HUMAN GENOME SCIENCES INC, 424B5, 2000-10-20

HUMAN GENOME SCIENCES INC
424B5, 2000-10-20
COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH

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The information in this document is not complete and may be changed. This
document is not an offer to sell these securities and is not soliciting
an offer to buy these securities in any state where the offer or sale is
not permitted.

Filed Pursuant to Rule 424(b)(5)
Registration No. 333-45272
SUBJECT TO COMPLETION, DATED OCTOBER 19, 2000
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED OCTOBER 19, 2000
8,000,000 Shares
HUMAN GENOME SCIENCES, INC.
Common Stock

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

We are selling 8,000,000 shares of common stock. Our common stock is listed
on The Nasdaq National Market under the symbol "HGSI." The last reported sale
price on October 19, 2000 was $91.44 per share.

The underwriters have an option to purchase a maximum of 1,200,000
additional shares to cover over-allotments of shares.

INVESTING IN OUR COMMON STOCK INVOLVES RISK. SEE "RISK FACTORS" BEGINNING
ON PAGE S-4.

<TABLE>
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UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND HUMAN GENOME
PUBLIC COMMISSIONS SCIENCES
-------- ------------- ------------
<S> <C> <C> <C>
Per Share............................................ $ $ $
Total................................................ $ $ $
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Delivery of the shares of common stock will be made on or about
, 2000.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the prospectus to which it relates is truthful or
complete. Any representation to the contrary is a criminal offense.

CREDIT SUISSE FIRST BOSTON
GOLDMAN, SACHS & CO.
LEHMAN BROTHERS
CIBC WORLD MARKETS
J.P. MORGAN & CO.
DAIN RAUSCHER WESSELS

The date of this prospectus supplement is , 2000.
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TABLE OF CONTENTS

PROSPECTUS SUPPLEMENT

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PAGE
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SUMMARY............................ S-1
RISK FACTORS....................... S-4
USE OF PROCEEDS.................... S-17
PRICE RANGE OF COMMON STOCK........ S-18
DIVIDEND POLICY.................... S-18
CAPITALIZATION..................... S-19
DILUTION........................... S-20
SELECTED FINANCIAL DATA............ S-20
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........ S-20
</TABLE>

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BUSINESS........................... S-21
UNDERWRITING....................... S-43
NOTICE TO CANADIAN RESIDENTS....... S-45
LEGAL MATTERS...................... S-46
EXPERTS............................ S-46
</TABLE>

PROSPECTUS

<TABLE>
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PAGE
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<S> <C>
RISK FACTORS....................... 1
SPECIAL NOTE REGARDING
FORWARD-LOOKING INFORMATION...... 1
HUMAN GENOME SCIENCES.............. 2
ABOUT THIS PROSPECTUS.............. 3
RATIO OF EARNINGS TO FIXED
CHARGES.......................... 3
IMPACT OF RECENTLY ISSUED
ACCOUNTING STANDARDS............. 4
USE OF PROCEEDS.................... 4
SECURITIES WE MAY OFFER............ 5
</TABLE>

<TABLE>
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PAGE
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DESCRIPTION OF COMMON STOCK AND
PREFERRED STOCK.................. 5
DESCRIPTION OF DEBT SECURITIES..... 8
DESCRIPTION OF WARRANTS............ 15
PLAN OF DISTRIBUTION............... 17
LEGAL MATTERS...................... 18
EXPERTS............................ 18
WHERE YOU CAN FIND MORE
INFORMATION...................... 18
INCORPORATION BY REFERENCE......... 19
</TABLE>

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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.

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SUMMARY

This summary highlights information about Human Genome Sciences. Because
this is a summary, it may not contain all the information you should consider
before investing in our common stock. You should carefully read this entire
prospectus supplement and the prospectus to which it relates.

HUMAN GENOME SCIENCES

We are a leading genomics and biopharmaceutical company focused on
therapeutic product development and functional analysis of genes using our
proprietary technology platform. We discover, research, develop and intend to
commercialize novel compounds for treating and diagnosing human disease based on
the identification and study of genes. We focus our internal product development
efforts on therapeutic proteins, antibodies, peptides and fusion proteins, and
use collaborations for the development of gene therapy products and small
molecule drugs. We have discovered a large number of genes through our genomics
capabilities and have developed a rapidly evolving product pipeline based on our
discoveries. Four therapeutic proteins we discovered, mirostipen (MPIF-1),
repifermin (KGF-2), BLyS and VEGF-2, have entered human clinical trials. We
recently submitted to the FDA an Investigational New Drug Application for a new
albumin-alpha interferon fusion protein. We have a number of additional products
in preclinical development.

We have extensive capabilities in gene discovery, intellectual property
protection and preclinical and clinical development and have recently
established a manufacturing capability. We intend to add sales and marketing and
additional manufacturing capabilities as needed. We have established strategic
partnerships with a number of leading pharmaceutical and biotechnology companies
to leverage our capabilities and gain access to complementary technologies and
sales and marketing infrastructure. Some of these partnerships provide us with
research funding and milestone payments, along with royalty payments as products
are developed and commercialized. We are also entitled to certain co-promotion,
co-development, revenue sharing and other product rights.

We have a growing intellectual property portfolio protecting our genomic
discoveries and product pipeline. As of October 6, 2000, we had 146 U.S. patents
covering 107 full-length human genes and had filed U.S. patent applications
covering more than 9,000 human genes and the proteins they encode.

STRATEGY

Our goal is to become a leading global fully-integrated biopharmaceutical
company through the discovery, development, manufacture and commercialization of
new gene-based products. As part of our strategy, we intend to continue to:

- Discover medically useful genes based on our proprietary technology
platform;

- Develop, manufacture and commercialize our gene-based products on our own
and with our strategic partners;

- Establish and enhance strategic alliances to provide access to the
product development, clinical development and marketing expertise of our
partners;

- Expand our technology platform to accelerate our product development
activities;
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- Pursue strategic acquisitions to augment our capabilities and provide
access to complementary technologies; and

- Capitalize on and expand our intellectual property portfolio.

PRODUCTS

We have discovered a large number of medically useful genes which we are
developing on our own or with our partners. Currently four therapeutic protein
products which we discovered have entered human clinical testing. MPIF-1, a
protein designed to protect cells which develop into white blood cells, red
blood cells and platelets from the toxic effects of chemotherapy, has entered
Phase II human clinical trials. KGF-2, a protein designed to speed the repair of
damage to skin and other cells, is in Phase II human clinical trials for the
treatment of venous ulcers, mucositis and ulcerative colitis. BLyS, an immune
stimulant, has recently entered Phase I human clinical trials for the treatment
of common variable immunodeficiency. VEGF-2, which we have licensed to Vascular
Genetics for gene therapy, is currently on clinical hold. We also have a rapidly
evolving pipeline of additional products in preclinical development to treat
diseases such as cancer, HIV, hepatitis, systemic lupus erythematosus,
rheumatoid arthritis and vascular disease.

RECENT DEVELOPMENTS

Collaborative Developments. On October 16, 2000, we announced that
SmithKline Beecham exercised its co-right option to jointly develop and
commercialize KGF-2. We recently announced the positive results of our first
Phase II trial of KGF-2 in venous ulcers and our plans to move forward with a
large safety and efficacy Phase II trial for this indication.

On October 9, 2000, we announced that Schering-Plough exercised one of its
two options with the selection of a novel interferon we discovered. This novel
interferon has the potential to treat autoimmune and infectious diseases as well
as cancer. As Schering-Plough develops this protein, we will be entitled to
milestone and royalty payments.

Principia Acquisition. On September 8, 2000, we acquired Principia
Pharmaceutical Corporation, a recombinant albumin fusion technology company. We
expect to use Principia's technology to provide longer acting forms of many
important proteins used in the treatment of disease. This technology genetically
fuses a protein to albumin, a very abundant, natural and long-lived protein in
the blood. When albumin is fused to a therapeutic protein, that protein is
expected to have the longer circulating life of albumin. Prolonging the activity
of the therapeutic protein in this manner may offer a reduced dosing frequency
and could lead to reduced side effects in patients. Using this technology, we
expect to develop safer, more effective and more convenient protein therapeutics
and biopharmaceuticals for certain diseases and expand our product pipeline. On
October 18, 2000, we submitted to the FDA an Investigational New Drug
Application for a new albumin-alpha interferon fusion protein.

In connection with the Principia transaction, we exchanged 817,221 shares
of our common stock for all outstanding shares of Principia capital stock and
all outstanding Principia stock options and warrants. We have agreed to register
the resale of the HGS shares and the issuance of HGS shares pursuant to stock
options. The acquisition is being accounted for using the purchase method of
accounting and is valued for accounting purposes at approximately $135 million.
We expect to write off substantially all of this amount as purchased in-process
research and development expenses relating to the
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transaction. Any remaining excess purchase price will be allocated to goodwill
and other identified intangibles and amortized over the estimated useful life of
the assets.

Stock Split. On September 18, 2000, we approved a two-for-one stock split
of our common stock, payable in the form of a stock dividend. The stock dividend
was paid on October 5, 2000, to holders of record as of the close of business on
September 28, 2000. We have adjusted all share and per share numbers in this
prospectus supplement to reflect the stock dividend.

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

We are a Delaware corporation. Our headquarters are located at 9410 Key
West Avenue, Rockville, Maryland 20850-3338. Our telephone number is (301)
309-8504.

THE OFFERING

Common stock offered by us...... 8,000,000 shares

Common stock to be outstanding
after this offering........... 117,707,930 shares

Use of proceeds................. To initiate and expand laboratory and human
studies; to initiate human studies of new
drugs for existing markets; to accelerate
ongoing research and development efforts; to
pursue patent coverage for our genes and
potential products; to operate and expand
our process development and manufacturing
facilities; to acquire complementary
products or companies; to develop new
partnerships in other areas of drug
development; and for general corporate
purposes. See "Use of Proceeds."

Nasdaq National Market symbol... HGSI

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The number of shares of our common stock to be outstanding after this
offering is based on the number of shares outstanding on June 30, 2000, and
excludes:

- 514,560 shares of common stock issuable upon conversion of our 5 1/2%
Convertible Subordinated Notes Due 2006; 3,998,224 shares of common stock
issuable upon conversion of our 5% Convertible Subordinated Notes Due
2007; and 2,739,726 shares of common stock issuable upon conversion of
our 3 3/4% Convertible Subordinated Notes Due 2007; and

- 17,044,194 shares of common stock issuable upon exercise of stock options
under our stock incentive plan, at a weighted average exercise price of
$17.40 per share; 9,551,308 shares of common stock reserved for issuance
pursuant to stock options not yet granted under our stock incentive plan;
and 500,000 shares of common stock reserved for issuance under our
employee stock purchase plan.

Unless otherwise noted, we assume in this prospectus supplement that the
underwriters will not exercise their over-allotment option.
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RISK FACTORS

Investing in our common stock involves risk. You should consider carefully
each of the following risks and all of the other information in this prospectus
supplement, the accompanying prospectus and the documents we incorporate by
reference before investing in our common stock. If any of the following risks
and uncertainties develop into actual events, our business, financial condition
or results of operations could be adversely affected.

RISKS RELATED TO OUR BUSINESS MODEL

BECAUSE OUR BUSINESS STRATEGY IS STILL LARGELY UNTESTED, WE DO NOT KNOW WHETHER
WE WILL BE ABLE TO COMMERCIALIZE ANY OF OUR PRODUCTS OR TO WHAT EXTENT WE WILL
GENERATE REVENUE.

We do not know whether we can implement our business strategy successfully
because we are in the early stages of development. We initially set out to find
as many genes as possible and are now using that information to develop medical
and pharmacological products. We use automated high-speed technology to:

- rapidly identify the function of and obtain proprietary rights to a
substantial number of genes; and

- select genes with the greatest potential for the treatment and diagnosis
of human disease.

Nobody has tested our strategy. Other companies first target particular
diseases and try to find cures for them through gene-based therapies. If our
strategy does not result in the development of products that we can sell
profitably, we will be unable to generate revenue.

IF WE ARE UNABLE TO IDENTIFY GENES WITH POTENTIAL VALUE, WE MAY NOT BE ABLE TO
RECOVER OUR INVESTMENT IN OUR GENE DISCOVERY EFFORT.

We invested significant time and resources to isolate and study genes and
determine their functions. We now devote an ever-increasing portion of our
resources to identifying and developing proteins, antibodies and other compounds
for the treatment of human disease. We have recently made substantial capital
expenditures and hired additional personnel to foster these activities. Before
we can commercialize a product, we must rigorously test the product in the
laboratory and complete extensive human studies. We cannot assure you that
expenses for testing and study will yield profitable products or even products
approved for marketing by the FDA. We will incur additional costs to continue
these activities. If we are not successful in identifying products which we can
develop commercially, we may be unable to recover the large investment we make
in research and development.

BECAUSE OUR PRODUCT DEVELOPMENT EFFORTS DEPEND ON NEW AND RAPIDLY-EVOLVING
TECHNOLOGIES, WE DO NOT KNOW WHETHER OUR EFFORTS WILL BE SUCCESSFUL.

To date, companies have developed and commercialized relatively few
gene-based products. Our work depends on new, rapidly-evolving technologies and
on the marketability and profitability of innovative products. Commercialization
involves risks of failure inherent in the development of products based on
innovative technologies and the risks associated with drug development
generally. These risks include the possibility that:

- these technologies or any or all of the products based on these
technologies will be ineffective or toxic, or otherwise fail to receive
necessary regulatory clearances;

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- the products, if safe and effective, will be difficult to manufacture on
a large scale or uneconomical to market;

- proprietary rights of third parties will prevent us or our collaborators
from exploiting technologies or marketing products;

- third parties will market superior or equivalent products; and

- we may not be able to obtain or exploit new and superior technology which
could render obsolete the technologies we use.

BECAUSE WE ARE AN EARLY STAGE COMPANY, WE DO NOT KNOW WHETHER WE CAN DEVELOP OUR
BUSINESS OR ACHIEVE PROFITABILITY.

We expect to continue to incur increasing losses and we cannot assure you
that we will ever become profitable. We are in the early stages of development,
and it will be a number of years, if ever, before we are likely to receive
revenue from product sales or royalty payments. We will continue to incur
substantial expenses relating to research and development efforts. We anticipate
that we will increase these efforts as we focus on the laboratory and human
studies that are required before we can sell a product. The development of our
products requires significant further research, development, testing and
regulatory approvals. We may not be able to develop products that will be
commercially successful or that will generate revenue in excess of the cost of
development.

PRODUCT DEVELOPMENT RISKS

BECAUSE WE HAVE LIMITED EXPERIENCE IN DEVELOPING AND COMMERCIALIZING PRODUCTS,
WE MAY BE UNSUCCESSFUL IN OUR EFFORTS TO DO SO.

Our ability to develop and commercialize products based on proteins,
antibodies and other compounds will depend on our ability to:

- develop products internally;

- complete laboratory testing and human studies;

- obtain and maintain necessary intellectual property rights to our
products;

- obtain and maintain necessary regulatory approvals related to the
efficiency and safety of our products;

- develop efficient production facilities meeting all regulatory
requirements or enter into arrangements with third parties to manufacture
our products on our behalf; and

- deploy sales and marketing resources effectively or enter into
arrangements with third parties to provide these functions.

Although we have initiated human studies with respect to three products, we
have limited experience with these activities and may not be successful in
developing or commercializing these or other products.

BECAUSE CLINICAL TRIALS FOR OUR PRODUCTS WILL BE EXPENSIVE AND PROTRACTED AND
THEIR OUTCOME IS UNCERTAIN, WE MUST INVEST SUBSTANTIAL AMOUNTS OF TIME AND MONEY
THAT MAY NOT YIELD VIABLE PRODUCTS.

Conducting clinical trials is a lengthy, time-consuming and expensive
process. Before obtaining regulatory approvals for the commercial sale of any
product, we must demonstrate through laboratory, animal and human studies that
such product is both

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effective and safe for use in humans. We will incur substantial expense for and
devote a significant amount of time to these studies.

The results of preliminary studies do not predict clinical success. A
number of potential drugs have shown promising results in early testing but
subsequently failed to obtain necessary regulatory approvals. Data obtained from
tests are susceptible to varying interpretations, which may delay, limit or
prevent regulatory approval. Regulatory authorities may refuse or delay approval
as a result of many other factors, including changes in regulatory policy during
the period of product development.

Completion of clinical trials may take many years. The length of time
required varies substantially according to the type, complexity, novelty and
intended use of the product candidate. Our rate of commencement and completion
of clinical trials may be delayed by many factors, including:

- our inability to manufacture sufficient quantities of materials for use
in clinical trials;

- variability in the number and types of patients available for each study;

- difficulty in maintaining contact with patients after treatment,
resulting in incomplete data;

- unforeseen safety issues or side effects;

- poor or unanticipated effectiveness of products during the clinical
trials; or

- government or regulatory delays.

Four of our products, MPIF-1, KGF-2, BLyS and VEGF-2 have entered clinical
trials, but only a small number of patients is involved. To date, data obtained
from these clinical trials have been insufficient to demonstrate safety and
efficacy under applicable FDA guidelines and are not sufficient to support an
application for regulatory approval without further studies. Studies conducted
by us or by third parties on our behalf may not demonstrate sufficient
effectiveness and safety to obtain the requisite regulatory approvals for
MPIF-1, KGF-2, BLyS and VEGF-2 or any other potential products. Regulatory
authorities may not permit us to undertake any additional clinical trials.

BECAUSE THE CLINICAL TESTING OF VEGF-2 HAS BEEN PUT ON HOLD BY THE FDA, THE
CLINICAL SUCCESS OF VEGF-2 IS UNCERTAIN.

Vascular Genetics, to which we have licensed VEGF-2 for gene therapy,
announced that it will not enroll or treat additional patients in its clinical
trials of VEGF-2 in response to an FDA hold on testing. Four clinical trials of
VEGF-2 had been ongoing. Vascular Genetics announced the completion of three of
these trials because enrollment and treatment were complete. In the fourth
study, a majority of the target patients had been enrolled and treated. During
the hold period, Vascular Genetics will provide the FDA with results which are
being compiled from the clinical trials, in addition to providing measurements
of the amount of the VEGF-2 protein in patient blood samples. Vascular Genetics
must receive approval from the FDA before it can complete the fourth trial or
initiate additional trials.

