ANERGEN INC, 424B1, 1996-08-12

ANERGEN INC
424B1, 1996-08-12
BIOLOGICAL PRODUCTS, (NO DIAGNOSTIC SUBSTANCES)

Previous: NEOSE TECHNOLOGIES INC, 10-Q, 1996-08-12

Next: INLAND CAPITAL FUND L P, 10-Q, 1996-08-12

<PAGE> 1
Filed Pursuant to Rule 424(b)(1)
Registration No. 333-07245

3,500,000 SHARES

LOGO

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

All the shares of Common Stock offered hereby are being sold by Anergen,
Inc. The Common Stock is traded on the Nasdaq National Market under the symbol
ANRG. Of the 3,500,000 shares of Common Stock being offered hereby, 600,000
shares will be sold to Warburg, Pincus Ventures, L.P., a principal stockholder
of Anergen, Inc. See "Principal Stockholders" and "Underwriting." On August 7,
1996, the closing sale price of the Company's Common Stock as reported by Nasdaq
was $3.63 per share. See "Price Range of Common Stock."

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.

<TABLE>
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- -----------------------------------------------------------------------------------------------
Per Share....................... $3.00 $0.21 $2.79
- -----------------------------------------------------------------------------------------------
Total........................... $10,500,000 $609,000 $9,891,000
- -----------------------------------------------------------------------------------------------
Total Assuming Full Exercise of
Over-Allotment Option(3)...... $12,075,000 $719,250 $11,355,750
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>

(1) The Underwriters will not be paid underwriting discounts and commissions in
connection with the 600,000 shares of Common Stock to be sold to Warburg,
Pincus Ventures, L.P. See "Underwriting."
(2) Before deducting expenses estimated at $400,000, 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 525,000 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 in New York City on or about August 14,
1996.
------------------------

PAINEWEBBER INCORPORATED VECTOR SECURITIES INTERNATIONAL, INC.
------------------------

THE DATE OF THIS PROSPECTUS IS AUGUST 9, 1996.
<PAGE> 2
[Graphic entitled "Autoimmune Cascade in Multiple Sclerosis" depictinga
macrophage engulfing a self-antigen from a nerve cell and presenting that
self-antigen on its surface, It further shows that the binding of the
self-antigen to the T cell receptor, when accompanied by "second signals" from
the macrophage, triggers T cell proliferation and the production of cytokines
that attack and damage the nerve cell]

[graphic subtitled "AnergiX(TM)" depicting T cells being bound by AnergiX
compounds, going into a state of inactivation or anergy, and not attacking the
nerve cell]

[graphic subtitled "AnervaX(TM)" depicting patient's antibodies binding to a
portion of the MHC protein on the surface of a macrophage, thereby preventing
the interaction between a T cell and the self-antigen presented by the
macrophage]

The terms Anergen, AnergiX, MS/AnergiX, MG/AnergiX, RA/AnergiX,
IDDM/AnergiX, and AnervaX are trademarks of the Company.

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.

2
<PAGE> 3

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors," and the Financial Statements and Notes
thereto, appearing elsewhere in this Prospectus. This Prospectus 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. Factors that might cause such a difference include, but are
not limited to, those discussed in "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business" as
well as elsewhere in this Prospectus.

THE COMPANY

Anergen, Inc. ("Anergen" or "the Company") is focused on the treatment of
autoimmune diseases through the discovery and development of proprietary
therapeutics that selectively interrupt the disease process. Anergen's current
research and development efforts are focused on two distinct core technologies,
AnergiX(TM) and AnervaX(TM), that the Company believes may be used to treat a
broad range of autoimmune diseases without generally suppressing the immune
system. Patient selection has begun for a Phase I clinical trial of the
Company's AnergiX compound for the treatment of multiple sclerosis ("MS") and
the Company has initiated a Phase II clinical trial of its AnervaX compound for
the treatment of rheumatoid arthritis ("RA"). Since 1993, the Company has
collaborated with Novo Nordisk A/S ("Novo Nordisk") in the development of
AnergiX treatments for MS, insulin dependent diabetes mellitus ("IDDM") and
myasthenia gravis ("MG"). In June 1996, the Company announced a collaborative
agreement with N.V. Organon ("Organon") to develop an AnergiX treatment for RA.

In the body's immune system, T cells normally regulate the identification
and destruction of foreign substances and malignant cells. Autoimmune diseases
are caused by abnormal destruction of healthy body tissues by disease-specific T
cells. Anergen's results to date suggest that treatments based on its core
technologies may interrupt the chain of events fundamental to the onset and
continuation of certain autoimmune diseases. The Company's AnergiX technology
selectively destroys or inactivates (anergizes) the T cells implicated in the
disease process. Its second core technology, AnervaX, stimulates the immune
system to produce antibodies that block the presentation of self-antigens to
destructive T cells. The Company believes that, because its potential
therapeutics target only disease-specific T cells, the normal function of the
immune system should remain unaffected. In contrast, currently available
therapies for autoimmune diseases treat only the symptoms of the disease or
broadly suppress the immune system, which can compromise the ability of the
immune system to protect against foreign substances.

Anergen received investigational new drug application ("IND") clearance in
December 1995 with the United States Food and Drug Administration ("FDA") to
begin Phase I clinical testing of its AnergiX compound for the treatment of MS.
In preclinical studies, the administration of an AnergiX compound prevented or
reduced disease symptoms caused by the T cell initiated autoimmune response in
animal models. The Company has also demonstrated in vitro that its AnergiX
compound can inactivate human T cells associated with MS. The Company is
collaborating with Novo Nordisk on the development of this compound.

In April 1996, the Company initiated a multicenter, double-blind,
placebo-controlled Phase II clinical trial of its AnervaX compound for the
treatment of RA. The results of a Phase I clinical trial completed in October
1995 indicated that AnervaX is well tolerated and can stimulate an immune
response in RA patients. Preclinical results have also demonstrated that the
Company's AnervaX approach may prevent the onset or reduce the severity of
autoimmune disease in animal models.

3
<PAGE> 4

In March 1996, the development program with Novo Nordisk was extended through
August 1998, increasing total funds expected to be received by the Company under
the collaboration from $25 million to $35 million. These amounts do not include
the cost of clinical trials that will be borne directly by Novo Nordisk.

In June 1996, the Company entered into a collaborative agreement with
Organon under which Organon, in exchange for certain marketing rights, will
support research and development of an AnergiX compound to treat RA that
incorporates a proprietary peptide discovered by Organon. Under the arrangement,
Organon will also pay the Company a one-time license fee, make milestone
payments and pay royalties on product sales, if any. The license fee, research
and development support and milestone payments that the Company may receive
under this agreement are estimated to exceed $15 million. These amounts do not
include the cost of clinical trials that will be borne directly by Organon.

The Company was incorporated in California in April 1988 as Biospan
Corporation and changed its name to Anergen, Inc. in July 1991. The Company's
principal executive offices are located at 301 Penobscot Drive, Redwood City,
California 94063, and its telephone number at that location is (415) 361-8901.

THE OFFERING

<TABLE>
<S> <C>
Common Stock Offered by the Company....... 3,500,000 shares(1)
Common Stock to be Outstanding after the
Offering................................ 18,529,430 shares(2)
Use of Proceeds........................... Research and product development, clinical
trials, additional personnel, capital
equipment, manufacturing expansion and other
working capital and general corporate purposes.
See "Use of Proceeds."
Nasdaq National Market Symbol............. ANRG
</TABLE>

- ---------------
(1) Assumes no exercise of the Underwriters' over-allotment option to purchase
up to 525,000 additional shares of Common Stock.
(2) Based upon the number of shares outstanding as of March 31, 1996. Excludes
825,815 shares issuable upon exercise of options outstanding under the
Company's 1988 Stock Option Plan, 20,000 shares issuable upon exercise of
options outstanding under the Company's 1995 Director Option Plan and
459,015 shares of Common Stock issuable upon exercise of outstanding
warrants. See "Capitalization," "Management -- Incentive Stock Plans" and
Note 6 to Financial Statements.

4
<PAGE> 5

SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Contract revenues -- related party...... $ -- $ -- $ 339 $ 2,325 $ 3,001 $ 551 $ 783
Interest income......................... 163 544 312 207 533 17 139
------- ------- ------- ------- ------- ------- -------
Total revenues................... 163 544 651 2,532 3,534 568 922
------- ------- ------- ------- ------- ------- -------
Expenses:
Research and development................ 2,696 4,525 5,553 7,423 8,322 1,898 1,895
General and administrative.............. 1,218 1,494 1,716 1,831 1,976 462 503
Interest expense........................ 142 78 226 238 322 71 55
------- ------- ------- ------- ------- ------- -------
Total expenses................... 4,056 6,097 7,495 9,492 10,620 2,431 2,453
------- ------- ------- ------- ------- ------- -------
Net loss.................................. $(3,893) $(5,553) $(6,844) $(6,960) $(7,086) $(1,863) $(1,531)
======= ======= ======= ======= ======= ======= =======
Net loss per share(1)..................... $ (0.96) $ (0.99) $ (1.12) $ (0.97) $ (0.55) $ (0.25) $ (0.10)
======= ======= ======= ======= ======= ======= =======
Shares used in calculating per share
data(1)................................. 4,059 5,599 6,118 7,202 12,859 7,527 14,984
======= ======= ======= ======= ======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------
ACTUAL AS ADJUSTED(2)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, equivalents and short-term investments...................... $ 9,653 $ 19,144
Total assets...................................................... 12,461 21,952
Long-term portion of capital lease obligations and debt........... 636 636
Total shareholders' equity........................................ 10,190 19,681
</TABLE>

- ---------------
(1) See Note 1 to Financial Statements for the method used to determine shares
used in calculating per share data.
(2) Adjusted to reflect the net proceeds from the sale by the Company of
3,500,000 shares of Common Stock offered hereby.

5
<PAGE> 6

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 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. Factors that might cause such a difference include,
but are not limited to, those discussed in "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business" as well as elsewhere in this Prospectus.

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

The Company was founded in 1988 to discover and develop biopharmaceutical
compounds for the treatment of autoimmune diseases. To achieve profitable
operations, the Company, alone or with others, must successfully develop, obtain
regulatory approval for, manufacture and market products. The Company does not
have any products available for sale nor does it expect to have any products
commercially available for at least several years, if at all. The Company's
potential products are at the early stages of research and development, with
only limited human testing of certain of the Company's products undertaken to
date. The products currently under development by the Company will require
significant additional research, laboratory testing and clinical trials and
investment of capital prior to their commercialization. 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 be successfully marketed. See "Business -- Products Under Development."

HISTORY OF NET LOSSES; ACCUMULATED DEFICIT

The Company has experienced significant net losses every year since its
inception in 1988. Net losses for the fiscal years ended December 31, 1994 and
1995 and the quarter ended March 31, 1996 were approximately $7.0 million, $7.1
million and $1.5 million, respectively, and the Company had an accumulated
deficit of approximately $37.8 million as of March 31, 1996. The Company expects
to incur substantial and increasing net losses for at least the next several
years. The amount of net losses and the time required by the Company to reach
profitability are highly uncertain. There can be no assurance that the Company
will ever be able to generate product revenue or achieve profitability on a
substantial basis or at all. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

FUTURE REQUIREMENT FOR SIGNIFICANT ADDITIONAL CAPITAL

The Company anticipates that its current cash and short-term investments
and expected revenues under its collaborations, combined with the estimated net
proceeds of this offering, will be sufficient to fund the Company's operations
for at least two years. The Company anticipates that such resources will be
primarily used to fund clinical testing of AnervaX for RA, and continued
research and development and preparation for clinical testing of AnergiX for the
treatment of IDDM and MG and additional research and development. The balance of
such resources will be used to fund continued limited research on other
autoimmune diseases and general and administrative activities, including those
associated with seeking collaborative arrangements to enable the Company to
increase its research and development activities in other autoimmune diseases.
The Company's working capital requirements over the next two years may vary
depending upon numerous factors, including the progress of the Company's
research and development programs, manufacturing activities, the progress of the
Company's clinical programs, the results of laboratory testing, the time and
cost required to seek regulatory approvals to commence clinical trials for the
Company's initial products, the need to obtain licenses to other proprietary
rights, any required adjustments to the Company's operating plan to respond to
competitive pressures or technological advances, developments with respect to
existing or future collaborative arrangements and the availability of various
methods of financing. In addition to this offering, the Company expects to seek
to raise additional capital through equity or debt financing, research and
development collaborations with corporate partners or through other sources. Any
additional equity financing may be

6
<PAGE> 7

dilutive to shareholders, and debt financing, if available, may involve
restrictions on stock dividends and other restrictions on the Company. Adequate
funds for the Company's operations, whether from equity or debt financings,
collaborative or other arrangements with corporate partners or from other
sources, may not be available when needed or on terms attractive to the Company.
Insufficient funds may require the Company to delay, scale back or eliminate
some or all of its research and product development programs or to license third
parties to commercialize products or technologies that the Company would
otherwise seek to develop itself. The Company's liquidity will be reduced as
amounts are expended for continuing research and development. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."

UNCERTAINTIES RELATED TO PRECLINICAL AND CLINICAL TRIALS

Before obtaining regulatory approvals for the commercial sale of any of its
products under development, the Company must demonstrate through preclinical
studies and clinical trials that the product is safe and efficacious for use in
each target indication. The results from preclinical studies and early clinical
trials may not be predictive of results that will be obtained in large-scale
testing, and there can be no assurance that the Company's clinical trials will
demonstrate the safety and efficacy of any products or will result in any
marketable products. A number of companies in the biotechnology industry have
suffered significant setbacks in advanced clinical trials, even after promising
results in earlier trials. The failure to adequately demonstrate the safety and
efficacy of a therapeutic product under development could delay or prevent
regulatory approval of the product and could have a material adverse effect on
the Company.

The rate of completion of the Company's clinical trials is dependent upon,
among other factors, the FDA's willingness to allow Anergen to proceed; the
results of Anergen's continued research and development, including test results
and success in producing the epitopes and MHC molecules for each AnergiX
compound; the number of skilled scientists, clinicians, and consultants the
Company is able to employ in its efforts and the general interest in the medical
community in a therapeutic using the Company's approach for treatment of the
diseases targeted by the Company. Currently, the Company does not anticipate
establishing its own clinical trials facility. The rate of completion of
clinical trials is also dependent on patient enrollment, which is a function of
many factors, including the size of the patient population, the proximity of
patients to clinical sites and the existence of competitive trials. If the
Company is unable to successfully complete its clinical trials, its business,
financial condition and results of operations could be materially and adversely
affected. See "Business -- Government Regulation."

UNCERTAINTY OF MARKET ACCEPTANCE

Even if the requisite regulatory approvals are obtained for the Company's
potential products or for products developed in collaboration with the Company,
uncertainty exists as to whether such products will be accepted by the market. A
number of factors also may limit the market acceptance of a product which may be
developed by, or discovered through collaboration with, the Company, including
the rate of adoption by health care practitioners, the indications for which the
product is approved, the rate of the product's acceptance by the target
population, the timing of market entry relative to competitive products, the
availability of alternative therapies, the price of the Company's product
relative to alternative therapies, the availability of third-party reimbursement
and the extent of marketing efforts by the Company and third-party distributors
or agents retained by the Company. Side effects or unfavorable publicity
concerning a Company product or any similar product could have an adverse effect
on the Company's ability to obtain physician, patient or third-party payor
acceptance and on efforts to sell that product. There can be no assurance of the
Company's ability, or the length of time required, to achieve commercialization
of the Company's products or that physicians, patients or third party payors
will accept any of the Company's products as readily as alternative therapies,
or at all. See "Business -- Products Under Development" and "-- Pharmaceutical
Pricing and Reimbursement."

GOVERNMENT REGULATION; NO ASSURANCE OF OBTAINING PRODUCT APPROVALS

The Company's research and development activities are subject to regulation
by numerous governmental authorities in the United States and other countries.
Further, the future production and marketing of any

7
<PAGE> 8

products developed by the Company would also be regulated, particularly as to
safety and efficacy. In the United States, vaccines, drugs and biologics are
subject to rigorous FDA review. The Federal Food, Drug, and Cosmetic Act, the
Public Health Service Act and other federal statutes and regulations govern or
influence the testing, manufacture, safety, labeling, storage, record keeping,
approval, advertising and promotion of such products. Noncompliance with
applicable requirements can result in fines, recall or seizure of products,
clinical study holds, total or partial suspension of production, refusal of the
government to approve New Drug Applications ("NDA"), Product License
Applications ("PLA"), Establishment License Applications ("ELA") or allow the
Company to enter into supply contracts and criminal prosecution. The FDA also
has the authority to revoke PLAs and ELAs previously granted.

In order to obtain FDA approval of a new biological product, the Company
must submit proof of safety, purity, potency and efficacy. In most cases such
proof entails extensive pre-clinical, laboratory, and clinical tests. The
testing, preparation of necessary marketing applications and processing of those
applications by the FDA is expensive and time consuming, can vary based on the
type of product, and may take several years to complete. There is no assurance
that the FDA will act favorably or quickly in making such reviews, and
significant difficulties or costs may be encountered by the Company in its
efforts to obtain FDA approvals that could delay or preclude the Company from
marketing any products it may develop or furnish an advantage to competitors.
The FDA may also require post-marketing testing and surveillance to monitor the
effects of approved products or place conditions on any approvals that could
restrict the commercial applications of such products. Product approvals may be
withdrawn if compliance with regulatory standards is not maintained or if
problems occur following initial marketing. In addition, delays imposed by the
governmental approval process may materially reduce the period during which the
Company may have the exclusive right to exploit patented products or
technologies.

The FDA approval process for a new biological drug involves completion of
pre-clinical studies which include laboratory tests and animal studies to assess
safety and effectiveness of the drug. Among other things, the results of these
studies as well as how the product will be manufactured, are submitted to the
FDA in an IND and, unless the FDA objects, the IND becomes effective 30 days
following receipt by the FDA. FDA-cleared human clinical trials may then be
conducted. The results of the clinical trials are submitted to the FDA as part
of a PLA. In addition to obtaining FDA approval for each AnergiX indication, an
ELA must be filed and the FDA must approve the manufacturing facilities for the
product. Product sales may commence only if the PLA and ELA are approved.
Regulatory requirements for obtaining such FDA approvals are rigorous and there
can be no assurance that such approvals will be obtained on a timely basis or at
all.

Sales of pharmaceutical products outside the United States are subject to
foreign regulatory requirements that vary widely from country to country. The
time required to obtain approvals required by foreign countries may be longer or
shorter than that required for FDA approval, and requirements for licensing may
differ from FDA requirements.

If approval is obtained, the Company will be subject to continuing FDA
obligations. When manufacturing biologics, the Company will be required to
adhere to regulations setting forth current Good Manufacturing Practices
("GMP"), which require that the Company manufacture its products and maintain
its records in a prescribed manner with respect to manufacturing, testing and
quality control activities. Further, the Company must pass a preapproval
inspection of its manufacturing facilities by the FDA before obtaining approval.

Satisfaction of these FDA requirements, or similar requirements by foreign
regulatory agencies, typically takes several years and the time needed to
satisfy them may vary substantially, based upon the type, complexity and novelty
of the pharmaceutical product. The effect of government regulation may be to
delay or to prevent marketing of potential products for a considerable period of
time and to impose costly procedures upon the Company's activities. There can be
no assurance that the FDA or any other regulatory agency will grant approval for
any products or indications being developed by the Company on a timely basis, or
at all. Success in preclinical or early stage clinical trials does not assure
success in later stage clinical trials. Data obtained from preclinical and
clinical activities are susceptible to varying interpretations which could
delay, limit or prevent regulatory approval. If regulatory approval of a product
is granted, such approval may impose limitations on the indicated uses for which
a product may be marketed. Further, even if regulatory approval is

8
<PAGE> 9

obtained, later discovery of previously unknown problems with a product may
result in restrictions on the product, including withdrawal of the product from
the market. Delay in obtaining or failure to obtain regulatory approvals would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Government Regulation."

DEPENDENCE UPON COLLABORATIVE PARTNERS

The Company's strategy for the development, clinical trials, manufacturing
and commercialization of its products includes maintaining and entering into
various collaborations with corporate partners, licensors, licensees and others.
To date, the Company has entered into collaborative arrangements with Novo
Nordisk with respect to the Company's AnergiX compounds for the treatment of MS,
MG and IDDM, and with Organon with respect to an AnergiX compound for the
treatment of RA. 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 or that such collaborators will successfully perform their development,
regulatory compliance, manufacturing or marketing functions or that such
collaborations will continue. There can also be no assurance that the Company
will be able to negotiate additional collaborative arrangements in the future on
acceptable terms, if at all, or that any such collaborative arrangements will be
successful. To the extent that the Company is not able to maintain or establish
such arrangements, the Company would be required to undertake such activities at
its own expense, which would significantly increase the Company's capital
requirements and limit the programs the Company is able to pursue. In addition,
the Company may encounter significant delays in introducing its products into
certain markets or find that the development, manufacture or sale of its
products in such markets is adversely affected by the absence of such
collaborative agreements.

The Company cannot control the amount and timing of resources which its
collaborative partners devote to the Company's program or potential products,
which can vary because of factors unrelated to the potential product.
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, 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. The Company's collaborative partners may develop, either alone or
with others, products that compete with the development and marketing of the
Company's products. Competing products, either developed by the collaborative
partners or to which the collaborative partners have rights, may result in their
withdrawal of support with respect to all or a portion of the Company's
technology, which would have a material adverse effect on the Company's
business, financial condition and results of operations. If Novo Nordisk,
Organon or any future collaborative partner breaches or terminates their
agreements with the Company or otherwise fails to conduct their collaborative
activities in a timely manner, the preclinical or clinical development or
commercialization of product candidates or research programs will be delayed,
and the Company will be required to devote additional resources to product
development and commercialization or terminate certain development programs.
There also can be no assurance that disputes will not arise in the future with
respect to the ownership of rights to any technology developed with third
parties. These and other possible disagreements between collaborators and the
Company could lead to delays in the collaborative research, development and
commercialization of certain product candidates or could require or result in
litigation or arbitration, which would be time consuming and expensive, and
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Business -- Collaborative Arrangements" and "-- Manufacturing."

