raised through the sale of
equity or equity-related securities, the issuance of such securities could
result in dilution to the Company's stockholders. There can be no assurance that
additional funding 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 or product candidates that the Company
would not otherwise relinquish. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

MANAGEMENT OF MULTIPLE COLLABORATIONS

The Company has three collaboration agreements and the Company's strategy
is to enter into additional collaboration agreements. Accordingly, because the
Company's agreements with its collaborators may result in the development of
similar compounds for multiple parties, there can be no assurance that conflicts
will not arise among collaborators as to rights to particular compounds in the
Company's libraries. Failure to successfully manage existing and future
collaborations, if any, or the occurrence of conflicts could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Collaboration Agreements and Licenses."

GOVERNMENT REGULATION; NO ASSURANCE OF PRODUCT APPROVAL

The U.S. Food and Drug Administration (the "FDA") and comparable agencies
in foreign countries impose substantial requirements on biotechnology and
pharmaceutical companies prior to the introduction of therapeutic products.
These requirements include lengthy and detailed laboratory and clinical testing
procedures, sampling activities and other costly and time-consuming procedures.
In particular, human therapeutic products are subject to rigorous preclinical
and clinical testing and other approval requirements by the FDA and comparable
foreign agencies. Although the time required for completing such testing and
obtaining such approvals is uncertain, satisfaction of these requirements
typically takes a number of years and varies substantially based on the type,
complexity and novelty of the pharmaceutical product. The Company cannot
accurately predict when product applications or submissions for FDA or other
regulatory review may

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<PAGE> 10

be submitted. The lengthy process of obtaining regulatory approvals and ensuring
compliance with appropriate federal statutes and regulations requires the
expenditure of substantial resources. Any delays or failure by the Company or
its collaborators or licensees to obtain regulatory approval and ensure
compliance with appropriate standards could adversely affect the
commercialization of such products, the Company's ability to earn product or
royalty revenue and its results of operations, liquidity and capital resources.

Any future FDA or other governmental approval of products, developed by the
Company independently or by collaborators, may entail limitations on the
indicated uses for which such products may be marketed. Approved products may be
subject to additional testing and surveillance programs as required by
regulatory agencies. In addition, product approvals may be withdrawn or limited
for noncompliance with regulatory standards or the occurrence of unforeseen
problems following initial marketing. Any party that manufactures therapeutic
products, including collaborators or contract manufacturers, would be required
to adhere to applicable standards for manufacturing practices and to engage in
extensive record keeping and reporting. Any manufacturing facilities, whether of
the Company, its collaborators or contract manufacturers, would be subject to
periodic inspection by state and federal agencies, including the FDA and
comparable agencies in foreign countries. See "Business -- Government
Regulation."

The effect of governmental regulation may be to delay the marketing of new
products for a considerable period of time, to impose costly requirements on the
activities of the Company or its collaborators or to provide a competitive
advantage to other companies that compete with the Company or its collaborators.
There can be no assurance that FDA or other regulatory approval for any products
developed by the Company or its collaborators will be granted on a timely basis,
if at all or, if granted, that compliance with regulatory standards will be
maintained. Adverse clinical results by the Company, its collaborators or by
others could have a negative impact on the regulatory process and timing. A
delay in obtaining, or failure to obtain, regulatory approvals could preclude or
adversely affect the marketing of products and the Company's liquidity and
capital resources. The extent of potentially adverse governmental regulation
that might arise from future legislation or administrative action cannot be
predicted.

The Company is also subject to various federal, state and local laws,
regulations and recommendations relating to safe working conditions, laboratory
and manufacturing practices, the experimental use of animals and the use and
disposal of hazardous or potentially hazardous substances, including radioactive
compounds and infectious disease agents, used in connection with its research
work. The extent and character of governmental regulation that might result from
future legislation or administrative action cannot be accurately predicted. See
"-- Potential Liability Regarding Hazardous Materials."

INTENSE COMPETITION; RISK OF OBSOLESCENCE OF TECHNOLOGY

Competition in the pharmaceutical and biotechnology industry is intense.
Many organizations are actively attempting to identify and optimize compounds
for potential pharmaceutical development. The Company competes directly with the
research departments of pharmaceutical companies, biotechnology companies,
chemical companies and with other combinatorial chemistry companies and research
and academic institutions. Many of these competitors have greater financial and
other resources, and more experience in research and development, than the
Company.

Historically, 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 potential
collaborators, are developing their own combinatorial chemistry and other
methodologies to improve productivity. 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. In addition, the Company competes with several alternative technologies
in the design and synthesis of new chemical libraries for drug discovery
programs. Such competition is based on the speed and efficiency of lead compound
identification and the efficiency of lead compound optimization. A competitor's
ability to identify or optimize lead compounds more quickly or more efficiently
than the Company could adversely affect the Company. The Company's processes may
be rendered obsolete or uneconomical by technological advances or entirely
different approaches developed by one or more of the

9
<PAGE> 11

Company's competitors. There can be no assurance that the existing approaches of
the Company's competitors or new approaches or technology developed by the
Company's competitors will not be more effective than those of the Company. See
"Business -- Competition."

UNCERTAINTIES ASSOCIATED WITH PATENTS AND PROPRIETARY RIGHTS

The Company's success will depend in large part on its ability, and the
ability of its licensees and licensors, to obtain patents for its technologies
and compounds, if any, resulting from the application of such technologies, to
defend patents once obtained and to maintain trade secrets, both in the United
States and in foreign countries. To date, the Company has filed six U.S. patent
applications. The success of the Company will also depend upon avoiding the
infringement of patents issued to competitors. There can be no assurance that
the Company or its collaborators will be able to obtain patent protection for
lead compounds or pharmaceutical products based upon the Company's technology.
Moreover, there can be no assurance that any patents issued to the Company or
its collaborators, or for which the Company has a license, will not be
challenged, invalidated or circumvented or that the rights granted thereunder
will provide competitive advantages to the Company. Litigation, which could
result in substantial cost to the Company, may be necessary to enforce the
Company's patent and license rights or to determine the scope and validity of
others' proprietary rights. If competitors of the Company prepare and file
patent applications in the United States that claim technology also claimed by
the Company, the Company may have to participate in interference proceedings
declared by the U.S. Patent and Trademark Office (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.

Because of the length of time and expense associated with bringing new
products through development and the length of time required for the
governmental approval process, the pharmaceutical industry has traditionally
placed considerable importance on obtaining and maintaining patent and trade
secret protection for significant new technologies, products and processes. The
Company and other biotechnology and pharmaceutical firms have applied, and are
applying, for patents for their products and certain aspects of their
technologies. The enforceability of patents issued to biotechnology and
pharmaceutical firms can be highly uncertain. Federal court decisions
establishing legal standards for determining the validity and scope of patents
in the field are in transition. For example, in a currently pending case, the
U.S. Supreme Court will consider whether to alter or replace the traditional
standard for determining patent infringement under the doctrine of equivalents.
There can be no assurance that the historical legal standards surrounding
questions of validity and scope will continue to be applied or that current
defenses as to issued patents in the field will offer protection in the future.
In addition, there can be no assurance that patents will issue or, if issued, as
to the degree and range of protection any such patents will afford or the extent
to which the Company will be successful in not infringing patents granted to
others.

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 conflicts could also
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.

Many of the Company's competitors have, or are affiliated with companies
having, substantially greater resources than the Company, and such competitors
may be able to sustain the costs of complex patent litigation to a greater
degree and for longer periods of time than the Company. Uncertainties resulting
from the initiation and continuation of any patent or related litigation could
have a material adverse effect on the Company's ability to compete in the
marketplace pending resolution of the disputed matters. Moreover, 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. The Company is aware of a U.S. patent issued to a third
party that broadly claims proprietary rights in the automation of iterative
parallel synthesis technology. Although the Company believes that its current
activities do not infringe this patent, there can be no assurance that the
Company's belief would be affirmed in any litigation over the patent or that the
Company's future technological developments would be outside the scope of this
patent. In the event that

10
<PAGE> 12

third parties have or obtain rights to intellectual property or technology used
or needed by the Company, there can be no assurance that any licenses would be
available to the Company or would be available on terms reasonably acceptable to
the Company.

The Company also relies on certain proprietary technologies, trade secrets
and know-how that are not patentable. Although the Company has taken steps to
protect its unpatented trade secrets and technology, 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 proprietary trade secrets and know-how will not otherwise become
known or be independently developed or discovered by competitors. See "Business
- -- Patents and Proprietary Information."

DEPENDENCE ON KEY EMPLOYEES

The Company is highly dependent on the principal members of its scientific
and management staff. The Company does not maintain key person life insurance on
the life of any employee. The Company's future success also will depend in part
on the continued service of its key scientific personnel in its computational
and medicinal chemistry and pharmacology departments as well as software,
engineering and management personnel and its ability to identify, hire and
retain additional qualified personnel. The Company has entered into an
employment agreement with its Director of Finance. The Company has not entered
into employment agreements with any other key employees.

There is intense competition for 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. Because of the intense competition, there
can be no assurance that the Company will be successful in adding technical
personnel as needed to meet the staffing requirements of additional
collaborative relationships. Failure to attract and retain key personnel could
have a material adverse effect on the Company. See "Business -- Employees" and
"Management."

POTENTIAL LIABILITY REGARDING 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. The risk of
accidental contamination or injury from hazardous 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 financial
resources of the Company. In addition, there can be no assurance that in the
future the Company will not be required to incur significant costs to comply
with environmental laws and regulations relating to hazardous materials. See
"Business -- Government Regulation."

RISK OF PRODUCT LIABILITY; POTENTIAL UNAVAILABILITY OF INSURANCE

The Company's business will expose it to potential product liability risks
that are inherent in the testing, manufacturing and marketing of human
therapeutic products. The Company does not currently have product liability
insurance, and there can be no assurance that the Company will be able to obtain
or maintain such insurance on acceptable terms or, if obtained, that such
insurance will provide adequate coverage against potential liabilities.

CONCENTRATION OF OWNERSHIP

Upon completion of this offering, the current directors, executive officers
and affiliated entities will beneficially own approximately 57.8% of the
outstanding Common Stock (54.5% of the outstanding Common Stock if the
over-allotment option is exercised in full). In particular, upon completion of
this offering, Debar ERA, Inc. ("Debar") and The Jon and Caroline Jessen Family
1990 Trust (the "Jessen Family Trust") will in the aggregate beneficially own
38.7% of the outstanding Common Stock (36.5% of the outstanding Common Stock if
the over-allotment option is exercised in full). Juli Jessen, the daughter of
Jon Jessen, a

11
<PAGE> 13

director of the Company, is the trustee of the Jessen Family Trust. All of the
outstanding shares of Debar are held by the adult children of Jon Jessen and are
subject to a voting trust, the trustee of which is Mark Jessen, a son of Jon
Jessen. Mark Jessen, who is also the President and Chief Executive Officer of
Debar, has sole disposition and voting power over the shares held in the voting
trust. As a result, these stockholders will be able to exercise control over all
matters requiring stockholder approval, including the election of directors and
approval of significant corporate transactions. Such concentration of ownership
may also have the effect of delaying, discouraging or preventing tender offers
for the Common Stock or changes in control of the Company unless the terms are
approved by such stockholders. See "Principal Stockholders" and "Description of
Capital Stock."

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial numbers of shares of Common Stock in the public market
following this offering could adversely affect the market price for the Common
Stock. Upon completion of this offering, the Company will have outstanding
6,247,635 shares of Common Stock, based upon the number of shares outstanding as
of September 1, 1996. Of these shares, all of the 2,500,000 shares sold in this
offering will be freely tradable (unless such shares are purchased by
"affiliates" of the Company, as that term is defined in Rule 144 ("Rule 144")
under the Securities Act of 1933, as amended (the "Securities Act")), without
restriction or registration under the Securities Act. The remaining 3,747,635
shares of Common Stock held by existing stockholders are "restricted
securities," as that term is defined in Rule 144 under the Securities Act (the
"Restricted Shares"), and are eligible for public sale only if they are
registered under the Securities Act or sold in accordance with Rules 144, 144(k)
or 701 promulgated under the Securities Act ("Rule 701"). As a result of
contractual restrictions and the provisions of Rules 144, 144(k) and 701,
additional shares will be available for sale in the public market as follows:
(i) no Restricted Shares will be eligible for immediate sale in the public
market on the date of this Prospectus; (ii) 2,973,715 Restricted Shares (plus
522,182 shares of Common Stock issuable to employees pursuant to stock options
that are then vested) will be eligible for sale upon expiration of lock-up
agreements 180 days after the date of this Prospectus; and (iii) an additional
773,920 Restricted Shares will be eligible for sale from time to time thereafter
upon expiration of their respective two-year holding periods under Rule 144.
Future sales of shares by existing stockholders pursuant to Rule 144, 144(k) or
701 could have an adverse effect on the market price of the Common Stock or
otherwise impair the Company's ability to raise additional capital. See
"Description of Capital Stock" and "Shares Eligible for Future Sale."

ANTITAKEOVER PROVISIONS

Certain provisions of the Company's Certificate of Incorporation and
Bylaws, as well as provisions of Delaware law, could discourage potential
acquisition proposals and delay or prevent a change in control of the Company.
For example, the Company's Certificate of Incorporation authorizes the Board of
Directors to issue up to 10,000,000 shares of Preferred Stock and to determine
the designations, price, rights, powers, preferences, privileges, and
limitations, including voting rights, of those shares without any further vote
or action by the stockholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The Certificate of
Incorporation and Bylaws, among other things, provide for a classified Board of
Directors, require that stockholder actions occur at duly called meetings of the
stockholders, limit the persons who may call special meetings of stockholders,
do not permit cumulative voting in the election of directors and require advance
notice of stockholder proposals and director nominations. Certain provisions
contained in the Company's charter documents and certain applicable provisions
of Delaware law could discourage a hostile bid in which stockholders could
receive a premium for their shares. In addition, these provisions could have the
effect of making it more difficult for a third party to acquire a majority of
the outstanding voting stock of the Company, or delay, prevent or deter a
merger, acquisition or tender offer in which the Company's stockholders could
receive a premium for their shares, or a proxy contest for control of the
Company or other change in the Company's management. See "Management" and
"Description of Capital Stock."

NO PRIOR PUBLIC MARKET; POTENTIAL 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 this offering.

12
<PAGE> 14

The initial public offering price will be determined by negotiation between the
Company and the Representatives of the Underwriters based on several factors and
may not be indicative of the book value of the Company's assets, market price of
the Common Stock after this offering or any other indicator of financial value.
See "Underwriting."

In addition, the market prices for securities of biotechnology 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 failure to attain milestones with respect
to the Company's programs, the Company's ability or inability to enter into
additional collaborations, developments concerning proprietary rights, including
patents and litigation matters, publicity regarding actual or potential results
with respect to research or compounds under development by the Company or its
collaborative partners, regulatory developments in both the United States and
foreign countries, public concern as to the efficacy of new technologies,
developments in the field of combinatorial chemistry, general market conditions
and other factors may have a significant impact on the market price of the
Common Stock. Failures by other drug discovery companies, including
combinatorial chemistry companies, could have an adverse effect on the market
price of the Common Stock. In the past, following periods of volatility in the
market price for a company's securities, securities class action litigation has
often been instituted. Such litigation could result in substantial costs and a
diversion of management attention and resources, which could have a material
adverse effect on the Company's business, results of operations and financial
condition.

IMMEDIATE AND SUBSTANTIAL DILUTION; NO DIVIDENDS

The initial public offering price of the Common Stock is substantially
higher than the net tangible book value per share of the Common Stock. At an
assumed initial public offering price of $11.00 per share, (the midpoint of the
range set forth on the cover page of this Prospectus) investors participating in
this offering will incur an immediate, substantial dilution in net tangible book
value of $6.79 per share and may incur additional dilution upon exercise of
outstanding stock options and warrants.

The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain any and all earnings for use in
its business and does not anticipate paying any dividends within the foreseeable
future. See "Dilution" and "Dividend Policy."

13
<PAGE> 15

USE OF PROCEEDS

The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby are estimated to be approximately $25,000,000 ($28,836,000 if the
Underwriters' over-allotment option is exercised in full), based on an assumed
public offering price of $11.00 per share (the midpoint of the range set forth
on the cover page of this Prospectus), and after deducting underwriting
discounts and commissions and estimated offering expenses.

The Company currently intends to use the proceeds of this offering as
follows: approximately 65% for research and development, approximately 10% for
facilities expansion and approximately 25% for general corporate purposes and
working capital. The Company believes the net proceeds of this offering, along
with its existing resources, will be adequate to fund the Company's operations
through 1998. The preceding forward-looking statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those projected, as set forth in Risk Factors and elsewhere in this
Prospectus. The amounts and timing of expenditures will depend, among other
things, on the rate of progress in expanding the Company's core technologies,
the Company's success in entering into collaboration agreements, the timing of
payments under the Company's current and future collaboration agreements, the
progress of ongoing research and development, the results of preclinical testing
and clinical trials, the rate at which operating losses are incurred, the FDA
regulatory process and other factors, many of which are beyond the Company's
control. The Company's management and Board of Directors have broad discretion
in determining how the proceeds of this offering will be allocated.

In addition, the Company may use a portion of the net proceeds of this
offering to acquire or invest in complementary businesses or technologies,
through mergers, acquisitions, joint ventures or otherwise. However, the Company
currently has no specific agreements or commitments with respect to such
transactions.

Pending the uses 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 any cash dividends on its capital
stock. The Company currently intends to retain any future earnings to finance
the growth and development of its business and, therefore, does not anticipate
paying any cash dividends in the foreseeable future.

14
<PAGE> 16

CAPITALIZATION

The following table sets forth the consolidated capitalization of the
Company (i) at June 30, 1996, and (ii) as adjusted to give effect to the sale of
the 2,500,000 shares of Common Stock offered by the Company at an assumed
initial public offering price of $11.00 per share (the midpoint of the range set
forth on the cover page of this Prospectus) and the application of the estimated
net proceeds therefrom. This table should be read in conjunction with the
Consolidated Financial Statements and Notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" appearing
elsewhere in this Prospectus.

<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt, less current maturities(1).............................. $3,716 $ 3,716
Stockholders' equity:
Preferred stock, $.001 par value: 10,000,000 shares authorized; no
shares issued and outstanding, actual and as adjusted.............. -- --
Common Stock, $.001 par value: 40,000,000 shares authorized; 3,736,892
shares issued and outstanding actual and 6,236,892 shares issued
and outstanding as adjusted(2)..................................... 4 6
Additional paid-in capital............................................ 1,924 26,922
Note receivable from officer for Common Stock purchased............... (12) (12)
Deferred compensation................................................. (160) (160)
Accumulated deficit................................................... (444) (444)
------ ------
Total stockholders' equity......................................... 1,312 26,312
------ ------
Total capitalization.......................................... $5,028 $30,028
====== ======
</TABLE>

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

(1) See Note 5 of Notes to Consolidated Financial Statements.

(2) Excludes (i) 892,700 shares of Common Stock issuable upon exercise of
options outstanding as of June 30, 1996 with a weighted average exercise
price of $0.10 per share and 450,000 shares of Common Stock issuable upon
exercise of an outstanding warrant with an exercise price of $1.51 per share
and (ii) 10,743 shares of Common Stock issued upon exercise of options
subsequent to June 30, 1996 and 72,767 shares of Common Stock (net of
cancellations) issuable upon exercise of options granted subsequent to June
30, 1996. See Note 7 to Notes to Consolidated Financial Statements,
"Management--Stock Option and Equity Incentive Plans," "Management--Stock
Options Granted Outside of the 1993 Plan and the 1996 Plan" and "Description
of Capital Stock--Warrants."

15
<PAGE> 17

DILUTION

The net tangible book value of the Company as of June 30, 1996 was
approximately $1,282,000, or $0.34 per share. Net tangible book value per share
is equal to the Company's total tangible assets less total liabilities, divided
by the number of outstanding shares of Common Stock. After giving effect to the
sale by the Company of the 2,500,000 shares of Common Stock offered hereby (at
an assumed initial public offering price of $11.00 per share, the midpoint of
the range set forth on the cover page of this Prospectus) and after deducting
underwriting discounts and commissions and estimated offering expenses, the net
tangible book value of the Company at June 30, 1996 would have been
approximately $26,282,000 million, or $4.21 per share. This represents an
immediate increase in net tangible book value of $3.87 per share to existing
stockholders and an immediate dilution of $6.79 per share to new investors
purchasing shares in this offering. The following table illustrates this per
share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $11.00
Net tangible book value at June 30, 1996.................. $0.34
Increase in net tangible book value attributable to new
investors.............................................. 3.87
Net tangible book value after this offering................. 4.21
-----
Dilution to new investors................................... $ 6.79
=====
</TABLE>

The following table summarizes, as of June 30, 1996, the differences
between existing stockholders and the new investors with respect to the number
of shares of Common Stock purchased from the Company, the total consideration
paid to the Company and the average price per share paid (before deducting
underwriting discounts and commissions and estimated offering expenses):

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1).... 3,736,892 60% $ 198,689 1% $ 0.05
New investors............... 2,500,000 40% 27,500,000 99% $ 11.00
--------- ----- ----------- -----
Total....................... 6,236,892 100% $27,698,689 100%
========= ===== =========== =====
</TABLE>

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

(1) The foregoing tables and calculations exclude (i) 892,700 shares of Common
Stock issuable upon exercise of options outstanding as of June 30, 1996 with
a weighted average exercise price of $0.10 per share and 450,000 shares of
Common Stock issuable upon exercise of a warrant outstanding as of June 30,
1996 with an exercise price of $1.51 per share and (ii) 10,743 shares of
Common Stock issued upon exercise of options subsequent to June 30, 1996 and
72,767 shares of Common Stock (net of cancellations) issuable upon exercise
of options granted subsequent to June 30, 1996. See Note 7 of Notes to
Consolidated Financial Statements. To the extent that options and warrants
are exercised in the future, there will be further dilution to new
investors. See "Management -- Stock Option and Equity Incentive Plans,"
"Management -- Stock Options Granted Outside of the 1993 Plan and the 1996
Plan" and "Description of Capital Stock -- Warrants."

