MAGAININ PHARMACEUTICALS INC, S-3/A, 1997-11-10

MAGAININ PHARMACEUTICALS INC
S-3/A, 1997-11-10
BIOLOGICAL PRODUCTS, (NO DIAGNOSTIC SUBSTANCES)

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 10, 1997
REGISTRATION NO. 333-38271
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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MAGAININ PHARMACEUTICALS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 2834 13-3445668
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION NO.) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)

5110 CAMPUS DRIVE
PLYMOUTH MEETING, PA 19462
(610) 941-4020
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

---------------
JAY MOORIN
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
MAGAININ PHARMACEUTICALS INC.
5110 CAMPUS DRIVE
PLYMOUTH MEETING, PA 19462
(610) 941-4020
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

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COPIES OF ALL COMMUNICATIONS TO:
DAVID R. KING JAMES R. TANENBAUM
MORGAN, LEWIS & BOCKIUS LLP STROOCK & STROOCK & LAVAN LLP
2000 ONE LOGAN SQUARE 180 MAIDEN LANE, 35TH FLOOR
PHILADELPHIA, PA 19103-6993 NEW YORK, NY 10038
(215) 963-5000 (212) 806-5400

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

If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]

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

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

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

CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock, $.002 par 2,875,000
value................. shares(1) $9.00(2) $25,875,000(2) $7,840.91(3)
</TABLE>
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(1) Includes 375,000 shares, which may be purchased by the Underwriters to
cover over-allotments, if any.

(2) Based on the average of the reported high and low sales of the Common
Stock reported on the Nasdaq National Market on November 7, 1997,
estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c).

(3) Fee of $9,531.06 previously paid in connection with the filing of the
Company's Registration Statement on Form S-3 on October 20, 1997.

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

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<PAGE>

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

SUBJECT TO COMPLETION, DATED NOVEMBER 10, 1997

PROSPECTUS

2,500,000 SHARES

MAGAININ PHARMACEUTICALS INC.

COMMON STOCK

All of the shares of Common Stock offered hereby are being sold by Magainin
Pharmaceuticals Inc. ("Magainin" or the "Company"). The Company's Common Stock
is quoted on the Nasdaq National Market tier of The Nasdaq Stock Market under
the symbol "MAGN." On November 7, 1997, the last reported sale price of the
Common Stock was $8.875 per share.

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THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 7.

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

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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share.................................... $ $ $
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Total(3)..................................... $ $ $
</TABLE>
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(1) See "Underwriting" for indemnification arrangements with the several
Underwriters

(2) Before deducting expenses payable by the Company estimated at $275,000.

(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 375,000 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 $ , $
and $ , respectively, See "Underwriting."

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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 , 1997 at the office of the agent of Hambrecht &
Quist LLC in New York, New York.

HAMBRECHT & QUIST
BANCAMERICA ROBERTSON STEPHENS
COWEN & COMPANY

, 1997
<PAGE>

AVAILABLE INFORMATION

This Prospectus, which constitutes a part of a Registration Statement on
Form S-3 (the "Registration Statement") filed by the Company with the
Securities and Exchange Commission (the "Commission") under the Securities Act
of 1933, as amended (the "Securities Act") omits certain of the information
set forth in the Registration Statement. Reference is hereby made to the
Registration Statement and to the exhibits thereto for further information
with respect to the Company and the securities offered hereby. Copies of the
Registration Statement and the exhibits thereto are on file at the offices of
the Commission and may be obtained upon payment of the prescribed fee or may
be examined without charge at the public reference facilities of the
Commission described below.

Statements contained herein concerning the provisions of documents are
necessarily summaries of such documents, and each statement is qualified in
its entirety by references to the copy of the applicable document filed with
the Commission.

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 statements and other information with the
Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facility maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the Commission's regional offices located at Seven World Trade Center, New
York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material can be obtained in person from the
Public Reference Section of the Commission at its principal office located at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
Additionally, such material may be obtained at the web site the Commission
maintains at "http://www.sec.gov", which contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. Reports and proxy statements concerning
the Company also may be inspected at the offices of the National Association
of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.

INFORMATION INCORPORATED BY REFERENCE

The following documents heretofore filed by the Company with the Commission
pursuant to the Exchange Act are incorporated herein by reference: (1) Annual
Report on Form 10-K for the year ended December 31, 1996, (2) Quarterly
Reports on Form 10-Q for the quarters ended March 31, 1997, June 30, 1997 and
September 30, 1997, and (3) the description of the Company's Common Stock
which is contained in the Company's Registration Statement on Form 8-A filed
under the Exchange Act on November 7, 1991 and as amended on January 15, 1993,
including any amendment or reports filed for the purpose of updating such
description.

All documents filed by the Company pursuant to section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the offering of the Common Stock hereunder shall be
deemed to be incorporated by reference herein and to be a part hereof from the
date of filing of such reports and documents. The Company will provide without
charge to each person to whom this Prospectus is delivered, a copy of any and
all such documents (exclusive of exhibits unless such exhibits are
specifically incorporated by reference herein), upon written or oral request
to Michael R. Dougherty, Executive Vice President and Chief Financial Officer,
Magainin Pharmaceuticals Inc., 5110 Campus Drive. Plymouth Meeting, PA 19462,
(610)941-5228.

Any statement contained in a document, all or a portion of which is
incorporated by reference herein, shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained or
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.

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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 MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK
ON NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."

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Cytolex(TM) is a registered trademark of the Company. All other brand names
or trademarks appearing in this Prospectus are the property of their
respective holders.

2
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial data appearing elsewhere or incorporated by reference
in this Prospectus. Investment in the securities offered hereby involves a high
degree of risk. See "Risk Factors." Except as otherwise noted, all information
in this Prospectus assumes no exercise of the Underwriters' over-allotment
option. This Prospectus contains forward-looking statements which involve risks
and uncertainties. The Company's actual results may differ significantly from
the results discussed in such forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed in
"Risk Factors," as well as those discussed elsewhere in this Prospectus.

THE COMPANY

Magainin Pharmaceuticals Inc. ("Magainin" or the "Company") is a
biopharmaceutical company engaged in the development of medicines for serious
diseases. The Company's development efforts are focused on anti-infectives,
oncology, and pulmonary and allergic disorders.

Magainin's research and drug development efforts are focused on two
technology platforms:

. Host Defense Drug Discovery--the Company isolates and develops
therapeutically active compounds from the host defense systems of
animals. Magainin peptides represent a new class of antibiotics being
developed for the treatment of infection. The Company's second host
defense class, aminosterols, is a new class of pharmaceuticals which the
Company believes may have multiple applications, including the control
of cell proliferation.

. Asthma Genomics--the Company employs a broad range of genomics
techniques to identify genes associated with the pathogenesis of asthma,
with the objective of utilizing the optimal biologic gene targets in the
development of novel therapeutics for asthma and allergy.

MAGAININ PEPTIDES--CYTOLEX(TM)

The Company's most advanced class of compounds under development are magainin
peptides. Discovered in the skin of the African clawed frog, magainins have
demonstrated broad activity against a variety of pathogens in preclinical
studies. These molecules act by puncturing the membrane of the pathogen cell,
resulting in the death of the pathogen.

The Company's lead product development candidate is Cytolex(TM) (formerly
called MSI-78), a topical cream antibiotic. The Company has completed two
pivotal Phase III clinical trials of Cytolex for the treatment of infection in
diabetic foot ulcers. These studies were designed as equivalence trials, with
the goal of demonstrating that topically applied Cytolex is as effective as
orally administered ofloxacin, a quinolone antibiotic indicated for the
treatment of infection, including skin and soft tissue infections. Company
analyses of the data from the studies showed statistical equivalence between
Cytolex and ofloxacin, with respect to the primary end point of clinical
response of infection at day 10 of treatment, and at subsequent time points
through day 28, and at follow-up. Clinical response rates for both Cytolex and
ofloxacin were between 84% and 89% and between 87% and 93%, at day 10 of
treatment, and at follow-up, respectively. As a secondary endpoint in the
trials, Cytolex and ofloxacin were comparable with respect to overall
assessments of microbiological improvements. The two studies enrolled 926
patients.

Data was also collected on wound healing as part of the studies. At the last
patient visit date, approximately six weeks after treatment was initiated, 18%
to 30% of wounds were resolved. The Company plans to evaluate additional
studies relating to the effect of Cytolex on wound healing.

Analyses of adverse events in the studies suggest a favorable profile for
Cytolex. Both drugs were well tolerated; however, treatment with ofloxacin was
associated with a significant excess of adverse events related to insomnia.

3
<PAGE>

In February 1997, Magainin and SmithKline Beecham ("SB") entered into a
development, supply and distribution agreement pursuant to which SB will market
and sell Cytolex in North America. Under this agreement, SB has paid $10.0
million to the Company, and may make additional payments of up to $22.5 million
upon the occurrence of certain product milestones. SB will also fund a majority
of development expenses for any additional indications for Cytolex.

AMINOSTEROLS--SQUALAMINE

Squalamine is the lead product development candidate in the Company's
aminosterol program. Squalamine was discovered in the body tissues of the
dogfish shark. The shark was initially examined because of its known resistance
to infection and cancer. Since the discovery of squalamine, the Company has
discovered several other aminosterol compounds in the shark. In preclinical
testing conducted to date, certain of these compounds have demonstrated an
ability to control cell growth, along with other pharmacological properties.
These properties may have application in the treatment of disease indications
characterized by cell proliferation, such as cancer.

The Company's initial disease focus for squalamine is solid tumors. The
formation of new blood vessels, or angiogenesis, is believed to be a critical
factor in tumor growth. Squalamine may be of benefit in the treatment of a
number of solid tumors by inhibiting new blood vessel growth required for tumor
nourishment.

In August 1997, the Company submitted an Investigational New Drug Application
("IND"), which is now effective, to begin Phase I clinical testing of
squalamine in patients with advanced malignancy.

ASTHMA GENOMICS

In 1996, Magainin initiated a research program in the genomics of asthma.
These efforts led to the identification of Asthma Associated Factor 1 ("AAF1"),
a gene which varies in DNA structure and function in asthmatic and allergic
humans and animals. The Company maintains a comprehensive research program to
identify additional genes in the AAF1 biologic pathway, which genes are
believed to be important in mediating the allergic responses controlled by
AAF1. Asthma Associated Factor 2 ("AAF2") has been discovered in humans as a
key second gene candidate in the AAF1 pathway, and other genes have also been
identified by the Company. The Company continues to investigate the role of
such genes in the allergic inflammatory response, with the objective of
utilizing the optimal biologic gene targets in the development of novel
therapeutics for asthma and allergy.

Magainin was incorporated in Delaware in June 1987. The Company's offices and
research facility are located at 5110 Campus Drive, Plymouth Meeting, PA 19462,
and its telephone number is (610) 941-4020.

4
<PAGE>

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the 2,500,000 shares
Company..........................
Common Stock to be outstanding
after the offering............... 21,879,607 shares (1)
Use of proceeds................... The Company will use the net proceeds to
fund both ongoing and planned research and
development activities, including continued
manufacturing and development efforts for
Cytolex, activities associated with the
Company's aminosterol and asthma genomics
programs, and working capital to be used
for general corporate purposes.
Nasdaq National Market symbol..... MAGN
</TABLE>
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(1) Based upon the number of shares outstanding as of September 30, 1997.
Excludes 4,492,707 shares issuable upon exercise of options and warrants
outstanding as of September 30, 1997. Of the options to purchase 2,951,072
shares of Common Stock that were outstanding as of September 30, 1997,
options to purchase 1,557,921 shares of Common Stock at a weighted average
exercise price of $3.90 per share were exercisable, and options to purchase
1,393,151 shares of Common Stock at a weighted average exercise price of
$8.72 per share were not exercisable. As of September 30, 1997, warrants to
purchase 1,541,635 shares of Common Stock at a weighted average exercise
price of $8.22 per share were outstanding and exercisable. See
"Capitalization" and "Description of Capital Stock."

5
<PAGE>

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

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- -----------------
1996 1995 1994 1993 1992 1997 1996
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<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Contract and
government grant..... $ 150 $ 2,056 $ 85 $ 273 $ 140 $10,088 $ 112
Related party
contract............. -- 280 326 319 260 -- --
-------- -------- -------- -------- ------- ------- --------
150 2,336 411 592 400 10,088 112
-------- -------- -------- -------- ------- ------- --------
Costs and expenses:
Research and
development.......... 22,326 18,160 11,258 11,455 6,626 16,864 17,870
General and
administrative....... 3,488 3,137 3,468 2,630 2,640 2,475 2,378
Charge for stock
issuance relating to
royalty buyout....... 7,080 -- -- -- -- -- 7,080
-------- -------- -------- -------- ------- ------- --------
32,894 21,297 14,726 14,085 9,266 19,339 27,328
-------- -------- -------- -------- ------- ------- --------
Loss from operations.. (32,744) (18,961) (14,315) (13,493) (8,866) (9,251) (27,216)
Interest income....... 2,172 1,778 1,207 846 494 1,301 1,648
Interest expense...... (48) (32) (48) (64) (87) (73) (18)
-------- -------- -------- -------- ------- ------- --------
Net loss.............. $(30,620) $(17,215) $(13,156) $(12,711) $(8,459) $(8,023) $(25,586)
======== ======== ======== ======== ======= ======= ========
Net loss per share.... $ (1.71) $ (1.17) $ (0.99) $ (1.14) $ (1.20) $ (0.41) $ (1.47)
======== ======== ======== ======== ======= ======= ========
Weighted average
shares outstanding... 17,938 14,696 13,301 11,108 7,076 19,366 17,459
======== ======== ======== ======== ======= ======= ========
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
DECEMBER 31, ------------------------
1996 ACTUAL AS ADJUSTED(1)
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<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and investments.................... $ 33,340 $ 25,129 $ 45,766
Working capital......................... 28,276 20,029 40,666
Total assets............................ 36,376 28,640 49,277
Long-term liabilities................... 915 1,104 1,104
Total liabilities....................... 6,433 6,641 6,641
Accumulated deficit..................... (95,243) (103,266) (103,266)
Stockholders' equity.................... 29,943 21,999 42,636
</TABLE>
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(1) As adjusted to reflect the sale of 2,500,000 shares of Common Stock offered
by the Company hereby at an assumed public offering price of $8.875 per
share and the receipt of the estimated net proceeds therefrom. See "Use of
Proceeds" and "Capitalization".

6
<PAGE>

RISK FACTORS

This Prospectus contains, in addition to historical information, statements
by the Company with regard to its expectations as to financial results and
other aspects of its business that involve risks and uncertainties and may
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements reflect management's
current views and are based on certain assumptions. Actual results could
differ materially from those currently anticipated as a result of a number of
factors, including, but not limited to, the risks and uncertainties discussed
below, as well as those discussed elsewhere in this Prospectus. In addition to
the other information in this Prospectus, prospective investors should
carefully consider the following factors in evaluating the Company and its
business before purchasing any shares of Common Stock offered hereby.

Risks Associated with Clinical Testing and FDA Approval of Cytolex. The
Company has completed two pivotal Phase III clinical trials of Cytolex for the
treatment of infection in diabetic foot ulcers and intends to submit a New
Drug Application ("NDA") to the U.S. Food and Drug Administration (the "FDA")
based on the results of these trials. Although the Company believes the two
pivotal trials conducted for Cytolex yielded successful results, there can be
no assurance that the FDA will concur with the Company's analysis in this
regard. There can be no assurance that the FDA will not, after completing its
own analysis of the two pivotal trials conducted for Cytolex, determine that
such trials should have been conducted or analyzed differently, and thus reach
a different conclusion from that reached by the Company or request that
further studies be conducted. Requiring the Company to conduct additional
studies would have a material adverse effect on the Company, as any such
additional studies would likely be time consuming and expensive.

The clinical trials conducted for Cytolex yielded substantial data. Such
data includes information relating to the primary endpoint for the studies
(clinical cure or improvement of infection), as well as additional data
relating to microbiological results, patient subgroup analysis, wound healing
and side effects. Analyses were also done on various aspects of the data, some
of which yielded results that favored ofloxacin. Additionally, the Company is
continuing its analysis of data from the studies. There can be no assurance
that such continued analysis will yield positive results.

There can be no assurance that Cytolex will receive FDA approval on a timely
basis, if at all. The failure of the Company to obtain FDA approval for
Cytolex, any significant delay in obtaining such approval, or the imposition
of highly restrictive conditions on such approval, would have a material
adverse effect on the Company.

Accumulated Deficit; Continuing Losses. The Company has been engaged to date
primarily in research and development activities and, through September 30,
1997, has generated no revenue from product sales. The Company has incurred
losses in each year since its inception, and at September 30, 1997, had an
accumulated deficit of approximately $103.3 million. There can be no assurance
that the Company will realize product revenues on a timely basis, if at all.
The Company's operations are subject to numerous risks associated with
research and development companies, including a competitive and regulatory
environment in an industry characterized by numerous well-established and
well-capitalized companies and exhaustive and expensive regulatory scrutiny.
The Company will be required to continue to conduct significant research,
development and testing activities which, together with projected general and
administrative expenses, are expected to result in continued substantial
losses for the foreseeable future.

Need for Substantial Additional Funds. The Company will require substantial
additional funds to continue its research and development programs and to
commercialize potential products. The Company may not have sufficient funds to
complete development activities for any of its proposed products, including
Cytolex.

The Company intends to seek additional funding through a combination of
future offerings of securities and collaborative arrangements with third
parties, and regularly explores alternatives in this regard. The

7
<PAGE>

Company does not have any commitments to obtain any additional funds and has
no established banking arrangements through which it can obtain additional
debt financing. There can be no assurance that future funding will be
available to the Company, or, if available, will be obtainable on terms
favorable to the Company. The receipt of funding, if any, from any corporate
partners, including SB, will depend largely on the progress of research and
development programs. Under collaborative arrangements, the Company may convey
marketing, distribution, manufacturing, development or other rights to its
proposed products to pharmaceutical companies in order to receive financial or
other assistance. This will result in lower consideration to the Company upon
commercialization of such products than if no arrangements were entered into
or if such arrangements were entered into at later stages in the product
development process. There can be no assurance that the Company will be able
to enter into such arrangements on favorable terms, if at all.

If the Company does not enter into appropriate collaborations, receive
additional funds from SB under its current agreement, or raise sufficient
funds from the periodic sale of securities, the Company will be required to
delay or eliminate expenditures for potential products, including Cytolex, or
to enter into collaborations with third parties to commercialize potential
products or technologies that the Company would otherwise seek to develop
itself, or seek other arrangements.

Manufacturing Uncertainties; Dependence on Third Parties. The Company does
not have the resources, facilities or capabilities to manufacture any of its
proposed products. The Company has no current plans to establish a
manufacturing facility. The Company expects that it will be dependent to a
significant extent on contract manufacturers for commercial scale
manufacturing of its proposed products in accordance with regulatory
standards. The Company's dependence on third parties for manufacturing may
adversely affect operating results as well as the Company's ability to develop
and deliver products on a timely and competitive basis. Production of peptides
(such as Cytolex and other magainins) is expensive relative to production of
traditional antibiotics. Additionally, there are a limited number of companies
which are currently able to produce bulk peptides on the scale which the
Company expects to require to commercialize Cytolex. There can be no assurance
that qualified outside contractors will be available to manufacture materials
for the Company, or do so at costs which are affordable by the Company.

Contract manufacturers may utilize their own technology, technology
developed by the Company, or technology acquired or licensed from third
parties. When contract manufacturers develop proprietary process technology
and have ownership of the Drug Master File, the Company's reliance on such
contract manufacturer is increased, and the Company may have to obtain a
license from such contract manufacturer to have its products manufactured by
another party. Technology transfer from the original contract manufacturer may
also be required. There can be no assurance that any such license will be
available on terms acceptable to the Company, or, if available, that such
technology will be successfully transferred to the Company. Any such
technology transfer may also require transfer of requisite data for regulatory
purposes, including information contained in a proprietary Drug Master File
held by a contract manufacturer. There can be no assurance that any such
transfer can be completed.

The Company is working with Abbott Laboratories ("Abbott") with regard to
the manufacture of bulk drug substance for Cytolex. The Company's current
arrangement with Abbott provides for cash payments by the Company to Abbott
through early 1998 aggregating approximately $17,180,000, as well as the
issuance by the Company to Abbott of up to 500,000 shares of its Common Stock
and the obligation to pay a royalty on future sales of Cytolex. Through
September 30, 1997, the Company has paid Abbott approximately $14,130,000
under this arrangement. Stock issuances by the Company to Abbott will result
in a charge to earnings, representing the fair value of the shares when
issued. The Company issued 125,000 shares of Common Stock to Abbott in October
1995, resulting in a charge to earnings of $1,250,000 in 1995. Future stock
issuances are related to the achievement by Abbott of contractual performance
milestones which could begin to occur in 1997.