UNCERTAINTY RELATING TO PATENTS AND PROPRIETARY RIGHTS

9
<PAGE> 10

scope of any patent protection will be significant, or that the patents will be
held valid if subsequently challenged. Moreover, the Company cannot ascertain
with certainty that no patent conflict will exist with other products or
processes which could compete with the Company's approaches.

Because of the length of time and expense associated with bringing new
products through development and to the marketplace, 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 is highly uncertain. Federal court decisions indicating
legal considerations surrounding the validity of patents in the field are in
transition, and there can be no assurance that the historical legal standards
surrounding questions of validity 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.

While the Company pursues patent protection for products and processes
where appropriate, it also relies on trade secrets, know-how and continuing
technological advancement to develop and maintain its competitive position. The
Company's policy is to have each employee enter into an agreement that contains
provisions prohibiting the disclosure of confidential information to anyone
outside the Company. Research and development contracts and relationships
between the Company and its scientific consultants provide access to aspects of
the Company's know-how that is protected generally under confidentiality
agreements with the parties involved. There can be no assurance, however, that
these confidentiality agreements will be honored or that the Company can
effectively protect its rights to its unpatented trade secrets. Moreover, there
can be no assurance that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's trade secrets.

The Company may be required to obtain licenses to patents or other
proprietary rights from third parties. There can be no assurance that any
licenses required under any patents or proprietary rights will be made available
on terms acceptable to the Company, if at all. If the Company does not obtain
required licenses, it could encounter delays in product development while it
attempts to redesign products or methods or it could find that the development,
manufacture or sale of products requiring such licenses could be foreclosed.

The Company is aware of a European patent and corresponding U.S. and
Australian patents which contain claims that relate to certain of the Company's
proposed products and their uses. In accordance with European Patent Office
("EPO") procedures, third parties can oppose an EPO patent grant by presenting
information which they believe justifies narrowing or revoking the grant of the
patent. The Company is opposing the aforementioned grant in the EPO. There can,
however, be no assurance that the granted EPO claims will be revoked or
significantly narrowed in scope as a result of the opposition proceeding. If
valid claims in these patents are found to be infringed by the Company's
products, the Company's ability to make, use, offer to sell, or sell, such
products could be materially and adversely affected.

In addition, the Company could incur substantial costs in defending any
patent litigation brought against it or in asserting the Company's patent
rights, including those licensed to the Company by others, in a suit against
another party. The United States Patent and Trademark Office (the "USPTO") could
institute interference proceedings in connection with one or more of the
Company's patents or patent applications, which proceedings could result in an
adverse decision as to priority of an invention. The USPTO also could institute
reexamination proceedings in connection with one or more of the Company's
patents or patent applications, which could result in an adverse decision as to
the patents' validity or scope. See "Business -- Patents and Proprietary
Rights."

NEED TO DEVELOP MANUFACTURING CAPABILITIES; RELIANCE ON SOLE SUPPLIER

The Company has no volume manufacturing capacity or experience in volume
manufacturing of pharmaceutical or other biological products. Establishing its
own volume manufacturing capabilities would

10
<PAGE> 11

require significant scale-up expenses and additions to facilities and personnel.
In addition, the Company must successfully develop the process required for
volume manufacturing. The pharmaceutical products under development by the
Company have never been manufactured on a commercial scale and there can be no
assurance that such products can be manufactured at a cost or in quantities to
make them commercially viable. The Company will be required to establish
arrangements with contract manufacturers to supply a portion of its compounds
for subsequent clinical trials as well as the manufacture, packaging, labeling
and distribution of finished products. If the Company is unable to contract for
sufficient supply of a portion of its compounds on acceptable terms, and it is
unable to develop the capability to produce the epitopes internally, the
Company's human clinical testing schedule would be delayed, resulting in the
delay of submission of products for regulatory approval and initiation of new
development programs, which would have a material adverse effect on the Company.
If the Company should encounter delays or difficulties in establishing
relationships with manufacturers to produce, package and distribute its finished
products, market introduction and subsequent sales of such products would be
adversely affected. Moreover, contract manufacturers that the Company may use
must adhere to current GMP regulations enforced by the FDA through its
facilities inspection program. If these facilities cannot pass a pre-approval
plant inspection, the FDA pre-market approval of the products will be adversely
affected.

The Company is dependent on a single supplier, HyClone Laboratories, Inc.
("HyClone"), for approximately 14% of its consumable supplies in fiscal 1995.
The Company does not have a contractual agreement with HyClone and orders all
supplies using purchase orders. The Company solicited price quotations from
several vendors before choosing HyClone as its supplier, and if HyClone is
unable or unwilling to supply the Company in the future, the Company would need
to repeat its search for a supplier. This search could delay or hamper
development and manufacture of the Company's products. There can be no assurance
that Anergen will be able to continue its relationship with HyClone on
acceptable terms or that it would be able to find an alternative supplier should
their relationship discontinue.

LACK OF MARKETING EXPERIENCE; DEPENDENCE ON THIRD PARTIES

The Company currently has no sales, marketing or distribution capability.
The Company intends to rely on relationships with one or more pharmaceutical
companies with established distribution systems and direct sales forces to
market its products. In the event that the Company is unable to reach agreement
with one or more pharmaceutical companies to market its products, it may be
required to market its products directly and to develop a marketing and sales
force with technical expertise and supporting distribution capability. There can
be no assurance that the Company will be able to establish in-house sales and
distribution capabilities or relationships with third parties, or that it will
be successful in gaining market acceptance for its products. To the extent that
the Company decides to utilize existing or future co-promotion or other
licensing arrangements, the Company must develop its own sales, marketing or
distribution capability, and there can be no assurance that such efforts will be
successful. See "Business -- Collaborative Arrangements" and "-- Marketing and
Sales."

COMPETITION AND TECHNOLOGICAL CHANGE

The biotechnology and pharmaceutical industries are characterized by
rapidly evolving technology and intense competition. The Company's competitors
include major pharmaceutical, chemical and specialized biotechnology companies,
most of which have financial, technical, research and development,
manufacturing, clinical and marketing resources significantly greater than those
of the Company. The Company believes that these other entities recognize the
need for effective therapies for the autoimmune diseases targeted by the Company
and are highly motivated to develop such therapies. In addition, many
specialized biotechnology companies have formed collaborations with large,
established companies to support research, development and commercialization of
products that may be competitive with those of the Company. Academic
institutions, governmental agencies and other public and private research
organizations are also conducting research activities and seeking patent
protection and may commercialize products on their own or through joint
ventures. The Company is aware of certain products in development by competitors
that are intended to be used for the prevention or treatment of certain diseases
the Company has targeted for product development.

11
<PAGE> 12

The existence of these products, or other products or treatments of which the
Company is not aware, or products or treatments that may be developed in the
future which may be more effective, may adversely affect the commercialization
or marketability of products which may be developed by the Company or
potentially render the Company's technology obsolete or non-competitive.

The Company's competitive position will depend on its ability to attract
and retain qualified scientific and other personnel, develop effective
proprietary products, implement production and marketing plans, obtain patent
protection and secure adequate capital resources. In addition, the first
pharmaceutical product to reach the market in a therapeutic or preventive area
is often at a significant competitive advantage relative to later entrants to
the market. The Company expects its products, if approved for sale, to compete
primarily on the basis of product efficacy, safety, patent position,
reliability, price and patient convenience. See "Business -- Competition."

UNCERTAINTY RELATED TO PHARMACEUTICAL PRICING AND REIMBURSEMENT

Political, economic and regulatory influences are subjecting the health
care industry in the United States to fundamental change. Initiatives to reduce
the federal deficit and to reform health care delivery are increasing these cost
containment efforts. The Company anticipates that Congress, state legislatures
and the private sector will continue to review and assess alternative benefits,
controls on health care spending through limitations on the growth of private
health insurance premiums and Medicare and Medicaid spending, the creation of
large insurance purchasing groups, price controls on pharmaceuticals and other
fundamental changes to the health care delivery system. Any such proposed or
actual changes could cause existing and potential partners of the Company to
limit or eliminate spending on collaborative development projects. Legislative
debate is expected to continue in the future, market forces are expected to
demand reduced costs and Anergen cannot predict what impact the adoption of any
federal or state health care reform measures or future private sector reforms
may have on its business.

In both domestic and foreign markets, sales of the Company's proposed
products will depend in part upon the availability of reimbursement from
third-party payors, such as government health administration authorities,
private health insurers and other organizations. In addition, other third-party
payors are increasingly challenging the price and cost effectiveness of medical
products and services. Significant uncertainty exists as to the reimbursement
status of newly approved health care products. There can be no assurance that
the Company's potential products or products discovered in collaboration with
the Company will be considered cost-effective or that adequate third-party
reimbursement will be available to enable Anergen to maintain price levels
sufficient to realize an appropriate return on its significant investment in
product research and development. Legislation and regulations affecting the
pricing of pharmaceuticals may change before the Company's proposed products are
approved for marketing. Adoption of such legislation could further limit
reimbursement for medical products. If adequate coverage and reimbursement
levels are not provided by the government and third-party payors for the
Company's products, the market acceptance of these products would be adversely
affected, which would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Pharmaceutical
Pricing and Reimbursement."

DEPENDENCE ON AND NEED FOR ADDITIONAL KEY PERSONNEL; RELIANCE ON ACADEMIC
COLLABORATORS

The success of the Company and of its business strategy is dependent in
large part on the ability of the Company to attract and retain key management
and operating personnel. Such persons are in high demand and are often subject
to competing offers. The Company will need to develop expertise and add skilled
employees or retain consultants in such areas as research and development,
clinical testing, government approvals, marketing and manufacturing in the
future. There can be no assurance that the Company will be able to attract and
retain the qualified personnel or develop the expertise needed for its business.
The loss of the services of one or more of the Company's officers or other
members of the research or management group or the inability to hire additional
personnel and develop expertise as needed would have a material adverse effect
on the Company.

12
<PAGE> 13

A significant portion of the Company's research and development and
clinical trials is conducted under sponsored research programs with several
universities. The Company depends on the availability of the principal
investigator for each such program, and the Company cannot assure that these
individuals or their research staffs will be available to conduct research and
development or clinical trials. The Company's academic collaborators are not
employees of the Company. As a result, the Company has limited control over
their activities and can expect that only limited amounts of their time will be
dedicated to Company activities. In addition, the Company's academic
collaborators are employed by major institutions which have collaborative
relationships with other parties, some of which may be competitors of the
Company. Accordingly, there can be no assurance that research and development,
preclinical and clinical testing performed by these collaborators will be
completed in a timely manner, if at all, and any inability to do so could have a
material adverse effect on the Company.

POTENTIAL PRODUCT LIABILITY

The testing, marketing and sale of human health care products entail an
inherent risk of exposure to product liability claims in the event that the use
of the Company's technology or prospective products is alleged to have resulted
in adverse effects. While the Company has taken, and will continue to take, what
it believes are appropriate precautions to minimize exposure to product
liability, there can be no assurance that it will avoid significant liability.
The Company possesses limited general liability and product liability insurance
related to its clinical trials of AnervaX for RA and intends to seek such
insurance related to its clinical trials of AnergiX for MS and certain other
types of insurance customarily obtained by business organizations. There can be
no assurance that the existing insurance coverage is adequate or that it will
avoid liability. The Company intends to seek insurance against product liability
risks associated with the testing, manufacturing or marketing of its products.
However, there can be no assurance that it will be able to obtain such insurance
in the future, or that if obtained, such insurance will be sufficient in amount.
Consequently, a product liability claim or other claims with respect to
uninsured liabilities or in excess of insured liabilities could have a material
adverse effect on the business or financial condition of the Company.

HAZARDOUS MATERIALS; ENVIRONMENTAL MATTERS

The Company is subject to regulation by the Occupational Safety and Health
Administration ("OSHA") and the Environmental Protection Agency ("EPA") and to
regulation under the Toxic Substances Control Act, the Resource Conservation and
Recovery Act and other regulatory statutes, and may in the future be subject to
other federal, state or local regulations. Although the Company believes that it
has complied with these laws, regulations and policies in all material respects
and has not been required to take any significant action to correct any material
noncompliance, there can be no assurance that the Company will not be required
to incur significant costs to comply with environmental and health and safety
regulations in the future. The Company's research and development involves the
controlled use of hazardous materials, including but not limited to certain
hazardous chemicals and radioactive materials. Although the Company believes
that its safety procedures for handling and disposing of such materials comply
with the standards prescribed by state and federal regulations, the risk of
accidental contamination or injury from these materials cannot be eliminated. In
the event of such an accident, the Company could be held liable for any damages
that result and any such liability could exceed the resources of the Company. In
addition, regulations may be promulgated governing biotechnology that may affect
the Company's research and development programs. The Company is unable to
predict whether any agency will adopt any regulation which would have a material
adverse effect on the Company's business, financial condition and results of
operations.

VOLATILITY OF STOCK PRICE

The market price of the Company's Common Stock, similar to the securities
of other biotechnology companies, has been and is likely to continue to be
highly volatile. Announcements regarding the results of regulatory approval
filings, clinical trials or other testing, technological innovations or new
commercial products by the Company or its competitors, patents and intellectual
property rights by the Company or its competitors, developments as to current or
future collaborations by the Company or its competitors,

13
<PAGE> 14

government regulations, the status of health care reform initiatives,
fluctuations in operating results, changes in recommendations by financial
analysts, and general market conditions for biotechnology stocks could have a
significant impact on the future price of the Common Stock. Trading volume of
the Company's Common Stock has been relatively limited and sales of substantial
amounts of Common Stock could have an adverse effect on the price of the Common
Stock. See "Price Range of Common Stock."

CONTROL BY EXISTING STOCKHOLDERS

Upon completion of the offering, the Company's officers, directors and
principal shareholders, namely Warburg, Pincus Ventures, L.P. ("Warburg"),
International Biotechnology Trust PLC ("IBT"), and Novo Nordisk, collectively
will beneficially own approximately 52.4% of the Company's outstanding Common
Stock, or approximately 51.0% if the Underwriters' over-allotment option is
exercised in full. Under a March 1995 common stock purchase agreement with
Warburg and IBT ("Warburg/IBT Purchase Agreement"), the Company is currently
obligated to include in the slate of nominees recommended by the Company's Board
of Directors and management, at each election of directors, two candidates
selected by Warburg, one candidate selected by IBT and one candidate mutually
agreed to by IBT and Warburg. In addition, pursuant to an August 1993 common
stock purchase agreement with Novo Nordisk entered into in connection with the
Novo Nordisk collaboration, the Company is similarly obligated to include in its
slate of nominees, at each election of directors, one candidate selected by Novo
Nordisk. The ownership of the Company's Common Stock, and the ability to
designate candidates for the Company's recommended slate of nominees for the
Board of Directors, of Warburg, IBT and Novo Nordisk will enable such
shareholders to have significant influence over major corporate transactions as
well as the election of directors of the Company and control over board
decisions and could have the effect of delaying, deterring or preventing a
change in control of the Company. See "Principal Stockholders" and "Description
of Capital Stock."

SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS

Sales of significant amounts of the Company's Common Stock in the public
market after this offering by other shareholders and option and warrant holders
could adversely affect the market price of the Company's Common Stock. Upon the
completion of this offering, the Company will have 18,566,042 shares of Common
Stock outstanding, assuming no exercise of outstanding options or warrants after
May 31, 1996. Approximately 18,152,077 shares (including the 3,500,000 shares
sold in this offering) of Common Stock are eligible for immediate sale in the
public market without restriction unless they are subject to lockup agreements
or held by "affiliates" of the Company within the meaning of Rule 144 ("Rule
144") of the Securities Act of 1933, as amended (the "Securities Act"), although
shares held by persons who may be deemed affiliates are subject to volume
restrictions applicable to affiliates under Rule 144. As of May 31, 1996,
8,786,074 shares were held by persons who may be deemed affiliates under Rule
144. In addition, 1,279,815 shares of Common Stock were subject to options
outstanding as of May 31, 1996, and 451,300 of these shares were fully vested.
Upon exercise of the currently vested portion of such options, all shares will
be eligible for immediate sale in the public market, subject to Rule 144 volume
restrictions applicable to affiliates or lockup agreements, if applicable. As of
May 31, 1996, there were 459,015 shares of Common Stock subject to warrants
which, upon exercise of such warrants, may be freely tradeable pursuant to Rule
144 or as a result of registration pursuant to registration rights. The Company
and each of its officers, directors and 5% or greater stockholders have agreed
not to sell or otherwise dispose of Common Stock of the Company for a 90-day
period following the effective date of the Registration Statement of which this
Prospectus is a part. The Commission has recently proposed to reduce the Rule
144 holding periods. If enacted, such modification will have a material effect
on the timing of when shares of the Company's Common Stock become eligible for
resale. Further, certain shareholders have the right, subject to certain
conditions, to participate in future Company registrations and to cause the
Company to register certain Common Stock owned by them. See "Description of
Capital Stock" and "Shares Eligible for Future Sale."

14
<PAGE> 15

ABSENCE OF DIVIDENDS; DILUTION

The Company has never paid any cash dividends and does not anticipate
paying cash dividends in the foreseeable future. Purchasers of the Common Stock
offered hereby will experience immediate and substantial dilution in the amount
of $1.94 in net tangible book value per share. Additional dilution will occur
upon exercise of outstanding stock options and warrants. See "Dividend Policy"
and "Dilution."

ANTI-TAKEOVER PROVISIONS; POSSIBLE ISSUANCE OF PREFERRED STOCK OR ACCELERATION
OF OPTION VESTING

The Board of Directors has authority, without further action by
shareholders, to issue up to 10,000,000 shares of Preferred Stock with rights,
preferences and privileges designated by the Board of Directors. This Preferred
Stock could be issued quickly with terms calculated to delay or prevent a change
in control of the Company or to make removal of management more difficult. In
certain circumstances, such issuance could have the effect of decreasing the
market price of the Common Stock or of delaying, deterring or preventing a
change in control of the Company. The Company has no present plan to issue any
shares of Preferred Stock. Further, pursuant to the Company's option plans, in
the event of certain mergers of the Company with other entities, transfers of
voting control of the Company's capital stock or sale of all or substantially
all of the Company's assets, the Company's Board of Directors has the right
under certain circumstances to cause all outstanding options to become fully
vested prior to the event causing such acceleration and all unexercised options
will terminate upon completion of such event. See "Management -- Employment
Agreements and Change of Control Arrangements."

15
<PAGE> 16

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 $9.5 million ($11.0 million if
the Underwriters' over-allotment option is exercised in full) after deducting
underwriting discounts and commissions and estimated offering expenses.

The Company expects to use the net proceeds from this offering for working
capital and general corporate purposes, including research and development,
clinical trials, hiring additional technical personnel, acquiring capital
equipment, and expanding manufacturing capabilities. The Company anticipates
that its current cash and short-term investments and expected revenues under its
collaborations, combined with the estimated net proceeds of this offering, will
be sufficient to fund its operations for at least two years. Consistent with its
past allocation of expenses, the Company intends to spend approximately 80% (or
approximately $7.6 million) of the net proceeds of this offering on research and
development related activities, and approximately 20% (or approximately $1.9
million) of such proceeds on general and administrative activities. The research
and development expenditures will be allocated principally to the Company's
ongoing Phase II clinical trials of AnervaX for RA; manufacturing of GMP grade
material for the Phase I clinical trial of the Company's AnergiX for MS and the
conduct of such clinical trial; research activities in its core AnervaX and
AnergiX technologies to further current programs in RA, MS, IDDM and MG and to
develop programs in other autoimmune diseases; and support of research
activities in academic institutions. The foregoing forward-looking statements
involve risks and uncertainties that could cause actual results to differ
materially. In particular, the Company has not identified precisely the amounts
it plans to spend on its various programs for production capabilities,
facilities, or working capital and general corporate purposes. The use of
proceeds is subject to change based upon the progress of the Company's research
and development programs, manufacturing activities, the progress of the
Company's clinical programs, the results of laboratory testing, the time and
cost required to seek regulatory approvals to commence clinical trials for the
Company's initial products, the need to obtain licenses to other proprietary
rights, any required adjustments to the Company's operating plan to respond to
competitive pressures or technological advances, developments with respect to
the Company's existing or future collaborative arrangements and the availability
of various methods of financing. The Company reserves the right at the
discretion of its Board of Directors to reallocate its use of proceeds of this
offering in response to these and other factors. See "Risk Factors -- Future
Requirement for Significant Additional Capital", "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
"Business -- Collaborative Arrangements."

Pending such uses, the Company intends to invest the net proceeds of the
offering in high-grade, interest-bearing financial instruments.

DIVIDEND POLICY

The Company has not declared or paid any dividends since its inception and
does not intend to pay any dividends in the foreseeable future. In addition,
there are restrictions imposed upon the Company's ability to pay cash dividends
under certain of the Company's credit arrangements.

16
<PAGE> 17

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
March 31, 1996, and as adjusted as of such date to reflect the receipt of the
net proceeds from the sale of the 3,500,000 shares of Common Stock offered
hereby (after deducting the underwriting discounts and commissions and estimated
offering expenses). See "Use of Proceeds."

<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------
AS
ACTUAL ADJUSTED(1)
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term portion of capital lease obligations and debt............... $ 636 $ 636
-------- --------
Shareholders' equity:
Preferred Stock: no par value, 10,000,000 shares authorized; none
outstanding...................................................... -- --
Common Stock: no par value, 40,000,000 shares, authorized;
15,029,430 shares issued and outstanding and: 18,529,430 shares
issued and outstanding as adjusted(2)(3)......................... 47,400 56,891
Additional paid-in capital.......................................... 648 648
Unrealized loss on investments...................................... (18) (18)
Accumulated deficit................................................. (37,840) (37,840)
-------- --------
Total shareholders' equity.................................. 10,190 19,681
-------- --------
Total capitalization.................................................. $ 10,826 $ 20,317
======== ========
</TABLE>

- ---------------
(1) Adjusted to reflect net proceeds of approximately $9.5 million from this
offering.

(2) See Note 6 to Financial Statements.

(3) As adjusted shares include 3,500,000 shares of Common Stock to be issued on
the closing of this offering. Excludes 825,815 shares issuable upon exercise
of stock options outstanding under the Company's 1988 Stock Plan, 20,000
shares issuable upon exercise of options outstanding under the Company's
1995 Director Option Stock Plan and 459,015 shares issuable upon exercise of
warrants outstanding as of March 31, 1996. Subsequent to March 31, 1996,
additional options for 434,000 shares were granted and options for 681
shares were exercised. See "Management -- Incentive Stock Plans" and Note 6
to Financial Statements.