16
<PAGE> 18

SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The selected consolidated financial data presented below under the captions
"Consolidated Statement of Operations Data" and "Consolidated Balance Sheet
Data" should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Consolidated Financial
Statements and Notes thereto. The Consolidated Statement of Operations Data for
the years ended December 31, 1993, 1994 and 1995 and the Consolidated Balance
Sheet Data as of December 31, 1993, 1994 and 1995 are derived from the
consolidated financial statements of the Company and its subsidiary, which
financial statements have been audited by KPMG Peat Marwick LLP, independent
certified public accountants. The consolidated financial statements as of
December 31, 1994 and 1995, and for each of the years in the three-year period
ended December 31, 1995, and the independent auditors' report thereon, are
included elsewhere in this Prospectus. The Consolidated Statement of Operations
Data for the six months ended June 30, 1995 and 1996, and the Consolidated
Balance Sheet Data as of June 30, 1996, are derived from the unaudited
consolidated financial statements of the Company and its subsidiary included
elsewhere in this Prospectus. The results of operations for the six months ended
June 30, 1996 are not necessarily indicative of the results for any future
period or for the full year ending December 31, 1996. The Consolidated Statement
of Operations Data for the periods ended December 31, 1991 and 1992, and the
Consolidated Balance Sheet Data as of December 31, 1991 and 1992, are derived
from unaudited financial statements not included in this Prospectus. The
unaudited financial statements have been prepared on a basis consistent with the
Company's audited financial statements and include all adjustments, consisting
only of normal recurring adjustments, that management believes necessary for a
fair presentation of the Company's financial position and results of operations
for these periods.

<TABLE>
<CAPTION>
INCEPTION SIX MONTHS
(MAY 1991) ENDED
THROUGH YEAR ENDED DECEMBER 31, JUNE 30,
DECEMBER 31, ------------------------------------ ---------------
1991(1) 1992(1) 1993(1) 1994 1995 1995 1996
------------ ------- ------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Contract research revenue........................ $ -- $ 50 $ 23 $ 50 $ 944 $ 382 $ 946
Contract research revenue from related party..... -- -- -- 1,440 2,565 1,215 1,275
Project initiation fees.......................... -- -- -- 250 250 -- 2,000
Other revenue.................................... 12 13 6 16 7 -- 3
----- ----- ------ ------- ------ ------ ------
Total revenue.......................... 12 63 29 1,756 3,766 1,597 4,224
----- ----- ------ ------- ------ ------ ------
Operating expenses:
Research and development....................... 115 599 816 2,181 3,685 1,522 2,274
General and administrative..................... 18 80 162 585 804 387 562
----- ----- ------ ------- ------ ------ ------
Total operating expenses.................... 133 679 978 2,766 4,489 1,909 2,836
----- ----- ------ ------- ------ ------ ------
Income (loss) from operations.................... (121) (616) (949) (1,010) (723) (312) 1,388
Interest income.................................. -- -- -- 97 180 84 79
Interest expense................................. -- -- (31) (25) (168) (37) (105)
Loss on sale of property and equipment........... -- -- -- -- (49) -- --
----- ----- ------ ------- ------ ------ ------
Income (loss) before income taxes................ (121) (616) (980) (938) (760) (265) 1,362
Income taxes..................................... -- -- (1) (1) (2) (2) (2)
----- ----- ------ ------- ------ ------ ------
Net income (loss)................................ $ (121) $(616) $ (981) $ (939) $ (762) $ (267) $1,360
===== ===== ====== ======= ====== ====== ======
Net income (loss) per share(2)................... -- -- $(0.24) $ (0.22) $(0.17) $(0.06) $ 0.30
===== ===== ====== ======= ====== ====== ======
Number of shares used in computing net income
(loss) per share(2)............................ -- -- 4,012 4,364 4,504 4,464 4,545
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------- JUNE 30,
1991(1) 1992(1) 1993 1994 1995 1996
------- ------- ----- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and debt securities available for sale................ $ 8 $ 6 $ 2 $ 3,346 $ 2,167 $4,343
Total assets............................................... 97 225 331 4,808 5,758 7,745
Long-term debt, less current maturities.................... -- 149 74 43 1,164 3,716
Accumulated deficit........................................ -- -- (100) (1,039) (1,801) (444)
Total partners' capital/stockholders' equity............... 97 76 57 3,629 2,881 1,312
</TABLE>

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

(1) Includes operations of the Partnership. The 1991 and 1992 partners'
capital/stockholders' equity data reflect the partners' equity interest in
the Partnership. See "Certain Transactions."
(2) See Note 1 of Notes to Consolidated Financial Statements.

17
<PAGE> 19

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 contains forward-looking statements that involve
certain risks and uncertainties. The Company's actual results may differ
materially from the results discussed in the forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Prospectus. The following discussion should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
included elsewhere in this Prospectus.

OVERVIEW

The Company has devoted substantially all of its resources to the
development of its highly integrated and comprehensive drug discovery technology
and to its efforts to discover and optimize small molecule drug candidates. The
Company intends to continue to develop in-house programs for the discovery of
new drugs and has established and will continue to seek corporate collaborations
with major pharmaceutical companies and biotechnology companies. Since inception
in May 1991, the Company raised $6.3 million through private sales of equity
securities (including the sale to Amgen of 2,978,182 shares of Series A
Preferred Stock of the Company in April 1994). See "Certain Transactions."

To date, the Company's revenue under collaboration agreements has consisted
of project initiation fees of $2.5 million and contract research revenue of $8.5
million. Contract research revenue is recognized at the time that research and
development activities are performed under the terms of the research contracts.
Contract research payments are generally received in advance of the performance
of the related research activities under the contract at the beginning of each
quarter. Such payments received in excess of amounts earned are recorded as
deferred contract research revenue. Project initiation fees and milestone
payments are nonrefundable and the contracts do not specify any future
performance obligations on the part of the Company related to such fees or
payments. Project initiation fees are recognized under the contract as revenue
when earned, generally when received, upon signing of an agreement. Revenue from
milestone payments will be recognized if and when the results or events
stipulated in the agreement have been achieved. To date, the Company has not
received any milestone payments under any of its collaboration agreements.

The Company earned revenue in 1994 and 1995 under collaboration agreements
with Amgen, Astra Pharma and Novo Nordisk. The Company expects that it will
continue to earn revenue from the collaborations noted, with the exception of
the Amgen collaboration, which was terminated in June 1996. In addition, the
Company expects to earn revenue from a collaboration with Roche Bioscience. See
"Business -- Collaboration Agreements." The Company will be required to conduct
significant research and development activities over the next several years to
fulfill its obligations under its collaboration agreements. The Company has
incurred cumulative net losses of $444,000 through June 30, 1996.

To date, the Company has not earned any revenue related to product sales
and the Company expects that its revenue sources over the next few years will be
limited to contract research payments under collaboration agreements. The timing
and amounts of such revenue will vary based on the terms of such collaboration
agreements. The Company anticipates that its operating expenses will increase
substantially as it expands its research and development efforts and the
increased expenses associated with such expansion may not be offset by
significant revenue.

RESULTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 1996 AND 1995

Total revenue for the six-month period ended June 30, 1996 increased by
164% to $4.2 million from $1.6 million in the six-month period ended June 30,
1995. Of the total revenue, contract research revenue in the six-month period
ended June 30, 1996 increased by 39% to $2.2 million compared to $1.6 million in
the corresponding period of 1995. For the six-month period ended June 30, 1996,
contract research revenue from the Company's collaborative agreements totalled
$1.3 million from Amgen, $386,000 from Astra and

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<PAGE> 20

$560,000 from Novo Nordisk. During the same period, project initiation fees were
$2.0 million, due to the signing of the Roche Bioscience collaboration
agreement.

Research and development expenses for the first six months of 1996
increased by 49% to $2.3 million from $1.5 million in the same period of 1995.
The increase reflects increased research and development expenses incurred both
on behalf of collaborators and under programs funded by the Company.

General and administrative expenses for the six-month period ended June 30,
1996 increased by 45% to $562,000 from $387,000 for the corresponding period of
1995. The increase is primarily due to increased legal expenses related to
contract negotiations and accounting expenses, expenses of recruiting and hiring
of administrative personnel and increased business development activities.

The Company records and amortizes over the related vesting periods deferred
compensation representing the difference between the exercise price of options
granted and the deemed fair market value of its Common Stock at the time of
grant. Options generally vest over four years. Deferred compensation amortized
to expense through June 30, 1996 was $3,000. Amortization of deferred
compensation over the next four fiscal years in connection with options granted
to date, including compensation recognized to date, will aggregate $601,750 as
such options vest.

The Company's net income for the six-month period ended June 30, 1996
compared to a net loss for the comparable period of 1995, is due principally to
the recognition of revenue from the non-refundable project initiation fee
received in connection with the signing of the three-year collaboration
agreement with Roche Bioscience in 1996.

YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993.

Total revenue increased by approximately 114% to $3.8 million in 1995 from
$1.8 million in 1994. This increase was due to a higher level of activity
related to collaborative research. Total revenue in 1993 was $29,000. For 1995,
contract research revenue from collaboration agreements totalled $2.6 million
from Amgen, $750,000 from Astra, $186,000 from Novo Nordisk and $8,000 from
miscellaneous research contracts, and a nonrefundable project initiation fee of
$250,000 from Novo Nordisk. The 1994 revenues were primarily attributable to
research support payments of $1.4 million from Amgen and a nonrefundable project
initiation fee of $250,000 from Astra Pharma.

Research and development expenses increased by 69% to $3.7 million in 1995
from $2.2 million in 1994. Research and developments costs totaled $816,000 in
1993. The increases were due to increased levels of research and development
under collaboration agreements and programs funded by the Company and include
costs associated with hiring of research and development personnel, increased
costs associated with depreciation of equipment and facilities expenses and
increased purchases of laboratory supplies and services.

General and administrative expenses increased by 37% to $804,000 in 1995
from $585,000 in 1994 primarily due to increased recruiting and hiring of
administrative personnel and expenses related to increases in travel for
business development, and legal and accounting expenses. General and
administrative expenses totaled $162,000 in 1993.

The Company's net loss decreased by 19% to $762,000 in 1995 from $939,000
1994. The total net operating loss in 1993 was $981,000.

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its operations since inception through the private
sales of equity securities, revenue from research collaborations and various
term financing arrangements. In 1994, the Company raised $4.5 million from the
private sale of Series A Preferred Stock in connection with a collaboration
agreement with Amgen. The Series A Preferred Stock was redeemed in June 1996 as
part of the termination of the collaboration agreement. In consideration of the
stock redemption, the Company issued to Amgen an unsecured, non-interest bearing
$4.5 million promissory note due on June 28, 2001. In connection with the
termination of the collaboration agreement, Amgen's warrant to purchase 703,636
shares of Common Stock was canceled and the Company issued to Amgen a new
warrant to purchase 450,000 shares of Common Stock at an exercise price of $1.51
per share with a term of seven years. See "Certain Transactions."

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<PAGE> 21

In June 1994, the Company secured $1.2 million in working capital financing
from Merrill Lynch Business Financial Services, Inc. The credit facility
requires $240,000 of the principal balance of the loan to be converted to a term
loan and paid annually. Interest is due monthly at an interest rate of 2.95%
above the 30-day commercial paper rate (8.42% at September 12, 1996). The
repayment of the term note and all amounts outstanding on the credit facility
are secured by the assets of the Company and are also guaranteed by Amgen. At
June 30, 1996, $715,000 was outstanding under the line of credit.

In May 1995, the Company acquired and improved new facilities at a total
cost of $1.9 million. Of this total, $1.4 million was financed by Genesee
Properties, the owner of the property, at 11% payable over a seven-year term.

As of June 30, 1996, the Company had $4.3 million in cash, debt securities
available for sale and interest receivable. Through June 30, 1996, the Company
had invested $4.3 million in research facility improvements, laboratory and
computer equipment and furniture.

Contract research payments under collaboration agreements are generally
received in advance of the performance of the related research activities at the
beginning of each quarter. Nonrefundable project initiation fees are generally
received upon the signing of the collaboration agreement. Under the Company's
collaboration agreements, milestone payments are to be received if and when the
results or events stipulated in the agreement have been achieved.

The Company's net cash provided by operating activities was $2.6 million
for the six-month period ended June 30, 1996. The cash was provided primarily by
the revenue earned in June 1996 with the signing of the Roche Bioscience
collaboration agreement. Net cash provided by financing activities included $1.7
million of long-term financing in 1995 used for facilities expansion, $482,000
in 1994 and $124,000 in 1993. Net borrowings on the Company's line of credit
were $219,000 in 1995 and $506,000 in 1994. The Company's net cash used in
operating activities was $62,000 in 1995, $421,000 in 1994 and $834,000 in 1993.
Cash used for capital expenditures was $134,000 for the six-month period ended
June 30, 1996, $2.6 million in 1995, $1.3 million in 1994 and $3,000 in 1993.
The Company expects to use a portion of the proceeds of this offering for
additional capital expenditures. See "Use of Proceeds."

The Company anticipates that the net proceeds from this offering, together
with its existing capital resources, will be sufficient to fund the Company's
operations and capital requirements through 1998. The Company's forecast of the
period of time through which its financial resources will be adequate to support
its operations is a forward-looking statement that involves risk and
uncertainties and actual results could vary as a result of a number of factors,
including those described herein and included in Risk Factors. There can be no
assurance the Company will not be required to use its available capital
resources sooner than anticipated. The Company's future capital requirements
will depend on many factors, including among others, (i) continued scientific
progress in its research and development programs, (ii) the ability of the
Company to establish and maintain collaboration agreements, (iii) the costs
involved in developing new combinatorial chemistry and other capabilities, (iv)
the costs involved in preparing, filing, prosecuting, maintaining and enforcing
patent claims, (v) competing technological and market developments, (vi)
progress of preclinical and clinical trials and (vii) in the long term,
effective commercialization activities and arrangements.

The Company anticipates that it will need to raise additional capital over
the next several years in order to conduct its operations. Such capital may be
raised through additional public or private financings, as well as collaboration
agreements, borrowings and other available resources. To the extent that
additional capital is raised through the sale of equity or equity-related
securities, the issuance of such securities could result in dilution to the
Company's existing stockholders. There can be no assurance that additional
funding will be available on favorable terms, if at all.

NEW ACCOUNTING PRONOUNCEMENT

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," effective for fiscal years beginning after December 15, 1995.
Under the provisions of SFAS 123, the Company is encouraged, but not required,
to measure compensation costs related to its employee stock compensation under
the fair value method. If the Company elects not to recognize compensation
expense under this method, it is required to disclose the pro forma effects
based on the SFAS 123 methodology. The Company anticipates adopting the pro
forma method of disclosure under SFAS 123.

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<PAGE> 22

BUSINESS

OVERVIEW

Alanex is a drug discovery company that is applying its highly integrated
and comprehensive approach to rapidly and cost-effectively discover and optimize
novel, small molecule drug candidates. The Company's proprietary core drug
discovery technology, Pharmacophore Directed Parallel Synthesis (PDPS),
accelerates the steps necessary to discover small molecule drug candidates, from
the initial identification of compounds that exhibit activity against selected
biological targets to the progression of these compounds to drug candidates for
human clinical trials. PDPS combines combinatorial chemistry with computational
and medicinal chemistries which, when used in conjunction with high throughput
screening and pharmacology, form an integrated drug discovery platform that can
be broadly applied to a wide array of biological targets. An important element
of the Company's strategy is to enter into collaborations with pharmaceutical
companies. Alanex has collaboration agreements with Astra Pharma, Novo Nordisk
and Roche Bioscience. To date, Alanex has used PDPS to identify one preclinical
drug development candidate, which is for the treatment of pain, and a number of
lead compounds in four other programs that address diseases or conditions for
which existing therapies are inadequate or unavailable, including diabetes,
obesity, depression and anxiety.

The Company's opiate agonist program, its most advanced drug discovery
program, has produced compounds that, in preclinical models, act as potent,
orally active analgesics with a novel mechanism of action for the treatment of
pain. This program is being conducted on behalf of Astra Pharma and is in
preclinical development. From initiation of this program to production of
preclinical compounds required only 14 months. Alanex's diabetes programs, which
are being pursued in conjunction with Novo Nordisk, focus on two distinct
molecular targets and have produced active lead compounds for each target.
Alanex's neuropeptide Y (NPY) antagonist program has produced active lead
compounds for the potential treatment of obesity and cardiovascular disease. In
addition, the Company's corticotrophin releasing factor (CRF) antagonist program
has produced active lead compounds that are being evaluated for the treatment of
depression and anxiety. Alanex recently initiated a project to discover drugs
that inhibit the action of gonadotropin releasing hormone (GnRH) for the
treatment of endometriosis and sex hormone-dependent tumors. Most recently, in
collaboration with Roche Bioscience, Alanex initiated a project to discover an
antagonist for an undisclosed target for the treatment for pain. Alanex intends
to continue to develop in-house programs for the discovery of new drugs. The
Company will also continue to seek corporate collaborations with major
pharmaceutical companies in order to capitalize on the emerging trend in the
pharmaceutical industry to outsource those components of drug discovery that can
be more efficiently provided by firms with unique or focused technologies.

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BACKGROUND

The discovery process for small molecule drugs typically includes two
steps: lead discovery and optimization of leads into drug candidates. Lead
discovery is the identification of one or more compounds that are active with
respect to a selected biological target. These compounds are identified through
screening of large collections of chemical compounds, either accumulated over
time or newly synthesized using combinatorial chemistry. A compound with the
most desirable pharmacological features is selected as a lead compound.

Although lead compounds display desirable pharmacological characteristics,
they typically do not initially have sufficient potency and selectivity to
qualify as drug candidates. Lead optimization improves upon a lead compound's
pharmacological characteristics by synthesizing and testing a number of
structural analogs of the lead compound. Typically, the chemical structure of
the lead compound must be significantly modified to optimize bioavailability and
stability and to minimize toxicity and undesirable side effects.

TRADITIONAL DRUG DISCOVERY

Historically, lead discovery and optimization were performed almost
exclusively by the internal research and development departments of large
pharmaceutical companies. In general, pharmaceutical companies' drug discovery
programs were limited to the use of collections of natural products and
compounds developed in previous drug discovery programs. As a result, existing
pharmaceutical libraries typically reflect a lack of chemical diversity and
breadth. Once lead compounds were identified, optimization was performed one
compound at a time using traditional medicinal chemistry. This approach to lead
discovery and optimization has been time consuming, expensive and often
ineffective in yielding a successful drug candidate.

Recently, the pharmaceutical industry has been under pressure to lower the
cost and increase the efficiency of its drug discovery efforts. Cost containment
efforts by governmental agencies, managed care organizations and third-party
payors have reduced profit margins, particularly for drugs that have generic
equivalents or therapeutic alternatives. To overcome pricing pressures,
pharmaceutical companies must develop innovative drugs that address unmet
medical needs or offer improvements over available therapies. At the same time,
advances in molecular biology and genomics have led to the discovery of an
increasing number of novel biological targets. Research efforts at
pharmaceutical and biotechnology companies, universities and other institutions
have identified novel receptors, enzymes and other proteins as drug targets and
have generated information on their potential role in human diseases. The
identification of these targets has expanded the opportunity for the discovery
and development of new drugs.

Despite the proliferation of new drug targets and increased spending on
drug discovery by major pharmaceutical companies, there has not been a
significant increase in the number of new drugs approved by the FDA on an annual
basis over the last 12 years. Furthermore, the time required to develop and
commercialize a drug is, on average, 15 years. Consequently, pharmaceutical
companies have placed high priority on improving their drug discovery
productivity and on capitalizing in an efficient manner on the proliferation of
new molecular targets.

COMBINATORIAL CHEMISTRY

Combinatorial chemistry emerged as a solution to many of the challenges of
traditional drug discovery. Combinatorial chemistry methods are capable of
generating large libraries of diverse molecules by creating combinations of
chemical building blocks. Such methods are intended to significantly shorten the
time and reduce the costs traditionally associated with the drug discovery
process.

Initial combinatorial chemistry methods were based primarily on the use of
oligomeric chemistry in which a single chemical reaction was used to combine
structurally different building blocks in a polymeric fashion. However,
compounds in libraries compiled using oligomeric chemistry methods, typically
oligonucleotides and peptides, are generally not ideal drug candidates because
they are not usually bioavailable and are metabolized quickly.

A significant advance in combinatorial chemistry was the shift to the
synthesis of drug-like, small molecule compounds that would be orally
bioavailable and metabolized at an acceptable rate. However, these

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compounds were typically generated in large mixtures. The use of mixtures makes
it possible to synthesize many compounds simultaneously and to screen them as
mixtures. The large number of compounds present in mixtures, however, requires
elaborate tagging and deconvolution methods to identify the specific compounds
with activity. These methods are generally expensive and time consuming.
Moreover, biological testing of mixtures often generates false positive results,
which can lead to inefficient and unproductive research.

The Company believes that existing combinatorial chemistry technologies
lack robust methods for converting active compounds identified through the
screening of libraries into lead compounds and drug candidates. Screening of
combinatorial libraries usually results in the identification of one or more
active compounds, or "hits." These hits may represent false leads or may be
weakly active predecessors of highly active and desirable drug candidates. Thus,
library screening and hit identification represent only the first in a series of
steps required for successful drug discovery. Combinatorial chemistry must be
integrated with medicinal chemistry and pharmacology to perform not only initial
improvement of activity of identified hits, but also full optimization of other
pharmacological characteristics, such as selectivity, metabolic stability,
bioavailability and safety.

The Company believes that the successful application of combinatorial
chemistry will require an integrated comprehensive approach to drug discovery
that will:

- Produce distinct individual compounds in sufficient numbers to generate
active hits against specific biological targets while avoiding the
limitations associated with the testing of mixtures;

- Generate diverse libraries containing only drug-like small molecules with
a relatively greater likelihood of being developed into drug candidates;
and

- Efficiently develop hits identified through the screening of compound
libraries into lead compounds and drug candidates by integrating
medicinal chemistry and pharmacology.

ALANEX'S DRUG DISCOVERY TECHNOLOGY

OVERVIEW

Alanex's drug discovery process is built around its PDPS technology that
has been designed to produce large numbers of diverse individual small molecule
compounds. PDPS is instrumental not only in the initial identification of active
lead compounds, but also in the efficient optimization of these leads into a
drug candidate. This is achieved by integrating combinatorial, computational and
medicinal chemistries with high throughput screening and
pharmacology -- disciplines that the Company believes are critical for achieving
success in drug discovery.

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MAIN COMPONENTS OF THE ALANEX
INTEGRATED DRUG DISCOVERY PROCESS

[Diagram illustrating the components of Alanex's drug discovery process. The
stylized arrow reflects the direction of the process from lead discovery to lead
optimization into a drug candidate. Chemical contribution to the drug discovery
process is represented by Alanex's PDPS technology for which Library Design,
Combinatorial Chemistry and Medicinal Chemistry components are shown with the
types of libraries they produce. Biological testing is represented by two
components: High Throughput Screening and In-Depth Pharmacology.]

