VIVUS INC, 424B1, 1996-06-26

VIVUS INC
424B1, 1996-06-26
SURGICAL & MEDICAL INSTRUMENTS & APPARATUS

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<PAGE> 1
Filed Pursuant to Rule 424(b)(1)
Registration Statement No. 333-04857

2,000,000 SHARES

LOGO
COMMON STOCK
------------------------

All of the shares of Common Stock offered hereby are being offered by
VIVUS, Inc. ("VIVUS"
or the "Company").

The Common Stock is quoted on the Nasdaq National Market under the symbol
"VVUS." On June 24, 1996, the last reported sale price of the Common Stock, as
reported on the Nasdaq National Market, was $26.75 per share. See "Price Range
of Common Stock."

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" AT PAGE 5.

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

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

<TABLE>

- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- ----------------------------------------------------------------------------------------
Per Share................... $26.75 $1.60 $25.15
- ----------------------------------------------------------------------------------------
Total....................... $53,500,000 $3,200,000 $50,300,000
- ----------------------------------------------------------------------------------------
Total Assuming Full Exercise
of Over-Allotment
Option(3)................. $61,525,000 $3,680,000 $57,845,000
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
</TABLE>

(1) See "Underwriting".
(2) Before deducting expenses estimated at $500,000, which are payable by the
Company.
(3) Assuming exercise in full of the 30-day option granted by the Company to the
Underwriters to purchase up to 300,000 additional shares, on the same terms,
solely to cover over-allotments. See "Underwriting."

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

The shares of Common Stock are offered by the Underwriters, subject to
prior sale, when, as and if delivered to and accepted by the Underwriters, and
subject to their right to reject orders in whole or in part. It is expected that
the delivery of the Common Stock will be made in New York City on or about June
28, 1996.

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

PAINEWEBBER INCORPORATED

INVEMED ASSOCIATES, INC.

GENESIS MERCHANT GROUP
SECURITIES

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

THE DATE OF THIS PROSPECTUS IS JUNE 25, 1996

<PAGE> 2

ARTWORK

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY ON THE NASDAQ NATIONAL
MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934.
SEE "UNDERWRITING."

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<PAGE> 3

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus and financial statements
incorporated herein by reference. Investors should carefully consider the
information set forth under the heading "Risk Factors." Unless otherwise
indicated, the information in this Prospectus assumes the Underwriters'
over-allotment option will not be exercised.

This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this Prospectus.

THE COMPANY

VIVUS, Inc. ("VIVUS" or the "Company") is a leader in the development of
advanced therapeutic systems for the treatment of erectile dysfunction. Erectile
dysfunction, commonly referred to as impotence, is the inability to achieve and
maintain an erection of sufficient rigidity for sexual intercourse. The
Company's transurethral system for erection is a non-invasive, easy to use
system that delivers pharmacologic agents topically to the urethral lining. In
March 1996, the Company submitted a New Drug Application ("NDA") to the Food and
Drug Administration ("FDA") for its anticipated first product, MUSE(R)
(alprostadil). The FDA accepted the Company's filing for priority review. The
Company believes that MUSE (alprostadil), if approved, could become first line
therapy for erectile dysfunction.

If required approvals are received, the Company intends to market and sell
its products initially through a direct sales force in the United States and to
distribute its products in foreign markets through distribution, co-promotion or
license agreements with corporate partners. In February 1996, the Company
entered into an agreement with a wholly owned subsidiary of Cardinal Health,
Inc. ("Cardinal") that provides that Cardinal will fulfill the Company's orders
and warehouse its products. In May 1996, the Company completed a marketing
agreement with Astra AB ("Astra") to distribute the Company's products in
Europe, South America, Central America, Australia and New Zealand. As
consideration for execution of the marketing agreement, Astra will pay the
Company $10 million in June 1996. The Company will be paid up to an additional
$20 million in the event it achieves certain milestones. Astra has agreed to
purchase product from the Company for resale into the above mentioned markets.

The Company has sought and will continue to seek pharmacologic agents
suitable for transurethral delivery for which significant safety data already
exists. The Company believes that such agents may progress more rapidly through
clinical development and the regulatory process. In the second half of 1996, the
Company expects to begin a Phase III multi-center trial for its second product
candidate, a combination of alprostadil and prazosin delivered via the Company's
transurethral system for erection. The Company has several other product
candidates in preclinical development.

Based on a published study of more than 1,200 men in Massachusetts, the
Company estimates that over 30% of males in the United States between the ages
of 40 and 70 suffer from moderate to complete erectile dysfunction. The Company
believes that similar rates of erectile dysfunction prevail outside the United
States. A recent estimate from the NIH Consensus Statement on Impotence (1992)
suggests that the number of United States men with erectile dysfunction may be
10 to 20 million. The rate of erectile dysfunction increases significantly with
age. The primary medical therapies currently used are needle injection of
pharmacologic agents into the penis, vacuum constriction devices, penile
implants and oral medications. Despite the detrimental effect erectile
dysfunction may have on a couple's quality of life, the Company believes that,
due in part to the limitations of current therapies, a large number of men
suffering from erectile dysfunction currently do not seek medical treatment. The
Company believes that its transurethral system for erection, because it is a
discreet, easily administered therapy, may increase the number of men who will
seek and receive medical treatment for erectile dysfunction.

The Company's technology is based on the discovery that the urethra,
although an excretory duct, can absorb certain pharmacologic agents into the
surrounding erectile tissues. The Company is the exclusive assignee of issued
patents and patent applications that were filed by ALZA Corporation ("Alza")
based on inventions by the Company's founding scientist while at Alza. The
Company is also the exclusive licensee of other United States and foreign
patents and patent applications that relate to the transurethral delivery of
pharmacologic agents for the treatment of erectile dysfunction.

VIVUS was incorporated in California in April 1991 and reincorporated into
Delaware on May 24, 1996. The Company's principal executive offices are located
at 545 Middlefield Road, Suite 200, Menlo Park, California 94025. The Company's
telephone number is (415) 325-5511.

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THE OFFERING

<TABLE>
<S> <C>
Common Stock Offered by the Company............ 2,000,000 shares
Common Stock to be Outstanding after the
Offering..................................... 15,804,665 shares(1)
Use of Proceeds................................ For expenses related to its marketing and
sales organization, a second manufacturing
plant and expansion of the Company's existing
plant, new product preclinical and clinical
costs, ongoing research and development
activities and general corporate purposes.
Nasdaq National Market symbol.................. VVUS
</TABLE>

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

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------- -------------------
1991(2) 1992 1993 1994 1995 1995 1996
------- ------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Operating expenses:
Research and development............. $ 340 $ 3,102 $ 6,814 $ 13,916 $ 21,313 $ 5,113 $ 5,359
General and administrative........... 174 626 1,499 2,587 4,389 897 1,379
---- ------ ------ ------- ------- ------- -------
Total operating expenses...... 514 3,728 8,313 16,503 25,702 6,010 6,738
Interest income........................ 2 63 538 1,639 2,891 553 503
---- ------ ------ ------- ------- ------- -------
Net loss...................... $(512) $(3,665) $(7,775) $(14,864) $(22,811) $ (5,457) $ (6,235)
==== ====== ====== ======= ======= ======= =======
Net loss per common and common
equivalent share............ -- -- $ (0.79) $ (1.27) $ (1.70) $ (0.44) $ (0.45)
Shares used in per share calculation... -- -- 9,828 11,744 13,457 12,315 13,991
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31, 1996
---------------------------------- -------------------------
1993 1994 1995 ACTUAL AS ADJUSTED(3)
-------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and securities..... $ 23,059 $ 40,999 $ 39,524 $ 33,772 $ 83,572
Total assets.............................. 24,732 43,021 44,049 38,657 88,457
Total liabilities......................... 1,297 2,714 2,868 3,499 3,499
Accumulated deficit....................... (11,952) (26,816) (49,627) (55,862) (55,862)
Stockholders' equity...................... 23,435 40,307 41,181 35,158 84,958
</TABLE>

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

(1) Excludes, as of May 31, 1996, 1,647,563 shares of Common Stock issuable upon
the exercise of outstanding options granted pursuant to the Company's 1991
Incentive Stock Plan and 264,300 shares of Common Stock issuable upon the
exercise of outstanding warrants.

(2) April 16, 1991 (inception) through December 31, 1991.

(3) Adjusted to reflect the sale of 2,000,000 shares of Common Stock offered by
the Company hereby at the public offering price of $26.75 per share and the
receipt of the estimated net proceeds therefrom as described under "Use of
Proceeds."

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<PAGE> 5

RISK FACTORS

An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should carefully consider the following
risk factors, in addition to other information contained in this Prospectus, in
evaluating an investment in the shares offered hereby.

This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the following risk factors and elsewhere in this
Prospectus.

DEPENDENCE ON THE COMPANY'S TRANSURETHRAL SYSTEM FOR ERECTION

The Company currently relies upon a single therapeutic approach to treat
erectile dysfunction, its transurethral system for erection. No assurance can be
given that the Company's therapeutic approach, or its proposed pharmacologic
formulations, will be shown to be safe and effective or ultimately be approved
by appropriate regulatory agencies. Certain side effects have been found to
occur with the use of MUSE (alprostadil). Mild to moderate transient
penile/perineal pain was suffered by 21 percent to 42 percent of patients
(depending on dosage) treated with MUSE (alprostadil) in the Company's Phase
II/III Dose Ranging study. Moderate to severe decreases in blood pressure were
experienced by one percent to four percent of patients (depending on dosage)
treated with MUSE (alprostadil) in such study. The existence of side effects or
dissatisfaction with product results may impact a patient's decision to use or
continue to use, or a physician's decision to recommend, MUSE (alprostadil) as a
therapy for the treatment of erectile dysfunction thereby affecting the
commercial viability of MUSE (alprostadil). The Company has never commercially
introduced a product and no assurance can be given that any of the Company's
products, if approved, will be successfully introduced. In addition,
technological changes or medical advancements could diminish or eliminate the
commercial viability of the Company's products. As a result of the Company's
single therapeutic approach and its current focus on MUSE (alprostadil), the
failure to obtain an approval of its NDA for MUSE (alprostadil) on a timely
basis, if at all, or to successfully commercialize such product would have an
adverse effect on the Company and could threaten the Company's ability to
continue as a viable entity.

GOVERNMENT REGULATION AND UNCERTAINTY OF PRODUCT APPROVALS

The Company's research, preclinical development, clinical trials,
manufacturing and marketing of its products are subject to extensive regulation
by numerous governmental authorities in the United States and other countries.
Clinical trials, manufacturing and marketing of the Company's products will be
subject to the rigorous testing and approval processes of the FDA and equivalent
foreign regulatory agencies. The process of obtaining FDA and other required
regulatory approvals is lengthy and expensive. The time required for FDA
approvals is uncertain and typically takes a number of years, depending on the
type, complexity and novelty of the product. Since the Company's products
involve transurethral delivery, a new therapeutic approach, regulatory approvals
may be obtained more slowly than for products produced using more conventional
delivery systems. The Company completed pivotal clinical trials in 1995 and
submitted an NDA for its anticipated first product, MUSE (alprostadil), to the
FDA in March 1996. While the Company believes its NDA filing was substantially
complete, there can be no assurance that the Company will not be required to
conduct additional research or clinical trials. Although the Company's NDA was
accepted for priority review by the FDA, there can be no assurance that FDA
approval will be granted on a timely basis, if at all, or if granted, that such
approval will not contain significant limitations in the form of warnings,
precautions or contraindications with respect to condition of use. Any delay in
obtaining, or failure to obtain, such approval would adversely affect the
Company's ability to generate product revenue.

The Company's clinical trials for future products will seek safety data as
well as efficacy data and will require substantial time and significant funding.
There is no assurance that clinical trials will be completed successfully within
any specified time period, if at all. Furthermore, the FDA may suspend clinical
trials at any time if it is believed that the subjects participating in such
trials are being exposed to unacceptable health risks. There can be no assurance
that FDA or other regulatory approvals for other products developed by the

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<PAGE> 6

Company will be granted on a timely basis, if at all, or if granted, that such
approval will not contain significant limitations in the form of warnings,
precautions or contraindications with respect to conditions of use. Any delay in
obtaining, or failure to obtain, such approvals could adversely affect the
Company's ability to generate product revenue. Failure to comply with the
applicable regulatory requirements can, among other things, result in fines,
suspensions of regulatory approvals, product recalls, operating restrictions and
criminal prosecution. In addition, the marketing and manufacturing of
pharmaceutical products are subject to continuing FDA review, and later
discovery of previously unknown problems with a product, manufacturer or
facility may result in the FDA requiring further clinical research or
restrictions on the product or the manufacturer, including withdrawal of the
product from the market. The restriction, suspension or revocation of regulatory
approvals or any other failure to comply with regulatory requirements would have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Government Regulation."

The Company obtains the necessary raw materials and components for the
manufacture of MUSE (alprostadil) from third parties. The Company currently
contracts with contract manufacturing organizations that are required to comply
with strict standards established by the Company. Contract manufacturers are
required by the Federal Food, Drug, and Cosmetic Act, as amended, and by FDA
regulations to follow Good Manufacturing Practice ("GMP"). The Company is
required to identify its suppliers to the FDA and is dependent upon its contract
manufacturers and its suppliers to comply with the Company's specifications and,
as required, GMP or similar standards imposed by foreign regulators. There can
be no assurance that the FDA, or a state, local or foreign regulator will not
take action against a contract manufacturer or supplier found to be violating
applicable regulations. Such an action could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business -- Raw Materials and Manufacturing."

LIMITED MANUFACTURING EXPERIENCE AND DEPENDENCE ON SOLE CONTRACT MANUFACTURER

The Company has only limited experience in manufacturing MUSE (alprostadil)
and has not yet manufactured it in commercial quantities. As a result, the
Company has no experience manufacturing its product in volumes necessary for the
Company to achieve significant commercial sales, and there can be no assurance
that reliable high volume manufacturing can be achieved at commercially
reasonable cost. If the Company encounters any manufacturing difficulties,
including problems involving production yields, quality control and assurance,
supplies of components or raw materials or shortages of qualified personnel, it
could have a material adverse effect on the Company's business, financial
condition and results of operations.