The trials of VEGF-2 are being conducted with patients for whom
conventional treatments have been unsuccessful or for whom no conventional
treatment exists. During the course of treatment, these patients could die or
suffer adverse medical effects for reasons that may not be related to VEGF-2.
Deaths in the patient population for the

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VEGF-2 trial did occur, in both active and placebo groups, and Vascular Genetics
has reviewed the relevant data regarding these patients and provided an analysis
of the reasons for these deaths to the FDA. These adverse effects may affect the
interpretation of the clinical trial results and the success of the trials.
Later clinical trials may be extensive, expensive and time-consuming. VEGF-2 may
never be approved for use in humans.

BECAUSE NEITHER WE NOR ANY OF OUR COLLABORATION PARTNERS HAVE RECEIVED MARKETING
APPROVAL FOR ANY PRODUCT RESULTING FROM OUR RESEARCH AND DEVELOPMENT EFFORTS,
AND MAY NEVER BE ABLE TO OBTAIN ANY SUCH APPROVAL, WE MAY NOT BE ABLE TO
GENERATE ANY PRODUCT REVENUE.

We have not completed development of any product based on our genetic
research. It is possible that we will not receive FDA marketing approval for any
of our products. Although four of our potential products have entered clinical
trials, we cannot assure you that any of these products will receive marketing
approval. All the products being developed by our collaboration partners will
also require additional research and development, extensive preclinical studies
and clinical trials and regulatory approval prior to any commercial sales. In
some cases, the length of time that it takes for our collaboration partners to
achieve various regulatory approval milestones may affect the payments that we
are eligible to receive under our collaboration agreements. We and our
collaboration partners may need to successfully address a number of technical
challenges in order to complete development of our products. Moreover, these
products may not be effective in treating any disease or may prove to have
undesirable or unintended side effects, toxicities or other characteristics that
may preclude our obtaining regulatory approval or prevent or limit commercial
use.

RISKS FROM OUR COLLABORATION RELATIONSHIPS AND STRATEGIC ACQUISITIONS

OUR PLAN TO USE COLLABORATIONS TO LEVERAGE OUR CAPABILITIES AND TO GROW IN PART
THROUGH THE STRATEGIC ACQUISITION OF OTHER COMPANIES AND TECHNOLOGIES WILL NOT
BE SUCCESSFUL IF WE ARE UNABLE TO INTEGRATE OUR PARTNERS' CAPABILITIES OR THE
ACQUIRED COMPANIES WITH OUR OTHER OPERATIONS OR IF THEY DO NOT MEET OUR
EXPECTATIONS.

As part of our strategy, we intend to continue to evaluate strategic
partnership opportunities and consider acquiring complementary technologies and
businesses. In order for our future collaboration efforts to be successful, we
must first identify partners whose capabilities complement and integrate well
with ours. Technologies to which we gain access may prove ineffective or unsafe.
Our partners may prove difficult to work with or less skilled than we originally
expected. In addition, any past collaborative successes are no indication of
potential future success in this area. In order to achieve the anticipated
benefits of an acquisition, we must integrate the acquired company's business,
technology and employees in an efficient and effective manner. The successful
combination of companies in a rapidly changing biotechnology and genomics
industry may be more difficult to accomplish than in other industries. The
combination of two companies requires, among other things, integration of the
companies' respective technologies and research and development efforts. We
cannot assure you that this integration will be accomplished smoothly or
successfully. The difficulties of integration are increased by the necessity of
coordinating geographically separated organizations and addressing possible
differences in corporate cultures and management philosophies. The integration
of certain operations will require the dedication of management resources which
may temporarily distract attention from the day-to-day operations of the
combined companies. The business of the combined companies may also be disrupted
by employee retention uncertainty and

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lack of focus during integration. The inability of management to successfully
integrate the operations of the two companies, in particular, to integrate and
retain key scientific personnel, or the inability to successfully integrate two
technology platforms, could have a material adverse effect on our business,
results of operations and financial condition.

BECAUSE OF THE PUBLIC AVAILABILITY OF GENOMIC DATA, THE BENEFITS TO OUR PARTNERS
OF COLLABORATION WITH US MAY BE SIGNIFICANTLY REDUCED.

The benefit to many of our partners from collaborations with us is access
to our genomic databases. There is substantially more genomic data now available
in the public domain than when several of our collaboration agreements were
originally executed. As a result, we expect that some of these collaboration
agreements may not be renewed when they expire.

BECAUSE WE DEPEND ON OUR COLLABORATION PARTNERS FOR REVENUE, WE MAY NOT BECOME
PROFITABLE IF WE CANNOT INCREASE THE REVENUE FROM OUR COLLABORATION PARTNERS OR
OTHER SOURCES.

To date we have received substantially all our revenue from payments made
under our collaboration agreements with SmithKline Beecham and, to a lesser
extent, other agreements. The SmithKline Beecham collaboration agreement and
many of our other collaboration agreements will expire in 2001. We expect that
some or all of these collaboration agreements may not be renewed. We also may
not be able to enter into additional collaboration agreements. We may not
receive expected milestone or royalty payments under our collaboration
agreements if our collaborators fail to:

- develop marketable products;

- obtain regulatory approvals for products; or

- successfully market products based on our research.

IF OUR RELATIONSHIP WITH ANY OF OUR COLLABORATORS PREVENTS US FROM ENTERING INTO
OTHER COLLABORATIVE AGREEMENTS, WE MAY HAVE LIMITED OPPORTUNITIES FOR PRODUCT
DEVELOPMENT AND REVENUE GROWTH.

Several of our collaboration agreements restrict our ability to enter into
similar agreements. Our current collaborators may prevent us from obtaining the
revenue and assistance that additional collaborators could provide. Because our
existing collaboration partners may force us to rely on them, these partners may
be able to exercise a great degree of control over our business.

IF ONE OF OUR COLLABORATORS PURSUES A PRODUCT THAT COMPETES WITH OUR PRODUCTS,
IT MAY HAVE A CONFLICT OF INTEREST AND WE MAY NOT RECEIVE THE MILESTONE OR
ROYALTY PAYMENTS THAT WE EXPECT.

Each of our collaborators is developing a variety of products, some with
other partners. Our collaborators may pursue existing or alternative
technologies instead of products they are developing in collaboration with us.
Our collaborators may also develop products that are similar to or compete with
products they are developing in collaboration with us. If our collaborators
pursue these other products instead of our products, we may not receive
milestone or royalty payments.

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IF WE ARE UNABLE TO INTEGRATE PRINCIPIA SUCCESSFULLY, WE MAY BE UNABLE TO OBTAIN
ANY ANTICIPATED BENEFITS FROM THE PRINCIPIA ACQUISITION.

We acquired Principia because of its albumin fusion technology. We expect
to use this technology to create longer lasting forms of our products and the
products of our partners. Although this technology has been tested in the
laboratory, it has not been approved for use in humans. We cannot assure you
that we will be able to use this technology to create products that can be
commercialized, or that albumin fused with a protein will extend the life of the
protein.

FINANCIAL AND MARKET RISKS

BECAUSE OF OUR SUBSTANTIAL INDEBTEDNESS, WE MAY BE UNABLE TO ADJUST OUR STRATEGY
TO MEET CHANGING CONDITIONS IN THE FUTURE.

As of June 30, 2000, we had long-term obligations of approximately $533.0
million. Our substantial debt will have several important consequences for our
future operations. For instance:

- payments of interest on, and principal of, our indebtedness will be
substantial, and may exceed then current revenues;

- we may be unable to obtain additional future financing for capital
expenditures, acquisitions or general corporate purposes;

- we may be unable to withstand changing competitive pressures, economic
conditions and governmental regulations; and

- we may be unable to make acquisitions or otherwise take advantage of
significant business opportunities that may arise.

IF WE DO NOT OBTAIN SUBSTANTIAL ADDITIONAL FUNDING ON ACCEPTABLE TERMS, WE MAY
NOT BE ABLE TO CONTINUE TO GROW OUR BUSINESS AND GENERATE ENOUGH REVENUE TO
RECOVER OUR INVESTMENT IN OUR PRODUCT DEVELOPMENT EFFORT.

Since inception we have expended, and will continue to expend, substantial
funds to continue our research and development programs. If we incur
unanticipated expenses or delays in receipt of revenue, we may need additional
financing beyond that which we have projected to fund our operating expenses and
capital requirements. We may not be able to obtain additional financing on
acceptable terms. If we raise additional funds by issuing equity securities, the
new securities may dilute the interests of our existing stockholders.

BECAUSE OUR STOCK PRICE HAS BEEN AND WILL LIKELY CONTINUE TO BE VOLATILE, THE
MARKET PRICE OF OUR COMMON STOCK MAY BE LOWER OR MORE VOLATILE THAN YOU
EXPECTED.

Our stock price, like the stock prices of other emerging and biotechnology
companies, has been highly volatile. During the past year, the market price of
our common stock has been as low as $17.84 per share and as high as $116.38 per
share. The market price of our common stock could fluctuate widely because of:

- future announcements about our company or our competitors, including the
results of testing, technological innovations or new commercial products;

- regulatory actions and changes in government regulations;

- announcements relating to health care reform;

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- our failure to acquire or maintain proprietary rights to the gene
sequences we discover or the products we develop;

- litigation; and

- public concern as to the safety of our products.

The stock market has experienced extreme price and volume fluctuations that
have particularly affected the market price for many emerging and biotechnology
companies. These fluctuations have often been unrelated to the operating
performance of these companies. These broad market fluctuations may cause the
market price of our common stock to be lower or more volatile than you expected.

WE DO NOT HAVE AN EXACT PLAN FOR THE USE OF THE NET PROCEEDS OF THIS OFFERING
AND WILL THEREFORE HAVE BROAD DISCRETION AS TO THE USE OF THESE PROCEEDS, WHICH
WE MAY NOT USE EFFECTIVELY.

We have no exact plan with respect to the use of the net proceeds of this
offering and have not committed these proceeds to any particular purpose.
Accordingly, our management will have broad discretion in applying the net
proceeds of this offering and may use the proceeds in ways with which you and
our other stockholders may disagree. We may not be able to invest these funds
effectively pending their use.

INTELLECTUAL PROPERTY RISKS

IF PATENT LAWS OR THE INTERPRETATION OF PATENT LAWS CHANGE, OUR COMPETITORS MAY
BE ABLE TO DEVELOP AND COMMERCIALIZE OUR DISCOVERIES.

The patent protection available to biotechnology firms is highly uncertain
and involves complex legal and factual questions that will determine who has the
right to develop a particular product. No clear policy has emerged regarding the
breadth of biotechnology patents. There have been, and continue to be, intensive
discussions on the scope of patent protection for both partial gene sequences
and full-length genes. Some regulatory authorities question the appropriateness
of patents on genes. The Patent and Trademark Office has recently proposed new
guidelines for patents. The biotechnology patent situation is even more
uncertain outside the U.S. and is currently undergoing review and revision in
many countries. These proposals and other changes in patent laws in the U.S. and
other countries may result in changes in, or different interpretations of,
patent laws which might allow others to use our discoveries or develop and
commercialize our products.

IF OUR PATENT APPLICATIONS DO NOT RESULT IN ISSUED PATENTS, OUR COMPETITORS MAY
OBTAIN RIGHTS TO AND COMMERCIALIZE THE DISCOVERIES WE ATTEMPTED TO PATENT.

Our pending applications covering full-length genes and their corresponding
proteins may not result in the issuance of any patents. As of October 6, 2000,
we had filed patent applications for more than 9,000 human genes and their
corresponding proteins and all or portions of genomes of eight infectious
microorganisms and one non-infectious microorganism. As of that date, we had
only 146 U.S. patents covering 107 full-length human genes. Our applications may
not be sufficient to meet the statutory requirements for patentability in all
cases. As a result, we may not obtain enforceable patents on genes we may want
to commercialize.

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<PAGE> 13

IF INFORMATION ABOUT THE GENES WE DISCOVER IS PUBLISHED BY OTHERS BEFORE WE
APPLY FOR PATENT PROTECTION, WE MAY BE UNABLE TO OBTAIN PATENT PROTECTION, WHICH
WOULD ENABLE OTHERS TO DEVELOP AND COMMERCIALIZE OUR DISCOVERIES.

Washington University has identified genes through partial sequencing
funded by Merck & Co. and has deposited those partial sequences in a public
database. In January 1997, The Institute for Genomic Research, or TIGR, in
collaboration with the National Center for Biological Information, disclosed
full-length DNA sequences which are reportedly in excess of 35,000 sequences
that were assembled from partial gene sequences available in publicly accessible
databases or sequenced at TIGR. In June 2000, the Human Genome Project and
Celera Genomics Corporation claimed to have completed an initial sequencing of
the human genome and have agreed to make this information available to the
public at no cost. These public disclosures might limit the scope of our claims
or make unpatentable subsequent patent applications on full-length genes we
file. Any publication of sequence information may prevent us from obtaining
patent protection for some genes in which we may have a scientific or commercial
interest.

IF OTHERS FILE PATENT APPLICATIONS OR OBTAIN PATENTS SIMILAR TO OURS, THEN THE
PATENT AND TRADEMARK OFFICE MAY DENY OUR PATENT APPLICATIONS, OR OTHERS MAY
RESTRICT THE USE OF OUR DISCOVERIES.

Other companies or institutions have filed, and may file in the future,
patent applications which attempt to patent genes similar to those covered in
our patent applications. The Patent and Trademark Office will decide which
applications merit a patent and the priority of competing patent claims. Any
patent application filed by a third party may prevail over patent applications
we filed, in which event the third party may require us to stop pursuing a
potential product or to negotiate a royalty arrangement to pursue the potential
product.

IF OUR POTENTIAL PRODUCTS CONFLICT WITH PATENTS THAT COMPETITORS, UNIVERSITIES
OR OTHERS HAVE OBTAINED, THEN WE MAY BE UNABLE TO COMMERCIALIZE THOSE PRODUCTS.

Other parties may claim that our products infringe their patents. This risk
will increase as the biotechnology industry expands and as other companies
obtain more patents and attempt to discover genes through the use of high-speed
sequencers. Other persons could bring legal actions against us to claim damages
or to stop our manufacturing and marketing of the affected products. If any of
these actions are successful, in addition to demanding monetary damages these
persons may require us to obtain a license in order to continue to manufacture
or market the affected products. We believe that there will continue to be
significant litigation in our industry regarding patent and other intellectual
property rights. If we become involved in litigation, it could consume a
substantial portion of our resources.

BECAUSE ISSUED PATENTS MAY NOT FULLY PROTECT OUR DISCOVERIES, OUR COMPETITORS
MAY BE ABLE TO COMMERCIALIZE PRODUCTS SIMILAR TO THOSE COVERED BY OUR ISSUED
PATENTS.

Issued patents may not provide commercially meaningful protection against
competitors and may not provide us with competitive advantages. Other parties
may challenge our patents or independently develop similar products which could
result in an interference proceeding in the Patent and Trademark Office. Others
may be able to design around our issued patents or develop products providing
effects similar to our products. In addition, others may discover uses for genes
or proteins different from uses covered in our patents, and these other uses may
be separately patentable. If another party holds a patent on the
S-11
<PAGE> 14

use of an invention, even if we hold the patent on the invention itself, that
other party could prevent us from selling any product that involves the use.

WE RELY ON OUR COLLABORATION PARTNERS TO SEEK PATENT PROTECTION FOR THE PRODUCTS
THEY DEVELOP BASED ON OUR RESEARCH.

Much of our future revenue may be derived from royalty payments from our
collaboration partners. These partners face the same patent protection issues
that we and other biotechnology firms face. As a result, we cannot assure you
that any product developed by our collaboration partners will be patentable, and
therefore, we may never receive any royalty payments. We also rely on our
collaboration partners to effectively prosecute their patent applications. Their
failure to obtain or protect necessary patents could also result in a loss of
royalty revenue to us.

IF WE ARE UNABLE TO PROTECT OUR TRADE SECRETS, OTHERS MAY BE ABLE TO USE OUR
SECRETS TO COMPETE MORE EFFECTIVELY.

We may not be able to adequately protect our trade secrets. We rely on
trade secret protection to protect our confidential and proprietary information.
We believe that we have developed proprietary procedures for making libraries of
DNA sequences and genes. We have not sought process patent protection for these
procedures. We have also developed a substantial database of genes we have
identified. While we have entered into confidentiality agreements with employees
and academic collaborators, we may not be able to prevent their disclosure of
these data or materials. Others may independently develop substantially
equivalent information and techniques. TIGR has developed or possesses specific
trade secrets important to our business, including information about sequencing
procedures and genes identified by TIGR.

REGULATORY RISKS

BECAUSE WE ARE SUBJECT TO EXTENSIVE AND UNCERTAIN GOVERNMENT REGULATORY
REQUIREMENTS, WE MAY BE UNABLE TO OBTAIN GOVERNMENT APPROVAL OF OUR PRODUCTS IN
A TIMELY MANNER.

Our products are subject to the extensive and evolving regulatory approval
process of the FDA and comparable agencies in other countries. The regulation of
new products is extensive, and the required process of laboratory testing and
human studies is lengthy and expensive. We may not obtain FDA approvals in a
timely manner, or at all. For instance, in February 2000, Vascular Genetics
announced that it will not enroll or treat additional patients in its clinical
trials of VEGF-2 in response to an FDA hold on further testing. We and our
collaborators may encounter significant delays or excessive costs in our efforts
to secure necessary approvals or licenses. Even if we obtain FDA regulatory
approvals, the FDA extensively regulates manufacturing, labeling, distributing,
marketing, promotion and advertising after product approval. Moreover, several
areas in which we or our collaborators may develop products involve relatively
new technology and have not been the subject of extensive product testing in
humans. The regulatory requirements governing these products and related
clinical procedures are still being determined. In addition, these products may
be subject to substantial review by foreign governmental regulatory authorities
which could prevent or delay approval in those countries. Regulatory
requirements imposed on our products could limit our ability to test,
manufacture and, ultimately, commercialize our products.

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NEGATIVE PUBLIC OPINION AND INCREASED REGULATORY SCRUTINY OF GENE THERAPY AND
GENETIC RESEARCH MAY LIMIT OUR ABILITY TO CONDUCT OUR BUSINESS.