The Company and Abbott have agreed that upon completion of Abbott's
development activities, they will negotiate in good faith a supply agreement
for the Company's worldwide supply needs of bulk drug substance

8
<PAGE>

for Cytolex. Early stage discussions as to supply cost have occurred with
Abbott, and, based on these discussions, the Company believes that further
progress in scale-up and manufacturing development efforts will be required to
enable the Company to manufacture and sell Cytolex on a profitable basis. This
may require substantial additional funds. No assurance can be given that a
cost-effective manufacturing process can ultimately be developed, or that any
such process would be approved by the FDA, or that the Company, Abbott, or
others will be able to manufacture Cytolex on a commercially viable basis. See
"Government Regulation."

The Company is currently dependent upon Abbott for the production of bulk
drug substance for Cytolex. In the event that bulk drug substance for Cytolex
is not manufactured at Abbott, the Company will need to secure other
manufacturing arrangements. The process developed by Abbott is proprietary,
and in the event the Company desires to utilize, or have another party
utilize, such technology, the Company would be required to make license
payments to Abbott. The Company has certain efforts under way with respect to
alternative manufacturing sources, including recombinant manufacturing;
however, these programs are at an early stage, and significant expenditures
over an extended period of time will be required to develop a commercially
viable process, and there can be no assurance that such efforts will be
successful.

The Company also expects to conduct significant manufacturing development
activities for its other products under development. The Company is currently
working with outside contractors for the chemical production of squalamine.
The Company expects to expend significant resources in the production of
squalamine and any other compounds under development, and there can be no
assurance that these efforts will be successful.

Dependence on Sales and Marketing Partners; Marketing Uncertainties. In
order to successfully develop and market its products, it will be necessary
for the Company to enter into marketing, distribution, development or other
arrangements with third parties, granting marketing rights, which may be
exclusive, to potential products. The Company has entered into such an
arrangement with SB with respect to Cytolex in North America, and intends to
seek a sales and marketing collaboration for Cytolex in other territories.
Such sales and marketing arrangements may also involve delegating to the
Company's partner in such collaborations the responsibility for all or a
significant portion of the development and regulatory approval process. In the
event that such collaborators do not develop an approvable or marketable
product or do not market a product successfully, the Company's business will
be adversely affected. There can be no assurance that the Company will be able
to enter into any such arrangements in the future, or that such collaborations
will be successful.

The amount and timing of resources to be devoted to the Company's products
by any of its collaborative partners is not within the control of the Company.
There can be no assurance that the interests of the Company will continue to
coincide with the interests of its collaborators. Collaborators could develop
products independently or through third parties which could compete with the
Company's proposed products. With respect to Cytolex, SB maintains a
significant presence in the antibiotic area, and currently sells a topical
antibiotic product indicated for the treatment of certain skin infections.
Furthermore, SB may unilaterally terminate its agreement with the Company.
There can be no assurance that any of the Company's collaborative agreements
will not be terminated by the Company's collaborators.

For certain products under development, the Company may conduct its own
marketing activities through its own sales force. The Company has no marketing
and sales staff and, although certain members of management have experience in
the marketing of pharmaceutical products, the Company has no experience with
respect to marketing its proposed products. Significant additional
expenditures, management resources and time will be required to develop a
sales force, and there can be no assurance that the Company will be successful
either in developing a sales force or penetrating the markets for any proposed
products it may develop.

Technological Uncertainty and Early Stage of Product Development. There can
be no assurance that the Company's research and development activities will be
successful, that any products under development

9
<PAGE>

will be approved or will be commercially viable and successfully marketed, or
that the Company will ever achieve significant levels of revenue or profits.
In addition, the Company may encounter unanticipated problems, including
development, regulatory, manufacturing and marketing difficulties, some of
which may be beyond the Company's ability to resolve.

There has been only limited research in the area of the use of naturally
occurring host defense compounds for the treatment of infectious and other
diseases. The Company has submitted an IND application to the FDA, to obtain
authorization for human testing, for only two compounds, Cytolex and
Squalamine. The Company's research activities in asthma have only recently
been initiated, and there can be no assurance that any product candidates will
result from these efforts. Additionally, there can be no assurance that
results obtained in preclinical studies will be indicative of results that
will be obtained in human clinical testing.

The Company's proposed products are in the developmental stage, require
significant further research, development, testing and regulatory approvals
and are subject to the risks of failure inherent in the development of all
pharmaceutical products. These risks include the possibilities that any or all
of the proposed products are found to be ineffective or toxic, or otherwise
fail to receive necessary regulatory approvals, that the proposed products,
although effective, are uneconomical to manufacture or to market, that third
parties hold proprietary rights that preclude the Company from marketing any
products, or that third parties market superior or equivalent products.

No Assurance of Market Acceptance of Cytolex. Even if the requisite
regulatory approvals for Cytolex are obtained, there is no assurance that such
product would be accepted in the United States or foreign markets. A number of
factors may affect the rate and overall market acceptance of Cytolex,
including the perception by physicians and other members of the health care
community of the safety and efficacy of Cytolex on an absolute basis or in
comparison to other drugs, the price of Cytolex relative to other drugs or
competing treatment modalities, the availability of third-party reimbursement,
and the effectiveness of the sales and marketing efforts by SB and the Company
relative to the sales and marketing efforts of competitors. In addition, side
effects or unfavorable publicity concerning Cytolex or comparable drugs on the
market could have an adverse effect on the Company's ability to obtain
physician, patient or third-party payor acceptance.

Government Regulation. The production and marketing of the Company's
products and its research and development activities are subject to regulation
by numerous governmental authorities in the United States and other countries.
In the United States, drug products are subject to rigorous review by the FDA.
The Federal Food, Drug, and Cosmetic Act and other federal statutes and
regulations govern or influence the testing, manufacture, safety, efficacy,
labeling, storage, recordkeeping, approval, advertising, promotion and
distribution of such products. Noncompliance with applicable requirements can
result in Warning Letters, fines, recall or seizure of products, refusal of
the government to approve marketing applications or to allow the Company to
enter into government supply contracts, the withdrawal of previously approved
new drug applications and criminal prosecution.

In order to obtain FDA approval to market a new drug product, the Company
must submit proof of safety, efficacy and quality. Such proof entails
extensive and time consuming preclinical and clinical testing. The results of
preclinical studies are submitted to the FDA as part of an IND. Once the IND
is effective, human clinical trials may be conducted. The results of the
clinical trials are submitted to the FDA as part of an NDA.

Any contract manufacturers that the Company may use must adhere to the Good
Manufacturing Practices prescribed by the FDA. Drug manufacturing facilities
must pass a plant inspection before the FDA will issue approval to market a
new drug product. Detailed manufacturing information is also required to be
submitted for review and approval by the FDA. Among other things, the Company
must submit data indicating that the drug product can be consistently
manufactured at the same quality standard, that the drug product is stable
over time, and that the level of chemical impurities in the drug product is
under specified

10
<PAGE>

levels. Peptides are an especially difficult compound to manufacture at these
standards, particularly in the quantities at which Cytolex will be required to
be manufactured. There can be no assurance that the manufacturing information
submitted for Cytolex, or other products under development, will be sufficient
for approval by the FDA.

Following extensive review of the NDA, the FDA may grant marketing approval,
require additional testing or information, or deny the application. Sales of a
new drug may commence following FDA approval of an NDA and satisfactory
completion of a pre-approval inspection of the manufacturing facility,
including a review of pertinent production records. If there are any
modifications to the drug, including any changes in indication, manufacturing
process, labeling or manufacturing facility, an NDA supplement may be required
to be submitted to the FDA. The FDA may also require post-marketing testing
and surveillance to monitor the effects of approved products or place
conditions on any approvals that could restrict the commercial applications of
such products. Product approvals may be withdrawn if compliance with
regulatory standards is not maintained or if problems concerning safety,
efficacy or quality of the product occur following approval.

Continued compliance with all FDA requirements and the conditions in an
approved application, including those concerning product specifications,
manufacturing process, validation, labeling, promotional material,
recordkeeping and reporting, is necessary for all approved drug products.
Failure to comply could result in Warning Letters, product recall or other
FDA-initiated actions, which could delay further marketing until the products
are brought into compliance.

In October 1992, the Prescription Drug User Fee Act of 1992 ("PDUFA") was
enacted, imposing substantial fees on a one-time basis for applications for
approval, and on an annual basis for manufacturing and marketing, of
prescription drugs. Legislation reauthorizing PDUFA is currently pending in
Congress and it is anticipated that such fees will continue and may increase
in the future.

The Company is also subject to regulation by other regulatory authorities,
including the Occupational Safety and Health Administration, the Environmental
Protection Agency, the Nuclear Regulatory Commission, the Drug Enforcement
Agency and the United States Department of Agriculture, and to regulation
under the Toxic Substances Control Act, the Resource Conservation and Recovery
Act and other regulatory statutes, and may in the future be subject to
additional federal, state or local regulations. These agencies may promulgate
regulations that affect the Company's research and development programs.

Sales of pharmaceutical products outside the United States are subject to
foreign regulatory requirements that vary widely from country to country.
Whether or not FDA approval has been obtained, approval of a product by
comparable regulatory authorities of foreign countries must be obtained prior
to the commencement of marketing the product in those countries. The time
required to obtain such approvals may be longer or shorter than that required
for FDA approval.

There can be no assurance that any required FDA or other governmental
approval will be granted, or if granted, will not be withdrawn. Governmental
regulation may prevent or substantially delay the marketing of the Company's
proposed products, cause the Company to undertake costly procedures, and
furnish a competitive advantage to the more substantially capitalized
companies with which the Company competes. In addition, the extent of
potentially adverse government regulations which might arise from future
administrative action or legislation cannot be predicted. Efforts are
currently underway in the U.S. Congress to reform federal regulation of drug
and biological products. The reform provisions, when and if implemented, could
modify a number of existing legal requirements and standards and create new
legal requirements and standards. Although certain of these provisions, if
implemented, could streamline and otherwise benefit development, marketing and
related requirements for drugs and biologics, others could increase regulatory
requirements or otherwise materially adversely affect the Company.

Competition. The pharmaceutical industry is characterized by intense
competition. Many companies, research institutions and universities are
working in a number of areas similar to the Company's field of interest. The
Company is aware that research is being conducted by others in connection with
compounds

11
<PAGE>

derived from the host defense systems of various animals. Additionally, many
companies are involved in research and development activities focused on the
pathogenesis of disease, and competition among companies attempting to find
genes responsible for disease is intense. Furthermore, many companies are
engaged in the development and sale of products, such as traditional
antibiotics, which may be, or are, competitive with the Company's proposed
products. Most of these entities have substantially greater financial,
technical, manufacturing, marketing, distribution and other resources than the
Company. The Company's proposed products will also be subject to competition
from products using techniques other than those developed by the Company or
based on advances that may render the Company's products obsolete.

The Company expects technological developments in the biopharmaceutical
field to occur at a rapid rate and expects competition to intensify as
advances in this field are made. Accordingly, the Company will be required to
continue to devote substantial resources and efforts to research and
development activities in order to maintain a competitive position in this
field. Compounds, products or processes developed by the Company may become
obsolete before the Company is able to recover a significant portion of its
research and development expenses. The Company will be competing with respect
to its proposed products with companies that have significantly more
experience in undertaking preclinical testing and human clinical trials of new
or improved therapeutic products and obtaining regulatory approvals of such
products. Some of these companies may be in advanced phases of clinical
testing of various drugs that may be competitive with the Company's proposed
products.

Colleges, universities, governmental agencies and other public and private
research organizations are becoming more active in seeking patent protection
and licensing arrangements to collect royalties for use of technology that
they have developed, some of which may be directly competitive with that of
the Company. In addition, these institutions, along with pharmaceutical and
specialized biotechnology companies, can be expected to compete with the
Company in recruiting highly qualified scientific personnel.

As to the disease areas being targeted by the Company, there can be no
assurance that Cytolex will be successfully marketed against oral antibiotics
for the treatment of infection in diabetic foot ulcers. These infections have
historically been treated with systemically administered antibiotics, such as
ofloxacin, which may be perceived by some medical professionals as having
certain advantages over Cytolex. There also can be no assurance that Cytolex
can be manufactured at a cost which will allow it to be sold at a competitive
price relative to oral antibiotics, or other topical antibiotics that may be
used for this indication. Significant efforts are underway by many companies
in the development and marketing of products intended for the additional
disease areas being targeted by the Company, including cancer and asthma. A
number of major pharmaceutical companies have significant franchises in these
disease areas, and can be expected to invest heavily to protect these
interests. In the cancer field, anti-angiogenic agents are under development
at a number of companies. In the asthma field, other biopharmaceutical
companies have also reported the discovery of genes relating to asthma.

Uncertainties Relating to Patents and Proprietary Rights. The Company's
success will depend in part upon its ability to obtain patent protection for
compounds, uses of compounds, and processes. Patent matters involve complex
legal and factual issues, and can be highly uncertain. Host defense compounds
can be isolated from a wide variety of sources, and it is not possible for the
Company or any other entity to have proprietary rights to all such compounds
or their uses. Additionally, chemical entities that are similar to, but not
identical with, the Company's compounds, may not be protected by issued
patents of the Company. In the genomics area, a number of companies are
attempting to identify rapidly and patent genes whose functions have not been
characterized. Additional companies are seeking to patent fully characterized
genes. The criteria for obtaining patent protection for genes is unclear and
the impact of this uncertainty on the Company's business cannot be determined.

12
<PAGE>

now pending or filed in the future will result in patents being issued or that
any patents now held by or licensed to the Company, or issued or licensed to
the Company in the future, will afford any competitive advantages for the
Company, or will not be challenged by third parties. The cost of litigation to
uphold the validity and prevent infringement of patents and to enforce
licensing rights can be substantial. Furthermore, there can be no assurance
that others will not independently develop similar technologies or duplicate
the technology owned by or licensed to the Company, or design around the
patented aspects of such technology. In addition, there can be no assurance
that the products and technologies the Company will seek to market will not
infringe patents or other rights owned by others, licenses to which may not be
available to the Company.

The Company also relies upon unpatented proprietary technology, and may
determine in appropriate circumstances that its interest would be better
served by reliance on trade secrets or confidentiality agreements rather than
patents. There can be no assurance that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to such proprietary technology or that the Company can
meaningfully protect its rights in such unpatented proprietary technology.
Additionally, if the Company is unable to obtain strong proprietary rights
protection of its products after obtaining regulatory clearance, competitors
may be able to market competing products by obtaining regulatory clearance,
through showing equivalency to the Company's product, without being required
to conduct the lengthy, clinical tests required to be conducted by the
Company.

Virtually all of the Company's key scientists worked at other biotech or
pharmaceutical companies or at universities and research institutions before
joining the Company. Disputes may arise as to whether technology developed by
such scientists while employed by or associated with the Company was first
discovered when they were employed by or associated with others in a manner
that would give third parties rights to such technology superior to the
rights, if any, of the Company. Disputes of this nature have occurred in the
past, and are expected to continue to arise in the future, and there can be no
assurance that the Company will prevail in any such disputes.

To the extent that consultants, vendors or other third parties apply
technological information independently developed by them or by others to the
Company's proposed products, disputes may arise as to the proprietary rights
to such information, which may not be resolved in favor of the Company.
Members of the Company's Scientific Advisory Board and other consultants are
employed by or have consulting agreements with third parties, and any
inventions discovered by such individuals are not likely to become the
property of the Company.

The Company has rights under license agreements to certain patents and
patent applications under which the Company expects to owe royalties on sales
of any products which are covered by issued patent claims. Additionally,
certain of these agreements also provide that if the Company elects not to
pursue the commercial development of any licensed technology, or does not
adhere to an acceptable schedule of commercialization, then the Company's
exclusive rights to such technology would terminate.

Dependence on Key Personnel. The Company depends to a considerable degree on
a limited number of key personnel. Due to the Company's limited number of
employees, many key responsibilities within the Company have been assigned to
a relatively small number of individuals. The Company does not maintain "key
man" insurance on any of its employees. The loss of certain senior management
could adversely affect the business of the Company. The success of the Company
will depend, among other factors, upon the successful recruitment and
retention of qualified personnel.

Product Liability and Insurance Risks. Before obtaining required regulatory
approvals for the commercial sale of products, the Company must demonstrate
through human clinical testing that such products are safe and efficacious for
use in each target indication. The administration of any product being
developed by the Company could produce undesirable side effects in humans. The
Company carries limited clinical trial insurance, and there can be no
assurance that such coverage is adequate.

13
<PAGE>

In addition, in the event the Company successfully develops any products,
the marketing of such products could expose the Company to product liability
claims. Certain agreements require the Company to maintain insurance coverage
naming third parties as additional insureds at such time as any related
products may be marketed. There can be no assurance that the Company will be
able to obtain such insurance or that such insurance can be maintained in
sufficient amounts to protect the Company against such liabilities or at a
reasonable cost. Certain arrangements also require the Company to indemnify
third parties with whom the Company has entered into contractual arrangements
against any liabilities that may arise in connection with such third party's
activities on behalf of the Company.

In the event of an uninsured or inadequately insured claim, the Company's
business and financial condition could be materially adversely affected.

Uncertainty Related to Reimbursement Policies; Health Care
Reform. Successful commercialization of Cytolex and the Company's other
potential products will be dependent in part on the coverage and reimbursement
of such products from third-party payors, such as government authorities,
private health insurers and other organizations, such as managed care
organizations. There can be no assurance that such coverage and reimbursement
will be available or, if available, will be in adequate amounts.

The revenues and profitability of pharmaceutical companies can be
significantly affected by the efforts of governmental and third-party payors
to contain or reduce the cost of health care through various means. For
example, in the United States, pricing of prescription pharmaceutical products
has been impacted by the efforts of managed care organizations and other
third-party payors, and, in certain foreign markets, pricing of prescription
pharmaceutical products is subject to government control. Government and
third-party payors have also taken more aggressive steps to limit the
availability of new and often more costly therapeutics especially where they
believe that the incremental therapeutic benefit is not justified by the
additional cost. All of these trends are expected to continue in the future.

Various proposals have been put forth to reform the current health care
system in the United States. Additionally, several states have enacted
modifications to the current health care system to both improve access and
control costs. Such reform measures could adversely affect the amount of
reimbursement available from governmental agencies or third party insurers, or
could affect the ability to set prices for newly approved therapeutic
products. Similar proposals are being considered by governmental officials in
other significant pharmaceutical markets, including Europe.

The Company cannot predict if such reforms will be implemented or the effect
any such reforms might have on the Company's business, and no assurance can be
given that any such reforms will not have an adverse effect on the Company's
business. In particular, it is possible that any such reform could impact the
manner in which drugs or therapies are marketed and could include restrictions
on the ability of pharmaceutical and biotechnology companies to price drugs or
therapies, which in turn could impact the ability of biotechnology companies
such as the Company to obtain financing for the continued development of
potential products. Furthermore, any such reform could also impose limits on
the overall growth of health care spending, as well as limits on the growth of
Medicare and Medicaid spending, all of which could have an adverse effect on
the Company.

Possible Volatility of Stock Price. The market prices for securities of
emerging and biotechnology companies, including the Company, have historically
been highly volatile. Future events concerning the Company or its competitors,
including product testing results, technological innovations, new commercial
products, government regulations, proprietary rights, regulatory actions,
litigation and other matters, may have a significant impact on the market
price of the Common Stock.

Effect of Exercise of Options and Warrants, and Other Issuance of Shares. As
of September 30, 1997, the Company had outstanding options to purchase an
aggregate of 2,951,072 shares at prices ranging from $.002 per share to $16.75
per share, of which approximately 1,557,921 were exercisable as of such date.
Also

14
<PAGE>

outstanding at September 30, 1997 were warrants to purchase 229,739 shares of
the Company's Common Stock exercisable at $8 per share, a warrant to purchase
300,000 shares of the Company's Common Stock, exercisable at $7.50 per share,
and warrants to purchase an aggregate of 1,011,896 shares of the Company's
Common Stock, exercisable at $8.48 per share, subject to adjustment. In
addition, the Company is giving consideration to adopting a new equity
compensation plan, subject to shareholder approval at its next annual meeting
of shareholders. Exercise of options and warrants at prices below the market
price of the Company's Common Stock could adversely affect the price of the
Company's Common Stock. Additional dilution may result from the issuance of
shares in connection with collaborations or manufacturing arrangements, or in
connection with other financings. See "Risk Factors--Need for Substantial
Additional Funds."

Dilution. Upon completion of this offering, purchasers of Common Stock in
this offering will incur immediate dilution of $6.93 in the per share net
tangible book value of their Common Stock from the assumed public offering
price of $8.875 per share.