[DIAGRAM]
PDPS

LIBRARY DESIGN
Virtual Library
>140,000,000
chemical structures

COMBINATORIAL MEDICINAL
CHEMISTRY CHEMISTRY
EXPLORATORY LIBRARY TARGETED LIBRARIES ANALOG LIBRARIES
>150,000 cpds Evaluation of hits Optimization
Screening for Selection of lead of lead
initial hits compounds compounds

[arrow pointing to right]
LEAD DISCOVERY LEAD OPTIMIZATION DRUG
CANDIDATE

HIGH
THROUGHPUT IN-DEPTH
SCREENING PHARMACOLOGY

BIOLOGICAL TESTING

Drug discovery at Alanex relies on the generation and screening of
combinatorial libraries. The successful discovery of drug candidates requires
that libraries be intelligently designed to provide a desired range of molecular
diversity and to incorporate available structural information about the selected
biological target. Alanex's proprietary library design software, LiBrain, is
used to create a large "virtual" library from which compounds to be synthesized
are selected, thereby facilitating the design of diverse exploratory, targeted
or analog combinatorial libraries. If no information is available regarding the
requirements for drug activity for a selected target, the initial search for a
hit is performed by screening Alanex's exploratory library, which consists of a
large number of molecules that have been selected to maximize diversity. When
information is available regarding the requirements for drug activity, targeted
or focused libraries are synthesized and screened. In a step-by-step fashion,
increasingly focused libraries are synthesized and screened to yield a drug
candidate with desirable activity. Alanex's PDPS technology produces
combinatorial libraries through high-speed, parallel synthesis of arrays of low
molecular weight individual compounds in a standard 96-well format used in high
throughput screening. Synthesized compounds can be purified using Alanex's
proprietary parallel chromatography technology.

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COMBINATORIAL LIBRARIES

Virtual Library. Alanex has created and is continuing to expand its virtual
library -- a collection of chemical structures that result from the combination
of available reagents with the chemical reactions for library synthesis.
Although the Company's proprietary software can access tens of billions of
molecular structures, the virtual library includes only those structures that
are drug-like and can be synthesized at Alanex within one or two days.
Currently, the Company's virtual library contains over 140 million such
structures, and its size increases as more reactions and more available building
blocks are added. This resource provides Alanex the ability to rapidly create
exploratory, targeted and analog libraries to use in the drug discovery process.

Exploratory Library. Alanex's exploratory library contains a diverse set of
molecules. Compounds in the Company's exploratory library are screened when no
information is available about the structure of the target or about small
molecules that are capable of binding to the target. As of July 1996, Alanex's
exploratory library contained over 150,000 synthesized compounds. The library
continues to grow at an average rate of approximately 10,000 individual
compounds per month.

Targeted Pharmacophore-Directed Libraries. Alanex's targeted libraries are
designed to incorporate all available information about the structural
requirements of a target. Alanex utilizes its targeted libraries either to
perform combinatorial optimization directed at identified hits or to discover
novel leads that are structurally different from known molecules but display
similar pharmacophoric features. A typical Alanex targeted library contains
between several hundred and several thousand compounds.

Analog Libraries. Once an active compound has been identified, related
structural analogs are synthesized to determine which parts of the molecule are
critical for biological activity and which parts can be replaced or modified to
optimize other pharmacological characteristics, such as oral bioavailability.
This task, traditionally performed by medicinal chemists one analog at a time,
is accomplished at Alanex using PDPS to rapidly design and synthesize analog
libraries typically containing between several dozen and several hundred
analogs.

IDENTIFICATION OF LEAD COMPOUNDS

To screen the large numbers of compounds generated through the application
of Alanex's PDPS technology, the Company has established high throughput
screening facilities currently capable of testing thousands of compounds per
day. All screening operations are performed in a standard 96-well format using
commercially available robotic workstations, which allow systematic expansion of
capacity as needed. A dedicated group of pharmacologists develops and supports
new high throughput screening assays. When hits are identified using new high
throughput screening assays, they are subjected to a series of secondary
pharmacological assays to determine their functional activity and selectivity.
Confirmed hits displaying promising pharmacological profiles become chemical
leads.

OPTIMIZATION OF LEAD COMPOUNDS INTO DRUG CANDIDATES

Lead compounds usually require significant structural modification to
optimize their activity, selectivity and bioavailability, or to improve
metabolic stability and minimize toxicity. Lead optimization is an iterative
process in which structural and biological information obtained from each series
of active molecules is used to design and synthesize new compounds with improved
pharmacological characteristics. Alanex has incorporated its medicinal chemistry
expertise into PDPS to significantly accelerate the optimization of lead
compounds into viable drug candidates. New targeted and analog libraries focused
on essential structural and pharmacological features of current leads are
rapidly designed and synthesized. Compounds in these libraries are purified
using Alanex's parallel chromatography technology to obtain reliable data about
structure-activity relationships. In parallel with PDPS, Alanex medicinal
chemists often utilize additional chemistries when such an approach is required
for the efficient modification of the current lead compounds.

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KEY BENEFITS OF ALANEX'S DRUG DISCOVERY APPROACH

VIRTUAL LIBRARY

Alanex's virtual library is comprised of more than 140 million chemical
structures, any one of which can be synthesized and screened by the Company in
one or two days. Access to such a large number of structures allows Alanex to
choose optimal sets of molecules for actual synthesis of both its diverse
exploratory library and targeted libraries.

LIBRARY DESIGN AND INFORMATION MANAGEMENT SOFTWARE

A central feature of Alanex's technology is the Company's proprietary
software, LiBrain, that is integrated into all stages of the drug discovery
process. This software is used to build and access chemical structures from
Alanex's virtual library, to evaluate and choose compounds for the synthesis of
exploratory, targeted and analog libraries, and to track and manage all chemical
and biological data associated with the testing of libraries and discovery of a
drug candidate.

DIVERSITY OF LIBRARY COMPOUNDS

Alanex's exploratory library is composed of multiple sub-libraries (1,000
to 10,000 compounds each) based on a variety of different chemical "templates,"
the fundamental core of the molecules. To create these sub-libraries, Alanex has
adapted over 45 chemical reactions and is continually expanding its list of
chemical reactions. The exploratory library achieves a high level of diversity
because the diversity within each sub-library is compounded by the large number
of templates. The Company believes that this approach to combinatorial
chemistry, as opposed to utilizing larger libraries with fewer templates,
enhances the likelihood of discovery of active compounds.

SYNTHESIS OF DRUG-LIKE STRUCTURES

Alanex designs and synthesizes libraries focused on structures that are
expected to have drug-like characteristics, such as compact heterocylic
structures, low molecular weights and other desirable pharmacological
properties. Compounds with these structures are preferred as drug candidates
because they are more likely to be orally active and typically have longer
duration of action.

SYNTHESIS OF INDIVIDUAL COMPOUNDS

Alanex's combinatorial synthesis technology produces large numbers of
distinct individual compounds and avoids the disadvantages associated with the
testing of mixtures. Individual compounds can be synthesized in larger
quantities than is typical with mixtures, allow for the performance of quality
control and can be used in a wide range of assays. Alanex's library production
is largely automated, and individual compounds are synthesized at an average
rate in excess of 10,000 per month.

ABILITY TO CONVERT LEAD COMPOUNDS INTO DRUG CANDIDATES

Alanex's PDPS' technology integrates combinatorial, computational and
medicinal chemistries with pharmacology and high throughput screening to expand
the scope of combinatorial chemistry by providing efficient tools for the
conversion of lead compounds into drug candidates. Optimization of important
pharmacological characteristics of the lead compounds requires modification of
its chemical structure. Alanex's access to over 45 chemical reactions and its
ability to add new reactions allows it to modify lead compounds in a wide
variety of ways, thus significantly facilitating the process of combinatorial
optimization.

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<PAGE> 28

In addition, Alanex's in-house medicinal chemistry expertise provides access to
chemical structures unavailable through combinatorial chemistry.

ALANEX'S DRUG DISCOVERY PROGRAMS

Alanex is currently advancing seven drug discovery programs in conjunction
with corporate collaborators or independently. In selecting programs, the
Company considers (i) the existence of a characterized molecular target, (ii)
the existence or adequacy of available remedies, (iii) the potential market size
for any product and (iv) a collaborator's area of interest. The table below
identifies current Alanex drug discovery programs and their molecular targets,
indications, program status and commercial rights.

<TABLE>
<CAPTION>
PROGRAM (MOLECULAR TARGET) INDICATION STATUS OF PROGRAM(1) COMMERCIAL RIGHTS
- ---------------------------- ---------------------------- -------------------- -----------------
<S> <C> <C> <C>
Opiate Agonist Pain Preclinical Studies Astra Pharma
Agonist for Undisclosed Diabetes Lead Development Novo Nordisk
Target
Antagonist for Undisclosed Diabetes Preclinical Studies Novo Nordisk
Target
Neuropeptide Y Antagonist Obesity and cardiovascular Lead Development Alanex
disease
CRF Antagonist Depression and anxiety Lead Development Alanex
GnRH Antagonist Endometriosis and sex Lead Discovery Alanex
hormone-dependent tumors
Antagonist for Undisclosed Pain Lead Discovery Roche Bioscience
Target
</TABLE>

- ---------------
(1) "Preclinical Studies" indicates that Alanex is conducting pharmacology and
toxicology testing of chemical leads in animal models and in vitro
(biochemical or cell culture assays). "Lead Development" indicates that
Alanex has identified a compound that meets preselected in vitro criteria
for potency and specificity. "Lead Discovery" includes the development of
assay systems, screening of chemical libraries and discovery of lead
compounds.

ASTRA PHARMA PAIN PROGRAM

The drugs used for the treatment of severe or chronic pain are generally of
limited effectiveness or associated with problems of tolerance, addiction and
gastrointestinal side effects. As a result, there is a substantial need for
effective pain relieving agents with a more favorable side effect profile. The
recent molecular cloning of multiple opiate receptor subtypes affords the
opportunity to discover new classes of analgesics.

On behalf of Astra Pharma, Alanex applied its PDPS technology and
discovered a new class of analgesic compounds that interact with a novel opiate
receptor target. From initiation of the program to production of preclinical
compounds required only 14 months. There can be no assurance that the Company
will be able to develop compounds in other programs as rapidly. These compounds
have been shown to be orally active in preclinical studies and are currently
being considered by Astra Pharma as possible clinical candidates. See
"Collaboration Agreements and Licenses."

NOVO NORDISK DIABETES PROGRAMS

Diabetes is a common and frequently devastating disease that can lead to
the development of debilitating and life threatening cardiovascular disease,
blindness, kidney failure and neurologic disorders. Diabetes affects seven
million to eight million individuals in the United States. Control of blood
glucose levels using insulin and oral hypoglycemic agents are the most common
forms of treatment for diabetes. However, these treatments are frequently
inadequate because they neither provide sufficient control of blood glucose
levels nor prevent the development of the serious complications associated with
the disease. Discovery of drugs that

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augment the synthesis, release and action of insulin could improve the
regulation of blood glucose levels and potentially reduce the severity of the
complications of diabetes.

Two molecular targets have been selected by Alanex and Novo Nordisk as the
basis for discovery of new drugs to treat diabetes. Addressing these two
targets, one with an agonist and one with an antagonist, may offer the
opportunity to introduce drugs with new mechanisms of action to treat diabetes
and its complications. Alanex has discovered and is optimizing lead compounds
for the agonist molecular target and is currently conducting preclinical studies
on compounds for the antagonist molecular target. See "Collaboration Agreements
and Licenses."

NEUROPEPTIDE Y (NPY) ANTAGONIST PROGRAM

Neuropeptide Y (NPY) is a 36-amino acid peptide that is involved in the
regulation of the cardiovascular, immune and gastrointestinal systems. NPY is
also present within nerves of the brain that regulate appetite and mood. Several
different NPY receptors have been identified, providing the opportunity to
discover NPY antagonists that are selective for modulating one among several
possible actions of NPY. Alanex has discovered detailed information on the
molecular requirements for NPY's binding to its receptors and is using this
information to discover NPY receptor antagonists for the treatment of obesity
and cardiovascular disease.

Obesity. Current estimates indicate that over 20% of the United States
population is obese. Obesity is a major risk factor responsible for the
development of hypertension, diabetes, degenerative joint disease, abnormal
wound healing and other major medical problems. Recent reports indicate that
direct and indirect costs associated with obesity were greater than $68 billion
in 1990.

NPY is a powerful known appetite stimulant and has been demonstrated to be
present in abnormally high amounts in the brains of obese animals. Based on
these observations, Alanex believes that a suitable antagonist could block the
effects of NPY, resulting in decreased appetite and normalization of body
weight. In addition, NPY antagonists that control obesity may also serve as
adjunctive therapy in the treatment of obesity-related diseases, such as
diabetes, hypertension and degenerative joint disease. Alanex has discovered a
lead compound that blocks NPY-induced feeding in preclinical models. This
compound is currently being evaluated for its effects on feeding and obesity in
preclinical models.

Cardiovascular Disease. Cardiovascular disease, including hypertension,
ischemic organ disease (such as myocardial infarction and stroke), heart failure
and reperfusion injury, is the leading cause of human morbidity and mortality in
the United States. There are currently over 900,000 deaths per year (43% of
deaths from all causes) in the United States that are attributable to
cardiovascular disease.

In humans, excessive release of NPY may elevate blood pressure, decrease
blood flow to heart muscle and impair heart function. In addition, NPY may play
a role in the development of reperfusion abnormalities that are observed
following angioplasty and stroke. The Company believes that NPY antagonists
could be useful in the treatment of some forms of cardiovascular disease. Alanex
has discovered a lead compound that is active and is being evaluated in
preclinical models for its effects on cardiovascular function.

CORTICOTROPIN RELEASING FACTOR (CRF) ANTAGONIST PROGRAM

Corticotropin releasing factor (CRF) is a 41-amino acid peptide that is
synthesized in the brain and is released following stress. CRF is the primary
regulator of the pituitary gland, the autonomic (involuntary) nervous system and
the behavioral responses that are produced by stress. CRF acts on the pituitary
gland to release adrenocorticotropic hormone, which in turn stimulates steroid
hormone release from the adrenal gland. Within the brain, CRF affects hormones
that control growth and reproduction and activates the autonomic nervous system
to modify cardiovascular, metabolic, gastrointestinal and immune functions.
Under appropriate circumstances, these CRF-induced responses to stress are
important to restore or maintain homeostasis. However, repeated exposure to
stress may produce depression and anxiety, as well as a number of other
disorders that result from the actions of CRF. Two different CRF receptor
subtypes are known to mediate the actions of CRF.

Depression and anxiety represent major health problems throughout the
world. The lifetime prevalence in the United States for any one person of
clinical depression is 10% and of generalized anxiety is 15%. Studies

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performed on preclinical models and human subjects indicate a potential role of
CRF in mediating depression and anxiety. Development of a potent, orally
available drug that blocks the actions of CRF could be useful in the treatment
of these indications.

Alanex is using its drug discovery technologies to develop an antagonist of
CRF that can be used to treat depression and anxiety. Alanex has discovered lead
compounds that are highly active on specific CRF receptor subtypes, and these
compounds are currently being optimized and evaluated in preclinical models for
their effects on depression and anxiety.

GNRH ANTAGONIST PROGRAM

Gonadotropin releasing hormone (GnRH) is a decapeptide that is synthesized
in the brain and controls the pituitary and gonadal hormones that regulate
fertility. In women, this peptide is required for successful ovulation and, in
men, it is necessary for spermatogenesis. Alanex is engaged in a program to
discover orally active small molecule drugs to treat two areas of human disease
that depend on GnRH action -- endometriosis and sex-hormone dependent tumors.
The GnRH project, initiated in July 1996, utilizes a human pituitary GnRH
receptor licensed from Mount Sinai School of Medicine of the City University of
New York ("Mount Sinai"). This project is in the lead discovery phase.

Endometriosis. Endometriosis is an abnormal proliferation of uterine tissue
and is dependent, in part, on the production of sex hormones. Endometriosis
affects 7% of women of reproductive age in the United States and is the major
cause of female infertility. Because GnRH controls sex hormone production,
peptide antagonists of GnRH have been used to successfully treat endometriosis.
However, this treatment involves the use of peptide analogs of GnRH that, due to
the chemical makeup of the drug, may be painful to patients. Orally active
antagonists of GnRH should be less costly, involve less patient pain and
increased patient compliance.

Sex-hormone Dependent Tumors. The growth of certain tumors, such as breast
cancer, is dependent on sex hormones. The Company believes that antagonists of
GnRH may be useful in the treatment of breast cancer in women and prostate
cancer in men. Prostate cancer is the most common form of cancer in men and is
currently diagnosed at a rate of approximately 100,000 new cases per year.
Presently there are an estimated 8.5 million men with prostate cancer in the
United States. Breast cancer is the most common form of cancer in women and has
a 12% cumulative lifetime probability of developing in any particular woman.

ROCHE BIOSCIENCE PAIN PROGRAM

In June 1996, the Company entered into a collaboration with Roche
Bioscience to discover an antagonist for an undisclosed target for the treatment
of pain. This project is in the lead discovery phase. The Company will perform
all aspects of this drug discovery project, including high throughput screening
of its exploratory library and lead optimization to provide Roche Bioscience
with one or more drug candidates. See "-- Collaboration Agreements and
Licenses."

The Company's potential products will require significant additional
preclinical and clinical development, regulatory approval and additional
investment prior to commercialization, either by the Company independently or by
others through collaborative arrangements. There can be no assurance that any
potential products will be successfully developed, prove to be safe and
efficacious in clinical trials, meet applicable regulatory standards, be capable
of being produced in commercial quantities at acceptable costs or achieve
commercial acceptance. See "Risk Factors -- Early Stage of Product Development;
Lack of Commercial Products; No Assurance of Successful Product Development."

STRATEGY

Alanex's objective is to use its integrated combinatorial chemistry drug
discovery technology to rapidly identify lead compounds and to efficiently
optimize these leads into drug development candidates that will address disease
conditions for which existing therapies are inadequate or unavailable. Key
elements of the Company's strategy to achieve this objective include the
following:

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CAPITALIZE ON STRATEGIC COLLABORATIONS WITH PHARMACEUTICAL COMPANIES

Alanex has established and will continue to seek collaborations with major
pharmaceutical companies. Under such collaborations, the Company's intent is to
license to its collaborators the commercial rights to compounds discovered by
the Company in exchange for upfront project initiation fees, research funding,
milestone payments and royalties on drug sales, where appropriate. This approach
is intended to capitalize on the emerging trend in the pharmaceutical industry
to outsource certain components of drug discovery that can be more efficiently
provided by firms that have unique or focused technologies.

ENTER INTO STRATEGIC RELATIONSHIPS WITH BIOTECHNOLOGY COMPANIES

The Company believes that, while a number of biotechnology companies have
identified biological targets, many lack an adequate supply of differentiated
chemical entities for incorporation into their assay systems for the discovery
of drugs. To access these novel targets, the Company intends to establish
collaborations with biotechnology companies that have discovered novel
biological targets. Under these collaborations, Alanex intends to screen its
exploratory library against the collaborator's proprietary targets. Unlike its
collaborations with pharmaceutical companies, the Company anticipates that it
would fund a share of the development costs in return for increased commercial
rights with respect to such products.

DEVELOP AND ADVANCE INTERNAL DRUG DISCOVERY PROGRAMS

Alanex will continue to develop in-house programs for the discovery of new
drugs. Alanex anticipates that it may, where appropriate, advance certain lead
compounds through the early phases of clinical development in order to retain a
larger economic interest in such products. During the course of development, the
Company may enter into a collaboration to continue clinical development or may
license a product, if approved, for manufacturing or marketing. Alanex will
develop the programs internally or, where appropriate, the Company will seek to
license proprietary biological targets from biotechnology companies, academic
and nonprofit research institutions to be the foundation of the Company's
in-house drug discovery programs. In the long term, Alanex may choose to
develop, manufacture and market its products independently.

COLLABORATION AGREEMENTS AND LICENSES

The Company has collaborative agreements with Astra Pharma, Novo Nordisk
and Roche Bioscience, as well as a licensing agreement with Mount Sinai. The
amount and timing of resources that the collaborators devote to the
collaborations are not within the control of the Company. There can be no
assurance that such collaborators will perform their obligations as expected or
that the Company will derive any additional revenue from such collaborations.
See "Risk Factors -- Dependence on Collaborators."

ASTRA PHARMA

In December 1994, the Company and Astra AB entered into a three-year
collaboration agreement for the identification and optimization of lead
compounds that interact with a specific opiate receptor which may have
application in the treatment of pain. The agreement was subsequently assigned to
Astra Pharma, an affiliate of Astra AB. The Company was paid a project
initiation fee of $250,000 and Astra Pharma is obligated to make additional
payments upon the achievement of certain milestones. In addition, Astra Pharma
is obligated to provide up to $2.25 million of additional funding to support
research undertaken in connection with the agreement. To date, Alanex has
received $1.3 million under the collaboration agreement. Under the terms of the
collaboration, Astra Pharma owns all rights in and has title to any and all
compounds discovered and products developed as a result of the research
collaboration. The Company has no right to commercialize and is not entitled to
receive royalties on the sales of any products resulting from the collaboration
agreement. Astra Pharma may terminate the collaboration agreement at any time
upon three months' written notice. In the event of early termination of the
collaboration agreement, Astra Pharma will have exclusive title to all compounds
and associated intellectual property rights discovered as a result of the
collaboration.

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NOVO NORDISK

In October 1995, the Company and Novo Nordisk entered into a three-year
collaboration agreement for the characterization of novel, non-peptide ligands
with desired receptor ligand binding affinities to be used to develop small
molecule drugs for the treatment of diabetes. Novo Nordisk paid the Company a
project initiation fee of $250,000 and is obligated to make additional payments
to the Company upon the achievement of certain milestones. In addition, Novo
Nordisk is obligated to provide up to $4.5 million in additional funding to
support research at the Company in the field of the collaboration. To date,
Alanex has received $1.3 million under the collaboration agreement. The
agreement provides that, in the event the collaboration results in a drug
candidate which Novo Nordisk elects to pursue to commercialization, Novo Nordisk
will be granted an exclusive worldwide license to develop and commercialize such
drug candidate. The Agreement provides for the Company to receive royalties on
the sales of any such drug. Novo Nordisk may, at any time, terminate the
collaboration upon three months' written notice. Upon any such early
termination, any licenses granted to Novo Nordisk by Alanex under the
collaboration agreement will continue in full force and effect, unless otherwise
specifically terminated.