The formulation, filling, packaging and testing of MUSE (alprostadil) is
performed by Paco Pharmaceutical Services, Inc. ("Paco"), a wholly owned
subsidiary of The West Company, at its facility in Lakewood, New Jersey. In June
1995, the Company completed construction of its approximately 6,000 square feet
of dedicated manufacturing and testing space within Paco's facility. The Company
will be required to expand its manufacturing and testing space at Paco or to
find additional facilities, if regulatory approval is obtained and MUSE
(alprostadil) is successfully introduced. The Company also intends to establish
a Company owned and operated manufacturing facility in Europe. Until the Company
develops an in-house manufacturing capability or is able to identify and qualify
alternative contract manufacturers, it will be entirely dependent upon Paco for
the manufacture of its products. As part of the approval process for the
Company's NDA, Paco will be subject to an audit by the FDA as part of its GMP
inspection. There can be no assurance that the facility will receive the
necessary GMP approval. There can be no assurance that the Company's reliance on
Paco or others for the manufacture of its products will not result in problems
with product supply, and there can be no assurance that the Company will be able
to establish a second manufacturing facility or expand its existing facility at
Paco. Interruptions in the availability of products could delay or prevent the
development and commercial marketing of MUSE (alprostadil) and other potential
products and would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Raw Materials
and Manufacturing" and "-- Government Regulation."

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<PAGE> 7

LIMITED SALES AND MARKETING EXPERIENCE AND DEPENDENCE ON THIRD PARTIES

The Company has no experience in the sale, marketing and distribution of
pharmaceutical products. If required approvals are received, the Company intends
to market and sell its products initially through a direct sales force in the
United States. In order to market its products directly, the Company must
develop a sales force with the proper technical expertise. There can be no
assurance that the Company will be able to build a sales force, or that the
Company's sales and marketing efforts will be successful.

In February 1996, the Company entered into an agreement with Cardinal.
Under this agreement, Cardinal will warehouse the Company's finished goods, take
customer orders, pack and ship its product, invoice customers and collect
related receivables. The Company will also have access to Cardinal's information
systems that support these functions. As a result of this agreement with
Cardinal, the Company is dependent on Cardinal's efforts to fulfill orders and
warehouse its products effectively. There can be no assurance that such efforts
will be successful.

The Company intends to market and sell its products in other foreign
markets through distribution, co-promotion or license agreements with corporate
partners. To the extent that the Company enters into distribution, co-promotion
or license agreements for the sale of its products, the Company will be
dependent upon the efforts of third parties. These third parties may have other
commitments, and there can be no assurance that they will commit the necessary
resources to effectively market, distribute and sell the Company's product. See
"Business -- Sales and Marketing."

INTENSE COMPETITION

Competition in the pharmaceutical and medical products industries is
intense and is characterized by extensive research efforts and rapid
technological progress. Certain treatments for erectile dysfunction exist, such
as needle injection therapy, vacuum constriction devices, penile implants and
oral medications, and the manufacturers of these products will continue to
improve these therapies. In July 1995, the FDA approved the use of alprostadil
in The Upjohn Company's ("Upjohn") needle injection therapy product for erectile
dysfunction. Previously, Upjohn had obtained approval in a number of European
countries. Additional competitive therapies under development include an oral
medication, Viagra, by Pfizer, Inc. which is currently in Phase III clinical
trials. Other large pharmaceutical companies are also actively engaged in the
development of therapies for the treatment of erectile dysfunction. These
companies have substantially greater research and development capabilities as
well as substantially greater marketing, financial and human resources than the
Company. In addition, these companies have significantly greater experience than
the Company in undertaking preclinical testing, human clinical trials and other
regulatory approval procedures. There are also small companies, academic
institutions, governmental agencies and other research organizations that are
conducting research in the area of erectile dysfunction. For instance, Zonagen,
Inc. and Pentech Pharmaceutical, Inc. have oral medications under development.
These entities may also market commercial products either on their own or
through collaborative efforts. The Company's competitors may develop
technologies and products that are available for sale prior to the Company's
products or that are more effective than those being developed by the Company.
Such developments would render the Company's products less competitive or
possibly obsolete. If the Company is permitted to commence commercial sales of
products, it will also be competing with respect to marketing capabilities and
manufacturing efficiency, areas in which it has limited experience. See
"Business -- Competition."

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PROPRIETARY RIGHTS AND RISK OF LITIGATION

The Company's success will depend, in large part, on the strength of its
current and future patent position relating to the transurethral delivery of
pharmacologic agents for the treatment of erectile dysfunction. The Company's
patent position, like other pharmaceutical companies, is highly uncertain and
involves complex legal and factual questions. Claims made under patent
applications may be denied or significantly narrowed and issued patents may not
provide significant commercial protection to the Company. The Company could
incur substantial costs in proceedings before the United States Patent Office,
including interference proceedings. These proceedings could also result in
adverse decisions as to the priority of the Company's licensed or assigned
inventions. There is no assurance that the Company's patents will not be
challenged or designed around by others. The Company is aware of a patent
application involving the transurethral application of prostaglandin E2 in the
United States. The corresponding application in Europe has been abandoned.
Failure of the Company's licensed patents to block issuance of such patent could
have a material adverse effect on the Company's business, financial condition
and results of operations.

There can be no assurance that the Company's products do not or will not
infringe on the patent or proprietary rights of others. A patent opposition to
the Company's exclusively licensed European patents has been filed with the
European Patent Office. The Company is vigorously defending the patents, however
an adverse decision could affect the Company's ability, based on its patent
rights, to limit potential competition in Europe. The Company may be required to
obtain additional licenses to the patents, patent applications or other
proprietary rights of others. There can be no assurance that any such licenses
would be made available on terms acceptable to the Company, if at all. If the
Company does not obtain such licenses, it could encounter delays in product
introductions while it attempts to design around such patents, or the
development, manufacture or sale of products requiring such licenses could be
precluded. The Company believes there will continue to be significant litigation
in the pharmaceutical industry regarding patent and other intellectual property
rights.

A former consultant to the Company has claimed that he is the inventor of
certain technology disclosed in one of the Company's patents. The former
consultant further claims that the Company defrauded him by allegedly failing to
inform him that it intended to use and patent this technology and by failing to
compensate him for the technology in the manner allegedly promised. The Company
has filed a declaratory relief action against the former consultant in the
United States District Court for the Northern District of California that seeks
to determine the Company's rights with respect to the allegations. The former
consultant has not yet been served in the proceeding. In a separate matter, the
licensors in an agreement by which the Company acquired a patent license have
recently filed a lawsuit alleging that they were defrauded in connection with
the renegotiation of the license agreement between the Company and the
licensors. In addition to monetary damages, the licensors seek to return to the
terms of the original license agreement. The Company has conducted a review of
the circumstances surrounding these two matters and believes that the
allegations are without merit. Although the Company believes that it should
prevail, the uncertainties inherent in litigation prevent the Company from
giving any assurances about the outcome of such litigation. See "Business --
Litigation."

The Company also relies on trade secrets and other unpatented proprietary
technology. No assurance can be given that the Company can meaningfully protect
its rights in such unpatented proprietary technology or that others will not
independently develop substantially equivalent proprietary products and
processes or otherwise gain access to the Company's proprietary technology. The
Company seeks to protect its trade secrets and proprietary know-how, in part,
with confidentiality agreements with employees and consultants. There can be no
assurance that these agreements will not be breached, that the Company will have
adequate remedies for any breach or that the Company's trade secrets will not
otherwise become known or be independently developed by competitors. In
addition, protracted and costly litigation may be necessary to enforce and
determine the scope and validity of the Company's proprietary rights. See
"Business -- Licensed Patents and Proprietary Rights."

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DEPENDENCE ON DUAL SOURCE OF SUPPLY

To date, the Company has obtained its supply of alprostadil from two
sources. The first is Spolana Chemical Works AS in Neratovice, Czech Republic
("Spolana") pursuant to a supply agreement that expires at the end of 1996. In
January 1996, the Company completed a long-term alprostadil supply agreement
with CHINOIN Pharmaceutical and Chemical Works Co., Ltd. ("Chinoin"). Chinoin is
the Hungarian subsidiary of the French pharmaceutical company Sanofi Winthrop.
The Company's sources of supply will be subject to GMP requirements of the FDA.
There can be no assurance FDA approval will be received. Alprostadil, a generic
drug, is extremely difficult to manufacture and is only available to the Company
from a limited number of other suppliers, none of which currently produce it in
commercial quantities. While the Company is seeking additional sources, there
can be no assurance that it will be able to identify and qualify such sources.
The Company is required to identify its suppliers to the FDA, and the FDA may
require additional clinical trials or other studies prior to accepting a new
supplier. Unless the Company secures and qualifies additional sources of
alprostadil, it will be entirely dependent upon Spolana and Chinoin for the
delivery of alprostadil. If interruptions in the supply of alprostadil were to
occur for any reason, including a decision by Spolana and/or Chinoin to
discontinue manufacturing, political unrest, labor disputes or a failure of
Spolana and/or Chinoin to follow regulatory guidelines, the development and
commercial marketing of MUSE (alprostadil) and other potential products could be
delayed or prevented. An interruption in the Company's supply of alprostadil
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Raw Materials and
Manufacturing."

HISTORY OF LOSSES AND LIMITED OPERATING HISTORY

The Company is a development stage company with a limited operating
history. The Company has not generated any revenue since its inception in April
1991. At March 31, 1996, the Company had an accumulated deficit of approximately
$55.9 million. The Company's losses will increase significantly during the next
twelve months as it incurs expenses related to its marketing and sales
organization, constructing a second manufacturing plant and expanding the
Company's existing plant, preclinical and clinical assessment of potential new
products and ongoing research and development activities. To achieve
profitability, the Company must successfully obtain required regulatory
approvals, manufacture, introduce and market MUSE (alprostadil). The time
required to reach profitability is highly uncertain, and there is no assurance
that the Company will be able to achieve profitability on a sustained basis, if
at all. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

FUTURE CAPITAL NEEDS AND UNCERTAINTY OF ADDITIONAL FINANCING

The Company expects to incur substantial additional costs, including
expenses related to its marketing and sales organization, a second manufacturing
plant and expansion of the Company's existing plant, new product preclinical and
clinical costs, ongoing research and development activities and general
corporate purposes. The Company anticipates that its existing capital resources
and the proceeds from this offering will be sufficient to support the Company's
operations through commercial introduction of MUSE (alprostadil) in the United
States and Europe but may not be sufficient for the introduction of any
additional future products. The Company may have to conduct additional studies
or clinical trials in order to obtain regulatory approval of MUSE (alprostadil).
Accordingly, the Company anticipates that it may be required to issue additional
equity or debt securities and may use other financing sources including, but not
limited to, corporate alliances and lease financings to fund the future
development and possible commercial launch of its products. The sale of
additional equity securities can be expected to result in additional dilution to
the Company's stockholders. There can be no assurance that such funds will be
available on terms satisfactory to the Company, or at all. Failure to obtain
adequate funding could cause a delay or cessation of the Company's product
development and marketing efforts and would have a material adverse effect upon
the Company's business, financial condition and results of operations. The
Company's working capital and additional funding requirements will depend upon
numerous factors, including: (i) the ability to obtain and timing and costs of
obtaining regulatory approvals; (ii) the level of resources that the Company
devotes to sales and marketing capabilities; (iii) the level of resources that
the Company devotes to expanding manufacturing capacity; (iv) the activities of

9
<PAGE> 10

competitors; (v) the progress of the Company's research and development
programs; (vi) the timing and results of preclinical testing and clinical
trials; and (vii) technological advances. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

DEPENDENCE ON KEY PERSONNEL

The Company's progress to date has been highly dependent upon the skills of
a limited number of key management personnel. To reach its future business
objectives, the Company will need to hire numerous other qualified personnel in
the areas of sales, manufacturing, clinical trial management and preclinical
testing. There can be no assurance that the Company will be able to hire such
personnel, as the Company must compete with other companies, academic
institutions, government entities and other agencies. The loss of any of the
Company's key personnel or the failure to attract or retain necessary new
employees could have an adverse effect on the Company's research, product
development and business operations. See "Management" and
"Business -- Employees."

RISKS RELATING TO INTERNATIONAL OPERATIONS

In the event the Company receives necessary foreign regulatory approvals,
the Company plans to market its products internationally. Changes in overseas
economic conditions, currency exchange rates, foreign tax laws or tariffs or
other trade regulations could have a material adverse effect on the Company's
business, financial condition and results of operations. The anticipated
international nature of the Company's business is also expected to subject it
and its representatives, agents and distributors to laws and regulations of the
foreign jurisdictions in which they operate or the Company's products are sold.
The regulation of drug therapies in a number of such jurisdictions, particularly
in the European Union, continues to develop, and there can be no assurance that
new laws or regulations will not have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the laws
of certain foreign countries do not protect the Company's intellectual property
rights to the same extent as do the laws of the United States.

PRODUCT LIABILITY AND AVAILABILITY OF INSURANCE

The use of the Company's products in clinical trials may expose the Company
to product liability claims and possible adverse publicity. These risks also
exist with respect to the Company's products, if any, that receive regulatory
approval for commercial sale. The Company currently maintains insurance coverage
for the clinical use of its products but does not have insurance coverage for
the commercial sale of its products. There can be no assurance that the Company
will be able to obtain product liability insurance. There can be no assurance
that the Company's present or future insurance will provide adequate coverage or
be available at a reasonable cost or that product liability claims would not
adversely affect the business or financial condition of the Company.

UNCERTAINTY OF PHARMACEUTICAL PRICING AND REIMBURSEMENT

In the United States and elsewhere, sales of pharmaceutical products
currently are dependent, in part, on the availability of reimbursement to the
consumer from third party payors, such as government and private insurance
plans. Third party payors are increasingly challenging the prices charged for
medical products and services. If the Company succeeds in bringing one or more
products to the market, there can be no assurance that these products will be
considered cost effective and that reimbursement to the consumer will be
available or sufficient to allow the Company to sell its products on a
competitive basis.