PRICE RANGE OF COMMON STOCK

The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "ANRG". The following table sets forth, for the periods indicated,
the range of low and high sale prices for the Company's Common Stock as reported
on the Nasdaq National Market since January 1, 1994:

<TABLE>
<CAPTION>
LOW HIGH
----- -----
<S> <C> <C>
1994
First Quarter.............................................. $4.25 $7.00
Second Quarter............................................. 3.25 5.50
Third Quarter.............................................. 3.00 5.25
Fourth Quarter............................................. 1.88 3.75
1995
First Quarter.............................................. $1.75 $4.00
Second Quarter............................................. 2.13 4.13
Third Quarter.............................................. 3.13 5.50
Fourth Quarter............................................. 2.63 5.50
1996
First Quarter.............................................. $3.34 $4.50
Second Quarter............................................. 3.13 6.34
Third Quarter (through August 7, 1996)..................... 3.13 5.34
</TABLE>

As of May 31, 1996 there were approximately 375 holders of record of the
Company's Common Stock. On August 7, 1996, the last sale price reported on the
Nasdaq National Market for the Company's Common Stock was $3.63 per share. See
"Risk Factors -- Volatility of Stock Price."

17
<PAGE> 18

DILUTION

The net tangible book value of the Company as of March 31, 1996 was
$10,190,000 or approximately $0.68 per share of Common Stock. Net tangible book
value per share is determined by dividing the net tangible book value (tangible
assets less total liabilities) by the number of shares of Common Stock
outstanding at that date. After giving effect to the receipt of the net proceeds
from the sale of the 3,500,000 shares of Common Stock offered hereby, the pro
forma net tangible book value of the Company as of March 31, 1996 would have
been approximately $19,681,000 or $1.06 per share of Common Stock. This
represents an immediate increase in net tangible book value of $0.38 per share
to existing shareholders and an immediate dilution of $1.94 per share to
purchasers of Common Stock in this offering. The following table illustrates
this per share dilution:

<TABLE>
<S> <C> <C>
Public offering price per share(1)................................ $ 3.00
-------
Net tangible book value per share before the offering........... 0.68
Increase per share attributable to new investors................ 0.38
------
Pro forma net tangible book value per share after the offering.... 1.06
-------
Dilution per share to new investors............................... $ 1.94
=======
</TABLE>

- ---------------
(1) Before deducting the underwriting discounts and commissions and estimated
offering expenses payable by the Company.

18
<PAGE> 19

SELECTED FINANCIAL DATA

The selected financial data set forth below with respect to the Company's
statements of operations for each of the three years in the period ended
December 31, 1995, and for the Company's balance sheets at December 31, 1994 and
1995, are derived from the Company's financial statements that have been audited
by Ernst & Young LLP, independent auditors, which are included elsewhere in this
Prospectus and are qualified by reference to such financial statements. The
balance sheet data as of December 31, 1991, 1992, and 1993 and the statements of
operations data for the years ended December 31, 1991 and 1992 have been derived
from the Company's audited financial statements which are not included herein.
The selected financial data at March 31, 1996 and for the three months ended
March 31, 1995 and 1996 are derived from the unaudited financial statements
included elsewhere in this Prospectus. The unaudited financial statements
include all adjustments, consisting only of normal recurring adjustments, which
the Company considers necessary for a fair presentation of its financial
position and results of operations for those periods. Operating results for the
three months ended March 31, 1996 are not necessarily indicative of the results
that may be expected for the full year ending December 31, 1996. The data set
forth below should be read in conjunction with the financial statements and the
notes related thereto.

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Contract revenues -- related party...... $ -- $ -- $ 339 $ 2,325 $ 3,001 $ 551 $ 783
Interest income......................... 163 544 312 207 533 17 139
------- ------- ------- ------- ------- ------- -------
Total revenues................... 163 544 651 2,532 3,534 568 922
Expenses:
Research and development................ 2,696 4,525 5,553 7,423 8,322 1,898 1,895
General and administrative.............. 1,218 1,494 1,716 1,831 1,976 462 503
Interest expense........................ 142 78 226 238 322 71 55
------- ------- ------- ------- ------- ------- -------
Total expenses................... 4,056 6,097 7,495 9,492 10,620 2,431 2,453
------- ------- ------- ------- ------- ------- -------
Net loss.................................. $(3,893) $(5,553) $(6,844) $(6,960) $(7,086) $(1,863) $(1,531)
======= ======= ======= ======= ======= ======= =======
Net loss per share........................ $ (0.96) $ (0.99) $ (1.12) $ (0.97) $ (0.55) $ (0.25) $ (0.10)
======= ======= ======= ======= ======= ======= =======
Shares used in calculating per share
data(1)................................. 4,059 5,599 6,118 7,202 12,859 7,527 14,984
======= ======= ======= ======= ======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, equivalents and short-term
investments........................... $13,655 $ 8,918 $ 9,585 $ 3,756 $11,492 $ 9,653
Total assets............................ 14,350 10,724 11,763 6,797 14,455 12,461
Long-term portion of capital lease
obligations and debt.................. 241 1,112 956 990 818 636
Total shareholders' equity.............. 13,188 7,857 9,251 3,870 11,714 10,190
</TABLE>

- ---------------
(1) Based on the number of shares outstanding for each applicable period.
Excludes employee stock options, director stock options and warrants
outstanding on March 31, 1996, for 825,815, 20,000 and 459,015 shares of
Common Stock, respectively, at weighted average exercise prices of $5.28,
$3.72 and $4.85 per share, respectively. In addition, 37,341 shares were
reserved for issuance under the Company's 1992 Consultant Stock Plan. See
"Management -- Incentive Stock Plans" and "Description of Capital Stock."

19
<PAGE> 20

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

The following discussion of the financial condition and results of
operations of Anergen, Inc. should be read in conjunction with the Financial
Statements and related Notes thereto included elsewhere in this Prospectus. This
Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from the
results anticipated in these forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed herein
and in "Risk Factors" and "Business" as well as elsewhere in this Prospectus.

LIQUIDITY AND CAPITAL RESOURCES

To date, the Company has financed its operations primarily through private
placements of its equity securities with venture capitalists (which raised an
aggregate of approximately $7.6 million in net proceeds), through an initial
public offering of its Common Stock in October of 1991 (which raised
approximately $14.2 million in net proceeds), through the sale of its Common
Stock to Novo Nordisk, in August of 1993 (which raised approximately $8 million
in net proceeds), and in June, 1994 through the issuance of 413,965 shares of
Common Stock and Warrants to purchase an additional 236,863 shares of Common
Stock at an exercise price of $3.52 per share through a private placement to two
purchasers in exchange for $1.5 million in proceeds. In April 1995 the Company
issued 7,317,073 shares of the Company's Common Stock to two new investors in
exchange for approximately $14.7 million in net proceeds. At March 31, 1996, the
Company's cash and short-term investments were approximately $9.7 million and
the Company had shareholders' equity of approximately $10.2 million. As of March
31, 1996 the Company had net borrowings of $1.4 million under three loan
agreements. Lease lines and loans have been and will continue to be used by the
Company to the extent that their terms are commercially attractive; however,
there can be no assurance that additional borrowing facilities will be
available. No amounts were available under debt or lease lines at March 31,
1996. At March 31, 1996 the Company had no material commitments for capital
expenditures.

The Company anticipates that its current cash, short-term investments and
expected revenues under its collaborations, combined with the estimated net
proceeds of this offering, will be sufficient to fund the Company's operations
for at least two years. The Company anticipates that its current resources will
be primarily used to fund clinical testing of AnervaX for RA, and continued
research and development and preparation for clinical testing of AnergiX for the
treatment of IDDM and MG and additional research and development. The balance of
such resources will be used to fund continued limited research on other
autoimmune diseases and general and administrative activities, including those
associated with seeking collaborative arrangements to enable the Company to
increase its research and development activities in other autoimmune diseases.
The foregoing forward-looking statements involve risks and uncertainties that
could cause actual results to differ materially. In particular, the Company's
capital requirements will vary depending upon numerous factors many of which are
outside the Company's control. These factors include the progress of the
Company's research and development programs, manufacturing activities, the
progress of the Company's clinical programs, the results of laboratory testing,
the time and cost required to seek regulatory approvals to commence clinical
trials for the Company's initial products, the need to obtain licenses to other
proprietary rights, any required adjustments to the Company's operating plan to
respond to competitive pressures or technological advances, developments with
respect to the Company's existing or future collaborative arrangements, and the
availability of various methods of financing. The Company expects to seek to
raise additional capital through equity or debt financing, research and
development collaborations with corporate partners or through other sources. Any
additional equity financing may be dilutive to shareholders, and debt financing,
if available, may involve restrictions on stock dividends and other restrictions
on the Company. Adequate funds for the Company's operations, whether from equity
or debt, collaborative or other arrangements with corporate partners or from
other sources, may not be available when needed or on terms attractive to the
Company. Insufficient funds may require the Company to delay, scale back or
eliminate some or all of its research and product development programs or to
license third parties to commercialize products or technologies that the Company
would otherwise seek to develop itself. The Company's liquidity will be reduced
as amounts are expended for continuing research and development.

20
<PAGE> 21

RESULTS OF OPERATIONS

Since its inception, the Company has engaged entirely in research and
development activities. The Company has been unprofitable to date, has generated
only limited revenues and expects to incur substantial and increasing net losses
over at least the next several years due to continued and expanded requirements
for research and development, laboratory testing, clinical trials, manufacturing
and regulatory activities. For the period from its inception through March 31,
1996, the Company has incurred a cumulative deficit of approximately $37.8
million.

Years Ended December 31, 1995, 1994 and 1993

The Company's net losses increased to $7.1 million in 1995 from $7.0
million in 1994 and from $6.8 million in 1993. The Company expects to incur
substantial and increasing net losses for at least the next several years. The
Company's total expenses increased to $10.6 million in 1995 from $9.5 million in
1994 and $7.5 million in 1993. In 1995, increased expenses were substantially
offset by contract revenues totaling approximately $3.0 million from its
corporate partner.

The Company began earning contract revenues in the fourth quarter of 1993
under the collaborative agreement with the Company's corporate partner, Novo
Nordisk. Contract revenues represent reimbursement of certain research and
development costs and totaled $3.0 million in 1995 compared with $2.3 million
for fiscal 1994 and $339,000 in 1993.

Research and development expenses increased to $8.3 million in 1995 from
$7.4 million in 1994 and $5.6 million in 1993. The 12% increase from 1994 to
1995 was primarily due to clinical trial costs for the Phase I trial for the
Company's AnervaX product for RA, preclinical costs associated with the
Company's filing of an IND for its AnergiX product for MS and increased
activities related to the Company's research project involving IDDM. The 34%
increase from 1993 to 1994 was due primarily to the initiation of clinical
trials for the Company's AnervaX product for RA and increased activities related
to preparation for filing an IND for the Company's AnergiX product for MS. The
Company expects research and development spending to continue to increase during
the next several years.

General and administrative expenses were approximately $2.0 million, $1.8
million and $1.7 million in 1995, 1994 and 1993, respectively. These increases
were due to adding personnel and providing necessary business, administrative
and finance resources to support increased research and development activities.
The Company expects to incur higher general and administrative expenses in the
next several years to support its expanded research and development efforts and
to pursue strategic relationships and continued funding for the Company's
operations.

In 1995 interest income rose to $533,000 due to an increase in cash and
short term investment balances resulting from proceeds received from the
follow-on financing completed in April 1995. Interest income fell to $207,000 in
1994 from $312,000 in 1993 due to decreasing cash and short-term investment
balances. Interest expense increased in 1995 to $322,000 due to debt financing
of the Company's facility expansion and addition of laboratory equipment.
Interest expense rose to $238,000 in 1994 from $226,000 in 1993 due to debt
financing related to the improvement of facilities and the purchase of
additional equipment.

At December 31, 1995, the Company had federal and state net operating loss
carryforwards of approximately $33.7 million and $16.6 million, respectively,
which expire in varying amounts through 2010. The Company's stock offering in
April 1995 resulted in a change in ownership for tax purposes and it is expected
that the entire net operating loss and credit carryforwards will be subject to
an annual limitation based on the Company's pre-change value. The annual
limitation will result in the expiration of the net operating losses and credits
before utilization. See Note 8 to Financial Statements.

21
<PAGE> 22

Three Months Ended March 31, 1996 and 1995

The Company's net loss decreased 18% to $1,531,000 in the fiscal quarter
ended March 31, 1996 compared to a $1,863,000 loss in the corresponding period
in the previous year due to increases in contract revenues and interest income
of $232,000 and $122,000, respectively. The Company's contract revenues relate
to its collaborative agreement with Novo Nordisk. Total expenses increased
slightly to $2,453,000 from $2,431,000. The Company expects total operating
expenses to increase as it increases research and development efforts,
laboratory testing, clinical trials, manufacturing and regulatory activities.

Research and development expenses decreased slightly to $1,895,000 for the
quarter ended March 31, 1996 from $1,898,000 in the corresponding period in the
previous year. In 1996, research and development costs relate to preparation for
Phase II clinical trials for AnervaX for RA and for a Phase I trial of AnergiX
for MS and to increased research activities in the IDDM program. In 1995, these
costs related primarily to the initiation of clinical trials of AnervaX for RA
and research activities in preparation of filing an IND for AnergiX for MS.

General and administrative expenses increased 9% to $503,000 for the
quarter ended March 31, 1996 compared to $462,000 in the corresponding period in
the previous year primarily due to increased corporate development activities.

Interest income increased to $139,000 for the quarter ended March 31, 1996
as compared to interest income of $17,000 in the corresponding period in the
previous year due to increased cash and short-term investment balances primarily
due to the sale of Common Stock to new investors in April 1995. Interest expense
decreased to $55,000 for the quarter ended March 31, 1996 as compared to
interest expense of $71,000 in the corresponding period in the previous year due
to a lower debt balance. Interest income is expected to increase as a result of
the temporary investment of the net proceeds of this offering and to decline
gradually as invested capital is used for operating activities.

Three Months Ended June 30, 1996 and 1995

The Company's net loss increased by 4% to $1,786,000 in the fiscal quarter
ended June 30, 1996 compared to a $1,717,000 loss in the corresponding period in
the previous year due primarily to a decrease in contract revenues and related
contract research and development activities. The Company's contract revenues
relate to its collaborative agreement with Novo Nordisk. Total expenses
decreased from $2,878,000 to $2,545,000 due primarily to decreased contracted
research and development expenses. The Company expects total operating expenses
to increase as it increases research and development efforts.

Research and development expenses decreased 17% to $1,945,000 for the
quarter ended June 30, 1996 from $2,332,000 in the corresponding period in the
previous year. This is due to a decrease in outside contracted costs of
preclinical activities of an IND for AnergiX for MS, filed in November 1995, and
to a decrease in clinical costs associated with the Company's ongoing clinical
trials of AnervaX. The Phase II clinical trial of AnervaX was initiated in June
1996.

General and administrative expenses increased 20% to $556,000 for the
quarter ended June 30, 1996 compared to $465,000 in the corresponding period in
the previous year primarily due to the retirement of John Fara, Ph.D., the
former President and CEO, the recruitment and hiring of Barry Sherman, M.D., as
President and CEO, and to increased corporate development activities.

Interest income decreased to $120,000 for the quarter ended June 30, 1996
as compared to interest of $150,000 in the corresponding period in the previous
year due to lower cash balances in 1995. Interest expense decreased to $44,000
for the quarter ended June 30, 1996 as compared to interest expense of $81,000
in the corresponding period in the previous year due to lower debt balances.
Interest income is expected to increase as a result of the temporary investment
of the net proceeds of the offering and to decline gradually over future periods
as invested capital is used for operating activities.

At June 30, 1996 the Company had cash, cash equivalents and short-term
investments of $7,672,000, as compared to cash, cash equivalents and short-term
investments of $11,492,000 at December 31, 1995.

22
<PAGE> 23

BUSINESS

This Prospectus contains certain forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from the results anticipated in these forward-looking statements as a result of
certain factors set forth herein and those discussed in "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" as well as elsewhere in this Prospectus.

GENERAL

The Company is focused on the treatment of autoimmune diseases through the
discovery and development of proprietary therapeutics that selectively interrupt
the disease process. Anergen's current research and development efforts are
focused on two distinct core technologies, AnergiX and AnervaX, that the Company
believes may be used to treat a broad range of autoimmune diseases without
generally suppressing the immune system. Patient selection has begun for a Phase
I clinical trial of the Company's AnergiX compound for the treatment of MS and
the Company has initiated a Phase II clinical trial of its AnervaX compound for
the treatment of RA. Since 1993, the Company has collaborated with Novo Nordisk
in the development of AnergiX treatments for MS, IDDM and MG. In June 1996, the
Company announced a collaborative agreement with Organon to develop an AnergiX
treatment for RA.

Anergen received IND clearance in December 1995 with the FDA to begin Phase
I clinical testing of its AnergiX compound for the treatment of MS. In
preclinical studies, the administration of an AnergiX compound prevented or
reduced disease symptoms caused by the T cell initiated autoimmune response in
animal models. The Company has also demonstrated in vitro that its AnergiX
compound can inactivate human T cells associated with MS. The Company is
collaborating with Novo Nordisk on the development of this compound.

The Company entered into a collaborative agreement with Novo Nordisk in
August 1993 under which Novo Nordisk, in exchange for certain marketing rights,
will support research and development of the Company's MS, MG and IDDM programs,
make milestone payments, and pay royalties on product sales, if any. The Company
has the right to co-promote any resultant products for MS and MG in North
America. In addition, at the time of the agreement Novo Nordisk made an $8
million equity investment in the Company. In March 1996, the development program
with Novo Nordisk was extended through August 1998, increasing total funds
expected to be received by the Company under the collaboration from $25 million
to $35 million. These amounts do not include the cost of clinical trials that
will be borne directly by Novo Nordisk.

23
<PAGE> 24

AUTOIMMUNE DISEASES

Background. Normally, the immune system recognizes and distinguishes
between invading foreign substances or "antigens" and the body's own tissue. The
body is able to react continually to a wide variety of antigens, to remember a
foreign substance to which it has been exposed previously, and to rid itself of
a foreign substance. The ability of the immune system to distinguish between its
own tissue (self) and foreign substances is essential for its normal function.

The recognition and memory processes of the immune system are controlled by
the activity of several types of cells. One of the most important, the "T cell,"
plays a critical role in recognizing antigens, initiating an immune response and
regulating the resulting cascade of immunological events. Another type of cell,
the "B cell," secretes antibodies that are involved in the recognition and
neutralization of antigens. These processes require the involvement of proteins
called human leukocyte antigen ("HLA") molecules which are found on the surface
of certain cells in the body. The HLA molecules are encoded by a gene complex
called MHC. The terms HLA and MHC are sometimes used interchangeably.

When a foreign substance enters the body, antigen presenting cells, which
act as scavenger cells, encounter and engulf the foreign substance. These
scavenger cells break down the antigen into smaller components called
"peptides." The antigen presenting cell then transports each individual peptide,
called an "epitope," bound to the MHC molecules as a complex, to its outer cell
membrane where it is presented to various T cells. Once a responsive T cell is
stimulated, it initiates an immune response that eliminates the foreign
substance from the body. T cells recognize specific MHC-epitope complexes
through receptors on their surfaces, with each type of T cell recognizing only
one out of millions of possible MHC-epitope complexes. There are several classes
of MHC molecules, with MHC Class II ("MHC II") molecules involved in the
presentation of self-antigens.

While the immune system is normally extremely efficient in seeking and
destroying foreign substances, in some cases, for reasons that are not yet
understood, the immune system is triggered to begin destroying the body's own
healthy tissue, resulting in autoimmune diseases such as RA, MS, IDDM and MG. In
these diseases, "self" tissue is presented to T cells which respond by
initiating an immune response that destroys healthy tissue. For example, T cells
are involved in the destruction of nerve structures in MS, joint tissue in RA,
and insulin-producing Beta cells in IDDM.

Existing Therapeutic Approaches. Traditional therapies for autoimmune
diseases include steroids and other immunosuppressive drugs that generally treat
the symptoms rather than the cause of the disease and are unable to prevent the
activation of T cells that initiate the destructive autoimmune response. Current
treatments are typically administered based on disease severity. For mild forms
of these diseases, drugs that ameliorate the symptoms may be given. These drugs
do not prevent the progression of tissue destruction and are relatively
ineffective in treating more severe symptoms. In advanced disease stages, more
powerful immunosuppressive drugs are used to suppress the body's entire immune
system. This has some therapeutic effect, but also limits the body's ability to
respond to invading foreign substances, which substantially increases the risk
of contracting other illnesses. In addition, such drugs generally have numerous
other unwanted and often severe side effects.

ANERGEN TECHNOLOGY

The Company's technology programs focus on the discovery and development of
proprietary therapeutics that destroy or inactivate T cells involved in the
disease process or selectively interrupt antigen presentation to the T cells
without affecting the protective functions of the immune system. Anergen
believes that its approaches to preventing or arresting autoimmune diseases may
result in therapies that are more specific and have fewer side effects than
currently available treatments. The two core technologies, AnergiX and AnervaX,
under development by the Company are summarized below and are illustrated on the
inside cover of this Prospectus.

AnergiX Technology. The Company's AnergiX technology is currently being
used to develop products for MS, RA, IDDM and MG. An AnergiX compound consists
of an epitope of the self-antigen that would

24
<PAGE> 25

normally be associated with triggering an autoimmune response in a particular
disease, combined with a soluble MHC II molecule. The AnergiX compound thus has
two of the three primary elements associated with the autoimmune response, but
lacks the third element, the antigen presenting cell. It is believed that the
activation of T cells requires not only the initial signal provided by the
binding to the T cell receptor of the MHC-epitope complex which is on the
surface of antigen presenting cells, but also a "second signal" provided by the
antigen presenting cell itself. Anergen believes that the binding of its AnergiX
compound to the receptor site on the destructive T cell, in the absence of the
antigen presently cell and its "second signal," inactivates that T cell. This
inactivated or nonresponsive state is referred to as a state of "anergy." The
Company believes that by inducing anergy, the autoimmune response can be
interrupted. In addition, the Company has shown that in the presence of AnergiX,
a significant percentage of T cells may undergo apoptosis, or programmed cell
death, which will also serve to interrupt the autoimmune process.