ROCHE BIOSCIENCE

In June 1996, the Company and Roche Bioscience entered into a three-year
collaboration agreement to discover an antagonist for an undisclosed target for
the treatment of pain. The agreement provides for Roche Bioscience to pay to the
Company a nonrefundable project initiation fee of $4.0 million, one-half of
which was paid and recognized as revenue upon execution of the collaboration
agreement and one-half of which Roche will be obligated to pay on October 31,
1996. Roche Bioscience is obligated to make additional payments upon the
achievement of certain milestones. In addition, during the term of the
agreement, Roche Bioscience will provide a minimum of $5.5 million in additional
funding to support research personnel at the Company, and the Company will work
exclusively with Roche Bioscience on the selected molecular target. To date, the
Company has received $2,575,000 under the collaboration agreement. Roche
Bioscience also has the option, until October 27, 1996, to expand the field of
research to include the funding of one or more additional molecular targets. The
agreement provides Roche Bioscience with an exclusive worldwide license to
commercialize any compounds resulting from the research that are selected by
Roche Bioscience for further development and to pay royalties to Alanex on any
sales of products developed from the collaboration. Alanex will retain all
rights to compounds not selected by Roche Bioscience for development, provided
that Roche Bioscience is not developing a structurally-related compound on which
Roche Bioscience will be paying milestones and royalties to the Company, and
Alanex may pursue such compounds following termination of 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.
If the collaboration agreement is terminated prior to its expiration, all
licenses granted by the parties to one another will terminate and revert back to
the respective parties, but Roche Bioscience will retain the right to
commercialize any products resulting from the research efforts under licenses
granted by the Company prior to the termination.

MOUNT SINAI

In June 1996, the Company and Mount Sinai entered into an agreement to
conduct research relating to the human GnRH receptor. Under the agreement, the
Company funded the initial phase of the research and is obligated to provide
additional funding upon the achievement of certain milestones. In connection
with the research agreement, Mount Sinai granted to the Company (i) a
non-exclusive worldwide license to develop and commercialize any products based
upon certain inventions and technologies owned by Mount Sinai relating to the
human GnRH receptor and (ii) an exclusive worldwide license to develop and
commercialize any products based upon know-how or patents or patent applications
covering inventions made during the course of the research. Pursuant to the
terms of the licenses, the Company is obligated to pay Mount Sinai a percentage
of any milestone payments received by the Company from third-party sublicenses
and royalties on sales of products. The Company may terminate the licenses upon
60 days' written notice; however, in the event of such termination, all rights
granted under the licenses will revert to Mount Sinai.

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COMPETITION

The pharmaceutical and biotechnology industries are subject to intense
competition and rapid and significant technological change. Many organizations
are actively attempting to identify and optimize compounds for potential
pharmaceutical development. The Company competes directly with the research
departments of pharmaceutical companies, biotechnology companies, other
combinatorial chemistry companies and research and academic institutions. Many
of these competitors have greater financial and other resources, and more
experience in research and development, than the Company. Historically,
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 the greatest potential
market for the Company's services and compounds, are developing combinatorial
chemistry and other methodologies to improve productivity. 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 competes with several alternative technologies in the design
and synthesis of new chemical libraries for drug discovery programs. Alanex
competes directly with several public companies, including Arris
Pharmaceuticals, Inc., Houghten Pharmaceuticals, Inc. and Pharmacopeia, Inc., as
well as several private companies. Competition is based on the speed and
efficiency of lead compound identification, the efficiency of lead compound
optimization, product efficacy and safety and the relative speed with which the
Company or its collaborators, as appropriate, can complete the preclinical and
clinical testing and approval processes and supply commercial quantities of any
product to the market.

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.

PATENTS AND PROPRIETARY INFORMATION

To date, the Company has filed six U.S. patent applications, five of which
were filed in the third quarter of 1996. Two of the applications include
composition of matter claims relating to compounds in the Company's NPY and CRF
programs. The other applications relate to various aspects of the Company's
technology, including its parallel synthesis technology and related methods and
devices. There can be no assurance, however, that patents will be issued to the
Company as a result of its pending applications or that, if issued, such patents
will be sufficiently broad to afford protection against competitors with similar
technology. The Company's success will depend in large part on its ability, and
the ability of its licensees and its licensors, to obtain patents for its
technologies and the compounds and other products, if any, resulting from the
application of such technology, to defend patents once obtained, to maintain
trade secrets and to 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 often uncertain and involve complex legal and factual
questions which are largely unresolved. However, disputes may arise between the
Company and other patent holders as to claims of infringement, which could
involve protracted periods of litigation. Many of the Company's competitors
have, or are affiliated with companies having, substantially greater resources
than the Company, and such competitors may be able to sustain the costs of
complex patent litigation to a greater degree and for longer periods of time
than the Company. Uncertainties resulting from the initiation and continuation
of any patent or related litigation could have a material adverse effect on the
Company's ability to compete in the marketplace pending resolution of the
disputed matters. In the event that third parties have or obtain rights to
intellectual property or technology

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used or needed by the Company, there can be no assurance that any licenses would
be available to the Company on acceptable terms, if at all.

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 technology. 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. Litigation, which could result in substantial cost to the Company, may
be necessary to enforce the Company's patent and license rights or to determine
the scope and validity of others' proprietary rights. Further, U.S. patents do
not provide any remedies for infringement that occurred before the patent is
granted. Because patent rights are territorial, the Company may not have an
effective remedy against use of its technology in any country in which it does
not, at that time, have an issued patent.

Because of the length of time and expense associated with bringing new
products through development and the length of time required for the
governmental approval process, the pharmaceutical industry has traditionally
placed considerable importance on obtaining and maintaining patent and trade
secret protection for significant new technologies, products and processes. The
Company and other biotechnology and pharmaceutical firms have applied, and are
applying, for patents for their products and certain aspects of their
technologies. The enforceability of patents issued to biotechnology and
pharmaceutical firms can be highly uncertain. Federal court decisions
establishing legal standards for determining the validity and scope of patents
in the field are in transition. For example, in a currently pending case, the
U.S. Supreme Court will consider whether to alter or replace the traditional
standard for determining patent infringement under the doctrine of equivalents.
There can be no assurance that the historical legal standards surrounding
questions of validity and scope will continue to be applied or that current
defenses as to issued patents in the field will offer protection in the future.
In addition, there can be no assurance as to the degree and range of protection
any patents will afford, whether patents will issue or the extent to which the
Company will be successful in not infringing patents granted to others.

The commercial success of the Company will also depend upon avoiding the
infringement of 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 prepare
and file patent applications in the United States that claim technology also
claimed by the Company, the Company 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. The Company is
aware of a U.S. patent issued to a third party that broadly claims the
automation of iterative parallel synthesis technology. Although the Company
believes that its current activities do not infringe this patent, there can be
no assurance that the Company's belief would be affirmed in any litigation over
the patent or that the Company's future technological developments would be
outside the scope of this patent. A U.S. 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. Further, U.S. patents do not
provide any remedies for infringement that occurred before the patent is
granted.

The Company currently has certain licenses from a third party and in the
future may require additional licenses from other parties to develop,
manufacture and market commercially viable products effectively. There can be no
assurance that any future licenses will be obtainable on commercially reasonable
terms, if at all, that the patents underlying such licenses will be valid and
enforceable or that the proprietary nature of the patented technology underlying
such licenses will remain proprietary.

The Company relies substantially on certain technologies which are not
patentable and are therefore potentially available to the Company's competitors.
The Company also relies on certain proprietary trade secrets and know-how, which
are not patentable. Although the Company has taken steps to protect its
unpatented technologies, trade secrets and know-how, in part through the use of
confidentiality agreements

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with its employees, consultants and certain of its contractors, there can be no
assurance that these agreements will not be breached, that the Company would
have adequate remedies for any breach, or that the Company's trade secrets will
not otherwise become known or be independently developed or discovered by
competitors.

GOVERNMENT REGULATION

Regulation by governmental authorities in the United States and foreign
countries is a significant factor in the manufacture and marketing of any
products that may be developed by the Company or a collaborator. The Company's
products will require regulatory approval by governmental agencies prior to
commercialization. In particular, human therapeutic products are subject to
rigorous preclinical and clinical testing and other approval requirements by the
FDA and comparable agencies in foreign countries. The time required for
completing such testing and obtaining such approvals is uncertain, although
satisfaction of these requirements typically takes a number of years and varies
substantially based on the type, complexity and novelty of the pharmaceutical
product. In addition, delays or rejections may be encountered based on changes
in FDA or foreign regulatory policy during the period of product development and
testing. Various federal statutes and regulations also regulate the
manufacturing, safety, labeling, storage, recordkeeping and marketing of such
products. The lengthy process of obtaining regulatory approvals and ensuring
compliance with appropriate federal statutes and regulations requires the
expenditure of substantial resources. Any delay or failure by the Company or its
collaborators or licensees to obtain regulatory approval could adversely affect
the commercialization of such products, the Company's ability to receive product
or royalty revenue and its liquidity and capital resources.

Preclinical studies are generally conducted in the laboratory to evaluate
the potential efficacy and the safety of a therapeutic product. The results of
these studies are submitted to the FDA as part of an Investigational New Drug
application, which must be reviewed by the FDA before human clinical testing can
begin. Once the FDA is satisfied with the submission, the clinical trial process
can commence. Typically, clinical evaluation involves three sequential phases,
which may overlap. During Phase I, clinical trials are conducted with a
relatively small number of subjects to determine the early safety profile of a
drug, as well as the pattern of drug distribution and drug metabolism by the
subject. In Phase II, trials are conducted with groups of patients afflicted by
a specific target disease to determine preliminary efficacy, dosage tolerance
and optimal dosage, and to gather additional safety data. In Phase III,
large-scale, multicenter comparative trials are conducted with patients
afflicted with a specific target disease to provide data for the statistical
proof of efficacy and safety as required by the FDA and others. The FDA, the
clinical trial sponsor or the investigator may suspend clinical trials at any
time if it believes that clinical subjects are being exposed to an unacceptable
health risk.

The results of preclinical and clinical testing are submitted to the FDA in
the form of a New Drug Application ("NDA"). In responding to an NDA, the FDA may
grant marketing approval, request additional information or deny the application
if the FDA determines that the application does not satisfy its regulatory
approval criteria. Furthermore, FDA or governmental approval of any products
developed by the Company, independently or with its collaborators, may entail
limitations on the indicated uses for which such products may be marketed. There
can be no assurance that approvals will be granted on a timely basis, if at all
or, if granted, whether such approvals will be sufficiently broad with respect
to the indicated uses for the product to be of significance to the Company. The
failure to obtain timely permission for clinical testing or timely approval for
product marketing would materially affect the Company. Product approvals may
subsequently be withdrawn if compliance with regulatory standards is not
maintained or if problems occur after the product reaches the market. The FDA
may require testing and surveillance programs to monitor the effect of a new
product and may prevent or limit future marketing of the product based on the
results of these postmarketing programs.

The Company is subject to various federal, state and local laws,
regulations and recommendations relating to safe working conditions, laboratory
and manufacturing practices, the experimental use of animals and the use and
disposal of hazardous or potentially hazardous substances, including radioactive
compounds and infectious disease agents, used in connection with the Company's
work. The extent and character of

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governmental regulation that might result from future legislation or
administrative action cannot be accurately predicted.

FACILITIES

The Company currently leases approximately 17,000 square feet of laboratory
and office space in San Diego, California under a seven-year operating lease
which expires in May 2002. The Company has an option to lease an additional
3,000 square feet of administrative space in its current facility. The Company
is exploring alternatives to expand its current facilities to meet its planned
expansion and believes that such facilities will be available on commercially
reasonable terms.

EMPLOYEES

As of September 1, 1996, the Company had 48 full-time employees. Of the 48
full-time employees, 39 were employed in research. Twenty-two of the Company's
employees have Ph.D.s and one has an M.D. None of the Company's employees are
covered by collective bargaining agreements and management considers
relationships with employees to be good.

LEGAL PROCEEDINGS

The Company is not a party to any material legal proceedings.

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MANAGEMENT

EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES

The executive officers, directors and certain key employees of the Company,
their ages as of September 1, 1996 and positions held are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------- --- ---------------------------------------
<S> <C> <C>
Marvin R. Brown, M.D. 49 President, Chief Executive Officer and
Chairman of the Board
Alexander Polinsky, Ph.D. 40 Vice President of Chemistry, Chief
Scientific Officer and Director
Michelle A. Youngers 39 Director of Finance and Secretary
Edgardo Baracchini, Ph.D. 36 Director of Business Development and
Strategic Planning
Dale S. Dhanoa, Ph.D. 42 Director of New Lead Discovery
Vlad Gregor, Ph.D. 42 Director of Medicinal Chemistry
Atsuo Kuki, Ph.D. 38 Director of Computational Chemistry
John May, Ph.D. 38 Director of Pharmacology
Arnold T. Hagler, 54 Director
Ph.D.(1)(2)
Jon R. Jessen(1)(2) 62 Director
Timothy J. Rink, M.D. 50 Director
</TABLE>

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

(1) Member of the Compensation Committee

(2) Member of the Audit Committee

Marvin R. Brown, M.D., co-founded the Partnership in May 1991 and has
served as President, Chief Executive Officer and director of the Company since
November 1993. Prior to joining the Company, Dr. Brown was on the faculty of the
Salk Institute for Biological Studies (the "Salk Institute") from 1975 to 1986.
In addition, Dr. Brown was a Professor of Medicine and Surgery and Director of
the Peptide Biology Laboratory at the University of California, San Diego
("UCSD") from 1986 through 1991. Dr. Brown received his M.D. from the University
of Arizona, followed by postgraduate medical training at UCSD and post-doctoral
training at the Salk Institute.

Alexander Polinsky, Ph.D., co-founded the Partnership in May 1991 and has
been a director of the Company since November 1993. Dr. Polinsky served as
Secretary of the Company from November 1993 to July 1996. In addition, from
November 1993 to November 1994, Dr. Polinsky served as Chief Financial Officer
of the Company. From 1989 through 1991, Dr. Polinsky was a Visiting Research
Scientist at UCSD. Dr. Polinsky received his Ph.D. in physical chemistry of
polymers from Moscow University in Russia and served on the faculty of the
chemistry department of Moscow University.

Michelle A. Youngers joined the Company as Director of Finance in June
1996. In July 1996, Ms. Youngers also assumed the position of Secretary of the
Company. From 1987 through May 1996, Ms. Youngers was a principal of Youngers &
Company, a tax, accounting and financial management consulting firm. From March
1994 to May 1996, Youngers and Company provided consulting services to the
Company. Ms. Youngers received her B.B.A. in accounting from the University of
San Diego and is a Certified Public Accountant.

Edgardo Baracchini, Ph.D., joined Alanex as Director of Business
Development and Strategic Planning in January 1996. From 1992 through 1995, Dr.
Baracchini was Assistant Director of Business Development at Isis
Pharmaceuticals, Inc., a publicly held biopharmaceutical company. Dr. Baracchini
did his postdoctoral research at UCSD, and at The Scripps Research Institute.
Dr. Baracchini received a B.S. in microbiology from the University of Notre
Dame, a Ph.D. in molecular and cell biology from the University of Texas at
Dallas and an M.B.A. from the University of California, Irvine.

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<PAGE> 38

Dale S. Dhanoa, Ph.D., has served as Director of New Lead Discovery at
Alanex since September 1995. Prior to joining the Company, Dr. Dhanoa held the
position of Group Leader at Synaptic Pharmaceutical Corporation ("Synaptic"), a
publicly held biopharmaceutical company, since 1993. While at Synaptic, he
directed several discovery programs in medicinal and combinatorial chemistry.
Dr. Dhanoa joined Merck & Co. ("Merck") as a senior research chemist in 1987.
Dr. Dhanoa was a research fellow of the Angiotensin II and Endothelin drug
discovery programs at Merck. Dr. Dhanoa received a B.Sc. in chemistry from
D.A.V. College in India, a M.Sc. in organic chemistry from McMaster University
in Canada and a Ph.D. in chemistry from Wayne State University and did
postdoctoral research at the University of Montreal.

Vlad Gregor, Ph.D., joined Alanex as Director of Medicinal Chemistry in
1994. Prior to joining the Company, Dr. Gregor was employed at Parke-Davis
Pharmaceutical Research ("Parke-Davis"), a Warner-Lambert Company, since 1983
where he held positions of increasing responsibility. While at Parke-Davis, he
established and managed several drug discovery efforts in oncology and CNS. He
received his M.S. and a Ph.D. in chemistry from the University of Michigan.

Atsuo Kuki, Ph.D., has served as Director of Computational Chemistry at
Alanex since July 1995. From 1986 to 1995, Dr. Kuki was on the faculty of the
Department of Chemistry of Cornell University, where he led a team engaged in
novel peptide chemistry, molecular design, and theoretical biophysics. While at
Cornell, Dr. Kuki was awarded the Presidential Young Investigator Award
(National Science Foundation) and the Dreyfus Foundation Teacher-Scholar Award.
Dr. Kuki was awarded a National Institutes of Health postdoctoral fellowship and
pursued theoretical chemical physics and biophysics at the University of
Illinois, Urbana-Champaign from 1985 to 1986. Dr. Kuki received a B.S. in
chemistry from Yale University and a Ph.D. in physical chemistry from Stanford
University.

John M. May, Ph.D., joined Alanex as Director of Pharmacology in 1994. From
1988 to 1994, Dr. May held several positions with increasing responsibilities at
Whitby Pharmaceuticals, a privately held pharmaceutical company, most recently
as Project Team Leader for its adenosine and dopamine programs. While at Whitby
Pharmaceuticals, Dr. May contributed to the preclinical development of drug
candidates for the treatment of cardiovascular and CNS disorders. He performed
his postdoctoral research at the University of North Carolina at Chapel Hill.
Dr. May obtained a B.S. in chemistry from Millsaps College and a Ph.D. in
pharmacology from Emory University.

Arnold T. Hagler, Ph.D., has been a director of the Company since January
1994. Dr. Hagler has been the Chief Executive Officer of ScienceMedia, a
start-up interactive science education company, since 1996. Dr. Hagler is the
founder of Biosym Technologies, a molecular modeling software company, and
served as its Chief Executive Officer from its inception in 1984 through 1992
and served as a director until 1995. Dr. Hagler received his B.S. in chemical
engineering from Cornell University and received his Ph.D. in physical chemistry
from Cornell University. Dr. Hagler also served as the chairperson of Biophysics
at the Agouron Institute.

Jon R. Jessen has been a director of the Company since November 1993. Mr.
Jessen is the founder of Debar ERA, Inc., an agricultural chemical supply
company, and from March 1966 to August 1995 served as its President. Mr. Jessen
is also the founder and, since April 1975, has been the Chief Executive Officer
of the Gowan Company. Mr. Jessen received his B.S. in biology from the
University of California, Davis.

Timothy J. Rink, M.D., has been a director of the Company since September
1996. Since February 1996, Dr. Rink has been the President, Chief Executive
Officer and a director of Aurora Biosciences Corporation, a privately held
biotechnology company. From February 1990 through November 1995, Dr. Rink served
as President and Chief Technical Officer of Amylin Pharmaceuticals, Inc., a
publicly held biopharmaceutical company. Currently, Dr. Rink serves on the
Scientific Advisory Board of Amylin. Dr. Rink also serves on the board of
directors of CoCensys, Inc. and NPS Pharmaceuticals, Inc., both publicly held
biopharmaceutical companies. Dr. Rink received his M.A., M.D. and Sc.D. in
Medical Sciences from the University of Cambridge, England.

Each officer serves at the discretion of the Board of Directors. Mr.
Jessen, a director of the Company, is the uncle, by marriage, of Dr. Brown, the
President and Chief Executive Officer of the Company.

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<PAGE> 39

BOARD OF DIRECTORS

The Company currently has authorized five directors. The Company intends to
seek additional members of the Board of Directors upon the completion of this
offering. In accordance with the Company's Certificate of Incorporation to be
effective upon the completion of this offering, the Board of Directors will be
divided into three classes with staggered three-year terms. Class I will consist
of Dr. Brown, Class II will consist of Dr. Polinsky and Dr. Hagler, Class III
will consist of Mr. Jessen and Dr. Rink. At each annual meeting of stockholders
after the initial classification, the successors to directors whose term will
then expire will be elected to serve from the time of election and qualification
until the third annual meeting following election. Any additional directorships
resulting from an increase in the number of directors will be distributed among
the three classes so that, as nearly as possible, each class will consist of
one-third of the directors. This classification of the Board of Directors may
have the effect of delaying or preventing changes in control or management of
the Company.

COMMITTEES OF THE BOARD OF DIRECTORS

The Audit Committee of the Board of Directors, composed of Dr. Hagler and
Mr. Jessen, was formed in July 1996 to review the internal accounting procedures
of the Company and consult with and review the services provided by the
Company's independent auditors. The Compensation Committee of the Board of
Directors, composed of Dr. Hagler and Mr. Jessen, was also formed in July 1996
to review and recommend to the Board of Directors the compensation and benefits
of all officers of the Company and review general policy relating to
compensation and benefits of employees of the Company. The Compensation
Committee will also administer the issuance of stock options and other awards
under the Company's 1993 Stock Plan and 1996 Equity Incentive Plan.

DIRECTOR COMPENSATION

Directors currently do not receive any cash compensation from the Company
for their service as members of the Board of Directors, although they are
reimbursed for certain expenses in connection with attendance at Board of
Directors and Committee meetings.

In January 1994, the Company issued and sold to Dr. Hagler, pursuant to the
Company's 1993 Stock Plan, 140,000 shares of restricted stock, at a price of
$0.10 per share (the then fair market value per share of the Common Stock as
determined in good faith by the Company's Board of Directors). These shares
vested over the 24-month period ended January 1996. In September 1996, the
Company granted to Dr. Rink an option to purchase 60,000 shares of Common Stock
of the Company at an exercise price of $1.50 per share. Such option has a term
of ten years and vests monthly and ratably over a three-year period from the
date of grant.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Until July 1996, the Company did not have a Compensation Committee of the
Board of Directors, and the entire Board of Directors participated in all
compensation decisions. In July 1996, the Board of Directors formed the
Compensation Committee and appointed Dr. Hagler and Mr. Jessen as its members.
No member of the Compensation Committee was, at any time during the fiscal year
ended December 31, 1995 or at any other time, an officer or employee of the
Company. Three of the Company's directors have acquired shares of Common Stock.
See "Certain Transactions" and "Principal Stockholders."

SCIENTIFIC ADVISORY BOARD

The Company's Scientific Advisory Board (the "SAB") is composed of
scientists with expertise in fields related to the Company's programs. The SAB
advises the Company on specific scientific and technical issues. SAB members are
compensated on a time-and-expenses basis and have from time to time received
options to purchase shares of Common Stock. All of the SAB members are employed
by other companies or institutions and may have commitments to, or consulting or
advisory contracts with, other entities which may conflict with

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<PAGE> 40

such members' obligations to the Company. The Company does not believe the
termination of any individual consulting agreement would materially affect its
business. The members of the SAB are as follows:

Floyd E. Bloom, M.D., is Chairman of the Neuropharmacology Department at
The Scripps Research Institute. Dr. Bloom has authored numerous books and
articles in the areas of neuropharmacology and biochemistry. Dr. Bloom is a
member of the National Academy of Science and the editor of the journal Science.

