INCYTE PHARMACEUTICALS INC, 424B4, 1997-07-31

INCYTE PHARMACEUTICALS INC
424B4, 1997-07-31
COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH

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<PAGE> 1

Filed pursuant to Rule 424(b)(4)
Registration No. 333-31307
PROSPECTUS

1,200,000 SHARES

INCYTE

COMMON STOCK

All of the 1,200,000 shares of Common Stock offered hereby are being sold
by the Company. The Company's Common Stock is quoted on the Nasdaq National
Market under the symbol INCY. On July 30, 1997, the last reported sale price for
the Common Stock was $67.75 per share. See "Price Range of Common Stock."
------------------------

THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 6.
------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
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>
<CAPTION>
===============================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............................... $67.00 $3.45 $63.55
- -----------------------------------------------------------------------------------------------
Total(3)................................ $80,400,000 $4,140,000 $76,260,000
===============================================================================================
</TABLE>

(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.

(2) Before deducting expenses payable by the Company estimated at $260,000.

(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 177,713 additional shares of Common Stock solely to cover
over-allotments, if any. If all such shares are purchased, the total Price
to Public, Underwriting Discount and Proceeds to Company will be
$92,306,771.00, $4,753,109.85 and $87,553,661.15, respectively. See
"Underwriting."
------------------------

The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about August 5, 1997, at the office of the agent of Hambrecht
& Quist LLC in New York, New York.

HAMBRECHT & QUIST

ALEX. BROWN & SONS
INCORPORATED

VECTOR SECURITIES INTERNATIONAL, INC.

July 31, 1997
<PAGE> 2

[GRAPHIC]

Incyte's products include an integrated platform of genomic databases, data
management software tools and related reagents and services. Shown above are
computer screen displays for selected database modules.
------------------------

LifeSeq and LifeSeq FL are registered trademarks of the Company. LifeSeq
Atlas, LifeSeq GeneAlbum, PathoSeq, ZooSeq, PhytoSeq, LifeTools and LifeTools 3D
are trademarks of the Company. Trademarks of other corporations and
organizations are also referred to in this Prospectus.
------------------------

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS OR EFFECTING SYNDICATE COVERING
TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ STOCK MARKET IN ACCORDANCE
WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."

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PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes thereto incorporated by
reference in this Prospectus.

THE COMPANY

<TABLE>
<S> <C> <C>
Abbott Laboratories Glaxo Wellcome plc Novo Nordisk A/S
ARIAD Pharmaceuticals, Inc. Hoechst AG Pfizer Inc
BASF AG F. Hoffmann-La Roche Ltd. Pharmacia & Upjohn, Inc.
Bristol-Myers Squibb Company Johnson & Johnson Schering AG
Eli Lilly and Company Monsanto Company Zeneca Ltd.
Genentech, Inc.
</TABLE>

Revenues from these collaborators generally include database access fees and, in
some cases, additional fees for custom sequencing services, referred to as
"satellite" database services. The Company's database agreements also provide
for milestone payments and royalties to be received from database collaborators
from the sale of products derived from proprietary information contained within
one or more database modules. In addition, the Company has entered into an
agreement with Novartis AG to furnish a customized enterprise-wide
bioinformatics data management system based upon the Company's LifeTools suite
of genomic software products.

The Company's genomic databases are designed to meet the need of the
pharmaceutical and biotechnology industries to utilize genomic information for
the acceleration of the discovery and development of new diagnostic and
therapeutic products. The construction of these databases has been made possible
by technological advances enabling the production of large quantities of genetic
information and by the development of sophisticated data management software
tools. By searching the genomic databases, collaborators can integrate and
analyze genetic information from multiple sources in order to discover genes
that may represent the basis for new biological targets, therapeutic proteins,
or gene therapy, antisense or diagnostic products.

Since early 1996, the Company has expanded its portfolio of database
modules from the LifeSeq gene sequence and expression database to also include
the LifeSeq FL database of full-length genes, the LifeSeq Atlas mapping
database, the PathoSeq microbial genomic database, the LifeTools suite of
bioinformatics software programs, the LifeTools 3D data mining and visualization
software, the LifeSeq GeneAlbum archive of DNA clones, and a variety of custom
database and sequencing services. The introduction of the ZooSeq animal genomic
database in 1997 marked the Company's first initiative to expand beyond
databases with applications in drug discovery to those with applications in
preclinical and clinical development. Each database module consists of a
relational database that runs on UNIX-based client/server networks and
incorporates HTML graphical user interfaces enabling collaborators to use
multiple search tools and browse various database modules. The databases are
available using either Oracle or Sybase database architectures and operate on
Sun Microsystems, Digital Equipment Corporation and Silicon Graphics
workstations.

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To date, the Company has focused predominantly on gene discovery, or the
identification of new genes through the sequencing of partial gene fragments.
Incyte has recently begun an initiative to obtain the full-length sequence of
every human gene, or "gene closure." This multi-year effort could clarify
information obtained with gene fragments as well as make available a set of DNA
clones representing every gene. The Company believes that this effort will
accelerate the ability of its collaborators to translate the information in the
databases into products.

The Company was incorporated in Delaware in 1991. Unless the context
requires otherwise, the terms "Incyte" and the "Company" mean Incyte
Pharmaceuticals, Inc. and its wholly owned subsidiaries. The Company's executive
offices are located at 3174 Porter Drive, Palo Alto, California 94304 and its
telephone number is (415) 855-0555.
------------------------

When used in this Prospectus, the words "expects," "anticipates,"
"estimates," and similar expressions are intended to identify forward-looking
statements. Such statements, which include statements under the captions "Risk
Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and "Business" and elsewhere in this
Prospectus as to the timing of availability of products under development, the
ability to commercialize products developed under collaborations and alliances,
the performance and utility of the Company's products and services, and the
adequacy of capital resources, are subject to risks and uncertainties that could
cause actual results to differ materially from those projected. These risks and
uncertainties include, but are not limited to, those risks discussed below as
well as the extent of utilization of genomic information by the pharmaceutical
and biotechnology industries in both research and development, risks relating to
the development of new database products and their use by potential
collaborators of the Company, the impact of technological advances and
competition, and the risks set forth below under "Risk Factors." The cautionary
statements made in this Prospectus should be read as being applicable to all
related forward-looking statements wherever they appear in this Prospectus.

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THE OFFERING

<TABLE>
<S> <C>
Common Stock offered............................. 1,200,000 shares
Common Stock to be outstanding after the 11,770,583 shares(1)
offering.......................................
Use of proceeds.................................. For capital expenditures, including data
processing-related computer hardware,
purchase of laboratory equipment,
scientific instrumentation and expansion
of facilities, strategic equity
investments in joint ventures or
businesses, acquisitions of businesses,
technologies or products and working
capital and other general corporate
purposes. See "Use of Proceeds."
Nasdaq National Market symbol.................... INCY
</TABLE>

RECENT FINANCIAL RESULTS

The Company's revenues, net income and earnings per share for the three
months ended June 30, 1997 were $21.2 million, $1.9 million and $0.17,
respectively, as compared to revenues of $8.4 million, net loss of $1.6 million
and a net loss per share of $0.16, for the three months ended June 30, 1996. For
the six months ended June 30, 1997, the Company's revenues, net income and
earnings per share were $39.1 million, $2.9 million and $0.26, respectively, as
compared to revenues of $14.7 million, a net loss of $3.6 million and a net loss
per share of $0.36, for the six months ended June 30, 1996. The increase in
revenues and net income resulted primarily from an increase in the number of
database collaboration agreements, partially offset by continuing increases in
costs and expenses.

SUMMARY FINANCIAL INFORMATION(2)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------- -----------------
1994 1995 1996 1996 1997
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.............................................. $ 1,512 $12,212 $41,785 $ 6,274 $17,859
Total costs and expenses.............................. 13,497 23,139 50,821 8,990 17,304
Net income (loss)..................................... $(11,475) $(9,937) $(6,761) $(2,038) $ 981
Net income (loss) per share........................... $ (1.63) $ (1.19) $ (0.67) $ (0.20) $ 0.09
Shares used in computation of net income (loss) per
share............................................... 7,030 8,367 10,156 10,034 11,453
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1997
-------------------------
ACTUAL AS ADJUSTED(3)
-------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities............................ $ 38,547 $114,547
Working capital............................................................. 16,951 92,951
Total assets................................................................ 79,609 155,609
Accumulated deficit......................................................... (35,541) (35,541)
Stockholders' equity........................................................ 46,258 122,258
</TABLE>

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

(1) Based upon the number of shares of Common Stock outstanding as of June 30,
1997. Does not include (i) 1,583,753 shares of Common Stock issuable upon
exercise of stock options outstanding as of June 30, 1997 at a weighted
average exercise price of $25.92 per share, (ii) 614,250 additional shares
reserved for issuance and available for grant or sale under the Company's
stock option plans as of June 30, 1997, and (iii) 200,000 shares reserved
for issuance and available for sale under the Company's employee stock
purchase plan as of June 30, 1997. See "Capitalization."

(2) Restated to reflect the combined results and financial position of Incyte
and Genome Systems, Inc. See Note 6 of Notes to Consolidated Financial
Statements.

(3) Adjusted to give effect to the receipt of the estimated net proceeds from
the sale of the 1,200,000 shares of Common Stock offered by the Company
hereby. See "Use of Proceeds" and "Capitalization."
------------------------

Except as otherwise noted, all information in this Prospectus assumes no
exercise of the Underwriters' over-allotment option.

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<PAGE> 6

RISK FACTORS

The following risk factors should be considered carefully in addition to
the other information contained or incorporated by reference in this Prospectus
before purchasing the Common Stock offered hereby.

Limited Operating History; History of Operating Losses; Uncertainty of
Continued Profitability or Revenues. The Company has had a limited operating
history and is at an early stage of development. For the years ended December
31, 1996, 1995 and 1994, the Company had net losses of $6.8 million, $9.9
million and $11.5 million, respectively, and as of March 31, 1997, the Company
had an accumulated deficit of $35.5 million. The Company's increase in
throughput of its gene sequencing and database efforts, together with the
development of new products and expansion of its marketing, sales and customer
service staff, will require a continued increase in expenditures in 1997 and
beyond. While the Company has reported profits since the fourth quarter of 1996,
there can be no assurance that the Company can maintain profitability. The
Company's ability to achieve and maintain significant revenues will be dependent
upon its ability to obtain additional database collaborators and retain existing
collaborators. The Company's ability to maintain profitability will be dependent
upon its ability to obtain such database collaborators, the level of
expenditures necessary for the Company to maintain and support its services to
its collaborators, and the extent to which it incurs research and development,
investment, acquisition-related or other expenses related to the development and
provision of its products and services to database collaborators. While the
Company currently has sixteen database collaborations, there can be no assurance
that the Company will be able to obtain any additional agreements for such
products and services. Further, the Company's database collaboration agreements
typically have a term of three years, which may be terminated earlier by a
collaborator if the Company breaches the database collaboration agreement, which
may include certain performance obligations, and fails to cure such breach
within a specified period. One of the Company's database collaboration
agreements expires at the end of 1997 and there can be no assurance that the
agreement will be renewed, and, if renewed, under what terms. Further, beginning
in August 1997, one database collaborator has the right on 30 days' written
notice to terminate its database collaboration agreement. There can be no
assurance that any of the Company's database collaboration agreements will be
renewed upon expiration or not terminated earlier in accordance with its terms.
The loss of revenues from any database collaborator could have a material
adverse effect on the Company's business, financial condition and results of
operations.

An element of the Company's commercialization strategy is the licensing to
database collaborators of the Company's patent rights to individual partial
genes or full-length cDNA sequences from the Company's proprietary sequence
database for development as potential pharmaceutical, diagnostic or other
products. Any potential product that is the subject of such a license would
require several years of further development, clinical testing and regulatory
approval prior to commercialization. Accordingly, the Company does not expect to
receive any milestone or royalty payments from any such licenses for a
substantial period of time, if at all. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

Fluctuations in Operating Results. The Company's operating results may
fluctuate significantly from quarter to quarter as a result of a variety of
factors, including changes in the demand for the Company's products and
services, the pricing of database access to database collaborators, the nature,
pricing and timing of other products and services provided to the Company's
collaborators, changes in the research and development budgets of the Company's
collaborators and potential collaborators, capital expenditures, acquisition and
licensing costs and other costs related to the expansion of Incyte's operations,
and the introduction of competitive databases or services. In particular, the
Company has a limited ability to control the timing of database installations,
there is a lengthy sales cycle required for the Company's database products, the
Company's revenue levels are difficult to forecast, the time required to
complete custom orders can vary significantly and the Company's increasing
levels of investment in external alliances could result in significant quarterly
fluctuations in expenses due to the payment of milestones, license fees or
research payments. The Company's investments in joint

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ventures and businesses may require the Company to record losses or expenses
related to its proportionate ownership interest in such entities, the
acquisition of in-process technologies, or the impairment in the value of the
securities underlying such investments. In addition, the need for continued
investment in development of the Company's databases and related products and
services and for extensive ongoing collaborator support capabilities results in
significant fixed expenses. If revenue in a particular period does not meet
expectations, the Company may not be able to adjust significantly its level of
expenditures in such period, which would have an adverse effect on the Company's
operating results. The Company believes that quarterly comparisons of its
financial results will not necessarily be meaningful and should not be relied
upon as an indication of future performance. Due to the foregoing and other
unforeseen factors, it is likely that in some future quarter or quarters the
Company's operating results may be below the expectations of public market
analysts and investors. In such event, the price of the Company's Common Stock
would likely be materially and adversely affected. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

Competition and Technological Changes. There are a finite number of genes
in the human genome, and competitors may seek to identify, sequence and
determine in the shortest time possible the biological function of a large
number of genes in order to obtain a proprietary position with respect to the
largest number of new genes discovered. There are a number of companies, other
institutions, and government-financed entities, including Human Genome Sciences,
Inc. ("HGS"), the National Institutes of Health ("NIH"), the Department of
Energy, Merck & Co., Inc. ("Merck") (in conjunction with Washington University)
and The Institute for Genomic Research ("TIGR"), engaged in gene sequencing.
Many of these companies, institutions and entities have greater financial and
human resources than the Company. In addition, the Company is aware that HGS and
at least one other company have developed genomic databases and are marketing
their data to pharmaceutical companies. Merck and TIGR have each made the
results of their sequencing efforts publicly available. The Company expects that
additional competitors may attempt to establish gene sequence, gene expression
or other genomic databases in the future.

In addition, competitors may discover and establish patent positions with
respect to gene sequences in Company's databases. Such patent positions or the
public availability of gene sequences comprising substantial portions of the
human genome or on microbial or plant genes could decrease the potential value
of the Company's databases to the Company's collaborators and adversely affect
the Company's ability to realize royalties or other revenue from
commercialization of products based upon such genetic information.

The gene sequencing machines that are utilized in the Company's
high-throughput computer-aided gene sequencing operations are commercially
available and are currently being utilized by several competitors. Moreover,
some of the Company's competitors or potential competitors are in the process of
developing, and may successfully develop, proprietary sequencing technologies
that may be more advanced than the technology used by the Company. In addition,
the Company is aware that there are a number of companies pursuing alternative
methods for generating gene expression information, including those developing
microarray technologies. There can be no assurance that such advanced sequencing
or gene expression technologies, if developed, will be commercially available
for purchase or license by the Company on reasonable terms, or at all.

A number of companies have announced their intent to develop and market
software to assist pharmaceutical companies and academic researchers in the
management and analysis of their own genomic data, as well as the analysis of
sequence data available in the public domain. Some of these entities have access
to significantly greater resources than the Company and there can be no
assurance that these products would not achieve greater market acceptance than
the products offered by the Company.

The Company's databases also require extensive software support and
incorporate features determined by database collaborators' needs. To the extent
the Company experiences delays or difficulties in implementing its database
software or collaborator-requested features, its ability to

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service its collaborators may be adversely affected, which might have an adverse
effect on the Company's business and operating results.

The genomics industry is characterized by extensive research efforts and
rapid technological progress. To remain competitive, the Company will be
required to continue to expand its databases and to enhance the functionality of
its bioinformatics and database software. New developments are expected to
continue and there can be no assurance that discoveries by others will not
render the Company's services and potential products noncompetitive. See
"Business -- Competition."

New and Uncertain Business. The Company's genomic database business and the
use of its databases, software tools and related services to assist its
collaborators and potentially improve the efficiency of the traditional drug
discovery process represent a business for which there is no precedent. There
can be no assurance that the Company's database collaborators or potential
collaborators will determine the Company's databases, software tools and related
services to be useful and cost-effective. The Company's strategy of using
high-throughput sequencing to identify genes rapidly and obtain proprietary
rights in as many genes as possible is unproven. In addition, the Company has
limited experience in providing software-based relational database products or
services. The Company's ability to sustain profitability depends on attracting
additional collaborators and retaining existing collaborators for its database
and sequencing products and services. The nature and price of the Company's
database and sequencing products and services are such that there is a limited
number of pharmaceutical and biotechnology companies that are potential
collaborators for such products and services. Additional factors that may affect
demand for the Company's products and services include the extent to which
potential collaborators choose to conduct in-house gene sequencing and
bioinformatics analysis, the emergence of competitors offering similar services
at competitive prices, the ability of the Company to service satisfactorily its
existing collaborators, the extent to which the gene and related information in
the Company's database is made public by, or is the subject of, patents issued
to others, and the emergence of technological innovations in gene sequencing,
gene expression profiling or bioinformatics and relational database software
that are more advanced than the technology used by and available to the Company.
There can be no assurance that the Company will be able to attract additional
collaborators on acceptable terms for its products and services or develop a
sustainable profitable business.