The Company believes, based on its research to date, that the state of
anergy created by the introduction of the Company's AnergiX may last for periods
of up to several months. The results of the Company's research demonstrated that
a state of anergy may also be induced in T cells that have already been
activated, indicating that such T cells could be inactivated even after the
destructive chain reaction has begun. Because the Company believes that its
AnergiX compounds will bind only to T cells specific to a disease, other T cells
are not expected to be affected, and the rest of the immune system should remain
responsive to foreign substances.

AnervaX Technology. The Company's AnervaX technology is currently being
developed to treat RA. AnervaX is a synthetic peptide vaccine consisting of a
small portion of the MHC II molecule. AnervaX is designed to elicit an immune
response that interferes with the presentation of self-antigens to T cells. This
immune response is intended to stimulate the production of a patient's own
antibodies to a subset of the MHC molecules on the patient's antigen presenting
cells. The Company believes that because AnervaX targets only the subset of MHC
molecules that appear to be involved in the particular autoimmune disease, this
approach potentially will allow the prevention or treatment of autoimmune
disease without generally suppressing the patient's overall immune system.

PRODUCTS UNDER DEVELOPMENT

The following table sets forth the current status of Anergen's product
development programs.
- --------------------------------------------------------------------------------
ANERGEN'S DEVELOPMENT PROGRAMS

<TABLE>
<CAPTION>
PATIENT POPULATION CORPORATE DEVELOPMENT
DISEASE TARGET TECHNOLOGY U.S./WORLDWIDE ALLIANCES(1) STATUS(2)
----------------------------- ---------- ------------------- ------------- -----------
<S> <C> <C> <C> <C>
Multiple Sclerosis........... AnergiX 300,000/650,000 Novo Nordisk Phase I
Rheumatoid Arthritis......... AnervaX 2,500,000/8,000,000 -- Phase II
AnergiX 2,500,000/8,000,000 Organon Preclinical
Insulin Dependent Diabetes
Mellitus................... AnergiX 600,000/1,800,000 Novo Nordisk Research
Myasthenia Gravis............ AnergiX 25,000/50,000 Novo Nordisk Preclinical
</TABLE>

(1) See "Business -- Collaborative Arrangements" for a discussion of the
relative rights of the Company and its collaborative partners.

(2) Research: Initiation of research studies.

Preclinical: Identification of a specific molecule for potential
human testing.

Phase I: Initial phase of human clinical testing to determine safety
and measure certain biological parameters.

Phase II: Multicenter, double-blind, placebo-controlled clinical
trial for safety, immunogenicity, dosage determination and initial
efficacy in a limited patient population.

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

25
<PAGE> 26

Multiple Sclerosis. MS is a progressive inflammatory disease of the
central nervous system that predominantly affects young adults and causes
increasing neurologic damage and disability throughout life. Symptoms range from
painful facial muscle spasms, vertigo and vomiting to a myriad of motor and
sensory problems. In the United States, the average longevity of patients after
diagnosis with MS is over thirty years. The care of MS patients requires
long-term medical, neurologic and psychological treatment and support. The use
of steroids and immunosuppressant drugs is the most common treatment for MS
today, but these drugs often have significant unwanted side effects such as
nausea and high blood pressure. Based on published data and other sources, the
Company believes that there are approximately 650,000 cases of MS worldwide.

The Company and Novo Nordisk have developed a potential therapeutic,
MS/Anergix, which is a compound of an MHC molecule combined with a peptide
derived from myelin basic protein, the self-antigen believed to be involved in
MS. The Company received IND clearance from the FDA in December 1995 and patient
selection for a Phase I clinical trial has begun. The costs of this and future
trials are fully supported by Novo Nordisk. The Company's preclinical tests
demonstrated that the use of an MS/AnergiX compound prevented or reduced
paralysis caused by the T cell-initiated destructive autoimmune response in an
animal model of MS. Additionally, in vitro testing of MS/AnergiX on human cells
demonstrated inactivation of T cells associated with MS. This study also
indicated that patients' T cells respond to the same antigen over time and that
potentially effective doses appear to be low.

Under the Company's collaborative agreement with Novo Nordisk, Novo Nordisk
will support research and development of the Company's MS program, including the
full cost of all clinical testing, and will pay royalties on worldwide sales of
any resulting products. The Company has retained co-promotion rights in North
America for therapeutics in MS. See "Risk Factors -- Dependence Upon
Collaborative Partners" and "Business -- Collaborative Arrangements -- Novo
Nordisk A/S."

Rheumatoid Arthritis. RA is a systemic inflammatory disease that causes
joint pain, swelling and, eventually, deformities. Patients afflicted with RA
may experience severe musculoskeletal disability. Over time, progression of the
disease involves degradation and destruction of the surrounding cartilage and
bone. Current treatment of RA involves the use of a variety of drugs in
successive stages: first, with drugs having analgesic actions such as aspirin
and other non-steroidal and anti-inflammatory drugs; second, with agents such as
gold and penicillamine that reduce the symptoms of RA; and third, with drugs
that attempt to contain the disease, including immunosuppressive drugs such as
corticosteroids and methotrexate. Each of these three approaches has side
effects of varying intensity and risks that increase as one moves to the more
aggressive therapies. Based on published data and other sources, the Company
believes that there are approximately 8,000,000 cases of RA worldwide.

The Company completed Phase I clinical testing of its AnervaX peptide
vaccine to treat RA in October 1995 and began Phase II clinical testing in April
1996. Preclinical studies demonstrated that Anergen's AnervaX approach may
prevent the onset of disease and reduce the severity of active disease in
certain animal models of autoimmune disease (experimental allergic
encephalomyelitis and non-obese diabetic ("NOD") mice). In vitro testing
indicated that animals treated with the AnervaX peptide vaccine generate
antibodies against MHC II molecules. The Company believes that such antibodies
bind to MHC II molecules and that this binding may interfere with the
interaction between MHC and T cells that is involved in the progression of
autoimmune disease. The results of the Phase I study showed the vaccine to be
well tolerated and capable of inducing an antibody response.

In addition, the Company is developing an AnergiX compound to treat RA in
conjunction with Organon under an agreement entered into in June 1996. The
compound to be developed uses Anergen's proprietary AnergiX technology and
incorporates a proprietary peptide discovered by Organon. Under the agreement,
Organon, in exchange for certain marketing rights, will support research and
development, including the full cost of all clinical testing, pay a one-time
license fee, make milestone payments and pay royalties on product sales, if any.
See "Risk Factors -- Dependence Upon Collaborative Partners" and
"Business -- Collaborative Arrangements."

Insulin Dependent Diabetes Mellitus. IDDM, or Type I diabetes, is caused
by an autoimmune attack resulting in the destruction of the insulin-producing
Beta cells in the pancreas. Insulin regulates the cellular

26
<PAGE> 27

uptake and metabolism of glucose, and its deficiency leads to hyperglycemia,
diabetic acidosis, and diabetic coma. Long term complications include vision
loss, renal failure and peripheral neuropathy. Currently, individuals with IDDM
are given insulin to supplement their ability to produce sufficient amounts of
the hormone. IDDM usually appears in individuals before the age of 20 and
affects about 0.5% of the Caucasian population worldwide. Based on published
data and other sources, the Company believes that there are approximately
1,800,000 cases of IDDM worldwide.

The Company has performed preclinical studies using an IDDM/AnergiX
compound composed of an MHC II molecule coupled with a synthetic glutamic acid
decarboxylase ("GAD") peptide in NOD mice, an animal model of IDDM. The GAD
peptide is suspected to be the self-antigen, which leads to the autoimmune
attack in diabetes. The Company tested this compound by treating NOD mice in a
dosing regimen designed to inactivate or anergize disease-causing T cells,
thereby preventing diabetes. Results of the study showed that treatment with the
IDDM/AnergiX complex reduced the rate of destruction of insulin-producing SS
cells in a dose dependent manner, while treatment with the GAD peptide alone
accelerated the disease. Under the Company's collaborative agreement with Novo
Nordisk, Novo Nordisk will support research and development of the Company's
program and will pay royalties on worldwide sales of any resulting products. See
"Risk Factors -- Dependence Upon Collaborative Partners" and
"Business -- Collaborative Arrangements -- N.V. Organon.

Myasthenia Gravis. MG is a neuromuscular disorder that is characterized by
muscle weakness and may lead to death in severe cases. Current methods of
treatment for MG utilize drugs that only ameliorate the symptoms and generally
are not effective in most cases of moderate or progressive MG. The more powerful
of these drugs have significant unwanted side effects. Based on published data
and other sources, the Company believes that there are approximately 50,000
cases of MG worldwide.

The Company has established an in vivo experimental model of autoimmune
myasthenia gravis ("EAMG") in rats, which is considered pathologically and
clinically comparable to human MG. Initial results indicate that the Company's
MG/AnergiX reduces clinical symptoms of this disease in rats. Additionally, the
Company tested its therapeutic approach for MG on human cells. Through this
study, the Company has identified what it believes to be an appropriate
antigenic peptide involved in MG. Using MG/AnergiX, the Company has demonstrated
in vitroinactivation of T cells associated with MG and that potentially
effective doses appear to be low. Under the Company's collaborative agreement
with Novo Nordisk, Novo Nordisk will support research and development of the
Company's MG program and will pay royalties on worldwide sales of any resulting
products. The Company has retained co-promotion rights in North America for
therapeutics in MG. See "Risk Factors -- Dependence Upon Collaborative Partners"
and "Business -- Collaborative Arrangements -- Novo Nordisk A/S."

ADDITIONAL APPLICATIONS FOR ANERGEN TECHNOLOGIES

The Company believes that its core technologies could be applied to a
number of other autoimmune diseases. To create an effective AnergiX product
intended to inactivate the T cells associated with a specific autoimmune
disease, one must correctly combine a proper epitope specific for the target
autoimmune disease with a proper MHC molecule associated with that disease.
Recent advances in the understanding of events that trigger autoimmune diseases
have accelerated the search for the epitopes associated with particular
diseases. Anergen intends to license technology developed by others and to
collaborate in the research and development of epitopes that, when combined with
the Company's MHC molecules in a proprietary soluble form, would result in
AnergiX compounds for the treatment of other autoimmune diseases. In 1994, the
Company initiated a research collaboration with a physician at the University of
Medicine and Dentistry of New Jersey to identify the epitope associated with
inflamatory bowel disease.

In order to develop additional AnervaX peptide vaccine products, the
Company must first identify the particular MHC sub-type involved with initiation
and continuation of the particular autoimmune disease. The Company must then
identify that portion of the MHC molecule sub-type that triggers an immune
response. It is this response that interferes with the presentation of the self
antigen to disease-related T cells. Based upon recent advances in the
understanding of the genetic clustering of MHC sub-types and their involvement
in

27
<PAGE> 28

other autoimmune diseases, the Company believes additional product candidates
may be developed utilizing its AnervaX core technology.

While development and commercialization of the Company's approach to
altering autoimmune disease states remains Anergen's focus, the Company is also
monitoring other opportunities that may arise out of its technology and
expertise, including the development of diagnostics for autoimmune and related
diseases and the possibility of adapting its T cell-specific drug delivery
approach to delivering compounds that would kill particular T cells, a method
that may prove useful in severe cases where an autoimmune disease has
substantially progressed. The Company expects to pursue funding from
collaborative partners prior to extensive research in any of these areas.

COLLABORATIVE ARRANGEMENTS

Novo Nordisk A/S. In August 1993, the Company entered into a collaborative
agreement with Novo Nordisk with an initial three-year development program term
and Novo Nordisk made an equity investment in the Company. Under the
collaborative agreement, Novo Nordisk will make milestone payments and support
research and development of the Company's MS, MG and IDDM programs in exchange
for exclusive worldwide rights to products developed under the collaboration,
including rights to commercialize these products, subject to the payment of
royalties to the Company. The Company has retained rights of co-promotion in
North America for therapeutics in MS and MG. In the event the Company engages in
co-promotion of its MS and MG products in North America, Novo Nordisk has agreed
to modify the royalty payments made to the Company to compensate for the level
of its marketing and sales efforts in amounts to be negotiated. In March 1996,
the Company and Novo Nordisk extended the term of the development program by an
additional two-year period through August 1998. Novo Nordisk may terminate the
agreement with respect to its development rights upon six months prior written
notice. The development program is subject to ongoing review by a research
committee that includes equal representation of both partners. The development
expenses incurred by the Company and reimbursable by Novo Nordisk are
significant and expected to increase. Under the original agreement, the research
and development support and milestone payments which may be received by the
Company under this agreement are estimated to total $25 million, including an $8
million equity investment made in the Company in August of 1993 for 1,219,745
shares of the Company's Common Stock. The Company recorded $3.0 million in
contract revenues related to this agreement in 1995 as compared to $2.3 million
in 1994. The expansion of this agreement and extension of the term of the
development program in March 1996 increased the estimated total proceeds to the
Company by an additional $10 million to $35 million.

N.V. Organon In June 1996, the Company entered into a collaborative
agreement with Organon under which Organon will pay the Company a license fee,
make milestone payments, and support research and development of an AnergiX
compound intended for the treatment of RA in exchange for certain marketing
rights, including certain rights to the commercialization of these products,
subject to the payment of royalties to the Company. The compound to be developed
uses Anergen's proprietary technology and incorporates a proprietary peptide
discovered by Organon coupled with an MHC molecule. This arrangement has no
effect on the Company's ownership of its AnervaX therapeutic intended to treat
RA, which is currently in Phase II clinical testing. The Company's development
program under the Organon agreement has an initial three-year term. Under the
agreement, Anergen granted to Organon exclusive worldwide rights to any products
developed under the collaborative agreement, including rights to commercialize
the products. While the agreement initially grants Organon rights to any AnergiX
compounds within the field of RA, after an initial Phase I study, Anergen has
the right, at its sole discretion, to convert Organon's rights to a
non-exclusive basis, in which case milestone payments and royalty rates would be
modified.

The agreement with respect to marketing rights continues in full force for
as long as Organon is engaged in marketing such products. Organon may terminate
the development program after thirty months by giving the Company six months
prior written notice. The Company has retained certain limited rights of co-
promotion in North America for therapeutics developed under the arrangement. In
the event the Company engages in co-promotion of products in North America,
Organon has agreed to modify the royalty payments made to the Company to
compensate for the level of its marketing and sales efforts in amounts to be

28
<PAGE> 29

negotiated. The development program is subject to ongoing review by a research
committee which includes equal representation of both partners. The development
expenses incurred by the Company and reimbursable by Organon are expected to be
significant and to increase.

Other Arrangements. The Company has several collaborations with academic
and clinical researchers to perform certain research, development and clinical
trial activities. To the extent that the Company is unable to maintain or
establish such collaborative arrangements, the Company's research, development
and clinical activities and business would be adversely affected.

The Company's strategy for the development, clinical trials, manufacturing
and commercialization of its products includes maintaining existing and
establishing additional collaborations with corporate partners, licensors,
licensees and others. There can be no assurance that the Company will be able to
maintain existing collaborative arrangements or establish new collaborative
arrangements in the future. To the extent that the Company is unable to maintain
or establish such collaborative arrangements, the Company's research and
development efforts and business would be adversely affected. In addition, the
Company's collaborative partners may develop, either alone or with others,
products that compete with the development and marketing of the Company's
products. The development of such competing products may result in the
withdrawal of support with respect to all or a portion of the Company's
technology which would have a material adverse effect on the Company's business,
financial conditions and results of operations. See "Risk Factors -- Dependence
Upon Collaborative Partners" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."

MANUFACTURING

Manufacture of the Company's AnergiX compounds requires the production of
two basic parts: the disease specific epitope and the MHC molecule. The Company
then combines these two component parts and puts them in a soluble form suitable
for a therapeutic product. The Company is currently synthesizing several
different epitopes related to MS, IDDM and MG for use in its research and
development operations. To date, the Company has contracted with an outside
manufacturer to produce the selected MS specific peptide under GMP guidelines.
In the future the Company may consider scaling up its synthesis operations in
order to produce these epitopes internally.

Production of MHC molecules can be accomplished in one of two ways: MHC
molecules can be extracted from cells cloned from commercially available cell
lines or MHC molecules can be produced using recombinant DNA technology. During
1993, the Company began producing MHC molecules in its pilot clinical
manufacturing facility. The initial production utilizes a mammalian cell culture
system to grow cells from a human cell line from which MHC molecules are
extracted. In 1995, the Company was inspected and granted a site license to
manufacture products for human use by the California Food and Drug
Administration. The Company, together with Novo Nordisk, is currently in the
process of evaluating production of MHC molecules using recombinant DNA
technology. The Company believes that either production methodology will provide
sufficient quantities of MHC for the Company's anticipated clinical trials.

The Company has contracted with an outside manufacturer to fill, finish and
package its final compounds. The Company's strategy is to maintain control over
its AnergiX manufacturing technology which will facilitate seeking of patent
protection and enable timely supply of products for clinical trials. Whether the
Company will choose to develop a full-scale manufacturing facility, rely on its
corporate partner, or rely on outside contract manufacturing will be determined
in the future after consideration of the Company's financial and scientific
resources and the potential advantages and disadvantages of these alternatives.
Anergen and Novo Nordisk have agreed to share manufacturing of AnergiX, but it
is at the discretion of Novo Nordisk to determine the degree to which the
Company will share in the manufacture of AnergiX. See "Risk Factors -- Need to
Develop Manufacturing Capabilities; Reliance on Sole Supplier."

Manufacture of the Company's AnervaX compounds is performed by an outside
contract manufacturer and the resultant product is filled and finished by a
second subcontractor. There can be no assurance that such parties will be able
to meet the Company's needs either with respect to timing, quantity or quality.
If the

29
<PAGE> 30

Company is unable to obtain or retain third party manufacturing on acceptable
terms, it may be delayed in its ability to commercialize AnervaX. The Company's
dependence upon third parties for the manufacturing of AnervaX may adversely
affect the Company's profit margins and its ability to develop, deliver and sell
products on a timely and competitive basis, if at all.

MARKETING AND SALES

The Company currently has no sales, marketing or distribution capability.
The Company has entered into collaborative relationships with Novo Nordisk and
Organon for the commercialization of its MS, RA, IDDM and MG products. For other
potential products, the Company intends to rely on relationships with one or
more pharmaceutical companies with established distribution systems and direct
sales forces to market its products. In the event that the Company is unable to
reach agreement with one or more pharmaceutical companies to market its
products, it may be required to market its products directly and to develop a
marketing and sales force with technical expertise and with supporting
distribution capability. There can be no assurance that the Company will be able
to establish in-house sales and distribution capabilities or relationships with
third parties, or that it will be successful in gaining market acceptance for
its products. To the extent that the Company enters into co-promotion or other
licensing arrangements, any revenues received by the Company will depend upon
the efforts of third parties, and there can be no assurance that such efforts
will be successful.

PATENTS AND PROPRIETARY RIGHTS

The Company is pursuing patent protection for its proprietary technologies.
In July 1992, the Company was issued a U.S. patent that covers pharmaceutical
compositions comprising MHC-peptide complexes. Four subsequent U.S. patents have
provided additional protection for these complexes, methods of making them, and
their use to induce anergy in T cells. The last patent in this series was issued
in November 1995 and all five U.S. patents in such series expire in 2009. The
Company has also been issued one other U.S. patent based upon other aspects of
its research, expiring in 2011. In June 1996, the Company received a grant for a
European patent directed to the MHC-peptide complexes, expiring in 2008. A
related patent has also been issued in Korea, expiring in 2008. In addition,
Anergen has filed other patent applications in Canada, the EPO and Japan.
Pending patent applications in the U.S. and other countries include those
covering different aspects of the Company's AnergiX and AnervaX technologies.

The Company has also entered into a number of collaborative research
arrangements with consultants at academic institutions. These agreements
generally provide for exchanges of information and for nondisclosure of
technical information by both parties, but the Company's current agreements do
not obligate the Company to release any of its technology for use by any other
entities nor commit the Company to pay royalties on any discovery made in
connection with such research agreements. In the future, the Company may enter
into agreements which provide for royalties in exchange for technology rights.

The Company's success will depend in significant part on its ability to
maintain patent protection for its therapeutic approach and for any developed
products, to preserve its trade secrets and to operate without infringing the
proprietary rights of third parties. Although the Company has obtained patents
covering certain aspects of its technology, no assurances can be given that
additional patents will be issued or, if issued, that the scope of any patent
protection will be significant, or that the patents will be held valid if
subsequently challenged. Moreover, the Company cannot ascertain with certainty
that no patent conflict will exist with other products or processes which could
compete with the Company's approaches.

30
<PAGE> 31

firms is highly uncertain. Federal court decisions indicating legal
considerations surrounding the validity of patents in the field are in
transition, and there can be no assurance that the historical legal standards
surrounding questions of validity 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 Company may be required to obtain licenses to patents or other
proprietary rights from third parties. The Company has not performed regular
patent watches for patents potentially covering each of its proposed products.
There can be no assurance that any licenses required under any patents or
proprietary rights will be made available on terms acceptable to the Company, if
at all. If the Company does not obtain required licenses, it could encounter
delays in product development while it attempts to redesign products or methods
or it could find that the development, manufacture or sale of products requiring
such licenses could be foreclosed.

The Company is aware of a European patent and corresponding U.S. and
Australian patents which contain claims that relate to certain of the Company's
proposed products and their uses. In accordance with EPO procedures, third
parties can oppose an EPO patent grant by presenting information which they
believe justifies narrowing or revoking the grant of the patent. The Company is
opposing the aforementioned grant in the EPO. There can, however, be no
assurance that the granted EPO claims will be revoked or significantly narrowed
in scope as a result of the opposition proceeding. If valid claims in these
patents are found to be infringed by the Company's products, the Company's
ability to make, use, offer to sell, or sell, such products could be materially
and adversely affected.

In addition, the Company could incur substantial costs in defending any
patent litigation brought against it or in asserting the Company's patent
rights, including those licensed to the Company by others, in a suit against
another party. The USPTO could institute interference proceedings in connection
with one or more of the Company's patents or patent applications, which
proceedings could result in an adverse decision as to priority of an invention.
The USPTO also could institute reexamination proceedings in connection with one
or more of the Company's patents or patent applications, which could result in
an adverse decision as to the patents' validity or scope. See
"Business -- Patents and Proprietary Rights."