15
<PAGE>

USE OF PROCEEDS

Assuming an offering price of $8.875 per share, the net proceeds to the
Company from the sale of 2,500,000 shares of Common Stock offered hereby will
be approximately $20,637,000 (or $23,773,000 if the Underwriters'
overallotment option is exercised in full). The Company intends to use the net
proceeds to fund both ongoing and planned research and development activities,
including continued manufacturing and development efforts for Cytolex,
activities associated with the Company's aminosterol and asthma genomics
programs, and working capital to be used for general corporate purposes.

Proceeds may also be used to acquire businesses, technologies or other
products that complement the business of the Company. The Company has no
current commitments or agreements for material transactions of this nature.

Pending the application of funds to such uses, the Company intends to invest
the net proceeds of this offering in U.S. government and other investment
grade securities. The Company intends to invest and use the net proceeds of
the offering so as not to be considered an investment company under the
Investment Company Act of 1940.
PRICE RANGE OF COMMON STOCK

The Common Stock of the Company is traded publicly on the Nasdaq National
Market under the symbol MAGN. The following table sets forth for the periods
indicated the high and low daily closing prices for the Common Stock:

<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1995
1st Quarter................................................ $ 5.25 $ 2.50
2nd Quarter................................................ 6.88 3.38
3rd Quarter................................................ 11.25 6.50
4th Quarter................................................ 13.13 7.75
YEAR ENDED DECEMBER 31, 1996
1st Quarter................................................ 15.13 10.25
2nd Quarter................................................ 12.88 8.38
3rd Quarter................................................ 12.88 7.50
4th Quarter................................................ 12.13 7.38
YEAR ENDING DECEMBER 31, 1997
1st Quarter................................................ 10.50 7.88
2nd Quarter................................................ 8.44 6.63
3rd Quarter................................................ 11.81 7.25
4th Quarter (through November 7, 1997)..................... 12.13 7.94
</TABLE>

On November 7, 1997, the reported last sale price for the Common Stock as
reported on the Nasdaq National Market was $8.875 per share. As of November 7,
1997 there were 339 holders of record of the Common Stock.

DIVIDEND POLICY

The Company has not declared or paid any dividends on its capital stock. The
Company currently anticipates that it will retain all future earnings for use
in its business and does not anticipate paying any cash dividends in the
foreseeable future.

16
<PAGE>

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
September 30, 1997 (i) on an actual basis and (ii) as adjusted to give effect
to the sale by the Company of the 2,500,000 shares of Common Stock offered
hereby at an assumed offering price of $8.875 per share and the application of
the estimated proceeds therefrom. This table should be read in conjunction
with the Financial Statements of the Company and the Notes thereto included in
this Prospectus.

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Note payable--long-term.................................. $ 1,000 $ 1,000
-------- --------
Stockholders' equity:
Preferred stock, $.001 par value; 9,211,000 shares
authorized;
no shares issued or outstanding....................... -- --
Common Stock, $.002 par value; 45,000,000 shares
authorized;
19,379,607 shares outstanding, actual; and 21,879,607
shares
outstanding, as adjusted(1)........................... 39 44
Additional paid-in capital............................. 125,209 145,841
Accumulated deficit.................................... (103,266) (103,266)
Unrealized gain on investments......................... 17 17
-------- --------
Total stockholders' equity........................... 21,999 42,636
-------- --------
Total capitalization................................ $ 22,999 $ 43,636
======== ========
</TABLE>
- ---------------------
(1) Excludes 4,492,707 shares issuable upon exercise of options and warrants
outstanding as of September 30, 1997. Of the options to purchase 2,951,072
shares of Common Stock that were outstanding as of September 30, 1997,
options to purchase 1,557,921 shares of Common Stock at a weighted average
exercise price of $3.90 per share were exercisable, and options to
purchase 1,393,151 shares of Common Stock at a weighted average exercise
price of $8.72 per share were not exercisable. As of September 30, 1997,
warrants to purchase 1,541,635 shares of Common Stock at a weighted
average exercise price of $8.22 per share were outstanding and
exercisable. The number of shares issuable upon the exercise of certain of
these warrants and the exercise price for such shares are subject to
adjustment under certain circumstances. See "Description of Capital
Stock."

DILUTION

The net tangible book value of the Company at September 30, 1997 was
approximately $21,999,000 or $1.14 per share. "Net tangible book value" per
share of Common Stock represents the total tangible assets of the Company
reduced by the total liabilities of the Company and divided by the number of
shares of Common Stock outstanding. Assuming completion of this offering at an
offering price of $8.875 per share, the adjusted net tangible book value of
the Company as of September 30, 1997 would have been approximately $42,636,000
or $1.95 per share. The increase in net tangible book value of $0.81 per share
would be due solely to the purchase of the shares in this offering. Purchasers
in this offering will immediately incur dilution of $6.93 per share assuming
an offering price of $8.875 per share. "Dilution" is determined by subtracting
net tangible book value per share after the offering from the offering price.

17
<PAGE>

SELECTED FINANCIAL DATA

The following selected financial data as of December 31, 1996 and 1995 and
for each of the three years in the period ended December 31, 1996 are derived
from the Company's financial statements which have been audited by Richard A.
Eisner & Company, LLP, independent auditors, which are included and
incorporated by reference in this Prospectus. The selected financial data set
forth as of December 31, 1994, 1993 and 1992, and for the years ended 1993 and
1992 are derived from audited financial statements not included or
incorporated by reference in this Prospectus. The unaudited financial data as
of September 30, 1997 and for the nine months ended September 30, 1997 and
1996 have been prepared on a basis consistent with the audited financial
statements and, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the financial condition and results of operations for the periods presented.
The results for the nine months ended September 30, 1997 are not necessarily
indicative of the results that may be expected for the year ending December
31, 1997. This data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in this Prospectus, and the financial statements and related notes
included in the Company's Reports on Form 10-K and Form 10-Q which are
incorporated by reference in this Prospectus.

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------ ------------------
1996 1995 1994 1993 1992 1997 1996
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Contract and
government grant... $ 150 $ 2,056 $ 85 $ 273 $ 140 $10,088 $ 112
Related party
contract........... -- 280 326 319 260 -- --
-------- -------- -------- -------- -------- -------- --------
150 2,336 411 592 400 10,088 112
-------- -------- -------- -------- -------- -------- --------
Costs and expenses:
Research and
development........ 22,326 18,160 11,258 11,455 6,626 16,864 17,870
General and
administrative..... 3,488 3,137 3,468 2,630 2,640 2,475 2,378
Charge for stock
issuance relating
to royalty buyout.. 7,080 -- -- -- -- -- 7,080
-------- -------- -------- -------- -------- -------- --------
32,894 21,297 14,726 14,085 9,266 19,339 27,328
-------- -------- -------- -------- -------- -------- --------
Loss from operations.. (32,744) (18,961) (14,315) (13,493) (8,866) (9,251) (27,216)
Interest income....... 2,172 1,778 1,207 846 494 1,301 1,648
Interest expense...... (48) (32) (48) (64) (87) (73) (18)
-------- -------- -------- -------- -------- -------- --------
Net loss.............. $(30,620) $(17,215) $(13,156) $(12,711) $ (8,459) $ (8,023) $(25,586)
======== ======== ======== ======== ======== ======== ========
Net loss per share.... $ (1.71) $ (1.17) $ (0.99) $ (1.14) $ (1.20) $ (0.41) $ (1.47)
======== ======== ======== ======== ======== ======== ========
Weighted average
shares outstanding... 17,938 14,696 13,301 11,108 7,076 19,366 17,459
<CAPTION>
DECEMBER 31,
------------------------------------------------ SEPTEMBER 30,
1996 1995 1994 1993 1992 1997
-------- -------- -------- -------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and investments.. $ 33,340 $ 43,666 $ 25,921 $ 38,303 $ 8,915 $ 25,129
Working capital....... 28,276 30,429 21,750 30,621 8,536 20,029
Total assets.......... 36,376 45,727 28,050 40,460 11,162 28,640
Long-term liabili-
ties................. 915 304 460 299 471 1,104
Total liabilities..... 6,433 4,534 4,137 3,451 982 6,641
Accumulated deficit... (95,243) (64,623) (47,408) (34,252) (21,541) (103,266)
Stockholders' equity.. 29,943 41,193 23,913 37,009 10,180 21,999
</TABLE>

18
<PAGE>

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

The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the Company's Financial Statements and Notes
thereto included elsewhere in this Prospectus. Except for the historical
information contained herein, the discussion in this Prospectus contains
certain forward-looking statements that involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations and intentions.
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. The Company's actual results could differ materially from
those discussed here. Factors that could cause or contribute to such
differences include those discussed in "Risk Factors," as well as those
discussed elsewhere herein.

GENERAL

The Company is a biopharmaceutical company engaged in the development of
medicines for serious diseases. The Company has completed two pivotal Phase
III clinical trials for its lead product development candidate, Cytolex, a
topical cream antibiotic intended for the treatment of infection in diabetic
foot ulcers. The Company is also conducting preclinical research on an
aminosterol class of compounds. One such compound, squalamine, is being
evaluated in cancer. The Company's newest research efforts are in the genomics
of asthma.

Since commencing operations in 1988, the Company has not generated any sales
revenue. The Company has funded operations primarily from the proceeds of
public and private placements of securities. The Company has incurred net
losses in each year since its inception, and expects to incur substantial
additional losses for the next several years. The Company expects that losses
will fluctuate from quarter to quarter, and that such fluctuations may be
substantial. At September 30, 1997, the Company's accumulated deficit was
approximately $103,266,000.

REVENUES

The Company has received no revenue from product sales. Revenues recorded to
date have consisted principally of revenues recognized under collaborations
with corporate partners, and pursuant to Small Business Innovation Research
("SBIR") grants. Contract revenues of $150,000 in 1996 consist of payments
under a collaborative arrangement with Abbott in the nutritional field. The
Company recorded revenues of $1,900,000 in 1995 relating to the execution of
an Agreement in Principle with Fisons plc in September 1995, and the
termination of this arrangement in November 1995. Related party contract
revenue consisted of funding received from Colgate-Palmolive Company pursuant
to an oral health care collaboration which concluded in January 1996.
Government grant revenues resulted from a $500,000 SBIR grant to develop a
treatment for certain gastrointestinal ailments, which ended during 1994.

For the nine month period ended September 30, 1997, the Company recorded
revenues of $10,000,000 reflecting the receipt of payments under the
development, supply and distribution agreement entered into in February, 1997
with SB for Cytolex. The Company also recorded revenues of $88,000 and
$112,000 in the nine month periods ended September 30, 1997 and 1996,
respectively, in connection with the collaborative arrangement with Abbott in
the nutritional field.

The Company does not expect to realize additional milestone revenues from
its arrangement with SB until FDA approval of Cytolex. However, there can be
no assurance that Cytolex will be approved by the FDA. The Company has no
other currently existing collaborations which will result in the realization
of research and development revenues.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses increased on an annual basis from 1994
through 1996 principally as a result of increases in clinical and preclinical
testing, manufacturing development expenses, personnel costs,

19
<PAGE>

and laboratory supplies. In particular, these increases have been related to
increasing costs associated with the Company's lead product candidate,
Cytolex. Expenses have also increased due to preclinical activities associated
with the Company's other research and development programs, including its
aminosterol and asthma genomics programs.

Research and development expenses decreased in the nine month period ended
September 30, 1997 as compared to the same period a year ago, due principally
to the completion of clinical testing of Cytolex in early 1997, partially
offset by an increase in preclinical development activities.

Significant development work is necessary to scale-up the manufacturing
process for the Company's products to those levels necessary for a profitable
commercial product. The Company contracts with third parties for these
manufacturing development activities, and for the procurement of material for
clinical and preclinical testing, and such expenses, including those for
Cytolex, amounted to $9,557,000, $7,652,000 and $3,620,000 in 1996, 1995 and
1994, respectively, and $6,720,000 and $6,470,000 for the nine month periods
ended September 30, 1997 and 1996, respectively.

The Company is working with Abbott with regard to the manufacture of bulk
drug substance for Cytolex. The Company's current arrangement with Abbott
provides for the development by Abbott of a solution phase chemical process to
manufacture bulk drug substance for Cytolex on a commercial scale, for the
production of bulk drug substance for Cytolex for development purposes, and
for Abbott to perform those activities necessary to submit a Drug Master File
to the FDA in support of any filing for marketing approval of Cytolex. This
arrangement provides for cash payments by the Company to Abbott through early
1998 aggregating approximately $17,180,000, as well as the issuance by the
Company to Abbott of up to 500,000 shares of its Common Stock and the
obligation to pay a royalty on future sales of Cytolex. Through September 30,
1997, the Company has paid Abbott approximately $14,130,000 under this
arrangement. Stock issuances by the Company to Abbott will result in a charge
to earnings, representing the fair value of the shares when issued. The
Company issued 125,000 shares of Common Stock to Abbott in October 1995,
resulting in a charge to earnings of $1,250,000 in 1995. Future stock
issuances are related to the achievement by Abbott of contractual performance
milestones, which could begin to occur in 1997. See "Risk Factors--
Manufacturing Uncertainties; Dependence on Third Parties."

The Company contracts with third parties to conduct its clinical trial
programs. In 1994, the Company initiated a pivotal clinical trial of Cytolex
for the treatment of infection in diabetic foot ulcers, and a second such
trial was initiated in August 1995. Such clinical trial costs amounted to
$4,005,000, $5,172,000 and $1,570,000 in 1996, 1995 and 1994, respectively,
and $651,000 and $4,005,000 in the nine month periods ended September 30, 1997
and 1996, respectively.

In September 1996, the Company announced results of its initial pivotal
trial of Cytolex for the treatment of infection in diabetic foot ulcers, and
in March 1997 the Company reported results from a second such pivotal trial.
The clinical trials conducted for Cytolex yielded substantial data. Such data
includes information relating to the primary endpoint for the studies
(clinical cure or improvement of infection), as well as additional data
relating to microbiological results, patient subgroup analysis, wound healing
and side effects. Although the Company believes the two pivotal trials of
Cytolex yielded successful results, there can be no assurance that the FDA
will concur with the Company's analysis in this regard.

The level of research and development expenses in future periods will depend
upon the success of the Cytolex development program, and the progress of other
research programs at the Company. Expenses relating to the development of
Cytolex are expected to continue to be significant in future periods
principally

20
<PAGE>

as a result of the Company's ongoing manufacturing development program,
partially offset by a decline in clinical trial costs related to Cytolex. The
Company also expects, in future periods, increased development expenses
relating to its aminosterol and asthma genomics programs.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses have consisted principally of personnel
costs and professional fees, and have fluctuated year to year from 1994
through 1996 due largely to changes in professional fees expense. General and
administrative expenses increased in the nine month period ended September 30,
1997 due to increases in professional fees expense. The Company expects
general and administrative expenses to increase in future periods as the
Company's level of activities increases.

OTHER EXPENSES/INCOME

The Company recorded in 1996 a non-cash charge to earnings of $7,080,000
representing the fair value of 550,000 shares of Common Stock issued by the
Company in a buyout of royalties which the Company would otherwise have owed
on any sales of Cytolex.

The increases in interest income from 1994 through 1996 are due principally
to increasing investment balances and higher prevailing interest rates. The
decrease in interest income in the nine month period ended September 30, 1997
as compared to the same period a year ago is principally due to decreased
investment balances.

Interest expense consists primarily of interest under the Company's credit
facilities, and the interest component of capital equipment leases. In late
1996 and early 1997, the Company borrowed $1,500,000 under its credit
facilities, resulting in increased interest expense in the nine month period
ended September 30, 1997 as compared to the same period a year ago.

NET LOSS

The Company expects to conduct, over the next several years, significant
research, preclinical development, clinical testing and manufacturing
development activities which, together with projected general and
administrative expenses, are expected to result in continued losses,
particularly due to the extended time period before the Company expects to
commercialize any products.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Cash and investments were approximately $25,129,000 at September 30, 1997 as
compared to $33,340,000 at December 31, 1996. The primary use of cash was to
finance the Company's operations. Cash used in operating activities was
$7,487,000 and $15,115,000 for the nine months ended September 30, 1997 and
1996, respectively, and $21,831,000, $14,953,000 and $11,741,000 in 1996, 1995
and 1994, respectively.

Since inception, the Company has funded its operations primarily from the
proceeds of public and private placements of securities, including $17,080,000
raised from its initial public offering in December 1991, $21,469,000 raised
from a public offering completed in February 1993, $18,023,000 raised from a
private placement completed in October 1993, $32,627,000 raised from a public
offering completed in August 1995, and $11,932,000 raised from a private
placement completed in August 1996, as well as contract and grant revenues,
interest income and lease and debt financing.

Capital expenditures were $1,206,000 in the nine months ended September 30,
1997, principally reflecting equipment purchases. Capital expenditures
increased to $1,655,000 in 1996, principally reflecting an expansion of the
Company's leased facility.

Accounts payable and accrued expenses decreased to $4,973,000 at September
30, 1997 as compared to $5,145,000 at December 31, 1996, due principally to
payments made under certain manufacturing

21
<PAGE>

development arrangements, partially offset by increases in accrued regulatory
costs and compensation costs. The Company expects a decrease in accounts
payable and accrued expenses in future periods as certain of these liabilities
are satisfied.

In February 1997, the Company entered into a development, supply and
distribution agreement (the "Agreement") in North America with SB for Cytolex.
SB has paid the Company $10.0 million under this Agreement, and may make
additional payments to Magainin of up to $22.5 million upon the occurrence of
certain product milestones. SB will also fund a percentage of any development
expenses for any additional indications for Cytolex. Upon the commencement of
commercial sales by SB, Magainin will be responsible for the supply of Cytolex
and SB will be responsible for the marketing and sales of Cytolex. Magainin
will receive certain percentages of SB sales revenues under agreed upon terms.
The Agreement also gives SB the right to negotiate for rights to another
Magainin product development candidate, under certain terms and conditions.

The Company anticipates the net proceeds of this offering, together with its
available cash, should be sufficient to finance its operations through 1999.
However, the Company's capital requirements may change due to numerous
factors, including the progress of the Company's research and development
programs, regulatory approvals, competitive and technological advances, the
commercial viability of the Company's products, the terms of collaborative
arrangements, if any, entered into by the Company, and other factors, many of
which are beyond the Company's control. The Company will require substantial
additional funds to continue its research and development programs and to
commercialize potential products. The Company intends to seek such funds
through a combination of future offerings of securities and collaborative
arrangements with third parties, and regularly explores alternatives in this
regard. There can be no assurance that future funding will be available to the
Company or, if available, will be obtainable on terms favorable to the
Company. The receipt of funding, if any, from any corporate partners,
including SB, will depend largely on the progress of research and development
programs. If the Company does not enter into appropriate collaborations,
receive additional funds from SB under its current agreement or raise
sufficient funds from the periodic sale of securities, the Company will be
required to delay or eliminate expenditures for potential products, including
Cytolex, or to enter into collaborations with third parties to commercialize
potential products or technologies that the Company would otherwise seek to
develop itself, or seek other arrangements. See "Risk Factors--Need for
Substantial Additional Funds."

The Company's capital expenditure requirements will depend upon numerous
factors, including the success of Cytolex and the progress of the Company's
other research and development programs, the time and cost required to obtain
regulatory approvals, the ability of the Company to enter into additional
collaborative arrangements, the demand for products based on the Company's
technology, if and when such products are approved, and possible acquisitions
of products, technologies and companies. The Company had no significant
capital commitments as of September 30, 1997.

The Company does not have the resources, facilities or capabilities to
manufacture any of its proposed products. The Company has no current plans to
establish a manufacturing facility. The Company expects that it will be
dependent to a significant extent on contract manufacturers for commercial
scale manufacturing of its proposed products in accordance with regulatory
standards. The Company's dependence on third parties for manufacturing may
adversely affect operating results as well as the Company's ability to develop
and deliver products on a timely and competitive basis. Production of peptides
(such as Cytolex and other magainins) is expensive relative to production of
traditional antibiotics. Additionally, there are a limited number of companies
which are currently able to produce bulk peptides on the scale which the
Company expects to require to commercialize Cytolex. There can be no assurance
that qualified outside contractors will be available to manufacture materials
for the Company, or do so at costs which are affordable by the Company.

22
<PAGE>

for Cytolex. Early stage discussions as to supply cost have occurred with
Abbott, and, based on these discussions, the Company believes that further
progress in scale-up and manufacturing development efforts, as well as
increases in projected volumes, will be required to enable the Company to
manufacture and sell Cytolex on a profitable basis. This may require
substantial additional funds. No assurance can be given that a cost-effective
manufacturing process can be developed, or that any such process would be
approved by the FDA, or that the Company, Abbott, or others will be able to
manufacture Cytolex on a commercially viable basis.