UNCERTAINTY AND POSSIBLE NEGATIVE EFFECTS OF HEALTHCARE REFORM

The healthcare industry is undergoing fundamental changes that are the
result of political, economic and regulatory influences. The levels of revenue
and profitability of pharmaceutical companies may be affected by the continuing
efforts of governmental and third party payors to contain or reduce healthcare
costs through various means. Reforms that have been and may be considered
include mandated basic healthcare benefits, controls on healthcare spending
through limitations on the increase in private health insurance premiums and

10
<PAGE> 11

Medicare and Medicaid spending, the creation of large insurance purchasing
groups and fundamental changes to the healthcare delivery system. Due to
uncertainties regarding the outcome of healthcare reform initiatives and their
enactment and implementation, the Company cannot predict which, if any, of the
reform proposals will be adopted or the effect such adoption may have on the
Company. There can be no assurance that future healthcare legislation or other
changes in the administration or interpretation of government healthcare or
third-party reimbursement programs will not have a material adverse effect on
the Company. Healthcare reform is also under consideration in other countries.

CONTROL BY EXISTING STOCKHOLDERS

Upon completion of this offering, the Company's officers, directors and
principal stockholders, and certain of their affiliates, will beneficially own
22.5 percent of the Company's outstanding Common Stock (approximately 22.1
percent assuming the Underwriter's over-allotment option is exercised in full).
Such concentration of ownership may have the effect of delaying, defining or
preventing a change in control of the Company. Additionally, these stockholders
will have significant influence over the election of directors of the Company.
This concentration of ownership may allow significant influence and control over
Board decisions and corporate actions.

POTENTIAL VOLATILITY OF STOCK PRICE

The stock market has recently experienced significant price and volume
fluctuations unrelated to the operating performance of particular companies. In
addition, the market price of the Company's Common Stock, like the securities of
other therapeutic companies without approved products, is likely to be highly
volatile and is likely to continue to be so. Factors such as variations in the
Company's financial results, comments by security analysts, the Company's
ability to scale up its manufacturing capability to commercial levels, the
Company's ability to successfully sell its product in the United States and
Europe, any loss of key management, the results of the Company's clinical trials
or those of its competition, adverse regulatory actions or decisions, evidence
regarding the safety or efficacy of the Company's products or those of its
competition, announcements of technological innovations or new products by the
Company or its competition, changing governmental regulations and developments
with respect to FDA submissions, developments with respect to patents or other
proprietary rights, product or patent litigation or public concern as to the
safety of products developed by the Company, may have a significant effect on
the market price of the Company's Common Stock.

ANTI-TAKEOVER EFFECT OF SHAREHOLDER RIGHTS PLAN AND CERTAIN CHARTER AND BYLAW
PROVISIONS

In February 1996, the Company's Board of Directors authorized its
reincorporation into the State of Delaware (the "Reincorporation") and adopted a
Shareholder Rights Plan. The Shareholder Rights Plan provides for a dividend
distribution of one Preferred Share Purchase Right (a "Right") on each
outstanding share of the Common Stock. Each Right entitles stockholders to buy
1/1000th of a share of VIVUS Series A Participating Preferred Stock at an
exercise price of $100.00. The Rights will become exercisable following the
tenth day after a person or group announces acquisition of 20 percent or more of
the Common Stock, or announces commencement of a tender offer, the consummation
of which would result in ownership by the person or group of 20 percent or more
of the Common Stock. The Company will be entitled to redeem the Rights at $0.01
per Right at any time on or before the tenth day following acquisition by a
person or group of 20 percent or more of the Company's Common Stock. The
Company's reincorporation into the State of Delaware was approved by its
shareholders and effective in May 1996.

The Shareholder Rights Plan and certain provisions of the Company's
Certificate of Incorporation and Bylaws, as adopted in connection with the
reincorporation, may have the effect of making it more difficult for a third
party to acquire, or of discouraging a third party from attempting to acquire
control of the Company. The Company's Certificate of Incorporation allows the
Company to issue Preferred Stock without any vote or further action by the
stockholders, and certain provisions of the Company's Certificate of
Incorporation and Bylaws eliminate the right of stockholders to act by written
consent without a meeting, specify procedures for

11
<PAGE> 12

director nominations by stockholders and submission of other proposals for
consideration at stockholder meetings, and eliminate cumulative voting in the
election of directors. Certain provisions of Delaware law could also delay or
make more difficult a merger, tender offer or proxy contest involving the
Company, including Section 203, which prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years unless certain conditions are met. The Shareholder Rights
Plan, the possible issuance of Preferred Stock, the procedures required for
director nominations and stockholder proposals and Delaware law could have the
effect of delaying, deferring or preventing a change in control of the Company,
including without limitation, discouraging a proxy contest or making more
difficult the acquisition of a substantial block of the Company's Common Stock.
These provisions could also limit the price that investors might be willing to
pay in the future for shares of the Company's Common Stock.

SHARES ELIGIBLE FOR FUTURE SALE

Sales of a substantial number of shares of Common Stock in the public
market following this offering could have an adverse effect on the price of the
Company's Common Stock. Each of the Company's directors and executive officers
has agreed that for a period of 90 days following the date of this Prospectus,
such stockholder will not, without the prior written consent of PaineWebber
Incorporated, directly or indirectly, offer to sell, sell or otherwise dispose
of shares of Common Stock or any securities convertible or exchangeable for
shares of Common Stock. Upon the expiration of these lock-up agreements,
approximately 2.8 million shares (including shares issuable upon the exercise of
outstanding vested options) will become eligible for sale.

DILUTION AND ABSENCE OF DIVIDENDS

The public offering price is substantially higher than the book value per
share of the Common Stock. At the public offering price of $26.75, investors
purchasing shares of Common Stock in this offering, based upon the net tangible
book value as adjusted per share of Common Stock as of March 31, 1996, will
incur immediate and substantial dilution in the amount of $21.30 per share.
Future equity financings may cause further dilution to investors. The Company
has never paid dividends on its Common Stock and will not pay dividends in the
foreseeable future. See "Dilution" and "Dividend Policy."

12
<PAGE> 13

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered by the Company hereby are estimated to be $49,800,000
($57,345,000 if the Underwriters' over-allotment option is exercised in full),
at the public offering price of $26.75 per share and after deduction of the
underwriting discount and estimated offering expenses. The Company anticipates
using the net proceeds of this offering for expenses related to its marketing
and sales organization, a second manufacturing plant and expansion of the
Company's existing plant, new product preclinical and clinical costs, ongoing
research and development activities, and general corporate purposes. The exact
timing and amount of funds required for specific uses by the Company cannot be
precisely determined by the Company at this time. Pending such uses, the Company
intends to invest the estimated net proceeds primarily in investment-grade,
interest-bearing obligations.

The Company believes that its existing cash, cash equivalents and
investments combined with the net proceeds from this offering will be sufficient
to support the Company's operations through commercial introduction of MUSE
(alprostadil) in the United States and Europe but may not be sufficient for the
introduction of any additional future products. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

PRICE RANGE OF COMMON STOCK

The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "VVUS." The Company commenced its initial public offering of Common
Stock on April 7, 1994 at an initial public offering price of $14.00. The
following table sets forth for the periods indicated during 1995 and 1996 the
high and low sale prices of the Common Stock as reported by the Nasdaq National
Market.

<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1994
Second Quarter (from April 7, 1994).............................. $ 16 $ 13
Third Quarter.................................................... 14 13
Fourth Quarter................................................... 15 1/4 13
YEAR ENDED DECEMBER 31, 1995
First Quarter.................................................... 18 1/2 13 1/4
Second Quarter................................................... 18 11 1/4
Third Quarter.................................................... 24 13 1/2
Fourth Quarter................................................... 31 1/2 16 3/4
YEAR ENDED DECEMBER 31, 1996
First Quarter.................................................... 31 3/4 23 1/2
Second Quarter (through June 24, 1996)........................... 32 3/4 25 1/4
</TABLE>

On June 24, 1996, the last sale price of the Common Stock as reported by
the Nasdaq National Market was $26.75 per share. As of June 19, 1995 there were
428 stockholders of record of the Company's Common Stock.

DIVIDEND POLICY

The Company has never declared or paid cash dividends on its Common Stock.
The Company intends to retain earnings and will not pay cash dividends in the
foreseeable future. Any future determination to pay cash dividends will be at
the discretion of the Board of Directors and will be dependent upon the
Company's financial condition, results of operations, capital requirements,
general business conditions and such other factors as the Board of Directors
deems relevant.

13
<PAGE> 14

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
March 31, 1996, and as adjusted to reflect the sale of the 2,000,000 shares of
Common Stock offered by the Company hereby at the public offering price of
$26.75 and the receipt of the estimated net proceeds therefrom:

<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Stockholders' equity(2):
Preferred stock, 5,000,000 shares, $0.001 par value, authorized;
none issued and outstanding........................................ $ -- $ --
Common stock, 30,000,000 shares, $0.001 par value, authorized;
13,585,693 shares issued and outstanding actual and 15,585,693
shares issued and outstanding as adjusted(1)....................... 14 16
Additional paid-in capital............................................ 91,734 141,532
Unrealized loss on securities......................................... (47) (47)
Deferred compensation................................................. (681) (681)
Accumulated deficit................................................... (55,862) (55,862)
-------- -----------
Total stockholders' equity......................................... $ 35,158 $ 84,958
======== =========
</TABLE>

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

(1) Excludes, as of May 31, 1996, 1,647,563 shares of Common Stock issuable
upon the exercise of outstanding options granted pursuant to the Company's
1991 Incentive Stock Plan at a weighted average exercise price of $12.70
per share and 264,300 shares of Common Stock issuable upon the exercise of
outstanding warrants at an exercise price of $8.63 per share.

(2) VIVUS was incorporated in California in April 1991 and reincorporated into
Delaware on May 24, 1996. The capitalization table considers the effect of
the reincorporation.

DILUTION

The net tangible book value of the Company as of March 31, 1996 was
approximately $35.2 million, or $2.59 per share of Common Stock. The net
tangible book value per share is equal to the Company's total tangible assets
less total liabilities, divided by the number of shares of Common Stock
outstanding. After giving effect to the sale of the 2,000,000 shares of Common
Stock offered by the Company hereby at an assumed public offering price of
$26.75 per share and the receipt of the estimated net proceeds therefrom, the
net tangible book value as adjusted of the Company at March 31, 1996 would have
been approximately $85.0 million or $5.45 per share. This represents an
immediate increase in net tangible book value of $2.86 per share to existing
stockholders and an immediate dilution of $21.30 per share to new investors
purchasing shares in this offering. The following table illustrates the per
share dilution:

<TABLE>
<S> <C> <C>
Assumed public offering price................................. $26.75
Net tangible book value before offering..................... $2.59
Increase attributable to new investors...................... 2.86
-----
Net tangible book value after offering........................ (5.45)
------
Dilution to new investors..................................... $21.30
======
</TABLE>

14
<PAGE> 15

SELECTED FINANCIAL DATA

The selected financial data as of December 31, 1994 and 1995 and for the
three years ended December 31, 1995 have been derived from consolidated
financial statements of the Company incorporated herein by reference. These
consolidated financial statements have been audited by Arthur Andersen LLP,
independent public accountants, whose report thereon is also incorporated herein
by reference. The selected financial data as of December 31, 1991, 1992 and 1993
and for the year ended December 31, 1992 and for the period from April 16, 1991
(inception) to December 31, 1991 are derived from audited financial statements
of the Company not incorporated herein by reference. The selected financial data
for the quarters ended March 31, 1995 and 1996, and as of March 31, 1995 and
1996 have been derived from unaudited financial statements of the Company but,
in the opinion of the Company, include all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation thereof. The
results for the quarter ended March 31, 1996 are not necessarily indicative of
results to be expected for a full fiscal year. The selected financial data set
forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" located elsewhere in
this Prospectus and the consolidated financial statements and notes thereto
incorporated herein by reference.

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------- -----------------
1991(1) 1992 1993 1994 1995 1995 1996
------- ------- ------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Operating expenses:
Research and development.............. $ 340 $ 3,102 $ 6,814 $ 13,916 $ 21,313 $ 5,113 $ 5,359
General and administrative............ 174 626 1,499 2,587 4,389 897 1,379
------- ------- ------- -------- -------- ------- -------
Total operating expenses............ 514 3,728 8,313 16,503 25,702 6,010 6,738
Interest income....................... 2 63 538 1,639 2,891 553 503
------- ------- ------- -------- -------- ------- -------
Net loss............................ $ (512) $(3,665) $(7,775) $(14,864) $(22,811) $(5,457) $(6,235)
======== ======== ======== ========= ========= ======== ========
Net loss per common and common
equivalent share.................. -- -- $ (0.79) $ (1.27) $ (1.70) $ (0.44) $ (0.45)
Shares used in per share calculation.... -- -- 9,828 11,744 13,457 12,315 13,991
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and
securities.......................... $ 486 $ 5,450 $23,059 $ 40,999 $ 39,524 $36,129 $33,772
Total assets.......................... 534 5,626 24,732 43,021 44,049 39,121 38,657
Total liabilities..................... 219 530 1,297 2,714 2,868 3,853 3,499
Accumulated deficit................... (512) (4,177) (11,952) (26,816) (49,627) (32,273) (55,862)
Stockholders' equity.................. 315 5,096 23,435 40,307 41,181 35,268 35,158
</TABLE>

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

(1) April 16, 1991 (inception) through December 31, 1991.

15
<PAGE> 16

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

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

OVERVIEW

Since its inception in April 1991, VIVUS, Inc. (the "Company"), a
development stage company, has focused on the design and development of products
for the treatment of erectile dysfunction. The Company has devoted substantially
all its efforts to research and development conducted on its behalf and through
collaboration with clinical institutions. The Company's primary product, MUSE
(alprostadil), has moved from preclinical development to regulatory application
phase over the last three years. The Company has generated a cumulative net loss
of $55.9 million for the period from its inception through March 31, 1996. The
ability of the Company to successfully obtain regulatory approval for,
manufacture, and market MUSE (alprostadil) is dependent on many factors. The
Company is subject to a number of risks including the approval of its product,
its ability to scale-up its manufacturing capabilities and secure adequate
supplies of raw materials, its ability to successfully market, distribute and
sell its product and intense competition. Accordingly, there can be no assurance
of the Company's future success.

Spending increased from 1993 through the period ended March 31, 1996
largely as a result of expanded operational activities related to the Company's
Phase II and III clinical trials, preparing the MUSE (alprostadil) NDA for the
FDA and expansion of its manufacturing capabilities. Spending levels will
continue to increase during 1996 as the Company further develops its commercial
manufacturing, marketing and sales capabilities.