Ethical, social and legal concerns about gene therapy, genetic testing and
genetic research could result in additional regulations restricting or
prohibiting the processes we or our suppliers may use. In recent years, gene
therapy studies, including studies of VEGF-2, have come under increasing
scrutiny which has delayed ongoing and may delay future clinical trials and
regulatory approvals. Federal and state agencies, congressional committees and
foreign governments have expressed interest in further regulating biotechnology.
More restrictive regulations or claims that our products are hazardous could
prevent us from commercializing any products.

BECAUSE WE ARE SUBJECT TO ENVIRONMENTAL, HEALTH AND SAFETY LAWS, WE MAY BE
UNABLE TO CONDUCT OUR BUSINESS IN THE MANNER WE CURRENTLY INTEND.

State and federal laws regarding environmental protection, hazardous
substances and human health and safety affect our business. The use of hazardous
substances in our operations exposes us to the risk of accidental releases. If
our operations result in contamination of the environment or expose individuals
to hazardous substances, we could be liable for damages and fines. Future
changes to environmental, health and safety laws could cause us to incur
additional expense or restrict our operations.

INDUSTRY RISKS

MANY OF OUR COMPETITORS HAVE SUBSTANTIALLY GREATER CAPABILITIES AND RESOURCES
AND MAY BE ABLE TO DEVELOP AND COMMERCIALIZE PRODUCTS BEFORE WE DO.

We are in a race to establish uses for and patent as many genes as possible
and to bring to market the products we develop. Many of our potential
competitors have substantially greater research and product development
capabilities and financial, scientific, marketing and human resources. We face
competition from entities using high-speed gene sequencers to discover genes.
For instance, the government-sponsored Human Genome Project and Celera Genomics
Corporation each claim to have mapped the entire human genome, and plan to make
their findings publicly available. We also face competition from entities using
more traditional methods to discover genes related to particular diseases. We
expect that competition in our field will intensify.

Our competitors include parties conducting research to identify genes and
human genome research similar to or competing with our focus on gene discovery,
including:

- institutes, such as those sponsored by the U.S. government and the
governments of Great Britain, France, Germany and Japan;

- small laboratories associated with universities or other not-for-profit
organizations;

- pharmaceutical and biotechnology companies; and

- government-financed programs.

These competitors may:

- succeed in identifying genes or developing products earlier than we do;

- obtain approvals from the FDA or other regulatory agencies for products
more rapidly than we do;

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<PAGE> 16

- develop treatments or cures that are more effective than those we propose
to develop; or

- acquire similar gene sequencing machines and engage in the automated
sequencing of genes.

The other risks of competition include the following:

- research and development by others may make our products, or the products
we and our collaborators may develop, obsolete or uneconomical;

- consumers may prefer existing or newly developed technologies to any
product we develop; and

- other companies use the same gene sequencing machines we use, in some
cases for business purposes that compete with our business.

IF WE LOSE OR ARE UNABLE TO ATTRACT KEY MANAGEMENT OR OTHER PERSONNEL, WE MAY
EXPERIENCE DELAYS IN PRODUCT DEVELOPMENT.

We depend on our senior executive officers as well as key scientific and
other personnel. Not all of our key personnel are bound by employment
agreements, and those with employment agreements are bound only for a limited
period of time. Our employment agreement with Dr. William A. Haseltine, our
Chairman of the Board and Chief Executive Officer, expires in February 2001.
Although Dr. Haseltine's employment agreement automatically extends for
additional one year terms, either party can terminate the agreement four months
prior to the end of the applicable term. If Dr. Haseltine decides to terminate
his employment with us, this termination could delay the commercialization of
our products or prevent us from becoming profitable. Further, we have not
purchased key-man life insurance on any of our executive officers or key
personnel, and therefore may not have adequate funds to find acceptable
replacements for them. Competition for qualified employees is intense among
pharmaceutical and biotechnology companies, and the loss of qualified employees,
or an inability to attract, retain and motivate additional highly skilled
employees required for the expansion of our activities, could hinder our ability
to complete human studies successfully and develop marketable products.

IF THE HEALTH CARE SYSTEM OR REIMBURSEMENT POLICIES CHANGE, THE PRICES OF OUR
POTENTIAL PRODUCTS MAY FALL OR OUR POTENTIAL SALES MAY DECLINE.

In recent years, officials have made numerous proposals to change the
health care system in the U.S. These proposals included measures that would
limit payments for or prohibit certain medical procedures and treatments or
subject the pricing of pharmaceuticals to government control. Government and
other third-party payors increasingly attempt to contain health care costs by
limiting both coverage and the level of reimbursement of newly approved health
care products. In some cases, they may also refuse to provide any coverage of
uses of approved products for disease indications other than those for which the
FDA has granted marketing approval. Governments may adopt future legislative
proposals and federal, state or private payors for health care goods and
services may take action to limit their payments for goods and services. In
certain foreign countries, particularly the countries of the European Union, the
pricing of prescription pharmaceuticals is subject to governmental control. Any
of these events could limit our ability to commercialize our products
successfully.

S-14
<PAGE> 17

OTHER RISKS RELATED TO OUR BUSINESS

BECAUSE WE DEPEND ON A SINGLE SUPPLIER FOR GENE SEQUENCING MACHINES AND
CHEMICALS, WE MAY BE UNABLE TO IDENTIFY ADDITIONAL GENES IF WE LOSE THAT
SUPPLIER.

We currently depend on a single supplier, Applied Biosystems, a division of
PE Corporation, to provide all our gene sequencing machines and the chemicals we
require in connection with our gene sequencing process. If we are unable to
obtain additional machines or an adequate supply of chemicals or other
ingredients at commercially reasonable rates, we may be unable to continue to
identify genes through gene sequencing. PE Corporation owns Celera Genomics
Corporation, an entity that claims it has completed the initial mapping of the
human genome and could potentially be one of our competitors. While other gene
sequencing machines are available, we do not believe they are as efficient as
the machines we currently use. Gene sequencing machines or chemicals may not
remain available in commercial quantities at acceptable costs.

BECAUSE WE CURRENTLY HAVE NO PROVEN MANUFACTURING CAPACITY CAPABLE OF PRODUCING
PRODUCTS FOR SALE, WE MAY HAVE TO RELY ON THIRD PARTIES TO MANUFACTURE OUR
PRODUCTS, AND WE MAY BE UNABLE TO OBTAIN REQUIRED QUANTITIES ECONOMICALLY.

We currently do not have any manufacturing facilities that have produced
materials for commercial sale or any experience in manufacturing materials
suitable for commercial sale. If we need others to manufacture our products, we
will have to depend on those third parties to comply with current good
manufacturing practices, known as cGMPs, and other regulatory requirements and
to deliver materials on a timely basis. These third parties may not perform
adequately. Any failures by these third parties may delay our development of
products or their submission for regulatory approval.

During 1997 and 1998, we designed and the Maryland Economic Development
Corporation constructed a process-development and manufacturing facility for the
preparation of our proteins for human studies. MEDCO is now expanding this
facility. The FDA must inspect and license this facility and the expansion to
determine compliance with cGMP requirements before any commercial production. A
delay in licensing of the facility or the expansion could delay or increase the
cost of regulatory approval. We may not be able to successfully establish
manufacturing capabilities and manufacture our products economically or in
compliance with cGMPs and other regulatory requirements.

BECAUSE WE CURRENTLY HAVE NO MARKETING CAPABILITY, WE MAY BE UNABLE TO
COMMERCIALIZE OUR PRODUCTS.

We currently do not have any products that are ready to be marketed. We
expect that in the future we may rely on collaborators or on third parties to
market any products that we may develop. These collaborators or other third
parties may not be successful in marketing our products. However, we may also
co-promote or retain U.S. marketing rights to our products. If we decide to
market products directly, we will incur significant additional expenditures and
commit significant additional management resources to develop an external sales
force and implement our marketing strategy. We may not be able to establish a
successful marketing force.

S-15
<PAGE> 18

BECAUSE WE MAY DEPEND ON OTHER THIRD PARTIES TO CONDUCT LABORATORY TESTING AND
HUMAN STUDIES, WE MAY ENCOUNTER DELAYS IN OR LOSE SOME CONTROL OVER OUR EFFORTS
TO DEVELOP PRODUCTS.

We may be dependent on third-party research organizations to design and
conduct our laboratory testing and human studies. If we are unable to obtain any
necessary testing services on acceptable terms, we may not complete our product
development efforts in a timely manner. If we rely on third parties for
laboratory testing and human studies, we may lose some control over these
activities and become too dependent upon these parties. These third parties may
not complete testing activities on schedule or when we request.

OUR CERTIFICATE OF INCORPORATION, BYLAWS AND RIGHTS PLAN COULD DISCOURAGE
ACQUISITION PROPOSALS, DELAY A CHANGE IN CONTROL OR PREVENT TRANSACTIONS THAT
ARE IN YOUR BEST INTERESTS.

Provisions of our certificate of incorporation and bylaws, as well as
Section 203 of the Delaware General Corporation Law, may discourage, delay or
prevent a change in control of our company that you as a stockholder may
consider favorable and may be against your best interest. We have also adopted a
rights plan, or "poison pill," that may discourage, delay or prevent a change in
control. Our certificate of incorporation and bylaws contain provisions that:

- authorize the issuance of up to 20,000,000 shares of "blank check"
preferred stock that could be issued by our board to increase the number
of outstanding shares and discourage a takeover attempt;

- a classify our board with staggered, three-year terms, which may lengthen
the time required to gain control of our board of directors;

- limit who may call special meetings of stockholders; and

- establish advance notice requirements for nomination of candidates for
election to the board or for proposing matters that can be acted upon by
stockholders at stockholder meetings.

BECAUSE THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS, IT MAY NOT PROVE TO
BE ACCURATE.

This prospectus, including the documents we incorporate by reference,
contains forward-looking statements and information relating to our company. We
generally identify forward-looking statements using words like "believe,"
"intend," "expect," "may," "should," "plan," "project," "contemplate,"
"anticipate" or similar statements. We base these statements on our beliefs as
well as assumptions we made using information currently available to us. Because
these statements reflect our current views concerning future events, these
statements involve risks, uncertainties and assumptions. Actual results may
differ significantly from the results discussed in these forward-looking
statements.

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<PAGE> 19

USE OF PROCEEDS

We estimate that we will receive approximately $703.6 million in net
proceeds from this offering, assuming a public offering price of $91.44 per
share. This amount reflects deductions from the gross proceeds of the offering
of:

- approximately $27.4 million, which will be retained by the underwriters
as discounts and commissions; and

- approximately $500,000, representing our estimated expenses for this
offering.

We expect to use the net proceeds from this offering to continue the
initiation and expansion of laboratory and human studies to evaluate additional
protein-, gene- and antibody-based drugs for new and existing markets, to
accelerate ongoing research and development efforts and explore new
opportunities in a variety of fields, to pursue patent coverage for our genes
and potential products, to operate and expand our process development and
manufacturing facilities, to acquire complementary products or companies and
develop partnerships in other areas of drug development that further our
strategic goal of becoming a fully-integrated global pharmaceutical company, and
for general corporate purposes. However, we will retain broad discretion in the
use of the net proceeds. The actual amount of net proceeds we spend on a
particular use will depend on many factors, including:

- our future revenue growth, if any;

- our future capital expenditures; and

- the amount of cash required by our operations.

Until we use the net proceeds of this offering, we intend to invest the net
proceeds in U.S. Treasury and government agency obligations and high grade
corporate debt securities and commercial paper.

This use of proceeds does not reflect the underwriters' exercise of their
over-allotment option. We estimate that we will receive $105.6 million in
additional net proceeds if the underwriters exercise their over-allotment option
in full.

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PRICE RANGE OF COMMON STOCK

Our common stock has been traded on the Nasdaq National Market under the
symbol "HGSI" since December 2, 1993. The high and low closing prices of our
common stock, as reported by the Nasdaq National Market, are shown below.

<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
1998
First Quarter............................................... $ 11.28 $ 8.94
Second Quarter.............................................. $ 10.82 $ 8.75
Third Quarter............................................... $ 10.00 $ 5.83
Fourth Quarter.............................................. $ 9.07 $ 6.39

1999
First Quarter............................................... $ 9.19 $ 7.41
Second Quarter.............................................. $ 11.50 $ 8.74
Third Quarter............................................... $ 22.38 $10.22
Fourth Quarter.............................................. $ 39.89 $18.55

2000
First Quarter............................................... $112.63 $34.57
Second Quarter.............................................. $ 75.93 $27.64
Third Quarter............................................... $ 89.91 $60.41
Fourth Quarter (through October 19, 2000)................... $100.94 $78.56
</TABLE>

The last reported bid price of our common stock on the Nasdaq National
Market on October 19, 2000 was $91.44 per share.

DIVIDEND POLICY

We have never declared or paid any cash dividends. We do not anticipate
declaring or paying cash dividends for the foreseeable future. Instead, we will
retain our earnings, if any, for the future operation and expansion of our
business.

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CAPITALIZATION

The following table shows our current assets and long-term investments and
capitalization at June 30, 2000, on an actual basis and as adjusted to give
effect to this offering and the application of the estimated net proceeds we
will receive in this offering. See "Use of Proceeds." You should also refer to
our financial statements and the related notes included in our filings with the
SEC.

<TABLE>
<CAPTION>
AT JUNE 30, 2000
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $258,967 $ 962,555
Short-term investments.................................... 582,467 582,467
Prepaid expenses and other current assets................. 19,229 19,229
-------- ----------
Total current assets.............................. $860,663 $1,564,251
======== ==========
Long-term investments....................................... $107,200 $ 107,200
======== ==========
Long-term obligations, net of current portion:
Other long-term debt, net of current portion.............. $ 1,336 $ 1,336
5 1/2% Convertible Subordinated Notes Due 2006............ 6,715 6,715
5% Convertible Subordinated Notes Due 2007................ 224,900 224,900
3 3/4% Convertible Subordinated Notes Due 2007............ 300,000 300,000
-------- ----------
Total long-term obligations, net of current
portion......................................... 532,951 532,951
Stockholders' equity:
Common stock, $0.01 par value, 250,000,000 shares
authorized, 109,707,930 shares issued and outstanding,
actual, 117,707,930 shares issued and outstanding, as
adjusted (1)........................................... 1,097 1,177
Additional paid-in capital................................ 638,894 1,342,402
Unearned portion of compensatory stock.................... (239) (239)
Retained deficit.......................................... (198,764) (198,764)
Accumulated other comprehensive income.................... 24,946 24,946
-------- ----------
Total stockholders' equity........................ 465,934 1,169,522
-------- ----------
Total capitalization.............................. $998,885 $1,702,473
======== ==========
</TABLE>

---------------
(1) Excludes:

- 514,560 shares of common stock issuable upon conversion of our 5 1/2%
Convertible Subordinated Notes Due 2006; 3,998,224 shares of common stock
issuable upon conversion of our 5% Convertible Subordinated Notes Due 2007;
and 2,739,726 shares of common stock issuable upon conversion of our 3 3/4%
Convertible Subordinated Notes Due 2007; and

- 17,044,194 shares of common stock issuable upon exercise of stock options
under our stock incentive plan, at a weighted average exercise price of $17.40
per share; 9,551,308 shares of common stock reserved for issuance pursuant to
stock options not yet granted under our stock incentive plan; and 500,000
shares of common stock reserved for issuance under our employee stock purchase
plan.

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<PAGE> 22

DILUTION

Our net tangible book value at June 30, 2000, was $450.3 million, or $4.10
per common share. Net tangible book value is the amount of total tangible assets
less total liabilities. Net tangible book value per common share is net tangible
book value divided by the number of shares of common stock outstanding. Net pro
forma tangible book value per common share is determined by dividing our net
tangible book value by the number of shares of our common stock outstanding
after giving effect to this offering. Assuming no changes in our net tangible
book value, other than to give effect to the sale of the common stock offered by
this prospectus and the application of the net offering proceeds as described
under "Use of Proceeds," our pro forma net tangible book value at June 30, 2000,
would have been $1,153.9 million, or $9.80 per common share.

This represents an immediate increase in pro forma net tangible book value
of $5.70 per common share to existing stockholders, and an immediate dilution in
pro forma net tangible book value of $81.64 per common share to new investors
purchasing our common stock in this offering. The following table illustrates
this per share dilution.

<TABLE>
<S> <C> <C>
Assumed offering price per common share..................... $91.44
Net tangible book value per common share at June 30,
2000................................................... $4.10
Increase per share attributable to new investors.......... $5.70
-----
Net tangible book value per common share after this
offering.................................................. $ 9.80
------
Dilution per common share to new investors.................. $81.64
======
</TABLE>

SELECTED FINANCIAL DATA

See "Selected Financial Data" and the related financial statements included
in our most recent annual report on Form 10-K and quarterly report on Form 10-Q.

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

See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in our most recent annual report on Form 10-K and
quarterly report on Form 10-Q.

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BUSINESS

OVERVIEW

We are a leading genomics and biopharmaceutical company focused on
therapeutic product development and functional analysis of genes using our
proprietary technology platform. We discover, research, develop and intend to
commercialize novel compounds for treating and diagnosing human disease based on
the identification and study of genes. We focus our internal product development
efforts on therapeutic proteins, antibodies, peptides and fusion proteins, and
we use collaborations for the development of gene therapy products and small
molecule drugs. We have discovered a large number of genes through our genomics
capabilities and have developed a rapidly evolving product pipeline based on our
discoveries. Four therapeutic proteins we discovered, mirostipen (MPIF-1),
repifermin (KGF-2), BLyS and VEGF-2, have entered human clinical trials. We
recently submitted to the FDA an Investigational New Drug Application for a new
albumin-alpha interferon fusion protein. We have a number of additional products
in preclinical development.

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INDUSTRY BACKGROUND

Every living organism has a unique "genome," a master blueprint of all the
cellular structures and activities required to build and support life. A genome
is a map of the organism's DNA, which is in part comprised of segments called
"genes." Genes contain the specific sequences of information responsible for
particular physiological traits and processes. Each gene is comprised of a
sequence of nucleotides which provide precise genetic instructions to create, or
"express" a protein. Proteins are the primary building blocks of an organism's
physiological characteristics. A typical human cell contains thousands of
different proteins essential to its structure, growth and function. If even one
gene is expressed abnormally, it can severely alter the cell's function and
result in a disease condition.