The Company is currently dependent upon Abbott for the production of bulk
drug substance for Cytolex. In the event that bulk drug substance for Cytolex
is not manufactured at Abbott, the Company will need to secure other
manufacturing arrangements. The process developed by Abbott is proprietary,
and in the event the Company desires to utilize, or have another party
utilize, such technology, the Company will be required to make license
payments to Abbott. The Company has certain efforts under way with respect to
alternative manufacturing sources, including recombinant manufacturing,
however, these programs are at an early stage, and significant expenditures
over an extended period of time will be required to develop a commercially
viable process, and there can be no assurance that such efforts will be
successful.

The Company's business is subject to a number of substantial risks and
uncertainties. In addition to the information set forth above, see the
information set forth under "Risk Factors."

23
<PAGE>

BUSINESS

THE COMPANY

Magainin is a biopharmaceutical company engaged in the development of
medicines for serious diseases. The Company's development efforts are focused
on anti-infectives, oncology, and pulmonary and allergic disorders.

Magainin's research and drug development efforts are focused on two
technology platforms:

Magainin Peptides--Cytolex(TM)

The Company's most advanced class of compounds under development are
magainin peptides. Discovered in the skin of the African clawed frog,
magainins have demonstrated broad activity against a variety of pathogens in
preclinical studies. These molecules act by puncturing the membrane of the
pathogen cell, resulting in the death of the pathogen.

In February 1997, the Company and SB entered into a development, supply and
distribution agreement pursuant to which SB will market and sell Cytolex in
North America. Under this agreement, SB has paid $10 million to the Company,
and may make additional payments of up to $22.5 million upon the occurrence of
certain product milestones. SB will also fund a majority of development
expenses for any additional indications for Cytolex.

Aminosterols--Squalamine

Squalamine is the lead product development candidate in the Company's
aminosterol program. Squalamine was discovered in the body tissues of the
dogfish shark. The shark was initially examined because

24
<PAGE>

of its known resistance to infection and cancer. Since the discovery of
squalamine, the Company has discovered several other aminosterol compounds in
the shark. In preclinical testing conducted to date, certain of these
compounds have demonstrated an ability to control cell growth, along with
other pharmacological properties. These properties may have application in the
treatment of disease indications characterized by cell proliferation, such as
cancer.

The Company's initial disease focus for squalamine is solid tumors. The
formation of new blood vessels, or angiogenesis, is believed to be a critical
factor in tumor growth. Squalamine may be of benefit in the treatment of a
number of solid tumors by inhibition of new blood vessel growth required for
tumor nourishment.

In August 1997, the Company submitted an IND, which is now effective, to
begin Phase I clinical testing of squalamine in patients with advanced
malignancy.

Asthma Genomics

In 1996, the Company initiated a research program in the genomics of asthma.
These efforts led to the identification of AAF1, a gene which varies in DNA
structure and function in asthmatic and allergic humans and animals. The
Company maintains a comprehensive research and development program to identify
additional genes in the AAF1 biologic pathway, which genes are believed to be
important in mediating the allergic responses controlled by AAF1. AAF2 has
been discovered in humans as a key second gene candidate in the AAF1 pathway,
and other genes have also been identified by the Company. The Company
continues to investigate the role of such genes in the allergic inflammatory
response.

BACKGROUND

Overview

Magainin's biopharmaceutical research and development efforts are focused on
two technology platforms. In host defense drug discovery, the Company seeks to
isolate and develop therapeutically active compounds from various organisms
for the treatment of human diseases. The Company's second platform technology
is a gene-based target and drug discovery program in asthma. The Company
employs a broad range of genomics techniques to identify genes associated with
the pathogenesis of asthma, with the objective of utilizing the optimal
biologic gene targets in the development of novel therapeutics for asthma and
allergy.

Host Defense System

The Company was formed to engage in the research, development and
commercialization of compounds derived from the host defense systems of
animals. The host defense system is the complex of natural processes and
mechanisms used by the body to protect itself against infection and certain
cancers. This system comprises physical barriers to infection, such as skin
and mucosal membranes and fluids, as well as more complex chemical and
biological components, such as the immune system. The Company believes that
certain classes of naturally occurring peptides, such as magainins, and
certain small molecules, such as aminosterols, both described below, are used
by the host defense system to provide a first line of defense against
infection and may have activity against certain cancers.

The Company's approach to identifying pharmaceutically active compounds in
the host defense systems of animals involves the extraction of compounds from
animal tissues. The extracts are assayed for activity against selected
pathogens, such as bacteria, fungi, viruses and certain cancers. The Company
then purifies the active compounds and determines the precise chemical
structure of the purified molecule. Once naturally occurring molecules have
been isolated, the Company analyzes the relationship between the molecular
structure of the compound and its biological activity. In general, this
requires identification of the structures

25
<PAGE>

in the compound which are believed to have therapeutic effects and an analysis
of how the compounds could be modified to improve the desired therapeutic
effects. The Company then utilizes its combinatorial chemistry capabilities to
modify the molecules to alter biological activity or increase stability.

Magainins

The Company's lead product development candidate, Cytolex, is a synthetic
magainin peptide. The first magainins were isolated from the African frog
Xenopus laevis by Dr. Michael A. Zasloff (presently Vice Chairman and
Executive Vice President of the Company, and President of the Magainin
Research Institute, a division of the Company) while conducting genetic and
molecular biological research at the National Institutes of Health ("NIH") in
1987. In connection with his research, Dr. Zasloff was performing surgery on
African clawed frogs in his laboratory. After suturing the frogs and returning
them to their aquarium tank, he noticed that the incisions healed without
infection, inflammation or notable scarring, despite being exposed to the
bacteria-filled aquarium water. Dr. Zasloff deduced that the frogs produced a
substance that protected them against infection. Eventually, he isolated, from
the skin, two related peptides, which he called magainins and which were later
shown to kill a variety of pathogens, including bacteria, amoeba, fungi and
parasites.

Magainins are peptides. A peptide is a chain of molecules, known as amino
acids, that are considered to be one of the basic building blocks of the human
body. Chains of two to 50 amino acids are generally referred to as peptides,
while longer chains are referred to as proteins. Magainins are shorter-chain
peptides, which can be synthesized chemically as well as by recombinant
technology. Chemical synthesis permits greater flexibility in manipulating the
sequence of amino acids, enabling the Company to create and test derivative
compounds more rapidly and efficiently than using recombinant technology. The
Company has modified natural peptides by rearranging the order and combination
of amino acids and by substituting and deleting additional amino acids to
produce magainins having a broader spectrum of therapeutic activity and
improved potency.

An increasing problem in the antibiotic field is resistance, the process by
which antibiotics lose their effectiveness over time as bacteria, through
mutation, develop the means to produce enzymes capable of diminishing the
antibiotic utility. To date, the Company has not noted the development of
resistance to magainins. The Company believes this is due to the means by
which magainins break down pathogen cells and kill pathogens, which mechanism
of action differs from traditional antibiotics. In the presence of a cell
membrane rich in acidic phospholipids and poor in cholesterol, such as
bacterial membranes, magainins twist into two-sided, spiral shaped molecules
(helices), with one side soluble in the fat-like substance that comprises cell
membranes and the other side soluble in water. Individual magainin peptides
then aggregate and line up to form a channel in the membrane of a pathogen.
Once formed, this aggregate punctures the cell membrane, breaks down the
integrity of the cell and kills the pathogen.

Aminosterols and Angiogenesis

Squalamine is the lead product development candidate in the Company's
aminosterol program. Squalamine was discovered in the body tissues of the
dogfish shark. The shark was initially examined because of its known
resistance to infection and cancer. The chemical structure of squalamine
uniquely combines a steroid and a polyamine, two classes of systemic agents
that are generally well-tolerated in humans. Since 1992, the Company has
discovered several other aminosterol compounds in the shark. In preclinical
testing, certain of these compounds have demonstrated an ability to control
cell growth, along with other pharmacological properties. These properties may
have application in the treatment of a number of disease indications
characterized by cell proliferation, including cancer.

Within the human body, a network of arteries, capillaries and veins, known
as the vasculature, functions to transport blood throughout the body. The
basic network of the vasculature is developed through angiogenesis, a
fundamental process by which new blood vessels are formed. The primary
angiogenic period in humans takes place during the first three months of
embryonic development. During this period, cytokines

26
<PAGE>

and growth factors are activated to stimulate the growth of new blood vessels.
Once the general network of the blood vessels is complete, these angiogenic
stimulators are balanced and stabilized by the production of inhibitory
factors. Although angiogenesis occurs in human embryonic development, wound
healing and in certain reproductive processes in women, angiogenesis is also
associated with several diseases, including cancer, as well as diabetic
retinopathy and macular degeneration, both of which are major causes of
blindness.

The term cancer includes many different types of uncontrolled cellular
growth. Clusters of cancer cells, referred to as tumors, may invade and
destroy surrounding organs, impair physiological function and lead to death.
In order to survive, cancer cells require oxygen and nutrients which they
receive from the body's blood supply. In order to access this blood supply,
cancer cells initiate a biochemical mechanism that stimulates angiogenesis,
which provides the blood supply that nourishes the tumor. As cancer cells grow
and metastasize (spread from primary sites to secondary sites) they require
continuous angiogenesis. Antiangiogenic substances are intended to inhibit the
growth of new blood vessels and may therefore be effective in treating certain
cancers, with potentially less serious and fewer adverse side effects than
traditional therapies.

The aminosterol compounds are believed by the Company to have a unique
mechanism of action whereby they inhibit cell proliferation at an early stage
in cell activation by blocking the function of certain ion transporters in the
cell membrane. These transporters act as pumps on the surface of cells, and
control cell function through regulation of intracellular pH, cell metabolism
and cell volume. In the case of squalamine, there is a blockade of function
for a specific sodium proton exchanger in the cell membrane of certain
endothelial cells which leads to a cessation of endothelial cell
proliferation, and as a consequence, capillary formation. Thus, squalamine is
believed by the Company to limit growth promoting signals from several
different growth stimulatory factors.

Genomics and Drug Discovery

Advances in genetics and molecular biology have significantly enhanced the
ability of scientists to clone and sequence genes and identify the causes of
disease at the molecular level. The examination of the genetic influences on
human disease is called genomics, or the study of the genome. Functional
genomics refers to the determination of the manner in which disease genes
specifically impact the disease process. In contrast to traditional drug
discovery and development, a genetics approach commences by identifying those
genes that are responsible for the initiation or progression of disease.
Analysis of DNA (deoxyribonucleic acid) helps characterize the specific role
of genes in the disease process. The information stored in the DNA of a gene
is a set of instructions to living cells of the organism. These instructions
direct the cells to synthesize specific proteins such as hormones or enzymes
that perform the basic biochemical and physiological functions of the cells.
Disease may occur when a defect (mutation) occurs in a gene or genes,
resulting in incorrect instructions being sent to cells, and disrupting the
normal balance or function of these essential proteins. The ability to detect
such a mutation and to understand how the disruption of normal protein
function contributes to the initiation and progression of the resultant
disease are potentially valuable aids to pharmaceutical discovery and
development. To identify an appropriate molecular target for therapeutic
intervention, it may also be necessary to characterize fully the biochemical
pathway in which the disease gene functions.

The Company employs a comprehensive functional genomics approach to
understand the genetic basis of disease and to develop potential drug leads.
The key elements of the Company's asthma genomics program include:

Gene Identification--To link a disease with specific genes, DNA and
relevant clinical information is collected from families and isolated
individuals afflicted with the disease. The DNA from each individual of the
families is tested with DNA mapping markers, which when analyzed give a
chromosomal location for a disease gene. The process is then extended to
more detailed DNA mapping studies of the chromosomal area, and the
identification of genes located in the area that may be associated with the
disease. These genes are screened for mutations (defects) using DNA
sequencing and other techniques and then correlated based on inherited
disease patterns in families and isolated discrete populations.

27
<PAGE>

Parallel studies of gene mapping and mutation analyses of animal models of
a disease process are often possible, and provide complimentary
information. Genetic defects related to disease susceptibility and
progression are thus identified.

Target Validation--Genes identified as potential targets for
pharmaceutical intervention undergo an integrated analysis using advanced
in vitro and in vivo bench techniques to elucidate mechanisms of disease
initiation and progression. This process, known as target validation,
provides further evidence of the relevance of the identified genes to
particular portions of the disease process, and guides the selection of
strategies for pharmaceutical intervention. The Company uses an integrated
approach of biochemistry, genetics, cellular and molecular biology, and
animal models of the disease in the target validation process.

Pathway Elucidation--To identify an appropriate target for therapeutic
intervention, it is highly desirable to know how the disease genes are
turned on or off (gene regulation pathways) and how the gene functions
within the biochemical processes of cells (signal transduction pathways).
The discovery process for novel regulatory and signaling proteins involves
a combination of biochemical, molecular, biological and genetic approaches.

Target Specific Assay Development--Targets identified as appropriate for
therapeutic intervention are placed in biochemical and cell based assay
systems that closely mimic their native environment. In a biochemical
assay, the components and mechanism of action of the target proteins are
known. Since biochemical assays are usually amenable to high-throughput
screening, results can be obtained rapidly and reproduced consistently. As
a complimentary approach, cell based assays extend the biochemical
screening capabilities by allowing analysis of sample activity in a
physiologically relevant environment while similarly permitting the
assessment of cytotoxicity and cell permeability. Cell based screens
provide multiple sites of therapeutic intervention to be assessed at one
time, such as the receptors, regulatory proteins, and signaling proteins
involved in a pathway.

Through these processes, the Company seeks to identify appropriate targets
for pharmaceutical intervention that aim to control the root cause of human
disease. The Company believes that pharmaceuticals developed for use against
these specific targets have the potential for greater effectiveness and fewer
side-effects than pharmaceuticals developed through more traditional
processes.

PRODUCT DEVELOPMENT AND RESEARCH PROGRAMS

Cytolex--Infected Diabetic Foot Ulcers

The Company's most advanced development compound is Cytolex, a topical cream
antibiotic. Cytolex is a 22 amino acid magainin peptide, formulated as a 1%
topical cream. In vitro studies of Cytolex have shown that it is a broad
spectrum anti-infective, effective against gram negative, gram positive and
fungal organisms. The Company's initial intended use for Cytolex is for the
treatment of infection in diabetic foot ulcers.

Infected foot ulcers in diabetic patients are a serious complication. The
often compromised vasculature and nervous systems in the diabetic patient can
create conditions conducive to foot ulceration and consequent infection. These
infections can lead to osteomyelitis (bone infection) and limb amputation.
Patients with infected ulcers are typically treated with oral antibiotics and
no topical antibiotics are currently approved specifically for the treatment
of infection in diabetic foot ulcers.

The Company believes that topical antibiotics may offer advantages over oral
antibiotics in the treatment of infection in diabetic foot ulcers. Increasing
utilization of oral antibiotics has exacerbated the development of antibiotic
resistance, and resistant organisms are expected to continue to develop.
Additionally, there can be side effects associated with oral antibiotics,
including gastrointestinal distress, headaches and insomnia. The Company
believes that a topical treatment for diabetic foot ulcers may also improve
patient compliance with their medication and associated wound care.

In September 1996, the Company announced results of its initial, pivotal
Phase III clinical trial of Cytolex, and in March 1997, the Company reported
results from a second such pivotal trial. These trials were

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designed as equivalence studies with the goal of demonstrating that Cytolex
topical cream is as effective as orally administered ofloxacin, a quinolone
antibiotic, indicated for the treatment of infection, including skin and soft
tissue infections. The Company's analysis of the data from the studies showed
statistical equivalence between Cytolex and ofloxacin, with respect to the
primary endpoint of clinical response of infection at day 10 of treatment, and
at subsequent time points through day 28, and at follow-up. Clinical response
rates for both Cytolex and ofloxacin were between 84% and 89% and between 87%
and 93%, at day 10 of treatment, and at follow-up, respectively. As a
secondary endpoint in the trials, Cytolex and ofloxacin were comparable with
respect to overall assessments of microbiological improvement. The two studies
together enrolled 926 patients. The Company intends to submit an NDA with the
FDA based on the results of these clinical trials; however, there can be no
assurance that Cytolex will be approved by the FDA. See "Risk Factors -- Risks
Associated with Clinical Testing and FDA Approval of Cytolex."

Additional analyses were done on the eradication rate for each individual
species of pathogen. Results varied from species to species, and generally
favored ofloxacin. Although eradication rates for individual organisms
differed, positive clinical responses were commonly observed even when total
eradication did not occur.

Data was also collected on wound healing as part of the studies. At the last
patient visit date, approximately six weeks after treatment was initiated, 18%
to 30% of wounds were resolved. The results indicated the rate and extent of
wound resolution was not statistically different in the two treatment groups.
The Company plans to evaluate additional studies relating to the effect of
Cytolex on wound healing.

Squalamine--Solid Tumors

Squalamine is the Company's lead product development candidate in its
aminosterol program. The Company's initial disease focus for squalamine is
solid tumors. In August 1997, the Company filed an IND with the FDA to begin
Phase I clinical testing of squalamine in patients with advanced malignancy.

Cancer is the second most common cause of death in the Western world,
exceeded only by coronary heart disease. The three most prevalent methods of
treating patients with cancer are surgery, radiation therapy and chemotherapy.
A cancer patient often receives a combination of these treatment methods.
Surgery and radiation therapy are particularly effective in patients in which
the disease has not yet metastasized to other tissue or organs. Chemotherapy
is the principal treatment for tumors that have metastasized. Chemotherapy
involves the administration of drugs designed to kill cancer cells ("cytotoxic
drugs") or the administration of hormone analogues to either reduce the
production of, or block the action of, certain hormones, such as estrogens and
androgens, which affect the growth of tumors. Because chemotherapeutic agents
generally attack rapidly dividing cells indiscriminately, damaging normal as
well as cancerous cells, use of such agents often has serious adverse effects.
Additionally, resistance to chemotherapy inevitably occurs over time.

Advances in the understanding of the genesis and development of cancer have
begun to yield new approaches to cancer treatment. One such approach is the
control of angiogenesis, or new blood vessel growth. Angiogenesis is a key
stage in the development of tumor malignancy, and its inhibition should
contribute to the tumor becoming or remaining dormant.

Squalamine may be of benefit in the treatment of solid tumors by inhibiting
new blood vessel growth required for tumor nourishment. Squalamine has
exhibited antiangiogenic properties in a number of in vitro and in vivo
assays, and in animal models. Squalamine is believed to inhibit the growth of
primitive or embryonic capillaries associated with tumor growth. Squalamine
has the potential to be used in combination

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<PAGE>

with a number of cytotoxic drugs in the treatment of solid tumors, and the
Company has observed synergies with certain such cytotoxic therapies in animal
testing.

Asthma Genomics Program

Asthma is characterized clinically by wheezing and shortness of breath due
to reversible bronchospasm. It is a chronic, disabling disorder that appears
to be increasing in prevalence and severity. The complex pathophysiology of
asthma is under intensive scrutiny; however, its precise causes are not well
understood. A number of studies suggest a genetic component to asthma, but
family studies have been difficult to interpret due to other influences,
including allergens and pollutants. Allergic diseases, including allergic
rhinitis, are often present in individuals with asthma, but are also important
disease entities by themselves. The Company believes the genetic
susceptibility factors for asthma and allergy will be, at least in part,
related to one another. Current treatments for asthma and allergy are limited
to controlling inflammation or treating airway constriction through use of
bronchodilators.

In 1996, Magainin initiated a research program in the genomics of asthma.
These efforts led to the identification of AAF1, a gene which varies in DNA
structure and function in asthmatic and allergic humans and animals. The
Company maintains a comprehensive research and development program to identify
additional genes in the AAF1 biologic pathway, which other genes are believed
to be important in mediating the allergic responses controlled by AAF1. AAF2
has been discovered in humans as a key second gene candidate in the AAF1
pathway, and other genes have also been identified by the Company. The Company
has filed patent applications and has licensed intellectual property relating
to AAF1, AAF2 and certain other genes in the treatment of asthma and allergy.
The Company continues to investigate the role of these genes in the allergic
inflammatory response, with the objective of utilizing the optimal biologic
gene targets in the development of novel therapeutics for asthma and allergy.

Other Research Programs

The Company is evaluating additional magainin peptides in a number of
disease indications. One such program is directed toward the treatment of
pseudomonas infections in cystic fibrosis patients. In this program, early
stage efforts include compound formulation activities necessary to deliver the
peptide in an aerosolized manner appropriate for inhalation therapy.
Additional magainin peptides are under evaluation in the treatment of other
infections.

The Company is also pursuing other research programs related to squalamine.
Due to the unique mechanism of action of squalamine, it may also have
application in a number of disease conditions characterized by abnormal blood
vessel growth, including rheumatoid arthritis, diabetic retinopathy, psoriasis
and age related macular degeneration of the eye. Additionally, the Company has
early research efforts directed toward the reformulation of squalamine as an
oral agent. As compared to the current intravenous formulation, an oral
formulation of squalamine may be of benefit in the treatment of chronic
disease conditions.