To date, the Company has received no revenue from product sales or from
collaborative agreements. The Company does not anticipate significant revenue
from operations for at least two years. The Company does not have any experience
in manufacturing or selling MUSE (alprostadil) in commercial quantities. Whether
the Company can successfully manage the transition to a large scale commercial
enterprise will depend upon the successful further development of its
manufacturing capability and its distribution network and attainment of domestic
and foreign regulatory approvals for MUSE (alprostadil) and other potential
products. Failure to make such a transition successfully would have a material
adverse effect on the Company's business, financial condition and results of
operations.

The Company anticipates that its losses will continue to increase
significantly over at least the next twelve months as it expands its operations,
prepares for the anticipated commercial introduction of MUSE (alprostadil) and
expands its research and development activities with regard to other products.
To achieve profitability, the Company must obtain the required regulatory
approvals and successfully manufacture, introduce and market MUSE (alprostadil).
The time required to reach profitability is highly uncertain, and there can be
no assurance that the Company will be able to obtain profitability on a
sustained basis, if at all.

The Company currently relies on a single therapeutic approach to treat
erectile dysfunction, the transurethral system for erection. The Company
recently completed Phase III clinical trials and submitted an NDA to the FDA for
its anticipated first product, MUSE (alprostadil). While the Company's NDA was
accepted for priority review by the FDA, there can be no assurance that FDA
approval will be granted on a timely basis, if at all, or if granted, that such
approval will not contain significant limitations in the form of warnings,
precautions or contraindications with respect to condition of use. Failure to
obtain approval of the Company's NDA for MUSE (alprostadil) on a timely basis,
if at all, or if granted, the failure to successfully commercialize MUSE
(alprostadil) would have a material adverse effect on the Company.

In April 1994, the Company successfully completed an initial public
offering of 2,473,000 shares of common stock, with net proceeds to the Company
of $31,578,000. The Company completed a secondary public offering of 1,800,000
shares of common stock in April 1995. Of the total number of shares offered,

16
<PAGE> 17

1,670,000 shares were sold by the Company and 130,000 shares were sold by a
stockholder. Net proceeds to the Company were $22,483,000.

The Company has an agreement with Alza, executed on December 31, 1993, that
provides for the assignment by Alza of patents and patent applications related
to the Company's technology. In consideration for the rights granted to the
Company under the agreement, the Company issued shares of Common Stock to Alza
and is required to pay certain royalties on the sale of any products for the
transurethral treatment for erectile dysfunction. To maintain exclusive rights
beyond December 31, 1998, the Company issued an additional 200,000 shares of
Common Stock to Alza in May 1996 and recorded a charge of $5.9 million to the
consolidated statement of operations.

RESULTS OF OPERATIONS

Three Months Ended March 31, 1996 and 1995

No revenues have been recorded from inception to March 31, 1996.

For the three months ended March 31, 1996, research and development
expenses were $5,359,000 compared with $5,113,000 for the three months ended
March 31, 1995, an increase of 5%. This increase was due primarily to increased
pre-launch manufacturing and quality assurance expenses, which were partially
offset by lower clinical costs resulting from the completion of the Phase II and
III clinical trials in 1995.

General and administrative expenses for the three months ended March 31,
1996 were $1,379,000 compared with $897,000 for the three months ended March 31,
1995, an increase of 54%. This increase resulted primarily from hiring
additional personnel to support the growth of the Company's operations, in
addition to higher marketing, legal and accounting expenses.

Interest income for the three months ended March 31, 1996 was $503,000
compared with $553,000 for the three months ended March 31, 1995. This decrease
was primarily the result of lower average invested cash balances.

Years Ended December 31, 1995 and 1994

Research and development expenses in 1995 were $21,313,000 compared with
$13,916,000 in 1994, an increase of 53%. This increase resulted primarily from
the increased expenses supporting the Company's Phase III confirmatory clinical
studies and ongoing clinical study programs for MUSE (alprostadil), costs
associated with the preparation of the NDA for MUSE (alprostadil), expansion of
the Company's manufacturing capability and growth in personnel to support the
Company's expanding operations. Clinical trial costs consisted largely of
payments to clinical investigators. The Company pays its clinical investigators
on a per patient basis. In clinical trials through December 31, 1995, the
Company's transurethral system for erection had been used by more than 1,950 men
at over 80 sites in the United States and Europe.

General and administrative expenses in 1995 were $4,389,000 compared with
$2,587,000 in 1994, an increase of 70%. This increase resulted primarily from
hiring additional personnel to support the growth of the Company's operations,
in addition to higher market research, legal and accounting expenses, and
expenses associated with being a public company.

Interest income in 1995 was $2,891,000 compared with $1,639,000 in 1994.
The increase resulted from higher average invested cash balances as well as
higher returns on its cash investments in 1995 due to the favorable effects of
higher average interest rates.

Years Ended December 31, 1994 and 1993

Research and development expenses in 1994 were $13,916,000 compared with
$6,814,000 in 1993, an increase of 104%. This increase resulted primarily from
increased purchases of alprostadil, enrollment of additional patients in
clinical trials, and contract manufacturing and quality control services.
Research and development expenses in 1993 included license fees of $1,380,000.
There were no license fees included in research and development expenses in
1994.

17
<PAGE> 18

General and administrative expenses in 1994 were $2,587,000 compared with
$1,499,000 in 1993, an increase of 73%. This increase resulted primarily from
hiring additional personnel to support the growth of the Company's operations,
in addition to higher legal and accounting expenses, and expenses associated
with being a public company.

Interest income in 1994 was $1,639,000 compared with $538,000 in 1993. The
increase resulted from higher average invested cash balances associated with the
$31,578,000 in net proceeds received from the initial offering in April 1994, in
addition to higher average interest rates in 1994.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company has financed operations primarily from the
sale of preferred and common stock. Through March 31, 1996, VIVUS has raised
$88,958,000. Cash, cash equivalents and securities available-for-sale totaled
$33,772,000 at March 31, 1996 compared with $39,524,000 at December 31, 1995.
The Company maintains its current excess cash balances in a variety of interest
bearing investment-grade financial investments such as U.S. government
securities, corporate debt and certificates of deposit. Principal preservation,
liquidity and safety are the primary investment objectives.

Cash used in operations in the three months ended March 31, 1996 was
$5,403,000 compared with $4,199,000 in the three months ended March 31, 1995.
The increased use of cash was primarily due to a net loss of $6,235,000 in the
three months ended March 31, 1996 compared with a net loss of $5,457,000 for the
same period in 1995. Cash used for operations is expected to increase in 1996 as
the Company further develops its commercial manufacturing, marketing and sales
capabilities.

Prepaid and other current assets at March 31, 1996 were $737,000 compared
with $590,000 at December 31, 1995, an increase of $147,000. This increase
resulted primarily from an increase in interest receivables related to the
Company's investment portfolio, and prepaid insurance.

Current liabilities were $3,499,000 at March 31, 1996 compared with
$2,868,000 at December 31, 1995. This increase was primarily due to an increase
in alprostadil purchases in 1996.

Capital expenditures in the three months ended March 31, 1996 were $499,000
compared with $974,000 for the same period ended March 31, 1995. Capital
expenditures during the period in 1996 and 1995 consisted primarily of
manufacturing and quality control equipment. Capital expenditures were higher in
1995 due to the construction of the Company's dedicated manufacturing and
testing space within the Paco facility in Lakewood, New Jersey. Major capital
expenditures over the next two years are likely to include a Company owned
manufacturing facility in Europe, expansion of its current facility in the
United States and establishing a research and quality control laboratory.

Cash used in operations in 1995 was $21,539,000 compared with $12,643,000
in 1994. The increased use of cash was primarily due to a net loss of
$22,811,000 in 1995 compared with a net loss of $14,864,000 in 1994.

Prepaid and other current assets at December 31, 1995 were $590,000
compared with $555,000 at December 31, 1994, an increase of $35,000. This
increase resulted primarily from an increase in interest receivables related to
the Company's investment portfolio.

Current liabilities were $2,868,000 at December 31, 1995 compared with
$2,714,000 at December 31, 1994. This increase was primarily due to an increase
in expenditures in 1995.

Capital expenditures in 1995 were $3,148,000 compared with $787,000 in
1994. In 1995, the Company constructed and equipped approximately 6,000 square
feet of manufacturing and testing space within Paco. Capital expenditures in
1995 consisted primarily of manufacturing, quality control and laboratory
equipment.

In 1995, the Company implemented an international product distribution
strategy for VIVUS products. Implementation included the transfer of
international product marketing rights to VIVUS International Limited in a
taxable transaction. The transfer of rights and related allocation of research
and development costs resulted in the current utilization of $29,467,000 of the
Company's net operating loss carryforward.

18
<PAGE> 19

The Company expects to incur substantial additional costs, including
expenses related to its marketing and sales organization, a second manufacturing
plant and expansion of the Company's existing plant, new product preclinical and
clinical costs, ongoing research and development activities and general
corporate purposes. The Company anticipates that its existing capital resources
and the proceeds from this offering will be sufficient to support the Company's
operations through commercial introduction of MUSE (alprostadil) in the United
States and Europe but may not be sufficient for the introduction of any
additional future products. While the Company believes its NDA filing was
substantially complete, the Company may have to conduct additional studies or
clinical trials in order to obtain regulatory approval of MUSE (alprostadil).
Accordingly, the Company anticipates that it may be required to issue additional
equity or debt securities and may use other financing sources including, but not
limited to, corporate alliances and lease financings to fund the future
development and possible commercial launch of its products. The sale of
additional equity securities can be expected to result in additional dilution to
the Company's stockholders. There can be no assurance that such funds will be
available on terms satisfactory to the Company, or at all. Failure to obtain
adequate funding could cause a delay or cessation of the Company's product
development and marketing efforts and would have a material adverse effect upon
the Company's business, financial condition and results of operations. The
Company's working capital and additional funding requirements will depend upon
numerous factors, including: (i) the ability to obtain and timing and costs of
obtaining regulatory approvals; (ii) the level of resources that the Company
devotes to sales and marketing capabilities; (iii) the level of resources that
the Company devotes to expanding manufacturing capacity; (iv) the activities of
competitors; (v) the progress of the Company's research and development
programs; (vi) the timing and results of preclinical testing and clinical
trials; and (vii) technological advances.

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BUSINESS

The following Business section contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Prospectus.

VIVUS is a leader in the development of advanced therapeutic systems for
the treatment of erectile dysfunction. Erectile dysfunction, commonly referred
to as impotence, is the inability to achieve and maintain an erection of
sufficient rigidity for sexual intercourse. The Company's transurethral system
for erection is a non-invasive, easy to use system that delivers pharmacologic
agents topically to the urethral lining. In March 1996, the Company submitted an
NDA to the FDA for its anticipated first product, MUSE (alprostadil). The FDA
accepted the Company's filing for priority review. The Company believes that
MUSE (alprostadil), if approved by the FDA and foreign regulatory bodies, could
become first line therapy for erectile dysfunction.

If required approvals are received, the Company intends to market and sell
its products initially through a direct sales force in the United States and to
distribute its products in foreign markets through distribution, co-promotion or
license agreements with corporate partners. In February 1996, the Company
entered into an agreement with Cardinal that provides that Cardinal will fulfill
the Company's orders and warehouse its products. In May 1996, the Company
completed a marketing agreement with Astra to distribute the Company's products
in Europe, South America, Central America, Australia and New Zealand. As
consideration for execution of the marketing agreement, Astra will pay the
Company $10 million in June 1996. The Company will be paid up to an additional
$20 million in the event it achieves certain milestones. Astra has agreed to
purchase product from the Company for resale into the above mentioned markets.

BACKGROUND

Erectile dysfunction results from (i) an inadequate supply of blood to the
penis, (ii) a failure to relax the smooth muscle tissue in the penis so it can
become engorged with blood or (iii) a failure to retain blood in the penis.
Blood is carried to the penis in two large arteries that terminate in a maze of
blood vessels contained in the three erectile bodies of the penis, the corpus
spongiosum which surrounds the urethra and two corpora cavernosa. Smooth muscle
tissue surrounds each individual blood vessel in the erectile bodies. When the
penis is flaccid, the smooth muscle tissue is in a contracted state, which
constricts the blood vessels resulting in reduced blood flow. During
stimulation, a signal is sent to nerve endings in the penis that causes the
smooth muscle tissue to relax. This relaxation allows the blood vessels to
expand and, as arterial blood fills the erectile bodies, the penis becomes
engorged with blood and erect. As the erectile bodies expand, the venous outflow
of blood is restricted so that the erection can be maintained.

[ILLUSTRATION]

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Causes of Erectile Dysfunction

Historically, psychological factors were considered the primary cause of
erectile dysfunction. It is now widely understood that a substantial majority of
all cases have a physiological cause. The Company believes that therapeutic
treatments of erectile dysfunction can be effective, whether the cause is
psychological or physiological. The primary physiological causes of erectile
dysfunction fall into the following general categories:

Vascular Diseases. Atherosclerosis, hypertension and other diseases can
impede or obstruct the flow of blood to the penis.

Neurological Diseases. Multiple sclerosis, Parkinson's disease and other
diseases can interrupt nerve impulses to the penis.

Diabetes. Diabetes mellitus can alter both nerve function and vascular
flow, inhibiting the ability to achieve an erection.

Prescription Drugs. Certain antihypertensive and cardiac medications, as
well as a number of other prescription drugs, can affect nerve function in the
penis by altering neurotransmitter levels.

Spinal Injury. Injury to the spinal column can interrupt nerve impulses
from the spinal cord to the penis.

Pelvic Surgery. Radical prostatectomies, cystoprostatectomies and
colectomies may traumatize or cut nerves or blood vessels to the penis.

Other Causes. Hormonal imbalance, renal failure and dialysis, and drug and
substance abuse (particularly smoking) can also impair the neurovascular system
and cause erectile dysfunction.

Market Size

Based on a published study of more than 1,200 men in Massachusetts, the
Company estimates that over 30% of males in the United States between the ages
of 40 to 70 suffer from moderate to complete erectile dysfunction. The Company
believes that similar rates prevail outside the United States. A recent estimate
from the NIH Consensus Statement on Impotence (1992) suggests that the number of
United States men with erectile dysfunction may be 10 to 20 million. The rate of
erectile dysfunction increases significantly with age.