Risks Associated with Strategic Investments. The Company intends to use a
portion of the net proceeds from this offering to fund strategic equity
investments in joint ventures or businesses that complement the business of the
Company. These investments may require the Company to record losses and expenses
related to its proportionate ownership interest in such entities, the
acquisition of in-process technologies, or the impairment in the value of the
securities underlying such investments. Such losses may exceed amounts
anticipated, which could result in the Company's operating results being below
the expectations of public market analysts and investors. In addition, the
Company could be required to invest greater amounts than initially anticipated
or to devote substantial management time to the management of research and
development relationships and joint ventures. The occurrence of any of the
foregoing could result in 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."

Risks Associated with Acquisitions. As part of its business strategy, the
Company may from time to time acquire assets and businesses principally relating
to or complementary to its operations, including for the purpose of acquiring
specific technology. The Company acquired Genome Systems, Inc. ("Genome
Systems") and Combion, Inc. ("Combion") in July 1996 and August 1996,
respectively. Genome Systems, located in St. Louis, Missouri and Combion,
located in Pasadena, California, are geographically disparate from the Company's
Palo Alto, California headquarters, which may make the integration and
management of their operations more difficult. These and any other acquisitions
by the Company will be accompanied by the risks commonly encountered in
acquisitions of companies. Such risks include, among other things, potential
exposure to unknown liabilities of acquired companies or to acquisition costs
and expenses exceeding amounts anticipated for such purposes, fluctuations in
the

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Company's quarterly and annual operating results due to the costs and expenses
of acquiring and integrating new businesses or technologies, the difficulty and
expense of assimilating the operations and personnel of the acquired businesses,
the potential disruption of the Company's ongoing business and diversion of
management time and attention, the inability to successfully integrate or to
complete the development and application of acquired technology and the
potential failure to achieve anticipated financial, operating and strategic
benefits from such acquisitions, difficulties in establishing and maintaining
uniform standards, controls, procedures and policies, the impairment of
relationships with and possible loss of key employees and customers of acquired
businesses as a result of changes in management and ownership, the incurrence of
amortization expenses if an acquisition is accounted for as a purchase, and
dilution to the stockholders of the Company if the consideration for the
acquisition consists of equity securities. There can be no assurance that the
Company will be successful in overcoming these risks or any other problems
encountered in connection with such acquisitions. If the Company is unsuccessful
in doing so, its business, financial condition and results of operations could
be materially and adversely affected.

Lengthy Sales Cycle. The ability of the Company to obtain new collaborators
for its databases, software tools and related services depends in significant
part upon prospective collaborators' perceptions that the Company's databases,
software tools, and related services can help accelerate drug discovery efforts.
The sales cycle is typically lengthy due to the education effort that is
required, as well as the need to effectively sell the benefits of the Company's
databases, software tools, and related services to a variety of constituencies
within potential collaborator companies, including research and development
personnel and top management. In addition, each database collaboration involves
the negotiation of agreements containing terms that may be unique to each
partner, such as the scope of any licenses granted and whether satellite
database services or access to multiple database modules is desired. The Company
may expend substantial funds and management effort with no assurance that a
database collaboration will result.

Uncertainty of Protection of Patents and Proprietary Rights. The Company's
database business and competitive position are dependent in part upon its
ability to protect its proprietary database information and software technology.
Despite the Company's efforts to protect its proprietary database information
and software technology, unauthorized parties may attempt to obtain and use
information that the Company regards as proprietary. Although the Company's
database collaboration agreements require its collaborators to provide adequate
security for the Company's databases and access thereto, policing unauthorized
use of the Company's databases and software by the Company or its collaborators
is difficult. The Company relies on patent, trade secret, and copyright law, and
nondisclosure and other contractual arrangements to protect its proprietary
information.

To date, the Company has been issued a number of patents with respect to
the gene sequences in the Company's databases and has not been issued patents or
registered copyrights for its related software. Patents cannot prevent others
from developing, selling or licensing databases which include sequences which
might be covered by the Company's patents and copyrights. The Company cannot
prevent others from independently developing software which might be covered by
any copyrights issued to the Company and trade secret laws do not prevent
independent development. Thus, 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 proprietary information,
that such information will not be disclosed or that the Company can effectively
protect its rights to unpatented trade secrets.

The Company pursues a policy of having its employees, consultants and
advisors execute proprietary information and invention agreements upon
commencement of employment or consulting relationships with the Company, which
agreements provide that all confidential information developed or made known to
the individual during the course of the relationship shall be kept confidential
except in specified circumstances. There can be no assurance, however, that
these agreements will provide meaningful protection for the Company's trade
secrets or other proprietary information in the event of unauthorized use or
disclosure of such information.

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The Company's current policy is to file patent applications on what it
believes to be novel full-length cDNA sequences and partial sequences obtained
through the Company's high-throughput computer-aided gene sequencing efforts.
The Company has filed U.S. patent applications in which the Company has claimed
certain partial gene sequences and has filed U.S. and European patent
applications claiming full-length gene sequences associated with cells and
tissues that are the subject of the Company's high-throughput gene sequencing
program. To date the Company holds a number of issued U.S. patents on
full-length genes, but no patent has issued under any of the Company's patent
applications claiming partial gene sequences. The Company is aware that Merck
(in conjunction with Washington University) and TIGR have made certain gene
sequences publicly available, which may adversely affect the ability of the
Company and others to obtain patents on such genes. There can be no assurance
that such publication of sequence information will not adversely affect the
Company's ability to obtain patent protection for certain sequences that have
been made publicly available.

The Company is aware that certain of its patent applications cover genes
which are also contained in patent applications filed by others with potentially
competing patent claims. Some of these potential conflicts may be decided in
interference proceedings before the United States Patent and Trademark Office
("USPTO"). Given the large number of applications filed by the Company, a large
number of interference proceedings could be expensive and time consuming. In
addition, it is impossible to predict how many, if any, of these competing
patent claims will be resolved in the Company's favor.

The patentability of partial gene sequences in general is uncertain,
involves complex legal and factual questions, and has recently been the subject
of much controversy. As a result, there can be no assurance that patent
applications filed by the Company on such partial gene sequences will result in
patents being issued, or that any issued patents will provide protection against
competitors. Even if patents are issued for partial gene sequences, there may be
uncertainty as to the scope of the coverage, enforceability or commercial
protection provided by any such patents. Certain court decisions suggest that
disclosure of a partial sequence may not be sufficient to support the
patentability of a full-length sequence and that patent claims to a partial
sequence may not cover a full-length sequence inclusive of that partial
sequence.

There has been substantial backlog of biotechnology patent applications
and, in particular, applications which claim gene sequences at the USPTO. In
1996, the USPTO issued guidelines limiting the number of gene sequences that can
be contained within a single patent application. Many of the Company's patent
applications containing multiple partial sequences contain more sequences than
the maximum number allowed under the new guidelines. The Company is reviewing
its options and it is possible that due to the resources needed to comply with
the guidelines, the Company may decide to abandon seeking patent protection for
some of its partial gene sequences.

In view of the delay in obtaining allowance of patent applications, and the
secrecy of patent applications, the Company does not know if other applications
that would have priority over the Company's applications have been filed.
Furthermore, changes in U.S. patent laws resulting from the General Agreement on
Tariffs and Trade ("GATT") became effective in June 1995. Most notably, GATT
resulted in U.S. law being amended to change the term of patent protection from
seventeen years from patent issuance to twenty years from the earliest effective
filing date of the application. Because the average time from filing to issuance
of biotechnology applications is at least one year and may be more than three
years depending on the subject matter, a twenty-year patent term from the date
of filing may result in a substantially shortened term of patent protection,
which may adversely affect the Company's period of exclusivity under any patents
that may issue to the Company. Pending applications claiming large numbers of
gene sequences may, in some situations, need to be refiled while claiming
priority to the earliest filing date and, in such situations, the patent term
will be measured from the date of the earliest priority application, thereby
reducing the patent term and having a potentially adverse effect on the
Company's period of exclusivity.

Biotechnology patent law outside the United States is even more uncertain
and is currently undergoing review and revision in many countries. Further, the
laws of certain foreign countries may

10
<PAGE> 11

not protect the Company's intellectual property rights to the same extent as do
the laws of the United States. The Company may participate in opposition
proceedings to determine the validity of its or its competitors' non-U.S.
patents, which could result in substantial costs to and diversion of effort by
the Company.

As the biotechnology industry expands, more patents are issued and other
companies engage in the business of discovering genes through the use of high
speed sequencers and in other genomic-related businesses, the risk increases
that the Company's potential products may be subject to claims that they
infringe the patents of others. Further, the Company is aware of several issued
patents in the field of microarray or gridding technology, which can be utilized
in the generation of gene expression information. Certain of these patents are
the subject of litigation. Therefore, the Company's operations may require it to
obtain licenses under any such patents or proprietary rights, and no assurance
can be given that such licenses would be made available on terms acceptable to
the Company. Litigation may be necessary to defend against or assert claims of
infringement, to enforce patents issued to the Company, to protect trade secrets
or know-how owned by the Company, or to determine the scope and validity of the
proprietary rights of others. The Company is aware that certain of its patent
applications cover genes which are also contained in patent applications filed
by others with potentially competing patent claims. Interference proceedings may
be necessary to establish which party was the first to invent or the first to
obtain a particular gene sequence for the purpose of patent protection. Such
litigation or proceedings could result in substantial costs to and diversion of
effort by the Company and may have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, there can
be no assurance that these efforts by the Company will be successful.

As is typical in the genomics and software industries the Company has from
time to time received notices from third parties alleging infringement claims.
The Company believes that it is not infringing the patent rights of any such
third party, and in circumstances in which the Company has determined a response
to such a claim to be appropriate, the Company has so notified the claimant. To
date, no third party has taken any action with respect to an alleged claim
against the Company. There can be no assurance that action will not be taken
against the Company in the future, either with respect to previously asserted or
new claims or that if any action is taken, what the outcome of such action will
be. See "Business -- Patents and Proprietary Technology."

Future Capital Needs; Uncertainty of Additional Funding. The Company
believes that the net proceeds from this offering, together with its existing
cash, cash equivalents and marketable securities, should be adequate to satisfy
the Company's projected working capital, capital expenditure and other cash
requirements at least through 1998. However, the Company can offer no assurance
that the Company will be able to obtain additional database collaborators or
retain existing collaborators for the Company's databases or that such database
products and services will produce revenues, which together with the Company's
cash, cash equivalents, and marketable securities, will be adequate to fund the
Company's cash requirements. The Company's cash requirements depend on numerous
factors, including the ability of the Company to attract collaborators to its
databases and genomic products and services; the Company's research and
development activities, including expenditures in connection with alliances,
license agreements and acquisitions of and investments in complementary
technologies and businesses; competing technological and market developments;
the cost of filing, prosecuting, defending, and enforcing patent claims and
other intellectual property rights; the purchase of additional capital
equipment, including capital equipment necessary to ensure that the Company's
sequencing operation remains competitive; and the costs associated with the
integration of new operations assumed through mergers and acquisitions. In
particular, the Company expects its cash requirements to increase in the
remainder of 1997 and in 1998 as it increases its investment in data
processing-related computer hardware in order to support its existing and new
database products; continues to seek access to technologies through investments,
alliances, license agreements, and/or acquisitions; and addresses its needs for
larger facilities and/or improvements in existing facilities. There can be no
assurance that changes in the Company's research and development plans or other

11
<PAGE> 12

changes affecting the Company's operating expenses will not result in changes in
the timing and amount of expenditures of the Company's capital resources. To the
extent that additional capital is raised through the sale of equity or
convertible debt securities, the issuance of such securities could result in
dilution to the Company's existing stockholders. There can be no assurance that
additional funding, if necessary, will be available on favorable terms, if at
all. If adequate funds are not available, the Company may be required to curtail
operations significantly or to obtain funds through entering into collaborative
arrangements that may require the Company to relinquish rights to certain of its
technologies, product candidates, products or potential markets. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

Management of Growth. The Company has recently experienced, and expects to
continue to experience significant growth in the number of its employees and the
scope of its operations. This growth has placed, and may continue to place, a
significant strain on the Company's management and operations. The Company's
ability to manage effectively such growth will depend upon its ability to
broaden its management team and its ability to attract, hire and retain skilled
employees. The Company's success will also depend on the ability of its officers
and key employees to continue to implement and improve its operational,
management information and financial control systems and to expand, train and
manage its employee base. In addition, the Company must continue to take steps
to provide customer support resources as the number of overall database
collaborators and the number of requests from collaborators increases. Further,
the Company's database collaborators typically have worldwide operations and may
require support at multiple U.S. and foreign sites. Providing this support will
require the Company to manage international customer support services from its
Palo Alto, California headquarters or to open non-U.S. offices, either of which
could result in additional burdens on the Company's systems and resources. The
Company's inability to manage growth effectively could have a material adverse
effect on the Company's business, financial condition and results of operations.

Dependence on Key Employees. The Company is highly dependent on the
principal members of its scientific and management staff, including Roy A.
Whitfield, its Chief Executive Officer, and Randal W. Scott, its President and
Chief Scientific Officer, the loss of whose services would have a material
adverse effect on the Company's business. The Company has not entered into any
employment agreements with any of such persons and does not maintain any key
person life insurance policy on the life of any employee. The Company's future
success also will depend in part on the continued service of its key scientific,
software, bioinformatics and management personnel and its ability to identify,
hire and retain additional personnel, including personnel in the customer
service and marketing areas. There is intense competition for such qualified
personnel in the areas of the Company's activities, especially with respect to
experienced bioinformatics and software personnel, and there can be no assurance
that the Company will be able to continue to attract and retain such personnel
necessary for the development of the Company's business. Failure to attract and
retain key personnel could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business -- Human
Resources" and "Management."

Dependence on Others. The Company currently uses a single supplier to
provide its gene sequencing machines and a single supplier to provide certain
reagents required in connection with the gene sequencing process. While other
gene sequencing machines are available, the Company does not believe that they
are as efficient as the machines currently used by the Company. In addition,
while the Company is evaluating certain second generation gene sequencing
machines, there can be no assurance that these second generation sequencing
machines will ever become commercially available, available at acceptable costs,
or prove to be more effective than current machines. Should the Company be
unable to obtain additional machines or an adequate supply of reagents or other
materials at commercially reasonable rates, its ability to continue to identify
genes through gene sequencing would be adversely affected. In addition, although
the Company obtains tissue samples from which mRNA may be isolated from a number
of sources, the loss of access to some of these sources, increased fees for
access to these sources or increased restrictions on use of the information
generated could

12
<PAGE> 13

adversely affect the Company's business. See "Business -- Products,"
"-- Database Production" and "-- Development Programs."

The Company's strategy for the development of its database and sequencing
business and the commercialization of its portfolio of partial and full-length
gene sequences may require the Company to enter into various research and
development relationships with corporate and academic collaborators and others.
The success of these relationships is dependent upon the performance of outside
parties of their responsibilities. There can be no assurance that the Company
will be able to establish collaborative arrangements or license agreements that
the Company deems necessary or acceptable to develop its database and sequencing
business or, in the future, to commercialize its portfolio of partial and
full-length gene sequences or that such collaborative arrangements or license
agreements will be successful. In addition, there can be no assurance that the
collaborators will not be pursuing alternative technologies or developing
alternative products either on their own or in collaboration with others,
including the Company's competitors.

The Company has relied on scientific, technical, pathology, commercial and
other data supplied and disclosed by others, including its academic
collaborators and sources of tissue samples, and may rely on such data in the
construction of its database. There can be no assurance that such data contains
no errors or omissions, the knowledge of which would adversely change the
prospects for the Company's business. See "Business -- Database Production."

Hazardous Materials; Environmental Matters. The Company's research and
development involves the controlled use of hazardous and radioactive materials
and biological waste. The Company is subject to federal, state and local laws
and regulations governing the use, manufacture, storage, handling and disposal
of such materials and certain waste products. Although the Company believes that
its safety procedures for handling and disposing of such materials comply with
the standards prescribed by such laws and regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, the Company could be held liable for any damages
that result and any such liability could exceed the resources of the Company.
Although the Company believes that it is in compliance in all material respects
with applicable environmental laws and regulations and currently does not expect
to make material additional capital expenditures for environmental control
facilities in the near-term, there can be no assurance that the Company will not
be required to incur significant costs to comply with environmental laws and
regulations in the future, or that the operations, business or assets of the
Company will not be materially or adversely affected by current or future
environmental laws or regulations. See "Business -- Government Regulation."

Reliance on Pharmaceutical Industry; Uncertainty of Health Care Reform and
Related Matters. The Company expects that all of its revenues in the foreseeable
future will be derived from products and services provided to the pharmaceutical
and biotechnology industries. Accordingly, the Company's success in the
foreseeable future is directly dependent upon the success of the companies
within those industries and their continued demand for the Company's products
and services. The Company's operations may in the future be subject to
substantial period-to-period fluctuations as a consequence of reductions and
delays in research and development expenditures by companies in such industries
resulting from factors such as changes in economic conditions, pricing
pressures, market-driven pressures on companies to consolidate and reduce costs,
and other factors affecting research and development spending. In addition, the
levels of revenues and profitability of pharmaceutical companies may be affected
by the continuing efforts of governmental and third party payors to contain or
reduce the costs of health care through various means. The Company cannot
predict the effect health care reforms may have on its business, and no
assurance can be given that any such reforms will not have a material effect on
the Company. Further, to the extent that such proposals or reforms have a
material adverse effect on the business, financial condition or profitability of
pharmaceutical companies that are prospective collaborators or licensees for the
Company's databases or the Company's potentially novel genes that may lead to
therapeutic or diagnostic products, the Company's ability to commercialize such
products may be adversely affected. There can be no assurance that the

13
<PAGE> 14

occurrence of any of the foregoing factors will not have a material adverse
effect on the Company's business, financial condition and results of operations.

Risk of Business Interruption. The Company conducts all of its sequencing
and other activities at its facilities in Palo Alto, California, a seismically
active area. Although the Company maintains business interruption insurance, the
Company does not currently have, nor does it plan to obtain, earthquake
insurance. A major catastrophe (such as an earthquake or other natural disaster)
could result in a prolonged interruption of the Company's business.