The Company has discovered a number of other aminosterol compounds in the
shark, each differing from squalamine in chemical structure. Each is believed
to interact with a different, specific receptor, and, as a consequence, alter
the intracellular metabolism in a manner that disturbs the target cell
response to certain growth factors, hormones and other signals. The Company is
evaluating the role of aminosterols in altering metabolism as it affects
obesity. Other therapeutic opportunities for these compounds may include
various malignancies, inflammatory diseases, and viral infections.

In addition, the Company has a number of other early stage research
programs. In one such program, the Company is engaged in research efforts on
defensins. Defensins are compounds found in animals and man which have host
defense properties similar to magainins and aminosterols. The Company believes
that the longer-term evolution of the host defense field may lie in the
discovery of compounds that regulate endogenous defensin expression, rather
than direct application of the defensin molecules themselves.

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<PAGE>

The Company conducts the majority of its research and development activities
through its own staff and facilities, including the Magainin Research
Institute, an internal division of the Company focused on host defense
research, and the Magainin Institute of Molecular Medicine, an internal
division of the Company focused on the genomics of asthma. The Company also
employs contract research organizations, independent consultants and other
research professionals to aid in its research and development activities, and
maintains a Scientific Advisory Board to help guide its efforts.

COLLABORATIVE ARRANGEMENTS

Development and Marketing Collaborations. Collaborations may allow the
Company to leverage its own scientific and financial resources and gain access
to markets and technologies that would not otherwise be available to the
Company. In the long term, development and marketing arrangements with
established companies in the markets in which potential products will compete
may allow the Company's products easier access to their intended market and
may accordingly conserve Company resources. The Company expects that it will
enter into development and marketing arrangements for most of the products it
may develop. From time to time, the Company holds discussions with various
potential partners. See "Risk Factors - Dependence on Sales and Marketing
Partners; Marketing Uncertainties."

Research and License Agreements. The Company has rights under license
agreements to several patents and patent applications under which the Company
expects to owe royalties on sales of any products which are covered by issued
patent claims. Additionally, certain of these agreements also provide that if
the Company elects not to pursue the commercial development of any licensed
technology, or does not adhere to an acceptable schedule of commercialization,
then the Company's exclusive rights to such technology would terminate. The
Company also funds research at certain institutions, and these relationships
may provide the Company with an option to license any results of the research.

MANUFACTURING

The Company does not have the resources, facilities or capabilities to
manufacture any of its proposed products. The Company has no current plans to
establish a manufacturing facility. The Company expects that it will be
dependent to a significant extent on contract manufacturers for commercial
scale manufacturing of its proposed products in accordance with regulatory
standards. The Company's dependence on third parties for manufacturing may
adversely affect operating results as well as the Company's ability to develop
and deliver products on a timely and competitive basis. Production of peptides
(such as Cytolex and other magainins) is expensive relative to production of
traditional antibiotics. Additionally, there are a limited number of companies
currently able to produce bulk peptides on the scale which the Company expects
to require to commercialize Cytolex. There can be no assurance that qualified
outside contractors will be available to manufacture materials for the
Company, or do so at costs which are affordable by the Company.

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<PAGE>

technology and have ownership of the Drug Master File, the Company's reliance
on such contract manufacturer is increased, and the Company may have to obtain
a license from such contract manufacturer to have its products manufactured by
another party. Successful technology transfer from the original contract
manufacturer may be required. There can be no assurance that any such license
will be available on terms acceptable to the Company, or, if available, that
such technology will be successfully transferred to the Company. Any such
technology transfer may require transfer of requisite data for regulatory
purposes, including information contained in a proprietary Drug Master File
held by a contract manufacturer. There can be no assurance that any such
transfer can be completed.

The Company is working with Abbott with regard to the manufacture of bulk
drug substance for Cytolex. This arrangement provides for the development by
Abbott of a solution phase chemical process to manufacture bulk drug substance
for Cytolex on a commercial scale, for the production of bulk drug substance
for Cytolex for development purposes, and for Abbott to perform those
activities necessary to submit a Drug Master File to the FDA in support of any
filing for marketing approval of Cytolex. There can be no assurance that
Abbott will satisfy any or all of its obligations under this arrangement in a
timely manner.

The Company and Abbott have agreed that, upon completion of Abbott's
development activities, they will negotiate in good faith a supply agreement
for the Company's worldwide supply needs of bulk drug substance for Cytolex.
Early stage discussions as to supply cost have occurred with Abbott, and,
based on these discussions, the Company believes that further progress in
scale-up and manufacturing development efforts will be required to enable the
Company to manufacture and sell Cytolex on a profitable basis. This may
require substantial additional funds. No assurance can be given that a cost-
effective manufacturing process can ultimately be developed, or that any such
process would be approved by the FDA, or that the Company, Abbott, or others
will be able to manufacture Cytolex on a commercially viable basis. See
"Government Regulation."

The Company is currently dependent upon Abbott for the production of bulk
drug substance for Cytolex. In the event that bulk drug substance for Cytolex
is not manufactured at Abbott, the Company will need to secure other
manufacturing arrangements. The process developed by Abbott is proprietary,
and in the event the Company desires to utilize, or have another party
utilize, such technology, the Company would be required to make license
payments to Abbott. The Company has certain efforts underway with respect to
alternative manufacturing sources, including recombinant manufacturing;
however, these programs are at an early stage, and significant expenditures
over an extended period of time will be required to develop a commercially
viable process, and there can be no assurance that such efforts will be
successful.

GOVERNMENT REGULATION

The production and marketing of the Company's products and its research and
development activities are subject to regulation by numerous governmental
authorities in the United States and other countries. In the United States,
drug products are subject to rigorous review by the FDA. The Federal Food,
Drug, and Cosmetic Act and other federal statutes and regulations govern or
influence the testing, manufacture, safety, efficacy, labeling, storage,
recordkeeping, approval, advertising, promotion and distribution of such
products. Noncompliance with applicable requirements can result in Warning
Letters, fines, recall or seizure of products, refusal of the government to
approve marketing applications or to allow the Company to enter into
government supply contracts, the withdrawal of previously approved new drug
applications and criminal prosecution.

In order to obtain FDA approval to market a new drug product, the Company
must submit proof of safety, efficacy and quality. Such proof entails
extensive and time consuming preclinical and clinical testing. The results of
preclinical studies are submitted to the FDA as part of an IND. Preclinical
studies involve laboratory evaluation of product characteristics and animal
studies to assess the efficacy and safety of the

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product. Once the IND is effective, human clinical trials may be conducted.
Human clinical trials are typically conducted in three sequential phases, but
the phases may overlap. Phase I trials consist of testing the product in a
small number of patients or healthy volunteer subjects primarily for safety at
one or more doses. In Phase II, in addition to safety, the efficacy of the
product is evaluated in a patient population somewhat larger than Phase I
trials. Phase III trials typically involve additional testing for safety and
clinical efficacy in an expanded population at geographically dispersed test
sites. A clinical plan, or "protocol," accompanied by the approval of the
Institutional Review Board participating in the trials, must be submitted to
the FDA prior to commencement of clinical trials. Various reports must be
submitted to the FDA during the course of the trials, and the FDA may order
the temporary or permanent discontinuation of a clinical trial at any time.
The results of the clinical trials are submitted to the FDA as part of an NDA.

Detailed manufacturing information is also required to be included in the
NDA for review and approval by the FDA. Among other things, the Company must
submit data indicating that the drug product can be consistently manufactured
at the same quality standard, that the drug product is stable over time, and
that the level of chemical impurities in the drug product is under specified
levels. Peptides are an especially difficult compound to manufacture at these
standards, particularly at the scale at which Cytolex will be required to be
manufactured. There can be no assurance that the manufacturing information
submitted for Cytolex, or other products under development, will be sufficient
for approval by the FDA.

Following extensive review of the NDA, the FDA may grant marketing approval,
require additional testing or information, or deny the application. Sales of a
new drug may commence following FDA approval of an NDA and satisfactory
completion of a pre-approval inspection of the manufacturing facility,
including a review of pertinent production records. If there are any
modifications to the drug, including any changes in indication, manufacturing
process, labeling or manufacturing facility, an NDA supplement may be required
to be submitted to the FDA. The FDA may also require post-marketing testing
and surveillance to monitor the effects of approved products or place
conditions on any approvals that could restrict the commercial applications of
such products. Product approvals may be withdrawn if compliance with
regulatory standards is not maintained, or if problems concerning safety,
efficacy or quality of the product occur following approval.

Continued compliance with all FDA requirements and conditions in an approved
application, including those concerning product specification, manufacturing
process, validation, labeling, promotional material, recordkeeping and
reporting, is necessary for all approved drug products. Failure to comply
could result in Warning Letters, product recall or other FDA-initiated
actions, which could delay further marketing until the products are brought
into compliance.

In October 1992, PDUFA was enacted, imposing substantial fees on a one-time
basis for applications for approval, and on an annual basis for the
manufacturing and marketing, of prescription drugs. Legislation reauthorizing
PDUFA is currently pending in Congress and it is anticipated that such user
fees will continue and may increase in the future.

Sales of pharmaceutical products outside the United States are subject to
foreign regulatory requirements that vary widely from country to country.
Whether or not FDA approval has been obtained, approval by comparable
regulatory authorities of foreign countries must be obtained prior to the
commencement of marketing in those countries. The time required to obtain such
approval may be longer or shorter than that required for FDA approval.

PATENT AND PROPRIETARY RIGHTS; LICENSED TECHNOLOGY

The Company's success will depend in part upon its ability to obtain patent
protection for compounds, uses of compounds, and processes. Patent matters
involve complex legal and factual issues, and can be highly

33
<PAGE>

uncertain. Host defense compounds can be isolated from a wide variety of
sources, and it is not possible for the Company or any other entity to have
proprietary rights to all such compounds, or their uses. Additionally,
chemical entities that are similar to, but not identical with, the Company's
compounds, may not be protected by issued patents of the Company. In the
genomics area, a number of companies are attempting to identify rapidly and
patent genes whose functions have not yet been characterized. Additional
companies are seeking to patent fully characterized genes. The criteria for
obtaining patent protection for genes is unclear, and the impact of this
uncertainty on the Company's business can not be determined.

The Company owns or has exclusive rights under license agreements to 43
issued patents, and an additional 27 patent applications are pending,
including the patent application relating to Cytolex. Of the 70 patents or
patent applications to which the Company has rights, 45 are related to host
defense and 25 are related to the Company's research efforts in genomics.
There can be no assurance that any patent applications now pending or filed in
the future will result in patents being issued or that any patents now held by
or licensed to the Company, or issued or licensed to the Company in the
future, will afford any competitive advantages for the Company, or will not be
challenged by third parties. The cost of litigation to uphold the validity and
prevent infringement of patents and to enforce licensing rights can be
substantial. Furthermore, there can be no assurance that others will not
independently develop similar technologies or duplicate the technology owned
by or licensed to the Company or design around the patented aspects of such
technology. In addition, there can be no assurance that the products and
technologies the Company will seek to market will not infringe patents or
other rights owned by others, licenses to which may not be available to the
Company.

The Company also relies upon unpatented proprietary technology, and may
determine in appropriate circumstances that its interest would be better
served by reliance on trade secrets or confidentiality agreements rather than
patents. There can be no assurance that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to such proprietary technology or that the Company can
meaningfully protect its rights in such unpatented proprietary technology.
Additionally, if the Company is unable to obtain strong proprietary rights
protection of its products after obtaining regulatory clearance, competitors
may be able to market competing products by obtaining regulatory clearance,
through showing equivalency to the Company's product, without being required
to conduct the lengthy clinical tests required to be conducted by the Company.

Virtually all of the Company's key scientists worked at other biotech or
pharmaceutical companies or at universities and research institutions before
joining the Company. Disputes may arise as to whether technology developed by
such scientists while employed by or associated with the Company was first
discovered when they were employed by or associate with others in a manner
that would give third parties rights to such technology superior to the
rights, if any, of the Company. Disputes of this nature have occurred in the
past, and are expected to continue to arise in the future, and there can be no
assurance that the Company will prevail in any such disputes.

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<PAGE>

COMPETITION

The pharmaceutical industry is characterized by intense competition. Many
companies, research institutions and universities are working in a number of
areas similar to the Company's field of interest. The Company is aware that
research is being conducted by others in connection with compounds from the
host-defense systems of various animals. Additionally, many companies are
involved in research and development activities focused on the pathogenesis of
disease, and competition among companies attempting to find the genes
responsible for disease is intense. Furthermore, many companies are engaged in
the development and sale of products, such as traditional antibiotics, which
may be, or are, competitive with the Company's proposed products. Most of
these entities have substantially greater financial, technical, manufacturing,
marketing, distribution and other resources than the Company. The Company's
proposed products may also be subject to competition from products using
techniques other than those developed by the Company or based on advances that
may render the Company's products obsolete.

Colleges, universities, governmental agencies and other public and private
research organizations are becoming more active in seeking patent protection
and licensing arrangements to collect royalties for use of technology that
they have developed, some of which may be directly competitive with that of
the Company. In addition, these institutions, along with pharmaceutical and
biotechnology companies, can be expected to compete with the Company in
recruiting highly qualified scientific personnel.

As to the disease areas being targeted by the Company, there can be no
assurance that Cytolex will be successfully marketed against oral antibiotics
for the treatment of infection in diabetic foot ulcers. These infections have
historically been treated with systemically administered antibiotics. There
also can be no assurance that Cytolex can be manufactured at a cost which will
allow it to be sold at a competitive price relative to oral antibiotics, or
other topical antibiotics that may be used for this indication. Significant
efforts are underway by many companies in the development and marketing of
products intended for the additional disease areas being targeted by the
Company, including cancer and asthma. A number of major pharmaceuticals
companies have significant franchises in these disease areas, and can be
expected to invest heavily to protect these interests. In addition, in the
cancer field, antiangiogenic agents are under development at a number of
companies. In the asthma field, other biopharmaceutical companies have also
reported the discovery of genes relating to asthma.

EMPLOYEES

As of September 30, 1997, the Company had 72 full-time employees. No
employees are covered by collective bargaining agreements, and the Company
considers relations with its employees to be good.

PROPERTIES

The Company occupies an aggregate of approximately 21,000 square feet of
space in Plymouth Meeting, Pennsylvania, which is used as office and
laboratory space. The Company leases this space pursuant to a lease expiring
in 1999, which provides for minimum annual rent payments of approximately
$322,000 in the year ending December 31, 1997 and is subject to increases on
an annual basis for the remaining term.

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DIRECTORS AND MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

Executive officers and directors of the Company, and their ages as of
September 30, 1997, are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Jay Moorin.............. 46 Chairman, President and Chief Executive Officer
Michael A. Zasloff,
M.D., Ph.D............. 51 Vice Chairman and Executive Vice President
Michael R. Dougherty.... 39 Executive Vice President, Chief Financial Officer,
and Director
Roy C. Levitt, M.D...... 44 Executive Vice President, and Director
Thomas J. Bigger........ 40 Senior Vice President
Paul A. Litka, M.D...... 48 Senior Vice President
Bernard Canavan, M.D.... 61 Director
Zola P. Horovitz,
Ph.D................... 63 Director
Charles A. Sanders,
M.D.................... 65 Director
Robert F. Shapiro....... 62 Director
James B. Wyngaarden,
M.D.................... 72 Director
</TABLE>

Jay Moorin has served as President and Chief Executive Officer of the
Company since 1991. In July 1996, Mr. Moorin was appointed Chairman of the
Board. Prior to joining the Company, Mr. Moorin served as a Managing Director
at Bear, Stearns & Co., Inc. and was responsible for health care investment
banking and other services to the pharmaceutical and distribution industry.
Mr. Moorin was employed in other capacities by Bear, Stearns from 1988 to
1990. From 1983 to 1988, Mr. Moorin was employed by E. R. Squibb & Co., Inc.
("Squibb"), joining Squibb as its first Corporate National Accounts Director
and subsequently was promoted to Business Area Director and Vice President of
Marketing and Business Development at SquibbMark, a division of Squibb.

Michael A. Zasloff, M.D., Ph.D., has served as Executive Vice President of
the Company and President of the Magainin Research Institute, since July 1992.
In July 1996, Dr. Zasloff was appointed Vice Chairman of the Board. From 1988
until Dr. Zasloff joined the Company on a full-time basis in July 1992, Dr.
Zasloff was the Company's Chief Scientific Advisor and served as the Charles
E.H. Upham Professor, Department of Pediatrics and Genetics, University of
Pennsylvania School of Medicine, and Chief, Division of Human Genetics and
Molecular Biology, the Children's Hospital of Philadelphia. From 1982 until
1988, Dr. Zasloff was Chief, Human Genetics Branch, National Institutes of
Child Health and Human Development, National Institutes of Health. Dr. Zasloff
currently also serves as Adjunct Professor, Department of Human Genetics and
Orthopedics, University of Pennsylvania School of Medicine.

Michael R. Dougherty has served as Executive Vice President and Chief
Financial Officer of the Company since March 1995, and as a Director since
August, 1997. From August 1993, when he joined the Company, until March 1995,
Mr. Dougherty served as Senior Vice President and Chief Financial Officer.
Prior to joining the Company, Mr. Dougherty served in the following capacities
at Centocor, Inc. (a biopharmaceutical company): Senior Vice President, Chief
Financial Officer and Treasurer, from February 1992 to August 1993, Vice
President Corporate Finance from May 1990 to February 1992 and Treasurer from
June 1986 to May 1990.

Roy C. Levitt, M.D., has served as Executive Vice President and the Director
of the Magainin Institute of Molecular Medicine since joining the Company in
January 1996. Dr. Levitt was appointed Chief of Research and Development at
the Company, and a Director in August, 1997. Prior to joining the Company, Dr.
Levitt was a faculty member at Johns Hopkins University in the Department of
Anesthesiology and Critical Care Medicine, from 1986 to 1995, in Neurological
Surgery from 1995 to 1996 and in Environmental Health Sciences from 1988 to
1996.

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<PAGE>

Thomas J. Bigger has served as Senior Vice President Business Development,
Marketing and Sales since joining the Company in July 1996. Mr. Bigger served
as Senior Vice President of Advanced Polymer Systems (a drug development
company), in 1994 and 1995. From 1979 to 1994, Mr. Bigger held a number of
positions of increasing responsibility at Rhone-Poulenc Rorer ("RPR"),
including serving as President of Dermik Laboratories, a subsidiary of RPR.

Paul A. Litka, M.D. has served as Senior Vice President Clinical Research
and Regulatory Affairs of the Company since May 1996. From March 1995, when he
joined the Company, until May 1996, Dr. Litka served as Vice President
Clinical Research. From 1991 to 1994, Dr. Litka was Senior Vice President and
General Manager of the Institute for Biological Research and Development, a
clinical research organization.

Bernard Canavan, M.D. has served as a director of the Company since 1994.
Dr. Canavan was employed by American Home Products Corporation for over
twenty-five years. From June 1990 until his retirement in January 1994, he was
President of American Home Products Corporation and was responsible for all
operations, including its pharmaceutical businesses worldwide. Previously, Dr.
Canavan was Chairman and Chief Executive Officer of American Home Products'
pharmaceutical company, Wyeth-Ayerst Laboratories. Dr. Canavan is also a
director of Alpha-Beta Technology, Inc., and BioChem International Inc.

Zola P. Horovitz, Ph.D. has served as a director of the Company since 1995.
Dr. Horovitz was employed by Bristol-Myers Squibb Company ("Bristol-Myers")
and its predecessor, Squibb Corporation, for over thirty years. At the time of
his retirement in 1994, Dr. Horovitz was Vice President of Business
Development at Bristol-Myers. Dr. Horovitz is currently a consultant to the
pharmaceutical and biotechnology industry, and is a director of Avigen, Inc.,
Clinicor Inc., Procept, Inc., Synaptic Pharmaceutical Corporation, Diacrin,
Inc., BioCryst Pharmaceuticals, Inc. and Roberts Pharmaceutical Corporation,
and is also a member of Magainin's Scientific Advisory Board.

Charles A. Sanders, M.D. has served as a director of the Company since
September 1996. Dr. Sanders is the retired Chairman and Chief Executive
Officer of Glaxo Inc., where he was employed from 1989 to 1995. Previously,
Dr. Sanders was Vice Chairman of Squibb Corporation and also served as General
Director of Massachusetts General Hospital. Dr. Sanders is a director of Scios
Inc., Vertex Pharmaceuticals Incorporated, StaffMark, Inc., Kendle
International and Pharmacopeia, Inc.