The terms Anergen, AnergiX, MS/AnergiX, MG/AnergiX, RA/AnergiX,
IDDM/AnergiX and AnervaX are trademarks of the Company. The Company's
registration of the trademarks Anergen, AnergiX and AnervaX are currently
pending, and the Company intends to register the remaining trademarks.

COMPETITION

31
<PAGE> 32

governmental agencies and other public and private research organizations are
also conducting research activities and seeking patent protection and may
commercialize products on their own or through joint ventures. The Company is
aware of certain products in development by competitors that are intended to be
used for the prevention or treatment of certain diseases the Company has
targeted for product development. The existence of these products, or other
products or treatments of which the Company is not aware, or products or
treatments that may be developed in the future which may be more effective, may
adversely affect the commercialization or marketability of products which may be
developed by the Company or potentially render the Company's technology obsolete
or non-competitive.

There are numerous pharmaceutical and biotechnology companies developing
therapies against autoimmune diseases. Many pharmaceutical companies are working
on products to treat MS. Current therapies, which have limited impact on the
disease state and primarily affect symptoms, include two beta interferon drugs.
Other potential therapeutics which target the underlying disease state include
oral tolerance therapy and peptide-based therapies. In RA, there are also many
upgrades under development which target the underlying disease state including
oral tolerance, peptide based therapies, peptide vaccines to the T cell
receptors and humanized antibodies. In IDDM, one experimental approach is based
on non-specific inhibition of T cells using cyclosporin, a general
immunosuppressant. In patients who already have IDDM, transplantation of
pancreas or insulin-producing (LOGO)b cells is also being explored. Autoimmune
diseases are a major target for many companies developing therapeutics, and it
is unclear which approaches will work most effectively.

The Company believes that the ability of its AnergiX to inactivate only the
specific T cells related to a particular autoimmune disease may provide, if the
Company's products are successfully developed, an important competitive
advantage over companies using approaches which have broader suppressive effects
on the human immune system. Anergen also believes that its ability to inactivate
these specific T cells without the use of toxins, if successfully demonstrated,
would be advantageous. The Company also believes that its AnervaX approach, if
successfully developed, may offer a competitive advantage if it is found to
interrupt disease progression without severely suppressing the immune system.

GOVERNMENT REGULATION

The Company's research and development activities are subject to regulation
by numerous governmental authorities in the United States and other countries,
and the production and marketing of any products developed by the Company would
also be regulated, particularly as to safety and efficacy. In the United States,
vaccines, drugs and biologics are subject to rigorous FDA review. The Federal
Food, Drug, and Cosmetic Act, the Public Health Service Act and other federal
statutes and regulations govern or influence the testing, manufacture, safety,
labeling, storage, record keeping, approval, advertising and promotion of such
products. Noncompliance with applicable requirements can result in fines, recall
or seizure of products, clinical study holds, total or partial suspension of
production, refusal of the government to approve product license applications or
allow the Company to enter into supply contracts and criminal prosecution. The
FDA also has the authority to revoke PLAs, and ELAs previously granted.

32
<PAGE> 33

competitors. The FDA may also require post-marketing testing and surveillance to
monitor the effects of approved products or place conditions on any approvals
that could restrict the commercial applications of such products. Product
approvals may be withdrawn if compliance with regulatory standards is not
maintained or if problems occur following initial marketing. In addition, delays
imposed by the governmental approval process may materially reduce the period
during which the Company may have the exclusive right to exploit patented
products or technologies.

The FDA approval process for a new biological drug involves completion of
pre-clinical studies which include laboratory tests and animal studies to assess
safety and effectiveness of the drug. Among other things, the results of these
studies as well as how the product will be manufactured are submitted to the FDA
as part of an IND and, unless the FDA objects, the IND becomes effective 30 days
following receipt by the FDA. FDA cleared human clinical trials may then be
conducted. There can be no assurance that submission of an IND will result in
FDA authorization to commence clinical trials. The results of the clinical
trials are submitted to the FDA as part of a PLA. In addition to obtaining FDA
approval for each AnergiX indication, an ELA must be filed and the FDA must
approve the manufacturing facilities for the product. Product sales may only
commence if the PLA and ELA are approved. Regulatory requirements for obtaining
such FDA approvals are rigorous and there can be no assurance that such
approvals will be obtained on a timely basis or at all.

Human clinical trials are typically conducted in three sequential phases,
but the phases may overlap. Phase I trials consist of testing the product in a
small number of patients primarily for safety at one or more dosage levels. In
Phase II, in addition to safety, the efficacy of the product is evaluated in a
patient population slightly larger than Phase I trials, and appropriate dosage
is established. Phase III trials typically involve additional testing for safety
and clinical efficacy in an expanded patient population at geographically
dispersed test sites, and with the dosage that will be submitted for approval. A
clinical plan, or "protocol", accompanied by the approval of the institutional
review board at the institution participating in the trials, and patient-
informed consent form must be submitted to the FDA prior to commencement of each
clinical trial. The FDA may order the temporary or permanent discontinuation of
a clinical trial at any time if it believes patient safety is at risk. The
Company's regulatory strategy is to seek input from the FDA at all stages of
clinical testing and manufacturing process development.

The results of the pre-clinical and clinical studies on biological drugs
such as the Company's AnergiX are submitted to the FDA in the form of a PLA and
ELA for approval to commence commercial sales. After completion of the FDA's
preliminary review of the PLA submission, the submission is sent to an FDA
selected scientific advisory panel composed of physicians and scientists with
expertise in the particular field. The FDA scientific advisory panel issues a
recommendation to the FDA that includes conditions for approval of the PLA.
Although the recommendation is not binding, the agency generally follows an
advisory panel's advice. Toward the end of the PLA review process, the FDA will
conduct an inspection of the manufacturer's facilities to ensure that they are
in compliance with the applicable GMP requirements. If the FDA evaluation of
both the ELA application and manufacturing facilities contained in the PLA
application are favorable, the FDA will issue an approval letter, which usually
contains a number of conditions which must be met in order to secure final
approval. In responding to the PLA, the FDA may grant marketing approval,
require additional testing or information, or deny the application. Governmental
approval of products developed by the Company may entail limitations on the
indicated uses for which such products may be marketed. Continued compliance
with all FDA requirements and the conditions in an approved application,
including product specification, manufacturing process, labeling and promotional
material and record keeping and reporting requirements, is necessary for all
products. Failure to comply, or the occurrence of unanticipated adverse effects
during commercial marketing, could lead to the need for product recall or other
FDA-initiated action, which could delay further marketing until the products are
brought into compliance.

Under the Orphan Drug Act, the FDA may designate a product as an orphan
drug. An orphan drug is a drug intended to treat a "rare disease or condition,"
which is a disease or condition that affects populations of fewer than 200,000
individuals in the United States or, if victims of a disease number more than
200,000, the sponsor establishes that it does not realistically anticipate that
its product sales will be sufficient to recover its costs. If a product is
designated as an orphan drug, then the sponsor is entitled to receive certain
incentives to

33
<PAGE> 34

undertake the development and marketing of the product, including limited tax
credits and high priority FDA review of an NDA. In addition, the sponsor that
obtains the first marketing approval for a designated orphan drug for a given
rare disease is eligible to receive marketing exclusivity for a period of seven
years. There may be multiple designations of an orphan drug; however, only the
sponsor of the first approved NDA for a given drug for its use in treating a
given rare disease may receive marketing exclusivity. The Company may apply for
orphan drug designation for some of its products and indications in development.
There is no assurance that the FDA would grant orphan drug designation or
marketing exclusivity for any such indications or products.

The Company is also subject to regulation by the OSHA and the EPA and to
regulation under the Toxic Substances Control Act, the Resource Conservation and
Recovery Act and other regulatory statutes, and may in the future be subject to
other federal, state or local regulations. Although the Company believes that
its safety procedures for handling and disposing of hazardous materials comply
with the standards prescribed by current laws and regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, the Company could be held liable
for any damages that result and any such liability could exceed the resources of
the Company. In addition, regulations may be promulgated governing biotechnology
that may affect the Company's research and development programs. The Company is
unable to predict whether any agency will adopt any regulation which would have
a material adverse effect on the Company's operations.

Satisfaction of these FDA requirements, or similar requirements by foreign
regulatory agencies, typically takes several years and the time needed to
satisfy them may vary substantially, based upon the type, complexity and novelty
of the pharmaceutical product. The effect of government regulation may be to
delay or to prevent marketing of potential products for a considerable period of
time and to impose costly procedures upon the Company's activities. There can be
no assurance that the FDA or any other regulatory agency will grant approval for
any products being developed by the Company on a timely basis, or at all.
Success in preclinical or early stage clinical trials does not assure success in
later stage clinical trials. Data obtained from preclinical and clinical
activities are susceptible to varying interpretations which could delay, limit
or prevent regulatory approval. If regulatory approval of a product is granted,
such approval may impose limitations on the indicated uses for which a product
may be marketed. Further, even if regulatory approval is obtained, later
discovery of previously unknown problems with a product may result in
restrictions on the product, including withdrawal of the product from the
market. Delay in obtaining or failure to obtain regulatory approvals would have
a material adverse effect on the Company's business financial condition or
results of operations.

PHARMACEUTICAL PRICING AND REIMBURSEMENT

Political, economic and regulatory influences are subjecting the health
care industry in the United States to fundamental change. Initiatives to reduce
the federal deficit and to reform health care delivery are increasing these cost
containment efforts. The Company anticipates that Congress, state legislatures
and the private sector will continue to review and assess alternative benefits,
controls on health care spending through limitations on the growth of private
health insurance premiums and Medicare and Medicaid spending, the creation of
large insurance purchasing groups, price controls on pharmaceuticals and other
fundamental changes to the health care delivery system. Any such proposed or
actual changes could cause any potential partners of the Company to limit or
eliminate spending on collaborative development projects. Legislative debate is
expected to continue in the future, market forces are expected to demand reduced
costs and Anergen cannot predict what impact the adoption of any federal or
state health care reform measures or future private sector reforms may have on
its business.

34
<PAGE> 35

increasingly challenging the price and cost effectiveness of medical products
and services. Significant uncertainty exists as to the reimbursement status of
newly approved health care products. There can be no assurance that the
Company's potential products or products discovered in collaboration with the
Company will be considered cost-effective or that adequate third-party
reimbursement will be available to enable Anergen to maintain price levels
sufficient to realize an appropriate return on its investment in product
research, discovery and development. Legislation and regulations affecting the
pricing of pharmaceuticals may change before the Company's proposed products are
approved for marketing. Adoption of such legislation could further limit
reimbursement for medical products. If adequate coverage and reimbursement
levels are not provided by the government and third-party payors for the
Company's products, the market acceptance of these products would be adversely
affected, which would have a material adverse effect on the Company's business,
financial condition and results of operations.

PRODUCT LIABILITY INSURANCE

The testing, marketing and sale of human health care products entail an
inherent risk of exposure to product liability claims in the event that the use
of the Company's technology or prospective products is alleged to have resulted
in adverse effects. While the Company has taken, and will continue to take, what
it believes are appropriate precautions to minimize exposure to product
liability, there can be no assurance that it will avoid significant liability.
The Company possesses limited general liability and product liability insurance
related to its clinical trials of AnervaX for RA and intends to seek such
insurance related to its clinical trials of AnergiX for MS, and certain other
types of insurance customarily obtained by business organizations. There can be
no assurance that the existing insurance coverage is adequate or that it will
avoid liability. The Company intends to seek insurance against product liability
risks associated with the testing, manufacturing or marketing of its products.
However, there can be no assurance that it will be able to obtain such insurance
in the future, or that if obtained, such insurance will be sufficient in amount.
Consequently, a product liability claim or other claims with respect to
uninsured liabilities or in excess of insured liabilities could have a material
adverse effect on the business or financial condition of the Company.

EMPLOYEES

As of May 31, 1996, the Company had 60 full-time employees, of whom
fourteen hold doctoral or medical degrees. Of the 60 full-time employees, 51
were engaged in, or directly supporting, the Company's research and development
activities. The Company also employs several part-time workers. The Company
considers relations with its employees to be good. None of the Company's
employees is covered by a collective bargaining agreement.

FACILITIES

The Company's laboratory and administrative facilities occupy approximately
27,000 square feet of space in Redwood City, California. The majority of these
facilities are subject to a lease which expires on January 3, 1999, with a
two-year renewal option. The Company believes that this space is adequate for
its immediate needs, and that it will be able to obtain additional space as
necessary.

SCIENTIFIC ADVISORY BOARD

Anergen benefits from the advice and assistance of its Scientific Advisory
Board, most of whom are involved in ongoing discussions with the Company's
researchers and all of whom are involved in full-time teaching and research at
academic institutions. The names of the members of the scientific advisory board
and some background information about them are set forth below.

Mark Davis, Ph.D., Professor, Department of Microbiology and Immunology,
Stanford University School of Medicine. Dr. Davis has been involved in research
on the structure and function of the T cell receptor. His group isolated and
characterized a T cell receptor gene and recently succeeded in expressing both T
cell antigen receptor and MHC II molecules in a soluble form to facilitate
analysis of their properties.

35
<PAGE> 36

Patricia Jones, Ph.D., Professor, Department of Biological Sciences,
Stanford University. Dr. Jones has been involved in research on the biochemistry
and molecular biology of MHC II molecules.

Harden McConnell, Ph.D., Robert Eckels Swain Professor and Chairman of the
Department of Chemistry, Stanford University. Dr. McConnell has been involved in
research on the properties, structure and functioning of cell membrane
components including MHC II proteins. He is also a director of the Company.

Subramaniam Sriram, M.D., Professor of Neurology, Vanderbilt University
Medical Center. Dr. Sriram's research efforts are directed towards elucidating
immunological mechanisms of autoimmune diseases of the central nervous system.
He has been involved in advancing the concept that MHC II molecules and helper T
cells are necessary parts of the pathology of autoimmune diseases.

The Company believes it has a good working relationship with its Scientific
Advisory Board. Communication with many members of the Scientific Advisory Board
takes place on a regular basis and in some cases at least weekly. In accordance
with consulting agreements the Company has with these advisors, information
conveyed to the Company as part of the consulting activity is the property of
the Company. Should scientific discoveries be made by a member of the Scientific
Advisory Board in conjunction with other research at another institution rather
than while acting as a consultant to the Company, that discovery would generally
be owned by the researcher or that institution. If such a discovery were deemed
to be helpful in the Company's own research, the Company would have to enter
into a license agreement in order to utilize the discovery. The Company relies
on its scientific advisors to assist the Company in formulating its research and
development strategy. Retaining and attracting qualified advisors will be
critical to the Company's success. Each of the scientific advisory Board members
is paid $12,000 annually for his or her services.

LEGAL PROCEEDINGS

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

36
<PAGE> 37

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information regarding the directors
and executive officers of the Company:

<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---------------------------------------------- --- --------------------------------------------
<S> <C> <C>
Barry M. Sherman, M.D. ....................... 55 President, Chief Executive Officer and
Director
John W. Varian................................ 37 Vice President, Finance and Chief Financial
Officer
Jeffrey L. Winkelhake, Ph.D. ................. 51 Vice President, Pharmaceutical Development
Bruce L.A. Carter, Ph.D. ..................... 52 Director
Nicholas J. Lowcock........................... 32 Director
Harden M. McConnell, Ph.D. ................... 67 Director
Harry H. Penner, Jr. ......................... 50 Director
James E. Thomas............................... 36 Director
Nicole Vitullo................................ 39 Director
</TABLE>

BARRY M. SHERMAN, M.D., joined the Company as President and Chief Executive
Officer and as a director in May 1996. Dr. Sherman previously served as Senior
Vice President and Chief Medical Officer at Genentech, Inc. ("Genentech"), a
biotechnology company. Dr. Sherman joined Genentech in 1985, and while there
served as a member of the Operations Committee and was responsible for the
company's overall clinical development activities. Since 1986, Dr. Sherman has
also been a Clinical Professor of Internal Medicine at Stanford University. From
1971 to 1985, Dr. Sherman was a Professor of Internal Medicine, Director of the
Clinical Research Center and Associate Chairman of the Department of Internal
Medicine at the University of Iowa College of Medicine. Dr. Sherman received his
M.D. in 1966 from the University of Michigan.

JOHN W. VARIAN joined the Company as Vice President, Finance and Chief
Financial Officer in August 1991. Prior to joining the Company, and since 1987,
Mr. Varian was a Senior Manager with Ernst & Young LLP. Mr. Varian is a
certified public accountant and received his BBA from Western Michigan
University.

JEFFREY L. WINKELHAKE, PH.D., joined the Company in April 1993 as Vice
President, Pharmaceutical Development. Prior to joining the Company, Dr.
Winkelhake served for three years as Director of Program Management at Cytel
Corporation, a biotechnology company. Prior to that, he served for over six
years as Director of Pharmacology at Cetus Corporation, also a biotechnology
company. From 1976 to 1984, Dr. Winkelhake was a Professor of Microbiology at
the Medical College of Wisconsin. Dr. Winkelhake received his Ph.D. in
Immunochemistry/Pharmacology from the University of Illinois.

BRUCE L. A. CARTER, PH.D., has served as a director of the Company since
February 1994. Since 1994 Dr. Carter has served as Corporate Executive Vice
President and Chief Scientific Officer of Novo Nordisk, a pharmaceutical and
bio-industrial company. From 1988 to 1995, Dr. Carter served as president of
ZymoGenetics, Inc., a biotechnology company that is a subsidiary of Novo
Nordisk, and has served as its chairman since 1994.

NICHOLAS J. LOWCOCK has served as a director of the Company since April
1995. Since August 1994, Mr. Lowcock has been an associate with E.M. Warburg,
Pincus & Co., Inc., a venture financing firm. Prior to August 1994, Mr. Lowcock
was a consultant with The Boston Consulting Group.

HARDEN M. MCCONNELL, PH.D., has served as a director of the Company since
May 1989. Dr. McConnell has been a Professor of Chemistry at Stanford University
since 1964 and became Chairman of the Department of Chemistry in 1989. He is
also a member of the Company's Scientific Advisory Board.

37
<PAGE> 38

HARRY H. PENNER, JR. has served as a director of the Company since August
1993. Since December 1993, Mr. Penner has been President and Chief Executive
Officer of Neurogen Corporation, a neuropharmaceutical company. From 1985 to
December 1993, Mr. Penner was Executive Vice President of Novo Nordisk and,
beginning in 1988, President of Novo Nordisk of North America, a subsidiary of
Novo Nordisk.

JAMES E. THOMAS has served as a director of the Company since April 1995.
Since 1989, Mr. Thomas has been employed by E.M. Warburg, Pincus & Co., Inc., a
venture financing firm, where he currently serves as Managing Director. Prior to
1989, Mr. Thomas was a Vice President of Goldman Sachs International in London.
Mr. Thomas is also a director of Celtrix Pharmaceuticals, Inc., Menley & James
Laboratories, Inc. and a number of privately held companies.

NICOLE VITULLO has served as a director of the Company since April 1995.
Ms. Vitullo is an Investment Advisor for Rothschild Asset Management, Ltd., a
manager of two publicly traded biotechnology funds, Biotechnology Investments
Limited and IBT. Prior to joining Rothschild in 1992, Ms. Vitullo was a Director
of Corporate Communications and Investor Relations at Cephalon, Inc., a
neuropharmaceutical company. From 1985 to 1991, Ms. Vitullo was Manager of
Healthcare Investments for Eastman Kodak, Co. Ms. Vitullo is also a director of
Cytel Corporation and Corvas International.

Directors are elected annually and hold office until their successors are
elected and qualified, or until their earlier removal or resignation. Bruce L.
A. Carter, Ph.D. was nominated to the Board pursuant to rights held by Novo
Nordisk under the Novo Nordisk common stock purchase agreement. Nicholas J.
Lowcock and James E. Thomas were nominated to the Board pursuant to rights held
by Warburg under the Warburg/IBT Purchase Agreement, and Nicole Vitullo was
nominated to the Board pursuant to rights held by IBT under the Warburg/IBT
Purchase Agreement. See "Business -- Collaborative Arrangements" and "Certain
Transactions." There are no family relationships among the directors or
executive officers of the Company.

BOARD COMMITTEES

The Board of Directors has a Compensation Committee and an Audit Committee.
The Compensation Committee makes recommendations to the Board concerning
salaries and incentive compensation for the Company's officers and employees.
The Audit Committee reviews the results and scope of the audit and other
accounting and related services and reviews and evaluates the Company's internal
control functions.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee of the Board of Directors consists of directors
Messrs. Penner and Thomas and Ms. Vitullo. The Compensation Committee makes
recommendations to the Board of Directors concerning salaries and incentive
compensation for employees of and consultants to the Company, except that the
Compensation Committee has full power and authority to grant stock options to
the Company's executive officers under the Company's 1988 Stock Plan. No
director or executive officer of the Company has a relationship that would
constitute an interlocking relationship with executive officers or directors of
another entity. In addition, Mr. Thomas and Ms. Vitullo are affiliates of
Warburg and IBT, respectively, and were nominated to the Board of Directors
pursuant to the Warburg/IBT Purchase Agreement. Mr. Carter is an officer of Novo
Nordisk and was nominated to the Board of Directors pursuant to the Novo Nordisk
common stock purchase agreement. See "Certain Transactions."

EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS

In May 1996, the Company entered into an employment agreement with Dr.
Barry M. Sherman effective in May 1996 providing for a base salary of $250,000
per year and an option to purchase 400,000 shares of Common Stock at an exercise
price of $3.75 per share subject to a four-year vesting schedule. The term of
Dr. Sherman's employment agreement is through May 2000, subject to extension by
mutual agreement of both parties and subject to voluntary termination by Dr.
Sherman and earlier termination by the Company with or without cause. If the
Company terminates Dr. Sherman without cause or constructively terminates Dr.
Sherman, Dr. Sherman is entitled to twelve months severance pay and accelerated
vesting of the lesser of the unvested portion or one-quarter of the options
referred to above (or the lesser of the unvested portion or one-

38
<PAGE> 39

half of such options if the termination occurs after a change of control). At
the end of twelve months, Dr. Sherman is eligible to receive a performance bonus
of up to twenty-five percent of his annual salary based on full or partial
completion of certain goals established by mutual agreement of Dr. Sherman and
the Board of Directors.