Current Therapies

Despite the detrimental effect erectile dysfunction may have on a couple's
quality of life, the Company believes that, due in part to the limitations of
current therapies, a large number of men suffering from erectile dysfunction
currently do not seek medical treatment. The primary physiological therapies
currently utilized for the treatment of erectile dysfunction are:

Needle Injection Therapy. This form of treatment involves the needle
injection of pharmacologic agents directly into the penis. These agents are
generally combinations of vasoactive compounds such as alprostadil, phentolamine
and papaverine. This form of treatment requires a prescription and instruction
from a health care professional on self-injection. Side effects may include pain
associated with injection and local pain and aching, priapism (persistent
prolonged erections), fibrosis (build-up of scar tissue), and bleeding.

Vacuum Constriction Devices. This form of treatment involves the use of a
mechanical system that creates a vacuum around the penis, causing the erectile
bodies to fill with blood. A constriction band is then placed around the base of
the penis to impede blood drainage and maintain the erection. Vacuum
constriction devices are large, mechanical devices that can be unwieldy and
somewhat difficult to use. In addition, the erection may not seem natural since
only the part of the penis beyond the constriction band is rigid, and the penis
can become cold and discolored due to the constriction of blood flow.
Complications encountered by some users of vacuum constriction devices include
pain and difficulty ejaculating.

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<PAGE> 22

Penile Implants. This therapy involves the surgical implantation of a
semi-rigid, rigid or inflatable device into the penile structure to mechanically
simulate an erection. In addition to the risks associated with surgical
procedures, there is a significant rate of complication with implants such as
infection and mechanical failure of the device. This may necessitate a second
surgical procedure to remove or reposition the device. In addition, due to the
scarring associated with the implant procedure, the patient may no longer be a
viable candidate for subsequent less radical therapies.

Oral Medications. Yohimbine is the primary oral medication currently
prescribed in the United States for the treatment of erectile dysfunction. While
easily administered, yohimbine must be taken multiple times daily and may cause
irritability, sweating, nausea and possibly hypertension. The Company believes
that, for patients with physiologic erectile dysfunction, the efficacy of
currently available oral medications is not significantly greater than placebo.
The Company is aware of several oral medications that are currently under
development, which, if approved, may be more effective than currently available
oral medications.

THE VIVUS SOLUTION

VIVUS intends to address the significant market opportunity for erectile
dysfunction therapy with its transurethral system for erection. The Company's
transurethral system for erection represents a unique approach to treating
erectile dysfunction and is based on the discovery that the urethra, although an
excretory duct, can absorb certain pharmacologic agents into the surrounding
erectile tissues. The Company believes that MUSE (alprostadil), if approved,
could become first line therapy and increase the number of men who seek and
receive treatment for erectile dysfunction. The Company's transurethral system
for erection is designed to overcome the limitations of current therapies
through its unique product attributes:

Ease of Administration. The Company's transurethral system for erection is
easy to use with minimal instruction, unlike needle injection therapy which
requires precise injection into a corpus cavernosum.

Non-invasive. The Company's transurethral system for erection utilizes
urethral delivery, permitting topical application to the urethral mucosa.

Discreet. The Company's transurethral system for erection utilizes a small,
easily carried, single-use disposable applicator that can be discreetly applied
and is easily integrated into the normal sexual life of the patient.
Administration takes less than a minute.

Quality of Erection. The Company's transurethral system for erection
therapy mimics the normal vasoactive process, producing an erection which is
more natural than those resulting from needle injection therapy, vacuum
constriction devices or penile implants.

Cost-competitive. Although the price for the Company's products has not
been established, the Company anticipates that it will be a competitively priced
therapy.

Minimal Side Effects. The Company believes that therapy with MUSE
(alprostadil) will result in fewer, less severe side effects than needle
injection therapy and penile implants.

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THE TRANSURETHRAL SYSTEM FOR ERECTION

Administration. Administration of the transurethral system for erection is
an easy and painless procedure. The end of the applicator is less than half the
diameter of a man's urine stream and is inserted approximately three centimeters
into the urethra. To use the transurethral system for erection, a patient
urinates, shakes the penis to remove excess urine, inserts the transurethral
system for erection into the urethra, releases the medication and then rolls the
penis between the hands for 10 seconds to distribute the medication.

[ILLUSTRATION]

The application process takes less than a minute. Once administered, the
pharmacologic agent dissolves in the small amount of urine which remains in the
urethra. The pharmacologic agent is absorbed by the urethral mucosa and moves
across the adjacent tissue and into the erectile bodies. When successful, an
erection is produced within 15 minutes of administration and lasts approximately
30-60 minutes. Many patients experience mild and transient penile pain, urethral
burning and/or local aching after administration and during intercourse.

Initial Pharmacologic Agent. Alprostadil is the first pharmacologic agent
anticipated for use in the transurethral system for erection. Alprostadil is the
generic name for the synthetic version of prostaglandin E(1), a naturally
occurring vasodilator present throughout the body and at high levels in seminal
fluid. Alprostadil received FDA approval in 1981 for preoperative management of
newborns with congenital heart defects. The Company believes that alprostadil
has been widely prescribed for needle injection therapy of erectile dysfunction
for years, even though it was only recently approved by the FDA for such use in
July 1995. The Company has developed a formulation of alprostadil for the
transurethral system for erection that enables it to quickly dissolve in the
urine present in the urethra and pass through the adjacent corpus spongiosum and
into the corpora cavernosa.

Other Pharmacologic Agents. The Company is also engaged in the evaluation
and development of additional pharmacologic agents to treat erectile dysfunction
either alone or in combination with other agents. One such agent is prazosin, a
generic alpha-blocker that can be delivered by the Company's transurethral
system for erection, both alone and in conjunction with alprostadil. The Company
has several other product candidates in preclinical development.

THE VIVUS STRATEGY

The Company's objective is to become the leading developer, manufacturer
and supplier of products for the treatment of erectile dysfunction. The Company
is pursuing this objective with the following strategies:

Facilitate Clinical Development and Regulatory Review. The Company has
sought and will continue to seek additional pharmacologic agents suitable for
transurethral delivery for which significant safety data already exists. The
Company believes that such agents may progress more rapidly through the clinical
development and regulatory process.

Expand the Market. The Company is seeking to increase the number of men
receiving treatment for erectile dysfunction by developing safe, effective,
discreet, easy to use, non-invasive products and by heightening physician and
consumer awareness of erectile dysfunction through education.

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<PAGE> 24

Maintain Proprietary Technology. The Company has sought and will continue
to seek a strong proprietary position for the Company's transurethral system for
erection by pursuing patent protection in the United States and key
international countries.

Develop Novel Pharmacologic Agents. The Company is engaged in the research
and development of and may seek to license novel pharmacologic agents that may
provide an enhanced therapeutic benefit in the treatment of erectile
dysfunction, either alone or in combination with other agents.

Achieve Broad Distribution. The Company intends to market and sell its
products initially through a direct sales force in the United States and to
distribute its products in foreign markets through distribution, co-promotion or
license agreements with corporate partners. In May 1996, the Company completed a
marketing agreement with Astra to distribute its products in Europe, South
America, Central America, Australia and New Zealand.

CLINICAL STUDIES

In March 1996, the Company submitted an NDA for its anticipated first
product, MUSE (alprostadil). The NDA submission utilized information from the
Company's clinical trials, which are depicted in the following chart and
discussed below.

(ILLUSTRATION)

In July 1992, the Company filed an Investigational New Drug ("IND")
application with the FDA. The IND application covered the use of the
transurethral system for erection to deliver alprostadil and prazosin, either
alone or in combination, for the treatment of erectile dysfunction. Under the
IND, the Company has established 83 study sites and to date has enrolled and
treated more than 1,950 men.

In early 1994, the Company completed a Phase II/III Dose Ranging study that
enrolled and treated 234 patients. The goal of this clinical trial was to
examine the safety and efficacy of MUSE (alprostadil), prazosin and MUSE
(alprostadil) in combination with prazosin at several dosage levels. The primary
efficacy endpoint of the Dose Ranging study was the patient achieving penile
rigidity or full enlargement.

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Based upon the results of this study, the Company chose alprostadil as its
initial pharmaclogic agent due to its safety and efficacy profile. Patients in
the Dose Ranging study suffered from erectile dysfunction for an average period
of 48 months prior to enrollment. More than 50 percent of the patients suffered
from erectile dysfunction for a period of 36 months or more prior to enrollment.
The results of this study showed that each dose of MUSE (alprostadil) (125, 250,
500 and 1000 mcg) was significantly better than placebo in achieving an
erection. More than 52 percent of men treated with MUSE (alprostadil) in the
study achieved penile rigidity and/or full penile enlargement, compared to 2.6
percent of men treated with placebo. The Company's transurethral system for
erection was also rated as easy to use. The principal side effects of therapy
with MUSE (alprostadil) were mild to moderate transient penile/perineal
discomfort (experienced by 21 percent to 42 percent of patients depending upon
dosage level) and moderate to severe decreases in blood pressure (experienced by
one percent to four percent of patients depending upon dosage level). The
Company believes that these data demonstrate preliminary efficacy and safety of
transurethrally administered alprostadil in men with longstanding erectile
dysfunction. In addition, several of the low-dose combinations of alprostadil
and prazosin delivered by the Company's transurethal system for erection
appeared to demonstrate preliminary safety and efficacy.

In early 1995, the Company completed a Phase III Quality of Life study that
enrolled and treated 539 patients. Upon completion of the Dose Ranging and
Quality of Life studies, certain patients continued treatment by enrolling in a
pivotal Phase III Maintenance study that was completed in mid-1995.

Two additional pivotal Phase III Confirmatory studies began enrollment in
mid-1994 and completed their enrollment with over 990 patients at 58 study sites
throughout the United States. A similar European Confirmatory study was
performed at 13 study sites in five European countries. A separate study was
also concluded at two sites in Mexico. The Confirmatory studies were designed to
further demonstrate the safety and efficacy of MUSE (alprostadil). The purpose
of these studies was to examine the long-term efficacy and safety of the product
in a large group of patient couples. The primary efficacy endpoint of the
Confirmatory studies was the ability of the patient and his partner to engage in
sexual intercourse. All of the Company's Phase III studies were prospective,
double-blind, placebo-controlled trials. In mid-1995, the Company completed its
Phase III Confirmatory studies for MUSE (alprostadil). Of participants using
MUSE (alprostadil) 64.9 percent reported successful intercourse at least once
versus 18.6 percent receiving placebo. Of all active doses administered, 50.4
percent resulted in intercourse, compared to 10.4 percent of placebo doses. No
increased risk of serious adverse events due to MUSE (alprostadil) was found,
and there were no reports of priapism (persistent abnormal erection) or penile
scarring. Eighty-eight (88) percent of patient couples that commenced the
pivotal Phase III Confirmation Study completed it. The most common side effect
reported was mild and transient penile pain, and less than one percent of
participants discontinued use due to discomfort. In patients who responded to
treatment with MUSE (alprostadil) there was a statistically significant
improvement in the patient's perception of his emotional well-being (p < 0.004)
and in his relationship with his partner (p < 0.001) compared to patients
treated with placebo. From the partner's perspective, there also was a
statistically significant improvement in her relationship with the patient (p <
0.001) compared to partners in the placebo group. During the NDA approval
process, the Company will continue open label Extended Maintenance studies for
those patients electing to continue treatment.

The Company's ongoing clinical trials will evaluate the long-term safety of
MUSE (alprostadil) for both the patient and his partner. Additional adverse side
effects may arise during the course of ongoing clinical trials. There can be no
assurance that MUSE (alprostadil) will be shown to be safe or efficacious or
that FDA approval will be obtained. The FDA may require limitations on use or
warnings that limit demand for the Company's products. See "Risk
Factors -- Dependence on The Transurethral System for Erection" and "--
Government Regulation and Uncertainty of Product Approvals."

Because alprostadil and prazosin have each been approved for other
indications, the FDA and other regulatory authorities allowed the Company to
commence clinical trials with limited preclinical safety studies. However, the
Company conducted additional safety studies, concurrent with its pivotal trials,
to further define the safety profile of alprostadil. These studies included
pharmacokinetic, in vitro mutagenicity, developmental reproductive and
repeat-dose toxicology studies. The Company included the results of these
studies in the

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NDA for MUSE (alprostadil). Additional safety studies may be required by the FDA
or other regulatory agencies.

RESEARCH AND DEVELOPMENT

The Company's research and development is focused on the evaluation of
pharmacologic agents capable of producing erections through various mechanisms
and the testing of promising agents, both alone and in combination with other
agents, in the Company's transurethral system for erection. Classes of agents
causing erections by relaxing smooth muscle tissue include nitric oxide donors,
potassium channel activators, phosphodiesterase inhibitors and other
vasodilators (such as alprostadil). Classes of agents that contribute to an
erection by delaying smooth muscle contraction include alpha blockers (such as
prazosin) and calcium channel blockers. The Company has evaluated several alpha
blocking agents and nitric oxide donors. In addition, the Company has begun the
evaluation of a phosphodiesterase inhibitor and certain calcium channel blockers
and potassium channel activators.

As part of the Company's strategy, the Company focuses its research and
development on pharmacologic agents for which significant safety data already
exists. The Company believes that such agents may progress more rapidly through
clinical development and the regulatory process. The Company is currently
developing its potential second product, an alprostadil and prazosin combination
for use with its transurethral system for erection. The Company expects to begin
a Phase III multi-center trial for this product in the second half of 1996. The
Company will be required to undertake time-consuming and costly development
activities and seek FDA approval for this product. There can be no assurance
that product development will ever be successfully completed, that NDAs, if
applied for, will be granted by the FDA on a timely basis, if at all, or that
the products will ever achieve commercial acceptance. Failure by the Company to
develop, obtain necessary regulatory approval for or to successfully market new
products could have a material adverse effect on the Company's business,
financial condition and results of operations.

SALES AND MARKETING

The Company has no experience in the sale, marketing and distribution of
pharmaceutical products. Upon receiving required approvals, the Company intends
to market and sell its products initially through a direct sales force in the
United States. In order to market its products directly, the Company must
develop a sales force with the proper technical expertise. There can be no
assurance that the Company will be able to build a sales force, or that the
Company's sales and marketing efforts will be successful.