Possible Volatility of Stock Price. The market price of the shares of
Common Stock, like that of the common stock of many other life sciences and
technology companies, is likely to be highly volatile, and the market has from
time to time experienced significant price and volume fluctuations that are
unrelated to the operating performance of particular companies. The Common Stock
may be particularly subject to such fluctuations due to its relatively limited
trading volume. The market price of the Common Stock could be subject to
significant fluctuations in response to variations in the Company's anticipated
or actual operating results, sales of substantial amounts of Common Stock,
announcements concerning the Company or its competitors, including technological
innovations or new commercial products or services, developments in patent or
other proprietary rights of the Company or its competitors, including
litigation, conditions in the life sciences, pharmaceuticals or genomics
industries, governmental regulation, health care legislation, changes in
estimates of the Company's performance by securities analysts, failure to meet
securities analysts' expectations, market conditions for life sciences or
technology stocks in general, and other events or factors.

14
<PAGE> 15

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 1,200,000 shares of
Common Stock offered by the Company hereby are estimated to be $76,000,000
($87,294,000 if the Underwriters' over-allotment option is exercised in full).

Of the net proceeds of this offering, the Company currently anticipates
that approximately $35 million of the net proceeds will be used for capital
expenditures, including data processing-related computer hardware, laboratory
equipment, scientific instrumentation and expansion of the Company's facilities.
In addition, the Company expects to utilize a significant portion of the net
proceeds to make strategic equity investments in joint ventures or businesses,
or for the acquisition of businesses, technologies and products that complement
the Company's business. Although the Company is continually in discussions with
respect to strategic investments and acquisitions, as of the date of this
Prospectus, no commitments have been made and no definitive agreements have been
reached. See "Risk Factors -- Risks Associated with Strategic Investments" and
"-- Risks Associated with Acquisitions." The balance of the net proceeds will be
utilized for working capital and general corporate purposes, including research
and development expenses to expand the Company's high-throughput gene sequencing
program and software development in connection with the Company's databases.
Pending such uses, the Company intends to invest the net proceeds in short-term,
investment grade, interest-bearing obligations.

The cost, timing and amount of funds required for such uses by the Company
cannot be determined precisely at this time and will be based on competitive
developments, the Company's research and development activities, technological
advances, payments under database collaboration agreements with the Company and
the availability of alternate methods of financing. The Board of Directors has
broad discretion in determining how the proceeds of this offering will be
applied. Based upon its current plans, the Company believes the proceeds of this
offering, together with its existing resources and anticipated cash flow from
operations, will be adequate to satisfy its capital needs at least through 1998.
See "Risk Factors -- Future Capital Needs; Uncertainty of Additional Funding"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

15
<PAGE> 16

PRICE RANGE OF COMMON STOCK

The Common Stock was traded on the American Stock Exchange from the
Company's initial public offering on November 4, 1993 until January 15, 1996.
Since January 16, 1996, the Common Stock has been traded on the Nasdaq National
Market under the symbol INCY. The following table sets forth for the periods
indicated the high and low sales prices for the Common Stock on the applicable
market.

<TABLE>
<CAPTION>
1995 HIGH LOW
------ ------
<S> <C> <C>
1st Quarter.............................................. $19.50 $12.88
2nd Quarter.............................................. 17.25 14.25
3rd Quarter.............................................. 24.38 16.00
4th Quarter.............................................. 25.13 16.50

1996
1st Quarter.............................................. 39.38 24.63
2nd Quarter.............................................. 39.88 23.13
3rd Quarter.............................................. 49.75 32.50
4th Quarter.............................................. 52.88 35.50

1997
1st Quarter.............................................. 74.50 48.13
2nd Quarter.............................................. 71.75 41.50
3rd Quarter (through July 30, 1997)...................... 72.00 60.75
</TABLE>

On July 30, 1997, the last reported sale price for the Common Stock on the
Nasdaq National Market was $67.75. As of June 30, 1997, there were approximately
170 holders of record of the Common Stock.

DIVIDEND POLICY

The Company has never declared or paid dividends on its capital stock and
does not anticipate paying any dividends in the foreseeable future. The Company
currently intends to retain its earnings, if any, for the development of its
business.

16
<PAGE> 17

CAPITALIZATION

The following table sets forth the capitalization of the Company at March
31, 1997 (i) on an actual basis and (ii) as adjusted to give effect to the sale
of 1,200,000 shares of Common Stock offered hereby and the receipt of the
estimated net proceeds therefrom. This table should be read in conjunction with
the Consolidated Financial Statements of the Company and the Notes thereto
included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
MARCH 31, 1997
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Noncurrent portion of capital lease obligations and notes payable..... $ 28 $ 28
-------- --------
Stockholders' equity:
Preferred Stock, $0.001 par value; 5,000,000 shares authorized; none
issued and outstanding........................................... -- --
Common Stock, $0.001 par value; 20,000,000 shares authorized(1);
10,474,715 shares issued and outstanding, actual; 11,674,715
shares issued and outstanding, as adjusted(2).................... 10 12
Additional paid-in capital.......................................... 81,923 157,921
Unrealized gain (loss) on available-for-sale securities............. (134) (134)
Accumulated deficit................................................. (35,541) (35,541)
-------- --------
Total stockholders' equity....................................... 46,258 122,258
-------- --------
Total capitalization........................................ $ 46,286 $ 122,286
======== ========
</TABLE>

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

(1) On July 2, 1997, the Company filed an amendment to its Certificate of
Incorporation to increase the number of shares of Common Stock authorized to
75,000,000.

(2) Excludes (i) 1,583,753 shares of Common Stock issuable upon exercise of
stock options outstanding as of June 30, 1997 at a weighted average exercise
price of $25.92 per share, which were granted pursuant to the Company's
stock option plans, (ii) 614,250 additional shares reserved for issuance and
available for grant or sale under the Company's stock option plans as of
June 30, 1997, and (iii) 200,000 shares reserved for issuance and available
for sale under the Company's employee stock purchase plan as of June 30,
1997.

17
<PAGE> 18

SELECTED CONSOLIDATED FINANCIAL DATA

The statement of operations data for each of the three years in the period
ended December 31, 1996, and the balance sheet data at December 31, 1995 and
1996 are derived from the audited Consolidated Financial Statements of the
Company audited by Ernst & Young LLP, independent auditors, which are included
elsewhere in this Prospectus and are qualified by reference to such Consolidated
Financial Statements and Notes related thereto. The statement of operations data
for the years ended December 31, 1992 and 1993 and the balance sheet data at
December 31, 1992, 1993 and 1994 have been derived from audited financial
statements of the Company audited by Ernst & Young LLP that are not included or
incorporated by reference herein. The statement of operations data for the three
months ended March 31, 1996 and 1997 and balance sheet data at March 31, 1997
are derived from unaudited consolidated financial statements included elsewhere
in this Prospectus. The unaudited consolidated financial statements include all
adjustments, consisting only of normal recurring adjustments, which the Company
considers necessary for a fair statement of the information set forth therein.
Operating results for the three months ended March 31, 1997 are not necessarily
indicative of the results that may be expected for any future period. The data
set forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and related Notes included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- -------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:(1)
Revenues................................. $ 1,701 $ 672 $ 1,512 $ 12,212 $41,785 $ 6,274 $17,859
Costs and expenses:
Research and development............... 3,194 4,764 11,169 19,212 40,864 7,745 14,730
Selling, general and administrative.... 666 737 2,328 3,927 6,792 1,245 2,574
Charge for purchase of in-process
research and development............. -- -- -- -- 3,165 -- --
------- ------- -------- -------- ------- ------- -------
Total costs and expenses................. 3,860 5,501 13,497 23,139 50,821 8,990 17,304
------- ------- -------- -------- ------- ------- -------
Income (loss) from operations............ (2,159) (4,829) (11,985) (10,927) (9,036) (2,716) 555
Interest and other income, net........... 33 60 510 990 2,275 678 478
------- ------- -------- -------- ------- ------- -------
Income (loss) before income taxes........ (2,126) (4,769) (11,475) (9,937) (6,761) (2,038) 1,033
Provision for income taxes............... -- -- -- -- -- -- (52)
------- ------- -------- -------- ------- ------- -------
Net income (loss)........................ $(2,126) $(4,769) $(11,475) $ (9,937) $(6,761) $(2,038) $ 981
======= ======= ======== ======== ======= ======= =======
Net income (loss) per share.............. $ (0.98) $ (2.01) $ (1.63) $ (1.19) $ (0.67) $ (0.20) $ 0.09
======= ======= ======== ======== ======= ======= =======
Shares used in computation of net income
(loss) per share....................... 2,178 2,369 7,030 8,367 10,156 10,034 11,453
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------- MARCH 31,
1992 1993 1994 1995 1996 1997
------- ------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:(1)
Cash, cash equivalents and marketable
securities.................................... $ 5,480 $15,540 $ 25,257 $ 41,181 $ 38,250 $ 38,547
Working capital................................. 4,903 14,865 20,866 38,983 22,047 16,951
Total assets.................................... 6,832 17,807 29,350 58,782 66,876 79,609
Capital lease obligations, less current
portion....................................... 372 517 148 147 37 28
Accumulated deficit............................. (3,580) (8,349) (19,824) (29,761) (36,522) (35,541)
Stockholders' equity............................ 5,861 16,451 24,344 47,503 45,247 46,258
</TABLE>

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

(1) Restated to reflect the combined results and financial position of Incyte
and Genome Systems. See Note 6 of Notes to Consolidated Financial
Statements.

18
<PAGE> 19

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

The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Company's Consolidated Financial
Statements and Notes thereto included elsewhere in this Prospectus. When used in
this discussion, the word "expects" and similar expressions are intended to
identify forward-looking statements. Such statements, which include statements
as to expected expenditure levels and the adequacy of capital resources, are
subject to risks and uncertainties that could cause actual results to differ
materially from those projected. These risks and uncertainties include, but are
not limited to, those risks discussed below as well as the ability of the
Company to obtain and retain database collaborators, competition from other
entities, and the cost of accessing technologies developed by other companies,
and the risks set forth under "Risk Factors" and elsewhere in this Prospectus.

OVERVIEW

The Company designs, develops and markets genomic database products,
genomic data management software tools and related reagents and services. The
Company's genomic databases integrate bioinformatics software with proprietary
and, when appropriate, publicly available genetic information to create
information-based tools used by the pharmaceutical and biotechnology companies
in drug discovery and development. In building the databases, the Company
utilizes high-throughput, computer-aided gene sequencing and analysis
technologies to identify and characterize the expressed genes of the human
genome as well as certain animal, plant and microbial genomes.

Revenues recognized by the Company are predominantly related to database
collaboration agreements and consist primarily of non-exclusive database access
fees. Revenues also include the sales of genomic screening products and services
and fees for custom or "satellite" database services. The Company's database
collaboration agreements also provide for future milestone payments and
royalties from the sale of products derived from proprietary information
obtained through the databases. There can be no assurance that any database
collaborators will ever generate products from information contained within the
databases and thus that the Company will ever receive milestone payments or
royalties. In addition, there can be no assurance that any of the Company's
database agreements will be renewed upon expiration, typically after a term of
three years, or will not be terminated earlier in accordance with its terms. See
"Risk Factors -- Limited Operating History; History of Operating Losses;
Uncertainty of Continued Profitability or Revenues."

The Company's operating results may fluctuate significantly from quarter to
quarter as a result of a variety of factors, including changes in the demand for
the Company's products and services, the pricing of database access to database
collaborators, the nature, pricing and timing of other products and services
provided to the Company's collaborators, changes in the research and development
budgets of the Company's collaborators and potential collaborators, capital
expenditures, acquisition and licensing costs and other costs related to the
expansion of Incyte's operations, and the introduction of competitive databases
or services. See "Risk Factors -- Fluctuations in Operating Results."

In July 1996, the Company issued Common Stock in exchange for all of the
outstanding shares of Genome Systems, a genomics service company located in St.
Louis, Missouri. The transaction has been accounted for as a pooling of
interests, and the consolidated financial statements discussed herein and all
historical financial information have been restated to reflect the combined
operations of both companies. In August 1996, the Company acquired for stock
Combion, a microarray technology company located in Pasadena, California. The
acquisition of Combion has been accounted for as a purchase, and the
consolidated financial statements discussed herein include the results of
Combion from the date of acquisition, August 15, 1996, forward. See Note 6 of
Notes to Consolidated Financial Statements.

19
<PAGE> 20

RECENT FINANCIAL RESULTS

The Company's revenues, net income and earnings per share for the three
months ended June 30, 1997 were $21.2 million, $1.9 million and $0.17,
respectively, as compared to revenues of $8.4 million, a net loss of $1.6
million and a net loss per share of $0.16 for the three months ended June 30,
1996. For the six months ended June 30, 1997, the Company's revenues, net income
and earnings per share were $39.1 million, $2.9 million and $0.26, respectively,
as compared to revenues of $14.7 million, a net loss of $3.6 million and a net
loss per share of $0.36 for the six months ended June 30, 1996. The increase in
revenues and net income resulted primarily from an increase in the number of
database collaboration agreements, partially offset by continuing increases in
costs and expenses.

COMPARISON OF THREE MONTHS ENDED MARCH 31, 1997 AND 1996

Revenues. Revenues for the three months ended March 31, 1997 increased to
$17.9 million, compared to $6.3 million for the corresponding period in 1996.
Revenues resulted primarily from database access fees and, to a much lesser
extent, from genomic screening products and services and custom satellite
database services. The increase in revenues from the corresponding quarter of
1996 was primarily due to an increase in the number of database collaboration
agreements. The Company recognizes revenue from these agreements ratably over
the terms of the agreements commencing upon installation. Revenue is deferred
for fees received before earned. Revenues for reagents and genomic screening
products are recognized when shipped and revenues for genomic screening services
are recognized upon completion.

Costs and Expenses. Total costs and expenses for the three months ended
March 31, 1997 increased to $17.3 million, compared to $9.0 million for the
corresponding period in 1996. Research and development expenses accounted for
84% of the increase and selling, general and administrative expenses represented
16% of the increase from period to period. Total costs and expenses are expected
to increase in the foreseeable future due to continued investment in new product
development and data production, obligations under existing and future research
and development alliances, and increased investment in marketing, sales and
customer services. The magnitude of the Company's operating expenses will
largely be a function of the Company's ability to secure new collaborators for
its database products and services. However, if the Company does not obtain
additional collaborators in a timely manner or if the Company's database
collaborators do not renew their collaboration agreement at the end of their
applicable terms, the Company may not be able to adjust significantly its level
of expenditures in any period, which would have an adverse effect on the
Company's operating results.

Research and development expenses increased to $14.7 million for the three
months ended March 31, 1997, compared to $7.7 million for the corresponding
period in 1996. The increase from 1996 to 1997 was primarily attributable to the
increase in the production of gene sequence and mapping information, increased
bioinformatics and database development efforts, costs related to intellectual
property protection and expenses related to continuing operations at Combion and
expanding operations at Genome Systems. The Company expects research and
development spending to increase over the next few years as the Company
continues to broaden its gene sequence production operations, pursue the
development of new database products and services, invest in new technologies
and invest in the continued protection of its intellectual property.

Selling, general and administrative expenses increased to $2.6 million for
the three months ended March 31, 1997, compared to $1.2 million for the
corresponding period in 1996. The increase is due primarily to growth in
marketing, sales and customer services and additional administrative personnel
required to support growth of the Company. The Company expects that selling,
general and administrative expenses will increase throughout 1997 due to
continued growth in marketing, sales and customer support, as well as expanding
operations.

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Interest and Other Income, Net. Interest and other income, net decreased to
$0.5 million for the three months ended March 31, 1997 compared to $0.7 million
for the same period in 1996. The decrease is due primarily to reduced interest
income from lower average cash and investment balances.

Provision for Income Taxes. The estimated effective annual income tax rate
for the three months ended March 31, 1997 is 5%, which represents the provision
for federal and state alternative minimum taxes after utilization of net
operating loss carryforwards. No provisions have been recorded prior to this
quarter as the Company has historically incurred annual net operating losses.
See Note 5 of Notes to Consolidated Financial Statements.

COMPARISON OF YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

Since inception, the Company has incurred annual operating losses and, as
of December 31, 1996, had an accumulated deficit of $36.5 million. The Company
incurred a net loss for the year ended December 31, 1996 of $6.8 million,
compared to a loss of $9.9 million and $11.5 million for 1995 and 1994,
respectively. On a per share basis, the losses for the years ended December 31,
1996, 1995 and 1994 were $0.67, $1.19 and $1.63, respectively. The sequential
decrease in net loss per share is due in part to the decrease in net loss and in
part due to the increase in the number of shares used to calculate net loss per
share from year to year. In November 1995, the Company completed a follow-on
public offering of 1.8 million shares and in 1996 the Company issued a total of
277,244 shares in connection with its business combinations with Genome Systems
and Combion.

Revenues. Total revenues were $41.8 million in 1996, compared to $12.2
million in 1995 and $1.5 million in 1994. The increases in revenues were
primarily due to an increase in the number of database collaboration agreements.
In accordance with its revenue recognition policy, the Company recognized
revenue from ten of twelve database agreements in 1996, compared to five of six
in 1995.

Costs and Expenses. Total costs and expenses increased to $50.8 million in
1996, compared to $23.1 million in 1995 and $13.5 million in 1994. Total costs
and expenses for 1996 include a one-time charge of $3.2 million for the purchase
of in-process research and development related to the acquisition of Combion.

Research and development expenses increased to $40.9 million in 1996,
compared to $19.2 million in 1995 and $11.2 million in 1994. Increases in
expenses from 1995 to 1996 were primarily due to increases in sequencing
production levels, new product development, and increased investment in new
technologies through alliances. Increases in expenses from 1994 to 1995 were
predominantly associated with expanded sequencing production, software and
database development, sequencing technology assessment, and intellectual
property protection.