In February 1996, the Company entered into an agreement with John W. Fara,
Ph.D., the Company's former President and Chief Executive Officer, regarding his
retirement from the Company. On May 31, 1996, Dr. Fara formally resigned as
President and Chief Executive Officer and as a director of the Company. Dr. Fara
will serve the Company on a part-time employment basis. Under the agreement, Dr.
Fara continues to receive a salary at an annual rate of $250,000 for a period of
twelve months. Dr. Fara is also eligible for bonuses for each substantial
development or license agreement that the Company enters into with certain third
parties or in the event of a sale of all or substantially all the Company's
assets, merger or consolidation of the Company with any other corporation or the
acquisition of 40% or more of the Company's outstanding Common Stock before
November 30, 1996. Dr. Fara's stock options continue to vest as long as he is
employed on a part-time basis and when he is no longer an employee all options
to acquire shares of the Company's Common Stock which were unvested as of such
date become fully exercisable.

The 1995 Director Option Plan provides that upon a change in control of the
Company, the unvested portion of all outstanding options under such Plan shall
become immediately exercisable. The 1988 Stock Option Plan and the 1992
Consultant Stock Plan, each provides that in the event of a change in control of
the Company, outstanding stock options and stock purchase rights under such
Plans shall be assumed or equivalent options or rights shall be substituted by
the successor entity. If such successor corporation does not agree to such
assumption or substitution, the Company's Board of Directors must provide for
such options or rights to become immediately exercisable in full. There are no
other compensatory plans or arrangements with respect to an executive officer
that will result in payments upon resignation, retirement, or any other
termination of such executive officer's employment or from a change of control
of the Company.

EXECUTIVE COMPENSATION

The following table sets forth the compensation paid by the Company for
each of the three years in the period ended December 31, 1995 to the Chief
Executive Officer and each other executive officer of the Company (the "Named
Executive Officers"). In May 1996, Dr. Sherman became President and Chief
Executive Officer and Dr. Fara resigned from such positions. See "-- Employment
Agreements and Change of Control Arrangements."

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------
ANNUAL COMPENSATION AWARD OF
------------------- OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) (# OF SHARES) COMPENSATION(3)
- -------------------------------------- ---- -------- -------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
John W. Fara, Ph.D.................... 1995 $240,000 $50,000 225,000(2) $ 5,674
President and Chief Executive 1994 225,000 -- -- 6,774
Officer 1993 205,000 40,000 50,000 6,668

John W. Varian........................ 1995 135,000 45,000 130,740(2) 3,520
Vice President, Finance and 1994 125,000 -- -- 3,882
Chief Financial Officer 1993 109,792 20,000 12,500 3,592

Jeffrey L. Winkelhake, Ph.D........... 1995 145,000 45,000 130,000(2) 3,719
Vice President, Pharmaceutical 1994 135,000 -- -- 2,948
Development 1993(4) 89,154 20,000 75,000 6,705
</TABLE>

- ---------------
(1) Represents payments for achievements of corporate objectives in 1995 and
1993, as applicable.

(2) Option awards in 1995 include 75,000, 55,000 and 55,000 shares subject to
incentive options related to 1995 officer compensation and 150,000, 75,740
and 75,000 shares subject to incentive options issued to

39
<PAGE> 40

replace options forfeited by Dr. Fara, Mr. Varian and Dr. Winkelhake,
respectively, in conjunction with the elective extension of exercise periods
for options granted prior to February 1995.

(3) Amounts included in "All Other Compensation" for 1995 include Company
matching contributions to the Anergen Retirement Savings Plan ("401(k)
Contributions"), payments by the Company on term life insurance policies
("Life Insurance Payments"), and relocation expenses. Specifically, the
amount stated for Dr. Fara in 1995 consists of 401(k) Contributions of
$3,720 and Life Insurance Payments of $1,954; the amount stated for Mr.
Varian in 1995 consists of 401(k) Contributions of $2,362 and Life Insurance
Payments of $1,158; and the amount stated for Dr. Winkelhake in 1995
consists of 401(k) Contributions of $2,900 and Life Insurance Payments of
$819.

(4) Dr. Winkelhake joined the Company in April 1993.

In February 1995, executive officers, employees and consultants had the
option to elect to extend the option exercise period for stock options granted
prior to February 1995 by four years. Elections to extend 555,113 options were
made. The following table sets forth each grant of stock options made during the
year ended December 31, 1995 to each executive officer, including 150,000,
75,740 and 75,000 shares subject to incentive options issued to replace options
forfeited by Dr. Fara, Mr. Varian and Dr. Winkelhake, respectively, in
conjunction with the elective extension of exercise periods for options granted
prior to February 1995:

OPTION GRANTS IN FISCAL 1995

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
---------------------------------------------------- VALUE AT ASSUMED ANNUAL
NUMBER OF % OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO TERM(3)
OPTIONS EMPLOYEES EXERCISE OR EXPIRATION -----------------------
NAME GRANTED(1) IN 1995 BASE PRICE(2) DATE 5% 10%
- -------------------------------- ---------- ---------- ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
John W. Fara, Ph.D.............. 100,000 11.9% $9.00 10/14/01 $ 0 $ 0
50,000 6.0 5.50 12/28/02 24,009 139,102
75,000 9.0 2.75 03/17/04 288,236 545,346

John W. Varian.................. 38,240 4.6 2.00 08/16/00 130,941 185,260
25,000 3.0 9.00 10/14/01 0 0
12,500 1.5 5.50 12/28/02 6,002 34,776
25,000 3.0 2.75 03/17/04 96,079 181,782
30,000 3.6 3.25 12/13/04 100,294 203,138

Jeffrey L. Winkelhake, Ph.D..... 50,000 6.0 7.75 04/07/02 0 26,602
25,000 3.0 5.50 12/28/02 12,004 69,551
30,000 3.6 2.75 03/17/04 115,294 218,138
25,000 3.0 3.25 12/13/04 83,579 169,282
</TABLE>

- ---------------
(1) The listed options become exercisable as to 1/48th of the shares subject to
the option at the end of each month after the date of grant, with full
vesting occurring four years after the date of grant. Under the terms of the
Company's 1988 Incentive Stock Plan, the Board of Directors retains
discretion, subject to plan limits, to modify the terms of outstanding
options and to reprice the options.

(2) The exercise price and tax withholding obligations related to exercise may
in some cases, be paid by delivery of other shares or by offset of the
shares subject to the options.

(3) The dollar amounts under these columns are the result of calculations at the
5% and 10% rates set by the SEC and therefore are not intended to forecast
the possible future appreciation, if any, of the Company's stock price. The
Company did not use an alternative formula for a grant date valuation, as
the Company does not believe that any formula will determine with reasonable
accuracy a present value based on future unknown or volatile factors.

40
<PAGE> 41

The following table sets forth, for each of the executive officers, each
exercise of stock options during the year ended December 31, 1995 and the
year-end value of unexercised options:

AGGREGATED OPTION EXERCISES IN FISCAL 1995 AND FISCAL YEAR-END VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE(2) OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE OPTIONS AT YEAR-END YEAR-END
NAME EXERCISE REALIZED(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------------- ----------- ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
John W. Fara, Ph.D. ........... 157,000 $ 280,889 150,220/106,780 $148,588/$91,413
John W. Varian................. 0 0 68,967/61,773 $93,074/$60,467
Jeffrey L. Winkelhake,
Ph.D. ....................... 0 0 51,471/78,529 $8,438/$61,563
</TABLE>

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

(1) Based on the closing price of the Company's Common Stock on the date of
exercise.

(2) Based on a fair market value of $4.25 which was the closing price of the
Company's Common Stock on December 29, 1995.

INCENTIVE STOCK PLANS

1991 Employee Stock Purchase Plan. The Company's 1991 Employee Stock
Purchase Plan (the "Purchase Plan") is intended to qualify under Section 423 of
the Internal Revenue Code of 1986, as amended (the "Code"). The Purchase Plan
was amended by the Board in March 1996 and such amendment was approved by
shareholders in June 1996 to increase the number of shares available for
issuance thereunder to a total of 250,000 shares. Under the Purchase Plan, the
Company withholds a specified percentage of each salary payment to participating
employees over certain offering periods. Unless the Board of Directors or its
committee determines otherwise, each offering period runs for 24 months and is
divided into four consecutive purchase periods of six months each. The Purchase
Plan expires by its terms in 2011.

The price at which stock is purchased under the Purchase Plan is equal to
85% of the fair market value of the Common Stock on the first day of the
applicable offering period or the last day of the applicable purchase period,
whichever is lower. To the extent permitted by Rule 16b-3, if the purchase price
of the Common Stock at the end of a purchase period in any offering period is
lower than the purchase price at the beginning of that offering period, then all
participants in that offering period are automatically withdrawn from that
offering period immediately after the exercise of their options and
automatically re-enrolled in the immediately following offering period.

As of May 31, 1996, a total of 133,079 shares of Common Stock have been
issued to employees at an aggregate purchase price of $453,909 and a weighted
average purchase price of $3.41 per share pursuant to offerings under the
Purchase Plan and 116,921 shares remained available for future issuance under
the Purchase Plan.

1988 Stock Option Plan. A total of 1,800,000 shares of the Company's Common
Stock has been reserved for issuance under the Company's 1988 Stock Option Plan
(the "Option Plan") adopted by the Board of Directors in 1988 and amended in
1990, 1991, 1992 and 1995. The Option Plan expires by its own terms in 1998. As
of May 31, 1996, options to purchase 1,259,815 shares were outstanding at a
weighted average exercise price of $4.76 per share, and options to purchase
417,457 shares had been exercised and 122,728 shares remained available for the
grant of options.

The Option Plan provides for the grant of "incentive stock options" within
the meaning of Section 422 of the Code and nonqualified stock options to
employees, directors and consultants of the Company. Incentive stock options may
be granted only to employees. The Option Plan is administered by the Board of
Directors, which determines the terms of options granted, including the exercise
price, the number of shares subject to the option, and the option's
exercisability. Options granted to employees are generally immediately
exercisable, but typically vest at the rate of 6/48ths of the shares after six
months and an additional 1/48th of the shares per month thereafter. The Option
Plan requires that the exercise price of incentive stock options must be at
least equal to the fair market value of such shares on the date of grant and the
exercise price of nonqualified stock options must be at least 85% of the fair
market value of such shares on the date of the grant.

41
<PAGE> 42

The maximum term of options granted under the Option Plan is ten years. With
respect to any participant who owns stock possessing more than 10% of the voting
rights or value of the Company's outstanding capital stock, the exercise price
of any option must be at least equal to 110% of the fair market value of such
shares on the date of grant and the term may be no longer than five years. In
the event of certain mergers of the Company with other entities, transfers of
voting control of the Company's capital stock or sales of all or substantially
all of the Company's assets, the Company will request that the acquiring entity
assume the Company's rights and obligations under the Option Plan or provide
similar options in substitution therefor. If the acquiring entity chooses not to
assume such rights and obligations or provide substitute options, then the
Company's Board of Directors will cause all outstanding options (together with
shares purchased upon exercise thereof) to become fully vested prior to the
event causing such acceleration and all unexercised options will terminate upon
completion of such event.

1995 Director Option Plan. A total of 200,000 shares of the Company's
Common Stock has been reserved for issuance under the Company's 1995 Director
Option Plan (the "Director Plan"), adopted by the Board of Directors in 1995.
The Director Plan expires by its own terms in 2005. At May 31, 1996, options to
purchase 20,000 shares were outstanding at a weighted average exercise price of
$3.72 per share and no options had been exercised.

The Director Plan provides for the grant of "nonstatutory options" to
non-employee directors of the Company. The Director Plan is administered by the
Board of Directors. All grants of options under the Director Plan are automatic
and non-discretionary pursuant to the terms of the Director Plan. Each non-
employee director is automatically granted a nonstatutory option to purchase
25,000 shares of Common Stock on the date such person first becomes a director
(provided that non-employee directors who were directors on the effective date
of the Director Plan were granted a nonstatutory option to purchase 5,000 shares
in lieu of such grant). On the first day of each fiscal year thereafter, each
incumbent non-employee director will automatically be granted a nonstatutory
option to purchase 5,000 shares of Common Stock (provided such person has served
on the Board at least six months). Options granted to directors are generally
immediately exercisable, but typically vest at the rate of 1/48th of the shares
per month after the date of grant. The Director Plan requires that the exercise
price of nonstatutory stock options is equal to the fair market value of such
shares on the date of grant. The term of options granted under the Director Plan
is ten years. In the event of certain mergers of the Company with other
entities, transfers of voting control of the Company's capital stock or sales of
all or substantially all of the Company's assets, all outstanding options shall
become fully vested.

As of May 31, 1996, only Dr. Harden McConnell and Mr. Harry H. Penner, Jr.
participated in the Director Plan.

1992 Consultant Stock Plan. A total of 50,000 shares of the Company's
Common Stock has been reserved for issuance under the Company's 1992 Consultant
Stock Plan (the "Consultant Plan") adopted by the Board of Directors in 1992.
The Consultant Plan expires by its term in 2002. The Consultant Plan permits the
Company to grant "nonstatutory options" (or bonus shares) to consultants who are
not directors or officers of the Company. The Board of Directors (or a committee
thereof) administers the plan and determines, among other things, the
individuals to whom options should be granted and the terms of options granted,
including exercise price, the number of shares subject to the option and the
option's exercisability. In the event of a merger of the Company with another
entity or the sale of all or substantially all of the Company's assets, the
Company will request that the acquiring entity assume the Company's rights and
obligations under the Consultant Plan or provide similar options in exchange for
outstanding options. If the acquiring entity chooses not to assume such rights
and obligations or provide substitute options, then the Company's Board of
Directors will make such options fully exercisable for a period of fifteen days
after notice to the holders, after which time the options will terminate. At May
31, 1996, 17,465 shares had been issued and no options had been granted under
the Consultant Plan.

42
<PAGE> 43

401(k) PLAN

In January 1992, the Company adopted a tax-qualified employee savings and
retirement plan (the "401(k) Plan"), which generally covers all of the Company's
full-time employees who have attained age 18. Pursuant to the 401(k) Plan,
employees may elect to defer up to 15% of their current compensation (subject to
certain statutorily prescribed limits, including an annual limit of $9,240 in
1995). These deferred amounts are contributed to the 401(k) Plan. The 401(k)
Plan permits, but does not require, additional matching and Company
contributions on behalf of participants. Since the Plan's inception, the Company
has contributed an amount equal to 50% of each participant's contribution for up
to 4% of their eligible compensation. The 401(k) Plan is intended to qualify
under Sections 401(k) and 401(a) of the Code. Contributions to such a qualified
plan are deductible to the Company when made and neither the contributions nor
the income earned on those contributions is taxable to participants until
withdrawn. All 401(k) Plan contributions are credited to separate accounts
maintained in trust by two individual trustees. Contributions are invested, at
the participant's direction, in one or more of the investment funds available
under the 401(k) Plan. All account balances are adjusted at least annually to
reflect the investment earnings and losses of the trust fund. Each participant
is fully vested in his or her salary deferral accounts under the 401(k) Plan.
Distributions may be made from a participant's account pursuant to the 401(k)
Plan's hardship withdrawal provisions as well as upon a participant's
termination of employment, disability or attainment of age 59 1/2. Distributions
will be in the form of a lump sum, installment payments or an annuity, in the
participant's discretion. Federal tax laws limit the amount that may be added to
a participant's accounts for any one year under a qualified plan such as the
401(k) Plan to the lesser of (i) $30,000 or (ii) 25% of the participant's
compensation (net of salary deferral contributions) for the year.

LIMITATIONS ON DIRECTORS' LIABILITIES AND INDEMNIFICATION

The Company's Articles of Incorporation and Bylaws provide for
indemnification of the officers and directors of the Company to the full extent
permitted by California law. The General Corporation Law of the State of
California permits a corporation to limit, under certain circumstances, a
director's liability for monetary damages in actions brought by or in the right
of the corporation. The Company's Articles of Incorporation also provide for the
elimination of the liability of directors for monetary damages to the full
extent permitted by law.

The Company has entered into agreements to indemnify its directors and
officers in addition to the indemnification provided for in the Articles of
Incorporation and Bylaws. These agreements will, among other things, indemnify
the Company's directors and officers for certain expenses (including attorneys'
fees), judgments, fines and settlement amounts incurred in any action or
proceeding, including any action by or in the right of the Company, on account
of services as a director or officer of any other enterprise to which the person
provides services at the request of the Company. The Company believes that these
provisions and agreements are necessary to attract and retain qualified persons
as directors and officers. The Company currently maintains a directors' and
officers' insurance policy. At present, there is no pending litigation or
proceeding involving a director, officer or employee of the Company as to which
indemnification is sought, nor is the Company aware of any threatened litigation
or proceeding that may result in claims for indemnification.

43
<PAGE> 44

CERTAIN TRANSACTIONS

In March 1995, the Company, Warburg and IBT (collectively, the
"Purchasers") entered into the Warburg/IBT Purchase Agreement pursuant to which
the Purchasers agreed to purchase 7,317,073 shares of Common Stock from the
Company for approximately $15 million. This transaction was approved by the
Company's shareholders and was completed on April 13, 1995. The Purchasers have
the right at any time after October 13, 1997 to request the Company to effect a
registration of at least 30% of the aggregate number of shares held by the
requesting Purchaser or any lesser percentage if the aggregate net offering
price would exceed $1,000,000. The Purchasers also have the right to have their
shares included in a registration by the Company of its securities for its own
account or the account of any of its shareholders. The Purchasers have certain
rights of representation on the Company's Board of Directors based on certain
minimum levels of ownership of the Company's Common Stock. Under the Warburg/IBT
Purchase Agreement, the Company is currently obligated to include in the slate
of nominees recommended by the Board of Directors and management at each
election of directors two candidates selected by Warburg, one candidate selected
by IBT and one candidate as mutually agreed to by IBT and Warburg. Upon the
closing of this transaction, the Board of Directors appointed to the Board to
fill vacancies two new members representing Warburg, Mr. Nicholas J. Lowcock and
Mr. James E. Thomas, and one new member representing IBT, Ms. Nicole Vitullo.
These three individuals have been reelected to the Board at the annual meeting
of shareholders in June 1996. Mr. Thomas and Ms. Vitullo are affiliates of
Warburg and IBT, respectively. It is expected that during the next fiscal year
IBT and Warburg may identify an appropriate industry representative for
nomination to the Board pursuant to their right to mutually designate such
candidate under the Warburg/IBT Purchase Agreement.

In March 1996, the Company and Novo Nordisk agreed to expand their
collaborative research and development agreement to establish certain milestones
for products developed under the agreement targeting IDDM and to extend the term
of the development program by an additional two-year period through August 1998.
See "Business -- Collaborative Arrangements -- Novo Nordisk A/S." Bruce L.A.
Carter, the Corporate Executive Vice President and Chief Scientific Officer of
Novo Nordisk, has served as a director of the Company since February 1994
pursuant to rights under the Novo Nordisk Purchase Agreement.

In May 1996, the Company entered into an employment agreement with Dr.
Barry M. Sherman, President and Chief Executive Officer and a director of the
Company. In February 1996, the Company entered into an agreement with John W.
Fara, Ph.D., the Company's former President and Chief Executive Officer. See
"Management -- Employment Agreements and Change of Control Arrangements."

44
<PAGE> 45

PRINCIPAL STOCKHOLDERS

The following table sets forth information known to the Company with
respect to the beneficial ownership of the Common Stock as of April 30, 1996,
and as adjusted to reflect the sale of Common Stock offered hereby, for (i) each
person who is known by the Company to own beneficially more than 5% of the
Common Stock, (ii) each of the Company's directors, (iii) each executive officer
named in the Summary Compensation Table and (iv) all directors and executive
officers as a group. Warburg, Pincus Ventures, L.P. will beneficially own
5,478,049 shares of Common Stock after the offering resulting from its purchase
of 600,000 shares in the offering.

<TABLE>
<CAPTION>
NO. OF SHARES PERCENTAGE(2)
BENEFICIALLY --------------------------------------
NAME(1) OWNED % BEFORE OFFERING % AFTER OFFERING
- ------------------------------------------------- ------------- ----------------- ----------------
<S> <C> <C> <C>
Warburg, Pincus Ventures, L.P.(3)................ 4,878,049 32.4% 29.5%
466 Lexington Avenue
New York, NY 10017
Warburg, Pincus & Co.(4)......................... 4,878,049 32.4% 29.5%
466 Lexington Avenue
New York, NY 10017
International Biotechnology Trust PLC............ 2,439,024 16.2% 13.1%
Five Arrows House
St. Swithin's Lane
London, EC4N 8NR
England
Novo Nordisk A/S................................. 1,219,745 8.1% 6.6%
Novo Alle
2880 Basgvaerd
Denmark
John W. Fara, Ph.D.(5)........................... 347,212 2.3% 1.9%
Barry M. Sherman, M.D.(6)........................ 16,667 * *
John W. Varian(7)................................ 100,350 * *
Jeffrey Winkelhake, Ph.D.(8)..................... 64,349 * *
Bruce L.A. Carter, Ph.D.(9)...................... 1,219,745 8.1% 6.6%
Harden M. McConnell, Ph.D.(10)................... 37,776 * *
Harry H. Penner, Jr.(11)......................... 22,502 * *
James E. Thomas(12).............................. 4,878,049 32.4% 29.5%
Nicholas J. Lowcock(13).......................... 0 -- --
Nicole Vitullo(14)............................... 0 -- --
All directors and officers as a group (10
persons)(15)................................... 6,686,650 43.4% 39.3%
</TABLE>

- ---------------
* Represents less than 1% of the outstanding Common Stock.

(1) The persons named in the table, to the Company's knowledge, have sole
voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them, subject to community property laws
where applicable and the information contained in the footnotes hereunder.

(2) Applicable percentage of ownership is based on 15,063,180 and 18,563,180
shares of Common Stock outstanding as of April 30, 1996 before and after
the proposed offering, respectively, on a pro forma basis, together with
applicable options and warrants held by such stockholder. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission, and includes voting and investment power with respect
to shares. Shares of Common Stock subject to options exercisable within 60
days of April 30, 1996 are deemed outstanding for computing the percentage
ownership of the person holding such options, but are not deemed
outstanding for computing the percentage ownership of any other person.