Stephen Bloom, M.D., is Professor of Endocrinology and Director of the
Endocrinology Clinical Service at the Royal Postgraduate Medical School and
Hammersmith Hospital, London, England. Dr. Bloom is currently involved in
research relating to the pathophysiology of peptide control of the endocrine
system, focusing on the disease areas of obesity and diabetes.

Charles Perrin, Ph.D., is a Professor of Chemistry at UCSD. Dr. Perrin's
research interests focus on physical organic chemistry and mechanisms of organic
chemical reactions.

Stuart Sealfon, M.D., is an Associate Professor in the Department of
Neurobiology and Neurology, Mt. Sinai Medical School, New York, New York. Dr.
Sealfon was the first to clone the human GnRH and other important G-protein
coupled receptors.

Palmer Taylor, Ph.D., is Chairman of the Department of Pharmacology at
UCSD. Dr. Taylor performed pioneering work on the pharmacology and molecular
biology of acetylcholine receptors.

Claes Wahlestedt, M.D., Ph.D., is the President of The Astra Pain Research
Unit in Montreal, Canada. He was formerly an Associate Professor in the
Department of Neurology and Neuroscience at Cornell University Medical College,
New York, New York. Dr. Wahlestedt is well known for his work concerning
neuropeptide Y and its role in human disease.

EXECUTIVE COMPENSATION

The following table sets forth the compensation awarded or paid to, or
earned by, the Company's Chief Executive Officer and the one other executive
officer of the Company who earned in excess of $100,000 in salary and bonus
(collectively, the "Named Executive Officers") for services rendered to the
Company during the fiscal year ended December 31, 1995:

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
-----------------------
NAME AND PRINCIPAL POSITION SALARY($) BONUS($)
--------------------------------------------------------------- --------- --------
<S> <C> <C>
Marvin R. Brown................................................ $ 158,542(2) --
President and Chief Executive Officer
Alexander Polinsky............................................. $ 125,500(3) $7,459(4)
Vice President of Chemistry and
Chief Scientific Officer
</TABLE>

- ---------------
(1) In accordance with the rules of the Securities and Exchange Commission (the
"Commission"), the compensation described in this table does not include
medical, group life insurance or other benefits received by the Named
Executive Officers which are available generally to all salaried employees
of the Company and certain perquisites and other personal benefits received
by the Named Executive Officers which do not exceed the lesser of $50,000 or
10% of any such officer's salary and bonus disclosed in this table. There
were no long-term compensation awards granted to the Named Executive
Officers during the fiscal year ended December 31, 1995.

(2) Effective September 1, 1996, Dr. Brown's annual base salary was increased to
$230,000.

(3) Contingent and effective upon the successful completion of this offering,
Dr. Polinsky's annual base salary will increase to $190,000.

(4) Represents forgiveness of outstanding indebtedness owed by Dr. Polinsky to
the Company. See "Certain Transactions."

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<PAGE> 41

SEVERANCE AGREEMENTS

In July 1996, the Company entered into an agreement with Dr. Brown which
provides that if Dr. Brown is terminated by the Company without cause, he will
be entitled to receive a severance payment in an amount equal to twelve months
of his base salary in effect at the time of his termination. In July 1996, the
Company entered into an agreement with Dr. Polinsky which provides that if Dr.
Polinsky is terminated by the Company without cause, he will be entitled to
receive a severance payment in an amount equal to nine months of his base salary
in effect at the time of his termination.

OPTION GRANTS IN LAST FISCAL YEAR

No stock options were granted during the fiscal year ended December 31,
1995 to the Named Executive Officers. Subsequent to December 31, 1995, options
to purchase 100,000 shares and 50,000 shares, respectively, of Common Stock at
an exercise price of $0.10 per share were granted to Drs. Brown and Polinsky.

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

No options were exercised during the fiscal year ended December 31, 1995 or
held at year end by the Named Executive Officers.

STOCK OPTION AND EQUITY INCENTIVE PLANS

The Company currently maintains two stock option plans. The Company's 1993
Stock Plan (the "1993 Plan"), covering an aggregate of 1,350,000 shares of
Common Stock, was adopted by the Board in November 1993 and amended and restated
in December 1993 and, subject to stockholder approval, in July 1996. The
Company's 1996 Equity Incentive Plan (the "1996 Plan"), covering an aggregate of
500,000 shares of Common Stock, was adopted by the Board, subject to stockholder
approval, in July 1996. Unless sooner terminated by the Board, the 1993 Plan
will terminate in November 2003 and the 1996 Plan will terminate in July 2006.
The 1993 Plan and the 1996 Plan are referred to herein as the "Plans."

The Plans are administered by the Board, unless the Board delegates
authority to a committee composed of members of the Board. Subject to certain
limitations set forth in the Plans, the Board has the authority to select the
persons to whom rights under the Plans (the "Stock Awards") will be granted, to
determine whether a Stock Award will be an incentive stock option (within the
meaning of Section 422 of the Internal Revenue Code (the "Code")) (an "Incentive
Stock Option"), an option that does not qualify as an Incentive Stock Option (a
"Nonqualified Stock Option" and, together with Incentive Stock Options, the
"Options"), a stock bonus, a right to purchase restricted stock or a combination
of the foregoing, and to specify the type of consideration to be paid to the
Company upon exercise of a Stock Award. Incentive Stock Options may be granted
only to employees of the Company and, subject to certain limitations set forth
in the Plans, Stock Awards other than Incentive Stock Options may be granted to
employees and directors of and consultants to the Company.

The maximum term of Options granted under the Plans is ten years. The
exercise price of Incentive Stock Options must be equal to at least 100% of the
fair market value of the Common Stock on the date of grant. The exercise price
of Incentive Stock Options granted under the Plans to any person holding more
than 10% of the total combined voting power of all classes of stock of the
Company must be equal to at least 110% of the fair market value of the Common
Stock on the date of grant and the term of such option cannot exceed five years.
To the extent that the aggregate fair market value of Common Stock with respect
to which Incentive Stock Options granted to any person are first exercisable in
any calendar year exceeds $100,000, the Incentive Stock Options or portions
thereof which exceed such limit shall be treated as Nonqualified Stock Options.
The exercise price of Nonqualified Stock Options must be equal to at least 85%
of the fair market value of the Common Stock on the date of grant. Common Stock
subject to Options granted under the Plans that expire or otherwise terminate
without full exercise shall again become available for issuance under the
respective Plans.

With certain limited exceptions, Options granted under the Plans are
non-transferable. Generally, Options granted under the Plans expire three months
after the termination of an optionee's employment or other service relationship
with the Company, except that Nonqualified Stock Options granted under the 1993

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<PAGE> 42

Plan generally expire six months after such termination. In general, if an
optionee is disabled while in an employment or service relationship with the
Company, Options granted under the Plans may be exercised up to twelve months
following such optionee's disablement. In general, if an optionee dies while in
an employment or service relationship with the Company, Options granted under
the 1993 Plan may be exercised up to twelve months after the death of such
optionee while Options granted under the 1996 Plan may be exercised up to 18
months after the death of such optionee.

Subject to certain limitations contained in the Plans, the purchase price
of Common Stock subject to a stock purchase agreement granted pursuant to the
Plans, as well as the form of consideration to be paid to the Company upon the
exercise of an Option, may be determined by the Board. In addition, the Board
has the authority under the Plans to award stock pursuant to a stock bonus in
consideration of past services actually rendered to the Company. Stock bonuses
and restricted stock purchase awards granted under the Plans are generally
non-transferable and the Common Stock awarded or sold pursuant to a stock bonus
or restricted stock purchase agreement may be subject to a repurchase option in
favor of the Company.

As of September 1, 1996, the Company had granted Options under the 1993
Plan to purchase an aggregate of 852,359 shares (net of cancellations) at
exercise prices ranging from $0.10 to $1.50 per share and 490,000 shares of
Common Stock had been issued as restricted stock under the 1993 Plan, all of
which is currently vested. As of September 1, 1996, no Stock Awards had been
granted under the 1996 Plan.

In the event of a merger or consolidation involving the Company, the Board
has discretion to provide that all Stock Awards outstanding under the Plans will
be assumed by the successor corporation or substituted with similar Stock Awards
or, if such Stock Awards are not assumed or substituted, then, with respect to
Stock Awards held by persons performing services as employees, directors or
consultants, such Stock Awards will vest and become immediately exercisable
prior to such event.

STOCK OPTIONS GRANTED OUTSIDE OF THE 1993 PLAN AND THE 1996 PLAN

The Company has from time to time granted options to purchase shares of
Common Stock outside of the 1993 Plan and the 1996 Plan ("Non-Plan Options") to
certain directors, officers and employees of the Company. As of September 1,
1996, Non-Plan Options were outstanding to purchase an aggregate of 210,000
shares of Common Stock with exercise prices ranging from $0.10 to $1.50 (and a
weighted average exercise price of $0.50 per share), and no Non-Plan Options had
been exercised. These Non-Plan Options vest monthly and ratably over a
three-year period. The Non-Plan Options have a term of ten years, except that
Non-Plan Options generally expire 30 days after the termination of an optionee's
employment or other service relationship with the Company. In general, if an
optionee dies while in an employment or service relationship with the Company,
that person's option may be exercised up to six months after his death.

EMPLOYEE STOCK PURCHASE PLAN

In July 1996, the Board adopted, subject to stockholder approval, the
Employee Stock Purchase Plan (the "Purchase Plan") covering an aggregate of
125,000 shares of Common Stock. The Purchase Plan is intended to qualify as an
employee stock purchase plan within the meaning of Section 423(b) of the Code.
Under the Purchase Plan, the Board may authorize participation by eligible
employees, including officers, in periodic offerings of up to 27 months in
length. The Purchase Plan provides that the Board shall specify certain terms
and conditions that will apply to each such offering within the parameters set
forth in the Purchase Plan. The initial offering under the Purchase Plan will
commence on the date of this Prospectus and terminate on August 31, 1998.
Employees who receive annual compensation in excess of $90,000 (the "Eligibility
Cut-off") will not be eligible to participate in the initial offering. The Board
has the authority to increase or decrease the amount of the Eligibility Cut-off
from time to time.

Except as set forth above, employees who satisfy the applicable length of
service requirement specified by the Board for an offering are eligible to
participate in the Purchase Plan for the period of such offering if they are
customarily employed by the Company or an affiliate of the Company for at least
20 hours per week and at least five months per calendar year. Participating
employees may elect to have up to 15% of their earnings (or such lesser amount
specified by the Board for a particular offering period) withheld from their
paychecks pursuant to the Purchase Plan. The amount withheld is then used to
purchase shares of Common Stock from

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<PAGE> 43

the Company on specified purchase dates determined by the Board. The price of
Common Stock purchased under the Purchase Plan generally will be equal to 85% of
the lower of the fair market value of the Common Stock at the commencement date
of each offering period or the specified purchase date. Employees may end their
participation in the offering at any time during the offering period, and
participation ends automatically on termination of employment with the Company.
Under the Purchase Plan, rights of any employee to purchase stock under all
employee stock purchase plans may not accrue at a rate that exceeds $25,000 in
fair market value per calendar year in which rights are outstanding, and no
person may purchase shares to the extent such person owns or would own 5% or
more of the total combined value or voting power of all classes of stock of the
Company and its affiliates (including stock subject to options).

In the event of a merger, reorganization, consolidation or liquidation
involving the Company, the Board has discretion to provide that each right to
purchase Common Stock will be assumed or an equivalent right substituted by the
successor corporation, or the Board may shorten the offering period and provide
for all sums collected by payroll deductions to be applied to purchase stock
immediately prior to such merger or other transaction. The Board has the
authority to amend or terminate the Purchase Plan at any time; however, no such
action may adversely affect any outstanding rights to purchase Common Stock
under the Purchase Plan.

401(k) PLAN

The Company maintains a tax-qualified employee savings and retirement plan
under Section 401(k) of the Code (the "401(k) Plan") covering all of the
Company's employees who have attained the age of 18 years and who have completed
six months of employment. Pursuant to the 401(k) Plan, employees may elect to
reduce their current compensation in an amount not to exceed the statutory
prescribed annual limit ($9,500 in 1996) and have the amount of such reduction
contributed to the 401(k) Plan. The Company may make discretionary contributions
to the 401(k) Plan, including contributions matching all or some portion of the
elective contributions made by employees. The Company does not currently match
employees' contributions. Any contributions made to the 401(k) Plan by the
Company generally vest proportionally over five years of service. The 401(k)
Plan is intended to qualify under Section 401 of the Code so that contributions
by employees or by the Company to the 401(k) Plan, and income earned on plan
contributions, are not taxable to employees until withdrawn from the 401(k)
Plan, and so that contributions by the Company, if any, will be deductible by
the Company when made. The 401(k) Plan may be amended or discontinued at any
time by the Company.

LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS

The Company's Bylaws provide that the Company will indemnify its directors
and executive officers and may indemnify its other officers, employees and other
agents to the fullest extent not prohibited by Delaware law as in effect from
time to time. The Company is also empowered under its Bylaws to enter into
indemnification contracts with its directors and officers and to purchase
insurance on behalf of any person it is required or permitted to indemnify.
Pursuant to this provision, the Company has entered into indemnification
agreements with each of its directors and executive officers.

In addition, the Company's Certificate of Incorporation provides that
directors of the Company shall not be personally liable to the Company or its
stockholders for monetary damages for any breach of fiduciary duty as a
director, except for liability (i) for any breach of the directors' duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) in respect of certain unlawful payments of dividends or unlawful
stock repurchases or redemptions as provided in Section 174 of the Delaware
General Corporation Law or (iv) for any transaction from which the director
derives any improper personal benefit. The Certificate of Incorporation also
provides that if the Delaware General Corporation Law is amended after the
approval by the Company's stockholders of the Certificate of Incorporation to
authorize corporate action further eliminating or limiting the personal
liability of directors, then the liability of the Company's directors shall be
eliminated or limited to the fullest extent permitted by the Delaware General
Corporation Law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.

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<PAGE> 44

CERTAIN TRANSACTIONS

Prior to November 1993, the Company's operations were conducted by the
Partnership. Effective as of November 22, 1993, the Partnership was reorganized
into the Company through a contribution and exchange transaction (the "Roll-Up")
pursuant to which the holders of general and limited partnership interests in
the Partnership received 2,450,000 shares of the Company's Common Stock in
exchange for their respective partnership interests in the Partnership. Of these
shares, Debar, a principal stockholder of the Company and the holder of a
partnership interest in the Partnership, received 2,418,500 shares. In
connection with the Roll-Up, Marvin R. Brown, President, Chief Executive Officer
and a director of the Company and Alexander Polinsky, Vice President of
Chemistry, Chief Scientific Officer and a director of the Company each
contributed his equity interest in Plictrix, Inc., a California corporation and
a general partner of the Partnership ("Plictrix"), to the Company in exchange
for 525,000 shares and 175,000 shares, respectively, of Common Stock, and
Plictrix became a wholly owned subsidiary of the Company. The Roll-Up was
effected to change the form of entity under which the Company's operations were
conducted.

In April 1994, the Company entered into a collaboration agreement with
Amgen under which Alanex granted to Amgen a worldwide exclusive license to drugs
discovered by Alanex to treat neurological diseases and a worldwide
non-exclusive license to Alanet, a proprietary software program developed by the
Company to analyze peptides. In connection with the collaboration agreement, the
Company issued to Amgen 2,978,182 shares of Series A Preferred Stock at a
purchase price of $1.51 per share and a warrant to purchase 703,636 shares of
Common Stock at an exercise price of $0.005 per share. As of June 1996, the
Company had received a total of $5,280,000 in contract research revenue under
the collaboration agreement.

In June 1996, the collaboration agreement between the Company and Amgen was
terminated by Amgen. In connection with the termination of the Amgen agreement,
(i) except as set forth below, all rights to the Company's technology reverted
to the Company, (ii) Amgen's warrant to purchase 703,636 shares of Common Stock
was canceled and the Company issued a new warrant to Amgen to purchase 450,000
shares of Common Stock at an exercise price of $1.51 per share with a term of
seven years and (iii) the Company redeemed Amgen's 2,978,182 shares of Series A
Preferred Stock (representing all of the issued and outstanding Preferred Stock
of the Company), at a repurchase price of $1.51 per share, payable with an
unsecured, non-interest-bearing promissory note for $4,500,000 due June 28,
2001. In addition, under the termination agreement, Alanex is obligated to
provide to Amgen, on a non-exclusive basis, on or before October 28, 1996,
certain compounds that were included in the Alanex technology licensed to Amgen
under the collaboration agreement. In exchange for such compounds, Amgen will
pay Alanex $400,000. In connection with the termination, all licenses, options
and other rights to the Company's technology granted to Amgen under the
collaboration agreement were terminated.

In November 1993, in connection with the purchase of 350,000 shares of
Common Stock, Dr. Polinsky, Vice President of Chemistry, Chief Scientific
Officer and a director of the Company, borrowed $17,500 pursuant to a promissory
note. The promissory note is secured by the shares purchased and bears interest
at the rate of 6.75% per annum. Payments of principal and accrued interest are
payable in three equal annual installments beginning in November 1994; however,
in the event Dr. Polinsky's employment by, or association with, the Company is
terminated for any reason, all remaining unpaid principal and accrued interest
will be accelerated and become due and payable immediately after such
termination or disassociation. The shares of Common Stock pledged to secure the
promissory note will be released from pledge at the rate of 20 shares for each
$1.00 in principal amount of indebtedness paid. In fiscal 1995, the Company
forgave $7,459 of Dr. Polinsky's indebtedness owed to the Company under the
promissory note. As of September 1, 1996, the outstanding principal and accrued
interest under the promissory note was $12,717.

In November 1995, Dr. Polinsky also borrowed $50,000 from the Company
pursuant to an unsecured promissory note bearing interest at the rate of 6.75%
per annum. Accrued interest on the promissory note is payable in three equal
annual installments commencing November 1996, with the entire principal amount
and any accrued and unpaid interest becoming due in November 1998. As of
September 1, 1996, the outstanding principal and accrued interest under the
promissory note was $52,780.

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<PAGE> 45

In May 1996, Dr. Brown, President, Chief Executive Officer and a director
of the Company, borrowed $60,000 from the Company pursuant to an unsecured
promissory note bearing interest at the rate of 6.75% per annum. Accrued
interest is payable in three equal annual installments commencing May 1997, with
the entire principal amount and any accrued and unpaid interest becoming due in
May 1999. As of September 1, 1996, the outstanding principal and accrued
interest under the promissory note was $62,262.

In May 1996, the Company entered into an employment agreement with Ms.
Youngers, the Director of Finance and Secretary of the Company. Under the
employment agreement, the Company will pay Ms. Youngers an annual base salary of
$108,000. In addition, Ms. Youngers will receive a bonus of $11,250 upon the
successful completion of the Company's initial public offering of Common Stock
and a second bonus of $11,250 upon the completion of one year of service with
the Company. In connection with the employment agreement, the Company granted to
Ms. Youngers an option to purchase 50,000 shares of Common Stock at an exercise
price of $0.10 per share, with such option vesting in equal monthly installments
over a four-year period; however, if Ms. Youngers is terminated by the Company
without cause during the first two years of employment with the Company, the
vesting of the option will be accelerated by a period of two years from the date
of termination and if Ms. Youngers is terminated by the Company without cause at
any time after the first two years of employment with the Company, the option
will accelerate by a period of one year from the date of termination.

The Company has entered into severance agreements with certain of its
executive officers. See "Management -- Severance Agreements."

The Company has entered into indemnification agreements with each of its
executive officers and directors. See "Management -- Limitation of Liability and
Indemnification of Officers and Directors."

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<PAGE> 46

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information with respect to the
beneficial ownership of the outstanding Common Stock as of September 1, 1996,
and as adjusted to reflect the sale of the 2,500,000 shares of Common Stock
being offered hereby by (i) each person (or group of affiliated persons) who is
known by the Company to own beneficially more than 5% of Common Stock, (ii) each
of the Company's directors, (iii) each of the Named Executive Officers and (iv)
all directors and executive officers of the Company as a group.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1) OFFERING(1)
DIRECTORS, OFFICERS AND --------------------- ---------------------
5% STOCKHOLDERS NUMBER PERCENT NUMBER PERCENT
- --------------------------------------------------- --------- ------- --------- -------
<S> <C> <C> <C> <C>
Debar ERA, Inc.(2)................................. 2,418,500 64.5% 2,418,500 38.7%
Box 5149
Yuma, AZ 85366
The Jon and Caroline Jessen Family 1990 Trust(3)... 2,418,500 64.5% 2,418,500 38.7%
4269 West County 12th Street
Yuma, AZ 85565
Amgen Inc.(4)...................................... 450,000 12.0% 450,000 7.2%
1840 Dehavilland Drive
Thousand Oaks, CA 91320
Marvin R. Brown(5)................................. 559,842 14.8% 559,842 8.9%
Alexander Polinsky(6).............................. 538,880 14.3% 538,880 8.6%
Arnold T. Hagler................................... 140,000 3.7% 140,000 2.2%
Timothy J. Rink(7)................................. 3,332 * 3,332 *
All directors and executive officers as a group (6
persons)(8)...................................... 1,254,747 32.9% 1,254,747 19.9%
</TABLE>

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

* Less than 1%

(1) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect to
securities. Except as indicated by footnote, and subject to community
property laws where applicable, to the best of the Company's knowledge, the
persons named in the table above have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them.
Shares subject to options that are exercisable within 60 days of September
1, 1996 are deemed to be beneficially owned by the person holding such
options for the purpose of computing the percentage ownership of such
person, but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person. Applicable percentage of
beneficial ownership is based on 3,747,635 shares of Common Stock
outstanding as of September 1, 1996, and 6,247,635 shares of Common Stock
outstanding after completion of this offering. Except as set forth above,
the address of each person set forth above is the address of the Company
appearing elsewhere in this Prospectus.

(2) Includes 773,920 shares of Common Stock held by the Jessen Family Trust. All
of the outstanding shares of Common Stock of Debar are held by the four
adult children of Mr. Jessen, a director of the Company, as follows: 25% by
Juli Jessen; 25% by Dirk Jessen; 25% by Mark Jessen; and 25% by Gowan
Deckey. All of the outstanding shares of Debar are subject to the Dune
Company of Yuma Voting Trust dated July 1, 1989 (the "Dune Trust"), the
trustee of which is Mark Jessen. Mark Jessen, who is also the President and
Chief Executive Officer of Debar has sole disposition and voting power over
the shares held in the Dune Trust. The Dune Trust expires on June 30, 1999.
Jon Jessen disclaims beneficial ownership of such shares.

(3) Includes 1,644,580 shares of Common Stock held by Debar. Juli Jessen, the
adult daughter of Jon Jessen, a director of the Company, is the trustee of
the Jessen Family Trust. Jon Jessen disclaims beneficial ownership of such
shares.