Throughout the past decade, researchers have focused on discovering genes
and sequencing the human genome to determine the order of nucleotides in a
specific gene, permitting identification of the gene and the protein it produces
using a variety of techniques. For example, scientists have used cDNA libraries,
which contain copies of DNA with only the expressed portion of the gene, in
conjunction with computer software to discern locations of genes within the
genome. Recent advances have made these technologies operate in a
high-throughput manner, causing the discovery of genes to become drastically
more efficient and allowing researchers to focus on the functional aspects of
genes. Understanding the functional aspects of genes allows for the correlation
of those genes to medically relevant conditions. Armed with these data,
researchers can more efficiently develop treatments for conditions of interest.

Gene research facilitates and greatly accelerates the development of a
variety of therapeutic, diagnostic and other products and services. Development
efforts can become more targeted as researchers develop compounds that affect
the specific activity of an expressed gene product. Most therapeutic drugs act
on proteins which cause or contribute to an illness or disorder. As a result,
the identification of proteins through gene research can play an important role
in the development of drugs and drug screens. Proteins themselves can also be
used as drugs. Insulin, which regulates sugar metabolism, is a good example of a
widely known protein drug. The identification of genes that code for proteins
that may be missing or defective can enable the development of therapeutics for
genetic diseases. In addition, identification of genes that may predispose a
person to a particular disease may enable the development of diagnostic tests
for the disease that will permit early diagnosis and more successful treatment.
Genomic research has the potential to make the drug discovery process
dramatically more time and cost efficient, as well as to enable the development
of more specific drugs.

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OUR STRATEGY

- Discover medically useful genes. We intend to continue to discover
medically useful genes using the strengths of our technology platform. We
undertake discovery based on our capabilities in gene sequencing,
transcriptional profiling, creation of gene libraries and bioinformatics.
We study our extensive genomic database for potentially medically useful
genes and focus on discovering their functions. Four therapeutic proteins
which we discovered using our proprietary genomics capabilities have
entered clinical trials for multiple indications.

- Develop, manufacture and commercialize our gene-based products. We seek
to clinically develop the medically useful genes we discover. This may
include using the protein product itself as a drug, using the protein as
a target for a small molecule drug or creating antibodies targeted at the
protein. We intend to manufacture proteins and commercialize the drugs we
develop on our own or in conjunction with our partners.

- Establish and enhance strategic alliances. We intend to continue to
establish alliances with leading pharmaceutical and biotechnology
companies. These alliances will provide us with access to the expertise
of our partners in areas such as product development, clinical
development and sales and marketing, while allowing our partners to
develop therapeutics based on our technologies. In addition, these
alliances may generate research funding, milestone and royalty payments
that will enable us to continually enhance our technology platform and to
discover and develop novel therapeutic proteins. We will also seek to
retain certain co-promotion, co-development, revenue sharing and other
product rights.

- Expand our technology platform. We will continue to invest considerable
resources to expand and enhance our proprietary technology platform. This
will allow us to accelerate our discovery and product development
activities and facilitate the formation of additional alliances with
major biotechnology and pharmaceutical companies. We also intend to
continue to establish collaborations with leading biotechnology companies
to gain access to complementary technologies for our product development
efforts.

- Pursue strategic acquisitions. We intend to continually evaluate
potential acquisitions and joint ventures that would allow us to augment
our technology, product development and commercialization capabilities,
as well as provide access to complementary technological expertise. For
example, we recently completed the acquisition of Principia
Pharmaceutical Corporation that provided us with a proprietary protein
fusion technology. This technology may provide longer acting forms of
many important proteins, which may allow us to develop safer, more
effective and more convenient versions of both existing and new products.

- Capitalize on and expand our intellectual property portfolio. We
vigorously pursue patents to protect our intellectual property and have
developed a strong intellectual property portfolio. We intend to
capitalize on and expand our portfolio as we make further discoveries. As
of October 6, 2000, we had 146 U.S. patents covering 107 full-length
human genes and had filed U.S. patent applications covering more than
9,000 human genes and the proteins they encode.

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<PAGE> 26

PRODUCTS IN DEVELOPMENT

We have discovered a large number of medically useful genes which we are
developing on our own or with our partners. Four therapeutic protein products we
have discovered have entered various stages of human clinical testing. In
addition, we have a rapidly evolving pipeline of products in preclinical
development.

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
PRODUCT INDICATION STATUS CURRENT HGS RIGHTS
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CLINICAL PROGRAMS
Mirostipen (MPIF-1) Adjunct to chemotherapy Phase II Worldwide except Japan
(Takeda)
Repifermin (KGF-2) Venous ulcers Phase II Worldwide, co-marketing with
Mucositis Phase II SmithKline Beecham
Ulcerative colitis Phase II

BLyS Common variable Phase I Worldwide
immunodeficiency

VEGF-2 Coronary artery disease Phase II(1) Licensed to Vascular
Genetics
Critical limb ischemia Phase II

PRECLINICAL PROGRAMS
THERAPEUTIC PROTEINS:
FasTR Hepatitis, autoimmune Preclinical Worldwide
disease

A novel interferon Multiple sclerosis, Preclinical Licensed to Schering-Plough
hepatitis, cancer

Radiolabeled BLyS Cancer, B-cell tumors Preclinical Worldwide

Vasolysin Cancer Preclinical Worldwide

ANTIBODIES AND PEPTIDES:
Anti-CCR5 HIV Preclinical Worldwide

BLyS Antibody Systemic lupus Preclinical Worldwide
erythematosus,
rheumatoid arthritis

Trail Receptor Cancer Preclinical Worldwide
Antibody

VEGF-2 Antibody Cancer, vascular disease Preclinical Worldwide

FUSION PROTEINS:
Albumin-Alpha Hepatitis IND Worldwide
Interferon submitted

Albumin-Human Growth hormone deficiency Preclinical Worldwide
Growth Hormone

GENE THERAPY:
CTGF-2 Vascular disease Preclinical Licensed to Transgene

TIMP-4 Restenosis Preclinical Licensed to Transgene
</TABLE>

--------------------------------------------------------------------------------
(1) Note: VEGF-2 trials are currently on hold pending FDA approval. See "Risk
Factors."

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<PAGE> 27

CLINICAL PROGRAMS

Mirostipen (Myeloid Progenitor Inhibitory Factor-1, MPIF-1)

Myeloid progenitor cells, which develop into white blood cells, red blood
cells and platelets, are destroyed by many forms of cancer chemotherapy,
resulting in a decrease in these cells. We have shown in laboratory and animal
studies that MPIF-1 inhibits the differentiation and growth of certain bone
marrow cells, including myeloid progenitor cells. By preventing the growth of
myeloid progenitor cells during aggressive chemotherapy, it may be possible to
reduce the destruction of these cells and allow the more rapid repopulation of
red and white blood cells in circulation. This, in turn, may reduce the
incidence of serious infection, anemia and coagulation disorders associated with
chemotherapy.

A Phase I study to evaluate MPIF-1 safety in healthy volunteers was
completed in 1998. Two Phase II studies have begun to evaluate MPIF-1 in
shielding myeloid progenitor cells from the harmful effects of chemotherapy.
These studies will test various doses of MPIF-1 in cancer patients undergoing
adjuvant chemotherapy treatment for various cancers. Trials are being conducted
at leading cancer research centers in the U.S. and should complete enrollment in
mid-2001. We expect results from the trials to be available in late 2001.

Repifermin (Keratinocyte Growth Factor-2, KGF-2)

We have shown in animal studies that KGF-2 speeds the repair of damage to
the cells lining the mouth, throat, gastrointestinal tract and related tissues
and heals serious chronic wounds to the skin. KGF-2 may also be useful in
treating a number of other conditions involving injury to skin cells, including
skin ulcers, burns and surgical and other wounds. In addition, KGF-2 may be
useful in the treatment of mucositis, an injury to the lining of the mouth and
intestinal tract which can be caused by some cancer treatments. SmithKline
Beecham recently exercised its co-right option to jointly develop and
commercialize KGF-2. We expect to share equally in clinical development costs
for Phase III trials and beyond. We will co-promote KGF-2 upon achieving
regulatory approvals.

Three Phase I studies to evaluate the safety of KGF-2 in healthy volunteers
have been completed. We recently completed Phase II human studies of KGF-2 for
the treatment of chronic venous ulcers, in which KGF-2 was shown to be well
tolerated and capable of accelerating wound healing by a number of partial
healing parameters. A large Phase II study to determine the safety and efficacy
of repifermin for complete healing of chronic venous ulcers should begin in
early 2001. Phase II studies have also been initiated to evaluate KGF-2 in the
treatment of mucositis in patients undergoing bone-marrow transplantation and
ulcerative colitis, an inflammatory bowel disease. The trials are being
conducted at leading research centers in the U.S. We expect results from these
trials to be available in mid-2001.

BLyS (B Lymphocyte Stimulator)

BLyS is a novel immune stimulant. We have shown in laboratory studies that
BLyS stimulates B lymphocytes to produce high levels of antibodies. BLyS has the
potential to improve treatments for certain immune deficiency syndromes and
certain forms of leukemia and lymphoma. In addition, BLyS could boost immune
systems depleted by organ transplantation, chemotherapy and bone-marrow
transplantation. BLyS could also enhance the performance of traditional
vaccines.

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<PAGE> 28

We are currently initiating human testing of BLyS in patients with common
variable immunodeficiency, a disorder that leaves individuals susceptible to
infection. The FDA has approved Phase I testing with increasing single doses of
BLyS in these patients. This trial has begun screening patients for enrollment.

VEGF-2 (Vascular Endothelial Growth Factor-2)

Laboratory studies have shown that VEGF-2 promotes the growth of certain
subsets of vascular endothelial cells, which form the lining and surface of
blood vessels. Thus, it may have potential as a treatment for coronary artery
disease and peripheral arterial disease. We have licensed the gene that encodes
VEGF-2 to Vascular Genetics, Inc., a company in which we have approximately a
32% equity position.

Vascular Genetics has initiated clinical trials on the use of the VEGF-2
gene in the treatment of critical limb ischemia and refractory coronary artery
disease. In February 2000, these studies were halted in response to questions
raised by the FDA. Three Phase II studies of VEGF-2 were completed prior to the
halt. A fourth Phase II study cannot be completed and further studies cannot be
initiated until approved by the FDA. Results from one trial are available and
were presented at the American College of Cardiology in March 2000. Results from
the other two trials are expected to be available in early 2001.

PRECLINICAL PROGRAMS

In addition to the products in clinical development, our research and
development efforts have generated numerous other product possibilities, many of
which are in preclinical development. We and our partners are focused on
developing potential products in the following areas:

- Therapeutic Proteins. Therapeutic proteins are human proteins that, in
natural or modified form, have medically useful physiologic or
pharmacologic effects. Therapeutic proteins may be useful for the
treatment of a variety of diseases, including autoimmune,
neurodegenerative and cardio-pulmonary diseases. Therapeutic proteins
currently in broad clinical use include interferon, insulin and human
growth hormone. We have conducted development studies on a number of
potential therapeutic proteins, including MPIF-1, KGF-2 and BLyS. We have
also identified thousands of what we believe to be new secreted proteins.
We are expressing and evaluating these proteins and assessing their
activity using laboratory and animal studies. Current therapeutic
proteins in preclinical development include FasTR, Radiolabeled BLyS,
Vasolysin and a novel interferon, which we recently licensed to
Schering-Plough.

- Antibodies and Peptides. Antibodies and peptides are proteins that bind
in a highly specific manner to molecules, including other proteins, and
distinct sites on cell surfaces called receptors. By attaching to them,
antibodies and peptides can be used to neutralize specific proteins and
block specific receptors. We are undertaking the development of
antibodies and peptides that act on many of our newly discovered
proteins. We have entered into collaborations with Abgenix, Cambridge
Antibody Technology and Dyax to enhance our antibody and peptide
development efforts. Antibody-based drugs currently in broad clinical use
include Herceptin, Rituxan and ReoPro. The antibodies and peptides we are
currently developing may be useful in the treatment of diseases such as
systemic lupus erythematosus, rheumatoid arthritis, cancer and certain
viral infections. Current antibodies in preclinical

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<PAGE> 29

development include Anti-CCR5, BLyS Antibody, Trail Receptor Antibody and
VEGF-2 Antibody.

- Fusion Proteins. On September 8, 2000, we acquired Principia
Pharmaceutical Corporation. We expect to use Principia's recombinant
protein fusion technology to provide longer acting forms of many
important proteins used in the treatment of disease. This technology
genetically fuses a protein to albumin, a very abundant, natural and
long-lived protein in the blood. When albumin is fused to a therapeutic
protein, the active protein is expected to have the longer circulating
life of albumin. Prolonging the activity of the therapeutic protein in
this manner may offer a reduced dosing frequency and could lead to
reduced side effects in patients. Using this technology, we expect to
develop safer, more effective and more convenient protein therapeutics
and biopharmaceuticals for certain diseases, as well as develop
longer-acting forms of many existing proteins. Current fusion proteins in
our preclinical development include Albumin-Alpha Interferon and
Albumin-Human Growth Hormone. We recently submitted to the FDA an
Investigational New Drug Application for Albumin-Alpha Interferon, a
fusion of albumin and alpha interferon.

- Gene Therapy. We believe that our gene discovery technology may identify
genes that can be introduced into the body through the use of gene
therapy. Many diseases are caused by overproduction, underproduction or
defective production of specific proteins. Gene therapy is an approach to
the treatment of disease in which scientists insert genes into a
patient's cells for the purpose of inducing these cells to produce
therapeutic proteins or to replace defective or missing genes. In other
applications, we believe that gene therapy may induce cells to secrete
proteins that enhance the immune system's ability to recognize and attack
a specific disease. Gene therapy might also allow localized delivery of
proteins that cannot reach the appropriate site through conventional
methods of administration. There are currently no gene therapy products
on the market although several are undergoing clinical trials. We have
entered into agreements with Schering-Plough, Vascular Genetics,
Transgene and Vical granting them the right to use our technologies for
gene therapy. Vascular Genetics has conducted gene therapy clinical
studies of VEGF-2, although these studies have been placed on hold by the
FDA. In July 2000, Transgene selected two genes from our database, CTGF-2
and TIMP-4, as its first two exclusive gene therapy products, both as a
potential treatment for severe cardiovascular conditions.

- Small Molecule Drugs. We believe that more complete knowledge of genes
and the proteins they express will enable traditional pharmaceutical
companies to design and screen pharmaceutical products in a more
efficient fashion by providing specific targets for drug discovery. The
discovery of new drugs often involves screening a large family of
synthetic and natural products to determine their impact on proteins
expressed by genes. Increasingly, automated biochemical tests that assess
the ability of chemical compounds to bind to and modify the activity of
purified proteins are used to test the efficacy and selectivity of new
drugs. A drug's selectivity is its ability to affect only the desired
protein targets and not other proteins expressed in the human body. The
undesired binding of a drug to other proteins not detected by a screening
test can result in toxicity or other undesirable side effects. We believe
that the genes we discover may contribute to screening tests by
permitting more complete sets of target proteins to be assembled for a
test. SmithKline Beecham and our other collaboration partners are
currently using proteins expressed by genes identified by us in a number
of screening tests. We may pursue small molecule drug

S-27
<PAGE> 30

development on our own or continue to leverage the expertise of our
partners in this area.

- Other. We believe that our genetic data could lead to the development of
diagnostic tests and antimicrobial agents and vaccines. The development
of diagnostic tests based on human genes that we identify is part of our
collaboration with SmithKline Beecham. For the development of
antimicrobial agents and vaccines, analysis of the total genome of a
microorganism should provide a complete picture of all genes encoded by
the microorganism. With this information, we believe it may be possible
to choose protein candidates that may be useful as vaccine components or
antigens required for the development of products to enhance the immune
system. We also believe that a high-throughput approach of gene
identification may identify new genes capable of producing antibiotics
and other useful secondary metabolites. In the future we may pursue these
developments on our own or leverage the expertise of our partners.

RESEARCH AND DEVELOPMENT CAPABILITIES

Our product development efforts are supported by our extensive research and
development capabilities and are substantially augmented by those of our
partners. We exploit the power of modern computers, automated laboratory
instruments and advances in biology to discover the structure and function of
new genes and to understand their potential medical applications. As part of
this process we cover all stages of development, from the discovery of new human
genes to human clinical trials of the new drugs. We continually seek to upgrade
our technologies and integrate new and more efficient technologies into our
development efforts. We believe this discovery process is responsible for our
success in translating genomic information into new drug candidates.

Our technology platform is based on various methods that we integrate in a
high-throughput fashion to enable the rapid progression from gene discovery to
clinical trials.

- Gene Isolation is the process of deciphering the sequence of a gene. We
believe we have isolated the messenger RNA from more than 95% of all
human genes. Of these, we believe that between 75% and 80% are fully
functional, as they contain all the instructions necessary to produce an
active protein.

- Secreted Protein Identification refers to the elucidation of secreted
proteins which are often involved in disease processes. We believe we
have identified several thousand human genes that encode signaling
proteins. We believe that this collection represents the majority of
human signaling proteins.

- Expression Profiling and Mapping refers to the comparison of messenger
RNA levels in diseased and healthy tissues. Our scientists use gene chips
and proprietary methods to analyze gene expression profiles in a wide
variety of tissues and cells. They also use a variety of techniques to
map chromosome location, which generally allow our scientists to map any
gene within two or three weeks.

- Proteomics is the analysis of proteins correlated with a particular
disease. In this step we map out the physical properties of each
signaling protein. We attempt to determine the molecular weight, amino
acid composition and amino acid sequence of the majority of the newly
discovered signaling proteins.

- Use of Antibodies. Antibodies are proteins that bind in a highly
specific manner to molecules. Antibodies are used to block the effects of
proteins and to determine the

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<PAGE> 31

location of a protein in tissues. We are working to produce antibodies to
many of our newly discovered secreted proteins.

- High-Throughput Biological Screening. We have developed a reliable
high-speed robotic cloning method to produce each newly discovered
signaling protein for biological studies. To date, we have cloned more
than 9,000 proteins.

- Biological Activity and Specificity. Our scientists can simultaneously
monitor changes in the expression of about 100 representative genes
through the use of an automated, high-throughput biological screening
system. We analyze the activity of the proteins on a wide variety of
different types of cells to assess their specificity of action, or the
range of circumstances in which they act, and the number of
characteristics they can influence. Only proteins that are highly
specific in their activity are selected for further development.