Robert F. Shapiro has served as a director of the Company since September
1996. In 1997, Mr. Shapiro joined Klingenstein, Fields and Co., Inc., an
investment management firm, as Vice Chairman and Partner. Since 1988, Mr.
Shapiro has served as President of RFS & Associates, Inc., a private
investment and consulting firm. Previously, Mr. Shapiro served as President
and Co-Chairman of Wertheim Schroder & Co., Inc. and Chairman of New Street
Capital Corporation, investment banking firms. Mr. Shapiro is also a director
of American Buildings Company, The Burnham Fund, Inc., Equitable Capital
Partners, L.P. and The TJX Companies, Inc.

James B. Wyngaarden, M.D. has served as a director of the Company since
September 1996. From 1990 to 1994, Dr. Wyngaarden was Foreign Secretary of the
National Academy of Sciences and Institute of Medicine. Dr. Wyngaarden
previously served in several capacities, including as the Director of the
National Institutes of Health. Dr. Wyngaarden is a director of Hybridon, Inc.
and Human Genome Sciences, Inc. and is also a member of Magainin's Scientific
Advisory Board.

37
<PAGE>

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information known to the Company with
respect to the beneficial ownership of the Company's Common Stock as of the
dates indicated by (i) all persons who were beneficial owners of five percent
(5%) or more of the Company's Common Stock as of December 31, 1996 and (ii) as
of September 30, 1997 by each director, each executive officer and all
directors and executive officers as a group.

<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED (2)
NUMBER OF --------------------------
SHARES BENEFICIALLY BEFORE AFTER
BENEFICIAL OWNER OWNED (1) OFFERING OFFERING
- ---------------- ------------------- ----------- -----------
<S> <C> <C> <C>
Amerindo Investment Advisors
Inc.
780 Third Avenue, Suite 3204
New York, NY 10017 (3)....... 957,500 4.9% 4.4%
First Union Corporation
One First Union Center
Charlotte, NC 28288 (4)...... 1,096,245 5.7% 5.0%
FMR Corporation
82 Devonshire Street
Boston, MA 01109 (5)......... 1,539,000 7.9% 7.0%
Oracle Partners, L.P.
135 East 57th Street, 30th
Floor
New York, NY 10022 (6)....... 1,317,000 6.8% 6.0%
Wellington Management Company
75 State Street
Boston, MA 02109 (7)......... 2,711,000 14.0% 12.4%
Jay Moorin (8)............... 759,612 3.8% 3.4%
Michael A. Zasloff, M.D.,
Ph.D. (9).................... 507,320 2.6% 2.3%
Michael R. Dougherty (10).... 154,500 * *
Roy C. Levitt, M.D. (11)..... 74,375 * *
Thomas J. Bigger (12)........ 31,250 * *
Paul A. Litka, M.D. (13)..... 41,000 * *
Bernard Canavan, M.D. (14)... 15,000 * *
Zola P. Horovitz, Ph.D.
(15)......................... 15,000 * *
Charles A. Sanders, M.D.
(16)......................... 3,750 * *
Robert F. Shapiro (17)....... 23,750 * *
James B. Wyngaarden, M.D
(18)......................... 4,250 * *
All current executive
officers and directors as a
group
(11 persons) (19)........... 1,629,807 7.8% 7.0%
</TABLE>
- ---------------------
* Less than one percent.
(1) Beneficial ownership has been determined pursuant to applicable rules of
the Commission.
(2) The percentage for each individual or group is based on the aggregate of
the shares outstanding as of September 30, 1997 (19,379,607 shares).
(3) This information is presented in reliance on information disclosed in a
Schedule 13F filed by Amerindo Investment Advisors Inc. ("Amerindo") with
the Commission reporting as of June 30, 1997.

38
<PAGE>

(4) This information is presented in reliance on information disclosed in a
Schedule 13G filed by First Union Corporation with the Commission
reporting as of December 31, 1996.
(5) This information is presented in reliance on information disclosed in a
Schedule 13F filed by FMR Corporation with the Commission reporting as of
June 30, 1997.
(6) This information is presented in reliance on information disclosed in a
Schedule 13F filed by Oracle Partners, L.P. with the Commission reporting
as of June 30, 1997.
(7) This information is presented in reliance on information disclosed in a
Schedule 13F filed by Wellington Management Company with the Commission
reporting as of June 30, 1997.
(8) Represents 759,112 shares of Common Stock issuable upon exercise of
options. Includes 500 shares owned by Mr. Moorin's wife as to which
shares Mr. Moorin disclaims beneficial ownership.
(9) Includes 305,008 shares of Common Stock issuable upon exercise of options
and 30,000 shares of Common Stock held by trusts for the benefit of
certain members of Dr. Zasloff's family.
(10) Represents 154,500 shares of Common Stock issuable upon exercise of
options.
(11) Includes 61,250 shares of Common Stock issuable upon exercise of options,
and 8,500 shares issuable to Dr. Levitt.
(12)Represents 31,250 shares of Common Stock issuable upon exercise of
options.
(13) Represents 41,000 shares of Common Stock issuable upon exercise of
options.
(14) Represents 15,000 shares of Common Stock issuable upon exercise of
options.
(15) Represents 15,000 shares of Common Stock issuable upon exercise of
options.
(16)Represents 3,750 shares of Common Stock issuable upon exercise of options.
(17) Includes 3,750 shares of Common Stock issuable upon exercise of options
and 5,000 shares owned by Mr. Shapiro's wife, as to which shares Mr.
Shapiro disclaims beneficial ownership.
(18)Includes 3,750 shares of Common Stock issuable upon exercise of options.
(19) See (8), (9), (10), (11), (12), (13), (14), (15), (16), (17) and (18)
above.

39
<PAGE>

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 45,000,000 shares of
Common Stock, par value $.002 per share, and 9,211,031 shares of Preferred
Stock, par value $.001 per share. At September 30, 1997, there were 19,379,607
shares of Common Stock outstanding, and no shares of Preferred Stock
outstanding. Stock options and warrants for an aggregate of 4,492,707 shares
of Common Stock were outstanding on such date.

COMMON STOCK

The holders of Common Stock are entitled to receive such dividends, if any,
as may be declared from time to time by the board of directors in its
discretion from funds legally available therefor, provided that the per share
amount, if any, of all dividends for the Common Stock in any fiscal year of
the Company, shall not be greater than the per share amount, if any, of all
dividends declared for the Preferred Stock during such fiscal year (assuming
for the calculation of the per share amounts for Preferred Stock the
conversion at the time of such calculation of all Preferred Stock into Common
Stock). See "Dividend Policy." Upon liquidation or dissolution of the Company,
the holders of Common Stock are entitled to receive, pro rata, all assets of
the Company after payment of liabilities and payments to holders of Preferred
Stock. Holders of Common Stock have no preemptive or other subscription
rights, and there are no conversion rights or redemption or sinking fund
provisions with respect to such shares. The holders of Common Stock are
entitled to one vote for each share held of record on all matters submitted to
a vote of stockholders. The holders of Common Stock do not have cumulative
voting rights in the election of directors. All of the shares of Common Stock
are, and the shares to be sold in this offering will be, fully paid and
nonassessable.

PREFERRED STOCK

The Company is authorized to issue up to 9,211,031 shares of Preferred
Stock. The board of directors has the authority to issue Preferred Stock in
one or more series and to fix the designations, powers, preferences and
relative, participating, optional or other special rights, and the
qualifications, limitations and restrictions thereof, including the dividend,
conversion, voting, redemption (including sinking fund provisions) and other
rights, liquidation preferences and the number of shares constituting any
series and the designation of such series, without any further vote or action
by the stockholders of the Company. Because the terms of the Preferred Stock
may be fixed by the board of directors of the Company without stockholder
action, the Preferred Stock could be issued quickly with terms calculated to
defeat a proposed take-over of the Company, or to make the removal of
management more difficult. Under certain circumstances, this could have the
effect of decreasing the market price of the Common Stock. Management of the
Company is not aware of any such threatened transaction to obtain control of
the Company.

WARRANTS

As of September 30, 1997, warrants to purchase an aggregate of 1,541,635
shares of Common Stock were outstanding. Of the outstanding warrants, (i)
warrants to purchase 1,011,896 shares were exercisable at a price of $8.4791
per share (the "1996 Warrants"), (ii) warrants to purchase 229,739 shares were
exercisable at a price of $8.00 per share (the "1991 Warrants") and (iii)
warrants to purchase 300,000 shares were exercisable at a price of $7.50 per
share (the "1994 Warrants").

Subject to certain exceptions, the exercise price per share for the 1996
Warrants is subject to adjustment, on a weighted average basis, upon the
following events: (i) the issuance or sale of shares of Common Stock for a
consideration per share of Common Stock less than the then current exercise
price, (ii) the grant or sale by the Company of options for which the exercise
price per share of Common Stock is less than the then current exercise price,
(iii) the issuance or sale by the Company of any securities convertible into
shares of Common Stock for which the conversion price per share of Common
Stock is less than the then current exercise price and (iv) a change in any
exercise price or conversion price for options or convertible securities

40
<PAGE>

to a price below the then current exercise price. In such events, the number
of shares issuable upon exercise of the 1996 Warrants is subject to a
corresponding adjustment. In addition, the exercise price per 1996 Warrant is
subject to a one-time adjustment, at the option of the holder of such 1996
Warrant, in the event that the average of the closing prices for the Common
Stock on the Nasdaq National Market in any calendar month prior to August 1999
is less than $7.7083. In that event, the holder of each 1996 Warrant shall
have the option to reset the exercise price to equal 110% of the average of
the closing price for such month.

LIMITATION OF LIABILITY

As permitted by the Delaware General Corporation Law, the Company's Restated
Certificate of Incorporation provides that directors of the Company shall not
be personally liable to the Company or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
Delaware General Corporation Law, relating to prohibited dividends or
distributions or the repurchase or redemption of stock, or (iv) for any
transaction from which the director derives an improper personal benefit. As a
result of these provisions, the Company and its stockholders may be unable to
obtain monetary damages from a director for breach of his duty of care.
Although stockholders may continue to seek injunctive or other equitable
relief for an alleged breach of fiduciary duty by a director, stockholders may
not have any effective remedy against the challenged conduct if equitable
remedies are unavailable.

The Company currently carries directors and officers liability insurance. In
addition, the Company's By-laws provide for indemnification of all officers
and directors against liabilities or expenses incurred in connection with any
action, suit or proceeding if the director or officer acted in good faith and
in a manner such person reasonably believed to be in, or not opposed to, the
Company's best interests, unless the action, suit or proceeding involves
liability by the director or officer to the Company and no court determines
that such director or officer is entitled to indemnification.

BUSINESS COMBINATION PROVISIONS

The business combination provision contained in Section 203 of the Delaware
General Corporation Law ("Section 203") defines an interested stockholder as
any person (other than the Company and any direct or indirect majority-owned
subsidiary of the Company) that (i) owns, directly or indirectly, 15% or more
of the outstanding voting stock of a corporation, or (ii) is an affiliate or
associate of a corporation and was the owner of 15% or more of the outstanding
voting stock at any time within the three-year period immediately prior to the
date on which it is sought to be determined whether such person is an
interested stockholder; and the affiliates and the associates of such person.
Under Section 203, a resident domestic corporation may not engage in any
business combination with any interested stockholder for a period of three
years following the date such stockholders became an interested stockholder,
unless (i) prior to such time the board of directors of the corporation
approved either the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder, or (ii) upon consummation
of the transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced
(excluding, for determining the number of shares outstanding, (a) shares owned
by persons who are directors and officers, and (b) employee stock plans, in
certain instances), or (iii) on or subsequent to such time the business
combination is approved by the board of directors and authorized at an annual
or special meeting of stockholders, and not by written consent, by affirmative
vote of at least 66 2/3% of the outstanding voting stock which is not owned by
the interested stockholder. The restrictions imposed by Section 203 will not
apply to a corporation if (i) the corporation's original certificate of
incorporation contains a provision expressly electing not to be governed by
this Section; or (ii) the corporation by the action of its stockholders
holding a majority of outstanding stock adopts an amendment to its certificate
of incorporation or by-laws expressly electing not to be governed by Section
203 (such amendment will not be effective until 12 months after adoption and
shall not apply to any business combination between such corporation and any
person who became an interested stockholder of such corporation on or prior to
such adoption).

41
<PAGE>

The Company has not elected out of the statute and, therefore, the
restrictions imposed by Section 233 apply to the Company. These restrictions
may have the effect of delaying, deferring or preventing a change in control
of the Company.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is Continental Stock
Transfer & Trust Company.

42
<PAGE>

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, Hambrecht
& Quist LLC, BancAmerica Robertson Stephens and Cowen & Company (the
"Underwriters") have severally agreed to purchase from the Company the
following respective number of shares of Common Stock:

<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Hambrecht & Quist LLC...........................................
BancAmerica Robertson Stephens..................................
Cowen & Company.................................................
---------
Total........................................................... 2,500,000
=========
</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
closing 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 of the shares of Common Stock being
offered hereby if any of such shares are purchased.

The Underwriters propose to offer the underwritten shares in part directly
to the public at the public offering price set forth on the cover page of this
Prospectus and in part to certain securities dealers at such price less a
concession not in excess of $ per share. The Underwriters may allow, and
such dealers may re-allow, a concession not in excess of $ per share to
certain other brokers and dealers. After the shares are released for sale to
the public, the offering price and other selling terms may from time to time
be varied by the Underwriters.

The Company has granted to the Underwriters an option exercisable for 30
days after the date of this Prospectus to purchase up to an aggregate of
375,000 additional shares of Common Stock to cover over-allotments, if any. If
the Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of
them as shown in the foregoing table bears to the 2,500,000 shares of Common
Stock offered hereby. The Underwriters may exercise such option only to cover
over-allotments made in connection with the sale of the shares.

The officers and directors of the Company have agreed that they will not,
without the prior written consent of Hambrecht & Quist LLC, directly or
indirectly sell, offer, contract to sell, make any short sale, pledge or
otherwise transfer or dispose of any shares of Common Stock or any securities
convertible into or exchangeable or exercisable for or any other rights to
purchase or acquire Common Stock during the 90-day period following the date
of this Prospectus, except that such individuals may transfer shares to
members of their immediate families or to trusts the beneficiaries of which
are such individuals and/or members of their immediate families, so long as
such transferees agree not to dispose of such shares as provided above.
Hambrecht & Quist LLC may release such officers and directors from such
obligations from time to time without notice. In addition, the Company has
agreed that for a period of 90 days after the effective date of the
Registration Statement, it will not, without the consent of the Underwriters,
offer, sell, contract to sell or otherwise dispose of any shares of Common
Stock or any securities convertible into, or exchangeable for, or warrants to
purchase, any shares of Common Stock, or grant any option to purchase or right
to acquire or acquire any option to dispose of any shares of Common Stock
except in specified circumstances.

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

43
<PAGE>

Until the distribution of the Common Stock is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase shares of Common Stock. As an exception to
these rules, the Underwriters are permitted to engage in certain transactions
that stabilize the price of the Common Stock.

In addition, if the Underwriters over-allot (i.e., if they sell more shares
of Common Stock than are set forth on the cover page of this Prospectus), and
thereby create a short position in the Common Stock in connection with this
offering, the Underwriters may reduce that short position by purchasing Common
Stock in the open market. The Underwriters also may elect to reduce any short
position by exercising all or part of the over-allotment option described
herein.

In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases.

Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Underwriters will engage in such transaction or that
such transactions, once commenced, will not be discontinued without notice.

In general, the rules of the Commission will prohibit the Underwriters from
making a market in the Company's Common Stock during the "cooling off" period
immediately preceding the commencement of sales in the offering. The
Commission has, however, adopted exemptions from these rules that permit
passive market making under certain conditions. These rules permit an
underwriter to continue to make a market subject to the conditions, among
others, that its bid not exceed the highest bid by a market maker not
connected with the offering and that its net purchases on any one trading day
not exceed prescribed limits. Pursuant to these exemptions, certain
Underwriters, selling group members (if any) or their respective affiliates
intend to engage in passive market making in the Company's Common Stock during
the cooling off period.

LEGAL OPINION

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Morgan, Lewis & Bockius LLP, Philadelphia,
Pennsylvania. Certain legal matters will be passed upon for the Underwriters
by Stroock & Stroock & Lavan LLP, New York, New York.

EXPERTS

The financial statements appearing in this Prospectus and contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996,
incorporated by reference in this Prospectus, have been audited by Richard A.
Eisner & Company, LLP, independent auditors, as indicated in their report with
respect thereto, and are included and incorporated herein by reference in
reliance upon such report given upon the authority of said firm as experts in
accounting and auditing.

44
<PAGE>

MAGAININ PHARMACEUTICALS INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors............................................ F-2
AUDITED FINANCIAL STATEMENTS
Balance Sheets as of December 31, 1996 and 1995........................... F-3
Statements of Operations for the years ended December 31, 1996, 1995 and
1994 and for the Period from June 29, 1987 (Inception) to December 31,
1996, ................................................................... F-4
Statements of Changes in Stockholders' Equity for the years ended December
31, 1996, 1995 and 1994 and for the Period from June 29, 1987 (Inception)
through December 31, 1996................................................ F-5
Statements of Cash Flows for the years ended December 31, 1996, 1995 and
1994 and for the Period from June 29, 1987 (Inception) to December 31,
1996..................................................................... F-7
Notes to Financial Statements............................................. F-8
UNAUDITED FINANCIAL STATEMENTS
Balance Sheet as of September 30, 1997.................................... F-17
Statements of Operations for the three months and nine months ended Sep-
tember 30, 1997 and 1996................................................. F-18
Statements of Cash Flows for the nine months ended September 30, 1997 and
1996..................................................................... F-19
Notes to Financial Statements............................................. F-20
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders
Magainin Pharmaceuticals Inc.
Plymouth Meeting, Pennsylvania

We have audited the accompanying balance sheets of Magainin Pharmaceuticals
Inc. (a development stage company) as at December 31, 1996, and December 31,
1995 and the related statements of operations, changes in stockholders' equity
and cash flows for each of the years in the three-year period ended December
31, 1996 and for the period June 29, 1987 (inception) to 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 enumerated above present fairly, in
all material respects, the financial position of Magainin Pharmaceuticals Inc.
at December 31, 1996 and December 31, 1995 and the results of its operations
and its cash flows for each of the years in the three-year period ended
December 31, 1996 and for the period June 29, 1987 (inception) to December 31,
1996, in conformity with generally accepted accounting principles.