45
<PAGE> 47

(4) Includes 450,000 shares of Common Stock issuable pursuant to an outstanding
warrant.

(5) Includes options to purchase 27,770 shares of Common Stock exercisable
within 60 days of September 1, 1996. Also includes options to purchase 7,072
shares of Common Stock exercisable within 60 days of September 1, 1996, held
by Alice Brown, the wife of Dr. Brown.

(6) Includes options to purchase 13,880 shares of Common Stock exercisable
within 60 days of September 1, 1996.

(7) Includes options to purchase 3,332 shares of Common Stock exercisable within
60 days of September 1, 1996.

(8) Includes options to purchase 52,054 shares of Common Stock described in
footnotes (5), (6) and (7) above, as applicable. Also includes options to
purchase 12,693 shares of Common Stock exercisable within 60 days of
September 1, 1996 held by Ms. Youngers, an executive officer of the Company.

DESCRIPTION OF CAPITAL STOCK

The Company intends to reincorporate in Delaware immediately prior to the
completion of this offering. The authorized capital stock of the Company
consists of 40,000,000 shares of Common Stock, $.001 par value, and 10,000,000
shares of Preferred Stock, $.001 par value.

COMMON STOCK

As of September 1, 1996, there were issued and outstanding 3,747,635 shares
of Common Stock held by 15 holders of record.

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, if any,
as may be declared by the Board of Directors out of funds legally available for
the payment of dividends. See "Dividend Policy."

In the event of a liquidation, dissolution or winding up of the Company,
holders of Common Stock are entitled to share ratably in all assets remaining
after payment of liabilities and liquidation preferences of any outstanding
shares of Preferred Stock. Holders of Common Stock have no preemptive rights or
rights to convert their Common Stock into any other securities. There are no
redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are validly issued, fully paid and
nonassessable. All shares of Common Stock issuable upon conversion of the
outstanding shares of Preferred Stock will be validly issued, fully paid and
nonassessable upon such conversion.

PREFERRED STOCK

The Board of Directors has the authority, without further action by the
stockholders, to issue up to 10,000,000 shares of Preferred Stock in one or more
series and to fix the designations, powers, preferences, privileges, and
relative participating, optional or special rights and the qualifications,
limitations or restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption and liquidation preferences, any or
all of which may be greater than the rights of the Common Stock. The Board of
Directors, without stockholder approval, can issue Preferred Stock with voting,
conversion or other rights that could adversely affect the voting power and
other rights of the holders of Common Stock. Preferred Stock could thus be
issued quickly with terms calculated to delay or prevent 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.

46
<PAGE> 48

WARRANTS

As of September 1, 1996, there was a warrant outstanding to purchase
450,000 shares of Common Stock (the "Warrant") at an exercise price of $1.51 per
share. The Warrant has a term of seven years. The Warrant was issued to Amgen in
June 1996 in connection with the termination of a collaboration agreement
between the Company and Amgen. See "Certain Transactions."

DELAWARE LAW AND CERTAIN CHARTER PROVISIONS

The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "Delaware Law"), an antitakeover law. In general,
the statute prohibits a publicly held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
For purposes of Section 203, a "business combination" includes a merger, asset
sale or other transaction resulting in a financial benefit to the interested
stockholder, and an "interested stockholder" is a person who, together with
affiliates and associates, owns (or within the three preceding years, did own)
15% or more of the corporation's voting stock.

The Company's Certificate of Incorporation and Bylaws include a number of
provisions that may have the effect of deterring hostile takeovers or delaying
or preventing changes in control of the Company. The Company's Certificate of
Incorporation provides that, upon the completion of this offering, the Board of
Directors will be divided into three classes of directors, with each class
serving a staggered three-year term. The classification system of electing
directors may tend to discourage a third party from making a tender offer or
otherwise attempting to obtain control of the Company and may maintain the
composition of the Board of Directors, as the classification of the Board of
Directors generally increases the difficulty of replacing a majority of
directors. In addition, the Company's Certificate of Incorporation 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 Bylaws limit who may call a
special meetings of the stockholders. Further, the Company's Certificate of
Incorporation does not include a provision for cumulative voting for directors.
Under cumulative voting, a minority stockholder holding a sufficient percentage
of a class of shares may be able to ensure the election of one or more
directors. Finally, the Company's Bylaws establish procedures, including advance
notice procedures with regard to the nomination of candidates for election as
directors and stockholder proposals. These and other provisions of the
Certificate of Incorporation and Bylaws could discourage potential acquisition
proposals and could delay or prevent a change in control of management of the
Company. Such provisions also may have the effect of preventing changes in the
management of the Company. See "Risk Factors -- Antitakeover Provisions."

TRANSFER AGENT AND REGISTRAR

American Stock Transfer & Trust Company has been appointed as the transfer
agent and registrar for the Company's Common Stock.

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering there has been no public market for the Common
Stock, and no prediction can be made regarding the effect, if any, that market
sales of shares or the availability of shares for sale will have on the market
price prevailing from time to time. As described below, only a limited number of
shares are currently available for sale, or will be available for sale shortly
after this offering, due to certain contractual and legal restrictions on
resale. Nevertheless, sales of substantial amounts of Common Stock in the public
market after the restrictions lapse could adversely affect the prevailing market
price.

Upon completion of this offering, the Company will have outstanding
6,247,635 shares of Common Stock. Of these shares, all of the 2,500,000 shares
of Common Stock sold in this offering will be freely tradable (unless such
shares are held by an "affiliate" of the Company as such term is defined in the
Securities Act) without restriction or registration under the Securities Act.
The remaining 3,747,635 shares are Restricted

47
<PAGE> 49

Shares and are eligible for public sale only if registered under the Securities
Act or sold in accordance with Rule 144 or Rule 701 thereunder, which rules are
summarized below. As a result of the contractual restrictions described below
and the provisions of Rule 144 or Rule 701, additional shares will be available
for sale in the public market as follows: (i) no Restricted Shares will be
eligible for immediate sale in the public market on the date of this Prospectus,
(ii) 2,973,715 Restricted Shares (plus 522,182 shares of Common Stock issuable
to employees pursuant to stock options that are then vested) will be eligible
for sale upon expiration of lock-up agreements (as described below) 180 days
after the date of this Prospectus and (iii) an additional 773,920 Restricted
Shares will be eligible for sale from time to time hereafter upon expiration of
their respective two-year holding periods under Rule 144.

The Company's executive officers, directors and stockholders, who own all
of the Restricted Shares, have agreed, subject to certain exceptions, that they
will not, without the prior written consent of PaineWebber Incorporated, offer,
sell, contract to sell, grant any option to purchase or otherwise dispose of any
shares of Common Stock or securities convertible into or exercisable or
exchangeable for Common Stock for a period of 180 days from the date of this
Prospectus (the "Lockup Period"). PaineWebber Incorporated, in its sole
discretion at any time and without notice, may release any or all shares from
the lockup agreements and permit holders of the shares to resell all or any
portion of their shares at any time prior to the expiration of the Lockup
Period.

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, any holder of Restricted Shares, including an
affiliate of the Company, as to which at least two years have elapsed since the
later of the date of their acquisition of such Restricted Shares from the
Company or an affiliate, would be entitled, within any three-month period, to
sell a number of shares that does not exceed the greater of 1% of the then
outstanding shares of Common Stock (approximately 62,476 shares immediately
after the completion of this offering assuming no exercise of the Underwriters'
over-allotment option) or the average weekly trading volume of the Common Stock
in the over-the-counter market during the four calendar weeks preceding the date
on which notice of the sale is filed with the Commission. Sales under Rule 144
are subject to certain requirements relating to manner of sale, notice and
availability of current public information about the Company. However, a person
(or persons whose shares are aggregated) who is not deemed to have been an
affiliate of the Company at any time during the 90 days immediately preceding
the sale and who owns beneficially Restricted Shares is entitled to sell such
shares under Rule 144(k) without regard to the limitations described above,
provided that at least three years have elapsed since the date the shares were
acquired from either the Company or from an affiliate of the Company.

Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its employees,
directors, officers, consultants or advisers prior to the completion of this
offering, pursuant to written compensatory benefit plans or written contracts
relating to the compensation of such persons. In addition, the Commission has
indicated that Rule 701 will apply to stock options granted by the Company
before this offering, along with the shares acquired upon exercise of such
options. Securities issued in reliance on Rule 701 are deemed to be Restricted
Shares and, beginning 90 days after the date of this Prospectus (unless subject
to the contractual restrictions described above), may be sold by persons other
than affiliates, subject only to the manner of sale provisions of Rule 144 and
by affiliates under Rule 144 without compliance with its two-year minimum
holding period requirements.

The Company intends to file a registration statement under the Securities
Act covering (i) 1,350,000 shares of Common Stock issuable under the 1993 Plan,
(ii) 500,000 shares of Common Stock issuable under the 1996 Plan, (iii) 150,000
shares of Common Stock issuable upon exercise of options issued outside of the
1993 Plan and the 1996 Plan and (iv) 125,000 shares of Common Stock issuable
under the Purchase Plan. Such registration statement is expected to be filed
soon after the date of this Prospectus and will become effective upon filing.
Accordingly, the shares registered under such registration statement will be
available for sale in the public market, unless such shares are subject to
vesting restrictions with the Company or the contractual restrictions described
above.

48
<PAGE> 50

UNDERWRITING

The underwriters named below (the "Underwriters"), for whom PaineWebber
Incorporated, Needham & Company, Inc. and Sutro & Co. Incorporated (the
"Representatives"), have severally agreed, subject to the terms and conditions
set forth in the Underwriting Agreement by and among the Company and the
Representatives (the "Underwriting Agreement"), to purchase from the Company,
and the Company has agreed to sell to the Underwriters, the number of shares of
Common Stock set forth opposite the name of such Underwriters below at the price
set forth on the cover page of this Prospectus.

<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
------------------------------------------------------------- ----------------
<S> <C>
PaineWebber Incorporated.....................................
Needham & Company, Inc.......................................
Sutro & Co. Incorporated.....................................
-----------
Total..............................................
===========
</TABLE>

The Underwriting Agreement provides that the obligations of the
Underwriters to purchase the shares of Common Stock listed above are subject to
certain conditions. The Underwriting Agreement also provides that the
Underwriters are committed to purchase all of the shares of Common Stock offered
hereby, if any are purchased (without consideration of any shares that may be
purchased through the Underwriters' over-allotment option).

The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public at the public offering price
set forth on the cover page of this Prospectus and to certain dealers at such
price less a concession to other dealers not in excess of $ per share; and that
the Underwriters and such dealers may reallow a concession to other dealers not
in excess of $ per share. After the initial public offering of the Common
Stock, the public offering price, the concessions to selected dealers and
reallowance to other dealers may be changed by the Representatives.

At the request of the Company, the Underwriters have reserved up to 125,000
shares of Common Stock for sale at the initial public offering price to
employees, business associates and related persons of the Company. The number of
shares of Common Stock available for sale to the general public will be reduced
to the extent such persons purchase such reserved shares. Any reserved shares
which are not so purchased will be offered by the Underwriters to the general
public on the same basis as the other shares offered hereby.

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 an
additional 375,000 shares of Common Stock at the initial public offering price,
less the underwriting discounts and commissions set forth on the cover page of
this Prospectus. The Underwriters may exercise such option only to cover
over-allotments, if any, incurred in the sale of the shares of Common Stock that
the Underwriters have agreed to purchase. To the extent the Underwriters
exercise such option, each of the Underwriters will become obligated, subject to
certain conditions, to purchase approximately the same percentage of such
additional shares of Common Stock as is approximately equal to the percentage of
shares of Common Stock that each is obligated to purchase as shown in the table
set forth above.

The representatives have informed the Company that they do not intend to
confirm sales to any account over which they exercise discretionary authority.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make in respect thereof.

The Company, its directors and executive officers and certain stockholders
have agreed not to offer, sell, contract to sell or grant any option to purchase
or otherwise dispose of any shares of Common Stock owned by them prior to the
expiration of 180 days from the date of this Prospectus, except (i) for shares
of Common Stock offered hereby, (ii) with the prior written consent of
PaineWebber Incorporated, and (iii) in the case of

49
<PAGE> 51

the Company, for the issuance of shares of Common Stock upon the exercise of
options or the grant of options to purchase shares of Common Stock.

Prior to this offering, there has been no public market for the Common
Stock of the Company. Accordingly, the initial public offering price will be
determined by negotiations among the Company and the Representatives. Among the
factors to be considered in determining the initial public offering price will
be the technology base of the Company, the quality and experience of the
Company's scientific talent, the previous experience of the Company's executive
officers, the medical and research applications and potential markets to be
addressed by the Company's product development programs, the market prices of
publicly traded stock of comparable companies in recent periods and the general
condition of the securities markets at the time of the offering.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by its counsel, Cooley Godward LLP, San Diego, California.
Certain legal matters in connection with the offering will be passed upon for
the Underwriters by Shearman & Sterling, San Francisco, California.

EXPERTS

The consolidated financial statements of Alanex Corporation as of December
31, 1994 and 1995, and for each of the years in the three-year period ended
December 31, 1995, have been included herein and in the Registration Statement
in reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.

ADDITIONAL INFORMATION

A Registration Statement on Form S-1, including amendments thereto,
relating to the Common Stock offered hereby has been filed by the Company with
the Commission. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to such
Registration Statement, exhibits and schedules. A copy of the Registration
Statement may be inspected by anyone without charge at the Commission's
principal office located at 450 Fifth Street, N.W., Judiciary Plaza, Washington,
D.C. 20549, the New York Regional Office located at 7 World Trade Center, 13th
Floor, New York, New York 10048, and the Chicago Regional Office located at
Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois
60661-2511, and copies of all or any part thereof may be obtained from the
Public Reference Branch of the Commission upon the payment of certain fees
prescribed by the Commission. The Commission also makes electronic filings
publicly available on the Internet within 24 hours of acceptance. The
Commission's Internet address is http://www.sec.gov. The Commission Web site
also contains reports, proxy and information statements, and other information
regarding registrants that file electronically with the Commission. The Company
intends to furnish its stockholders with annual reports containing audited
financial statements certified by its independent auditors and quarterly reports
containing unaudited financial information for the first three quarters of each
fiscal year.

50
<PAGE> 52

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report......................................................... F-2
Consolidated Balance Sheets.......................................................... F-3
Consolidated Statements of Operations................................................ F-4
Consolidated Statements of Stockholders' Equity...................................... F-5
Consolidated Statements of Cash Flows................................................ F-6
Notes to Consolidated Financial Statements........................................... F-8
</TABLE>

F-1
<PAGE> 53

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Alanex Corporation:

We have audited the accompanying consolidated balance sheets of Alanex
Corporation and subsidiary as of December 31, 1994 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Alanex
Corporation and subsidiary as of December 31, 1994 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995, in conformity with generally accepted accounting
principles.

KPMG PEAT MARWICK LLP

San Diego, California
July 3, 1996, except for note 12 to the
consolidated financial statements, as to
which the date is July 17, 1996

F-2
<PAGE> 54

ALANEX CORPORATION

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 1994 AND 1995 AND JUNE 30, 1996

ASSETS (Note 5)

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- JUNE 30,
1994 1995 1996
----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash............................................. $ 375,000 $ 114,000 $2,830,000
Debt securities available for sale............... 2,971,000 2,053,000 1,513,000
Inventory........................................ 64,000 131,000 114,000
Prepaid expenses and other current assets........ 34,000 167,000 141,000
----------- ----------- ----------
Total current assets..................... 3,444,000 2,465,000 4,598,000
=========== =========== ==========
Property and equipment, net (notes 4 and 5)........ 1,265,000 3,122,000 2,929,000
Notes receivable from officers (note 3)............ -- 60,000 110,000
Deposits and other assets.......................... 99,000 111,000 108,000
----------- ----------- ----------
Total assets............................. $ 4,808,000 $ 5,758,000 $7,745,000
=========== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit (note 5).......................... $ 506,000 $ 725,000 $ 715,000
Current maturities of long-term debt (note 5).... 199,000 347,000 507,000
Accounts payable and accrued expenses............ 91,000 305,000 334,000
Accrued payroll, payroll taxes and benefits...... 145,000 242,000 301,000
Deferred contract research revenue (note 6)...... 195,000 94,000 860,000
----------- ----------- ----------
Total current liabilities................ 1,136,000 1,713,000 2,717,000
Long-term debt, less current maturities (note 5)... 43,000 1,164,000 3,716,000
----------- ----------- ----------
Total liabilities........................ 1,179,000 2,877,000 6,433,000
Stockholders' equity (notes 7, 8 and 12):
Preferred stock, $0.001 par value, 10,000,000
shares authorized; 2,978,000 Series A shares
issued and outstanding at December 31, 1994
and 1995; none outstanding at June 30, 1996... 4,430,000 4,430,000 --
Common stock, $0.001 par value; 40,000,000 shares
authorized; 3,640,000, 3,723,000 and 3,737,000
shares issued and outstanding at December 31,
1994 and 1995 and June 30, 1996,
respectively.................................. 4,000 4,000 4,000
Additional paid-in capital....................... 252,000 260,000 1,924,000
Note receivable from officer for purchase of
common stock.................................. (18,000) (12,000) (12,000)
Deferred compensation............................ -- -- (160,000)
Accumulated deficit.............................. (1,039,000) (1,801,000) (444,000)
----------- ----------- ----------
Total stockholders' equity............... 3,629,000 2,881,000 1,312,000
----------- ----------- ----------
Commitments (note 10)
Total liabilities and stockholders'
equity................................. $ 4,808,000 $ 5,758,000 $7,745,000
=========== =========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE> 55

ALANEX CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995,
AND THE SIX-MONTH PERIODS ENDED JUNE 30, 1995 AND 1996

<TABLE>
<CAPTION>
SIX-MONTH PERIODS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------- -------------------------
1993 1994 1995 1995 1996
--------- ----------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Contract research revenue
(note 6)............... $ 23,000 $ 50,000 $ 944,000 $ 382,000 $ 946,000
Contract research revenue
from a related party... -- 1,440,000 2,565,000 1,215,000 1,275,000
Project initiation fees... -- 250,000 250,000 -- 2,000,000
Other revenue............. 6,000 16,000 7,000 -- 3,000
-------- --------- --------- --------- ---------
Total revenue..... 29,000 1,756,000 3,766,000 1,597,000 4,224,000
Operating expenses:
Research and
development............ 816,000 2,181,000 3,685,000 1,522,000 2,274,000
General and administrative
(note 8)............... 162,000 585,000 804,000 387,000 562,000
-------- --------- --------- --------- ---------
Total operating
expenses........ 978,000 2,766,000 4,489,000 1,909,000 2,836,000
-------- --------- --------- --------- ---------
Income (loss) from
operations................ (949,000) (1,010,000) (723,000) (312,000) 1,388,000
-------- --------- --------- --------- ---------
Other income (expense):
Interest income........... -- 97,000 180,000 84,000 79,000
Interest expense.......... (31,000) (25,000) (168,000) (37,000) (105,000)
Loss on sale of property
and equipment.......... -- -- (49,000) -- --
-------- --------- --------- --------- ---------
Other income
(expense)....... (31,000) 72,000 (37,000) 47,000 (26,000)
-------- --------- --------- --------- ---------
Income (loss) before income
taxes..................... (980,000) (938,000) (760,000) (265,000) 1,362,000
Income taxes (note 9)....... (1,000) (1,000) (2,000) (2,000) (2,000)
-------- --------- --------- --------- ---------
Net income
(loss).......... $(981,000) $ (939,000) $ (762,000) $ (267,000) $1,360,000
======== ========= ========= ========= =========
Net income (loss) per
share..................... $ (0.24) $ (0.22) $ (0.17) $ (0.06) $ 0.30
======== ========= ========= ========= =========
Weighted average number of
common and common
equivalent shares
outstanding............... 4,012,000 4,364,000 4,504,000 4,464,000 4,545,000
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE> 56

ALANEX CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995,
AND THE SIX-MONTH PERIODS ENDED JUNE 30, 1995 AND 1996

<TABLE>
<CAPTION>
NOTE
RECEIVABLE
FOR
PREFERRED STOCK COMMON STOCK ADDITIONAL PURCHASE OF
PARTNERS' ------------------------ --------------------- PAID-IN COMMON
CAPITAL SHARES AMOUNT SHARES AMOUNT CAPITAL STOCK
--------- ---------- ----------- --------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Partners' capital at $ 76,000 -- $ -- -- $ -- $ $ --
December 31, 1992...............
Capital contributions............ 962,000 -- -- -- -- --
Issuance of stock in exchange for (157,000) -- -- 3,150,000 4,000 153,000 --
partnership interest............
Issuance of common stock in -- -- -- 350,000 -- 18,000 (18,000)
exchange for note receivable
from officer....................
Net loss......................... (881,000) -- -- -- -- -- --
---------- ---------- ---------- ------ ---------- -------- --------
Balance at December 31, 1993..... -- -- -- 3,500,000 4,000 171,000 (18,000)
Issuance of Series A preferred -- 2,978,000 4,430,000 -- -- 67,000 --
stock and common stock warrants
to Amgen........................
Issuance of common stock......... -- -- -- 140,000 -- 14,000 --
Net loss......................... -- -- -- -- -- -- --
---------- ---------- ---------- ------ ---------- -------- --------
Balance at December 31, 1994..... -- 2,978,000 4,430,000 3,640,000 4,000 252,000 (18,000)
---------- ---------- ---------- ------ ---------- -------- --------
Payments received on note -- -- -- -- -- -- 6,000
receivable from officer for
purchase of common stock........
Issuance of common stock on -- -- -- 83,000 -- 8,000 --
exercise of stock options.......
Net loss......................... -- -- -- -- -- -- --
---------- ---------- ---------- ------ ---------- -------- --------
Balance at December 31, 1995..... -- 2,978,000 4,430,000 3,723,000 4,000 260,000 (12,000)
Redemption of Series A preferred ......... (2,978,000) (4,430,000) -- -- 1,502,000 --
stock (unaudited)--
Issuance of common stock on -- -- -- 14,000 -- 2,000 --
exercise of stock options
(unaudited).....................
Deferred compensation related to -- -- -- -- -- 160,000 --
grant of stock options..........
Net income (unaudited)........... -- -- -- -- -- -- --
---------- ---------- ---------- ------ ---------- -------- --------
Balance at June 30, 1996 $ -- -- $ -- 3,737,000 $ 4,000 $1,924,000 $ (12,000)
(unaudited).....................
========== ========== ========== ====== ========== ======== ========