- Animal Models refer to producing animals with the human disease
equivalent. We test proteins that are highly specific in their activity
with animal models of human disease. Where possible, we compare the
results for each tested protein to the best existing therapy. Proteins
which prove to be active in these models are selected for extensive
laboratory studies.

- Preclinical Studies and Manufacturing. In this step we develop protocols
for human testing based on extensive laboratory toxicology and
pharmacokinetic studies. A toxicological study tests whether and how the
therapy could be harmful to humans. Pharmacokinetic studies analyze how
the drug will be absorbed, metabolized and stored by, distributed
throughout and excreted from the body. We are developing techniques for
measuring blood and tissue levels of each protein to enable measurements
within human subjects. We need to develop manufacturing methods for
large-scale production of each protein. We lease a newly constructed
84,000 square foot process development and manufacturing facility to
support Phase I, II and III human clinical studies and the North American
launch of novel protein and gene products. Construction of a 43,000
square foot expansion of this facility has recently been completed. We
plan to establish additional manufacturing facilities in the future.

- Clinical Development is the process of conducting human clinical trials
and gaining the necessary approval from regulatory agencies. The goal of
clinical development is to establish the safety and efficacy of our drugs
for the treatment of human disease. Four products discovered by us have
entered clinical development for multiple indications.

- Bioinformatics refers to the use of computers to process, analyze, store
and retrieve biological information. Our high capacity computer system
has been designed for ease of use by research scientists, who readily
access the system through desktop computers. Our data are also available
to scientists at SmithKline Beecham, Takeda, Schering-Plough, Merck KGaA
and Sanofi-Synthelabo through bioinformatics systems that we and
SmithKline Beecham created. We believe that our proprietary
bioinformatics system is an important asset for the identification and
creation of gene-based product opportunities.

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<PAGE> 32

COLLABORATIVE ARRANGEMENTS

Forming strategic alliances with leading pharmaceutical and biotechnology
companies is a key element of our strategy. We currently have three major types
of collaborations:

- Drug Discovery. These are collaborations in which we provide our drug
discovery capabilities in exchange for access to our partners' drug
development and commercialization expertise as well as research funding
and long-term value creation through potential milestone and royalty
payments. We are also entitled to certain co-promotion, co-development,
revenue sharing and other product rights. Between 1993 and 1997, we
entered into major collaborations with SmithKline Beecham, Takeda,
Schering-Plough, Merck KGaA and Sanofi-Synthelabo. These collaborations
continue through June 2001, a period described as the initial research
term, after which they may be extended in certain respects for up to an
additional five years (except for Takeda), however, we expect that some
or all of these collaborations may not be renewed.

- Technology. These are collaborations in which we gain access to our
partners' technology to complement our own drug discovery and development
capabilities in exchange for license fees, potential milestone and
royalty payments as well as equity investments.

- Microbial. These are collaborations in which we provide access to gene
sequence data for specific microbial organisms to biopharmaceutical
companies in exchange for license fees and royalty payments.

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

<TABLE>
<CAPTION>
YEAR ESTABLISHED PARTNER FOCUS
------------------------------------------------------------------------------------
<S> <C> <C>
DRUG DISCOVERY COLLABORATIONS
1993-97 SmithKline Beecham Therapeutic proteins, small
molecule drugs, gene therapy
vaccines and diagnostics
1995 Takeda Therapeutic proteins and small
molecule drugs
1996 Schering-Plough Therapeutic proteins, small
molecule drugs and gene therapy
1996 Merck KGaA Therapeutic proteins and small
molecule drugs
1996 Sanofi-Synthelabo Therapeutic proteins and small
molecule drugs
TECHNOLOGY COLLABORATIONS
1997 Vascular Genetics Gene therapy
1998 Transgene Gene therapy
1999 Abgenix Antibodies
2000 Cambridge Antibody Technology Antibodies
2000 Dyax Antibodies and peptides
2000 Vical Gene therapy
2000 Praecis Small molecule drugs, including
peptides
MICROBIAL COLLABORATIONS
1995-97 MedImmune Infectious agents
1996 Pharmacia Staphylococcus aureus
------------------------------------------------------------------------------------
</TABLE>

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<PAGE> 33

DRUG DISCOVERY COLLABORATIONS

SmithKline Beecham. We entered into collaboration agreements with
SmithKline Beecham in May 1993, which we amended in June 1996 and July 1997.
These agreements continue through June 2001, the conclusion of the initial
research term. Under these agreements, we granted SmithKline Beecham rights to
develop and commercialize therapeutic and diagnostic products based on human
genes discovered by us in SmithKline Beecham's field, which is the field of
human and animal health care, including gene therapy vaccines but excluding
other gene therapy products, antisense products and the use of genes for
synthesizing drugs that were known in May 1993. Pursuant to the collaboration
agreements SmithKline Beecham has paid us an aggregate of $125 million, of which
$55 million was allocated to the purchase of shares of our common stock. We and
SmithKline Beecham jointly entered into collaboration agreements with four
additional pharmaceutical companies: Takeda, Schering-Plough, Merck KGaA and
Sanofi-Synthelabo. Under all five agreements, we can unilaterally designate
proteins with therapeutic potential for exclusive development and
commercialization, as long as we select the protein before SmithKline Beecham or
any other collaboration partners and meet certain research requirements prior to
designation. We can also unilaterally research, develop and commercialize
antibody products directed against antigens derived from the human genome
database we created, and identify and use novel molecular targets derived from
our human genome database to discover and develop small molecule pharmaceutical
products under certain circumstances. SmithKline Beecham and the other
collaboration partners have the same rights.

We share equally with SmithKline Beecham any license fees and product-
development milestone payments made under the four additional collaboration
agreements, but we receive all royalty and research support payments under those
agreements. SmithKline Beecham has granted us royalty payments, based on net
sales of products developed from any of our patents or technologies that fall
within SmithKline Beecham's field, for any sales made by SmithKline Beecham or
its licensees. We are also entitled to milestone payments in connection with the
development of these products. We hold an option to co-promote any products sold
by SmithKline Beecham in the U.S., Canada, Mexico and Europe, subject to the
rights granted to Takeda and other collaborators. If we develop and market or
license to a third party any product in SmithKline Beecham's field pursuant to
our rights under these agreements, SmithKline Beecham will usually be entitled
to royalty payments from, or to share in milestone payments and license fees we
receive with respect to, those products.

Our collaboration agreements with SmithKline Beecham include an option for
SmithKline Beecham to co-develop and co-commercialize products in SmithKline
Beecham's field to which we have exclusive development and commercialization
rights under our collaboration agreements with SmithKline Beecham and for which
Schering-Plough has not exercised its option. SmithKline Beecham recently
exercised its option to jointly develop and commercialize KGF-2. SmithKline
Beecham is also entitled to royalty payments on and an option to co-promote
products outside SmithKline Beecham's field sold by us which are based on or
incorporate patents or information developed by SmithKline Beecham using our
human gene technology.

Takeda. SmithKline Beecham and Takeda entered into a license agreement
relating to the development and sale of products in SmithKline Beecham's field
based upon rights licensed from us. We are entitled to all royalty payments and
one-half of the milestone payments due from Takeda to SmithKline Beecham under
this license agreement on sales

S-31
<PAGE> 34

of products developed by Takeda. We entered into an option and license agreement
with Takeda pursuant to which we granted Takeda an exclusive option to license
rights under our patents and technology in the field of human health care, other
than gene therapy, antisense and diagnostics, in order to make and sell up to
three products in Japan. In consideration of the grant of the option, Takeda
paid us $5 million and agreed to pay to us milestone payments and royalties
based on the sale of Takeda products covered by the option and license
agreement. The option period terminates three years following expiration of the
initial research term under our collaboration agreements with SmithKline
Beecham. Takeda has exercised one of its options with the selection of MPIF-1.

Schering-Plough. In June 1996, we entered into a collaboration agreement
with Schering-Plough. Under this agreement, Schering-Plough has the right to use
our human gene technology and biological information developed by us and
SmithKline Beecham to discover, develop and commercialize products.
Schering-Plough was also granted an option to co-develop and co-commercialize up
to two of our therapeutic protein products to which we have exclusive
development and commercialization rights under our agreements with SmithKline
Beecham. This option can also be exercised with respect to proteins we elect to
license to third parties. Schering-Plough recently exercised one of its two
options with the selection of a novel interferon discovered by us. We will
receive milestones and royalty payments for any product developed from this
protein. Schering-Plough is obligated to pay license fees, research payments and
milestone payments in connection with the development of products.
Schering-Plough has paid us an aggregate of $37.5 million under this agreement.
We also have a collaboration with Schering-Plough related to gene therapy by
which Schering-Plough was granted a non-exclusive license to use our human gene
technology to conduct research and an option to obtain an exclusive license to
specific genes in the field of gene therapy.

Merck KGaA. In July 1996, we entered into a collaboration agreement with
Merck KGaA. Under this agreement, Merck KGaA has the right to use our human gene
technology and biological information developed by us and SmithKline Beecham to
discover, develop and commercialize products. Merck KGaA is obligated to pay
license fees, research payments, and milestone payments in connection with the
development of products. Merck KGaA has paid us an aggregate of $32.5 million
under this agreement.

Sanofi-Synthelabo. In July 1996, we entered into a collaboration agreement
with Sanofi-Synthelabo. Under this agreement, Sanofi-Synthelabo has the right to
use our human gene technology and biological information developed by us and
SmithKline Beecham to discover, develop and commercialize products.
Sanofi-Synthelabo is obligated to pay license fees, research payments and
milestone payments in connection with the development of products.
Sanofi-Synthelabo has paid us an aggregate of $22.5 million under this
agreement.

Post-Initial Research Term. The initial research term under our
collaboration agreements with SmithKline Beecham and the other four
collaboration partners expires on June 30, 2001. SmithKline Beecham,
Schering-Plough, Merck KGaA and Sanofi-Synthelabo have the right to extend the
research term for up to five additional years, which would extend the time for
submitting research plans for therapeutic products other than antibody products
and therapeutic protein products. These companies can extend the collaborations
by making set payments. After any renewal, the terms of the collaborations will
change in that the collaborators will be entitled to use our gene data only as
it exists on June 30, 2001 and will have no access to future gene sequence
information or other data generated by us. In addition, the field of use for new
products to be developed by

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<PAGE> 35

these collaborators will be limited to small molecule drugs, except that these
collaborators may continue projects underway on June 30, 2001 if they notify us
before that date. We expect that some or all of these collaboration agreements
may not be renewed.

TECHNOLOGY COLLABORATIONS

Antibodies and Peptides

Abgenix. In November 1999, we entered into a collaboration and license
agreement with Abgenix relating to the field of fully human antibody drug
candidates. Pursuant to this agreement, we licensed technology from Abgenix that
we and Abgenix will use to generate fully human antibody drug candidates. We
will independently develop and seek to commercialize antibody-based drugs from
this collaboration. Abgenix has an option to develop and commercialize products
derived from our antigens. We and Abgenix will pay reciprocal milestone and
royalty payments for products developed and commercialized. We and Abgenix will
jointly work on up to five targets of interest.

Cambridge Antibody Technology (CAT). In August 1999, we entered into an
antibody license agreement with CAT for the development of fully human antibody
therapeutics for up to three of our target human proteins. In February 2000, we
entered into a broader agreement with CAT that provides us with the right to use
their technology to develop and sell an unlimited number of fully human
antibodies for therapeutic and diagnostic purposes. We also plan to combine our
resources to develop and sell a significant number of therapeutic antibody
products. CAT has the right to select up to twenty-four of our proprietary
antigens for preclinical development. We have the option to share clinical
development costs and to share the profits equally with them on up to eighteen
such products. CAT has rights to develop six such products on their own. We are
entitled to clinical development milestone and royalty payments on those six
products. We also invested approximately $55.0 million for ordinary shares of
CAT.

Dyax. In February 2000, we entered into a license agreement with Dyax
relating to Dyax' phage display and peptide technology. Under the agreement, we
have the right to use Dyax' phage display technology to develop an unlimited
number of therapeutic and diagnostic products that we may sell or outlicense.
Over the next several years, we will pay Dyax $16.0 million for licenses and
committed research support. We will provide milestone and royalty payments to
Dyax on products we develop and sell or will share revenue we receive from
outlicensees. The licensed technologies include Dyax' phage display technology
to create peptide drugs, human monoclonal antibody drugs and in vitro diagnostic
products. In addition, we have the right to require that Dyax perform research
in the fields of protein separation and high-throughput screening technology. We
also have rights to improvements in Dyax' phage display technology.

Praecis. In February 2000, we entered into a collaboration agreement with
Praecis relating to the field of small molecule drugs, including peptides. Under
the agreement, Praecis will screen two of our targets to identify novel small
molecule drugs to combat metabolic disorders and infectious diseases.

Gene Therapy

Transgene. In February 1998, we entered into an agreement with Transgene
relating to the field of human gene therapy, including gene therapy vaccines to
the extent it will not conflict with our other collaboration agreements. Under
this agreement, we granted Transgene the right to license exclusively up to 10
genes. We obtained a 10% equity interest in Transgene and certain co-development
and co-marketing rights. Transgene

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recently selected two genes from our database, CTGF-2 and TIMP-4, as its first
two exclusive gene therapy products. CTGF-2 stimulates the formation of blood
vessels and could be an effective tool in the control of coronary artery
disease. TIMP-4 prevents restenosis, which is the growth of blood-vessel
obstruction following an angioplasty. Our collaboration with Transgene will end
in 2008.

Vical. In February 2000, we entered into a license agreement with Vical
relating to the field of gene therapy. Under this agreement, we licensed
technology from Vical and granted Vical the right to license up to three genes.
The agreement provides for reciprocal royalty payments. Our collaboration with
Vical will end in 2004.

Vascular Genetics. In November 1997, we entered into an agreement with
Vascular Genetics whereby we granted Vascular Genetics an exclusive license in
the field of gene therapy for our VEGF-2 gene. As of June 30, 2000, we held an
approximately 32% equity interest in Vascular Genetics.

MICROBIAL COLLABORATIONS

MedImmune. We entered into a collaboration and license agreement with
MedImmune in July 1995, which we amended in March and December 1997. This
agreement is related to the development of drugs based upon certain infectious
agents sequenced by us or TIGR or as to which we hold licenses. Programs under
this agreement include the creation of vaccines and immunotherapeutics for
non-encapsulated Haemophilus influenzae, Streptococcus pneumoniae, Escherichia
coli, Helicobacter pylori and Borrelia burgdorferi. MedImmune recently
sub-licensed the Streptococcus pneumoniae vaccine technology to SmithKline
Beecham. We are entitled to a portion of the payments received by MedImmune
under its sub-license.

Pharmacia. In October 1996, we entered into an agreement with Pharmacia in
which we granted to Pharmacia a nonexclusive license to conduct research and to
make, use and sell products based on genes of Staphylococcus aureus and the
pathogenicity islands of Escherichia coli sequenced by us.

PATENTS AND PROPRIETARY RIGHTS

Our commercial success depends in large part on our ability to obtain
patent or other intellectual property protection for genes we discover. We apply
for patent protection for genes we identify by partial sequencing and,
subsequently, for those genes which we fully sequence. There is substantial
uncertainty as to the patentability of genes based on partial sequences. Even if
patent protection is afforded for such sequences, it may not provide useful
commercial advantages. Our business might be enhanced by patent protection based
on partial gene sequences, but we do not believe our commercial success will be
materially dependent on our ability to obtain it. We have isolated and obtained
full-length sequence information for many of the genes that we or our
collaborators intend to develop further and have filed, and continue to file,
for patent protection based on such full-length sequences. However, we will not
isolate and fully sequence a significant portion of the partial gene sequences
we discover.

The biotechnology patent situation outside the U.S. is even more uncertain and
is currently undergoing review and revision in many countries. These proposals
and other changes in patent laws in the U.S. and other countries may result in
changes in, or different interpretations of, the patent laws that might allow
others to use our discoveries or develop and commercialize our products.

As of October 6, 2000, we had filed U.S. patent applications with respect
to more than 9,000 human genes and their corresponding proteins. We have also
filed U.S. patent applications with respect to all or portions of the genomes of
eight infectious microorganisms and one non-infectious microorganism. As of
October 6, 2000, we had 146 U.S. patents covering 107 full-length human genes.
The remaining applications covering full-length genes and their corresponding
proteins may not result in the issuance of any patents. Our applications may not
be sufficient to meet the statutory requirements for patentability in all cases.
In certain instances, we will be dependent upon our collaborators to file and
prosecute patent applications.

Washington University has identified genes through partial sequencing
funded by Merck & Co. and has deposited those partial sequences in a public
database. In January 1997, The Institute for Genomic Research, or TIGR, in
collaboration with the National Center for Biological Information, disclosed
full-length DNA sequences which are reportedly in excess of 35,000 sequences
that were assembled from partial gene sequences available in publicly accessible
databases or sequenced at TIGR. In addition, in June 2000, the Human Genome
Project and Celera Genomics Corporation claimed to have completed an initial
sequencing of the human genome, and will make this information available at no
cost. All of this public disclosure might limit the scope of our claims or make
unpatentable subsequent patent applications on full-length genes we file.

Other companies or institutions have filed, and may file patent
applications in the future, which attempt to patent genes similar to those
covered in our patent applications, including applications based on our
potential products. The Patent and Trademark Office would decide which
applications merit a patent and the priority of competing patent claims. Any
patent application filed by a third party may prevail over patent applications
we filed, in which event the third party may require us to stop pursuing a
potential product or to negotiate a royalty arrangement to pursue the potential
product.

Other parties may claim that our potential products infringe their patents.
This risk will increase as the biotechnology industry expands and as other
companies obtain more patents and attempt to discover genes through the use of
high-speed sequencers. Other persons could bring legal actions against us to
claim damages or to stop our manufacturing and marketing of the affected
products. If any of these actions are successful, in addition to demanding
monetary damages, these persons may require us to obtain a license in order to
continue to manufacture or market the affected products. We believe that there
will continue to be significant litigation in our industry regarding patent and
other intellectual property rights. If we become involved in litigation, it
could consume a substantial portion of our resources.