Selling, general and administrative expenses were $6.8 million in 1996,
compared to $3.9 million in 1995 and $2.3 million in 1994. The increase from
1995 to 1996 was due primarily to growth in marketing, sales, and customer
services as well as growth in general management and corporate services. The
increase from 1994 to 1995 was due primarily to the recruitment of new database
collaborators, particularly with respect to increased marketing and business
development expenses, and the continued expansion of the Company's sequencing
production and data analysis capabilities.

Interest and Other Income, Net. Interest and other income, net, increased
to $2.3 million in 1996 from $1.0 million in 1995 and $0.5 million in 1994. The
increase from 1995 to 1996 was primarily due to larger average investment
balances resulting from the full-year impact of the Company's follow-on public
stock offering completed in late 1995 and increased payments from database
collaborators. The increase from 1994 to 1995 was primarily due to larger cash
balances held by the Company as a result of the full-year impact of equity
investments by Pfizer Inc and Pharmacia & Upjohn, Inc. in July and December
1994.

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LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 1997, the Company had $38.5 million in cash, cash
equivalents and marketable securities, compared to $38.3 million as of December
31, 1996 and $41.2 million as of December 31, 1995. During the three month
period ended March 31, 1997 and the year ended December 31, 1996, cash provided
by operations was largely offset or exceeded by investments in capital
equipment, consisting primarily of data processing-related computer hardware and
laboratory equipment, as well as expenditures for research and development
alliances and facilities improvements. The Company has classified all of its
marketable securities as short-term, as the Company may not hold its marketable
securities until maturity in order to take advantage of favorable market
conditions. Available cash is invested in accordance with the Company's
investment policy's primary objectives of liquidity, safety of principal and
diversity of investments.

Net cash provided by operating activities was $7.9 million for the three
months ended March 31, 1997, resulting primarily from deferred revenue and
depreciation and amortization, partially offset by accounts receivable due to
the timing of signing of collaboration agreements. Net cash provided by
operating activities was $16.6 million in 1996, compared to net cash used in
operating activities of $8.8 million in 1995 and $6.1 million in 1994. The
increase in net cash provided by operating activities in 1996 compared to 1995
resulted from increases in deferred revenue and accounts payable and decreases
in the net loss and accounts receivable. The increase in cash used in operating
activities in 1995 compared to 1994 was due to an increase in accounts
receivable, offset in part by an increase in deferred revenues. Net cash
generated by operating activities may fluctuate significantly from period to
period due to the timing of large prepayments by database collaborators.

The Company's investing activities, other than purchases, sales and
maturities of short-term investments, totaled $7.6 million for the three months
ended March 31, 1997, $20.8 million in 1996, $8.0 million in 1995 and $3.0
million in 1994. Investing activities for the three months ended March 31, 1997
and the year ended December 31, 1996 consisted of capital expenditures and
strategic equity investments. Investing activities in 1995 and 1994 consisted of
capital expenditures. Capital expenditures in the three months ended March 31,
1997 and in 1996 consisted primarily of investments in data processing-related
computer hardware and laboratory equipment, as well as leasehold improvements
related to the expansion of the Company's facilities. Capital expenditures in
1995 were primarily due to leasehold improvements in the Company's new
facilities and the purchases of new gene sequencing equipment and workstations
required in conjunction with the Company's expanded production and software
capabilities. The Company expects to continue to make capital expenditures and
strategic equity investments, if deemed appropriate in connection with
collaborations to develop or acquire access to technologies. See "Risk
Factors -- Risks Associated with Strategic Investments."

Net cash provided by financing activities was $58,000 for the three months
ended March 31, 1997, $1.5 million in 1996, $32.8 million in 1995 and $18.8
million in 1994. During the three months ended March 31, 1997 and during 1996,
net cash provided by financing activities was due to issuances of Common Stock
upon exercise of stock options and warrants. Net cash provided by financing
activities in 1995 was primarily due to the net proceeds of the November 1995
public offering. Net cash provided by financing activities in 1994 reflected
primarily the $19.4 million in net proceeds from the sales of Common Stock, the
majority of which was received from Pfizer Inc and Pharmacia & Upjohn, Inc.,
partially offset by principal payments on capital lease obligations.

The Company expects its cash requirements to increase in the remainder of
1997 and in 1998 as it increases its investment in data-processing-related
computer hardware in order to support its existing and new database products,
continues to seek access to technologies through investments, research and
development alliances, license agreements and/or acquisitions, and addresses its
needs for larger facilities and/or improvements in existing facilities. The
Company expects to continue to fund future operations with revenues from genomic
database products and services in addition to using the net proceeds from this
offering, its current cash, cash equivalents and marketable securities. The
Company expects these resources will satisfy the Company's projected working
capital, capital

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expenditure and other cash requirements at least through 1998. However, the
Company can offer no assurance that the Company will be able to obtain
additional collaborators or retain existing collaborators for the Company's
databases or that such database products and services will produce revenues,
which together with the Company's cash, cash equivalents and marketable
securities, will be adequate to fund the Company's cash requirements. The
Company's cash requirements depend on numerous factors, including the ability of
the Company to attract and retain collaborators for its databases and genomic
products and services; the Company's research and development activities,
including expenditures in connection with alliances, license agreements and
acquisitions of and investments in complementary technologies and businesses;
competing technological and market developments; the cost of filing,
prosecuting, defending, and enforcing patent claims and other intellectual
property rights; the purchase of additional capital equipment, including capital
equipment necessary to ensure that the Company's sequencing operation remains
competitive; and the costs associated with the integration of new operations
assumed through mergers and acquisitions. There can be no assurance that
additional funding, if necessary, will be available on favorable terms, if at
all. See "Risk Factors -- Future Capital Needs; Uncertainty of Additional
Funding."

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BUSINESS

OVERVIEW

Incyte Pharmaceuticals, Inc. ("Incyte" or the "Company") is a leader in the
design, development and marketing of genomic database products, genomic data
management software tools and related reagents and services. The Company's
genomic databases integrate bioinformatics software with proprietary and, when
appropriate, publicly available genetic information to create information-based
tools used by pharmaceutical and biotechnology companies in drug discovery and
development. In building the databases, the Company utilizes high-throughput,
computer-aided gene sequencing and analysis technologies to identify and
characterize the expressed genes of the human genome, as well as certain animal,
plant and microbial genomes. Incyte currently provides access to its genomic
databases through collaborations with pharmaceutical and biotechnology companies
worldwide. As of June 30, 1997, fifteen pharmaceutical or biotechnology
companies and one agricultural company had entered into multi-year database
collaboration agreements to obtain access to the Company's databases on a
non-exclusive basis. Revenues from these collaborators generally include
database access fees and, in some cases, additional fees for custom sequencing
services, referred to as "satellite" database services. The Company's database
agreements also provide for milestone payments and royalties to be received from
database collaborators from the sale of products derived from proprietary
information contained within one or more database modules. In addition, the
Company has entered into an agreement with Novartis AG ("Novartis") to furnish a
customized enterprise-wide bioinformatics data management system based upon the
Company's LifeTools suite of genomic software products.

Since early 1996, the Company has expanded its portfolio of database
modules from the LifeSeq gene sequence and expression database to also include
the LifeSeq FL database of full-length genes, the LifeSeq Atlas mapping
database, the PathoSeq microbial genomic database, the LifeTools suite of
bioinformatics software programs, the LifeTools 3D data mining and visualization
software, the LifeSeq GeneAlbum archive of DNA clones, and a variety of custom
database and sequencing services. The introduction of the ZooSeq animal genomic
database in 1997 marked the Company's first initiative to expand beyond
databases with applications in drug discovery to those with applications in
preclinical and clinical development. Each database module consists of a
relational database that runs on UNIX-based client/server networks and
incorporates HyperText Markup Language ("HTML") graphical user interfaces
enabling collaborators to use multiple search tools and browse various database
modules. The databases are available using either Oracle or Sybase database
architectures and operate on Sun Microsystems, Digital Equipment Corporation and
Silicon Graphics workstations.

BUSINESS STRATEGY

Incyte's strategy is to position its databases as an essential technology
platform to assist research and development efforts within the pharmaceutical
and biotechnology industries. By providing non-

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exclusive access to the Company's databases, Incyte seeks to gain industry-wide
adoption of its databases for the discovery and development of a broad range of
potential therapeutic and diagnostic products. Incyte's ability to offer the
same dataset to multiple end-users provides significant operating leverage while
allowing the Company to broadly distribute its tools. As a result, Incyte has
been able to expand rapidly the data content of its human genomic databases, as
well as to begin to build additional genomic databases focused on medically
relevant microbes, preclinical animal models and plants. Incyte believes that
its products and services can assist pharmaceutical and biotechnology companies
in accelerating the drug discovery and development process, resulting in time
and cost savings. This strategy is being implemented through the following
initiatives:

- Generate Revenues through Database Collaboration Agreements. The Company
provides database collaborators with non-exclusive access to one or more
of the Company's databases, as well as additional services such as DNA
cloning and customized satellite databases. The fees and periods of
access are negotiated with each collaborator with the initial term
typically being for a period of three years.

- Generate Royalty Income. The Company's database collaboration agreements
provide for milestone payments and royalties from the development and
sale of products derived from proprietary information obtained from
LifeSeq and other databases. This strategy allows the Company to avoid
the financial risk associated with drug development, while retaining
future revenue-earning capability from the portfolio of products
developed by its database collaborators with information from Incyte's
databases. The Company believes that as its collaborator base expands,
the likelihood of collaborators discovering drugs based in part on usage
of the LifeSeq database and related products may increase.

- Expand Database Product Line. Incyte intends to continue to expand the
information content of its existing databases, as well as to create new
databases. New databases are generated primarily in response to the needs
of the Company's database collaborators, with whom the Company conducts
quarterly research meetings to exchange ideas on how best to obtain and
use genomic information. In particular, the Company plans to expand its
product line to include information from a diversity of organisms.
Frequently it is easier to assess gene function in lower organisms, such
as yeast, microbes or animals, than it is in humans. Given the
significant sequence similarities, or homologies, between genes of
plants, animals and humans, the functions of human genes may then be
inferred. Incyte believes that such initiatives in comparative genomics
will be critical to maximizing the utility of genomic information.

- Provide New Products to Address Preclinical and Clinical Phases of Drug
Development. The Company is expanding its product portfolio to address
the pharmaceutical and biotechnology industries' needs, not only with
respect to drug discovery, but also with respect to preclinical and
clinical development. Incyte believes that future products, developed by
leveraging the Company's current technologies, will assist its
collaborators in assessing the pharmacology and toxicology of potential
new drugs, identifying the genetic factors that determine drug efficacy
and toxicity, and stratifying drug responders and non-responders based
upon their genetic profiles.

- Develop Enterprise-Wide Information Management Product. The Company is
developing an enterprise-wide genomic information management system
capable of updating, reprocessing and integrating genetic data from
multiple sources and from different organisms. Such a system will be
designed to integrate Incyte proprietary, collaborator-specific and
public domain data, as well as to compare information from humans,
animals, microbes, fungi and plants. The system will incorporate the
architecture necessary to integrate Incyte's software tools with
three-dimensional visualization tools, data mining programs, project
management capabilities, multicasting technology and any additional
technologies developed to more efficiently manage and analyze genomic
data. These tools and technologies are being developed independently by
Incyte as well as cooperatively with third parties.

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BACKGROUND

Genes are found in all living cells and are comprised of DNA, which in turn
is comprised of nucleotide base pairs, or bases. Genes provide the necessary
information to code for the synthesis of proteins which conduct all functions
within the cell. Many human diseases are associated with inadequate or
inappropriate presence, production or performance of proteins. As such,
pharmaceutical and biotechnology companies often seek to develop drugs that will
bind to a targeted protein involved in disease in order to regulate, inhibit or
stimulate its biological activity. Other proteins, known as therapeutic
proteins, have direct biological activity capable of treating disease. Insulin
and human growth hormone are examples of therapeutic proteins. Understanding the
role genes play in disease, and the protein targets or therapeutic proteins
which they encode, has thus become a significant area of interest and research
within the pharmaceutical and biotechnology industries.

One frequently employed method for determining gene function involves the
grouping of genes into "related" families based on similarities in sequence. DNA
sequencing is a process that identifies the order in which the bases in DNA are
arranged in a particular section of DNA, or DNA fragment. Once a gene's sequence
is known, its function may be inferred by comparing its sequence with the
sequences of other human genes of known function, as genes with similar, or
homologous, sequences may have related functions. For example, if an unknown
gene shares sequence homology with a known tumor suppressor gene, the unknown
gene could similarly play a role in cancer. Comparing gene sequences across
species has also become a useful tool for understanding gene function, as
frequently it is easier to assess gene function in lower organisms than it is in
humans.

Another method used to determine gene function focuses on the analysis of
gene activity within a cell. When a gene is active, its DNA is copied into
messenger RNA or "mRNA." The population of mRNA within a cell can be isolated
and converted into copy DNA or "cDNA," thereby creating a cDNA library that
represents the population of mRNAs present in a cell type at a particular time.
In a process called "gene expression profiling," high-throughput cDNA sequencing
and computer analysis can be used to identify which genes are active or inactive
and, if active, at what levels. Expression profiles provide a more detailed
picture of cellular genetics than conventional laboratory techniques by
indicating which genes, both known and novel, are specifically correlated to
discrete biological events in normal and disease-state cells.

Due to improvements in sequencing technology, genomic information from both
public and private sources is increasing at a dramatic rate. As a result,
bioinformatics, or the use of computers and sophisticated algorithms to store,
analyze and interpret large volumes of biological data, is essential in order to
capture value from this growing pool of data. To date, the main focus of
bioinformatic and genomic tools has been drug discovery. The Company believes
these tools, as well as tools under development, will also assist researchers
with the preclinical and clinical development process. For example, with the
help of new technology and bioinformatic analyses, scientists may be able to
correlate genetic and physiologic response in preclinical animal models, examine
gene expression profiles in drug-treated animals to assess the pharmacological
activity and toxicity of new drugs, and stratify clinical trial patients
according to their genetic profiles.

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PRODUCTS

Incyte's products include an integrated platform of genomic databases, data
management software tools, and related reagents and services.

[CHART]

Genomic Databases. The Company provides its database collaborators with
non-exclusive database access. Database collaborators receive periodic data
updates, typically monthly, as well as software upgrades and additional search
and analysis tools when they become available. The fees and the period of access
are negotiated with each database collaborator, with the initial term typically
lasting for a period of three years. Fees generally consist of database access
fees, non-exclusive or exclusive license fees and option fees corresponding to
patent rights on proprietary sequences. Incyte may also receive milestone and
royalty payments from database collaborators from the sale of products derived
from the Company's technology and database information. Additional fees may be
received for custom sequencing and database services and the supply of DNA
clones. Where appropriate, collaborators can browse not only Incyte-generated
data, but also public domain information provided through HTML links to the
World Wide Web. Incyte currently offers the following database modules:

- LifeSeq Database. The LifeSeq gene sequence and expression database
consists of a proprietary sequence database module linked to a
proprietary gene expression database module. Researchers can easily move
from one module to another through HTML-based graphical interfaces. The
sequence database contains Incyte's computer-edited gene sequence files
and is used by collaborators to identify related or homologous genes. For
example, a collaborator may wish to identify new genes homologous to a
gene identified through the collaborator's own research and believed to
be linked to a disease. Additionally, a collaborator may wish to discover
a potentially related family of genes homologous to an interesting gene
uncovered while searching another Incyte database module. The expression
database contains biological information about each sequence in the
Company's sequence database, including tissue source, homologies, and
annotations regarding characteristics of the gene sequence. Most
importantly, the expression database contains a gene expression profile
for every tissue in the database combined with proprietary bioinformatics
software to allow collaborators to browse data and compare differences in
gene expression across cells, tissues, and different disease states.
Thus, the expression database can be used to assist researchers in
correlating the presence of specific genes to discrete biological events
in normal and disease-state cells. Incyte continually adds additional
sequences and expression data from normal and diseased tissues to the
LifeSeq database.

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- LifeSeq FL Database. This database contains the full-length gene
sequences for DNA fragments of medically interesting genes found in the
LifeSeq gene sequence and expression database. Incyte scientists and the
Company's collaborators select genes for inclusion in this database based
on a number of factors, including their sequence homologies to known
therapeutically important gene families, unusual tissue or
disease-related expression patterns and chromosomal location. A variety
of methods, including a proprietary, high-throughput cloning technology,
is used to obtain the full-length sequence once a DNA fragment for a
medically interesting gene is identified.

- LifeSeq Atlas Database. This database contains the chromosomal locations
for certain of the genes and gene fragments identified in the Company's
LifeSeq gene sequence and expression database that the Company believes
may be of utility to its database collaborators. In particular, this
database may be useful for companies engaged in positional cloning, a
technique used to identify genes believed to be responsible for genetic
disorders, which relies heavily on comparative analysis of the
chromosomes of members of families afflicted by a disease.

- PathoSeq Database. With drug-resistant strains of bacteria and other
microorganisms posing an increasing threat to world health,
pharmaceutical and biotechnology companies are searching for genes unique
to these pathogens that will aid in the development of new drugs for
combating infectious disease. The PathoSeq database currently contains
proprietary and public domain genomic data for over one dozen medically
relevant bacterial and fungal microorganisms. PathoSeq's software and
bioinformatic tools edit all sequence data to remove artifacts and
contamination, assemble all sequences, display the relative position of
the DNA coding regions, and identify genes either common among multiple
microorganisms or unique to one microbial genome. The Company believes
PathoSeq can help researchers understand the biology of microorganisms,
study the mechanisms of drug resistance, identify genes that may make
effective drug targets, and, ultimately, develop new therapeutics to
treat and prevent infectious disease.