/s/ Richard A. Eisner & Company, LLP

Richard A. Eisner & Company, LLP

New York, New York
January 29, 1997

F-2
<PAGE>

MAGAININ PHARMACEUTICALS INC.
(A DEVELOPMENT STAGE COMPANY)

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
-------- --------
(IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 2,072 $ 1,880
Short-term investments................................... 31,268 32,270
Prepaid expenses and other current assets................ 454 509
-------- --------
Total current assets................................... 33,794 34,659
Fixed assets, net.......................................... 2,506 1,476
Long-term investments...................................... -- 9,516
Other assets............................................... 76 76
-------- --------
Total assets........................................... $ 36,376 $ 45,727
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.................... $ 5,145 $ 4,080
Note payable--current.................................... 250 --
Equipment lease obligations--current..................... 123 150
-------- --------
Total current liabilities.............................. 5,518 4,230
Note payable--long-term.................................... 750 --
Equipment lease obligations--long-term..................... 38 161
Deferred rent.............................................. 127 143
-------- --------
Total liabilities...................................... 6,433 4,534
-------- --------
Commitments, contingencies and other matters
Stockholders' equity:
Preferred stock--$.001 par value; shares authorized--
9,211; none issued
Common Stock--$.002 par value; shares authorized--45,000;
shares issued and outstanding--19,364 and 17,052........ 39 34
Additional paid-in capital............................... 125,134 105,662
Unrealized gain on investments........................... 13 120
Deficit accumulated during the development stage......... (95,243) (64,623)
-------- --------
Total stockholders' equity............................. 29,943 41,193
-------- --------
Total liabilities and stockholders' equity............. $ 36,376 $ 45,727
======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-3
<PAGE>

MAGAININ PHARMACEUTICALS INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
JUNE 29, 1987
YEAR ENDED DECEMBER 31, (INCEPTION) TO
---------------------------- DECEMBER 31,
1996 1995 1994 1996
-------- -------- -------- --------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues:
Contract and government grant... $ 150 $ 2,056 $ 85 $ 2,983
Related party contract.......... -- 280 326 1,527
-------- -------- -------- ---------
150 2,336 411 4,510
-------- -------- -------- ---------
Costs and Expenses:
Research and development........ 22,326 18,160 11,258 78,681
General and administrative...... 3,488 3,137 3,468 20,512
Charge for stock issuance
relating to royalty buyout..... 7,080 -- -- 7,080
-------- -------- -------- ---------
32,894 21,297 14,726 106,273
-------- -------- -------- ---------
Loss from operations.............. (32,744) (18,961) (14,315) (101,763)
Interest income................... 2,172 1,778 1,207 7,210
Interest expense.................. (48) (32) (48) (690)
-------- -------- -------- ---------
Net loss.......................... $(30,620) $(17,215) $(13,156) $ (95,243)
======== ======== ======== =========
Net loss per share................ $ (1.71) $ (1.17) $ (0.99)
======== ======== ========
Weighted average shares
outstanding...................... 17,938 14,696 13,301
======== ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-4
<PAGE>

MAGAININ PHARMACEUTICALS INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
DEFICIT TREASURY
COMMON STOCK ACCUMULATED STOCK UNREALIZED
---------------- ADDITIONAL DURING --------- GAIN (LOSS)
NUMBER PAID IN DEVELOPMENT NUMBER ON
OF SHARES AMOUNT CAPITAL STAGE OF SHARES INVESTMENTS
--------- ------ ---------- ----------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
For the period from
inception through
December 31, 1996
Common Stock issued,
$.002 per share
(inception)............ 374 $ 1 $ -- $ -- -- --
Common Stock issued,
$2.00 per share........ 1,750 3 3,496 -- -- --
Net loss................ -- -- -- (1,324) -- --
------ --- ------ ------- --- ---
Balance--December 31,
1988................... 2,124 4 3,496 (1,324) -- --
Acquisition of treasury
shares, $.002 per
share.................. -- -- -- -- 54 --
Common Stock issued,
$.002 to $.30 per
share.................. 2 -- -- -- -- --
Common Stock issued,
exercise of options.... 3 -- -- -- -- --
Common Stock issued,
$3.00 per share........ 1,000 2 2,998 -- -- --
Net loss................ -- -- -- (2,086) -- --
------ --- ------ ------- --- ---
Balance--December 31,
1989................... 3,129 6 6,494 (3,410) 54 --
Fair value of warrants
issued as
compensation........... -- -- 41 -- -- --
Common Stock issued,
$.002 to $.40 per
share.................. 5 -- 1 -- -- --
Common Stock issued,
$3.00 per share (net of
expenses).............. 70 -- 200 -- -- --
Common Stock issued,
$4.00 per share (net of
expenses).............. 1,000 2 3,972 -- -- --
Common Stock issued,
$6.50 per share (net of
expenses).............. 154 -- 986 -- -- --
Common Stock issued,
exercise of options.... 75 -- 13 -- -- --
Net loss................ -- -- -- (4,321) -- --
------ --- ------ ------- --- ---
Balance--December 31,
1990................... 4,433 8 11,707 (7,731) 54 --
Common Stock issued,
$4.00 per share........ 176 -- 702 -- -- --
Common Stock issued,
exercise of warrants
and options............ 394 1 1,958 -- -- --
Fair value of warrants
issued................. -- -- 250 -- -- --
Retirement of treasury
stock.................. (54) -- -- -- (54) --
Common Stock issued
pursuant to initial
public offering, $9.00
per share (net of
expenses).............. 2,000 4 16,212 -- -- --
Net loss................ -- -- -- (5,351) -- --
------ --- ------ ------- --- ---
Balance--December 31,
1991................... 6,949 13 30,829 (13,082) -- --
Common Stock issued as
compensation, $4.00 per
share.................. 1 -- 2 -- -- --
Common Stock issued
pursuant to initial
public offering over-
allotment, $9.00 per
share (net of
expenses).............. 105 1 865 -- -- --
Common Stock issued,
exercise of options.... 54 -- 11 -- -- --
Net loss................ -- -- -- (8,459) -- --
------ --- ------ ------- --- ---
Balance--December 31,
1992................... 7,109 14 31,707 (21,541) -- --
Common Stock issued
pursuant to public
offering, $6.00 per
share (net of
expenses).............. 3,875 8 21,460 -- -- --
Common Stock issued,
exercise of options.... 76 -- 48 -- -- --
Common Stock issued
pursuant to private
placement, $8.75 per
share (net of
expenses).............. 2,200 5 18,019 -- -- --
Net loss................ -- -- -- (12,711) -- --
------ --- ------ ------- --- ---
Balance--December 31,
1993................... 13,260 27 71,234 (34,252) -- --
</TABLE>

F-5
<PAGE>

MAGAININ PHARMACEUTICALS INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY--(CONTINUED)

The accompanying notes are an integral part of these financial statements.

F-6
<PAGE>

MAGAININ PHARMACEUTICALS INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 29, 1987
DECEMBER 31, (INCEPTION) TO
---------------------------- DECEMBER 31,
1996 1995 1994 1996
-------- -------- -------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss........................ $(30,620) $(17,215) $(13,156) $ (95,243)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Fair value of stock, options
and warrants issued.......... 7,060 1,250 200 8,809
Depreciation and
amortization................. 625 456 551 3,809
Deferred rent................. (16) (6) 7 127
Changes in operating assets
and liabilities:
(Increase) decrease in
prepaid expenses and other
assets..................... 55 (28) 25 (645)
Increase in accounts payable
and accrued expenses....... 1,065 590 632 5,145
-------- -------- -------- ---------
Net cash used in operating
activities............... (21,831) (14,953) (11,741) (77,998)
-------- -------- -------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of investments......... (28,019) (62,948) (20,856) (182,852)
Proceeds from maturities and
sales of investments........... 38,430 44,821 33,884 151,595
Capital expenditures............ (1,655) (360) (149) (4,196)
-------- -------- -------- ---------
Net cash provided by (used
in) investing
activities............... 8,756 (18,487) 12,879 (35,453)
-------- -------- -------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from notes payable..... 1,000 -- -- 1,000
Payments on capitalized
equipment leases............... (150) (186) (352) (1,840)
Proceeds from sale of stock and
exercise of options and
warrants....................... 12,417 32,956 29 116,363
-------- -------- -------- ---------
Net cash provided by (used
in) financing
activities............... 13,267 32,770 (323) 115,523
-------- -------- -------- ---------
Net increase (decrease) in cash
and cash equivalents............. 192 (670) 815 2,072
Cash and cash equivalents at
beginning of period.............. 1,880 2,550 1,735 --
-------- -------- -------- ---------
Cash and cash equivalents at end
of period........................ $ 2,072 $ 1,880 $ 2,550 $ 2,072
======== ======== ======== =========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for
interest....................... $ 48 $ 32 $ 48 $ 439
======== ======== ======== =========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-7
<PAGE>

MAGAININ PHARMACEUTICALS INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS

NOTE A--THE COMPANY:

Magainin Pharmaceuticals Inc. (the "Company") was incorporated on June 29,
1987. The Company is engaged in the development of medicines for serious
diseases. The Company's development efforts are focused on anti-infectives,
oncology and, pulmonary and allergic disorders.

The Company is in the development stage, and its efforts have been
principally devoted to research and development. The Company is subject to
those risks associated with development stage companies. Substantial financing
will be required by the Company to fund its research and development
activities. There is no assurance that such financing will be available when
needed or that the Company's research and development efforts will be
successful.

NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

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 related notes. Actual results could differ from those estimates.

Cash and Cash equivalents--The Company considers all highly liquid
investment instruments purchased with a maturity of three months or less to be
cash equivalents.

Investments--Investments purchased with a maturity of more than three
months, and which mature less than twelve months from the balance sheet date,
are classified as short-term investments. Long-term investments are those with
maturities greater than twelve months from the balance sheet date. The Company
generally holds investments to maturity, however, since the Company may, from
time to time, sell securities to meet cash requirements, the Company
classifies its investments as available-for-sale as defined by Statement of
Financial Accounting Standards ("SFAS"), No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". Available-for-sale securities are
carried at market value with unrealized gains and losses reported as a
separate component of Stockholders' Equity. Gross realized gains and losses on
the sales of investment securities are determined on the specific
identification method and are included in interest income.

Concentration of Credit--The Company invests generally in securities of the
U.S. Treasury, U.S. government agencies, and U.S. government security-based
money market funds. The Company has not experienced any losses on its
investments.

Fixed Assets and Depreciation--Fixed assets are recorded at cost and
depreciated using the straight-line method over the estimated useful lives of
the assets. Equipment under capital leases and leasehold improvements are
amortized using the straight-line method over the term of the respective
lease, or their estimated useful lives, whichever is shorter. Expenditures for
maintenance and repairs are charged to expense as incurred.

Revenue recognition--Any revenues from research and development arrangements
are recognized pursuant to the terms of the related agreements as work is
performed, or as milestones are achieved.

Research and development--Research and development costs are expensed as
incurred.

Patent costs--Patent-related costs are expensed as incurred.

F-8
<PAGE>

MAGAININ PHARMACEUTICALS INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Lease expense--Expense related to the facility lease is recorded on a
straight-line basis over the lease term. The difference between rent expense
incurred and the amount paid is recorded as deferred rent and is amortized
over the lease term.

Income Taxes--The Company accounts for income taxes using the liability
method as prescribed by Financial Accounting Standards Board ("FASB")
Statement No. 109, "Accounting for Income Taxes". Deferred tax assets and
liabilities are determined based on differences between the financial
reporting and tax bases of assets and liabilities, and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse. The measurement of deferred tax assets is reduced, if
necessary, by a valuation allowance for any tax benefits which are not
expected to be realized. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in the period that such tax rate changes
are enacted.

Net loss per share--Net loss per share is computed by dividing the net loss
by the weighted average number of shares of Common Stock outstanding during
each period. Outstanding options and warrants have not been considered because
their inclusion would have an antidilutive effect on net loss per share.

New Pronouncements--In October 1995, the FASB issued SFAS 123 "Accounting
for Stock-Based Compensation Arrangements". SFAS 123 permits a company to
choose either a new fair value-based method of accounting for stock-based
compensation, or retaining the current intrinsic value-based method of
accounting for stock-based compensation provided for in APB Opinion 25. The
statement requires pro forma disclosures of net income and earnings per share
computed as if the fair value-based method had been applied in financial
statements of companies that continue to follow the intrinsic value-based
method of accounting. The Company has adopted SFAS 123 for disclosure purposes
only, and as a result, the adoption of SFAS 123 will not materially impact the
Company's results of operations.

Reclassification--Certain reclassifications have been made to prior years'
financial statements to conform to the 1996 presentation.

NOTE C--SHORT-TERM AND LONG-TERM INVESTMENTS:

The Company invests in U.S. Treasury and U.S. Government agency securities.
Excess cash is invested on a short-term basis in U.S. government based money
market funds. Unrealized gains at December 31, 1996 total $13,000. The Company
has not realized any losses on its investments.

NOTE D--FIXED ASSETS:

Fixed assets are stated at cost and are summarized as follows (in
thousands):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Laboratory and office equipment................... $3,766 $2,707
Leasehold improvements............................ 2,433 1,837
------ ------
Total............................................ 6,199 4,544
Less accumulated depreciation and amortization.... 3,693 3,068
------ ------
$2,506 $1,476
====== ======
</TABLE>

F-9
<PAGE>

MAGAININ PHARMACEUTICALS INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE E--ACCOUNTS PAYABLE AND ACCRUED EXPENSES:

Accounts payable and accrued expenses consist of the following (in
thousands):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Accounts payable................................... $ 176 $ 290
Clinical trial costs............................... 720 1,333
Manufacturing development costs.................... 3,426 1,865
Preclinical costs.................................. 269 --
Professional fees.................................. 200 334
Deferred contract income........................... 87 87
Other.............................................. 267 171
------ ------
$5,145 $4,080
====== ======
</TABLE>

NOTE F--EQUIPMENT LEASE OBLIGATIONS:

The Company leases equipment under various agreements with terms of 36 to 48
months and accounts for these leases as capital leases. Equipment purchases
under these leases were approximately $0, $0, $399,000 and $2,003,000 for the
years ended December 31, 1996, 1995, 1994 and the period June 29, 1987
(inception) through December 31, 1996, respectively. The net book value of the
equipment held under capital leases was approximately $149,000 and $293,000 at
December 31, 1996 and 1995, respectively.

Future lease payments as of December 31, 1996 are as follows (in thousands):

<TABLE>
<S> <C>
YEAR ENDING DECEMBER 31,
1997................................................................. $131
1998................................................................. 42
----
Total.............................................................. 173
Less amounts representing interest................................... 12
----
Present value of future lease payments at end of year................ 161
Less amounts due within one year..................................... 123
----
Amounts due after one year........................................... $ 38
====
</TABLE>

NOTE G--NOTE PAYABLE:

In April 1996, the Company entered into a credit arrangement with a
commercial bank under which up to $1,000,000 may be borrowed to finance the
acquisition of equipment and the costs of improvements to the Company's leased
facilities. Borrowings under this credit facility bear interest at a rate of
8.5% for the three-year term of the loan. The loan provides for monthly
interest payments, with principal payments made in quarterly installments in
the second and third year after borrowings. Under this credit arrangement, the
Company has agreed to maintain, in an unrestricted investment account with the
bank, an investment balance not less than the outstanding loan balance. Any
amounts outstanding shall become immediately due and payable under certain
circumstances, including the failure of the Company to maintain (i) a certain
minimum cash and investment balance, and (ii) certain financial ratios.

F-10
<PAGE>

MAGAININ PHARMACEUTICALS INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

As of December 31, 1996, the Company had borrowed $1,000,000 under this
facility.

The principal repayment obligations as of December 31, 1996 are as follows
(in thousands):

<TABLE>
<S> <C>
1997............................................................... $ 250
1998............................................................... $ 500
1999............................................................... $ 250
-------
Total.............................................................. $ 1,000
</TABLE>

NOTE H--STOCKHOLDERS' EQUITY:

In August 1995, the Company consummated a public offering of 3,500,000
shares of Common Stock with proceeds to the Company (after underwriting
discounts and offering expenses) of approximately $32,627,000.

In October 1995, pursuant to an arrangement with a contract manufacturer,
the Company issued to such manufacturer 125,000 shares of Common Stock with a
fair value of $10 per share. In connection therewith, the Company recorded a
non-cash charge to earnings of $1,250,000.

In May 1996, the Company increased the number of its authorized common
shares to 45,000,000.

In August 1996, the Company completed a private placement of 1,556,763
shares of Common Stock, together with warrants as described below, with
proceeds to the Company (after offering expenses) of approximately
$11,932,000.

In September 1996, pursuant to a buyout of a royalty arrangement, the
Company issued 550,000 shares of Common Stock with a fair value of $12.87 per
share. In connection, therewith, the Company recorded a non-cash charge to
earnings of $7,060,000.

Warrants--Under a 1991 credit agreement with certain stockholders, the
Company granted warrants to the lenders to purchase an aggregate of 250,000
shares of Common Stock exercisable at $8 per share. These warrants expire in
2001. In connection therewith, the Company recorded a non-cash charge to
earnings of $250,000 in 1991. At December 31, 1996, 229,739 of these warrants
are outstanding.

In October 1994, pursuant to an arrangement with a contract manufacturer,
the Company granted to such manufacturer a warrant to purchase 300,000 shares
of Common Stock exercisable at $7.50 per share. The warrant expires in 1999.
In connection therewith, the Company recorded a non-cash charge to earnings of
$200,000 in 1994.

In August 1996, the Company completed a private placement of 1,556,763
shares of Common Stock, together with warrants to purchase an aggregate of
1,011,896 shares of Common Stock. The warrants are exercisable at $8.48 per
share, and contain provisions to decrease the exercise price, and increase the
issuable shares, under certain circumstances. Such circumstances include the
issuance of shares of Common Stock by the Company for a consideration per
share less than the exercise price of the warrants, and the issuance by the
Company of securities convertible into shares of Common Stock for which the
exercise or conversion price is less than the exercise price of the warrants.
The warrant holders also have a one-time right, in the event the average price
of the Company's Common Stock in any month prior to August 1999 falls below a
certain level, to reduce the exercise price of the warrant to 110% of such
average price.

F-11
<PAGE>

MAGAININ PHARMACEUTICALS INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Stock option plans--In May 1991, the stockholders approved the 1990 Stock
Option Plan (the "1990 Plan") which provides for the granting of options for
the purchase of up to 160,000 shares of Common Stock. In May 1996, the
stockholders approved the amended 1992 Stock Option Plan (the "1992 Plan")
which provides for the granting of options for the purchase of up to 2,500,000
shares of Common Stock.

The plans provide for the granting of incentive stock options and
nonqualified stock options and are administered by a committee of the Board of
Directors (except as to options awarded to non-employee directors as described
below). The committee has the authority to determine the term during which an
option may be exercised (provided that no option may have a term of more than
10 years), the exercise price of an option and the rate at which options may
be exercised. Incentive stock options may be granted only to employees of the
Company. Nonqualified stock options may be granted to employees, directors or
consultants of the Company. For nonqualified stock options under the 1992 Plan
and incentive stock options, the exercise price can not be less than the fair
market value of the underlying Common Stock on the date of the grant. The 1992
Plan also provides for initial grants to nonemployee directors to purchase
15,000 shares of Common Stock, and annual grants thereafter of options to
purchase 5,000 shares of Common Stock.

In addition to the shares of Common Stock issuable upon exercise of options
granted under the Company's stock option plans, 734,383 shares of Common Stock
are issuable upon exercise of outstanding options granted to officers,
employees and consultants pursuant to other written agreements. The price for
these options was set by the Board of Directors, or a committee designated by
the Board, based upon an evaluation of the fair market value of the Company's
Common Stock. The options vest over various periods, not exceeding five years,
and expire no later than ten years from the date of grant.

During 1994, a number of outstanding options with higher exercise prices
were exchanged for fewer options with an exercise price equal to $3.75 per
share. Pursuant to this program, 499,975 option shares were exchanged for
431,724 new option shares.

The Company applies APB Opinion 25 and related Interpretations in accounting
for its options. Accordingly, no compensation cost has been recognized for its
stock option grants. Had compensation cost for the Company's stock option
grants been determined based on the fair value at the grant dates for awards
consistent with the method of SFAS 123, the Company's net income and earnings
per share would have been reduced to the pro forma amounts indicated below (in
thousands, except per share data):

<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C> <C>
Net Loss................................... As reported $( 30,620) $( 17,215)
Pro forma $( 31,816) $( 17,410)
Net Loss Per Share......................... As reported $ (1.71) $ (1.17)
Pro forma $ (1.78) $ (1.18)
</TABLE>

The resulting effect on pro forma net loss and net loss per share disclosed
for 1996 and 1995 is not likely to be representative of the effects on net
loss and net loss per share on a pro forma basis in future years, because 1995
and 1996 pro forma results include the impact of only one and two years,
respectively, of grants and related vesting, while subsequent years will
include additional years of grants and vesting.

F-12
<PAGE>

MAGAININ PHARMACEUTICALS INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

A summary of the status of the Company's stock options as of December 31,
1994, 1995 and 1996, and changes during the years ending on those dates is
presented below (in thousands, except per share data):

<TABLE>
<CAPTION>
1996 1995 1994
----------------- ----------------- -----------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
OPTIONS (000) PRICE (000) PRICE (000) PRICE
- ------- ------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 2,048 $ 3.97 1,759 $3.07 1,563 $4.13
Granted................. 782 $10.56 504 $7.16 323 $5.49
Exercised............... (196) $ 2.56 (107) $3.08 (25) $1.14
Forfeited............... (168) $ 5.01 (108) $4.90 (102) $8.72
Outstanding at end of
year................... 2,466 $ 6.07 2,048 $3.97 1,759 $3.07
Options exercisable at
year-end............... 1,203 $ 3.00 1,157 $2.39 926 $1.89
Weighted-average fair
value of options
granted during the
year................... $7.54 $5.30 --
</TABLE>

The following table summarizes information about stock options outstanding
at December 31, 1996 (in thousands, except per share data):

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- ---------------------
WEIGHTED-AVERAGE WEIGHTED- WEIGHTED-
SHARES REMAINING AVERAGE SHARES AVERAGE
RANGE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/96 LIFE PRICE AT 12/31/96 PRICE
- --------------- ----------- ------------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$.002-$.40..... 146 2 years $ .022 146 $ .022
$2.00-$3.75.... 1062 6 years $ 2.75 867 $ 2.54
$5.25-$8.00.... 300 8 years $ 6.70 139 $ 6.35
$9.13-$11.63... 943 9 years $10.38 43 $ 9.18
$16.75-$16.75.. 15 8 years $16.75 8 $16.75
----- ------- ------ ----- ------
$.002-$16.75... 2,466 7 years $ 6.07 1,203 $ 3.00
</TABLE>

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1995 and 1996: dividend yield of zero (.0%)
percent, expected volatility of eighty-two (82%) and seventy-nine (79%)
percent; respectively, risk-free interest rates ranging from 5.6% to 7.25%,
and expected life of six years.