In February 1996, the Company entered into an agreement with a wholly-owned
subsidiary of Cardinal Health, Inc. ("Cardinal"). Under this agreement, Cardinal
will warehouse the Company's finished goods, take customer orders, pack and ship
its product, invoice customers and collect related receivables. The Company will
also have access to Cardinal's information systems that support these functions.
As a result of this agreement with Cardinal, the Company is dependent on
Cardinal's efforts to fulfill orders and warehouse its products effectively.
There can be no assurance that such efforts will be successful.

In May 1996, the Company completed a marketing agreement with Astra to
distribute the Company's products in Europe, South America, Central America,
Australia and New Zealand. As consideration for execution of the marketing
agreement, Astra will pay the Company $10 million in June 1996. The Company will
be paid up to an additional $20 million in the event it achieves certain
milestones. The Company and Astra will jointly build a specialty sales
organization within Astra called "ASTRA/VIVUS," to promote the product in
certain European markets, including the United Kingdom, France and Germany. The
Company retains the right to take over this specialty organization and
co-promote the product in these markets after a certain period of time. Astra
has agreed to purchase product from the Company for resale into the above
mentioned markets. The marketing agreement does not have minimum purchase
commitments, and Astra may take up to twelve months to introduce a product in a
given country following regulatory approval in such country. As a result of this
marketing agreement with Astra, the Company is dependent on Astra's efforts to
market, distribute and sell the Company's products effectively in the above
mentioned markets. There can be no assurance that such efforts will be
successful.

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RAW MATERIALS AND MANUFACTURING

To date, the Company has obtained its supply of alprostadil from two
sources. The first is Spolana pursuant to a supply agreement that expires at the
end of 1996. In January 1996, the Company completed a long-term alprostadil
supply agreement with Chinoin. Chinoin is the Hungarian subsidiary of the French
pharmaceutical company Sanofi Winthrop. The Company's sources of supply will be
subject to GMP requirements of the FDA. While the Company believes it has taken
steps to ensure GMP compliance, there can be no assurance FDA approval will be
received. Alprostadil, a generic drug, is extremely difficult to manufacture and
is only available to the Company from a limited number of other suppliers, none
of which currently produce it in commercial quantities. While the Company is
seeking additional sources of alprostadil, there can be no assurance that it
will be able to identify and qualify such sources. The Company is required to
identify its suppliers to the FDA, and the FDA may require additional clinical
trials or other studies prior to accepting any new supplier. Unless the Company
secures and qualifies additional sources of alprostadil, it will be entirely
dependent upon Spolana and Chinoin for the delivery of alprostadil. If
interruptions in the supply of alprostadil were to occur for any reason,
including a decision by Spolana and/or Chinoin to discontinue manufacturing,
political unrest, labor disputes, or a failure of Spolana and/or Chinoin to
follow regulatory guidelines, the development and commercial marketing of MUSE
(alprostadil) and other potential products could be delayed or prevented. An
interruption in the Company's supply of alprostadil would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Risk Factors -- Dependence on Dual Source of Supply."

The Company has only limited experience in manufacturing MUSE (alprostadil)
and has not yet manufactured it in commercial quantities. As a result, the
Company has no experience manufacturing its product in volumes necessary for the
Company to achieve significant commercial sales, and there can be no assurance
that reliable, high-volume manufacturing can be achieved at commercially
reasonable cost. If the Company encounters any manufacturing difficulties,
including problems involving production yields, quality control and assurance,
supplies of components or raw materials or shortages of qualified personnel, it
could have a material adverse effect on its business, financial condition and
results of operations.

The formulation, filling, packaging and testing of MUSE (alprostadil) is
performed by Paco at its facility in Lakewood, New Jersey. In June 1995, the
Company completed construction of its approximately 6,000 square feet of
dedicated manufacturing and testing space within Paco's facility. The Company
will be required to expand its manufacturing and testing space at Paco or to
find additional facilities, if regulatory approval is obtained and MUSE
(alprostadil) is successfully introduced. The Company also intends to establish
a Company owned and operated manufacturing facility in Europe. Until the Company
develops an in-house manufacturing capability or is able to identify and qualify
alternative contract manufacturers, it will be entirely dependent upon Paco for
the manufacture of its products. As part of the approval process for the
Company's NDA, Paco will be subject to audit by the FDA as part of its GMP
inspection. There can be no assurance that the facility will receive the
necessary GMP approval. There can be no assurance that the Company's reliance on
Paco or others for the manufacture of its products will not result in problems
with product supply, and there can be no assurance that the Company will be able
to establish a second manufacturing facility or expand its existing facility at
Paco. Interruptions in the availability of products could delay or prevent the
development and commercial marketing of MUSE (alprostadil) and other potential
products and would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk Factors -- Limited
Manufacturing Experience and Dependence on Sole Contract Manufacturer."

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The Company obtains the necessary raw materials and components for the
manufacture of MUSE (alprostadil) from third parties. The Company currently
contracts with contract manufacturing organizations that are required to comply
with strict standards established by the Company. Contract manufacturers are
required by the Federal Food, Drug, and Cosmetic Act, as amended, and by FDA
regulations to follow GMP. The Company is required to identify its suppliers to
the FDA and is dependent upon its contract manufacturers and its suppliers to
comply with the Company's specifications and, as required, GMP or similar
standards imposed by foreign regulators. Although the Company has taken all
actions that it believes are reasonable to assure that its contract
manufacturers and suppliers are in compliance with these requirements, there can
be no assurance that the FDA, or a state, local or foreign regulator will not
take action against a contract manufacturer or supplier found to be violating
applicable regulations. Such an action could have a material adverse effect on
the Company's business, financial condition and results of operation. See "Risk
Factors -- Government Regulation and Uncertainty of Product Approvals."

LICENSED PATENTS AND PROPRIETARY RIGHTS

The Company's policy is to aggressively maintain its patent protection and
to enforce all of its intellectual property rights.

The Company is the exclusive licensee of United States and Canadian patents
originally filed in the name of Dr. Gene Voss. These patents claim methods of
treating erectile dysfunction by the topical application of an ointment
containing a vasodilator. There are also claims to methods of treatment
involving the insertion of a catheter into the urethra to deliver vasodilators.

The Company is the exclusive licensee of patents and patent applications
filed in the name of Dr. Nils Kock in numerous countries. Patents have issued in
Australia, Canada, New Zealand, Sweden, South Africa and Europe (Austria,
Belgium, Germany, France, Great Britain, Ireland, Italy, Luxembourg,
Netherlands, Sweden, Greece and Spain). Patent applications are pending in
Denmark, Finland, Japan and the United States. The European patents claim
compositions for the treatment of erectile dysfunction through the urethra of
certain active substances including alpha-receptor blockers, vasoactive
polypeptides, prostaglandins or nitroglycerine dispersed in a hydrophilic
vehicle. A competitor has filed a patent opposition against this patent with the
European Patent Office. The Company is vigorously defending this patent,
however, an adverse decision could affect the Company's ability, based on its
patent rights, to prevent potential competition in Europe.

The Company is the exclusive assignee of two United States patents and
divisional patent applications from Alza Corporation ("Alza"), covering
inventions of Dr. Virgil Place made while he was an employee of Alza. The
patents and patent applications describe dosage forms for administering a
therapeutic agent to the urethra, methods for treating erectile dysfunction and
specific drug formulations that can be delivered transurethrally for the
treatment of erectile dysfunction. Five additional divisional or continuation
applications claiming subject matter disclosed but not claimed in the issued
patents or applications were filed in the United States on June 7, 1995. Patent
applications filed before June 8, 1995, if approved, will have a patent life of
17 years from the patent issue date. Patent applications filed after June 8,
1995, if approved, will have a patent life of 20 years from the filing date.
Foreign patents have issued in South Africa and Australia and foreign
applications are pending in Canada, Finland, Ireland, Mexico, Portugal, New
Zealand, Japan, South Korea, Norway and Europe (Austria, Belgium, Switzerland,
Germany, Denmark, Spain, France, United Kingdom, Italy, Luxembourg, Netherlands,
Sweden and Greece).

The Company's license and assignment agreements for these patents and
patent applications are royalty bearing and do not expire until the licensed
patents expire. These license and assignment agreements provide that the Company
may assume responsibility for the maintenance and prosecution of the patents and
to bring infringement actions.

In addition, the Company filed four patent applications in the United
States and one patent cooperation treaty application in 1995 and two in 1996.
These patents further address the treatment, diagnosis and/or prevention of
erectile dysfunction, and one covers a chemical synthesis of a drug substance
for erectile dysfunction. The Company is currently prosecuting these recently
filed patents.

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The Company's success will depend in large part on the strength of its
current and future patent position relating to the transurethral delivery of
pharmacologic agents for the treatment of erectile dysfunction. The Company's
patent position, like other pharmaceutical companies, is highly uncertain and
involves complex legal and factual questions. Claims made under patent
applications may be denied or significantly narrowed and the issued patents may
not provide significant commercial protection to the Company. The Company could
incur substantial costs in proceedings before the United States Patent Office,
including interference proceedings. These proceedings could also result in
adverse decisions as to the priority of the Company's licensed or assigned
inventions. There is no assurance that the Company's patents will not be
challenged or designed around by others. The Company is aware of a patent
application involving the transurethral application of prostaglandin E2 in the
United States. The corresponding application in Europe has been abandoned.
Failure of the Company's licensed patents to block issuance of such patent could
have a material adverse effect on the Company's business, financial condition
and results of operations.

The Company also relies on trade secrets and other unpatented proprietary
technology. No assurance can be given that the Company can meaningfully protect
its rights in such unpatented proprietary technology or that others will not
independently develop substantially equivalent proprietary products and
processes or otherwise gain access to the Company's proprietary technology. The
Company seeks to protect its trade secrets and proprietary know-how, in part,
with confidentiality agreements with employees and consultants. There can be no
assurance that these agreements will not be breached, that the Company will have
adequate remedies for any breach or that the Company's trade secrets will not
otherwise become known or be independently developed by competitors. In
addition, protracted and costly litigation may be necessary to enforce and
determine the scope and validity of the Company's proprietary rights. See "Risk
Factors -- Proprietary Rights and Risk of Litigation."

COMPETITION

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<PAGE> 30

manufacturers of these products will continue to improve these therapies. In
July 1995, the FDA approved the use of alprostadil in Upjohn's needle injection
therapy product for erectile dysfunction. Previously, Upjohn had obtained
approval in a number of European countries. Additional competitive therapies
under development include an oral medication, Viagra, by Pfizer, Inc., which is
currently in Phase III clinical trials. Other large pharmaceutical companies are
also actively engaged in the development of therapies for the treatment of
erectile dysfunction. These companies have substantially greater research and
development capabilities as well as substantially greater marketing, financial
and human resources than the Company. In addition, these companies have
significantly greater experience than the Company in undertaking preclinical
testing, human clinical trials and other regulatory approval procedures. There
are also small companies, academic institutions, governmental agencies and other
research organizations that are conducting research in the area of erectile
dysfunction. For instance, Zonagen, Inc. and Pentech Pharmaceutical, Inc. have
oral medications under development. These entities may also market commercial
products either on their own or through collaborative efforts. The Company's
competitors may develop technologies and products that are available for sale
prior to the Company's products or that are more effective than those being
developed by the Company. Such developments would render the Company's products
less competitive or possibly obsolete. If the Company is permitted to commence
commercial sales of products, it will also be competing with respect to
marketing capabilities and manufacturing efficiency, areas in which it has
limited experience. See "Risk Factors -- Intense Competition."

GOVERNMENT REGULATION

The production and marketing of the Company's proposed products and its
research and development activities are subject to regulation for safety,
effectiveness and quality by numerous governmental authorities in the United
States and other countries. In the United States, drugs are subject to rigorous
FDA regulation. The Federal Food, Drug, and Cosmetic Act, as amended, the
regulations promulgated thereunder, and other federal and state statutes and
regulations, govern, among other things, the testing, manufacture, safety,
effectiveness, labeling, storage, record keeping, advertising and promotion of
the Company's products. Product development and approval within this regulatory
framework takes a number of years and involves the expenditure of substantial
resources.

The steps required before a pharmaceutical agent may be marketed in the
United States include (i) preclinical laboratory tests, in vivo preclinical
studies and formulation studies, (ii) the submission to the FDA of an IND
application for human clinical testing, which must become effective before human
clinical trials commence, (iii) adequate and well-controlled human clinical
trials to establish the safety and effectiveness of the drug, (iv) the
submission of an NDA to the FDA, and (v) the FDA approval of the NDA prior to
any commercial sale or shipment of the drug. In addition to obtaining FDA
approval for each product, each domestic drug manufacturing establishment must
be registered with, and approved by, the FDA. Domestic manufacturing
establishments are subject to biennial inspections by the FDA and must comply
with GMP for both drugs and devices. To supply products for use in the United
States, foreign manufacturing establishments must comply with GMP and are
subject to periodic inspection by the FDA or by corresponding regulatory
agencies in such countries under reciprocal agreements with the FDA. The
Company's contract manufacturing site, located in New Jersey, must also be
licensed by the State of New Jersey and must comply with New Jersey's separate
regulatory requirements.

Preclinical tests include laboratory evaluation of product chemistry and
formulation, as well as animal studies to assess the potential safety and
effectiveness of the product. Compounds must be adequately manufactured and
preclinical safety tests must be conducted by laboratories that comply with FDA
regulations. The results of the preclinical tests are submitted to the FDA as
part of an IND and are reviewed by the FDA prior to the commencement of human
clinical trials. There can be no assurance that submission of an IND will result
in FDA authorization to commence clinical trials.

Clinical trials involve the administration of the investigational new drug
to patients, under the supervision of a qualified principal investigator.
Clinical trials are conducted in accordance with Good Clinical Practices under
protocols that detail the objectives of the study, the parameters to be used to
monitor safety and the effectiveness criteria to be evaluated. Each protocol
must be submitted to the FDA as part of the IND.

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<PAGE> 31

Further, each clinical study must be conducted under the auspices of an
independent Institutional Review Board ("IRB") at the institution at which the
study will be conducted. The IRB will consider, among other things, ethical
factors, the safety of human subjects and the possible liability of the
institution.