- ZooSeq Database. The ZooSeq database, introduced in June 1997, was
developed to aid pharmaceutical and biotechnology companies in designing
and evaluating preclinical drug studies in animals, a crucial step in the
drug development process. ZooSeq will focus on genomic information from
animals commonly used in preclinical drug pharmacology and toxicology
studies. The database currently contains gene sequence and expression
data for the Sprague-Dawley rat, the most common animal used in drug
toxicology studies. The Company plans to expand this database in 1998 to
include mice and other research animals. ZooSeq is designed to allow
scientists to compare gene sequence, expression patterns and function
across species. By correlating a drug's effects on a rat with the
animal's genetic makeup, and then cross-referencing this data with
Incyte's LifeSeq database, a researcher may better predict the drug's
efficacy, and side effects before moving to human clinical trials.

Other databases in development by the Company include the PhytoSeq
database, a database of plant sequences designed for agricultural and
agrochemical companies interested in identifying genes responsible for desirable
crop and disease resistance characteristics, and the LifeChipTM databases, a
series of disease or application-specific database modules being constructed in
conjunction with Affymetrix, Inc.

Satellite Database Services. To construct satellite databases, Incyte
generates sequence data and gene expression profiles using genetic material from
tissues or cells selected by the database collaborators. Such databases are
provided exclusively for a negotiated time period in a format compatible with
the Company's non-exclusive database modules. These tissues and cells can be
provided by the database collaborators from their own tissue banks or internal
research programs or from other sources.

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Software. LifeTools, a suite of specialized bioinformatic software
programs, consists of high-throughput sequence analysis and data management
tools for handling complex genomic information from multiple sources. LifeTools
Blocks reads and edits raw sequence data, including data imported from public
databases, and annotates and clusters sequence fragments based on sequence
similarity. LifeTools SeqServer is a fast, scaleable database search engine with
intranet-based graphical tools for interactive queries and analyses. LifeTools
Relational, a relational database management system, stores and distributes
sequence cluster, homology, tissue expression information and biological data.
LifeTools 3D provides sophisticated three-dimensional visualization and analysis
tools. Incyte's database management architecture is based on open system
standards, providing interconnectivity between disparate systems and
applications, and enterprise-wide access to data and functions.

Incyte intends to continue to aggressively develop new bioinformatic
software programs internally, as well as with third party software developers
and development groups. Some of the bioinformatic software tools under
development include project management tools and multicasting or "push"
software. The Company is working with TIBCO Software, Inc. ("TIBCO") to develop
push software that will allow individual scientists to receive customized
database information broadcast to their desktops over the Internet and private
networks.

The Company also is developing an enterprise-wide genomic information
management system capable of updating, reprocessing and integrating genetic data
from multiple sources and from different organisms. Such a system will be
designed to integrate Incyte proprietary, collaborator-specific and public
domain data, as well as to compare information from humans, animals, microbes,
fungi and plants. The system will incorporate the architecture necessary to
integrate Incyte's software tools with three-dimensional visualization tools,
data mining programs, project management capabilities, multicasting technology
and any additional technologies developed to more efficiently manage and analyze
genomic data. These tools and technologies are being developed independently by
Incyte as well as cooperatively with third parties.

DNA Clone and Other Services. Incyte offers a variety of DNA clone and
other services designed to assist its collaborators in using information from
its databases in internal lab-based experiments. The DNA fragments from which
the information in Incyte's databases is derived represent valuable resources
for researchers, enabling them to perform bench-style experiments to supplement
the information obtained from searching Incyte's databases. Incyte retains a
copy of all isolated clones corresponding to the sequences in the database. The
Company's collaborators may request from the Company clones corresponding to a
sequence of interest on a one-by-one basis or through LifeSeq GeneAlbum, a
subscription-based service that provides database collaborators with large
numbers of DNA clones. Genome Systems produces a broad line of genomic research
products, such as DNA clones and insert libraries, and offers technical support
services, including high-throughput DNA screening, custom robotic services,
contract DNA preparation, and fluorescent in-situ hybridization, to assist
researchers in the identification and isolation of novel genes.

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DATABASE PRODUCTION

THE LIFESEQ DATABASE DATA FLOW

[DIAGRAM]

The Company engages in the high-throughput automated sequencing of genes
derived from tissue samples followed by the computer-aided analysis of each gene
sequence to identify homologies to genes of known function in order to predict
the biological function of newly identified sequences. The derivation of
information in the Company's databases involves the following steps:

Tissue Access. Incyte obtains tissue samples representing most major
organs in the human body from various academic and commercial sources.
Where possible, in addition to the tissue sample, the Company obtains
information as to the medical history and pathology of the tissue. The
genetic material is isolated from the tissue and prepared for analysis. The
results of this analysis as well as the corresponding pathology and medical
history information are incorporated into the database.

High-Throughput cDNA Sequencing. The Company utilizes specialized
teams in an integrated approach to its high-throughput sequencing and
analysis effort. Gene sequencing is performed using multiple work shifts to
increase daily throughput. The Company is currently sequencing
approximately 60,000 DNA sequences per week. One team develops and prepares
cDNA libraries from biological sources of interest. A second team prepares
the cDNAs using robotic workstations to perform key steps that result in
purified cDNAs for sequencing (called cDNA templates). A third team
operates automated DNA sequencers that typically sequence from 200 to 800
base pairs from each cDNA template. These base pairs represent a portion of
the entire cDNA sequence. The Company believes that partial gene sequences
are often sufficient to identify the expressed gene and allow for more
rapid gene discovery.

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Bioinformatics. Sequence information generated from Incyte's
high-throughput sequencing operations is uploaded to a network of servers.
Incyte's proprietary bioinformatic software then assembles and edits the
sequence information. The sequence of each cDNA is compared via automated,
computerized algorithms to the sequences of known genes in the Company's
databases and public domain databases to identify whether the cDNA codes
for a known protein or is homologous to a known gene. Each sequence is
annotated as to its cell or tissue source, its relative abundance and
whether it is homologous to a known gene with known function or previously
unidentified. The bioinformatics staff monitors this computerized analysis
and may perform additional analyses on sequence information. The finished
data are then added to Incyte's proprietary sequence databases.

CUSTOMERS

The Company has entered into database collaboration agreements with sixteen
companies as of June 30, 1997. Each collaborator has agreed to pay, during an
average term of three years, annual fees to receive non-exclusive access to the
Company's databases. For the three months ended March 31, 1997, the Company
recognized revenue from 14 of these companies, two of which each contributed 10%
or more of total revenues. In 1996, the Company recognized revenue from ten of
these companies, three of which each contributed in excess of 10% of total
revenues. Current database collaborators are:

Abbott Laboratories F. Hoffmann-La Roche Ltd.
ARIAD Pharmaceuticals, Inc. Johnson & Johnson
BASF AG Monsanto Company
Bristol-Myers Squibb Company Novo Nordisk A/S
Eli Lilly and Company Pfizer Inc
Genentech, Inc. Pharmacia & Upjohn, Inc.
Glaxo Wellcome plc Schering AG
Hoechst AG Zeneca Ltd.

In addition, the Company has an agreement with Novartis pursuant to which
the Company is developing an enterprise-wise bioinformatics software and data
management system that will be based on the Company's LifeTools product line and
include custom features designed specifically for Novartis.

Certain of the Company's database collaboration agreements contain minimum
annual update requirements which if not met could result in Incyte's breach of
the respective agreement. One of the Company's database agreements expires at
the end of 1997 and there can be no assurance that the agreement will be
renewed, and if renewed, under what terms. Further, beginning in August 1997 one
database collaborator has the right on 30 days' written notice to terminate its
database collaboration agreement. There can be no assurance that any of the
Company's database collaboration agreements will be renewed upon expiration or
will not be terminated earlier in accordance with its terms. The loss of
revenues from any database collaborator could have a material adverse effect on
the Company's business, financial condition and results of operations. See "Risk
Factors -- Limited Operating History; History of Operating Losses; Uncertainty
of Continued Profitability or Revenues," "-- New and Uncertain Business," and
"-- Competition and Technological Changes."

DEVELOPMENT PROGRAMS

Since its inception, the Company has made substantial investments in
research and technology development. During the three months ended March 31,
1997 and the years ended December 31, 1996, 1995 and 1994, the Company spent
approximately $14.7 million, $40.9 million, $19.2 million, and $11.2 million,
respectively, on research and development activities. This investment in
research and development includes an active program to enter into relationships
with other technology-driven companies and, when appropriate, acquire licenses
to technologies for evaluation or use in the production and analysis process.
The Company has entered into a number of research and develop-

31
<PAGE> 32

ment relationships with companies and research institutions. The Company's
commitments under any one of these agreements do not represent a significant
expenditure in relation to the Company's total research and development expense.

The Company is currently evaluating new technologies relating to tissue
processing, DNA amplification, microarray production, and advanced automated
sequencing and expression profiling to expand the productivity, efficiency and
quality of its database products. Technologies in which the Company has made
investments to increase and enhance the content of such products include mass
spectrometry for high-throughput expression profiling and microarray technology
to monitor the activity of many specific genes simultaneously in multiple tissue
samples.

To enhance the functionality of the Company's products, Incyte is
developing an enterprise-wide database management architecture, together with
improvements to its bioinformatics capabilities and additional data analysis
tools. The Company's development efforts with respect to this architecture are
focused on creating a genomic information management system in a format
compatible with Incyte's existing proprietary database software that will enable
collaborators to integrate their proprietary data with Incyte's and public
domain information. The system will incorporate the architecture necessary to
integrate Incyte's software tools with three-dimensional visualization tools,
data mining programs, project management capabilities, multicasting technology
and any additional technologies developed to more efficiently manage and analyze
genomic data.

The following table represents certain of the Company's recent research and
development relationships:

<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------
COMPANY DESCRIPTION
- --------------------------------------------------------------------------------------------
Affymetrix Development of gene expression databases and services using
Affymetrix's GeneChipTM DNA probe array technology
Centre National de la Development of new bioinformatics algorithms
Recherche Scientifique
GeneTrace Development of mass spectrometry DNA analysis applications
Molecular Dynamics Evaluation of capillary gel electrophoresis technology in
high-throughput DNA sequencing
NetGenics Application of Common Object Request Broker Architecture
(CORBA) and project management tools
OncorMed Development of tissue databank and performance of functional
studies of selected genes
Molecular Simulations Integration of LifeSeq with Molecular Simulations' WebLabTM
Gene Explorer
Silicon Graphics Application of Silicon Graphics' MineSetTM 3D visualization
software
TIBCO Application of TIBCO's patented "push" software and
multicasting technology
- --------------------------------------------------------------------------------------------
</TABLE>

PATENTS AND PROPRIETARY TECHNOLOGY

The Company's database business and competitive position is dependent upon
its ability to protect its proprietary database information and software
technology. The Company relies on patent, trade secret and copyright law, and
nondisclosure and other contractual arrangements to protect its proprietary
information.

The Company's ability to license proprietary genes may be dependent upon
its ability to obtain patents, protect trade secrets and operate without
infringing upon the proprietary rights of others.

32
<PAGE> 33

Other pharmaceutical, biotechnology and biopharmaceutical companies, as well as
academic and other institutions have filed applications for, may have been
issued patents or may obtain additional patents and proprietary rights relating
to products or processes competitive with those of the Company. Patent
applications filed by competitors, may claim some of the same gene sequences or
partial gene sequences as those claimed in patent applications filed by the
Company. The Company is aware that Merck (in conjunction with Washington
University) and TIGR have made certain gene sequences publicly available, which
may adversely affect the ability of the Company and others to obtain patents on
such genes. There can be no assurance that such publication of sequence
information will not adversely affect the Company's ability to obtain patent
protection for sequences that have been made publicly available.

The patentability of partial gene sequences in general is highly uncertain,
involves complex legal and factual questions and has recently been the subject
of much controversy. No clear policy has emerged with respect to the breadth of
claims allowable for partial gene fragments. There is significant uncertainty as
to what claims, if any, will be allowed on partial gene sequences derived
through high-throughput gene sequencing. Certain court decisions suggest that
disclosure of a partial sequence may not be sufficient to support the
patentability of a full-length sequence and that patent claims to a partial
sequence may not cover a full-length sequence inclusive of that partial
sequence. In 1996, the USPTO issued guidelines limiting the number of gene
sequences that can be contained within a single patent application. Many of the
Company's patent applications containing multiple partial sequences contain more
sequences than the maximum number allowed under the new guidelines. The Company
is reviewing its options, and it is possible that due to the resources needed to
comply with the guidelines, the Company may decide to abandon seeking patent
protection for some of its partial gene sequences. To date, no patent has issued
under any of the Company's patent applications claiming partial gene sequences.

As the biotechnology industry expands, more patents are issued and other
companies engage in the business of discovering genes through the use of high
speed sequencers and other genomic-related businesses, the risk increases that
the Company's potential products may be subject to claims that they infringe the
patents of others. Further, the Company is aware of several issued patents in
the field of microarray or gridding technology, which can be utilized in the
generation of gene expression information. Certain of these patents are the
subject of litigation. Therefore, the Company's operations may require it to
obtain licenses under any such patents or proprietary rights, and no assurance
can be given that such licenses would be made available on terms acceptable to
the Company. Litigation may be necessary to defend against or assert claims of
infringement, to enforce patents issued to the Company, to protect trade secrets
or know-how owned by the Company, or to determine the scope and validity of the
proprietary rights of others. The Company is aware that certain of its patent
applications cover genes which are also contained in patent applications filed
by others with potentially competing patent claims. Interference proceedings may
be necessary to establish which party was the first to invent or the first to
obtain a particular sequence for the purpose of patent protection. Such
litigation or interference proceedings could result in substantial costs to and
diversion of effort by the Company and may have a material adverse effect on the
Company's business, operating results and financial condition. In addition,
there can be no assurance that such proceedings or litigation would be resolved
in the Company's favor.

33
<PAGE> 34

As a result, there can be no assurance that patent applications relating to
the Company's products or processes will result in patents being issued, or that
any issued patents will provide protection against competitors. Even if patents
are issued on the basis of gene sequences, there may be uncertainty as to the
scope of the coverage, enforceability or commercial protection provided by any
such patents. See "Risk Factors -- Uncertainty of Protection of Patents and
Proprietary Rights."

COMPETITION

There are a finite number of genes in the human genome, and competitors may
seek to identify, sequence and determine in the shortest time possible the
biological function of a large number of genes in order to obtain a proprietary
position with respect to the largest number of new genes discovered. There are a
number of companies, other institutions, and government-financed entities,
including HGS, the NIH, the Department of Energy, Merck (in conjunction with
Washington University) and TIGR, engaged in gene sequencing. Many of these
companies, institutions and entities have greater financial and human resources
than the Company. In addition, the Company is aware that HGS and at least one
other company have developed genomics databases and are marketing their data to
pharmaceutical companies. Merck and TIGR have each made the results of their
sequencing efforts publicly available. The Company expects that additional
competitors may attempt to establish gene sequence, gene expression or other
genomic databases in the future.

In addition, competitors may discover and establish patent positions with
respect to gene sequences in the Company's databases. Such patent positions or
the public availability of gene sequences comprising substantial portions of the
human genome or on microbial or plant genes could decrease the potential value
of the Company's databases to the Company's collaborators and adversely affect
the Company's ability to realize royalties or other revenue from
commercialization of products based upon such genetic information. See "Risk
Factors -- Uncertainty of Protection of Patents and Proprietary Rights."

The gene sequencing machines that are utilized in the Company's
high-throughput computer-aided gene sequencing operations are commercially
available and are currently being utilized by several competitors. Moreover,
some of the Company's competitors or potential competitors are in the process of
developing, and may successfully develop, proprietary sequencing technologies
that may be more advanced than the technology used by the Company. In addition,
the Company is aware that there are a number of companies pursuing alternative
methods for deriving gene expression information, including those developing
microarray technologies. There can be no assurance that such advanced sequencing
or gene expression technologies, if developed, will be commercially available
for purchase or license by the Company on reasonable terms, or at all.

The Company believes that the features and ease of use of its database
software, its experience in high-throughput gene sequencing, the cumulative size
of its database, the quality of the data, including the annotations in its
database, and its experience with bioinformatics and database software are
important aspects of the Company's competitive position.

34
<PAGE> 35

The genomics industry is characterized by extensive research efforts and
rapid technological progress. New developments are expected to continue and
there can be no assurance that discoveries by others will not render the
Company's services and potential products noncompetitive. In addition,
significant levels of research in biotechnology and medicine occur in
universities and other non-profit research institutions. These entities have
become increasingly active in seeking patent protection and licensing revenues
for their research results. These entities also compete with the Company in
recruiting talented scientists. See "Risk Factors -- Competition and
Technological Changes."

GOVERNMENT REGULATION

Regulation by governmental authorities in the United States and other
countries will be a significant factor in the production and marketing of any
pharmaceutical products that may be developed by a licensee of the Company or by
the Company. At the present time the Company does not intend to develop any
pharmaceutical products itself. The Company will receive royalties from its
database collaborators on any pharmaceutical products developed by such
collaborators derived from information obtained from Incyte's genomic databases.
Thus, the receipt and timing of regulatory approvals for the marketing of such
products may have a significant effect in the future on the Company's revenues.
Pharmaceutical products developed by licensees will require regulatory approval
by governmental agencies prior to commercialization. In particular, human
pharmaceutical therapeutic products are subject to rigorous preclinical and
clinical testing and other approval procedures by the United States Food and
Drug Administration in the United States and similar health authorities in
foreign countries. Various federal and, in some cases, state statutes and
regulations also govern or influence the manufacturing, safety, labeling,
storage, recordkeeping and marketing of such pharmaceutical products, including
the use, manufacture, storage, handling and disposal of hazardous materials and
certain waste products. The process of obtaining these approvals and the
subsequent compliance with appropriate federal and foreign statutes and
regulations require the expenditure of substantial resources over a significant
period of time, and there can be no assurance that any approvals will be granted
on a timely basis, if at all. Any such delay in obtaining or failure to obtain
such approvals could adversely affect the Company's ability to earn milestone
payments, royalties or other license-based fees. Additional governmental
regulations that might arise from future legislation or administrative action
cannot be predicted, and such regulations could delay or otherwise affect
adversely regulatory approval of potential pharmaceutical products. See "Risk
Factors -- Reliance on Pharmaceutical Industry; Uncertainty of Health Care
Reform and Related Matters."