NOTE I--INCOME TAXES:

The Company has approximately $85,522,000 of net operating loss ("NOL")
carryforwards, and approximately $4,258,000 of research and development tax
credits, available to offset future federal income tax, subject to limitations
for alternative minimum tax. The NOL and research and development credit
carryforwards are subject to examination by the tax authorities and expire in
various years from 2003 through 2011. The NOL carryforward differs from the
accumulated deficit due principally to differences in the recognition of
certain research and development expenses for financial and federal income tax
reporting.

The Tax Reform Act of 1986 contains provisions that may limit the NOL and
research and development credit carryforwards available to be used in any
given year upon the occurrence of certain events, including

F-13
<PAGE>

MAGAININ PHARMACEUTICALS INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

significant changes in ownership interest. A change in ownership of a company
of greater than 50% within a three-year period results in an annual limitation
on that company's ability to utilize its NOL carryforwards from tax periods
prior to the ownership change. The Company is subject to an annual limitation
on the use of its NOL carryforwards and research and development credits
pursuant to these provisions. The Company does not believe that such
limitation will have a material adverse impact on the utilization of its
carryforwards.

The Company's NOL, research and development tax credit carryforwards and
temporary differences represent a previously unrecognized tax benefit.
Recognition of these benefits requires future income. Because the attainment
of future income is uncertain, the Company has established a valuation
allowance, which increased by approximately $7,698,000 during 1996, for the
entire amount of the tax benefit.

Significant components of the Company's deferred tax assets as of December
31, 1996 and 1995 are as follows (in thousands):

<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Net operating loss carryforwards........................ $ 29,077 $ 24,533
Research credits........................................ 4,258 3,451
Other (net)............................................. 3,213 866
-------- --------
Net deferred tax assets................................. 36,548 28,850
Valuation allowance for deferred tax assets............. $(36,548) $(28,850)
-------- --------
Total deferred tax assets............................... $ -- $ --
======== ========
</TABLE>

NOTE J--COLLABORATIVE AGREEMENTS:

In 1990, the Company entered into a Research and License Agreement with
Colgate-Palmolive Company ("Colgate") pursuant to which the Company received
research funding of approximately $0, $280,000, $326,000, and $1,527,000
during the years ended December 31, 1996, 1995 and 1994 and during the period
from June 29, 1987 (inception) to December 31, 1996, respectively. This
agreement has expired, and the Company does not expect to receive any
additional such funding.

In August 1994, the Company entered into a collaboration in the nutritional
field with Abbott Laboratories ("Abbott"). The Company recorded revenue of
$150,000, $150,000 and $62,500 in the years ended December 31, 1996, 1995 and
1994, respectively, under this arrangement.

The Company recorded revenues of $1.9 million in 1995 relating to the
execution of an agreement in principle with Fisons plc ("Fisons") in September
1995, and the termination by Fisons of this arrangement in November 1995.

Under license agreements, the Company will owe royalties on sales of certain
of its proposed products. Additionally, certain of these agreements also
provide that if the Company elects not to pursue the commercial development of
any licensed technology, or does not adhere to an acceptable schedule of
commercialization, then the Company's exclusive rights to such technology
would terminate.

The Company maintains relationships with, and funds research at, a number of
institutions. These relationships typically provide the Company with an option
to license any results of the research. Generally, the Company would be
obligated to pay royalties based upon any revenue from the licenses.

F-14
<PAGE>

MAGAININ PHARMACEUTICALS INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE K--401(K) PLAN:

The Company maintains a 401(k) retirement plan available to all full-time,
eligible employees. Employee contributions are voluntary and are determined on
an individual basis, limited to the maximum amount allowable under federal tax
regulations. The Company, at its discretion, may make certain contributions to
the plan. No such contributions have been made through December 31, 1996.

NOTE L--COMMITMENTS, CONTINGENCIES AND OTHER MATTERS:

Manufacturing

The Company contracts with third parties for the manufacture of materials,
and is working with Abbott Laboratories with regard to the manufacture of bulk
Cytolex. The Company's current arrangement with Abbott provides for the
development by Abbott of a chemical process to manufacture bulk Cytolex on a
commercial scale, for the production of bulk Cytolex, and for Abbott to
perform those activities necessary to submit a Drug Master File to the FDA in
support of any filing for marketing approval of Cytolex. The arrangement with
Abbott provides for cash payments by the Company through early 1998
aggregating approximately $12,900,000, as well as the issuance by the Company
to Abbott of up to 500,000 shares of its Common Stock and the obligation to
pay a royalty on future sales of Cytolex. Through December 31, 1996, the
Company has paid Abbott approximately $8,600,000 under this arrangement. Stock
issuances by the Company to Abbott will result in a charge to earnings,
representing the fair value of the shares when issued. The Company issued
125,000 shares of Common Stock to Abbott in October 1995, resulting in a
charge to earnings of $1,250,000 in 1995. Future stock issuances are related
to the achievement by Abbott of contractual performance milestones which could
begin to occur in 1997. Substantial additional funds will also be required to
continue manufacturing development efforts beyond the term of this current
arrangement.

There are a limited number of companies which are currently able to produce
materials on the scale which the Company expects to require to commercialize
its compounds. There can be no assurance that qualified outside contractors
will be available to manufacture materials for the Company, or do so at costs
which are affordable by the Company. The Company is currently dependent upon
Abbott for the production of bulk Cytolex, and, as described above, Abbott is
currently conducting certain manufacturing development activities. The Company
and Abbott have agreed that, upon completion of such activities, they will
negotiate in good faith a supply agreement for the Company's worldwide supply
needs of Cytolex. In the event that this agreement is not entered into, or
Abbott does not otherwise continue to manufacture Cytolex, the Company's
timeline to commercialize Cytolex would be adversely affected, and the Company
may need to spend substantial funds on securing other manufacturing
arrangements or building a manufacturing infrastructure, and licensing
applicable manufacturing related technology from such contract manufacturer.

The Company also expects to conduct significant manufacturing development
activities for its other products under development.

Rent

The Company has entered into an operating lease for its laboratory and
corporate office facility. The lease provides for minimum annual rent payments
through 1999 as follows (in thousands):

<TABLE>
<S> <C>
YEAR ENDING DECEMBER 31,
1997................................................................ $322
1998................................................................ 335
1999................................................................ 319
</TABLE>

F-15
<PAGE>

MAGAININ PHARMACEUTICALS INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

The lease provides for escalations relating to increases in real estate
taxes and certain operating expenses.

Rent expense was approximately $310,000, $297,000, $291,000, and $1,978,000
for the years ended December 31, 1996, 1995 and 1994, and for the period from
June 29, 1987 (inception) to December 31, 1996, respectively.

F-16
<PAGE>

MAGAININ PHARMACEUTICALS INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 365 $ 2,072
Short-term investments............................ 24,764 31,268
Prepaid expenses and other current assets......... 437 454
--------- --------
Total current assets............................ 25,566 33,794
Fixed assets, net................................... 3,003 2,506
Other assets........................................ 71 76
--------- --------
Total assets.................................... $ 28,640 $ 36,376
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses............. $ 4,973 $ 5,145
Note payable--current............................. 500 250
Equipment lease obligations--current.............. 64 123
--------- --------
Total current liabilities....................... 5,537 5,518
Note payable--long term............................. 1,000 750
Equipment lease obligations--long term.............. -- 38
Deferred rent....................................... 104 127
--------- --------
Total liabilities............................... 6,641 6,433
--------- --------
Commitments, contingencies and other matters
Stockholders' equity:
Preferred stock--$.001 par value; shares
authorized--9,211, none issued................... -- --
Common Stock--$.002 par value; shares authorized--
45,000; shares issued and outstanding--19,380 and
19,364........................................... 39 39
Additional paid-in capital........................ 125,209 125,134
Unrealized gain on investments.................... 17 13
Accumulated deficit............................... (103,266) (95,243)
--------- --------
Total stockholders' equity...................... 21,999 29,943
--------- --------
Total liabilities and stockholders' equity...... $ 28,640 $ 36,376
========= ========
</TABLE>

See accompanying notes to unaudited financial statements.

F-17
<PAGE>

MAGAININ PHARMACEUTICALS INC.

STATEMENTS OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1997 1996 1997 1996
--------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Revenues:
Related party contract............. $ -- $ -- $ -- $ --
Contract and government grant...... 13 37 10,088 112
-------- --------- -------- ---------
13 37 10,088 112
-------- --------- -------- ---------
Costs and expenses:
Research and development........... 6,327 5,788 16,864 17,870
General and administrative......... 826 789 2,475 2,378
Charge for stock issuance relating
to royalty buy out................ -- 7,080 -- 7,080
-------- --------- -------- ---------
7,153 13,657 19,339 27,328
-------- --------- -------- ---------
Loss from operations................. (7,140) (13,620) (9,251) (27,216)
Interest income...................... 431 546 1,301 1,648
Interest expense..................... (29) (8) (73) (18)
-------- --------- -------- ---------
Net loss............................. $ (6,738) $ (13,082) $ (8,023) $ (25,586)
======== ========= ======== =========
Net loss per share................... $ (.35) $ (.72) $ (.41) $ (1.47)
======== ========= ======== =========
Weighted average shares outstanding.. 19,369 18,209 19,366 17,459
</TABLE>

See accompanying notes to unaudited financial statements.

F-18
<PAGE>

MAGAININ PHARMACEUTICALS INC.

STATEMENTS OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................. $ (8,023) $(25,586)
Adjustments to reconcile net loss to net cash used in
operating activities:
Fair value of stock, options and warrants issued....... -- 7,080
Depreciation and amortization.......................... 709 428
Deferred rent.......................................... (23) (12)
Decrease in prepaid expenses and other assets.......... 22 34
Increase (decrease) in accounts payable and accrued
expenses.............................................. (172) 2,941
-------- --------
Net cash used in operating activities................ (7,487) (15,115)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments................................. (37,426) (24,883)
Proceeds from maturities and sales of investments........ 43,934 27,933
Capital expenditures..................................... (1,206) (1,253)
-------- --------
Net cash provided by investing activities............ 5,302 1,797
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on notes payable................ 625 500
Payments on notes payable................................ (125) --
Payments on capitalized equipment leases................. (97) (115)
Proceeds from sale of securities and exercise of options
and warrants............................................ 75 12,419
-------- --------
Net cash provided by financing activities............ 478 12,804
-------- --------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS................ (1,707) (514)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........... 2,072 1,880
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................. $ 365 $ 1,366
======== ========
</TABLE>

See accompanying notes to unaudited financial statements.

F-19
<PAGE>

MAGAININ PHARMACEUTICALS INC.

NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)

(A) BASIS OF PRESENTATION

The accompanying condensed financial statements do not include all of the
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles, but in
the opinion of management, contain all adjustments (which consist of only
normal recurring adjustments) necessary for a fair presentation of such
financial information. Results of operations for interim periods are not
necessarily indicative of those to be achieved for full fiscal years.

The condensed financial statements should be read in conjunction with the
audited financial statements as of December 31, 1996 and for the year then
ended, included in the Company's 1996 Annual Report on Form 10-K, filed with
the Securities and Exchange Commission.

As a result of revenues earned during the nine months ended September 30,
1997, the Company is no longer in the development stage.

(B) ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following (in
thousands):

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Accounts payable................................ $ 209 $ 176
Clinical trial costs............................ 726 720
Manufacturing development costs................. 2,273 3,426
Preclinical costs............................... 357 269
Regulatory costs................................ 577 --
Professional fees............................... 163 200
Accrued compensation and benefits............... 612 4
Other........................................... 56 350
------ ------
$4,973 $5,145
====== ======
</TABLE>

The Company entered into a credit arrangement in 1996 with a commercial bank
under which up to $1,000,000 may be borrowed to finance the acquisition of
equipment and the costs of improvements to the Company's leased facilities.
Borrowings under this credit facility bear interest at a rate of 8.5% for the
three year term of the loan. The loan provides for monthly interest payments,
with principal payments made in quarterly installments in the second and third
year after borrowings. Under this credit arrangement, any amounts outstanding
shall become immediately due and payable under certain circumstances,
including the failure of the Company to maintain certain minimum cash and
investments balance, and financial ratios.

As of September 30, 1997, the Company has borrowed $875,000 under this
facility.

The Company entered into an additional credit arrangement in 1997 under
which up to $1,500,000 may be borrowed. Borrowings under this credit facility
bear interest at the prime rate minus one quarter percent, to be established
at the time of borrowing. The loan provides for monthly interest payments,
with all principal due April 1999. Under this credit arrangement, any amounts
outstanding shall become immediately due and payable under certain
circumstances, including the failure of the Company to maintain certain
minimum cash and investments balance, and financial ratios.

As of September 30, 1997, the Company has borrowed $625,000 under this
facility.

F-20
<PAGE>

MAGAININ PHARMACEUTICALS INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)

(D) COLLABORATIVE AGREEMENTS

In February 1997, the Company entered into a development, supply and
distribution agreement (the "Agreement") in North America with SmithKline
Beecham ("SB") for Cytolex(TM). SB has paid the Company $10.0 million under
this Agreement, and may make additional payments to Magainin of up to $22.5
million, upon the occurrence of certain product milestones. SB will also fund
a percentage of any development expenses for any additional indications for
Cytolex(TM). Upon the commencement of commercial sales by SB, Magainin will be
responsible for the supply of Cytolex(TM) and SB will be responsible for the
marketing and sales of Cytolex(TM). Magainin will receive certain percentages
of SB sales revenues under agreed upon terms. The Agreement also gives SB the
right to negotiate for rights to another Magainin product development
candidate, under certain terms and conditions.

(E) NEW ACCOUNTING PRONOUNCEMENTS

In February 1997, the Financial Accounting Standards Board issued FAS No.
128, "Earnings per Share," which is effective for financial statements for
fiscal years ending after December 15, 1997. This statement simplifies the
standards for computing earnings per share previously found in APB Opinion No.
15, making such standards comparable to international EPS standards. The
Company intends to adopt FAS No. 128 for its fiscal year ending December 31,
1997; early adoption is not permitted. The Company does not expect that the
effect of adopting FAS No. 128 will be material.

F-21
<PAGE>

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

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 UN-
DERWRITERS. 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 INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

-----------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................................................. 2
Information Incorporated by Reference................................. 2
Prospectus Summary.................................................... 3
Risk Factors.......................................................... 7
Use of Proceeds....................................................... 16
Price Range of Common Stock........................................... 16
Dividend Policy....................................................... 16
Capitalization........................................................ 17
Dilution.............................................................. 17
Selected Financial Data............................................... 18
Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 19
Business.............................................................. 24
Directors and Management.............................................. 36
Principal Stockholders................................................ 38
Description of Capital Stock.......................................... 40
Underwriting.......................................................... 43
Legal Opinion......................................................... 44
Experts............................................................... 44
Index to Financial Statements......................................... F-1
</TABLE>

2,500,000 SHARES

MAGAININ PHARMACEUTICALS INC.

COMMON STOCK

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

HAMBRECHT & QUIST

BANCAMERICA ROBERTSON STEPHENS

COWEN & COMPANY

, 1997

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

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table shows the estimated expenses of the issuance and
distribution of the securities offered hereby.

<TABLE>
<S> <C>
Commission fee..................................................... $ 9,531
NASD registration fee.............................................. 3,590
Nasdaq listing fee................................................. 17,500
Legal fees and expenses............................................ 100,000
Blue Sky Fees and expenses......................................... 15,000
Printing and engraving expenses.................................... 100,000
Accounting fees and expenses....................................... 25,000
Miscellaneous...................................................... 4,379
--------
Total............................................................ $275,000
========
</TABLE>
- ---------------------
*To be filed by amendment.

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law ("Section 145") permits
indemnification of directors, officers, agents and controlling persons of a
corporation under certain conditions and subject to certain limitations.
Article 9 of the Company's By-Laws provides for the indemnification of
directors, officers, employees and agents of the Company to the maximum extent
permitted by the Delaware General Corporation Law. Section 145 empowers a
corporation to indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he is or was a director, officer or agent of the
corporation or another enterprise if serving at the request of the
corporation. Depending on the character of the proceeding, a corporation may
indemnify against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred in connection with
such action, suit or proceeding if the person indemnified acted in good faith
and in respect to any criminal action or proceeding, had no reasonable cause
to believe his conduct was unlawful. In the case of an action by or in the
right of the corporation, no indemnification may be made with respect to any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
that despite the adjudication of liability such person is fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper. Section 145 further provides that to the extent a director, officer,
employee or agent of a corporation has been successful in the defense of any
action, suit or proceeding referred to above or in the defense of any claim,
issue or matter therein, he shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith.

The Company's By-laws permit it to purchase insurance on behalf of such
person against any liability asserted against him and incurred by him in any
such capacity, or arising out of his status as such, whether or not the
Company would have the power to indemnify him against such liability under the
foregoing provision of the By-laws.

ITEM 16. LISTS OF EXHIBITS

The exhibits filed as part of this registration statement are as follows:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1* Underwriting Agreement
5.1* Opinion of Morgan, Lewis & Bockius LLP regarding legality of
Securities being registered.
</TABLE>

II-1
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
23.1* Consent of Morgan, Lewis & Bockius LLP (included in its opinion
filed as Exhibit 5.1 hereto).
23.2** Consent of Richard A. Eisner & Company, LLP.
24.1* Powers of Attorney (included on signature page).
</TABLE>
- ---------------------

* Previously filed.

** Filed herewith.

ITEM 17. UNDERTAKINGS

The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the Securities offered therein, and the offering of such
Securities at that time shall be deemed to be the initial bona fide offering
thereof.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to its Restated Certificates of Incorporation, its By-
laws, or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the Securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against a public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.

The undersigned Registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:

(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;

(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;

Provided, however, that paragraph (1)(i) and 1(ii) do not apply if the
registration statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs
is contained in periodic reports filed by the registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.

(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a registration statement relating to the Securities offered therein,
and the offering of such Securities at that time shall be deemed to be the
initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment
any of the Securities being registered which remain unsold at the
termination of the offering.

II-2
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED AMENDMENT NO. 1 TO
THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED
THEREUNTO DULY AUTHORIZED, IN PLYMOUTH MEETING, PENNSYLVANIA, ON NOVEMBER 10,
1997.

Magainin Pharmaceuticals Inc.

/s/ Jay Moorin
By: _________________________________
JAY MOORIN
CHAIRMAN, PRESIDENT AND CHIEF
EXECUTIVE OFFICER

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 1 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING
PERSONS AND BY JAY MOORIN AS ATTORNEY-IN-FACT FOR THE SPECIFIED PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.

SIGNATURE TITLE
DATE

Chairman of the Board,
/s/ Jay Moorin President and Chief November 10,
_____________________________________ Executive Officer 1997
JAY MOORIN (Principal Executive
Officer)

* Executive Vice November 10,
_____________________________________ President, Chief 1997
MICHAEL R. DOUGHERTY Financial Officer and
Director (Principal
Financial and
Accounting Officer)

* Vice Chairman of the November 10,
_____________________________________ Board and Executive 1997
MICHAEL A. ZASLOFF, M.D., PH.D. Vice President

* Executive Vice President November 10,
_____________________________________ and Director 1997
ROY C. LEVITT, M.D.

* Director November 10,
_____________________________________ 1997
BERNARD CANAVAN, M.D.

* Director November 10,
_____________________________________ 1997
ZOLA P. HOROVITZ, PH.D.

* Director November 10,
_____________________________________ 1997
CHARLES A. SANDERS, M.D.

* Director November 10,
_____________________________________ 1997
ROBERT F. SHAPIRO

* Director November 10,
_____________________________________ 1997
JAMES B. WYNGAARDEN, M.D.

/s/ Jay Moorin
*By: _____________________________________
JAY MOORIN
ATTORNEY-IN-FACT

II-3
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DOCUMENT NUMBER
------- -------- ------
<C> <S> <C>
1.1* Underwriting Agreement.......................................
5.1* Opinion of Morgan, Lewis & Bockius LLP regarding legality of
Securities being registered. ...............................
23.1* Consent of Morgan, Lewis & Bockius LLP (included in its
opinion filed as Exhibit 5.1 hereto). ......................
23.2** Consent of Richard A. Eisner & Company, LLP. ................
24.1* Powers of Attorney (included on the signature page). ........
</TABLE>
- ---------------------

* Previously filed

** Filed herewith.

<PAGE>

Exhibit 23.2

CONSENT OF INDEPENDENT AUDITORS

We consent to the inclusion and the incorporation by reference in Amendment
No. 1 to the Registration Statement (No. 333-38271) on Form S-3 being filed
under the Securities Act of 1933 by Magainin Pharmaceuticals Inc. of our
report dated January 29, 1997 on the financial statements included elsewhere
herein and in the December 31, 1996 Annual Report on Form 10-K of Magainin
Pharmaceuticals Inc. We also consent to the references to our firm under the
captions "Selected Financial Data" and "Experts" in the Prospectus.

Richard A. Eisner & Company, LLP

New York, New York

November 10, 1997