(3) The sole general partner of Warburg, Pincus Ventures, L.P. ("Warburg") is
Warburg, Pincus & Co., a New York general partnership ("WP"). Lionel I.
Pincus is the managing partner of WP and may be deemed to control it. E.M.
Warburg, Pincus & Company, a New York general partnership

45
<PAGE> 46

("E.M. Warburg"), manages Warburg. WP has a 15% interest in the profits of
Warburg as the general partner, and also owns approximately 1.5% of the
limited partnership interests in Warburg. After the offering, Warburg will
beneficially own 5,478,049 shares as a result of its purchase of 600,000
shares of Common Stock in the offering.

(4) Represents shares held by Warburg. After the offering, Warburg will
beneficially own 5,478,049 shares as a result of its purchase of 600,000
shares of Common Stock in the offering. As the sole general partner of
Warburg (as described in footnote 3 above), WP may be deemed to be a
beneficial owner (within the meaning of Rule 13d-3 under the Securities
Exchange Act of 1934) of the shares held by Warburg.

(5) Includes 146,342 shares subject to options exercisable within 60 days of
April 30, 1996.

(6) Includes 16,667 shares subject to options exercisable within 60 days of
April 30, 1996. Dr. Sherman joined the Company as President and Chief
Executive Officer and as a director of the Company in May 1996.

(7) Includes 81,571 shares subject to options exercisable within 60 days of
April 30, 1996.

(8) Includes 63,142 shares subject to options exercisable within 60 days of
April 30, 1996.

(9) Includes 1,219,745 shares held by Novo Nordisk, of which Dr. Carter is an
executive officer. Dr. Carter disclaims beneficial ownership of these
shares.

(10) Includes 14,376 shares subject to options exercisable within 60 days of
April 30, 1996.

(11) Includes 17,502 shares subject to options exercisable within 60 days of
April 30, 1996.

(12) Represents shares held by Warburg. After the offering, Warburg will
beneficially own 5,478,049 shares as a result of its purchase of 600,000
shares of Common Stock in the offering. Mr. Thomas, a director of the
Company, is a Managing Director of E.M. Warburg, Pincus & Co., Inc., a
wholly-owned subsidiary of WP ("EMW"), and a general partner of WP and E.M.
Warburg. As such, Mr. Thomas may be deemed to have an indirect pecuniary
interest (within the meaning of Rule 16a-1 under the Securities Exchange
Act of 1934) in an indeterminate portion of the shares beneficially owned
by Warburg and WP. Mr. Thomas disclaims beneficial ownership of these
shares within the meaning of Rule 13d-3 under the Securities Exchange Act
of 1934.

(13) Does not include shares held by Warburg. Mr. Lowcock is employed by EMW and
is a director of the Company. Mr. Lowcock disclaims beneficial ownership of
the shares held by Warburg and WP.

(14) Does not include shares held by IBT. Ms. Vitullo, a director of the
Company, is an employee of Rothschild, Inc., a corporation affiliated with
Rothschild Asset Management, Ltd., investment manager for IBT. Ms. Vitullo
disclaims beneficial ownership of the shares of IBT.

(15) Includes 339,600 shares subject to options exercisable within 60 days of
April 30, 1996. Reflects the shares of Warburg of which Mr. Thomas may be
deemed to have an indirect pecuniary interest (within the meaning of Rule
16a-1 of the Securities Exchange Act of 1934) and the shares of Novo
Nordisk of which Dr. Carter is an executive officer. Does not reflect
beneficial ownership of Mr. Lowcock of Warburg and Ms. Vitullo of IBT who
each disclaim beneficial ownership of the shares held by their respective
entities. Also includes shares beneficially held by Dr. Sherman, who joined
the Company as President and Chief Executive Officer and as a director in
May 1996.

46
<PAGE> 47

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 40,000,000 shares
of Common Stock and 10,000,000 shares of Preferred Stock. At May 31, 1996, there
were 15,066,042 shares of Common Stock outstanding, held by 375 shareholders of
record. At May 31, 1996, options to purchase an aggregate of 1,279,815 shares
and warrants to purchase an aggregate of 459,015 shares of Common Stock were
outstanding. See "Management -- Incentive Stock Plans" and "Certain
Transactions."

COMMON STOCK

Each holder of Common Stock is entitled to one vote for each share held.
The holders of Common Stock, voting as a single class, are entitled to elect all
of the directors. Although California law generally permits holders of Common
Stock to cumulate votes for the election of directors upon giving notice as
required by law, the Articles of Incorporation provide, as permitted by
California law, that the right to cumulate votes will be eliminated if the
Company has at least 800 holders of its equity securities as of the record date
of the Company's most recent annual meeting of shareholders. The Company
believes it has more than 800 shareholders. The elimination of cumulative voting
will have the effect of making it more difficult for a minority shareholder to
elect a member of the board of directors because while an owner of just over 15%
of the outstanding shares could currently elect a director, after the
elimination of cumulative voting, more than 50% ownership of the Company is
required to guarantee election of a director. The Common Stock is not
convertible into any other security.

Holders of Common Stock are entitled to receive ratably such dividends as
may be declared by the Board of Directors out of funds legally available
therefor. See "Dividend Policy." In the event of a liquidation, dissolution or
winding up of the Company, holders of Common Stock would be entitled to share in
the Company's assets remaining after the payment of liabilities and the
satisfaction of any liquidation preference granted the holders of any
outstanding shares of Preferred Stock. The Common Stock has no preemptive or
other subscription rights. The outstanding shares of Common Stock are, and the
Common Stock offered hereby will be when issued, fully paid and nonassessable.

PREFERRED STOCK

The Board of Directors has the authority, without further action by
shareholders, to issue up to 10,000,000 shares of Preferred Stock in one or more
series, and to fix the designations, rights, preferences, privileges,
qualifications and restrictions thereof, including dividend rights, conversion
rights, voting rights, rights and terms of redemption, liquidation preferences
and sinking fund terms, any or all of which may be greater than the rights of
the Common Stock. The Board of Directors, without shareholder approval, can
issue Preferred Stock with voting, conversion and other rights which 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 to make removal of
management more difficult. In certain circumstances, such issuance could have
the effect of decreasing the market price of the Common Stock. The issuance of
Preferred Stock may have the effect of delaying, deterring or preventing a
change in control of the Company without any further action by the shareholders.
The Company has no present plan to issue any shares of Preferred Stock.

WARRANTS

In connection with its initial public offering on October 10, 1991, the
Company sold warrants to the underwriters of its initial public offering (the
"Representative's Warrants") to purchase from the Company up to 196,656 shares
of Common Stock at an exercise price per share equal to $5.98 per share, subject
to adjustment. The Representative's Warrants are exercisable until October 9,
1996, and are not transferable except to officers of the Representative and
certain successors in interest of the Representative. In addition, the Company
has granted certain rights to the holders of the Representative's Warrants to
register the Common Stock underlying the Representative's Warrants under the
Securities Act.

47
<PAGE> 48

In connection with a facilities and equipment financings, the Company
issued warrants to purchase 16,919 and 8,577 shares of Common Stock at $9.93 and
$5.83, respectively, subject to adjustment ("MMC Warrants"). The 16,919 share
MMC Warrant is exercisable at any time until December 29, 1999 and the 8,577
share MMC Warrant is exercisable at any time until December 30, 2000.

In connection with a Securities Purchase Agreement entered into on May 11,
1994 (the "1994 Purchase Agreement"), the Company issued warrants to a group of
private investors to purchase 236,863 shares of the Company's Common Stock at an
exercise price of $3.52 per share, subject to adjustment. These warrants are
exercisable at any time until June 30, 1997. The Company may redeem the warrants
after June 30, 1996 if the closing price of the Company's Common Stock as quoted
on the Nasdaq National Market exceeds the exercise price by 150% for ten days
within a period of 20 consecutive trading days.

REGISTRATION RIGHTS OF CERTAIN HOLDERS

Warburg and IBT (collectively the "Purchasers"), who in the aggregate hold
7,317,073 shares of Common Stock (7,917,073 shares of Common Stock after the
offering which includes 600,000 shares purchased by Warburg in connection with
the offering), are entitled to certain rights with respect to the registration
of such shares under the Securities Act. These rights are provided under the
terms of the Warburg/IBT Purchase Agreement. Subject to certain limitations in
the agreement, the Purchasers have the right at any time after October 13, 1997
to request the Company to effect a registration of at least 30% of the aggregate
number of shares held by the requesting Purchaser or any lesser percentage if
the aggregate net offering price would exceed $1,000,000. The Purchasers also
have the right to have their shares included in a registration by the Company of
its securities for its own account or the account of any of its shareholders.

The MMC Warrants grant the holders thereof registration rights which are in
pari passu with certain registration rights of the holders of Registrable
Securities. If the Company registers any of its Common Stock either for its own
account or for the account of other security holders, the holders of the MMC
Warrants are entitled to include the shares issuable upon exercise of such MMC
Warrants in the registration, subject to the ability of the underwriters to
limit the number of shares included in the offering and provided that the
Company does not in good faith determine that the incremental cost and effort in
so doing is significant.

Additionally, the Representative's Warrants provide certain rights with
respect to the registration under the Securities Act of the 196,656 shares
issuable upon exercise thereof (the "Warrant Shares"). The holders of at least
50% of the Warrant Shares may require on one occasion that the Company use its
best efforts to register the Warrant Shares for public resale. Until October 9,
1996, if the Company registers any of its Common Stock either for its own
account for the account of other security holders, the holders of the Warrant
Shares are entitled to include their shares of Common Stock in the registration.

Novo Nordisk has the right at any time after August 17, 1996 to require
that the Company use its best efforts to register any shares of Common Stock
held by Novo Nordisk for public resale. The right is provided under the Novo
Nordisk common stock purchase agreement. Novo Nordisk may require the Company on
no more than one occasion every six months to effect such a registration. Novo
Nordisk must bear all of the out-of-pocket expenses incurred by the Company in
connection with such a registration unless Form S-3 is not available, in which
case the Company shall bear all registration expenses. The Company, however,
shall not be required to effect such registration if in the reasonable opinion
of counsel, Novo Nordisk's shares of Common Stock may be sold in the public
market under the Securities Act without registration.

Under the 1994 Purchase Agreement, $1.5 million was received by the Company
from two purchasers in exchange for 413,965 shares of Common Stock and warrants
to purchase an additional 236,863 shares of Common Stock at an exercise price of
$3.52 per share, subject to adjustment. The Company is obligated to register at
the Company's expense the 236,863 shares of Common Stock issuable upon exercise
of such warrants if so requested by the warrant holders.

Except as otherwise noted, all registration expenses must be borne by the
Company and all selling expenses must be borne by the holders of the securities
being registered.

48
<PAGE> 49

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.P.

SHARES ELIGIBLE FOR FUTURE SALE

Future sales of substantial amounts of the Company's Common Stock in the
public market by existing shareholders could adversely affect the market price
of the Company's Common Stock. Upon the completion of this offering, the Company
will have 18,566,042 shares of Common Stock outstanding, assuming no exercise of
outstanding options or warrants after May 31, 1996. Approximately 18,152,077 of
the shares (including the 3,500,000 shares sold in this offering) are eligible
for immediate sale in the public market without restriction, although shares
held by persons who may be deemed affiliates are subject to volume restrictions
applicable to affiliates under Rule 144. As of May 31, 1996, 8,786,074 shares
were held by persons who may be deemed affiliates under Rule 144. In addition,
1,279,815 shares of Common Stock were subject to options outstanding as of May
31, 1996, and 451,300 of these shares were fully vested. Upon exercise of the
currently vested portion of such options, all shares will be eligible for
immediate sale in the public market, subject to Rule 144 volume restrictions
applicable to affiliates. As of May 31, 1996, there were 459,015 shares of
Common Stock subject to warrants which, upon exercise of such warrants, may be
freely tradeable pursuant to Rule 144 or as a result of registration pursuant to
registration rights. The Commission has recently proposed to reduce the Rule 144
holding periods. If enacted, such modification will have a material effect on
the timing of when shares of the Company's Common Stock become eligible for
resale.

The Company's directors, executive officers, certain principal
stockholders, who in the aggregate hold 9,125,674 of the shares of Common Stock
or securities convertible into Common Stock of the Company outstanding
immediately prior to the completion of this offering, have entered into lock-up
agreements under which they have agreed not to offer, sell, contract to sell,
grant any option to purchase or otherwise dispose of, or agree to dispose of,
directly or indirectly, any shares of Common Stock, options or warrants to
acquire shares of Common Stock or securities exchangeable for or convertible
into Common Stock owned by them for a period of 90 days after the date of this
Prospectus, without the prior written consent of PaineWebber Incorporated. The
Company has entered into a similar agreement, except that the Company may grant
options and issue stock under its current stock option and stock purchase plans
and pursuant to other currently outstanding options. See "Risk Factors -- Future
Requirements for Significant Additional Capital."

Upon expiration of the lock-up agreements, approximately 9,764,112 shares
of Common Stock (including approximately 378,038 shares subject to outstanding
vested options) will become eligible for immediate public resale, subject in
some cases to vesting provisions and volume limitations pursuant to Rule 144.
The number of shares sold in the public market could increase if holders subject
to volume restrictions exercise their registration rights.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least two
years (including the holding period of any prior owner, except an affiliate) is
entitled to sell in "broker's transactions" or to market makers, within any
three-month period commencing 90 days after the date of this Prospectus, a
number of shares that does not exceed the greater of (i) one percent of the
number of shares of Common Stock then outstanding (approximately 190,632 shares
immediately after this offering) or (ii) the average weekly trading volume of
the Common Stock during the four calendar weeks preceding the required filing of
a Form 144 with respect to such sale. Sales under Rule 144 are generally subject
to certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company. Under Rule 144(k),
a person who is not deemed to have been an affiliate of the Company at any time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least three years, is entitled to sell such shares
without having to comply with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Under Rule 701 under the Securities
Act, persons who purchase shares upon exercise of options granted prior to the
effective date of this offering are entitled to sell such shares 90 days after
the effective date of this offering in reliance on Rule 144, without having to
comply with the holding period requirements of Rule 144 and, in the case of non-
affiliates, without having to comply with the public information, volume
limitation or notice provisions of Rule 144. See "Risk Factors -- Shares
Eligible for Future Sale; Registration Rights."

49
<PAGE> 50

UNDERWRITING

PaineWebber Incorporated and Vector Securities International, Inc.
(collectively, the "Underwriters"), have severally agreed, subject to the terms
and conditions of the Underwriting Agreement among the Company and the
Underwriters (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 each Underwriter's name in the following table.

<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
PaineWebber Incorporated.................................................. 1,750,000
Vector Securities International, Inc...................................... 1,750,000
---------
Total........................................................... 3,500,000
=========
</TABLE>

In the Underwriting Agreement, the Underwriters have agreed, subject to
certain conditions, to purchase all of the shares of Common Stock being sold
pursuant to such Agreement (other than those covered by the over-allotment
option described below), if any are purchased. The Underwriting Agreement
provides that, in the event of a default by an Underwriter, in certain
circumstances, the purchase commitments of the non-defaulting Underwriter may be
increased or the Underwriting Agreement may be terminated.

The Company has been advised by the Underwriters that they propose to offer
the shares of Common Stock to the public at the price to the public set forth on
the cover page of this Prospectus, and to certain securities dealers at such
price less a concession not in excess of $0.12 per share and that the
Underwriters and such dealers may reallow a discount not in excess of $0.05 per
share to the other dealers. After the closing of the public offering, the public
offering price, the concession to selected dealers and the discounts to other
dealers may be changed.

As part of this offering, the Underwriters will sell 600,000 shares of
Common Stock to Warburg at the public offering price set forth on the cover page
of this Prospectus. The Underwriters will not receive any fees or commissions in
connection with the sale of such shares.

The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, under which the
Underwriters may purchase up to an additional 525,000 shares of Common Stock
from the Company at the price to the public set forth on the cover page of this
Prospectus less the underwriting discounts and commissions. The Underwriters may
exercise the option solely for the purpose of covering over-allotments, if any.
To the extent such option is exercised, each Underwriter will become obligated,
subject to certain conditions, to purchase approximately the same percentage of
such additional shares of Common Stock as it was obligated to purchase pursuant
to the Underwriting Agreement.

The Company, its directors and officers and 5% or greater stockholders of
the Company have agreed not to offer, sell, contract to sell or otherwise
dispose of any shares of Common Stock, or rights to acquire shares of Common
Stock, for a period of 90 days after the date of this Prospectus without the
prior written consent of PaineWebber Incorporated.

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

50
<PAGE> 51

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Certain legal matters in connection with this offering will be
passed upon for the Underwriters by Shearman & Sterling, San Francisco,
California.

EXPERTS

The financial statements of Anergen, Inc. at December 31, 1994 and 1995,
and for each of the three years in the period ended December 31, 1995, appearing
in this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein and in the Registration Statement, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.

Portions of this Prospectus entitled "Risk Factors -- Uncertainty Relating
to Patents and Proprietary Rights" and "Business -- Patents and Proprietary
Rights," except for the second and ninth paragraphs thereof, have been reviewed
and approved by Townsend and Townsend and Crew LLP, as experts in patent law,
and are included herein in reliance upon their review and approval.

ADDITIONAL INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy and information statements filed
by the Company with the Commission pursuant to the informational requirements of
the Exchange Act may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the following Regional Offices of the Commission: New York Regional
Office, 26 Federal Plaza, Room 1102, New York, New York 10007; and Chicago
Regional Office, Everett McKinley Dirksen Building, 219 South Dearborn Street,
Room 1204, Chicago, Illinois 60604. Copies of such material may be obtained from
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington D.C. 20549, at prescribed rates. In addition, reports, proxy
statements and other information concerning the Company (symbol: ANRG) can be
inspected and copied at the offices of the Nasdaq National Market, Nasdaq
Operations, 1735 K Street, N.W., Washington, D.C. 20006, on which the Common
Stock of the Company is quoted.

The Company has filed with the Commission a Registration Statement under
the Securities Act with respect to the shares of Common Stock offered hereby.
This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and such Common Stock, reference is made
to the Registration Statement and to the exhibits and schedules filed therewith.
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. A copy of the Registration Statement may be
inspected without charge at the offices of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, and copies of all or any part thereof may be
obtained from the Public Reference Section of the Commission upon the payment of
the fees prescribed by the Commission. In addition, copies of the Registration
Statement may be obtained from the Commission's Internet address at
http://www.sec.gov.

51
<PAGE> 52

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
ITEM PAGE
- -------------------------------------------------------------------------------------- ----
<S> <C>
Report of Independent Auditors........................................................ F-2
Audited Financial Statements
Balance Sheets at December 31, 1994 and 1995 and March 31, 1996 (unaudited)........... F-3
Statements of Operations for each of the three years in the period ended December 31,
1995 and the three months ended March 31, 1995 and 1996 (unaudited)................. F-4
Statement of Shareholders' Equity for each of the three years in the period ended
December 31, 1995 and for the three months ended March 31, 1996 (unaudited)......... F-5
Statements of Cash Flows for each of the three years in the period ended December 31,
1995 and the three months ended March 31, 1995 and 1996 (unaudited)................. F-6
Notes to Financial Statements......................................................... F-7
</TABLE>

F-1
<PAGE> 53

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Anergen, Inc.

We have audited the accompanying balance sheets of Anergen, Inc. as of
December 31, 1994 and 1995, and the related statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Anergen, Inc. at December
31, 1994 and 1995, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.

ERNST & YOUNG LLP

San Francisco, California
February 9, 1996

F-2
<PAGE> 54

ANERGEN, INC.

BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- -------- MARCH 31,
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and equivalents.................................... $ 1,248 $ 468 $ 310
Short-term investments.................................. 2,508 11,024 9,343
Contract receivables-related party...................... 592 815 783
Prepaid expenses........................................ 178 102 103
-------- -------- --------
Total current assets............................ 4,526 12,409 10,539
Property and equipment, net............................... 2,251 2,010 1,886
Other assets.............................................. 20 36 36
-------- -------- --------
$ 6,797 $ 14,455 $ 12,461
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities................ $ 977 $ 1,040 $ 889
Current portion of capital lease obligations and debt... 960 883 746
-------- -------- --------
Total current liabilities....................... 1,937 1,923 1,635
Long-term portion of capital lease obligations and debt... 990 818 636
Commitments
Shareholders' equity:
Preferred stock, no par value; 10,000,000 shares
authorized; none issued and outstanding.............. -- -- --
Common stock, no par value; 40,000,000 shares
authorized; 7,438,495 and 14,967,680 shares issued
and outstanding at December 31, 1994 and 1995,
respectively (15,029,430 shares at March 31, 1996
(unaudited))......................................... 32,572 47,359 47,400
Additional paid-in capital.............................. 648 648 648
Deferred compensation................................... (36) -- --
Unrealized gain (loss) on investments................... (91) 16 (18)
Accumulated deficit..................................... (29,223) (36,309) (37,840)
-------- -------- --------
Total shareholders' equity...................... 3,870 11,714 10,190
-------- -------- --------
$ 6,797 $ 14,455 $ 12,461
======== ======== ========
</TABLE>

See accompanying notes.

F-3
<PAGE> 55

ANERGEN, INC.

STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Contract revenues-related party........ $ 339 $ 2,325 $ 3,001 $ 551 $ 783
Interest income........................ 312 207 533 17 139
------- ------- ------- ------- -------
Total revenues................. 651 2,532 3,534 568 922
------- ------- ------- ------- -------
Expenses:
Research and development............... 5,553 7,423 8,322 1,898 1,895
General and administrative............. 1,716 1,831 1,976 462 503
Interest expense....................... 226 238 322 71 55
------- ------- ------- ------- -------
Total expenses................. 7,495 9,492 10,620 2,431 2,453
------- ------- ------- ------- -------
Net loss................................. $(6,844) $(6,960) $(7,086) $(1,863) $(1,531)
======= ======= ======= ======= =======
Net loss per share....................... $ (1.12) $ (0.97) $ (0.55) $ (0.25) $ (0.10)
======= ======= ======= ======= =======
Shares used in calculating per share
data................................... 6,118 7,202 12,859 7,527 14,984
======= ======= ======= ======= =======
</TABLE>

See accompanying notes.