HUMAN RESOURCES

As of June 30, 1997, the Company had 515 full-time equivalent employees,
including 146 in sequencing production, 138 in bioinformatics, 71 in research
and technology development, 76 in marketing, sales and administrative positions
and 84 in the Company's Genome Systems subsidiary. None of the Company's
employees is covered by collective bargaining agreements, and management
considers relations with its employees to be good. The Company's future success
will depend in part on the continued service of its key scientific, software,
bioinformatics and management personnel and its ability to identify, hire and
retain additional personnel, including personnel in the customer service and
marketing area. There is intense competition for qualified personnel in the
areas of the Company's activities, especially with respect to experienced
bioinformatics and software personnel, and there can be no assurance that the
Company will be able to continue to attract and retain such personnel necessary
for the development of the Company's business. Failure to attract and retain key
personnel could have a material adverse effect on the Company's business,
financial condition and operating results. See "Risk Factors -- Management of
Growth" and "-- Dependence on Key Employees."

35
<PAGE> 36

PROPERTIES

Incyte's headquarters are in Palo Alto, California, where its main research
laboratories, sequencing facility, bioinformatics and administrative facilities
are located. Incyte also operates facilities in St. Louis, Missouri, through its
merger with Genome Systems and in Pasadena, California through its acquisition
of Combion. As of June 30, 1997, Incyte had multiple sublease and lease
agreements covering approximately 196,000 square feet that expire on various
dates ranging from April 1998 to August 2006. In July 1997, the Company entered
into a multi-year lease with respect to a 95,000 square foot building to be
constructed adjacent to the Company's Palo Alto headquarters. The Company is
currently pursuing options to obtain temporary space suitable to meet current
growth requirements until the Company can occupy the new Palo Alto building.
There can be no assurance that suitable additional space will be available to
the Company, when needed, on commercially reasonable terms. The Company's
inability to obtain sufficient additional space, when needed, could have a
material adverse effect on the Company's business, financial condition and
results of operations.

36
<PAGE> 37

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of the Company and their ages as of
July 15, 1997 are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------- --- --------------------------------------------------
<S> <C> <C>
Roy A. Whitfield....................... 43 Chief Executive Officer and Director
Randal W. Scott, Ph.D. ................ 39 President and Chief Scientific Officer, Secretary
and Director
Denise M. Gilbert, Ph.D. .............. 39 Executive Vice President, Chief Financial Officer
and Treasurer
Jeffrey J. Collinson(1)(2)............. 55 Chairman of the Board of Directors
Barry M. Bloom, Ph.D.(1)(2)............ 68 Director
Frederick B. Craves, Ph.D.(1)(2)....... 51 Director
Jon S. Saxe(1)(2)...................... 61 Director
</TABLE>

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

(1) Member of Compensation Committee of the Board of Directors.

(2) Member of Audit Committee of the Board of Directors.

Roy A. Whitfield has been Chief Executive Officer of the Company since June
1993 and a director since June 1991. Mr. Whitfield served as President of the
Company from June 1991 until January 1997 and as Treasurer of the Company from
April 1991 until October 1995. Previously, Mr. Whitfield served as the President
of Ideon Corporation, which was a majority owned subsidiary of Invitron
Corporation ("Invitron"), a biotechnology company, from October 1989 until April
1991. From 1984 to 1989, Mr. Whitfield held senior operating and business
development positions with Technicon Instruments Corporation ("Technicon"), a
medical instrumentation company, and its predecessor company, CooperBiomedical,
Inc., a biotechnology and medical diagnostics company. Prior to his work at
Technicon, Mr. Whitfield spent seven years with the Boston Consulting Group's
international consulting practice. Mr. Whitfield received a B.S. with First
Class Honors in mathematics from Oxford University, and an M.B.A. with
Distinction from Stanford University.

Randal W. Scott, Ph.D., has been President of the Company since January
1997. He has served as Chief Scientific Officer of the Company since March 1995,
a director since June 1991 and Secretary of the Company since April 1991. Dr.
Scott served as Executive Vice President of the Company from March 1995 until
January 1997 and as Vice President, Research and Development of the Company from
April 1991 through February 1995. Dr. Scott was one of Invitron's founding
scientists and was employed by Invitron from March 1985 to June 1991. In 1987,
Dr. Scott started the Protein Biochemistry Department at Invitron's California
Research Division and became Senior Director of Research in November 1988. Dr.
Scott was responsible for developing Invitron's proprietary products and
discovery programs and is an inventor of several of the Company's patents. Prior
to joining Invitron, he was a Senior Scientist at Unigene Laboratories, a
biotechnology company. Dr. Scott received his Ph.D. in Biochemistry from the
University of Kansas.

Denise M. Gilbert, Ph.D., has been Executive Vice President, Chief
Financial Officer and Treasurer of the Company since October 1995. From July
1993 to October 1995 Dr. Gilbert was Vice President and Chief Financial Officer
of Affymax N.V., a biopharmaceutical company. Prior to joining Affymax, Dr.
Gilbert spent seven years as a Wall Street biotechnology analyst, serving as a
Managing Director of Smith Barney from July 1991 to July 1993, Vice President at
NatWest Securities from July 1990 to July 1991, and senior analyst at Montgomery
Securities from July 1986 to July 1990. Dr. Gilbert received her B.A. in
Biological Sciences from Cornell University and Ph.D. in Cell and Developmental
Biology from Harvard University.

37
<PAGE> 38

Jeffrey J. Collinson has been a director of the Company since inception and
has served as Chairman of the Board of Directors since April 1991. Mr. Collinson
has served as President of Collinson Howe Venture Partners Inc. (formerly named
Schroder Venture Advisers, Inc.), a venture capital management firm, since 1990
and was President of Schroder Venture Managers, Inc., a venture capital firm,
from 1983 to 1990. Mr. Collinson is also a director of Intensiva Healthcare
Corporation, Neurogen Corporation and Spare, Kaplan, Bischel & Associates.

Barry M. Bloom, Ph.D., has been a director of the Company since October
1994. Dr. Bloom retired in 1993 from Pfizer Inc, where he was most recently
Executive Vice President, Research and Development, and a member of the Board of
Directors. Dr. Bloom began his career with Pfizer in 1952 as a research chemist.
He was named president of Pfizer Central Research, and elected a corporate vice
president in 1971, a member of the Board of Directors in 1973, and a member of
the Corporate Management Committee in 1984. He was named senior vice president
in 1990 and executive vice president in 1991. Dr. Bloom serves on the Boards of
Directors of Cubist Pharmaceuticals, Inc., Neurogen Corporation, Southern New
England Telecommunications Corporation, and Vertex Pharmaceuticals, Inc. and is
a scientific adviser to Philadelphia Ventures, Axiom Venture Partners and Virus
Research Institute.

Frederick B. Craves, Ph.D., has been a director of the Company since July
1993. Since January 1, 1997, Dr. Craves has been Managing Director and Chairman
of The Craves Group, a private merchant bank focused on life science. He also is
a general partner of Burrill & Craves, a private merchant bank specializing in
life science, which he co-founded in 1994. Dr. Craves has been an independent
management consultant since May 1993 and in July 1993, he was appointed Chairman
of the Board of NeoRx Corporation and of Epoch Pharmaceuticals, Inc., each of
which is a biotechnology company. From January 1991 to May 1993, he was
President and Chief Executive Officer of Berlex Biosciences, a biotechnology
company that is a wholly owned subsidiary of Schering AG. Dr. Craves was
Chairman, Chief Executive Officer and President of Codon, a biotechnology
company, from 1982 until its acquisition by Schering AG in 1990.

Jon S. Saxe has been a director of the Company since July 1993. Since
January 1995, he has been the President of Protein Design Labs, Inc., a
biotechnology company. From April 1993 through December 1994, he was President
of Saxe Associates, a consultancy. Mr. Saxe served as President and Chief
Executive Officer of Synergen, Inc., a biotechnology company, from October 1989
to April 1993. Mr. Saxe served as Vice President, Licensing and Corporate
Development, for Hoffmann-La Roche Inc., a pharmaceutical company, from August
1984 to September 1989, and as Head, Patent Law from September 1978 to September
1989. Mr. Saxe is also a director of Ribogene, Inc., ID Biomedical, Inc. and
Protein Design Labs, Inc.

38
<PAGE> 39

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding beneficial
ownership of the Common Stock at June 30, 1997, and as adjusted to reflect the
sale by the Company of the shares offered hereby (assuming no exercise of the
Underwriters' over-allotment option), by: (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 of the Company's executive officers, and (iv)
all directors and executive officers of the Company as a group. Ownership
information is based upon information furnished by the respective individuals or
entities, as the case may be.

<TABLE>
<CAPTION>
PERCENTAGE
BENEFICIALLY
OWNED(1)
SHARES -------------------
BENEFICIALLY BEFORE AFTER
OWNED(1) OFFERING OFFERING
--------- -------- --------
<S> <C> <C> <C>
INVESCO PLC(2).................................................... 807,300 7.6% 6.9%
11 Devonshire Square
London EC2M 4YR
England
Pharmacia & Upjohn, Inc. ......................................... 791,333 7.5 6.7
The Pharmacia & Upjohn Centre
67 Alma Road
Windsor, Berkshire
SL4 3HD, United Kingdom
Pfizer Inc........................................................ 710,000 6.7 6.1
235 East 42nd Street
New York, NY 10017
Jeffrey J. Collinson(3)........................................... 262,326 2.5 2.2
Roy A. Whitfield(4)............................................... 356,280 3.3 3.0
Randal W. Scott(5)................................................ 205,700 1.9 1.7
Denise M. Gilbert(6).............................................. 117,500 1.1 1.0
Frederick B. Craves(7)............................................ 48,800 * *
Jon S. Saxe(8).................................................... 41,000 * *
Barry M. Bloom(9)................................................. 21,750 * *
All directors and executive officers as a group (7 persons)(10)... 1,053,356 9.6 8.7
</TABLE>

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

* Less than 1%.

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

(2) According to a Schedule 13G dated February 14, 1997 filed by INVESCO PLC,
INVESCO PLC has shared voting power and shared dispositive power with
INVESCO North American Group, Ltd., INVESCO, Inc., INVESCO North American
Holdings, Inc. and INVESCO Funds Group, Inc. with respect to all shares
listed in the table.

(3) Includes 100,000 shares held by Schroders Incorporated, 107,123 shares held
by Schroder Ventures Limited Partnership, 27,877 shares held by Schroder
Ventures U.S. Trust and 100 shares held by Collinson Howe Venture Partners,
Inc. Mr. Collinson, a director of the Company, shares voting and investment
power with respect to such shares. Mr. Collinson disclaims beneficial
ownership of shares held by Schroders Incorporated, Schroder Ventures
Limited Partnership and Schroder Ventures U.S. Trust, except to the extent
of his proportionate interest therein. Mr. Collinson is the majority
shareholder of Collinson Howe Venture Partners, Inc. and may be deemed to be
the beneficial owner of the shares held by that entity. Also includes 11,316
shares held by Indian Chase, Inc., over which Mr. Collinson has voting and
investment power, and 902 shares held by

39
<PAGE> 40

Mr. Collinson's minor child. Mr. Collinson disclaims beneficial ownership of
shares held by Indian Chase, Inc. except to the extent of his proportionate
interest therein and disclaims beneficial ownership of the shares held by
his child.

(4) Includes 86,200 shares subject to options exercisable within 60 days of
June 30, 1997.

(5) Includes 82,284 shares subject to options exercisable within 60 days of
June 30, 1997.

(6) Includes 117,500 shares subject to options exercisable within 60 days of
June 30, 1997.

(7) Includes 2,000 shares held by Burrill & Craves, a general partnership. Dr.
Craves is a general partner of such partnership and may be deemed to be the
beneficial owner of the shares held by the partnership. Also includes 2,100
shares held by a trust for which Dr. Craves is a trustee, 3,700 shares held
by Dr. Craves' spouse, and 41,000 shares subject to options exercisable
within 60 days of June 30, 1997.

(8) Includes 41,000 shares subject to options exercisable within 60 days of
June 30, 1997.

(9) Includes 21,750 shares subject to options exercisable within 60 days of
June 30, 1997.

(10) Includes shares included pursuant to notes (3), (4), (5), (6), (7), (8) and
(9) above.

40
<PAGE> 41

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below have severally agreed to purchase from the Company the
following number of shares of Common Stock:

<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
----------------------------------------------------------------- ---------
<S> <C>
Hambrecht & Quist LLC............................................ 325,000
Alex. Brown & Sons Incorporated.................................. 325,000
Vector Securities International, Inc............................. 325,000
Furman Selz LLC.................................................. 75,000
Genesis Merchant Group Securities................................ 75,000
Van Kasper & Company............................................. 75,000
------
Total.................................................. 1,200,000
======
</TABLE>

The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company and its counsel and
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if any
of such shares are purchased.

The Underwriters propose to offer shares of Common Stock directly to the
public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $2.07 per share. The Underwriters may allow and such dealers may reallow a
concession not in excess of $0.10 per share to certain other dealers. After the
public offering of the shares, the offering price and other selling terms may be
changed by the Underwriters.

The Company has granted the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 177,713
additional shares of Common Stock at the public offering price, less the
underwriting discount, set forth on the cover page of this Prospectus. To the
extent that the Underwriters exercise this option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage thereof
which the number of shares of Common Stock to be purchased by it shown in the
above table bears to the total number of shares of Common Stock offered hereby.
The Company will be obligated, pursuant to the option, to sell such shares to
the Underwriters to the extent the option is exercised. The Underwriters may
exercise such option only to cover overallotments made in connection with the
sale of shares of Common Stock offered hereby.

The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended
(the "Securities Act"), and to contribute to payments the Underwriters may be
required to make in respect thereof.

Certain stockholders of the Company, including the executive officers and
directors who will own in the aggregate approximately 1,900,000 shares of Common
Stock after the offering, have agreed that they will not, without the prior
written consent of Hambrecht & Quist LLC acting alone or each of the
representatives of the Underwriters acting jointly, offer, sell or otherwise
dispose of any shares of Common Stock or securities exchangeable for or
convertible into or exercisable for or any rights to purchase or acquire Common
Stock owned by them during the 90-day period following the date of this
Prospectus. Hambrecht & Quist LLC may, in its sole discretion and at anytime
without notice to the Company's stockholders or the public market release all or
any part of the shares subject to the lock-up agreements. The Company has agreed
that it will not, without the prior written consent of

41
<PAGE> 42

Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares of Common
Stock, or securities exchangeable for or convertible into or exercisable for or
any rights to purchase or acquire Common Stock during the 90-day period
following the date of this Prospectus, except that the Company may, pursuant to
its stock plans, sell shares, grant additional options or issue shares upon the
exercise of options granted prior to the date hereof.

In connection with the offering, certain Underwriters and selling group
members (if any) or their respective affiliates who are qualified registered
market makers on the Nasdaq National Market, may engage in passive market making
transactions in the Common Stock on the Nasdaq National Market in accordance
with Rule 103 under Regulation M. Such passive market makers must comply with
applicable volume and price limitations and must be identified as such. In
general, a passive market maker must display its bid at a price not in excess of
the highest independent bid for such security; if all independent bids are
lowered below the passive market maker's bid, however, such bid must then be
lowered when certain purchase limits are exceeded.

In connection with this offering, certain Underwriters and selling group
members (if any) and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the offering than
they are committed to purchase from the Company, and in such case may purchase
Common Stock in the open market following completion of the offering to cover
all or a portion of such short position. The Underwriters may also cover all or
a portion of such short position, up to 177,713 shares of Common Stock, by
exercising the Underwriters' over-allotment option referred to above. Any of the
transactions described in this paragraph may result in the maintenance of the
price of the Common Stock at a level above that which might otherwise prevail in
the open market. None of the transactions described in this paragraph is
required, and, if they are undertaken, they may be discontinued at any time.

LEGAL MATTERS

Certain legal matters with respect to the validity of Common Stock offered
hereby are being passed upon for the Company by Pillsbury Madison & Sutro LLP,
San Francisco, California and for the Underwriters by Wilson Sonsini Goodrich &
Rosati, Professional Corporation, Palo Alto, California.

EXPERTS

The consolidated financial statements of Incyte Pharmaceuticals, Inc. at
December 31, 1995 and 1996, and for each of the three years in the period ended
December 31, 1996, appearing in this Prospectus and Registration Statement and
in Incyte Pharmaceuticals, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1996 incorporated herein by reference, have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein and appearing in Incyte Pharmaceuticals, Inc.'s Annual Report
on Form 10-K and incorporated herein by reference. Such consolidated financial
statements are included and incorporated by reference in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.

AVAILABLE 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, proxy and information statements, and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy and information statements, and other information filed by the Company can
be

42
<PAGE> 43

inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C., as well as the regional
offices of the Commission located at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois, and 7 World Trade Center, Suite 1300, New York,
New York. Copies of such material can be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. The Commission maintains a World Wide Web site that contains
reports, proxy and information statements, and other information that are filed
through the Commission's Electronic Data Gathering, Analysis and Retrieval
System. This Web site can be accessed at http://www.sec.gov.

The Company has filed with the Commission a Registration Statement on Form
S-3 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act with respect to the Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock, reference is made to the Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus as to the contents of
any contract or other document are not necessarily complete and, in each
instance, reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. Copies of the Registration Statement, including
all exhibits thereto, may be obtained from the Commission's principal office in
Washington, D.C. upon payment of the fees prescribed by the Commission, or may
be examined without charge at the offices of the Commission described above.