Issued patents may not provide commercially meaningful protection against
competitors. Any issued patent may not provide us with competitive advantages.
Others may challenge our patents or independently develop similar products that
could result in an interference proceeding in the Patent and Trademark Office.
Others may be able to design around our issued patents or develop products
providing effects similar to our products. In addition, others may discover uses
for genes or proteins other than those uses covered in our patents, and these
other uses may be separately patentable. The holder of a patent

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covering the use of an invention as to which we have a patent claim could
exclude us from selling a product for a use covered by its patent.

We rely on trade secret protection to protect our confidential and
proprietary information. We believe we have developed proprietary procedures for
making libraries of DNA sequences and genes. We have not sought patent
protection for these procedures. We have developed a substantial database
concerning genes we have identified. We have taken security measures to protect
our data and continue to explore ways to further enhance the security for our
data. However, we may not be able to meaningfully protect our trade secrets.
While we have entered into confidentiality agreements with employees and
academic collaborators, we may not be able to prevent their disclosure of these
data or materials. Others may independently develop substantially equivalent
information and techniques. TIGR has developed or possesses specific trade
secrets important to our business, including information about sequencing
procedures and genes identified by TIGR. Although TIGR also enters into
confidentiality agreements with its employees, there is an additional risk that
such trade secrets cannot be meaningfully protected.

COMPETITION

We are in a race to identify, establish uses for and patent as many genes
as possible and to commercialize the products we develop. Many of our potential
competitors have substantially greater research and product development
capabilities and financial, scientific, marketing and human resources. The Human
Genome Project and Celera Genomics Corporation have recently claimed to have
mapped the complete human genome, and have pledged to make their findings
available to the public at no cost. We face competition from other entities
using high-speed gene sequencers to discover genes, such as Incyte Genomics,
Inc. and Celera Genomics Corporation. We also face competition from entities
using more traditional methods to discover genes related to particular diseases,
such as Amgen, Inc., Genentech, Inc., Millennium Pharmaceuticals, Inc. and other
large biotechnology and pharmaceutical companies. We expect that competition in
our field will continue to be intense.

Research to identify genes is also being conducted by various institutes
and U.S. and foreign government-financed entities, including British, French,
German and Japanese efforts, as well as numerous smaller laboratories associated
with universities or other not-for-profit entities. In addition, a number of
pharmaceutical and biotechnology companies and government-financed programs are
engaged or have announced the intention to engage in areas of human genome
research similar to or competitive with our focus on gene discovery, and other
companies are likely to enter the field.

The gene sequencing machines we use are commercially available and are
currently being used by many other companies, in some cases for business
purposes that compete with us. In addition, a number of other companies have
announced plans to engage in gene discovery and could acquire similar machines
and develop procedures for automated sequencing of genes. Although we believe
that our large-scale, automated processes and lead time provide us with a
competitive advantage, any one of these companies or other entities may discover
and establish a patent position in one or more genes that we have identified and
might have designated or considered designating as a product candidate. Any
potential products based on genes we identify will face competition both from
companies developing gene-based products and from companies developing other
forms of treatment for diseases that may be caused by, or related to, genes we
identify.

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We face significant competition in our product development and
commercialization efforts. Although we believe that there are significant
product development opportunities for both us and our collaborators based on our
gene databases, competition exists among us and our collaborators to develop and
commercialize products. In addition, our competitors may succeed in developing
products before we do, obtaining approvals from the FDA or other regulatory
agencies for such products more rapidly than we do, or developing products that
are more effective than those proposed to be developed by us. Similarly, while
we will share any success of our collaborators in identifying and
commercializing products through royalties and co-payment arrangements, our
collaborators face similar competition from other competitors who may succeed in
developing products more quickly, or developing products that are more
effective, than those developed by our collaborators. Certain of these
competitors may be further advanced than us in developing potential products.
Research and development by others may render the products that we or our
collaborators may seek to develop obsolete or uneconomical or result in
treatments, cures or diagnostic tests superior to any therapy or diagnostic test
developed by us or our collaborators. In addition, therapies or diagnostic tests
developed by us or our collaborators may not be preferred to any existing or
newly developed technologies.

GOVERNMENT REGULATION

Regulation of Pharmaceutical Products. New drugs and biological drugs are
subject to regulation under the Federal Food, Drug, and Cosmetic Act. In
addition to being subject to certain provisions of that Act, biologics are also
regulated under the Public Health Service Act. We believe that the
pharmaceutical products developed by us or our collaborators will be regulated
either as biological products or as new drugs. Both statutes and their
corresponding regulations govern, among other things, the testing,
manufacturing, distribution, safety, efficacy, labeling, storage, record
keeping, advertising and other promotional practices involving biologics or new
drugs. FDA approval or other clearances must be obtained before clinical
testing, and before manufacturing and marketing, of biologics and drugs.

In addition, any gene therapy products developed by us will require
regulatory approvals prior to human trials and additional regulatory approvals
prior to commercialization. New human gene therapy products are subject to
extensive regulation by the FDA and the Center for Biological Evaluation and
Research and comparable agencies in other countries. Currently, each human-study
protocol is reviewed by the FDA and, in some instances, the National Institute
for Health, on a case-by-case basis. The FDA and the National Institute for
Health have published guidance documents with respect to the development and
submission of gene therapy protocols.

Obtaining FDA approval has historically been a costly and time-consuming
process. We may not obtain FDA approvals in a timely manner, or at all. We and
our collaborators may encounter significant delays or excessive costs in our
efforts to secure necessary approvals or licenses. Generally, in order to gain
FDA pre-market approval, a developer first must conduct laboratory studies and
animal-model studies to gain preliminary information on an agent's efficacy and
to identify any safety problems. The results of these studies are submitted as a
part of an investigational new drug application, which the FDA must review
before human trials of an investigational drug can start. The investigational
new drug application includes a detailed description of the initial animal
studies and human investigation to be undertaken.

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Laboratory studies can take several years to complete, and there is no
assurance that an investigational new drug application based on such studies
will ever become effective so as to permit human testing to begin. A 30-day
waiting period after the receipt of each investigational new drug application is
required by the FDA prior to the commencement of human testing. If the FDA has
not commented on or questioned the investigational new drug application within
this 30-day period, human studies may begin. If the FDA has comments or
questions, it places the studies on clinical hold and the questions must be
answered to the satisfaction of the FDA before human testing may begin.

In order to commercialize pharmaceutical products, we or one of our
collaborators must sponsor and file an investigational new drug application and
be responsible for initiating and overseeing the human studies to demonstrate
the safety and efficacy and, for a biologic product, the potency, which are
necessary to obtain FDA approval of any such products. For our or our
collaborator-sponsored investigational new drug applications, we or our
collaborator will be required to select qualified investigators (usually
physicians within medical institutions) to supervise the administration of the
products, and ensure that the investigations are conducted and monitored in
accordance with FDA regulations and the general investigational plan and
protocols contained in the investigational new drug application. Human trials
are normally done in three phases, although the phases may overlap. Phase I
trials are concerned primarily with the safety and preliminary effectiveness of
the drug, involve fewer than 100 subjects and may take from six months to over a
year to complete. Phase II exploratory trials normally involve a few hundred
patients, but in some cases may involve fewer. Phase II trials are designed
primarily to demonstrate effectiveness in treating or diagnosing the disease or
condition for which the drug is intended, although short-term side effects and
risks in people whose health is impaired may also be examined. Phase III
confirmatory trials are expanded trials with larger numbers of patients which
are intended to gather the additional information for proper dosage and labeling
of the drug and demonstrate its safety and effectiveness. All three phases
generally take two to five years, but may take longer, to complete. Recent
regulations promulgated by the FDA may shorten the time periods and reduce the
number of patients required to be tested in the case of certain life-threatening
diseases which lack available alternative treatments.

The FDA receives reports on the progress of each phase of testing, and it
may require the modification, suspension, or termination of trials if an
unwarranted risk is presented to patients. If the FDA imposes a clinical hold,
trials may not recommence without FDA authorization and then only under terms
authorized by the FDA. The investigational new drug application process can thus
result in substantial delay and expense. Human gene therapy products (which is
one of the areas in which we are seeking to develop products) are a new category
of therapeutics. Because this is a relatively new and expanding area of novel
therapeutic interventions, there can be no assurance as to the length of the
trial period, the number of patients the FDA will require to be enrolled in the
trials in order to establish the safety, efficacy and potency of human gene
therapy products, or that the data generated in these studies will be acceptable
to the FDA to support marketing approval.

After completion of trials of a new drug or biologic product, FDA marketing
approval must be obtained. If the product is regulated as a biologic, the Center
for Biological Evaluation and Research will require the submission and approval,
depending on the type of biologic, of either a biologic license application or,
in some cases, a product license application and an establishment license
application before commercial marketing of the biologic. If the product is
classified as a new drug, we must file a new drug application with the Center
for Drug Evaluation and Research and receive approval before commercial

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marketing of the drug. The new drug application or biologic license applications
must include results of product development, laboratory, animal and human
studies, and manufacturing information. The testing and approval processes
require substantial time and effort and there can be no assurance that the FDA
will accept the new drug application or biologic license applications for filing
and, even if filed, that any approval will be granted on a timely basis, if at
all. In the past, new drug applications and biologic license applications
submitted to the FDA have taken, on average, one to two years to receive
approval after submission of all test data. If questions arise during the FDA
review process, approval can take more than two years. Notwithstanding the
submission of relevant data, the FDA may ultimately decide that the new drug
application or biologic license application does not satisfy its regulatory
criteria for approval and require additional studies. In addition, the FDA may
condition marketing approval on the conduct or specific post-marketing studies
to further evaluate safety and effectiveness. Rigorous and extensive FDA
regulation of pharmaceutical products continues after approval, particularly
with respect to compliance with cGMP, reporting of adverse effects, advertising,
promotion and marketing. Discovery of previously unknown problems or failure to
comply with the applicable regulatory requirements may result in restrictions on
the marketing of a product or withdrawal of the product from the market as well
as possible civil or criminal sanctions.

If a developer obtains designation by the FDA of a biologic or drug as an
"orphan" drug for a particular use, the developer may request small grants from
the federal government to help defray the costs of qualified testing expenses in
connection with the development of such drug. Orphan drug designation may be
granted to drugs for rare diseases, typically defined as a disease or condition
that affects populations of fewer than 200,000 individuals in the United States,
and includes many genetic diseases. The first applicant who has obtained
designation of a drug for a particular use as an orphan drug and then obtains
approval of a marketing application for such drug for the particular use is
entitled to marketing exclusivity for a period of seven years, subject to
certain limitations.

Orphan drug designation does not convey any advantage in, or shorten the
duration of, the regulatory approval process. Although obtaining FDA approval to
market a product with an orphan drug designation can be advantageous, there can
be no assurance that the scope of protection or the level of marketing
exclusivity that is currently afforded by orphan drug designation will remain in
effect in the future.

Moreover, several areas in which we or our collaborators may develop
products involve relatively new technology and have not been the subject of
extensive product testing in humans. The regulatory requirements governing these
products and related testing procedures remain uncertain. In addition, these
products may be subject to substantial review by foreign governmental regulatory
authorities that could prevent or delay approval in those countries. Regulatory
requirements ultimately imposed on our products could limit our ability to test,
manufacture and, ultimately, commercialize our products.

We are currently conducting human trials with respect to KGF-2, MPIF-1 and
BLyS. Trials for VEGF-2 are being conducted by Vascular Genetics and have been
temporarily suspended at FDA request. We are conducting preclinical trials with
respect to other proteins and expect to continue to conduct preclinical and
clinical studies with respect to additional potential products, as permitted
under our collaboration agreements. Accordingly, we are beginning to incur
significant expenses with respect to our laboratory, animal and human studies.
We cannot assure you that the trials will lead to our successful

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development of any products. As further studies are conducted, we may choose to
abandon particular projects that we might have previously considered promising.

Other. Ethical, social and legal concerns about gene therapy, genetic
testing and genetic research could result in additional regulations restricting
or prohibiting the processes we or our suppliers may use. Federal and state
agencies, congressional committees and foreign governments have expressed
interest in further regulating biotechnology. More restrictive regulations or
claims that our products are unsafe or pose a hazard could prevent us from
commercializing any products.

In addition to the foregoing, state and federal laws regarding
environmental protection and hazardous substances, including the Occupational
Safety and Health Act, the Resource Conservation and Recovery Act and the Toxic
Substances Control Act, affect our business. These and other laws govern our
use, handling and disposal of various biological, chemical and radioactive
substances used in, and wastes generated by, our operations. If our operations
result in contamination of the environment or expose individuals to hazardous
substances, we could be liable for damages and governmental fines. We believe
that we are in material compliance with applicable environmental laws and that
our continued compliance therewith will not have a material adverse effect on
our business. We cannot predict, however, how changes in these laws may affect
our future operations.

SOURCES OF SUPPLY

We currently depend on a single supplier, Applied Biosystems, a division of
PE Corporation, to provide all our gene sequencing machines and some of the
chemicals we require for our gene sequencing process. PE Corporation owns Celera
Genomics Corporation, which has recently claimed to have mapped the entire human
genome and could potentially be one of our competitors. We have not experienced
problems in obtaining either gene sequencing machines or chemicals in a timely
manner. While other gene sequencing machines are available, we do not believe
they are as efficient as the machines we currently use. We have entered into
agreements with PE Corporation that set price schedules for the chemicals we
use, subject to adjustment if we do not meet minimum purchase requirements. For
one enzyme we are obligated to purchase and PE Corporation is obligated to sell
a stated quantity at a fixed price. We order these chemicals by submitting
purchase orders at the time of purchase. Gene sequencing machines or chemicals
may not remain available in commercial quantities at acceptable costs. If we are
unable to obtain additional machines or an adequate supply of chemicals or other
ingredients at commercially reasonable rates, our ability to continue to
identify genes through gene sequencing in accordance with our current business
plan would be adversely affected.

We have contracted for the manufacture of therapeutic proteins for testing
and development. We will be dependent on third party manufacturers for our
supply of therapeutic proteins until we are able to produce sufficient
therapeutic proteins at our leased facility that was substantially completed in
February 1999. Any failure or delay in supplying therapeutic proteins could
affect the timing of laboratory and human trials and could delay submission of
products for regulatory approval.

MANUFACTURING

We have developed in-house capabilities for the production and purification
of laboratory-produced proteins for use in our research activities, but do not
have any

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manufacturing facilities licensed to supply materials suitable for commercial
sale, or any experience in manufacturing materials suitable for commercial sale.
From time to time, we may depend on third parties for manufacturing. If we need
others to manufacture our products, we will depend on those third parties to
comply with current good manufacturing practices, known as cGMPs, and other
regulatory requirements and to deliver materials on a timely basis. These third
parties may not perform adequately. Any failures by these third parties may
delay our development of products or their submission for regulatory approval.

During 1997 and 1998, we designed and the Maryland Economic Development
Corporation constructed a process development and manufacturing facility for the
preparation of our proteins for human studies. The facility comprises
approximately 84,000 square feet, with construction of an additional 43,000
square foot expansion recently completed, and is located in the Johns Hopkins
Belward Research Campus near our offices and research laboratories. We completed
the original facility in 1999. We designed the facility to allow for the
production and purification of multiple laboratory-produced proteins. We intend
to use the facility for production of laboratory and human study supplies of our
therapeutic proteins and for process development and scale-up. The FDA must
inspect and license this facility to determine compliance with cGMP requirements
for commercial production. A delay in licensing of the facility could delay or
increase the cost of regulatory approval. We may not be able to successfully
establish manufacturing capabilities and manufacture our products economically
or in compliance with cGMPs and other regulatory requirements. We have entered
into a long-term lease arrangements with the Maryland Economic Development
Corporation for the facility and the expansion.

Our long-range plan is to establish additional manufacturing capabilities
to allow us to meet our full commercial manufacturing requirements. While we
intend to expand our manufacturing capabilities, we may contract with third
party manufacturers or may develop products with partners and take advantage of
such partner's manufacturing capabilities. We may not be able to successfully
establish manufacturing capabilities or manufacture our products economically or
in compliance with cGMPs and other regulatory requirements.

MARKETING

We do not currently have any marketed products. We expect that in the
future we will rely at least partially on collaborators or on third parties with
whom we may contract to market any products that we may develop. Our
collaborators or other third parties may not be successful in marketing our
products. To date, we have collaborated with SmithKline Beecham, Schering-Plough
and others. However, we also may co-promote or retain U.S. marketing rights to
certain of our products. If we decide to market products directly, we will incur
significant additional expenditures and commit significant additional management
resources to develop an external sales force and implement our marketing
strategy. We may not be able to establish a successful marketing force.

EMPLOYEES

As of October 6, 2000, we had 609 full-time employees, of whom 483 were in
research and development, including 100 scientists holding doctoral degrees. We
anticipate hiring approximately 90 additional employees during the next six
months, including research and development staff, process development and
manufacturing personnel, and medical and regulatory affairs and strategic
marketing staff. None of our employees is covered by a collective bargaining
agreement and we consider relations with our employees to be good.

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PROPERTIES

We currently lease approximately 204,000 square feet of laboratory and
office space in six buildings in Rockville, Maryland. Our leased space includes
approximately 151,000 square feet of laboratory space and approximately 53,000
square feet of administrative office space. An additional 50,000 square feet of
leased administrative office space is currently under construction. We have
entered into long-term leases for our 84,000 square foot process-development and
manufacturing facility and a 43,000 square foot expansion. We have recently
completed construction of the expansion and started construction of a 51,000
square foot leased building that will house additional process development and
manufacturing personnel. We have entered into an agreement to acquire
approximately 50 acres of land for the development of future laboratory and
office facilities. We believe that our properties are generally in good
condition, are well maintained, and are generally suitable and adequate to carry
on our business.

LITIGATION

We are not party to any material legal proceedings.

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UNDERWRITING

Under the terms and subject to the conditions contained in an underwriting
agreement dated , 2000, we have agreed to sell to the underwriters
named below, for whom Credit Suisse First Boston Corporation, Goldman, Sachs &
Co., Lehman Brothers Inc., CIBC World Markets Corp., J.P. Morgan Securities Inc.
and Dain Rauscher Incorporated are acting as representatives, the following
respective numbers of shares of common stock.