F-4
<PAGE> 56

ANERGEN, INC.

STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
ADDITIONAL UNREALIZED TOTAL
PREFERRED COMMON PAID-IN DEFERRED GAIN(LOSS) ON ACCUMULATED SHAREHOLDERS'
STOCK STOCK CAPITAL COMPENSATION INVESTMENTS DEFICIT EQUITY
--------- ------- ---------- ------------ -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1992....... $ -- $22,929 $648 $ (301) $ -- $ (15,419) $ 7,857
Issuance of 1,219,745 shares of
common stock to Novo Nordisk
A/S............................ -- 8,000 -- -- -- -- 8,000
Issuance of common stock to
employees under option and
purchase plans................. -- 175 -- -- -- -- 175
Amortization of deferred
compensation................... -- -- -- 133 -- -- 133
Unrealized gain(loss) on
investments
available-for-sale............. -- -- -- -- (70) -- (70)
Net loss......................... -- -- -- -- -- (6,844) (6,844)
----- ------- ---- ----- ---- -------- -------
BALANCE, DECEMBER 31, 1993....... -- 31,104 648 (168) (70) (22,263) 9,251
Issuance of 413,965 shares of
common stock and 236,863
warrants to private investors,
net............................ -- 1,370 -- -- -- -- 1,370
Issuance of common stock to
employees under option and
purchase plans................. -- 98 -- -- -- -- 98
Amortization of deferred
compensation................... -- -- -- 132 -- -- 132
Unrealized gain(loss) on
investments
available-for-sale............. -- -- -- -- (21) -- (21)
Net loss......................... -- -- -- -- -- (6,960) (6,960)
----- ------- ---- ----- ---- -------- -------
BALANCE, DECEMBER 31, 1994....... -- 32,572 648 (36) (91) (29,223) 3,870
Issuance of 7,317,073 shares of
common stock in follow-on
offering, net.................. -- 14,651 -- -- -- -- 14,651
Issuance of common stock to
employees under option and
purchase plans................. -- 136 -- -- -- -- 136
Amortization of deferred
compensation................... -- -- -- 36 -- -- 36
Unrealized gain(loss) on
investments
available-for-sale............. -- -- -- -- 107 -- 107
Net loss......................... -- -- -- -- -- (7,086) (7,086)
----- ------- ---- ----- ---- -------- -------
BALANCE, DECEMBER 31, 1995....... -- 47,359 648 -- 16 (36,309) 11,714
Issuance of common stock to
employees under option and
purchase plans (unaudited)..... -- 41 -- -- -- -- 41
Unrealized gain(loss) on
investments available-for-sale
(unaudited).................... -- -- -- -- (34) -- (34)
Net loss (unaudited)............. -- -- -- -- -- (1,531) (1,531)
----- ------- ---- ----- ---- -------- -------
BALANCE, MARCH 31, 1996
(UNAUDITED).................... $ -- $47,400 $648 $ -- $(18) $ (37,840) $10,190
===== ======= ==== ===== ==== ======== =======
</TABLE>

See accompanying notes.

F-5
<PAGE> 57

ANERGEN, INC.

STATEMENTS OF CASH FLOWS

INCREASE (DECREASE) IN CASH AND EQUIVALENTS
(IN THOUSANDS)

<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED ENDED
DECEMBER 31, MARCH 31,
------------------------------ -----------------
1993 1994 1995 1995 1996
-------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash used in operating activities:
Net loss.................................... $ (6,844) $ (6,960) $ (7,086) $(1,863) $(1,531)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization............ 711 781 1,031 191 267
Deferred compensation amortization....... 133 132 36 33 --
Loss on sale of equipment................ -- 4 -- -- --
Changes in operating assets and liabilities:
Contract receivables-related party....... (339) (253) (223) 41 32
Prepaid expenses......................... (57) (50) 76 (50) (1)
Other assets............................. (1) -- (16) (16) --
Accounts payable and accrued
liabilities............................ (213) 10 63 31 (151)
-------- -------- -------- ------- -------
Net cash used in operating
activities........................ (6,610) (6,336) (6,119) (1,633) (1,384)
Cash provided by (used in) investing
activities:
Purchase of investments
available-for-sale....................... (19,214) (10,784) (30,172) (1,016) (1,554)
Sales and maturities of investments
available-for-sale....................... 17,695 16,654 21,763 2,683 3,201
Proceeds from sale of equipment............. -- 41 -- -- --
Purchase of equipment....................... (686) (1,386) (790) (68) (143)
-------- -------- -------- ------- -------
Net cash provided by (used in)
investing activities.............. (2,205) 4,525 (9,199) 1,599 1,504
Cash provided by financing activities:
Repayments of capital lease obligations and
debt..................................... (604) (688) (1,038) (231) (319)
Proceeds from facility and equipment debt
financing................................ 462 1,093 789 -- --
Issuance of common stock, net............... 8,175 1,468 14,787 36 41
-------- -------- -------- ------- -------
Net cash provided by financing
activities........................ 8,033 1,873 14,538 (195) (278)
-------- -------- -------- ------- -------
Net increase (decrease) in cash and
equivalents................................. (782) 62 (780) (229) (158)
Cash and equivalents at beginning of period... 1,968 1,186 1,248 1,248 468
-------- -------- -------- ------- -------
Cash and equivalents at end of period......... 1,186 1,248 468 1,019 310
Short-term investments at end of period....... 8,399 2,508 11,024 897 9,343
-------- -------- -------- ------- -------
Cash and short-term investments at end of
period...................................... $ 9,585 $ 3,756 $ 11,492 $ 1,916 $ 9,653
======== ======== ======== ======= =======
</TABLE>

See accompanying notes.

F-6
<PAGE> 58

ANERGEN, INC.

NOTES TO FINANCIAL STATEMENTS

(INFORMATION AT MARCH 31, 1996 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of business

Anergen, Inc. (the "Company") was incorporated on April 26, 1988 for the
purpose of developing therapies using biopharmaceutical compounds for the
treatment of autoimmune diseases. The Company devotes its efforts to research
and development on its own behalf and also, since September 1993, on behalf of
its corporate partner, Novo Nordisk A/S.

In the course of its activities, the Company has sustained continuing
operating losses and expects such losses to continue. The Company plans to
finance future operations with a combination of stock sales, payments from
collaborative partnerships and licensing of certain technology and, in the
longer term, revenues from product sales, if any. The Company anticipates that
its current cash, short-term investments and expected revenues under its
collaborative agreement with Novo Nordisk A/S will be sufficient to fund its
operations through the first half of 1997. If financing arrangements
contemplated by management are not consummated, the Company may have to seek
other sources of capital or reevaluate operating plans.

Interim financial information (unaudited)

The financial statements at March 31, 1996 and for the three months ended
March 31, 1995 and 1996 are unaudited, but include all adjustments (consisting
of normal recurring adjustments) which the Company considers necessary for a
fair statement of its financial position at such dates and its operating results
and cash flows for those periods. Results for interim periods are not
necessarily indicative of results for the entire year.

Use of estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Cash and equivalents

Cash and equivalents are carried at cost which approximates fair value
(based on quoted market prices) and include primarily interest bearing demand
deposits and U.S. Government notes with original maturities of three months or
less.

Securities available-for-sale

The Company accounts for its short-term investments in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities"("Statement 115"). Under Statement 115
management determines the appropriate classification of debt securities at the
time of purchase and reevaluates such designation as of each balance sheet date.
Debt securities are classified as held-to-maturity when the Company has the
positive intent and ability to hold the securities to maturity. Marketable
securities and debt securities not classified as held-to-maturity are classified
as available-for-sale. To date, all marketable securities have been classified
as available-for-sale. Available-for-sale securities are carried at fair value,
with unrealized gains and losses, net of tax, reported in a separate component
of shareholders' equity. The amortized cost of debt securities in this category
is adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in interest income. The cost of securities sold is
based on the specific identification method. Interest and dividends on
securities classified as available-for-sale are included in interest income.

F-7
<PAGE> 59

ANERGEN, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AT MARCH 31, 1996 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)

Property and equipment

Property and equipment is stated at cost, less accumulated depreciation and
amortization. Depreciation of property and equipment is provided over the
estimated useful lives (3 to 4 years) of the respective assets using the
straight-line method. Leasehold improvements are amortized over the shorter of
the life of the lease or their estimated useful lives using the straight-line
method.

Contract revenues

Contract revenues consist of revenues from the Company's corporate partner,
Novo Nordisk A/S. Contract revenues derived from the corporate partner agreement
are recorded as earned based on the level of research effort performed by the
Company. The Company is also entitled to receive (i) development milestone
payments upon the occurrence of certain events and (ii) royalties on product
sales, if any.

Research and development

Research and development costs are expensed as incurred and include
personnel costs, materials consumed in research and development activities,
depreciation on equipment used and the cost of facilities used for research and
development.

Stock compensation

The Company continues to account for its stock compensation under APB 25,
the intrinsic value method. The Company has not elected adoption of FAS 123
(effective in fiscal year 1996), however it plans to disclose the pro forma
effects of recognizing the fair market value of options granted as compensation
expense beginning in 1996.

Income taxes

The Company accounts for income taxes using the liability method as
prescribed by Financial Accounting Standards Board Statement No. 109,
"Accounting for Income Taxes." Research and development tax credits will be
accounted for under the "flow through" method when utilized.

Net loss per share

Net loss per share is computed using the weighted average number of shares
of common stock outstanding. Common equivalent shares from stock options and
warrants are excluded from the computation as their effect is anti-dilutive.

2. COLLABORATION WITH NOVO NORDISK A/S - RELATED PARTIES

In August 1993, the Company entered into a development and license
agreement ("Agreement") with Novo Nordisk A/S for the purpose of developing and
commercializing the Company's AnergiX(TM) products for multiple sclerosis
("MS"), myasthenia gravis ("MG"), and insulin dependent diabetes mellitis. Under
the Agreement the Company is entitled to receive (i) research and development
cost reimbursement (ii) development milestone payments and (iii) royalties on
product sales, if any. For the years ended December 31, 1993, 1994 and 1995, the
Company recorded contract revenues $339,000, $2,325,000 and $3,001,000,
respectively, and $783,000 in the three months ended March 31, 1996, under this
agreement. The Company has granted to Novo Nordisk A/S exclusive worldwide
rights to products developed under the Agreement, including rights to
commercialize these products. The Company has retained rights of co-

F-8
<PAGE> 60

ANERGEN, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AT MARCH 31, 1996 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)

promotion in North America for therapeutics in MS and MG. In addition, in August
of 1993, Novo Nordisk A/S purchased 1,219,745 shares of common stock for $8
million, and an officer of Novo Nordisk A/S became a member of the Company's
Board of Directors.

3. PROPERTY AND EQUIPMENT

Property and equipment consists of the following at December 31, 1994 and
1995 (in thousands):

<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Research and office leasehold improvements....................... $ 608 $ 998
Research and office equipment.................................... 2,458 2,843
Pilot manufacturing facility leasehold improvements.............. 600 600
Pilot manufacturing facility equipment........................... 972 987
------- -------
4,638 5,428
Less accumulated depreciation and amortization................... (2,387) (3,418)
------- -------
$ 2,251 $ 2,010
======= =======
</TABLE>

4. INVESTMENTS

The following is a summary of short-term investments (available-for-sale
securities) (in thousands):

<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE SECURITIES
---------------------------------------------------
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
December 31, 1994
U.S. corporate securities................ $ 530 $ -- $(19) $ 511
U.S. government obligations.............. 2,069 -- (72) 1,997
------- --- ---- -------
Total debt securities.......... $ 2,599 $ -- $(91) $ 2,508
======= === ==== =======
December 31, 1995
U.S. corporate securities................ $ 7,671 $ 11 $ --
U.S. government obligations.............. 3,337 5 -- 3,342
------- --- ---- -------
Total debt securities.......... $11,008 $ 16 $ -- $11,024
======= === ==== =======
</TABLE>

The net adjustment to unrealized holding gains(losses) on
available-for-sale securities included as a separate component of shareholders'
equity was ($21,000) and $107,000 in 1994 and 1995, respectively.

F-9
<PAGE> 61

ANERGEN, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AT MARCH 31, 1996 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)

The amortized cost and estimated fair value of debt and marketable equity
securities at December 31, 1994 and 1995, by contractual maturity, are shown
below (in thousands). Expected maturities will differ from contractual
maturities because the issuers of the securities may have the right to prepay
obligations without prepayment penalties.

<TABLE>
<CAPTION>
ESTIMATED
BOOK FAIR
VALUE VALUE
------- ---------
<S> <C> <C>
December 31, 1994
Available-for-Sale
Due in one year or less....................... $ 2,599 $ 2,508
Due after one year through three years........ -- --
Due after three years......................... -- --
------- -------
$ 2,599 $ 2,508
======= =======
December 31, 1995
Available-for-Sale
Due in one year or less....................... $ 5,825 $ 5,828
Due after one year through three years........ 5,183 5,196
Due after three years......................... -- --
------- -------
$11,008 $11,024
======= =======
</TABLE>

5. LEASE AND DEBT OBLIGATIONS

The Company leases its facilities under noncancelable operating leases.
Facilities rent expense for 1993, 1994, and 1995 was $292,000, $321,000, and
$551,000, respectively.

Property and equipment at December 31, 1995 includes $263,000 of equipment
under capital lease obligations, less accumulated amortization of $244,000. The
leases provide that the Company pay taxes, insurance and maintenance expense
related to the leased assets.

On December 29, 1992, the Company entered into a loan agreement which
provided $1,400,000 in financing related to the Company's pilot manufacturing
facility. As of April 12, 1993, the Company had borrowed the full amount
available under this agreement. Slightly under half of this debt is unsecured
while the remainder is secured by equipment in the Company's pilot manufacturing
facility. This loan is repayable over a 36 month period with the final payment
to be based on the fair market value of the leasehold improvements and equipment
(but not less than 10% or more than 20% of the original cost). Warrants to
purchase 16,919 shares of the Company's common stock at an exercise price of
$9.93 per share were issued to the lender under this loan agreement. No value
was assigned to these warrants due to immateriality. At December 31, 1995 the
Company had net borrowings of $146,000 under the loan.

On December 30, 1993, the Company amended the above agreement to provide
for an additional $500,000 in financing related to equipment purchases. At March
31, 1994, the Company had borrowed the full amount available under this
agreement, all of which is secured by equipment purchased by the Company. At
December 31, 1995, the Company had net borrowings of $257,000 under the loan.
This loan is repayable over a 36 month period with the final payment to be based
on the fair market value of the equipment (but not less than 10% or more than
20% of the original cost). Warrants to purchase 8,577 shares of the Company's
common stock at an exercise price of $5.83 per share were issued to the lender
under this amendment to the loan agreement. No value was assigned to these
warrants due to immateriality.

F-10
<PAGE> 62

ANERGEN, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AT MARCH 31, 1996 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)

On April 18, 1994 the Company entered into a loan agreement with Silicon
Valley Bank of California which provided $1,200,000. As of December 31, 1994
$957,000 had been drawn down upon under this agreement, all of which is secured
by equipment purchased by the Company. At December 31, 1995, the Company had net
borrowings of $561,000 under the loan.

On June 23, 1995 the Company entered into a second loan agreement with
Silicon Valley Bank of California which provided $800,000 in financing available
through December 31, 1995. As of December 31, 1995 the Company had borrowed the
full amount available under this agreement, ($712,000 balance outstanding at
December 31, 1995), all of which is secured by equipment purchased by the
Company. Under agreements with Silicon Valley Bank there are restrictions
imposed upon the Company's ability to declare cash dividends.

Future minimum payments, by year and in the aggregate, under the debt and
capital leases and noncancelable operating leases consisted of the following at
December 31, 1995 (in thousands):

<TABLE>
<CAPTION>
DEBT AND CAPITAL OPERATING
LEASES LEASES
---------------- ---------
<S> <C> <C>
1996....................................... $1,020 $ 578
1997....................................... 688 541
1998....................................... 190 505
1999....................................... -- 39
------ ------
Total minimum debt and lease payments...... 1,898 $ 1,663
======
Less amount representing interest.......... 197
------
Present value of future minimum debt and
lease payments........................... 1,701
Less current portion of debt and lease
obligations.............................. 883
------
Long-term debt and lease obligations....... $ 818
======
</TABLE>

6. SHAREHOLDERS' EQUITY

1988 Stock Option Plan

The Company has granted certain officers, employees and consultants options
to purchase shares of the Company's common stock at prices ranging from $0.16 to
$11.00 per share under its 1988 Stock Option Plan ("option plan"). The Company
has reserved 1,800,000 shares of common stock for issuance under the option
plan. These options vest over periods of up to four years and, once vested, can
be exercised at any time for a period of 5 years from the date of grant. The
Company recorded deferred compensation of $529,000 in 1991 related to the
issuance of certain stock options. This compensation was charged to operations
ratably over the

F-11
<PAGE> 63

ANERGEN, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AT MARCH 31, 1996 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)

vesting period of the options. As of December 31, 1995, all of this amount had
been amortized and charged to operations. The activity under the option plan is
as follows:

<TABLE>
<CAPTION>
NUMBER OF PRICE PER
SHARES SHARE
--------- -----------
<S> <C> <C>
Balance at December 31, 1992................ 645,000 $0.16-11.00
Granted..................................... 257,000 5.50- 9.50
Exercised................................... (56,000) 0.16- 2.00
Forfeited................................... (11,000) 0.21-11.00
-----------
--------
Balance at December 31, 1993................ 835,000 $0.16-11.00
Granted..................................... 109,000 2.62- 5.75
Exercised................................... (45,000) 0.16- 0.27
Forfeited................................... (94,000) 0.21-10.75
-----------
--------
Balance at December 31, 1994................ 805,000 $0.21-11.00
Granted..................................... 283,000 2.00- 3.25
Exercised................................... (168,000) 0.21- 2.62
Forfeited................................... (41,000) 2.62-11.00
-----------
--------
Balance at December 31, 1995................ 879,000 $0.21-11.00
Granted (unaudited)......................... 11,000 4.00
Exercised (unaudited)....................... (61,000) 0.21- 2.75
Forfeited (unaudited)....................... (3,000) 2.62-10.75
-----------
--------
Balance at March 31, 1996 (unaudited)....... 826,000 $0.21-11.00
======== ===========
Vested at December 31, 1995................. 430,000 $0.21-11.00
======== ===========
Vested at March 31, 1996 (unaudited)........ 417,000 $2.00-11.00
======== ===========
</TABLE>

The Company's Board of Directors has approved a plan whereby the Company's
officers, employees and consultants had the option during the month of February
1995 to elect to extend the option exercise period by four years. Elections to
extend 555,113 options were made. All vested shares under grants subsequent to
February 1995 can be exercised at any time for a period of nine years from the
date of grant.

Warrants

In connection with the October 10, 1991 initial public offering, the
Company's underwriters were granted a warrant exercisable for five years to
purchase up to 196,656 shares of the Company's common stock for $5.98 per share;
it remains unexercised as of December 31, 1995.

In June, 1994 the Company issued warrants to purchase 236,863 shares of
Common Stock at an exercise price of $3.52 per share through a private placement
to two purchasers; it remains unexercised as of December 31, 1995.

Employee Stock Purchase Plan

The Company has an Employee Stock Purchase Plan under which a total of
150,000 shares of common stock have been reserved and made available for
purchase by eligible employees.

Eligible employees may have up to 10% of their wages withheld for purchases
of common stock of the Company. On September 30 and March 31 of each year, the
funds then in each employee's account are applied to the purchase of shares of
common stock at 85% of the fair market value at such date or at six month
retroactive intervals up to 24 months, whichever is less. As of December 31,
1995, 97,205 shares had been purchased with such funds.

F-12
<PAGE> 64

ANERGEN, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AT MARCH 31, 1996 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)

7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities include the following (in
thousands):

<TABLE>
<CAPTION>
1994 1995
---- ------
<S> <C> <C>
Accounts payable.................................... $537 $ 559
Accrued collaborative expenses...................... 87 87
Outside production support.......................... 21 20
Accrued vacation pay................................ 103 114
Accrued professional fees........................... 142 157
Other............................................... 87 103
---- ------
Total accounts payable and accrued
liabilities............................. $977 $1,040
==== ======
</TABLE>

8. INCOME TAXES

At December 31, 1995, the Company had federal and state net operating loss
carryforwards of approximately $33.7 million and $16.6 million, respectively,
which expire in varying amounts through 2010. Additionally, the Company has
research and development tax credit carryforwards for federal tax purposes of
approximately $1.3 million.

The Company's stock offering in April 1995 resulted in a change in
ownership and it is expected that the entire net operating loss and credit
carryforwards as of April 1995 may be subject to an annual limitation based on
the Company's pre-change value. The annual limitation will result in the
expiration of the net operating losses and credits before utilization.

Net operating losses incurred subsequent to April 1995 may also be subject
to an annual limitation such that the net operating losses may expire before
utilization.

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of December 31, 1994 and
1995 are as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforwards............. $ 9,502 $ 12,500
Research credits............................. 1,666 1,700
Other deferred tax assets.................... 87 200
---------- ----------
-- --
Net deferred tax assets........................ 11,255 14,400
Valuation allowance for deferred tax assets.... (11,255) (14,400)
---------- ----------
-- --
Total deferred tax assets...................... $ -- $ --
============ ============
</TABLE>

The net valuation allowance increased by $2,508,000 during the year ended
December 31, 1994 ($5,953,000 in 1993).

F-13
<PAGE> 65

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

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>
Summary............................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 16
Dividend Policy....................... 16
Capitalization........................ 17
Price Range of Common Stock........... 17
Dilution.............................. 18
Selected Financial Data............... 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 20
Business.............................. 23
Management............................ 37
Certain Transactions.................. 44
Principal Stockholders................ 45
Description of Capital Stock.......... 47
Shares Eligible for Future Sale....... 49
Underwriting.......................... 50
Legal Matters......................... 51
Experts............................... 51
Additional Information................ 51
Index to Financial Statements......... F-1
</TABLE>

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

3,500,000 SHARES

LOGO

COMMON STOCK

------------------------
P R O S P E C T U S
------------------------

PAINEWEBBER INCORPORATED
VECTOR SECURITIES INTERNATIONAL, INC.

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

AUGUST 9, 1996
- ------------------------------------------------------
- ------------------------------------------------------