DOCUMENTS INCORPORATED BY REFERENCE

The following documents previously filed with the Commission are hereby
incorporated by reference into this Prospectus: (i) the Company's Annual Report
on Form 10-K for the year ended December 31, 1996, (ii) the Company's Quarterly
Reports on Form 10-Q for the quarters ended March 31, 1997 and June 30, 1997,
and (iii) the description of the Common Stock contained in the Company's
Registration Statement on Form 8-A filed under the Exchange Act on January 5,
1996. All documents subsequently filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act prior to the termination of the offering
to which this Prospectus relates shall be deemed to be incorporated by reference
into this Prospectus and to be part of this Prospectus from the date of filing
thereof.

Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus and
the Registration Statement of which it is a part to the extent that a statement
contained herein or in any other subsequently filed document which also is
incorporated herein modifies or replaces such statement. Any statement so
modified or superseded shall not be deemed, in its unmodified form, to
constitute a part of this Prospectus or such Registration Statement. The Company
will provide without charge to each person to whom a copy of the Prospectus has
been delivered, and who makes a written or oral request, a copy of any and all
of the foregoing documents incorporated by reference in the Registration
Statement (other than exhibits unless such exhibits are specifically
incorporated by reference into such documents). Requests should be submitted in
writing or by telephone to Investor Relations, Incyte Pharmaceuticals, Inc.,
3174 Porter Drive, Palo Alto, California 94304, telephone (415) 845-4111.

43
<PAGE> 44

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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

F-1
<PAGE> 45

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders of Incyte Pharmaceuticals, Inc.

We have audited the accompanying consolidated balance sheets of Incyte
Pharmaceuticals, Inc., as of December 31, 1995 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. 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 consolidated financial position of Incyte
Pharmaceuticals, Inc. at December 31, 1995 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.

/s/ ERNST & YOUNG LLP

Palo Alto, California
February 7, 1997

F-2
<PAGE> 46

INCYTE PHARMACEUTICALS, INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PAR VALUE)

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1995 1996 1997
-------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.............................. $ 10,547 $ 7,628 $ 8,008
Marketable securities -- available-for-sale............ 30,634 30,622 30,539
Accounts receivable.................................... 7,643 2,469 8,678
Prepaid expenses and other current assets.............. 756 2,456 2,597
-------- -------- --------
Total current assets........................... 49,580 43,175 49,822
Property and equipment, net.............................. 9,084 22,936 25,346
Long-term investments.................................... -- 313 3,313
Deposits and other assets................................ 118 452 1,128
-------- -------- --------
$ 58,782 $ 66,876 $ 79,609
======== ======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable....................................... 2,344 $ 4,670 $ 3,953
Accrued expenses....................................... 714 1,121 2,469
Accrued compensation................................... 187 386 454
Deferred revenue....................................... 7,268 14,878 25,946
Current portion of capital lease obligations and notes
payable............................................. 84 73 49
-------- -------- --------
Total current liabilities...................... 10,597 21,128 32,871
Noncurrent portion of capital lease obligations and notes
payable................................................ 147 37 28
Noncurrent portion of accrued rent....................... 535 464 452
Commitments
Stockholders' equity:
Preferred Stock, $0.001 par value; 5,000,000 shares
authorized; none issued and outstanding at December
31, 1995, 1996 and March 31, 1997................... -- -- --
Common Stock, $0.001 par value; 20,000,000 shares
authorized; 9,995,783, 10,447,301 and 10,474,715
shares issued and outstanding at December 31, 1995,
1996 and March 31, 1997, respectively............... 10 10 10
Additional paid-in capital............................. 77,250 81,832 81,923
Unrealized gain (loss) on available-for-sale
securities.......................................... 33 (73) (134)
Deferred compensation.................................. (29) -- --
Accumulated deficit.................................... (29,761) (36,522) (35,541)
-------- -------- --------
Total stockholders' equity..................... 47,503 45,247 46,258
-------- -------- --------
$ 58,782 $ 66,876 $ 79,609
======== ======== ========
</TABLE>

See accompanying notes.

F-3
<PAGE> 47

INCYTE PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------- -------------------
1994 1995 1996 1996 1997
-------- -------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues (Notes 1 and 2)............... $ 1,512 $ 12,212 $41,785 $ 6,274 $17,859
Costs and expenses:
Research and development............. 11,169 19,212 40,864 7,745 14,730
Selling, general and
administrative.................... 2,328 3,927 6,792 1,245 2,574
Charge for purchase of in-process
research and development.......... -- -- 3,165 -- --
-------- -------- -------- ------- -------
Total costs and expenses............... 13,497 23,139 50,821 8,990 17,304
-------- -------- -------- ------- -------
Income (loss) from operations.......... (11,985) (10,927) (9,036) (2,716) 555
Interest income........................ 674 1,186 2,495 679 580
Interest and other expense, net........ (164) (196) (220) (1) (102)
-------- -------- -------- ------- -------
Income (loss) before income taxes...... (11,475) (9,937) (6,761) (2,038) 1,033
Provision for income taxes............. -- -- -- -- (52)
-------- -------- -------- ------- -------
Net income (loss)...................... $(11,475) $ (9,937) $(6,761) $(2,038) $ 981
======== ======== ======== ======= =======
Net income (loss) per share............ $ (1.63) $ (1.19) $ (0.67) $ (0.20) $ 0.09
======== ======== ======== ======= =======
Shares used in computation of net
income (loss) per share.............. 7,030 8,367 10,156 10,034 11,453
======== ======== ======== ======= =======
</TABLE>

See accompanying notes.

F-4
<PAGE> 48

INCYTE PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)

<TABLE>
<CAPTION>
NOTES UNREALIZED
ADDITIONAL RECEIVABLE GAIN/LOSS ON TOTAL
COMMON PAID-IN FROM MARKETABLE DEFERRED ACCUMULATED STOCKHOLDERS'
STOCK CAPITAL STOCKHOLDERS SECURITIES COMPENSATION DEFICIT EQUITY
------ ---------- ------------ ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993..... $ 7 $ 25,182 $(34) $ -- $ (355) $ (8,349) $ 16,451
Issuance of 29,044 shares of
Common Stock upon exercise of
stock options................ -- 28 -- -- -- -- 28
Issuance of 1,501,333 shares of
Common Stock to database
collaborators................ 1 19,141 -- -- -- -- 19,142
Payment of notes receivable from
shareholders................. -- -- 34 -- -- -- 34
Deferred compensation, Genome
Systems...................... -- 142 -- -- (142) -- --
Amortization of deferred
compensation................. -- -- -- -- 142 -- 142
Net change in unrealized gains
on available-for-sale
securities................... -- -- -- 22 -- -- 22
Net loss........................ -- -- -- -- -- (11,475) (11,475)
--- ------- ---- ----- ----- -------- --------
Balances at December 31, 1994..... 8 44,493 -- 22 (355) (19,824) 24,344
Issuance of 28,815 shares of
Common Stock upon exercise of
stock options................ -- 88 -- -- -- -- 88
Issuance of 1,837,000 shares of
Common Stock, net of expenses
and underwriters' fees of
$2,232....................... 2 32,669 -- -- -- -- 32,671
Amortization of deferred
compensation................. -- -- -- -- 326 -- 326
Net change in unrealized gains
on available-for-sale
securities................... -- -- -- 11 -- -- 11
Net loss........................ -- -- -- -- -- (9,937) (9,937)
--- ------- ---- ----- ----- -------- --------
Balances at December 31, 1995..... 10 77,250 -- 33 (29) (29,761) 47,503
Issuance of 228,648 shares of
Common Stock upon exercise of
stock options and 149,699
shares upon exercise of
warrant...................... -- 1,582 -- -- -- -- 1,582
Issuance of 73,171 shares of
Common Stock in exchange for
shares of Combion, Inc....... -- 3,000 -- -- -- -- 3,000
Amortization of deferred
compensation................. -- -- -- -- 29 -- 29
Net change in unrealized gains
on available-for-sale
securities................... -- -- -- (106) -- -- (106)
Net loss........................ -- -- -- -- -- (6,761) (6,761)
--- ------- ---- ----- ----- -------- --------
Balances at December 31, 1996..... 10 81,832 -- (73) -- (36,522) 45,247
Issuance of 19,947 shares of
Common Stock upon exercise of
stock options and 7,467
shares upon exercise of
warrant (unaudited).......... -- 91 -- -- -- -- 91
Net change in unrealized gains
on available-for-sale
securities (unaudited)....... -- -- -- (61) -- -- (61)
Net income (unaudited).......... -- -- -- -- -- 981 981
--- ------- ---- ----- ----- -------- --------
Balances at March 31, 1997
(unaudited)..................... $ 10 $ 81,923 $ -- $ (134) $ -- $ (35,541) $ 46,258
=== ======= ==== ===== ===== ======== ========
</TABLE>

See accompanying notes.

F-5
<PAGE> 49

INCYTE PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ ------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).................................. $(11,475) $ (9,937) $ (6,761) $ (2,038) $ 981
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization.................... 982 2,750 6,461 1,036 2,238
Expense for abandoned equipment.................. 442 124 -- -- --
Noncash portion of purchase of in-process
research and development...................... -- -- 3,000 -- --
Changes in certain assets and liabilities:
Accounts receivable........................... (69) (7,439) 5,174 7,169 (6,209)
Prepaid expenses and other assets............. (118) (571) (1,722) (141) (817)
Accounts payable.............................. 1,119 760 2,326 (24) (717)
Deferred revenue.............................. 2,769 4,498 7,610 5,525 11,068
Accrued vacation and other expenses........... 241 1,014 535 735 1,404
-------- -------- -------- -------- -------
Total adjustments.................................. 5,366 1,136 23,384 14,300 6,967
-------- -------- -------- -------- -------
Net cash provided by (used in) operating
activities....................................... (6,109) (8,801) 16,623 12,262 7,948
CASH FLOWS FROM INVESTING ACTIVITIES
Long-term investments.............................. -- -- (625) (625) (3,000)
Capital expenditures............................... (2,978) (8,042) (20,188) (3,821) (4,625)
Purchases of short-term investments................ (26,206) (74,037) (16,526) (11,180) (4,511)
Sale of short-term investments..................... -- -- -- -- 4,510
Maturities of short-term investments............... 7,920 61,722 16,336 5,078 --
-------- -------- -------- -------- -------
Net cash (used in) investing activities............ (21,264) (20,357) (21,003) (10,548) (7,626)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuances of common stock........ 19,370 32,759 1,582 394 91
Payment of notes receivable from stockholders...... 34 -- -- -- --
Proceeds from capital leases and notes payable..... 87 69 -- -- --
Principal payments on capital lease obligations.... (709) (72) (121) (20) (33)
-------- -------- -------- -------- -------
Net cash provided by financing activities.......... 18,782 32,756 1,461 374 58
-------- -------- -------- -------- -------
Net increase (decrease) in cash and cash
equivalents...................................... (8,591) 3,598 (2,919) 2,088 380
Cash and cash equivalents at beginning of the
period........................................... 15,540 6,949 10,547 10,547 7,628
-------- -------- -------- -------- -------
Cash and cash equivalents at end of the period..... $ 6,949 $ 10,547 $ 7,628 $ 12,635 $ 8,008
======== ======== ======== ======== =======
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Interest paid...................................... $ 288 $ 45 $ 17 $ 4 $ 5
======== ======== ======== ======== =======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Property and equipment acquired pursuant to capital
lease obligations................................ $ 606 $ 69 -- -- --
======== ======== ======== ======== =======
Deferred compensation.............................. $ 142 $ -- -- -- --
======== ======== ======== ======== =======
Unrealized gain (loss) on marketable securities --
available-for-sale............................... $ 22 $ 11 $ (106) $ (258) $ (148)
======== ======== ======== ======== =======
</TABLE>

See accompanying notes.

F-6
<PAGE> 50

INCYTE PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Business

Incyte Pharmaceuticals, Inc. (the "Company") was incorporated in Delaware
in April 1991. The Company designs, develops, and markets genomic databases,
software tools, and related genomic reagents and services. The Company's
databases, available singly or in combination, integrate bioinformatics software
with proprietary and, when appropriate, publicly available genetic information.
Non-exclusive access to the Company's databases is offered to pharmaceutical and
biotechnology companies worldwide for use in drug discovery and development of
diagnostic and therapeutic products.

Principles of Consolidation

The consolidated financial statements include the accounts of Incyte
Pharmaceuticals, Inc., and its wholly owned subsidiaries. All material
intercompany accounts, transactions, and profits have been eliminated in
consolidation.

Interim Financial Information

The accompanying interim consolidated financial statements as of March 31,
1997 and for the three months ended March 31, 1996 and 1997 are unaudited but
include all adjustments, consisting only of normal recurring adjustments, which
the Company considers necessary for a fair presentation of the financial
position and operating results. The results of operations for the three months
ended March 31, 1997 are not necessarily indicative of the 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.

Concentrations of Credit Risk

Cash, cash equivalents, and marketable securities and trade receivables are
financial instruments which potentially subject the Company to concentrations of
credit risk. The estimated fair value of financial instruments approximates the
carrying value based on available market information. The Company primarily
invests its excess available funds in notes and bills issued by the U.S.
government and its agencies and, by policy, limits the amount of credit exposure
to any one issuer and to any one type of investment, other than securities
issued or guaranteed by the U.S. Government. The Company has not experienced any
credit losses to date and does not require collateral on receivables.

Cash and Cash Equivalents

Cash and cash equivalents are held in U.S. banks or in custodial accounts
with U.S. banks. Cash equivalents are defined as all liquid investments with
maturity from date of purchase of 90 days or less that are readily convertible
into cash and have insignificant interest rate risk. All other investments are
reported as marketable securities.

F-7
<PAGE> 51

INCYTE PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)

Marketable Securities Available-for-Sale

All marketable securities are classified as available-for-sale.
Available-for-sale securities are carried at fair value, with unrealized gains
and losses reported as a separate component of stockholders' equity. The
amortized cost of debt securities in this category is adjusted for amortization
of premiums and accretions of discounts to maturity. Such amortization is
included in interest income. Realized gains and losses and declines in value
judged to be other than temporary for available-for-sale securities are included
in interest and other income.

The following is a summary of the Company's investment portfolio, including
cash equivalents of $2,173,000 and $398,000 as of December 31, 1995 and 1996,
respectively, and $825,000 as of March 31, 1997:

<TABLE>
<CAPTION>
NET
UNREALIZED ESTIMATED
AMORTIZED (LOSSES) FAIR
COST GAINS VALUE
--------- -------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
DECEMBER 31, 1995
U.S. Treasury notes and other U.S.
government securities................. $31,779 $ 32 $31,811
Corporate debt securities............... 995 1 996
------- ----- -------
$32,774 $ 33 $32,807
======= ===== =======
DECEMBER 31, 1996
U.S. Treasury notes and other U.S.
government securities................. $30,695 $ (73) $30,622
Corporate debt securities............... 398 -- 398
------- ----- -------
$31,093 $ (73) $31,020
======= ===== =======
MARCH 31, 1997
U.S. Treasury notes and other U.S.
government securities................. $27,075 $ (220) $26,855
Corporate debt securities............... 4,510 (1) 4,509
------- ----- -------
$31,585 $ (221) $31,364
======= ===== =======
</TABLE>

All marketable securities -- available-for-sale mature within two years. At
December 31, 1995 and 1996 and at March 31, 1997, all of the Company's
investments are classified as short-term, as the Company may not hold its
investments until maturity in order to take advantage of market conditions. Of
the marketable securities held at December 31, 1996, $23,148,000 had maturities
under a year and $7,872,000 had maturities over a year and of the marketable
securities held at March 31, 1997, $21,403,000 had maturities under a year and
$9,961,000 had maturities over a year. Unrealized gains were not material and
have therefore been netted against unrealized losses.

F-8
<PAGE> 52

INCYTE PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)

Property and Equipment

Property and equipment is stated at cost, less accumulated depreciation and
amortization. Depreciation is provided using the straight-line method over the
estimated useful lives of the respective assets (generally two to five years).
Leasehold improvements are amortized over the shorter of estimated useful life
of the assets or lease term. Property and equipment consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1995 1996 1997
------- ------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Office equipment.......................... $ 406 $ 950 $ 1,669
Laboratory equipment...................... 6,825 12,982 13,449
Computer equipment........................ 1,950 9,935 12,931
Leasehold improvements.................... 3,179 8,679 9,123
------- ------- --------
12,360 32,546 37,172
Less accumulated depreciation and
amortization............................ (3,276) (9,610) (11,826)
------- ------- --------
$ 9,084 $22,936 $ 25,346
======= ======= ========
</TABLE>

Depreciation expense was $723,000, $2,154,000, and $5,230,000 for 1994,
1995, and 1996, respectively. Amortization was $103,000, $266,000, and
$1,061,000 for 1994, 1995, and 1996, respectively.

Certain laboratory and computer equipment used by the Company could be
subject to technological obsolescence in the event that significant advancement
is made in competing or developing equipment technologies. Management
continually reviews the estimated useful lives of technologically sensitive
equipment and believes that those estimates appropriately reflect the current
useful life of its assets. In the event that a currently unknown significantly
advanced technology became commercially available, the Company would re-evaluate
the value and estimated useful lives of its existing equipment, possibly
requiring a material effect to the financial statements.

Software Costs

In accordance with the provisions of the Financial Accounting Standards
Board Statement No. 86, "Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed," the Company has capitalized software
development costs incurred in developing certain products once technological
feasibility of the products has been determined. Capitalized software costs are
amortized over three years and have been immaterial to date.

Stock-Based Compensation

The Company accounts for stock option grants in accordance with APB Opinion
No. 25, "Accounting for Stock Issued to Employees." The Company currently grants
stock options for a fixed number of shares to employees and directors with an
exercise price equal to the fair value of the shares at the date of grant, and
therefore records no compensation expense.