DEFERRED ACCUMULATED
COMPENSATION DEFICIT TOTAL
------------ ----------- -----------
<S> <C> <C> <C>
Partners' capital at $ -- $ -- $ 76,000
December 31, 1992...............
Capital contributions............ -- -- 962,000
Issuance of stock in exchange for -- --
partnership interest............
Issuance of common stock in -- -- --
exchange for note receivable
from officer....................
Net loss......................... -- (100,000 ) (981,000)
--------- ----------
Balance at December 31, 1993..... -- (100,000 ) 57,000
Issuance of Series A preferred -- -- 4,497,000
stock and common stock warrants
to Amgen........................
Issuance of common stock......... -- -- 14,000
Net loss......................... -- (939,000 ) (939,000)
--------- ----------
Balance at December 31, 1994..... -- (1,039,000 ) 3,629,000
--------- ----------
Payments received on note -- -- 6,000
receivable from officer for
purchase of common stock........
Issuance of common stock on -- -- 8,000
exercise of stock options.......
Net loss......................... -- (762,000 ) (762,000)
--------- ----------
Balance at December 31, 1995..... -- (1,801,000 ) 2,881,000
Redemption of Series A preferred -- (3,000 ) (2,931,000)
stock (unaudited)--
Issuance of common stock on -- -- 2,000
exercise of stock options
(unaudited).....................
Deferred compensation related to (160,000) -- --
grant of stock options..........
Net income (unaudited)........... -- 1,360,000 1,360,000
--------- ----------
Balance at June 30, 1996 $ (160,000) $ (444,000 ) $ 1,312,000
(unaudited).....................
========= ==========
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE> 57

ALANEX CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995,
AND THE SIX-MONTH PERIODS ENDED JUNE 30, 1995 AND 1996

<TABLE>
<CAPTION>
SIX-MONTH PERIODS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------- -------------------------
1993 1994 1995 1995 1996
--------- ----------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................... $(981,000) $ (939,000) $ (762,000) $ (267,000) $1,360,000
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization...... 98,000 274,000 641,000 222,000 327,000
Loss on sale of property and -- -- 49,000 -- --
equipment........................
Changes in assets and liabilities:
Inventory........................ -- (64,000) (67,000) (45,000) 17,000
Prepaid expenses and other (2,000) (72,000) (133,000) (68,000) 26,000
current assets................
Accounts payable and accrued 1,000 90,000 214,000 96,000 29,000
expenses......................
Accrued payroll, payroll taxes -- 145,000 97,000 44,000 59,000
and benefits..................
Deferred contract research 50,000 145,000 (101,000) 480,000 766,000
revenue.......................
--------- ---------- ---------- ---------- ----------
Net cash provided by (used in) (834,000) (421,000) (62,000) 462,000 2,584,000
operating activities........
--------- ---------- ---------- ---------- ----------
Cash flows from investing activities:
Proceeds from sale of property and -- -- 28,000 -- --
equipment..........................
Purchase of property and equipment... (3,000) (1,276,000) (2,568,000) (2,371,000) (134,000)
Purchase of debt securities available -- (4,454,000) (1,495,000) (1,495,000) --
for sale and time deposits.........
Proceeds from sale and maturities of -- 1,526,000 2,413,000 1,939,000 540,000
debt securities available for
sale...............................
Notes receivable from officers, -- -- (54,000) 6,000 (50,000)
net................................
Deposits and other assets............ (14,000) (33,000) (19,000) (31,000) 3,000
--------- ---------- ---------- ---------- ----------
Net cash provided by (used in) (17,000) (4,237,000) (1,695,000) (1,952,000) 359,000
investing activities........
--------- ---------- ---------- ---------- ----------
</TABLE>

<TABLE>
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Capital contributions................ 805,000 -- -- -- --
Net borrowings on line of credit..... -- 506,000 219,000 461,000 (10,000)
Proceeds from issuance of long-term 80,000 482,000 1,670,000 1,470,000 --
debt...............................
Payments on long-term debt........... (37,000) (468,000) (401,000) (141,000) (219,000)
Proceeds from issuance of common -- 14,000 -- -- --
stock..............................
Proceeds from issuance of Series A -- 4,430,000 -- -- --
preferred stock....................
Proceeds from issuance of common -- 67,000 8,000 6,000 2,000
stock warrants, options............
--------- ---------- ---------- ---------- ----------
Net cash provided by (used in) 848,000 5,031,000 1,496,000 1,796,000 (227,000)
financing activities........
--------- ---------- ---------- ---------- ----------
Net increase (decrease) in cash........ (3,000) 373,000 (261,000) 306,000 2,716,000
Cash at beginning of period............ 5,000 2,000 375,000 419,000 114,000
--------- ---------- ---------- ---------- ----------
Cash at end of period.................. $ 2,000 $ 375,000 $ 114,000 $ 725,000 $2,830,000
========= ========== ========== ========== ==========
</TABLE>

F-6
<PAGE> 58

ALANEX CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995,
AND THE SIX-MONTH PERIODS ENDED JUNE 30, 1995 AND 1996

<TABLE>
<CAPTION>
SIX-MONTH PERIODS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
1993 1994 1995 1995 1996
--------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Supplemental cash flow disclosures:
Cash paid during the period for $ 31,000 $ 23,000 $ 163,000 $ 34,000 $ 111,000
interest...........................
Cash paid during the period for $ 1,000 $ 1,000 $ 2,000 $ 2,000 $ 2,000
income taxes.......................
Supplemental schedule of noncash
investing and financing activities:
Common stock issued for limited $ 157,000 $ -- $ -- $ -- $ --
partnership interests............
Redemption of Series A preferred $ -- $ -- $ -- $ -- $2,931,000
stock in exchange for a note
payable and warrants (notes 5 and
7)...............................
Common stock issued in return for $ 18,000 $ -- $ -- $ -- $ --
note receivable from officer.....
</TABLE>
See accompanying notes to consolidated financial statements.

F-7
<PAGE> 59

ALANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1994 AND 1995 (AUDITED) AND JUNE 30, 1996 (UNAUDITED)

(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Reorganization

Alanex Corporation (the "Company") was incorporated in November 1993, under
the laws of the State of California. The Company is a drug discovery company
that is applying its highly integrated and comprehensive approach to rapidly and
cost-effectively discover and optimize novel, small molecule drug candidates.

Prior to November 1993, the Company's operations were conducted through
Alanex, L.P., a California limited partnership ("Alanex") and Plictrix, Inc.
("Plictrix"), the general partner of Alanex. In 1993, the partners approved the
reorganization of Alanex and Plictrix to form the Company effective in November
1993. In conjunction with this transaction, the Company issued 2,450,000 shares
of common stock to the partners of Alanex and 700,000 shares to stockholders of
Plictrix in exchange for their respective ownership interests. The transaction
has been accounted for as a reorganization of entities under common control,
using historical cost. The Company has restated all historical financial
information to reflect the reorganization.

On March 31, 1994, all of the assets and liabilities of Alanex were
transferred to the Company and Alanex was dissolved.

Principles of Consolidation

The consolidated financial statements include the accounts of Alanex
Corporation and its wholly owned subsidiary Plictrix. All significant
intercompany balances have been eliminated in consolidation.

Debt Securities Available for Sale

In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (SFAS 115). SFAS 115 requires that investments be
classified as "held to maturity," "available for sale" or "trading securities."
Investments held to maturity would be reported at amortized cost. Other
investments in debt and equity securities would be recorded at fair market
value. The Company adopted SFAS 115 effective January 1, 1994. The adoption of
SFAS 115 did not have a material impact on the Company's financial position or
results of operations.

Management determines the appropriate classification of its investments in
debt and equity securities at the time of purchase and reevaluates such
determination at each balance sheet date. Debt securities for which the Company
does not have the intent or ability to hold to maturity are classified as
available for sale. As of December 31, 1994 and 1995 and June 30, 1996, debt
securities available for sale consisted of government-backed and corporate debt
instruments. Debt securities available for sale are carried at fair value, which
approximates cost, with any unrealized gains and losses, net of tax, reported as
a separate component of stockholders' equity. These securities mature at various
dates through 1996.

Inventory

Inventory consists of chemical materials and supplies and is stated at the
lower of cost or net realizable value. Cost is determined on a first-in,
first-out basis.

F-8
<PAGE> 60

ALANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1994 AND 1995 (AUDITED) AND JUNE 30, 1996 (UNAUDITED)

Depreciation and Amortization

Depreciation and amortization are computed using the double declining
balance method over the estimated useful lives of the related assets or over the
terms of the related capital leases, whichever is shorter (three to fifteen
years). Renewals and replacements which extend the useful life of the asset are
capitalized.

Contract Revenue

Contract research revenue is based on an established rate for each
full-time equivalent scientist ("FTE") and is negotiated to include a reasonable
profit. Research revenue is recognized at the time research and development
activities are performed under the terms of the research contracts. Contract
research payments are generally received in advance of the performance of the
related research activities under the contract at the beginning of each quarter.
Such payments received in excess of amounts earned are recorded as deferred
contract research revenue. Project initiation fees and milestone payments are
nonrefundable and the contracts do not specify any future performance
obligations on the part of the Company related to such fees or payments. Project
initiation fees are recognized under the contract as revenue when earned,
generally when received, upon signing of a contract. Revenue from milestone
payments will be recognized if and when the results or events stipulated in the
agreement have been achieved. Through June 30, 1996, the Company has not
received any milestone payments under any of its collaboration agreements.

Research and Development Costs

All research and development costs are expensed in the period incurred.

Net Income (Loss) Per Share

Net income (loss) per share is computed based upon the weighted average
number of common and common equivalent shares (using the treasury stock method)
outstanding after certain adjustments described below. Common equivalent shares
are not included in the per-share calculations where the effect of their
inclusion would be anti-dilutive, except that, in accordance with Securities and
Exchange Commission Staff Accounting Bulletin No. 83, all common and common
equivalent shares issued during the twelve-month period prior to the initial
filing of the Company's proposed initial public offering have been included in
the calculation as if they were outstanding for all periods presented using the
treasury stock method and the anticipated public offering price of common stock.

Income Taxes

The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). Under the asset and liability method of SFAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in operations in the period
that includes the enactment date.

Use of Estimates

The preparation of these consolidated financial statements in conformity
with generally accepted accounting principles requires management of the Company
to make estimates and assumptions that affect

F-9
<PAGE> 61

ALANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1994 AND 1995 (AUDITED) AND JUNE 30, 1996 (UNAUDITED)

the reported amounts of assets and liabilities, revenue and expenses, and the
disclosure of contingent assets and liabilities. Actual results could differ
from those estimates.

Consolidated Interim Financial Information

The accompanying interim financial information as of June 30, 1996, and for
the six-month periods ended June 30, 1995 and 1996, is unaudited and, in the
opinion of management, reflects all adjustments that are necessary for a fair
presentation of the Company's financial position, results of operations and cash
flows for the period then ended. All such adjustments are of a normal and
recurring nature.

(2) FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires that fair values be disclosed for
the Company's financial instruments. The carrying amount of cash, other current
assets, accounts payable and accrued expenses, and deferred contract research
revenue are considered to be representative of their respective fair values due
to the short-term nature of those instruments. Debt securities available for
sale are carried at fair value. The carrying amount of the line of credit and
longterm debt are reasonable estimates of their fair values as the debt bears
interest based on market rates currently available for debt with similar terms.

(3) RELATED PARTY TRANSACTION

As of December 31, 1995, the Company had a short-term receivable from an
officer of the Company of $10,000, due October 6, 1996. As of May 22, 1996, this
amount was combined with an outstanding note receivable from the officer in the
amount of $50,000 dated January 22, 1996. The new note, in the amount of
$60,000, is due in May 1999 with interest payable annually at the minimum rate
of interest required to avoid imputed interest (6.75% at December 31, 1995).

As of December 31, 1995, the Company also has two notes receivable from
another officer with original principal face values of $17,500 and $50,000. The
balance on the first note of $12,000 is related to the purchase of common stock,
is secured by the stock and is due November 22, 1996. The unsecured note in the
amount of $50,000 is due November 3, 1998. Interest is payable annually at the
minimum rate of interest required to avoid imputed interest (6.75% at December
31, 1995).

(4) PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost and consist of the following at
December 31, 1994 and 1995 and June 30, 1996:

<TABLE>
<CAPTION>
1996
1994 1995 -----------
---------- ----------- (UNAUDITED)
<S> <C> <C> <C>
Laboratory equipment................................. $1,013,000 $ 1,752,000 $ 1,834,000
Office and computer equipment........................ 527,000 689,000 743,000
Leasehold improvements............................... 126,000 1,747,000 1,732,000
Construction in progress............................. 100,000 -- --
---------- ----------- -----------
1,766,000 4,188,000 4,309,000
Accumulated depreciation and amortization............ (501,000) (1,066,000) (1,380,000)
---------- ----------- -----------
$1,265,000 $ 3,122,000 $ 2,929,000
========== =========== ===========
</TABLE>

F-10
<PAGE> 62

ALANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1994 AND 1995 (AUDITED) AND JUNE 30, 1996 (UNAUDITED)

Laboratory and office equipment acquired under a capital lease obligation
totaled $193,000, $170,000 and $170,000, net of accumulated amortization of
$152,000, $145,000 and $161,000 at December 31, 1994 and 1995 and June 30, 1996,
respectively.

(5) LONG-TERM DEBT

Long-term debt at December 31, 1994 and 1995 and June 30, 1996 consists of
the following:

<TABLE>
<CAPTION>
JUNE 30,
1994 1995 1996
--------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Unsecured, non-interest bearing, term obligation for
preferred stock redemption, face value of $4,500,000,
discounted to an 8.95% effective rate, due June 28,
2001................................................. $ -- $ -- $ 2,931,000
Term note payable to bank, interest at 30-day
commercial paper rate plus 2.95% (8.95% at December
31, 1995), principal payments of $20,000 plus
interest due monthly through August 1996; secured by
equipment............................................ 160,000 160,000 40,000
Capital lease obligation for equipment, interest at
8.5% per annum, monthly installments due through
October 1996, secured by equipment................... 82,000 36,000 12,000
Term obligation for tenant improvements, interest at
11% per annum, monthly installments of $24,000 due
through 2002; secured by leasehold improvements...... -- 1,315,000 1,240,000
--------- ---------- ----------
242,000 1,511,000 4,223,000
Current maturities................................... (199,000) (347,000) (507,000)
--------- ---------- ----------
$ 43,000 $1,164,000 $ 3,716,000
========= ========== ==========
</TABLE>

Maturities of long-term debt as of December 31, 1995, are as follows:

<TABLE>
<CAPTION>
CAPITAL
DEBT LEASE TOTAL
---------- -------- ----------
<S> <C> <C> <C>
1996.................................................... $ 311,000 $ 36,000 $ 347,000
1997.................................................... 171,000 -- 171,000
1998.................................................... 191,000 -- 191,000
1999.................................................... 213,000 -- 213,000
2000.................................................... 589,000 -- 589,000
---------- -------- ----------
1,475,000 36,000 1,511,000
Current maturities...................................... (311,000) (36,000) (347,000)
---------- -------- ----------
$1,164,000 $ -- $1,164,000
========== ======== ==========
</TABLE>

In connection with the secured term note payable, the Company has an
available line of credit for the difference between the balance outstanding on
the term notes and $1,200,000 and $960,000 at December 31, 1994 and 1995,
respectively. The credit facility requires $240,000 of the loan principal
balance to be converted to a term loan and paid annually. The line of credit
bears interest at the 30-day commercial paper rate plus 2.95%. The balance
outstanding on this line of credit was $506,000, $725,000 and $715,000 at
December 31, 1994 and 1995 and June 30, 1996, respectively. Both the term note
payable and line of credit are secured by all of the assets of the Company and
are guaranteed by Amgen Inc. ("Amgen") (Note 7).

F-11
<PAGE> 63

ALANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1994 AND 1995 (AUDITED) AND JUNE 30, 1996 (UNAUDITED)

(6) RESEARCH AND LICENSE AGREEMENTS

Amgen

In April 1994, the Company and Amgen, a preferred stockholder, entered into
a collaborative research and license agreement to conduct drug research
programs. Under the terms of the agreement, the Company received a negotiated
amount for each research FTE devoted to the programs per year. This research
agreement was terminated by mutual agreement effective in June 1996. Included in
contract revenue for 1994 and 1995 is $1,440,000 and $2,565,000, respectively,
recognized under this agreement (Note 7).

Astra Pharma

In December 1994, the Company and Astra AB entered into a three-year
collaboration agreement for the identification and optimization of lead
compounds that interact with a specific opiate receptor which may have
application in the treatment of pain. The agreement was subsequently assigned to
Astra Pharma, an affiliate of Astra AB. The Company was paid a project
initiation fee of $250,000 and, Astra Pharma is obligated to make additional
payments upon the achievement of certain milestones. In addition, Astra Pharma
is obligated to provide up to $2.25 million of additional funding to support
research undertaken in connection with the agreement. Through June 30, 1996,
Alanex has received $1.3 million under the collaboration agreement. Under the
terms of the collaboration, Astra Pharma owns all rights in and has title to any
and all compounds discovered and products developed as a result of the research
collaboration. The Company has no right to commercialize and is not entitled to
receive royalties on the sales of any products resulting from the collaboration
agreement. Astra Pharma may terminate the collaboration agreement at any time
upon three months' written notice. In the event of early termination of the
collaboration agreement, Astra Pharma shall have exclusive title to all
compounds and associated intellectual property rights discovered as a result of
the collaboration.

Novo Nordisk

In October 1995, the Company and Novo Nordisk entered into a three-year
collaboration agreement for the characterization of novel, non-peptide ligands
with desired receptor ligand binding affinities to be used to develop small
molecule drugs for the treatment of diabetes. Novo Nordisk paid the Company a
project initiation fee of $250,000 and is obligated to make additional payments
to the Company upon the achievement of certain milestones. In addition, Novo
Nordisk is obligated to provide up to $4.5 million of additional funding to
support research at the Company in the field of collaboration. The agreement
provides that, in the event the collaboration results in a drug candidate which
Novo Nordisk elects to pursue to commercialization, Novo Nordisk will be granted
an exclusive worldwide license to develop and commercialize such drug candidate
and the Company will receive royalties on the sales of any such drug. Through
June 30, 1996, Alanex has received $1.3 million under the collaboration
agreement. Novo Nordisk may, at any time, terminate the collaboration upon three
months' written notice. Upon any such early termination, any licenses granted to
Novo Nordisk by Alanex under the collaboration agreement will continue in full
force and effect, unless otherwise specifically terminated.

Roche Bioscience

F-12
<PAGE> 64

ALANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1994 AND 1995 (AUDITED) AND JUNE 30, 1996 (UNAUDITED)

Roche Bioscience will be obligated to pay on October 31, 1996. Roche Bioscience
is obligated to make additional payments upon the achievement of certain
milestones. In addition, during the term of the agreement, Roche Bioscience will
provide a minimum of $5.5 million in additional funding to support research
personnel at the Company, and the Company will work exclusively with Roche
Bioscience on the selected molecular target. Through June 30, 1996, the Company
has received $2,575,000 under the collaboration agreement. Roche Bioscience also
has the option, until September 27, 1996, to expand the field of research to
include the funding of one or more additional molecular targets. The agreement
provides to Roche Bioscience an exclusive worldwide license to commercialize any
compounds resulting from the research that is selected by Roche Bioscience for
further development and to pay royalties on any sales of products developed from
the collaboration. Alanex will retain all rights to compounds not selected by
Roche Bioscience for development, provided that Roche Bioscience is not
developing a structurally-related compound on which Roche Bioscience will be
paying milestones and royalties to the Company and Alanex may pursue such
compounds following termination of 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. If the collaboration agreement
is terminated prior to its expiration, all licenses granted by the parties to
one another will terminate and revert back to the respective parties, but Roche
Bioscience will retain the right to commercialize any products resulting from
the research efforts under licenses granted by the Company prior to the
termination.

Mount Sinai

In June 1996, the Company and Mount Sinai entered into an agreement to
conduct research relating to the human GnRH receptor. Under the agreement, the
Company funded the initial phase of the research and is obligated to provide
additional funding upon the achievement of certain milestones. In connection
with the research the agreement, Mount Sinai granted the Company, (i) a
non-exclusive worldwide license to develop and commercialize any products based
upon certain inventions and technologies owned by Mt. Sinai relating to the
human GnRH receptor and (ii) an exclusive worldwide license to develop and
commercialize any products based upon know-how or patents or patent applications
covering inventions made during the course of the research. Pursuant to the
terms of the licenses, the Company is obligated to pay Mount Sinai a percentage
of any milestone payments received by the Company from third-party sublicenses
and royalties on sales of products. The Company may terminate the licenses upon
60 days' written notice whereupon all rights granted under the licenses will
revert back to Mount Sinai.

(7) STOCKHOLDERS' EQUITY

In April 1994, the Company entered into a collaboration agreement with
Amgen under which Alanex granted to Amgen a worldwide exclusive license to drugs
discovered by Alanex to treat neurological diseases and a worldwide nonexclusive
license to Alanex, a proprietary software program developed by the Company to
analyze peptides. In connection with the collaboration agreement, the Company
issued to Amgen 2,978,182 shares of Series A Preferred Stock at a purchase price
of $1.51 per share and a warrant to purchase 703,636 shares of common stock at
an exercise price of $0.005 per share. As of June 1996, the Company had received
a total of $5,280,000 in contract research revenue under the collaboration
agreement.

In June 1996, the collaboration agreement between the Company and Amgen was
terminated. In connection with the termination of the Amgen agreement, (i)
except as set forth below, all rights to the Company's technology reverted to
the Company, (ii) Amgen's warrant to purchase 703,636 shares of common stock was
canceled and the Company issued a new warrant to Amgen to purchase 450,000
shares of common stock at an exercise price of $1.51 per share with a term of
seven years, and (iii) the Company redeemed Amgen's 2,978,182 shares of Series A
Preferred Stock (representing all of the issued and outstanding Preferred Stock
of the Company), at a repurchase price of $1.51 per share. The Company recorded
an

F-13
<PAGE> 65

ALANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1994 AND 1995 (AUDITED) AND JUNE 30, 1996 (UNAUDITED)

unsecured, non-interest bearing promissory note in the amount of $4,500,000 due
June 28, 2001. This note has been discounted in the Consolidated Financial
Statements at 8.95% (Note 5). In addition, under the termination agreement,
Alanex is obligated to provide to Amgen on a non-exclusive basis, on or before
October 28, 1996, certain compounds that were included in the Alanex technology
licensed to Amgen under the collaboration agreement. In exchange for such
compounds, Amgen will pay Alanex $400,000. In connection with the termination,
all licenses, options and other rights to the Company's technology granted to
Amgen under the collaboration agreement were terminated.