Clinical trials are typically conducted in three sequential phases, but the
phases may overlap. In Phase I, the initial introduction of the drug into
healthy subjects, the drug is tested for safety, dosage tolerance, absorption,
distribution, metabolism, excretion and pharmacodynamics (clinical
pharmacology). Phase II involves studies in a limited patient population to (i)
determine the effectiveness of the drug for specific, targeted indications, (ii)
determine dosage tolerance and optimal dosage and (iii) identify possible
adverse effects and safety risks. When a compound is found to be effective and
to have an acceptable safety profile in Phase II evaluations, Phase III trials
are undertaken to further evaluate clinical effectiveness and to further test
for safety within an expanded patient population at geographically dispersed
clinical study sites. There can be no assurance that Phase I, Phase II or Phase
III testing will be completed within any specific time period, if at all, with
respect to any of the Company's products subject to such testing. Furthermore,
the Company or the FDA may suspend clinical trials at any time if it is believed
that the patients are being exposed to an unacceptable health risk. See "Risk
Factors -- Government Regulation and Uncertainty of Product Approvals."

The results of the pharmaceutical development, preclinical studies and
clinical studies are submitted to the FDA in the form of an NDA for approval of
the marketing and commercial shipment of the drug. The testing and approval
process is likely to require substantial time and effort and there can be no
assurance that any approval will be granted on a timely basis, if at all. The
FDA may deny an NDA if applicable regulatory criteria are not satisfied, require
additional testing or information, or require postmarketing testing and
surveillance to monitor the safety of the Company's products if they do not view
the NDA as containing adequate evidence of the safety and effectiveness of the
drug. Notwithstanding the submission of such data, the FDA may ultimately decide
that the application does not satisfy its regulatory criteria for approval.
Moreover, if regulatory approval of a drug is granted, such approval may entail
limitations on the indicated uses for which it may be marketed. Finally,
approvals may be withdrawn if compliance with regulatory standards is not
maintained or if problems occur following initial marketing.

For purposes of prioritizing the review of NDAs, FDA classifies drugs as
either "priority review" or "standard review" products. A "priority review" drug
is one that appears to represent a therapeutic advance over available therapy.
This assessment is for FDA's review purposes only and does not represent the
agency's views or predictions regarding a drug's ultimate value or how it will
be received in the market. FDA can change a drug's classification during the
review process.

In connection with the Prescription Drug User Fee Act of 1992 (PDUFA), FDA
has accepted a five-year goal, to be implemented by September 30, 1997, of
acting on priority NDAs within six months of submission and on standard NDAs
within 12 months of submission (major amendments received within three months of
the action due date extend the date by three months). For these purposes, to
"act on" an application does not necessarily mean to approve an NDA, but rather
includes issuing an initial action letter indicating either that the application
is approvable or that it is not approvable and listing the deficiencies that
must be corrected.

There are numerous "interim" review-time goals under PDUFA slated for
implementation before 1997, but these do not treat priority and standard
applications separately. Experience under PDUFA thus far has shown that, on
average, priority applications have undergone somewhat shorter review periods
than have standard applications before issuance of an initial action letter.
However, the review period prior to an initial action letter and prior to final
approval for any particular NDA will depend on many factors and may be
considerably longer or shorter than the average, and there is no assurance that
any particular NDA will in fact be approved by the FDA.

Among the conditions for an NDA approval is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
to GMP. In complying with standards set forth in these regulations,
manufacturers must continue to expend time, money and effort in the area of
production and quality control to ensure full technical compliance.

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<PAGE> 32

For clinical investigation and marketing in Europe, the Company also is
subject to foreign regulatory requirements governing human clinical trials and
marketing approval for drugs. The requirements governing the conduct of clinical
trials, product licensing, pricing and reimbursement vary widely for European
countries both within and outside the European Union ("EU"). The Company's
approach to the European regulatory process involved the identification of
respected clinical investigators in the member states of the EU and other
European countries to conduct clinical studies. The Company designed these
studies to meet FDA, EU and other European countries' standards. Within the EU,
while marketing authorizations must be supported by clinical trial data of a
type and extent set out by EU directives and guidelines, the approval process
for the commencement of clinical trials is just beginning to be harmonized by EU
law, and still varies from country to country. The system for obtaining
marketing authorizations within the EU changed on January 1, 1995. The new EU
registration system is a dual one in which certain products, such as
biotechnology and high-technology products and those containing new active
substances, have access to a central regulatory system that provides
registration throughout the entire EU. Other products will be registered by
national authorities in individual EU member states, operating on a principle of
mutual recognition. As far as possible, the Company's studies were designed to
develop a regulatory package sufficient for multi-country approval in the
European markets without the need to duplicate studies for individual country
approvals.

Outside the United States and Europe, the Company's ability to market a
product is contingent upon receiving a marketing authorization from the
appropriate regulatory authority. This foreign regulatory approval process
includes all of the risks associated with FDA approval previously discussed.

EMPLOYEES

As of May 17, 1996 the Company employed 42 persons, of whom one is
part-time. None of the Company's current employees is represented by a labor
union or is the subject of a collective bargaining agreement. The Company
believes that it maintains good relations with its employees.

FACILITIES

The Company currently occupies 16,507 square feet of administrative space
in Menlo Park, California under a lease which expires in December 1997. The
Company's facility serves as the principal site for administration, clinical
trial management, regulatory affairs and monitoring of product production and
quality control. The current facilities are expected to meet the Company's
administration requirements through the term of the lease.

In June 1995, the Company completed constructing and equipping to its
specifications approximately 6,000 square feet of leased manufacturing and
testing space within Paco's facility in Lakewood, New Jersey.

The Company is currently subleasing 2,150 square feet of laboratory space
in San Carlos, California under a sublease which expires in August 1996. The
Company anticipates that it can renew this lease or that other space will be
available.

LITIGATION

A former consultant to the Company has claimed that he is the inventor of
certain technology disclosed in one of the Company's patents. The former
consultant further claims that the Company defrauded him by allegedly failing to
inform him that it intended to use and patent this technology, and by failing to
compensate him for the technology in the manner allegedly promised. On May 28,
1996, the Company filed a complaint for declaratory judgment against the former
consultant in the United States District Court for the Northern District of
California, which seeks a declaration from the court that the former consultant
is not an inventor of any of the technology disclosed in the patent. In a
separate matter, on April 10, 1996, the licensors in an agreement by which the
Company acquired a patent license filed a lawsuit in a Texas State court that
alleges that they were defrauded in connection with the renegotiation of the
license agreement between the Company and the licensors. On May 8, 1996 the
action was removed to the United States District Court for the Western District
of Texas. In addition to monetary damages, the licensors seek to return to the
terms of the original license agreement. The Company has conducted a review of
the circumstances surrounding these two matters

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<PAGE> 33

and believes that the allegations are without merit. Although the Company
believes that it should prevail, the uncertainties inherent in litigation
prevent the Company from giving any assurances about the outcome of such
litigation. See "Management -- Limitations on Liability and Indemnification
Matters."

MEDICAL ADVISORY BOARD

VIVUS has recruited several physician specialists and experienced
practitioners in the treatment of erectile dysfunction to serve on its Medical
Advisory Board.

Nils G. Kock, M.D., Ph.D. is a Professor Emeritus and former chairman in
the Department of Surgery, University of Goteborg, Sahlgren's Hospital,
Goteborg, Sweden. Dr. Kock is an expert in the causes and treatment of erectile
dysfunction, an area where he has published extensively. He was one of the first
to study transurethral therapy in patients with erectile dysfunction, and is the
named inventor on a patent which is licensed to the Company describing
transurethral therapy for erectile dysfunction.

Stanley G. Korenman, M.D. is the Associate Dean of Ethics and the Medical
Scientist Training Program, Department of Medicine, University of California at
Los Angeles, California. Dr. Korenman is a renowned endocrinologist and
geriatrician. He has lectured and published extensively on the causes and
treatment of erectile dysfunction and aging and male sexual function.

Tom F. Lue, M.D. is a Professor in the Department of Urology, School of
Medicine, University of California Medical Center, San Francisco, California.
Dr. Lue is an acknowledged expert in the area of erectile dysfunction and has
published extensively on its causes and treatment.

Virgil A. Place, M.D., Chairman of the Board and Chief Scientific Officer
of VIVUS, also serves as a Medical Advisory Board member.

Mary Lake Polan, M.D., Ph.D. is a Professor and the Chairman of the
Department of Gynecology and Obstetrics, Stanford University Medical Center,
Stanford, California. Dr. Polan has published extensively on the causes and
treatment of female infertility and the female reproductive system.

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<PAGE> 34

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The executive officers and directors of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------- ----- ---------------------------------------------------
<S> <C> <C>
Virgil A. Place, M.D.................. 71 Chairman of the Board and Chief Scientific Officer
Leland F. Wilson...................... 52 President, Chief Executive Officer and Director
Paul C. Doherty, Ph.D................. 46 Vice President, Research and Development
Neil Gesundheit, M.D.................. 43 Vice President, Clinical and Regulatory Affairs
Terry M. Nida......................... 47 Vice President, Europe
Clair W. Sater........................ 54 Vice President, Corporate Development
David C. Yntema....................... 51 Vice President, Finance and Chief Financial Officer
Richard L. Casey(1)................... 49 Director
Samuel D. Colella(2)(3)............... 56 Director
Brian H. Dovey(2)(3).................. 55 Director
Elizabeth A. Fetter................... 37 Director
Peter Barton Hutt(1).................. 61 Director
</TABLE>

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

(1) Member of Compensation Committee

(2) Member of Audit Committee

(3) Member of Nominating Committee

All directors hold office until the next annual meeting of stockholders or
until their successors have been elected and qualified. Officers serve at the
discretion of the Board of Directors. There are no family relationships between
any of the directors or executive officers of the Company.

VIRGIL A. PLACE, M.D. is the founder of VIVUS and has been its Chief
Scientific Officer and Chairman of the Board since the Company was formed in
April 1991. Before joining VIVUS, Dr. Place worked at Alza from 1969 to 1993. At
Alza, Dr. Place was Principal Scientist and held a variety of executive
positions including Vice President of Medical and Regulatory Affairs. In
addition, Dr. Place served nine years on the Alza Board of Directors. He
received a B.A. in Chemistry from Indiana University and an M.D. from Johns
Hopkins University. He is Board Certified in Internal Medicine, with specialty
training at Mayo Clinic.

LELAND F. WILSON has been President and a director of VIVUS since April
1991 and Chief Executive Officer since November 1991. Prior to joining VIVUS,
Mr. Wilson was Vice President of Marketing and Corporate Development of GeneLabs
Technologies, Inc. from 1989 to 1991. Mr. Wilson was Group Product Director,
later promoted to Director of Marketing at LifeScan, a Johnson & Johnson
company, from 1986 to 1989. From 1973 to 1986, Mr. Wilson served in several
research, marketing and sales positions for Syntex Research and Syntex
Laboratories, Inc. Mr. Wilson received a B.S. and an M.S. from Pennsylvania
State University.

PAUL C. DOHERTY, PH.D. has been Vice President, Research and Development of
VIVUS since February 1994. Prior to joining VIVUS, Dr. Doherty was Senior
Scientist working in erectile dysfunction research for Lilly Research
Laboratories, Eli Lilly and Company from 1990 to 1994. He was Assistant
Professor, Department of Anatomy at Northeastern Ohio University College of
Medicine from 1984 to 1990. He received a B.S. in Biology from Boston College, a
Ph.D. in Anatomy from the University of Texas Health Science Center and has
completed postgraduate work in Behavioral Endocrinology at the Massachusetts
Institute of Technology.

NEIL GESUNDHEIT, M.D., M.P.H. has been Vice President, Clinical and
Regulatory Affairs for VIVUS since February 1994. Prior to joining VIVUS, Dr.
Gesundheit was Associate Director of Clinical Research (Endocrinology) at
Genentech, Inc. from 1989 to 1993. He received an A.B. from Harvard University,
an

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<PAGE> 35

M.P.H. from the University of California at Berkeley, and an M.D. from the
University of California at San Francisco. Dr. Gesundheit is Board Certified in
Internal Medicine and in the subspecialty of Endocrinology and Metabolism.

TERRY M. NIDA has been Vice President, Europe for VIVUS since November 1995
and effective March 28, 1996 was appointed an executive officer. Prior to
joining VIVUS, Mr. Nida was Vice President for Carrington Laboratories, with
responsibility for all sales, marketing and business development activities. Mr.
Nida was Senior Director, Worldwide Sales, Marketing and Business Development
for Centocor, Inc. from 1993 to 1994, and Director of Sales and Marketing in
Europe for Centocor, Inc. from 1990 to 1993. He received his B.A. in English and
Masters in Administration of Justice from Wichita State University.

CLAIR W. SATER has been Vice President, Corporate Development for VIVUS
since January 1995. From January 1993 to January 1995, Mr. Sater was Vice
President, Marketing and Business Development. Prior to joining VIVUS, Mr. Sater
was Executive Vice President for Cholestech Corporation from 1990 to 1991. Mr.
Sater was Vice President of Marketing and Vice President of International for
LifeScan, a Johnson & Johnson company, from 1982 to 1990. Mr. Sater received a
B.S. and an M.S. in Engineering from Iowa State University and an M.B.A. from
Stanford University.

DAVID C. YNTEMA has been Vice President, Finance and Chief Financial
Officer of VIVUS since May 1994. Prior to joining VIVUS, he served as Chief
Financial Officer of EO, Inc., a hand-held personal computer company, from 1993
to 1994, MasPar Computer Corporation, a supercomputer company, from 1990 to
1993, and System Industries, Inc., a storage sub-system company, from 1988 to
1990. He received a B.A. from Hope College and an M.B.A. from the University of
Michigan, and is a Certified Public Accountant.

RICHARD L. CASEY has been a director of VIVUS since March 1992. Since 1987,
Mr. Casey has been Chairman and Chief Executive Officer of Scios, Inc., a
biotechnology company. Prior to joining Scios, Inc., Mr. Casey was Executive
Vice President of Alza and President of Alza Pharmaceuticals Division. Mr. Casey
is a director of Guilford Pharmaceuticals, Inc. He received a B.S. in Chemistry
and an M.B.A. from Stanford University.