<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
Credit Suisse First Boston Corporation.....................
Goldman, Sachs & Co........................................
Lehman Brothers Inc........................................
CIBC World Markets Corp....................................
J.P. Morgan Securities Inc. ...............................
Dain Rauscher Incorporated.................................
---------
Total............................................ 8,000,000
=========
</TABLE>

The underwriting agreement provides that the underwriters are obligated to
purchase all of the shares if any are purchased, other than those covered by the
over-allotment option described below. The underwriting agreement also provides
that if an underwriter defaults, the purchase commitment of non-defaulting
underwriters may be increased or the offering of common stock may be terminated.

We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 1,200,000 additional shares at the initial public offering
price less the underwriting discounts and commissions. The option may be
exercised only to cover any over-allotments of common stock.

The underwriters propose to offer the common stock initially at the public
offering price on the cover page of this prospectus supplement and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ for share
sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.

The following table summarizes the compensation and estimated expenses we
will pay.

<TABLE>
<CAPTION>
PER SHARE TOTAL
------------------------------- -------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting Discounts and
Commissions paid by us........ $ $ $ $
Expenses payable by us.......... $ $ $ $
</TABLE>

We have agreed that we will not offer, sell, contract to sell, announce our
intention to sell, pledge or otherwise dispose of, directly or indirectly, or
file with the SEC a registration statement under the Securities Act (other than
amendments to our registration statements which are effective on the date of
this prospectus) relating to, any shares of common stock or any securities
convertible into, or exchangeable or exercisable for, any shares of common
stock, in each case for a period of 90 days after the date of this prospectus
supplement, or publicly disclose the intention to make any such offer, sale,
pledge, disposition or filing, without the prior written consent of Credit
Suisse First Boston Corporation, provided, however, that (1) we may issue and
sell common stock pursuant to any employee stock option plan, directors' stock
option plan, stock ownership plan or
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dividend reinvestment plan in effect on the date of this prospectus and (2) we
may issue common stock upon the conversion of securities or the exercise of
warrants outstanding on the date of this prospectus.

Our executive officers and directors have agreed that they will not offer,
sell, contract to sell, pledge or otherwise dispose of, directly or indirectly,
any shares of common stock or securities convertible into or exchangeable or
exercisable for any shares of common stock, enter into a transaction which would
have the same effect, or enter into any swap, hedge or other arrangement that
transfers, in whole or in part, any of the economic consequences of ownership of
common stock, whether any such aforementioned transaction is to be settled by
delivery of common stock or such other securities, in cash or otherwise, or
publicly disclose the intention to make any such offer, sale, pledge or
disposition, or to enter any such transaction, swap, hedge or other arrangement,
without, in each case, the prior written consent of Credit Suisse First Boston
Corporation for a period of 60 days after the date of this prospectus
supplement.

We have agreed to indemnify the underwriters against liabilities under the
Securities Act or contribute to payments that they may be required to make in
that respect.

In connection with the offering the underwriters may engage in stabilizing
transactions, over-allotment transactions, syndicate covering transactions,
penalty bids and passive market making in accordance with Regulation M under the
Securities Exchange Act of 1934.

- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.

- Over-allotment involves sales by the underwriters of shares in excess of
the number of shares the underwriters are obligated to purchase, which
creates a syndicate short position. The short position may be either a
covered short position or a naked short position. In a covered short
position, the number of shares over-allotted by the underwriters is not
greater than the number of shares that they may purchase in the
over-allotment option. In a naked short position, the number of shares
involved is greater than the number of shares in the over-allotment
option. The underwriters may close out any short position by either
exercising their over-allotment option and/or purchasing shares in the
open market.

- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions. In determining the source of shares to
close out the short position, the underwriters will consider, among other
things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the
over-allotment option. If the underwriters sell more shares than could be
covered by the over-allotment option, a naked short position, the
position can only be closed out by buying shares in the open market. A
naked short position is more likely to be created if the underwriters are
concerned that there could be downward pressure on the price of the
shares in the open market after pricing that could adversely affect
investors who purchase in the offering.

- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.

S-44
<PAGE> 47

- In passive market making, market makers in the common stock who are
underwriters or prospective underwriters may, subject to limitations,
make bids for or purchases of the common stock until the time, if any, at
which a stabilizing bid is made.

These stabilizing transactions, syndicate covering transactions and penalty bids
may have the effect of raising or maintaining the market price of our common
stock or preventing or retarding a decline in the market price of the common
stock. As a result the price of our common stock may be higher than the price
that might otherwise exist in the open market. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.

A prospectus supplement in electronic format may be made available on the
web sites maintained by one or more of the underwriters participating in this
offering. The representatives may agree to allocate a number of shares to
underwriters for sale to their online brokerage account holders. Internet
distributions will be allocated by the underwriters that will make internet
distributions on the same basis as other allocations.

Credit Suisse First Boston Corporation has engaged in transactions with and
performed various investment banking and other services for us in the past and
may do so from time to time in the future. Credit Suisse First Boston
Corporation acted as the initial purchaser in connection with our private
placements of convertible subordinated notes in June 1999, December 1999,
February 2000, and March 2000 and as the dealer manager in connection with the
offer we made to holders of convertible subordinated notes from our June 1999
private placement.

NOTICE TO CANADIAN RESIDENTS

RESALE RESTRICTIONS

The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are made. Any resale of the common stock in Canada must
be made under applicable securities laws which will vary depending on the
relevant jurisdiction, and which may require resales to be made under available
statutory exemptions or under a discretionary exemption granted by the
applicable Canadian securities regulatory authority. Purchasers are advised to
seek legal advice prior to any resale of the common stock.

REPRESENTATIONS OF PURCHASERS

By purchasing common stock in Canada and accepting a purchase confirmation
a purchaser is representing to us and the dealer from whom the purchase
confirmation is received that

- the purchaser is entitled under applicable provincial securities laws to
purchase the common stock without the benefit of a prospectus qualified
under those securities laws,

- where required by law, that the purchaser is purchasing as principal and
not as agent, and

- the purchaser has reviewed the text above under Resale Restrictions.

S-45
<PAGE> 48

RIGHTS OF ACTION (ONTARIO PURCHASERS)

The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.

ENFORCEMENT OF LEGAL RIGHTS

All of the issuer's directors and officers, as well as the experts named
herein, may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada upon
the issuer or such persons. All or a substantial portion of the assets of the
issuer and such persons may be located outside of Canada and, as a result, it
may not be possible to satisfy a judgment against the issuer or such persons in
Canada or to enforce a judgment obtained in Canadian courts against such issuer
or persons outside of Canada.

NOTICE TO BRITISH COLUMBIA RESIDENTS

A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by the purchaser in this offering. The report must be in
the form attached to British Columbia Securities Commission Blanket Order BOR
#95/17, a copy of which may be obtained from us. Only one such report must be
filed for common stock acquired on the same date and under the same prospectus
exemption.

TAXATION AND ELIGIBILITY FOR INVESTMENT

Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and about the eligibility of the common
stock for investment by the purchaser under relevant Canadian legislation.

LEGAL MATTERS

Piper Marbury Rudnick & Wolfe LLP, Baltimore, Maryland, will provide us
with an opinion as to legal matters in connection with the common stock offered
by this prospectus. Cravath, Swaine & Moore, New York, New York, will pass upon
legal matters for the underwriters.

EXPERTS

Ernst & Young LLP, independent auditors, have audited our financial
statements included in our annual report on Form 10-K for the year ended
December 31, 1999, as set forth in their report, which is incorporated by
reference in this prospectus and elsewhere in this registration statement. Our
financial statements are incorporated by reference in reliance on Ernst & Young
LLP's report, given on their authority as experts in accounting and auditing.

S-46
<PAGE> 49

$1,000,000,000
HUMAN GENOME SCIENCES, INC.
----------------------
Common Stock
Preferred Stock
Debt Securities
Warrants to Purchase Common Stock,
Preferred Stock or Debt Securities
----------------------

We will provide the specific terms for each of these securities in
supplements to this prospectus. You should read carefully this prospectus and
any supplement before you invest.

Our common stock is listed on the Nasdaq National Market under the symbol
"HGSI." No trading market currently exists for any of the other securities we
are registering.

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

INVESTING IN OUR SECURITIES INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON
PAGE 1.

THIS PROSPECTUS MAY NOT BE USED TO COMPLETE SALES OF SECURITIES UNLESS IT
IS ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.

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

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

The date of this prospectus is October 19, 2000.
<PAGE> 50

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
RISK FACTORS................................................ 1
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION.......... 1
HUMAN GENOME SCIENCES....................................... 2
ABOUT THIS PROSPECTUS....................................... 3
RATIO OF EARNINGS TO FIXED CHARGES.......................... 3
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS......... 4
USE OF PROCEEDS............................................. 4
SECURITIES WE MAY OFFER..................................... 5
DESCRIPTION OF COMMON STOCK AND PREFERRED STOCK............. 5
DESCRIPTION OF DEBT SECURITIES.............................. 8
DESCRIPTION OF WARRANTS..................................... 15
PLAN OF DISTRIBUTION........................................ 17
LEGAL MATTERS............................................... 18
EXPERTS..................................................... 18
WHERE YOU CAN FIND MORE INFORMATION......................... 18
INCORPORATION BY REFERENCE.................................. 19
</TABLE>

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

i
<PAGE> 51

RISK FACTORS

Investing in our securities involves risk. Please see the risk factors
described under the caption "Factors That May Affect Our Business" beginning on
page 20 of our Annual Report on Form 10-K for the year ended December 31, 1999,
which is incorporated by reference in this prospectus. Before making an
investment decision, you should carefully consider these risks as well as other
information we include or incorporate by reference in this prospectus.

SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION

This prospectus, any prospectus supplement and the documents we incorporate
by reference contain forward-looking statements. We generally identify
forward-looking statements using words like "believe," "intend," "expect,"
"may," "should," "plan," "project," "contemplate," "anticipate" or similar
statements. We base these statements on our beliefs as well as assumptions we
made using information currently available to us. Because these statements
reflect our current views concerning future events, these statements involve
risks, uncertainties and assumptions. Actual results may differ significantly
from the results discussed in these forward-looking statements.

1
<PAGE> 52

HUMAN GENOME SCIENCES

We research and develop novel compounds for treating and diagnosing human
disease based on the identification and study of genes. The sequence in which
chemicals appear in a gene controls its biological function and effect. We use
automated high-speed technology to discover these sequences and generate a large
collection of partial human gene sequences. We believe that our collection
includes most of the genes responsible for producing proteins in the human body.
We also possess one of the largest databases of the genes of humans and
microbes, which we refer to as our "genomic database." We believe we have
created a broad base of product opportunities based on our genomic database.

We began our work in the genetics industry by identifying and cataloging
genes. We have since focused primarily on the research and development of
proteins for the treatment of human disease. We use our advanced computer system
to identify the most promising product candidates. We are able to analyze
partial gene sequences and identify the genes corresponding to partial and
full-length gene sequences and the proteins made by those genes. We have
isolated and characterized thousands of full-length genes and purified more than
375 potential proteins for the treatment of human disease. We have recently
expanded our use of antibodies and other technologies to increase the
opportunities created by our genomic database.

We have a two-pronged commercialization strategy:

- Product Development and Commercialization. We use our in-house resources
to research and develop proteins that can be produced on a large scale
and used to treat and diagnose disease. Generally, our strategy is to
develop potential products to a late stage of testing in the laboratory
or an early stage of studies in humans, and then to collaborate with
pharmaceutical or biotechnology companies for further development and
commercialization of our products.

- Corporate Collaborations. We increase our capabilities by collaborating
with pharmaceutical and biotechnology companies for the development and
commercialization of new products. We believe that these arrangements
enable us to focus our in-house resources on a select number of product
candidates while still exploiting the broader product opportunities
created by our genomic database.

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

We are a Delaware corporation. Our headquarters are located at 9410 Key
West Avenue, Rockville, Maryland 20850-3338. Our telephone number is (301)
309-8504.

2
<PAGE> 53

ABOUT THIS PROSPECTUS

This prospectus is part of a registration statement that we filed with the
SEC using a "shelf" registration process. Under this shelf process, we may
offer, from time to time, in one or more offerings:

- shares of our common stock;

- shares of our preferred stock;

- our debt securities; or

- warrants to purchase our common stock, preferred stock or debt
securities.

The total offering price of these securities will not exceed
$1,000,000,000. This prospectus provides you with a general description of the
securities we may offer. Each time we offer securities, we will provide you with
a prospectus supplement that will describe the specific amounts, prices and
terms of the securities we offer. We may also add, update or change information
contained in this prospectus with the prospectus supplement.

We will sell the securities to or through underwriters, dealers or agents
or directly to purchasers. We and our agents reserve the sole right to accept
and to reject in whole or in part any proposed purchase of securities. We will
provide the names of any underwriters, dealers or agents involved in the sale of
the securities, and any applicable fee, commission or discount arrangements with
them. See "Plan of Distribution."

RATIO OF EARNINGS TO FIXED CHARGES
(in thousands)

We present below the ratio of our earnings to our fixed charges. Earnings
consist of net loss plus fixed charges. Fixed charges consist of interest
expense, including amortization of debt issuance costs, and that portion of
rental expense we believe to be representative of interest.

<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
------------------------
2000 1999
---------- ----------
<S> <C> <C>
Deficiency of earnings available to cover fixed
charges................................................ $(77,665) $(14,276)
</TABLE>

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Deficiency of earnings
available to cover fixed
charges..................... $(41,944) $(22,957) ($21,148) $(7,559) $(32,719)
</TABLE>

3
<PAGE> 54

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In December 1999, the SEC issued Staff Accounting Bulletin 101, "Revenue
Recognition in Financial Statements," which provides guidance related to revenue
recognition. The SEC delayed the required effective date of SAB 101 until the
fourth fiscal quarter of fiscal years beginning after December 15, 1999, which
is our fourth quarter of 2000. SAB 101 requires companies to report any changes
in revenue recognition as a cumulative change in accounting principle at the
time of implementation in accordance with APB Opinion No. 20, "Accounting
Changes."

Historically we have recognized non-refundable license fees, research
payments, additional payments and milestone payments in connection with
collaboration agreements when the revenue is earned in accordance with the
applicable performance requirements and/or contractual terms. This revenue
recognition policy was applicable to certain agreements we entered into with
Schering-Plough, Sanofi-Synthelabo and Merck KGaA during 1996. We recognized
revenue under these agreements when we had performed all significant obligations
and the customer was obligated to pay. We generally considered any remaining
performance obligations, such as maintaining access to our genomic databases, as
insignificant. However, SAB 101 provides guidance that indicates revenue
recognition over the collaboration term is generally the preferred treatment for
all fees, regardless of the significance of remaining performance obligations.

We are currently in the process of evaluating the impact SAB 101 will have
on our financial position and results of operations. Based upon the proposed
implementation schedule of SAB 101, we have preliminarily determined that we
will record a cumulative effect of a change in accounting principle of between
$8 million and $13 million as a charge to earnings during the fourth quarter of
2000. We expect to recognize an equivalent amount as revenue over the remaining
term of the applicable agreements, which will be during the first and second
quarters of 2001.

USE OF PROCEEDS

Except as described in any prospectus supplement, we currently intend to
use the net proceeds from the sale of the securities to initiate and expand
laboratory and human studies, to enhance ongoing research and development
efforts, to pursue patent coverage for genes and proteins, to operate and expand
our process development and manufacturing facility, to acquire complementary
products or companies and for general corporate purposes.

When we offer a particular series of securities, we will describe the
intended use of the net proceeds from that offering in a prospectus supplement.

The actual amount of net proceeds we spend on a particular use will depend
on many factors, including:

- our future revenue growth, if any;

- our future capital expenditures; and

- the amount of cash required by our operations.

Many of these factors are beyond our control. Therefore, we will retain
broad discretion in the use of the net proceeds.

4
<PAGE> 55

SECURITIES WE MAY OFFER

We may offer shares of common stock, shares of preferred stock, debt
securities or warrants to purchase common stock, preferred stock or debt
securities, or any combination of the foregoing, either individually or as units
consisting of one or more securities. We may offer up to $1,000,000,000 of
securities under this prospectus. If we offer securities as units, we will
describe the terms of the units in a prospectus supplement.

DESCRIPTION OF COMMON STOCK AND PREFERRED STOCK

We describe below the common stock and preferred stock we may offer under
this prospectus. The terms we summarize below will apply generally to any future
common stock or preferred stock that we may offer. We will describe the
particular terms of these securities in more detail in a prospectus supplement.

COMMON STOCK

We are authorized to issue 250,000,000 shares of common stock. Each
stockholder of record is entitled to one vote for each outstanding share of our
common stock owned by that stockholder on every matter properly submitted to the
stockholders for their vote. After we satisfy the dividend rights of holders of
any preferred stock, we will pay holders of common stock any dividend declared
by our board out of funds legally available for that purpose. After we pay
liquidation preferences to holders of any preferred stock, we will pay to
holders of common stock, on a pro rata basis, all our remaining assets available
for distribution to stockholders in the event of our liquidation, dissolution or
winding up. Holders of common stock have no preemptive right to become
subscribers or purchasers of additional shares of any class of our capital
stock. In the future, we may designate and issue shares of a series of preferred
stock with rights, preferences and privileges senior to those of our common
stock.

PREFERRED STOCK

We are authorized to issue, without stockholder approval, up to 20,000,000
shares of preferred stock having rights senior to those of our common stock. Our
board may issue the preferred stock in one or more series and fix and designate
the rights, preferences, privileges and restrictions of the preferred stock,
including:

- dividend rights;

- conversion rights;

- voting rights;

- redemption rights and terms of redemption; and

- liquidation preferences.

Our board may fix the number of shares constituting any series and the
designations of these series. We have issued rights that are in some cases
exercisable for shares of our junior participating preferred stock. See
"-- Rights Agreement."

5
<PAGE> 56

We will fix the rights, preferences, privileges and restrictions of the
preferred stock of each series by a certificate of designation relating to each
series. We will specify the terms of the preferred stock in a prospectus
supplement, including:

- the maximum number of shares in the series and the distinctive
designation;

- the terms on which dividends will be paid, if any;

- the terms on which the shares may be redeemed, if at all;

- the liquidation preference, if any;

- the terms of any retirement or sinking fund for the purchase or
redemption of the shares of the series;

- the terms and conditions, if any, on which the shares of the series will
be convertible into, or exchangeable for, shares of any other class or
classes of capital stock;

- the voting rights, if any, on the shares of the series; and

- any or all other preferences and relative, participating, operational or
other special rights or qualifications, limitations or restrictions of
the shares.