(8) STOCK OPTIONS

In November 1993, the Company adopted the Alanex Corporation 1993 Stock
Plan (the "Plan"). Upon adoption of the Plan, 1,050,000 shares of common stock
were reserved for issuance under the Plan. In December 1993, the number of
shares of common stock issuable under the Plan was increased to 1,350,000. Under
the Plan, the Board of Directors may grant incentive stock options to purchase
common stock at prices which are not less than the fair market value at the date
of grant. Nonstatutory stock options are granted at prices which are to be
determined by the Board of Directors, but not less than 85% of fair market value
at the date of grant. Other terms and conditions are established by the Board of
Directors at the time of grant. Options under the Plan generally vest over 4
years and have a term of 10 years from the date of grant.

The Company has from time to time granted options to purchase shares of
common stock outside of the Plan ("NonPlan Options") to certain directors,
officers and employees of the Company. As of June 30, 1996, Non-Plan Options,
granted on January 19, 1996, were outstanding to purchase an aggregate of
150,000 shares of common stock at a weighted average exercise price of $0.10 per
share, and no Non-Plan Options had been exercised. These Non-Plan Options vest
monthly and ratably over a three-year period. Non-Plan Options have a term of
ten years, except that Non-Plan Options generally expire 30 days after the
termination of an optionee's employment or other service relationship with the
Company. In general, if an optionee dies while in an employment or service
relationship with the Company, that person's option may be exercised up to six
months after his death.

Information with respect to stock option activity is as follows:

<TABLE>
<CAPTION>
EXERCISE
PRICE
OPTIONS PER SHARE
------- ---------
<S> <C> <C>
Outstanding, December 31, 1993................................... 349,000 $ .10
Options granted.................................................. 171,000 .10
--------
Outstanding December 31, 1994.................................... 520,000 .10
Options granted.................................................. 148,000 .10
Options exercised................................................ (83,000) .10
Options canceled................................................. (29,000) .10
--------
Outstanding December 31, 1995.................................... 556,000 .10
Options granted (unaudited)...................................... 386,000 .10
Options exercised (unaudited).................................... (14,000) .10
Options canceled (unaudited)..................................... (35,000) .10
--------
Outstanding, June 30, 1996 (unaudited)........................... 893,000 .10
========
</TABLE>

During the six-month period ended June 30, 1996, the Company issued 236,100
options under the 1993 plan with an exercise price of $.10 per share. These
options were issued to management, directors and employees. In accordance with
Accounting Principles Board Opinion No. 25, the Company intends to take a

F-14
<PAGE> 66

ALANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1994 AND 1995 (AUDITED) AND JUNE 30, 1996 (UNAUDITED)

charge to operations of approximately $160,000 over the vesting period of
options to acquire 117,500 shares to record compensation expense incurred as a
result of the issuance of those options. The charge to operations for the six
months ended June 30, 1996 was approximately $3,000. As of June 30, 1996,
377,000 options were vested and exercisable.

(9) INCOME TAXES

The Company's income taxes for 1993, 1994 and 1995 consist of the
following:

<TABLE>
<CAPTION>
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Current:
Federal................................................ $ -- $ -- $ --
State.................................................. 1,000 1,000 2,000
------ ------ ------
1,000 1,000 2,000
------ ------ ------
Deferred:
Federal................................................ -- -- --
State.................................................. -- -- --
------ ------ ------
-- -- --
------ ------ ------
$1,000 $1,000 $2,000
====== ====== ======
</TABLE>

The following table summarizes the tax effects of temporary differences
that give rise to significant portions of the deferred tax assets and deferred
tax liability at December 31, 1994 and 1995:

<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Deferred tax assets:
Accrued employee benefits.................................. $ 28,000 $ 27,000
Net operating loss carryforwards -- federal................ 327,000 587,000
Net operating loss carryforwards -- state.................. 46,000 109,000
--------- --------
Gross deferred tax assets.......................... 401,000 723,000
Valuation allowance.......................................... (401,000) (723,000)
--------- --------
Net deferred tax asset............................. $ -- $ --
========= ========
</TABLE>

The Company has recorded a valuation allowance against any deferred tax
assets for deductible temporary differences and tax operating loss
carryforwards. The Company increased its valuation allowance by approximately
$40,000, $300,000 and $322,000 for the years ended December 31, 1993, 1994 and
1995, respectively, primarily as a result of the increase in tax operating loss
carryforwards.

As of December 31, 1995, the Company has net operating loss carryforwards
for federal income tax purposes of approximately $1,800,000 which are available
to offset future federal taxable income, if any, through 2010, and net operating
loss carryforwards for state income tax purposes of approximately $900,000 which
are available to offset future state taxable income, if any, through 2000.

In accordance with Internal Revenue Code Section 382, the annual
utilization of net operating loss carryforwards and credits existing prior to a
change in control may be limited.

F-15
<PAGE> 67

ALANEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1994 AND 1995 (AUDITED) AND JUNE 30, 1996 (UNAUDITED)

(10) COMMITMENTS

Leases that do not meet the criteria for capitalization are classified as
operating leases with related rentals charged to operations as incurred. Future
minimum lease payments under noncancelable operating leases (with initial lease
terms in excess of one year) as of December 31, 1994 and 1995 are as follows:

<TABLE>
<S> <C>
1996............................. $ 202,000
1997............................. 202,000
1998............................. 202,000
1999............................. 202,000
2000............................. 202,000
Thereafter....................... 270,000
----------
$1,280,000
==========
</TABLE>

Total 1993, 1994 and 1995 rent expense for operating leases was $78,000,
$128,000 and $258,000, respectively. Rent expense for the six-month periods
ended June 30, 1995 and 1996 was $109,000 and $101,000, respectively.

(11) EMPLOYEE BENEFITS PLAN

Effective January 1, 1995, the Board of Directors approved the Alanex
401(k) Compensation Deferral Savings Plan (the "401k Plan"), adopting provisions
of the Internal Revenue Code Section 401(k). The 401k Plan was approved by the
IRS in 1995. The 401k Plan is for the benefit of all qualifying employees, and
permits employee voluntary contributions and Company profit sharing
contributions. At the discretion of the Board of Directors, the Company may
match employee contributions equal to a discretionary percentage of the
employee's salary reductions, limited to the maximum contribution allowable for
income tax purpose. Employer contributions vest proportionally over five years
of service. No employer contributions have been approved by the Board of
Directors through December 31, 1995.

(12) SUBSEQUENT EVENTS

On July 17, 1996, the Board of Directors of the Company, subject to
approval by the stockholders, approved a reincorporation of the Company as a
Delaware corporation. As a result of the reincorporation, the accounts within
the consolidated financial statements have been retroactively restated for all
periods presented to reflect a par value of $0.001 per share.

The Company's 1996 Equity Incentive Plan (the "1996 Plan"), covering an
aggregate of 500,000 shares of Common Stock, was adopted by the Board, subject
to stockholder approval, in July 1996.

F-16
<PAGE> 68

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

NO 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 OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITERS. 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 ITS DATE.
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. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 14
Dividend Policy....................... 14
Capitalization........................ 15
Dilution.............................. 16
Selected Consolidated Financial
Data................................ 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 18
Business.............................. 21
Management............................ 36
Certain Transactions.................. 43
Principal Stockholders................ 45
Description of Capital Stock.......... 46
Shares Eligible for Future Sale....... 47
Underwriting.......................... 49
Legal Matters......................... 50
Experts............................... 50
Additional Information................ 50
Index to Consolidated Financial
Statements.......................... F-1
------------------------
UNTIL , 1996 (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 IS IN ADDITION TO
THE OBLIGATIONS OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- --------------------------------------------
- --------------------------------------------
</TABLE>

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

2,500,000 SHARES

LOGO

COMMON STOCK

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

PROSPECTUS
------------------------

PAINEWEBBER INCORPORATED
NEEDHAM & COMPANY, INC.
SUTRO & CO. INCORPORATED

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

, 1996

- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 69

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth all expenses, other than the 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 and the NASD filing fee.

<TABLE>
<S> <C>
Registration fee.................................................................. $ 11,897
NASD filing fee................................................................... 3,500
Nasdaq Stock Market Listing Application fee....................................... 31,867
Blue sky qualification fees and expenses.......................................... 10,000
Printing and engraving expenses................................................... 80,000
Legal fees and expenses........................................................... 275,000
Accounting fees and expenses...................................................... 125,000
Transfer agent and registrar fees................................................. 10,000
Miscellaneous..................................................................... 27,736
-------
Total................................................................... $575,000
=======
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Section 145 of the Delaware General Corporation Law permits a corporation
to indemnify its directors, officers, employees and other agents in terms
sufficiently broad to permit indemnification (including reimbursement for
expenses) under certain circumstances for liabilities arising under the
Securities Act of 1933, as amended (the "Act"). The Registrant's Bylaws contain
provisions covering indemnification of corporate directors, officers and other
agents against certain liabilities and expenses incurred as a result of
proceedings involving such persons in their capacities as directors, officers,
employees or agents, including proceedings under the Act or the Securities
Exchange Act of 1934.

The Registrant's Bylaws provide for the indemnification of directors and
executive officers to the fullest extent not prohibited by the Delaware General
Corporation Law and authorize the indemnification by the Company of other
officers, employees and other agents as set forth in the Delaware General
Corporation Law. The Registrant has entered into indemnification agreements with
its directors and executive officers, in addition to indemnification provided
for in the Registrant's Bylaws.

The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant and
its officers and directors for certain liabilities arising under the Act or
otherwise.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

Since November 19, 1993, the date of the Registrant's inception, the
Registrant has sold and issued (without payment of any selling commission to any
person) the following unregistered securities:

1. During the period November 19, 1993 to September 1, 1996, the
Registrant granted incentive and non-statutory stock options to employees,
officers and directors of and consultants to the Company under its 1993
Stock Plan (the "1993 Plan") covering an aggregate of 914,200 shares of the
Company's Common Stock. Certain of these option vest over a period of time
following their respective dates of grant.

2. During the period November 19, 1993 to September 1, 1996, the
Registrant granted non-statutory stock options to employees, officers,
directors and consultants of the Company outside of the Company's employee
benefit plans covering an aggregate of 210,000 shares of the Company's
Common Stock. Certain of these options vest over a period of time following
their respective dates of grant.

II-1
<PAGE> 70

3. In November 1993, the Registrant issued 350,000 shares of Common
Stock to a certain executive officer for a promissory note in the amount of
$17,500 bearing interest at the rate of 6.75% per annum.

4. In November 1993, the Registrant issued 3,640,000 shares of the
Company's Common Stock to certain founders of the Company in exchange for
certain partnership interests held by such founders in Alanex, L.P., a
California limited partnership and certain equity interests in Plictrix,
Inc., a California corporation.

5. In December 1993, the Registrant issued 140,000 shares of Common
Stock to a director of the Company for a total purchase price of $1,400.

6. In April 1994, pursuant to the terms of an equity financing of the
Company, the Registrant issued 2,978,182 shares of the Company's Series A
Preferred Stock for $4,497,055 in cash to a certain investor. In connection
with the equity financing, the Registrant granted a warrant to purchase
703,636 shares of the Company's Common Stock at a purchase price of $.005
per share to the same investor.

7. In June 1996, the Registrant canceled the warrant referenced in
paragraph (4) above and granted a warrant to purchase 450,000 shares of the
Company's Common Stock at a purchase price of $1.51 per share to the same
investor.

The sales and issuances of securities in the transactions described in
paragraphs (1) and (2), (3) and (5) above were deemed to be exempt from
registration under the Securities Act by virtue of Rule 701 promulgated
thereunder in that they were offered and sold either pursuant to written
compensatory benefit plans or pursuant to a written contract relating to
compensation, as provided by Rule 701.

The sales and issuances of securities in the transactions described in
paragraphs (4), (6) and (7) above were deemed to be exempt from registration
under the Securities Act by virtue of Section 4(2) and/or Regulation D
promulgated thereunder.

The recipients represented their intention to acquire the securities for
investment purposes only and not with a view to the distribution thereof.
Appropriate legends are affixed to the stock certificates issued in such
transactions. Similar legends were imposed in connection with any subsequent
sales of any such securities. All recipients either received adequate
information about the Registrant or had access, through employment or other
relationships, to such information.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(A) EXHIBITS.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -------------------------------------------------------------------------------
<C> <S>
1.1** Form of Underwriting Agreement.
2.1* Form of Agreement and Plan of Merger to be used in connection with Registrant's
Reincorporation in Delaware.
3.1* Registrant's Articles of Incorporation.
</TABLE>

<TABLE>
<C> <S>
3.2* Registrant's Certificate of Incorporation to be effective following the closing
of this offering.
3.3* Registrant's Bylaws to be effective after closing.
4.1* Reference is made to Exhibits 3.1 and 3.2.
4.2* Specimen stock certificate.
5.1** Opinion of Cooley Godward LLP.
10.1* Form of Indemnification Agreement entered into between the Registrant and its
directors and executive officers.
</TABLE>

II-2
<PAGE> 71

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -------------------------------------------------------------------------------
<C> <S>
10.2* Registrant's 1993 Stock Plan, as amended.
10.3* Form of Incentive Stock Option Agreement under the 1993 Stock Plan.
10.4* Form of Nonstatutory Stock Option Agreement under the 1993 Stock Plan.
10.5* Registrant's 1996 Equity Incentive Plan (the "1996 Plan")
10.6* Form of Incentive Stock Option Agreement under the 1996 Plan.
10.7* Form of Nonstatutory Stock Option Agreement under the 1996 Plan.
10.8* Registrant's Employee Stock Purchase Plan and related offering document.
10.9+* Termination and Redemption Agreement dated June 28, 1996 between the Registrant
and Amgen Inc.
10.10* Warrant to purchase Common Stock dated June 28, 1996, between the Registrant
and Amgen Inc.
10.11* Promissory Note dated June 28, 1996 in the original principal amount of
$4,500,000 payable to the order of Amgen Inc.
10.12* Amendment to Collaboration Agreement dated December 19, 1994 and among
Registrant, Astra AB and Astra Pharma, Inc.
10.13+* Collaboration Agreement dated December 19, 1994 between the Registrant and
Astra AB.
10.14+* Collaboration Agreement dated October 31, 1995 between the Registrant and Novo
Nordisk.
10.15+* Collaborative Research and License Agreement dated June 27, 1996, between the
Registrant and Roche Bioscience, a division of Syntex (U.S.A.) Inc.
10.16* Materials Transfer and Research Agreement dated June 27, 1996 between the
Registrant and Roche Bioscience, a division of Syntex (U.S.A.) Inc.
10.17+* Research Agreement dated June 17, 1996 between the Registrant and Mount Sinai
School of Medicine of the City University of New York.
10.18+* Nonexclusive License Agreement dated June 17, 1996 between the Registrant and
Mount Sinai School of Medicine of the City University of New York.
10.19+* Exclusive License Agreement dated June 17, 1996 between the Registrant and
Mount Sinai School of Medicine of the City University of New York.
10.20* Term WCMA Loan on Security Agreement dated June 6, 1994 between the Registrant
and Merrill Lynch Business Financial Services Inc.
10.21* Term WCMA Note dated June 6, 1994 payable by the Company to Merrill Lynch
Business Financial Services Inc. in the original principal amount of
$1,200,000.
10.22* Standard Industrial Lease -- Multi-Tenant dated July 1, 1994 between the
Registrant and General Atomics.
10.23* Promissory Note dated November 22, 1993 in the original principal amount of
$17,500.
10.24* Promissory Note dated November 3, 1995 in the original principal amount of
$50,000.
10.25* Promissory Note dated May 22, 1996 in the original principal amount of $60,000.
10.26* Employment Agreement dated May 1, 1996 between Michelle A. Youngers and the
Company
10.27* Letter Agreement dated July 17, 1996 between Marvin R. Brown and the Company
10.28* Letter Agreement dated July 17, 1996 between Alexander Polinsky and the Company
10.29* Secured Promissory Note dated October 31, 1994 in the original principal amount
of $1,476,640 payable to the order of Genessee Properties, Inc.
11.1* Statement regarding calculation of net income (loss) per share.
</TABLE>

II-3
<PAGE> 72

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -------------------------------------------------------------------------------
<C> <S>
23.1 Consent of KPMG Peat Marwick LLP
23.2** Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
24.1 Power of Attorney. Reference is made to page II-6.
27.1* Financial Data Schedule
</TABLE>

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

* Previously filed.
** To be filed by amendment.

+ Confidential treatment requested for portions of the exhibit.

(b) SCHEDULES

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 Registrant hereby undertakes to provide 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
of 1933 may be permitted to directors, officers, and controlling persons of the
Registrant, the Registrant 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 Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant 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 Registrant 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 Act and
will be governed by the final adjudication of such issue.

The undersigned Registrant undertakes that: (1) for purposes of determining
any liability under the Securities Act, the information omitted from the form of
prospectus as filed as part of the registration statement in reliance upon Rule
430A and contained in the 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,
and (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-4
<PAGE> 73

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to 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 1st day of October,
1996.

By: /s/ MARVIN R. BROWN
Marvin R. Brown
President and Chief Executive
Officer

Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- --------------------------- -------------------
<S> <C> <C>
/s/ MARVIN R. BROWN President, Chief Executive October 1, 1996
- --------------------------------------------- Officer and Director
Marvin R. Brown, M.D. (Principal Executive
Officer)
*/s/ MICHELLE A. YOUNGERS Director of Finance and October 1, 1996
- --------------------------------------------- Secretary
Michelle A. Youngers (Principal Financial and
Accounting Officer)
*/s/ ALEXANDER POLINSKY Director October 1, 1996
- ---------------------------------------------
Alexander Polinsky, Ph.D.
*/s/ JON R. JESSEN Director October 1, 1996
- ---------------------------------------------
Jon R. Jessen
*/s/ ARNOLD T. HAGLER Director October 1, 1996
- ---------------------------------------------
Arnold T. Hagler, Ph.D.
*/s/ TIMOTHY J. RINK Director October 1, 1996
- ---------------------------------------------
Timothy J. Rink, M.D., Sc.D.
*By: /s/ MARVIN R. BROWN
- ---------------------------------------------
Marvin R. Brown
Attorney-in-fact
</TABLE>

II-5
<PAGE> 74

EXHIBIT INDEX

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
------- --------------------------------------------------------------------------------
<C> <S> <C>
1.1** Form of Underwriting Agreement.....................................
2.1* Form of Agreement and Plan of Merger to be used in connection with
Registrant's Reincorporation in Delaware...........................
3.1* Registrant's Articles of Incorporation.............................
</TABLE>

<TABLE>
<C> <S> <C>
3.2* Registrant's Certificate of Incorporation to be effective following
the closing of this offering.......................................
3.3* Registrant's Bylaws to be effective after closing..................
4.1* Reference is made to Exhibits 3.1 and 3.2..........................
4.2* Specimen stock certificate.........................................
5.1** Opinion of Cooley Godward LLP......................................
10.1* Form of Indemnification Agreement entered into between the
Registrant and its directors and executive officers................
10.2* Registrant's 1993 Stock Plan, as amended...........................
10.3* Form of Incentive Stock Option Agreement under the 1993 Stock
Plan...............................................................
10.4* Form of Nonstatutory Stock Option Agreement under the 1993 Stock
Plan...............................................................
10.5* Registrant's 1996 Equity Incentive Plan (the "1996 Plan")..........
10.6* Form of Incentive Stock Option Agreement under the 1996 Plan.......
10.7* Form of Nonstatutory Stock Option Agreement under the 1996 Plan....
10.8* Registrant's Employee Stock Purchase Plan and related offering
document...........................................................
10.9+* Termination and Redemption Agreement dated June 28, 1996 between
the Registrant and Amgen Inc.......................................
10.10* Warrant to purchase Common Stock dated June 28, 1996, between the
Registrant and Amgen Inc...........................................
10.11* Promissory Note dated June 28, 1996 in the original principal
amount of $4,500,000 payable to the order of Amgen Inc.............
10.12* Amendment to Collaboration Agreement dated December 19, 1994 and
among Registrant, Astra AB and Astra Pharma, Inc...................
10.13+* Collaboration Agreement dated December 19, 1994 between the
Registrant and Astra AB............................................
10.14+* Collaboration Agreement dated October 31, 1995 between the
Registrant and Novo Nordisk........................................
10.15+* Collaborative Research and License Agreement dated June 27, 1996,
between the Registrant and Roche Bioscience, a division of Syntex
(U.S.A.) Inc.......................................................
10.16* Materials Transfer and Research Agreement dated June 27, 1996
between the Registrant and Roche Bioscience, a division of Syntex
(U.S.A.) Inc.......................................................
10.17+* Research Agreement dated June 17, 1996 between the Registrant and
Mount Sinai School of Medicine of the City University of New
York...............................................................
10.18+* Nonexclusive License Agreement dated June 17, 1996 between the
Registrant and Mount Sinai School of Medicine of the City
University of New York.............................................
</TABLE>

<PAGE> 75

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
------- --------------------------------------------------------------------------------
<C> <S> <C>
10.19+* Exclusive License Agreement dated June 17, 1996 between the
Registrant and Mount Sinai School of Medicine of the City
University of New York.............................................
10.20* Term WCMA Loan on Security Agreement dated June 6, 1994 between the
Registrant and Merrill Lynch Business Financial Services Inc.......
10.21* Term WCMA Note dated June 6, 1994 payable by the Company to Merrill
Lynch Business Financial Services Inc. in the original principal
amount of $1,200,000...............................................
10.22* Standard Industrial Lease -- Multi-Tenant dated July 1, 1994
between the Registrant and General Atomics.........................
10.23* Promissory Note dated November 22, 1993 in the original principal
amount of $17,500..................................................
10.24* Promissory Note dated November 3, 1995 in the original principal
amount of $50,000..................................................
10.25* Promissory Note dated May 22, 1996 in the original principal amount
of $60,000.........................................................
10.26* Employment Agreement dated May 1, 1996 between Michelle A. Youngers
and the Company....................................................
10.27* Letter Agreement dated July 17, 1996 between Marvin R. Brown and
the Company........................................................
10.28* Letter Agreement dated July 17, 1996 between Alexander Polinsky and
the Company........................................................
10.29* Secured Promissory Note dated October 31, 1994 in the original
principal amount of $1,476,640 payable to the order of Genesee
Properties, Inc....................................................
11.1* Statement regarding calculation of net income (loss) per share.....
23.1 Consent of KPMG Peat Marwick LLP...................................
23.2** Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1....
24.1* Power of Attorney. Reference is made to page II-6..................
27.1* Financial Data Schedule............................................
</TABLE>

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

* Previously filed.

** To be filed by amendment.

+ Confidential treatment requested for portions of the exhibit.

<PAGE> 1

EXHIBIT 23.1

[KPMG PEAT MARWICK LLP LETTERHEAD]

INDEPENDENT AUDITORS' CONSENT

The Board of Directors
Alanex Corporation:

We consent to the use of our report included herein and to the references to our
firm under the headings "Selected Consolidated Financial Data" and "Experts"
in the prospectus.

KPMG PEAT MARWICK LLP

San Diego, California
September 16, 1996