SAMUEL D. COLELLA has been a director of VIVUS since November 1991. Mr.
Colella has been a general partner at Institutional Venture Partners, a venture
capital firm, since 1984. Mr. Colella is a director of Biosys, Inc., Endosonics
Corp. and Genta Incorporated. He received a B.S. in Business and Engineering
from the University of Pittsburgh and an M.B.A. from Stanford University.

BRIAN H. DOVEY has been a director of VIVUS since November 1991. Mr. Dovey
has been a general partner of Domain Associates, a venture capital firm, since
1988. Mr. Dovey is a director of Univax Biologics, Inc., Creative BioMolecules,
Inc., Athena Neurosciences, Inc. and ReSound Corporation. He received a B.A.
from Colgate University and an M.B.A. from Harvard Business School.

ELIZABETH A. FETTER was appointed as a director of VIVUS in June 1996. Ms.
Fetter has been employed by Pacific Bell since 1991, most recently as the
President of its Industry Markets Group. She received a B.A. in Communications
Studies from Pennsylvania State University and an M.S. in Industrial
Administration in Public Policy from Carnegie-Mellon University.

PETER BARTON HUTT has been a director of VIVUS since January 1992. Mr. Hutt
has been a partner in the Washington, D.C. law firm of Covington & Burling since
1975. From 1971 to 1975 he was chief counsel for the Food and Drug
Administration. Mr. Hutt is a director of Cell Genesys, Inc., IDEC
Pharmaceuticals, Inc., Emisphere Technologies, Inc., Sparta Pharmaceuticals,
Inc. and Interneuron Pharmaceutical, Inc. He received a B.A. from Yale
University, an LL.B. from Harvard University, and an LL.M. from New York
University.

LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS

The Company's Certificate of Incorporation limits the liability of
directors to the maximum extent permitted by Delaware law. Delaware law provides
that directors of a corporation will not be personally liable for monetary
damages for breach of their fiduciary duties as directors, except liability for
(i) breach of their

35
<PAGE> 36

duty of loyalty to the corporation or its stockholders, (ii) acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) unlawful payments of dividends or unlawful stock repurchases or
redemptions, or (iv) any transaction from which the director derived an improper
personal benefit. Such limitation of liability does not apply to liabilities
arising under the federal or state securities laws and does not affect the
availability of equitable remedies such as injunctive relief or rescission.

The Company's Bylaws provide that the Company shall indemnify its directors
and executive officers and may indemnify its other officers and employees and
other agents to the fullest extent permitted by law. The Company believes that
indemnification under its Bylaws covers at least negligence and gross negligence
on the part of indemnified parties. The Company's Bylaws also permit it to
secure insurance on behalf of any officer, director, employee or other agent for
any liability arising out of his or her actions in such capacity, regardless of
whether the Bylaws permit such indemnification.

The Company has entered into agreements to indemnify its directors and
executive officers, in addition to the indemnification provided for in the
Company's Bylaws. These agreements, among other things, indemnify the Company's
directors and executive officers for certain expenses (including attorneys'
fees), judgments, fines and settlement amounts incurred by any such person in
any action or proceeding, including any action by or in the right of the Company
arising out of such person's services as a director or executive officer of the
Company, any subsidiary of the Company or any other company or enterprise to
which the person provides services at the request of the Company. The Company
believes that these provisions and agreements are necessary to attract and
retain qualified persons as directors and executive officers.

There is certain pending and threatened litigation involving Leland F.
Wilson and Virgil A. Place, each a director and officer of the Company, that may
result in a claim for indemnification. See "Business -- Litigation."

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<PAGE> 37

UNDERWRITING

The underwriters named below (the "Underwriters"), for whom PaineWebber
Incorporated, Invemed Associates, Inc. and Genesis Merchant Group Securities are
acting as representatives (the "Representatives"), have severally agreed, on the
terms and subject to the conditions set forth in the Underwriting Agreement by
and among the Company and the Underwriters (the "Underwriting Agreement"), to
purchase from the Company, and the Company has agreed to sell to the
Underwriters, the number of shares of Common Stock set forth opposite the name
of such Underwriters below:

<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
---------------------------------------------------------------- ---------
<S> <C>
PaineWebber Incorporated........................................ 900,000
Invemed Associates, Inc......................................... 900,000
Genesis Merchant Group Securities............................... 200,000
---------
Total................................................. 2,000,000
========
</TABLE>

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

The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public at the public offering price
set forth on the cover of this Prospectus and to certain dealers at such price
less a concession not in excess of $0.90 per share, and that the Underwriters
and such selected dealers may reallow a concession to other dealers not in
excess of $0.10 per share. After the public offering of the Common Stock, the
public offering price, the concessions to selected dealers and reallowance to
other dealers may be changed by the Representatives.

The Company has granted the Underwriters an option, exercisable during the
30-day period after the date of this Prospectus, to purchase up to an additional
300,000 shares of Common Stock at the public offering price set forth on the
cover page of this Prospectus, less the underwriting discounts and commissions.
To the extent the Underwriters exercise such option, each of the Underwriters
will become obligated, subject to certain conditions, to purchase such
percentage of such additional shares of Common Stock as is approximately equal
to the percentage of shares of Common Stock that it is obligated to purchase as
shown in the table set forth above. The Underwriters may exercise such option
only to cover over-allotments, if any, incurred in the sales of shares of Common
Stock.

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

The Company, its directors and executive officers and certain stockholders
have agreed not to offer, sell, contract to sell, or grant any option to
purchase or otherwise dispose of any shares of Common Stock owned by them prior
to the expiration of 90 days from the date of this Prospectus, except (i) for
shares of Common Stock offered hereby, (ii) with the prior written consent of
PaineWebber Incorporated, and (iii) in the case of the Company, for the issuance
of shares of Common Stock upon the exercise of options, or the grant of options
to purchase shares of Common Stock.

In connection with this offering, certain Underwriters and selling group
members or their affiliates may engage in passive market making transactions in
the Common Stock on the Nasdaq National Market in

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<PAGE> 38

accordance with Rule 10b-6A under the Exchange Act. Passive market making
consists of, among other things, displaying bids on the Nasdaq National Market
limited by the bid prices of independent market makers and making purchases
limited by such prices and effected in response to order flow. Net purchases by
a passive market maker on each day are limited to a specified percentage of the
passive market maker's average daily trading volume in the Common Stock during a
specified prior period, and all passive market making activity must be
discontinued when such limit is reached. Passive market making may stabilize the
market price of the Common Stock at a level above that which might otherwise
prevail and, if commenced, may be discontinued at any time.

As of the date of this Prospectus, Invemed Associates, Inc. and its
affiliates beneficially own an aggregate of 199,172 shares of Common Stock
(including up to 92,505 shares subject to outstanding warrants exercisable for
Common Stock). In addition, Genesis Merchant Group Securities beneficially owns
an aggregate of 90 shares of Common Stock.

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto, California.
Certain legal matters relating to patents in connection with this offering will
be passed on by Flehr Hohbach Test Albritton & Herbert, San Francisco,
California. Pillsbury Madison & Sutro LLP, Menlo Park, California is acting as
legal counsel for the Underwriters in connection with certain legal matters
relating to the shares of Common Stock offered hereby. As of the date of this
Prospectus, members of Wilson Sonsini Goodrich & Rosati, P.C., beneficially own
approximately 18,500 shares of the Company's Common Stock.

EXPERTS

The consolidated financial statements incorporated by reference in this
Prospectus and elsewhere in the Registration Statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are incorporated herein in reliance upon the
authority of such firm as experts in accounting and auditing.

The statements in this Prospectus under the caption "Risk
Factors -- Proprietary Rights and Risk of Litigation" and "Business -- Licensed
Patents and Proprietary Rights" have been reviewed and approved by Flehr Hohbach
Test Albritton & Herbert, patent counsel for the Company, as experts in such
matters and are included herein in reliance upon such review and approval.

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<PAGE> 39

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, and in accordance therewith files reports, proxy and
information statements, and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, statements and other information
can be inspected and copied at the public reference facilities maintained by the
Commission at its office at Room 1034, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the Commission's regional offices at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center,
Suite 1300, New York, New York 10048. Copies of such materials can be obtained
from the public reference section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Company's Common Stock is
quoted on the Nasdaq National Market.

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

The Company's logo and MUSE are trademarks of the Company. Trademarks of
other corporations and organizations are also referred to in this Prospectus.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents previously filed with the Commission are hereby
incorporated by reference into this Prospectus: (i) the Company's Annual Report
on Form 10-K for the year ended December 31, 1995, (ii) the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996, (iii) the description
of the Common Stock contained in the Company's Registration Statement on Form
8-A filed under the Exchange Act with the Commission that became effective on
April 7, 1994, (iv) the description of Common Stock and the Preferred Share
Purchase Rights contained in the Company's Registration Statement on Form 8-A
filed under the Exchange Act with the Commission that became effective on March
5, 1996, and (v) the Company's Form 8-K filed with the Commission on May 31,
1996. All documents subsequently filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act prior to the termination of the offering
to which this Prospectus relates shall be deemed to be incorporated by reference
into this Prospectus and to be part of this Prospectus from the date of filing
thereof. The following unaudited material events occurring subsequent to the
date of the report of independent public accountants should be read in
conjunction with the December 31, 1995 financial statements, (i) the discussion
under "Business -- Litigation," (ii) the discussion of the marketing agreement
with Astra under "Business -- Sales and Marketing" and (iii) the discussion of
the issuance of Common Stock to ALZA under "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Overview."

Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus and
the Registration Statement of which it is a part to the extent that a statement
contained herein or in any other subsequently filed document which also is
incorporated herein modifies or replaces such statement. Any statement so
modified or superseded shall not be deemed, in its unmodified form, to
constitute a part of this Prospectus or such Registration Statement. The Company
will provide without charge to each person to whom a copy of the Prospectus has
been delivered, and who makes a written or oral request, a copy of any and all
of the foregoing documents incorporated by reference in the Registration
Statement (other than exhibits unless such exhibits are specifically
incorporated by reference into such documents). Requests should be submitted in
writing or by telephone to David C. Yntema, VIVUS, Inc., 545 Middlefield Road,
Suite 200, Menlo Park, California 94025, telephone (415) 325-5511.

39
<PAGE> 40

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

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Prospectus Summary......................... 3
Risk Factors............................... 5
Use of Proceeds............................ 13
Price Range of Common Stock................ 13
Dividend Policy............................ 13
Capitalization............................. 14
Dilution................................... 14
Selected Financial Data.................... 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 16
Business................................... 20
Management................................. 34
Underwriting............................... 37
Legal Matters.............................. 38
Experts.................................... 38
Available Information...................... 39
Incorporation of Certain Documents by
Reference................................ 39
</TABLE>

2,000,000 SHARES

LOGO
COMMON STOCK

------------------------
PROSPECTUS
------------------------
PAINEWEBBER INCORPORATED

INVEMED ASSOCIATES, INC.
GENESIS MERCHANT GROUP
SECURITIES

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

JUNE 25, 1996

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<PAGE> 41

APPENDIX -- DESCRIPTION OF GRAPHICS

INSIDE FRONT COVER:

(UPPER LEFT). This illustration depicts a cross section of the penis and
labels the location of the urethra and the erectile bodies. There is a box
around the urethra with an arrow attached to it that points to the illustration
in the upper right of the inside front cover.

INSIDE FRONT COVER:

CAPTION: CROSS SECTION OF PENIS
For an erection to occur, a sufficient quantity of blood must
flow into the erectile bodies of the penis and be maintained
there.

(UPPER RIGHT). This illustration is being pointed to by the box that is
around the urethra in the illustration in the upper right of the inside front
cover and depicts a blow up view of the urethra. The illustration depicts a
pharmacologic agent in the urethra that is being transferred to the surrounding
erectile tissues.

CAPTION: CLOSE-UP VIEW OF THE URETHRA
The pharmacologic agent is applied topically to the urethral
lining where it is quickly absorbed and rapidly transferred to
the surrounding erectile tissues.

(LOWER LEFT). This is a photograph of a hand holding the Company's
transurethral system for erection which contains a pharmacologic agent.

CAPTION: The Company's transurethral system for erection consists of a
single-use, disposable plastic applicator which contains the pharmacologic agent
and can be easily administered with minimal instruction.

PAGE 20

This illustration depicts a cross section of the penis and labels the
location of the corpora cavernosa, the corpus spongiosum and the urethra.

PAGE 23

There are two illustrations side by side. The one on the left is a
depiction of a hand holding the Company's transurethral system for erection. The
one on the right is a depiction of the Company's transurethral system for
erection being inserted into the urethra of the penis.

PAGE 24

This chart depicts the sequence of the Company's clinical trials from left
to right. On the far left is a column of two boxes. One is for the Company's
Dose Ranging Study and the other is for the Company's Quality of Life Study.
Each study is indicated as having been completed, and the applicable box
designates the Dose Ranging Study as a Phase II/III study and the Quality of
Life Study as a Phase III Study.

To the right of the two far left boxes is a middle column of four boxes for
(from top to bottom) the Company's Maintenance Study, the Company's U.S.
Confirmatory Study #1, the Company's U.S. Confirmatory Study #2 and the
Company's European Confirmatory Study. Each of these studies is designated as a
Phase III study that has been completed. The top box in the column is for the
Maintenance Study, and there are arrows emanating from two far left boxes that
point to the box for the Maintenance Study.

There are two boxes in a column on the far right for the Company's Extended
Maintenance Study and the Company's European Extended Maintenance Study
indicating that each of them is still in process. The upper box is for the
Extended Maintenance Study, and there are arrows emanating from the upper three
boxes (Maintenance Study, U.S. Confirmatory Study #1, and U.S. Confirmatory
Study #2) in the middle column that point to the box for the Extended
Maintenance Study. The lower box in the far right column is for the
<PAGE> 42

European Extended Maintenance Study, and there is an arrow emanating from lowest
box in the middle column that points to the box for the European Extended
Maintenance Study.

Beneath the far left column of boxes and the middle column of boxes is a
long rectangular box that runs from the beginning of the left column to the end
of the middle column. This box is for the Company's Safety Studies that are
designated as complete.

Sitting above and between the middle column of boxes and the far right
column of boxes is an ellipse for the Company's NDA Submission, which is
indicated as having been filed in March 1996. An arrow emanates from the bottom
of the ellipse and points down to the space between the middle column of boxes
and the far right column of boxes.