Revenue Recognition

The Company recognizes revenue for database collaboration agreements evenly
over the term of the agreement. Revenue is deferred for fees received before
earned. Revenues from custom orders, such as satellite databases, are recognized
upon shipment. Revenues from reagents and genomic

F-9
<PAGE> 53

INCYTE PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)

screening products are recognized when shipped, and revenues from genomic
screening services are recognized upon completion.

Businesses Acquired

In July 1996, the Company issued 204,073 shares of its Common Stock in
exchange for all of the outstanding shares of Genome Systems, Inc. ("Genome
Systems"), a privately held genomics service company in St. Louis, Missouri. The
transaction has been accounted for as a pooling of interests, and the
consolidated financial statements discussed herein and all historical financial
information have been restated to reflect the combined operations of both
companies. Genome Systems has retained its name and operations, continuing to
offer a range of customized genomic screening products and services used by
scientists to assist in the identification and isolation of novel genes.

In August 1996, the Company acquired Combion, Inc. ("Combion"), a privately
held microarray technology company located in Pasadena, California, for 73,171
shares of the Company's Common Stock. The acquisition of Combion has been
accounted for as a purchase, and the consolidated financial statements discussed
herein reflect the inclusion of the results of Combion from the date of
acquisition, August 15, 1996.

See Note 6 of Notes to Consolidated Financial Statements.

Net Income (Loss) Per Share

Net income (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 for periods prior to
1997, as their effect is antidilutive. For the three months ended March 31,
1997, common equivalent shares from stock options are included in the
computation using the treasury stock method, as their effect is dilutive.

In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Under the
new requirements for calculating primary earnings per share, the dilutive effect
of stock options will be excluded. The Company expects that there will be no
material impact on the earnings per share for the quarters ended March 31, 1997
and 1996.

Reclassifications

Certain reclassifications were made to the prior periods' balances to
conform with the 1997 presentation.

2. COLLABORATIVE AGREEMENTS

As of December 31, 1996, the Company had entered into database
collaboration agreements with eleven pharmaceutical companies and one
agricultural company. Each collaborator has agreed to pay, during the term of
the agreement, annual fees to receive non-exclusive access to selected modules
of the Company's databases. In addition, if a partner develops certain products
utilizing the Company's technology and database information, potential milestone
and royalty payments could be received by the Company. If these agreements are
not renewed and if the Company cannot sign a sufficient number of new database
agreements, the loss of revenue could have a material adverse effect on the
Company's business and operating results. Certain companies also have satellite
database agreements, whereby the Company provides custom sequencing services,
which are billed for separately. Satellite

F-10
<PAGE> 54

INCYTE PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)

database services are provided to the collaborator on an exclusive basis for a
negotiated period of time. Over 90% of the revenues in 1996 are derived from ten
collaborators, three of which individually contributed more than 10% of the
total, or approximately 37% in the aggregate. In 1995, the majority of the
revenues were derived from five collaborators, including three of which
contributed more than 10% individually, or approximately 73% in the aggregate.
In 1994, the Company recognized its first database collaboration revenues,
primarily from one collaborator, which contributed more than 10% of the total.

As of March 31, 1997, the Company has entered into additional collaboration
agreements under similar terms.

In addition to the database collaboration agreements, the Company has
entered into a number of research and development alliances with companies and
research institutions. These agreements provide for the funding of research
activities by the Company and the possible payment of milestones, license fees,
and, in some cases, royalties.

3. COMMITMENTS

At December 31, 1996, the Company had signed noncancelable operating leases
on multiple facilities, including facilities in Palo Alto and Pasadena,
California, and St. Louis, Missouri. The leases expire on various dates ranging
from September 1997 to August 2006. Rent expense for the years ended December
31, 1994, 1995, and 1996 were approximately $443,000, $1,251,000, and
$1,645,000, respectively, and $385,000 and $514,000 for the three months ended
March 31, 1996 and 1997, respectively.

The Company had laboratory equipment with a cost of approximately $370,000
at December 31, 1995 and 1996, and related accumulated amortization of
approximately $194,000 and $268,000 at December 31, 1995 and 1996, respectively,
under capital leases. These leases are secured by the equipment leased
thereunder.

At December 31, 1996, future noncancelable minimum payments under the
operating and capital leases were as follows:

<TABLE>
<CAPTION>
CAPITAL
LEASES
AND
OPERATING NOTES
LEASES PAYABLE
--------- -------
(IN THOUSANDS)
<S> <C> <C>
Year ended December 31:
1997........................................... $ 2,228 $ 78
1998........................................... 1,907 25
1999........................................... 1,580 14
2000........................................... 1,554 --
2001 and thereafter............................ 2,666 --
------ ----
Total minimum lease payments..................... $ 9,935 117
======
Less amount representing interest................ (7)
----
Present value of minimum lease payments.......... 110
Less current portion............................. (73)
----
Noncurrent portion............................... $ 37
====
</TABLE>

The Company has entered into a number of research and development alliances
with companies and research institutions. The Company's commitments in aggregate
and under any one of these

F-11
<PAGE> 55

INCYTE PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)

agreements do not represent a significant expenditure in relation to the
Company's total research and development expense. See Note 2 of Notes to
Consolidated Financial Statements.

4. STOCKHOLDERS' EQUITY

Common Stock

At December 31, 1996, the Company had reserved a total of 1,917,315 shares
of its Common Stock for issuance upon exercise of outstanding warrants and stock
options described below. On May 21, 1997, the Company's stockholders approved an
increase in the number of shares of Common Stock authorized for issuance from
20,000,000 to 75,000,000.

Sales of Stock

In November 1995, the Company completed a follow-on public stock offering
and issued 1,837,000 shares of Common Stock, including 137,000 shares issued on
December 13, 1995 upon partial exercise of the underwriters' over-allotment
option, at $19.00 per share before deducting the underwriting discount and
offering expenses.

Warrants

As of December 31, 1996, the Company had outstanding a warrant to purchase
8,868 shares of Common Stock at an exercise price of $10.50 per share. The
warrant was exercised in January 1997.

Stock Compensation Plans

The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its stock compensation plans. Accordingly, no compensation cost
has been recognized for its fixed stock option plans. Had compensation cost for
the Company's two stock-based compensation plans been determined consistent with
FASB Statement No. 123, the Company's pro forma net loss and loss per share in
1995 and 1996 would have been increased to approximately $10.6 million and $10.5
million, or $1.27 per share and $1.03 per share, respectively. The fair value of
the options granted during 1995 and 1996 are estimated at $8.68 and $18.88 per
share, respectively, on the date of grant, using the Black-Scholes
multiple-option pricing model with the following assumptions: dividend yield 0%,
volatility of 55%, risk-free interest rate with an average of 6.68% and 6.10%
for 1995 and 1996, respectively, and an average expected life of 3.25 years.

The effects on pro forma disclosures of applying FASB 123 are not likely to
be representative of the effects on pro forma disclosures of future years. As
FASB 123 is only applicable to options granted after December 31, 1994, the pro
forma effect will not be fully reflected until the year ending December 31,
1998.

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility and option life. Because the Company's employee stock options have
characteristics significantly different from those of traded options, because
changes in the subjective input assumptions can materially affect the fair value
estimate, and because the Company has a relatively limited history with option
behavior, in management's opinion the existing models do not necessarily provide
a reliable single measure of the fair value of its employee stock options.

F-12
<PAGE> 56

INCYTE PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)

Summaries of stock option activity for the Company's two fixed stock option
plans as of December 31, 1995 and 1996, and related information for the years
ended December 31 are included in the plan descriptions below.

1991 Stock Plan

In November 1991, the Board of Directors adopted the 1991 Stock Plan, which
was amended and restated in 1992, 1995, and 1996, for issuance of Common Stock
to employees, consultants, and scientific advisors. Options issued under the
plan shall, at the discretion of the compensation committee of the Board of
Directors, be either incentive stock options or nonstatutory stock options. The
exercise prices of incentive stock options granted under the plan are not less
than the fair market value on the date of the grant, as determined by the Board
of Directors. Options generally vest over approximately four years, pursuant to
a formula determined by the Company's Board of Directors, and expire after ten
years. At December 31, 1996, the Company had reserved 2,000,000 shares of Common
Stock for issuance under the plan. On May 21, 1997, the Company's stockholders
approved an increase in the number of shares of Common Stock reserved for
issuance under the plan from 2,000,000 to 2,400,000.

Activity under the plan was as follows:

<TABLE>
<CAPTION>
SHARES SUBJECT TO
OUTSTANDING OPTIONS
----------------------
WEIGHTED
SHARES AVERAGE
AVAILABLE EXERCISE
FOR GRANT SHARES PRICE
--------- --------- --------
<S> <C> <C> <C>
Balance at December 31, 1993............... 416,750 372,834 $ 2.60
Options granted............................ (310,700) 310,700 $13.28
Options exercised.......................... -- (29,044) $ 0.97
Options canceled........................... 2,782 (2,782) $ 5.67
-------- --------- ------
Balance at December 31, 1994............... 108,832 651,708 $ 7.71
Additional authorization................... 800,000 -- --
Options granted............................ (623,400) 623,400 $18.28
Options exercised.......................... -- (28,815) $ 3.06
Options canceled........................... 9,959 (9,959) $13.02
-------- --------- ------
Balance at December 31, 1995............... 295,391 1,236,334 $13.12
Additional authorization................... 400,000 -- --
Options granted............................ (526,150) 526,150 $39.49
Options exercised.......................... -- (223,278) $ 7.08
Options canceled........................... 70,163 (70,163) $16.76
-------- --------- ------
Balance at December 31, 1996............... 239,404 1,469,043 $23.26
======== ========= ======
</TABLE>

Options to purchase a total of 1,161,137 and 1,457,298 shares at December
31, 1995 and 1996 respectively, were exercisable. Of the shares exercisable,
300,064 and 401,502 shares were vested at December 31, 1995 and 1996,
respectively.

Non-Employee Directors' Stock Option Plan

In August 1993, the Board of Directors approved the 1993 Directors' Stock
Option Plan (the "Directors' Plan"), which was amended in 1995. The Directors'
Plan provides for the automatic grant

F-13
<PAGE> 57

INCYTE PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)

of options to purchase shares of Common Stock to non-employee directors of the
Company. The maximum number of shares issuable under the Directors' Plan is
200,000.

The Directors' Plan provides immediate issuance of options to purchase an
initial 20,000 shares of Common Stock to each new non-employee director joining
the Board. The initial options are exercisable in five equal annual
installments. Additionally, members who continue to serve on the Board will
receive annual option grants for 5,000 shares exercisable in full on the first
anniversary of the date of the grant. All options are exercisable at the fair
market value of the stock on the date of grant. Through December 31, 1996, the
Company had granted options under the Directors' Plan to purchase 113,750 shares
of Common Stock at exercise prices ranging from $4.00 per share to $34.625 per
share (98,750 shares of Common Stock at exercise prices ranging from $4.00 per
share to $15.13 per share at December 31, 1995); 70,750 shares are vested and
exercisable at December 31, 1996 (43,750 shares were vested and exercisable at
December 31, 1995).

The following table summarizes information about stock options outstanding
at December 31, 1996, for both the 1991 Stock Plan and the 1993 Directors' Stock
Option Plan.

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
- ------------------------------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.30-2.00..................... 141,594 6.02 $ 1.53 129,849 $ 1.49
$4.00-10.63.................... 130,017 7.00 $ 6.26 102,017 $ 6.54
$10.88-15.13................... 247,273 8.01 $14.44 247,273 $14.44
$16.88-22.50................... 530,509 8.78 $18.41 530,509 $18.41
$30.25-46.75................... 533,400 9.68 $39.42 518,400 $39.56
--------- ---- ------ --------- ------
$0.30-46.75.................... 1,582,793 8.57 $22.36 1,528,048 $22.71
</TABLE>

In July 1996, in connection with the Genome Systems transaction described
in Note 6 below, the Company issued, in exchange for an option to purchase
capital stock of Genome Systems, an option to purchase 10,741 shares of Common
Stock at an exercise price of $0.047 per share. The option was not issued under
the provisions of either plan described above. The option has been exercised
with respect to 5,370 shares as of December 31, 1996.

Employee Stock Purchase Plan

On May 21, 1997, the Company's stockholders adopted the 1997 Employee Stock
Purchase Plan (the "ESPP"). The Company has authorized 200,000 shares of Common
Stock for issuance under the ESPP. Each regular full-time and part-time employee
is eligible to participate after one year of employment. The initial offering
period commences August 1, 1997 and ends November 1, 1999.

5. INCOME TAXES

As of December 31, 1996, the Company had federal net operating loss
carryforwards of approximately $29,800,000. The net operating loss carryforwards
will expire at various dates, beginning on 2006, through 2011 if not utilized.

F-14
<PAGE> 58

INCYTE PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)

Significant components of the Company's deferred tax assets are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............. $ 9,700 $ 10,100
Research credits............................. 900 1,500
Capitalized research and development......... 1,400 1,600
Other, net..................................... 100 1,500
-------- --------
Deferred tax assets............................ 12,100 14,700
Valuation allowance for deferred tax assets.... (12,100) (14,700)
-------- --------
Net deferred tax asset......................... $ -- $ --
======== ========
</TABLE>

The valuation allowance for deferred tax assets increased by approximately
$4.6 million and $4.1 million during the years ended December 31, 1994 and 1995,
respectively.

Utilization of the net operating losses and credits may be subject to an
annual limitation, due to the ownership change limitations provided by the
Internal Revenue Code of 1986.

The estimated effective annual income tax rate for the three months ended
March 31, 1997 is 5%, which represents the provision for federal and state
alternative minimum taxes after utilization of net operating loss carryforwards.

6. BUSINESS COMBINATIONS

In July 1996, the Company issued 204,073 shares of Common Stock in exchange
for all of the capital stock of Genome Systems, a privately held genomics
company located in St. Louis, Missouri. Genome Systems provides genomic research
products and technical support services to scientists to assist them in the
identification and isolation of novel genes. The merger has been accounted for
as a pooling of interests and, accordingly, the Company's financial statements
and financial data have been restated to include the accounts and operations of
Genome Systems since inception.

The table below presents the separate results of operations for Incyte and
Genome Systems for the periods prior to the merger. Incyte's results of
operations include Genome Systems since the transaction:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1994 1995 1996
-------- -------- -------
<S> <C> <C> <C>
Revenue:
Incyte.................................... $ 243 $ 9,908 $40,051
Genome Systems............................ 1,269 2,304 1,734
-------- -------- -------
$ 1,512 $ 12,212 $41,785
======== ======== =======
Net income (loss):
Incyte.................................... $(11,500) $(10,142) $(6,724)
Genome Systems............................ 25 205 106
Merger related expenses................... -- -- (143)
-------- -------- -------
$(11,475) $ (9,937) $(6,761)
======== ======== =======
</TABLE>

F-15
<PAGE> 59

INCYTE PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)

In August 1996, the Company acquired all the common stock of Combion, Inc.,
a microarray technology company in Pasadena, California, in a stock-for-stock
exchange, issuing 73,171 shares of its Common Stock valued at $3 million. The
acquisition has been accounted for as a purchase transaction and, accordingly,
the purchase price was allocated to assets and liabilities based on the
estimated fair value as of the date of acquisition. The excess of the
consideration paid over the estimated fair value of net assets acquired has been
recorded as the purchase of in-process research and development. Combion's
results of operations have been included in the consolidated results of
operations since the date of acquisition. Pro forma results of operations have
not been presented because the effect of this acquisition was not material to
the Company's consolidated results of operations or financial position.

F-16
<PAGE> 60
Appendix-Description of Graphics

GRAPHIC ON INSIDE FRONT COVER

Computer screen displays of seven of the Company's databases -- LifeSeq
database screen display in center - six screens surrounding center from upper
left hand corner: LifeSeq FL, ZooSeq, PhytoSeq, PathoSeq, LifeSeq Gene
Album and LifeSeq Atlas.

CHART ON PAGE 27-INCYTE'S PRODUCTS

1995 1996 1997
LifeSeq LifeSeq LifeSeq
Satellites------> Satellites Satellites
LifeSeq FL LifeSeq FL
PathoSeq PathoSeq
LifeSeq Atlas LifeSeq Atlas
GeneAlbum GeneAlbum
Life Tools-------> Life Tools
Life Tools 3D
ZooSeq

DIAGRAM ON PAGE 30 UNDER THE CAPTION THE "LIFESEQ DATABASE DATA FLOW"

Arrow from cDNA sequencing production line and public-domain databases
(Wash. U/Merck, GenBank, TIGR) into automated bioanalysis system arrow into
LifeSeq Expression database.

Arrow from LifeSeq Expression database to Sequence database and Sequence
database to/from Search tools (Smith-Waterman, BLAST, GCG, FASTA, etc.)

Arrows from LifeSeq Expression database (HTML interface on client Macs,
PCs, or Unix machines) to Library Information, Clone Information, Electronic
Northern, Transcript Imaging, Library Comparisons, Protein Function

Telephone poles as links between Public-domain databases (Gen Bank, Blocks,
Citation Indices, Swiss Prot, etc.) and UNIX-based server (Sybase or Oracle
RDBMS)

<PAGE> 61

================================================================

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

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 6
Use of Proceeds................................ 15
Price Range of Common Stock.................... 16
Dividend Policy................................ 16
Capitalization................................. 17
Selected Consolidated Financial Data........... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 19
Business....................................... 24
Management..................................... 37
Principal Stockholders......................... 39
Underwriting................................... 41
Legal Matters.................................. 42
Experts........................................ 42
Available Information.......................... 42
Documents Incorporated by Reference............ 43
Index to Consolidated Financial Statements..... F-1

=====================================================
</TABLE>

================================================================

1,200,000 SHARES

INCYTE

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

PROSPECTUS
-----------------------
HAMBRECHT & QUIST

ALEX. BROWN & SONS
INCORPORATED

VECTOR SECURITIES INTERNATIONAL,
INC.
JULY 31, 1997

================================================================