We will describe the specific terms of a particular series of preferred
stock in the prospectus supplement relating to that series. We urge you to read
the applicable certificate of designation and the description in the prospectus
supplement. We will describe in the prospectus supplement the U.S. federal
income tax consequences relating to the preferred stock.

Our issuance of preferred stock may have the effect of delaying or
preventing a change in control. Our issuance of preferred stock could decrease
the amount of earnings and assets available for distribution to the holders of
common stock or could adversely affect the rights and powers, including voting
rights, of the holders of common stock. The issuance of preferred stock could
have the effect of decreasing the market price of our common stock.

POSSIBLE ANTI-TAKEOVER EFFECTS

We have adopted provisions in our certificate of incorporation and bylaws
to enhance the likelihood of continuity and stability in the composition of our
board and its policies. In addition, provisions of Delaware law may hinder or
delay an attempted takeover of our company other than through negotiation with
our board. These provisions could discourage attempts to acquire us or remove
our management even if some or a majority of our stockholders believe this
action to be in their best interest. These provisions could discourage attempts
that might result in our stockholders' receiving a premium over the market price
of their shares of common stock.

Classified Board of Directors; Removal, Vacancies. We have divided our
board into three classes of directors serving staggered three-year terms. The
classification of directors makes it more difficult for stockholders to change
the composition of our board in a relatively short period of time. Our directors
may be removed only for cause. In addition, we may fill vacancies and newly
created directorships resulting from any increase in the size of our board only
by the affirmative vote of a majority of the directors then in office, a quorum
or by a sole remaining director. Thus, stockholders may be unable to remove
incumbent directors without cause and fill the resulting vacancies with their
own nominees.

6
<PAGE> 57

Special Stockholders' Meetings. Unless otherwise required by statute, only
the following persons may call a special meeting of stockholders:

- our board or our chairman or president; or

- the holders of at least a majority of our securities outstanding and
entitled to vote generally in the election of directors.

Section 203 of Delaware Law. In addition, we are subject to the provisions
of Section 203 of the Delaware General Corporation Law. Section 203 prohibits
publicly held Delaware corporations from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A "business
combination" includes mergers, asset sales and other transactions resulting in a
financial benefit to the interested stockholder. Generally, an "interested
stockholder" is a person who, together with affiliates and associates, owns, or
within three years did own, 15% or more of a corporation's voting stock. These
provisions could have the effect of delaying, deferring or preventing a change
in control of our company or reducing the price that certain investors might be
willing to pay in the future for shares of our common stock.

RIGHTS AGREEMENT

Our board has adopted a rights plan. As a result, we issued one preferred
share purchase right for each outstanding share of common stock. We will issue
one preferred share purchase right for each additional share of common stock
that we issue. The rights become exercisable ten days after a person or group
acquires 15%, or 20% in the case of some of our stockholders, or more of our
outstanding common stock or commences or announces a tender or exchange offer
which would result in such ownership. A holder of a right that becomes
exercisable may purchase one four-thousandth of a share of our junior
participating preferred stock, par value $.01 per share, at a price of $250.00
per one four-thousandth of a share, subject to adjustment.

If any person acquires 15%, or 20% in the case of some of our stockholders,
or more of our outstanding common stock, each right not owned by that person
would permit the purchase, for the exercise price, of our common stock having a
market value of twice the exercise price. After the rights become exercisable,
if we are acquired through a merger or other business combination transaction or
50% or more of our assets or earning power is sold, a holder of a right may
purchase, for the exercise price, common stock of the acquiring company having a
market value of twice the exercise price.

The rights expire on May 20, 2008, unless we redeem or exchange the rights
before that time. The purchase price payable and the shares of preferred stock
issuable upon exercise of the rights are subject to adjustment as described in
the rights agreement. In addition, our board may redeem the rights, at $0.00025
per right, or replace the rights with new rights at any time. Our board may not
redeem the rights after a person or group acquires 15%, or 20% in the case of
some of our stockholders, or more of our outstanding common stock.

Shares of this preferred stock, when issued upon exercise of the rights,
will be non-redeemable and will rank junior to all series of any other class of
preferred stock. Each share of this preferred stock will receive a cumulative
preferential quarterly dividend payment equal to the greater of $250.00 per
share or 4,000 times the dividend declared per share of common stock. In the
event of liquidation, a holder of a share of this preferred

7
<PAGE> 58

stock will receive a preferential liquidation payment equal to the greater of
$4,000 per share or 4,000 times the payment made per share of common stock. A
holder of a share of this preferred stock will receive 4,000 votes, voting
together with the common stock. Finally, in the event of any merger,
consolidation or other transaction in which common stock is exchanged, a holder
of a share of this preferred stock will receive 4,000 times the amount received
per share of common stock. These rights are subject to anti-dilution
adjustments.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company, New York, New York.

DESCRIPTION OF DEBT SECURITIES

We may offer any combination of senior debt securities or subordinated debt
securities. Debt securities are unsecured obligations to repay advanced funds.
We may issue senior debt securities and subordinated debt securities under
separate indentures between us, as issuer, and the trustee or trustees
identified in the prospectus supplement. We filed the form for each type of
indenture as an exhibit to the registration statement of which this prospectus
is a part.

We will describe the particular terms of any debt securities we may offer
in a prospectus supplement. The following summaries of the debt securities and
the indentures are not complete. We urge you to read the indentures and the
description of the debt securities included in the prospectus supplement.

GENERAL

We may issue an unlimited principal amount of debt securities in separate
series. We may specify a maximum aggregate principal amount for the debt
securities of any series. The debt securities will have terms that are
consistent with the indentures. Unless the prospectus supplement indicates
otherwise, senior debt securities will be unsecured and unsubordinated
obligations and will rank equal with all our other unsecured and unsubordinated
debt. We will make payments on our subordinated debt securities only if we have
made all payments due under our senior indebtedness, including any outstanding
senior debt securities.

The indentures might not limit the amount of other debt that we may incur
and might not contain financial or similar restrictive covenants. The indentures
might not contain any provision to protect holders of debt securities against a
sudden or dramatic decline in our ability to pay our debt.

We will describe the debt securities and the price or prices at which we
will offer the debt securities in a prospectus supplement. We will describe:

- the title and form of the debt securities;

- any limit on the aggregate principal amount of the debt securities or the
series of which they are a part;

- the person to whom any interest on a debt security of the series will be
paid;

- the date or dates on which we must repay the principal;

8
<PAGE> 59

- the rate or rates at which the debt securities will bear interest, if
any, the date or dates from which interest will accrue, and the dates on
which we must pay interest;

- if applicable, the duration and terms of the right to extend interest
payment periods;

- the place or places where we must pay the principal and any premium or
interest on the debt securities;

- the terms and conditions on which we may redeem any debt security, if at
all;

- any obligation to redeem or purchase any debt securities, and the terms
and conditions on which we must do so;

- the denominations in which we may issue the debt securities;

- the manner in which we will determine the amount of principal of or any
premium or interest on the debt securities;

- the currency in which we will pay the principal of and any premium or
interest on the debt securities;

- the principal amount of the debt securities that we will pay upon
declaration of acceleration of their maturity;

- the amount that will be deemed to be the principal amount for any
purpose, including the principal amount that will be due and payable upon
any maturity or that will be deemed to be outstanding as of any date;

- if applicable, that the debt securities are defeasible and the terms of
defeasance;

- if applicable, the terms of any right to convert debt securities into, or
exchange debt securities for, shares of common stock or other securities
or property;

- whether we will issue the debt securities in the form of one or more
global securities and, if so, the depositary and terms for the global
securities;

- the subordination provisions that will apply to any subordinated debt
securities;

- any addition to or change in the events of default applicable to the debt
securities and any change in the right of the trustee or the holders to
declare the principal amount of any of the debt securities due and
payable; and

- any addition to or change in the covenants in the indentures.

We may sell the debt securities at a substantial discount below their
stated principal amount. We will describe U.S. federal income tax
considerations, if any, applicable to debt securities sold at an original issue
discount in the prospectus supplement. An "original issue discount security" is
any debt security sold for less than its face value, and which provides that the
holder cannot receive the full face value if maturity is accelerated. We will
describe the particular provisions relating to acceleration of the maturity upon
the occurrence of an event of default in the prospectus supplement. In addition,
we will describe U.S. federal income tax or other considerations applicable to
any debt securities that are denominated in a currency or unit other than U.S.
dollars in the prospectus supplement.

CONVERSION AND EXCHANGE RIGHTS

If applicable, we will describe the terms on which you may convert debt
securities into or exchange them for common stock or other securities or
property in the prospectus

9
<PAGE> 60

supplement. The conversion or exchange may be mandatory or may be at your
option. We will describe how to calculate the number of shares of common stock
or other securities or property that you will receive upon conversion or
exchange.

SUBORDINATION OF SUBORDINATED DEBT SECURITIES

We will pay the indebtedness underlying the subordinated debt securities
only if we have made all payments due under our senior indebtedness, including
any outstanding senior debt securities. If we distribute our assets to creditors
upon any dissolution, winding-up, liquidation or reorganization or in
bankruptcy, insolvency, receivership or similar proceedings, we must first pay
all amounts due or to become due on all senior indebtedness before we pay the
principal of, or any premium or interest on, the subordinated debt securities.
If an event of default accelerates the subordinated debt securities, we may not
make any payment on the subordinated debt securities until we have paid all
senior indebtedness or the acceleration is rescinded. If the payment of
subordinated debt securities accelerates because of an event of default, we must
promptly notify holders of senior indebtedness of the acceleration.

If we experience a bankruptcy, dissolution or reorganization, holders of
senior indebtedness may receive more, ratably, and holders of subordinated debt
securities may receive less, ratably, than our other creditors. The indenture
for subordinated debt securities may not limit our ability to incur additional
senior indebtedness.

FORM, EXCHANGE AND TRANSFER

We will issue debt securities only in fully registered form, without
coupons, and only in denominations of $1,000 and integral multiples thereof. The
holder of a debt security may elect, subject to the terms of the indentures and
the limitations applicable to global securities, to exchange them for other debt
securities of the same series of any authorized denomination and of similar
terms and aggregate principal amount.

Holders of debt securities may present them for exchange as provided above
or for registration of transfer, duly endorsed or with the form of transfer duly
executed, at the office of the transfer agent we designate for that purpose. We
will not impose a service charge for any registration of transfer or exchange of
debt securities, but we may require a payment sufficient to cover any tax or
other governmental charge payable in connection with the transfer or exchange.
We will name the transfer agent in the prospectus supplement. We may designate
additional transfer agents or rescind the designation of any transfer agent or
approve a change in the office through which any transfer agent acts, but we
must maintain a transfer agent in each place in which we will pay on debt
securities.

If we redeem the debt securities, we will not be required to issue,
register the transfer of or exchange any debt security during a specified period
prior to mailing a notice of redemption. We are not required to register the
transfer of or exchange any debt security selected for redemption, except the
unredeemed portion of the debt security being redeemed.

GLOBAL SECURITIES

The debt securities may be represented, in whole or in part, by one or more
global securities that will have an aggregate principal amount equal to that of
all debt securities of that series. We will deposit each global security with a
depositary or a custodian. The global security will bear a legend regarding the
restrictions on exchanges and registration of transfer.

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No global security may be exchanged in whole or in part for debt securities
registered, and no transfer of a global security in whole or in part may be
registered, in the name of any person other than the depositary or any nominee
or successor of the depositary unless:

- the depositary is unwilling or unable to continue as depositary; or

- the depository is no longer in good standing under the Exchange Act or
other applicable statute or regulation.

The depositary will determine how all securities issued in exchange for a
global security will be registered.

As long as the depositary or its nominee is the registered holder of a
global security, we will consider the depositary or the nominee to be the sole
owner and holder of the global security and the underlying debt securities.
Except as stated above, owners of beneficial interests in a global security will
not have the global security or any debt security registered in their names,
will not receive physical delivery of certificated debt securities and will not
be considered to be the owners or holders of the global security or underlying
debt securities. We will make all payments of principal, premium and interest on
a global security to the depositary or its nominee. The laws of some
jurisdictions require that some purchasers of securities take physical delivery
of such securities in definitive form. These laws may prevent you from
transferring your beneficial interests in a global security.

Only institutions that have accounts with the depositary or its nominee and
persons that hold beneficial interests through the depositary or its nominee may
own beneficial interests in a global security. The depositary will credit, on
its book-entry registration and transfer system, the respective principal
amounts of debt securities represented by the global security to the accounts of
its participants. Your ownership of beneficial interests in a global security
will be shown only on, and the transfer of those ownership interests will be
effected only through, records maintained by the depositary or any such
participant.

The policies and procedures of the depositary may govern payments,
transfers, exchanges and others matters relating to beneficial interests in a
global security. We and the trustee will assume no responsibility or liability
for any aspect of the depositary's or any participant's records relating to, or
for payments made on account of, beneficial interests in a global security.

PAYMENT AND PAYING AGENTS

Unless we indicate otherwise, we will pay principal and any premium or
interest on a debt security to the person in whose name the debt security is
registered at the close of business on the regular record date for such
interest. Unless we indicate otherwise, we will pay principal and any premium or
interest on the debt securities at the office of our designated paying agent.
Unless we indicate otherwise, the corporate trust office of the trustee will be
the paying agent for the debt securities.

We will name any other paying agents for the debt securities of a
particular series in the prospectus supplement. We may designate additional
paying agents, rescind the designation of any paying agent or approve a change
in the office through which any paying agent acts, but we must maintain a paying
agent in each place of payment for the debt securities.

The paying agent will return to us all money we pay to it for the payment
of the principal, premium or interest on any debt security that remains
unclaimed for a specified

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period. Thereafter, the holder may look only to us for payment, as an unsecured
general creditor.

CONSOLIDATION, MERGER AND SALE OF ASSETS

Under the terms of the indentures, so long as any securities remain
outstanding, we may not consolidate or enter into a share exchange with or merge
into any other person, in a transaction in which we are not the surviving
corporation, or sell, convey, transfer or lease our properties and assets
substantially as an entirety to any person, unless:

- the successor assumes our obligations under the debt securities and the
indentures; and

- we meet the other conditions described in the indentures.

EVENTS OF DEFAULT

Each of the following will constitute an event of default under each
indenture:

- failure to pay the principal of or any premium on any debt security when
due;

- failure to pay any interest on any debt security when due, for more than
a specified number of days past the due date;

- failure to deposit any sinking fund payment when due;

- failure to perform any covenant or agreement in the indenture that
continues for a specified number of days after written notice has been
given by the trustee or the holders of a specified percentage in
aggregate principal amount of the debt securities of that series;

- certain events in bankruptcy, insolvency or reorganization; and

- any other event of default specified in the prospectus supplement.

If an event of default occurs and continues, both the trustee and holders
of a specified percentage in aggregate principal amount of the outstanding
securities of that series may declare the principal amount of the debt
securities of that series to be immediately due and payable. The holders of a
majority in aggregate principal amount of the outstanding securities of that
series may, under certain circumstances, rescind and annul the acceleration if
all events of default, other than the nonpayment of accelerated principal, have
been cured or waived.

Except for certain duties in case of an event of default, the trustee will
not be obligated to exercise any of its rights or powers at the request or
direction of any of the holders, unless the holders have offered the trustee
reasonable indemnity. If they provide this indemnification, the holders of a
majority in aggregate principal amount of the outstanding securities of any
series may direct the time, method and place of conducting any proceeding for
any remedy available to the trustee or exercising any trust or power conferred
on the trustee with respect to the debt securities of that series.

No holder of a debt security of any series may institute any proceeding
with respect to the indentures, or for the appointment of a receiver or a
trustee, or for any other remedy, unless:

- the holder has previously given the trustee written notice of a
continuing event of default;

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- the holders of a specified percentage in aggregate principal amount of
the outstanding securities of that series have made a written request
upon the trustee, and have offered reasonable indemnity to the trustee,
to institute the proceeding; and

- the trustee has failed to institute the proceeding for a specified period
of time after its receipt of the notification; and

- the trustee has not received a direction inconsistent with the request
within a specified number of days.

MODIFICATION AND WAIVER

We and the trustee may change an indenture without the consent of any
holders with respect to specific matters, including:

- to fix any ambiguity, defect or inconsistency in the indenture; and

- to change anything that does not materially adversely affect the
interests of any holder of debt securities of any series.

In addition, under the indentures, we and the trustee may change the rights
of holders of a series of notes with the written consent of the holders of at
least a majority in aggregate principal amount of the outstanding debt
securities of each series that is affected. However, we and the trustee may only
make the following changes with the consent of the holder of any outstanding
debt securities affected:

- extending the fixed maturity of the series of notes;

- reducing the principal amount, reducing the rate of or extending the time
of payment of interest, or any premium payable upon the redemption, of
any debt securities; or

- reducing the percentage of debt securities the holders of which are
required to consent to any amendment.

The holders of a majority in principal amount of the outstanding debt
securities of any series may waive any past default under the indenture with
respect to debt securities of that series, except a default in the payment of
principal, premium or interest on any debt security of that series or in respect
of a covenant or provision of the indenture that cannot be amended without each
holder's consent.

Except in certain limited circumstances, we may set any day as a record
date for the purpose of determining the holders of outstanding debt securities
of any series entitled to give or take any direction, notice, consent, waiver or
other action under the indentures. In certain limited circumstances, the trustee
may set a record date. To be effective, the action must be taken by holders of
the requisite principal amount of such debt securities within a specified period
following the record date.

DEFEASANCE

We may apply the provisions in the indentures relating to defeasance and
discharge of indebtedness, or to defeasance of certain restrictive covenants, to
the debt securities of any series. The indentures provide that, upon
satisfaction of the requirements described below,

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we may terminate all of our obligations under the debt securities of any series
and the applicable indenture, known as legal defeasance, other than our
obligation:

- to maintain a registrar and paying agents and hold moneys for payment in
trust;

- to register the transfer or exchange of the notes; and

- to replace mutilated, destroyed, lost or stolen notes.

In addition, we may terminate our obligation to comply with any restrictive
covenants under the debt securities of any series or the applicable indenture,
known as covenant defeasance.

We may exercise our legal defeasance option even if we have previously
exercised our covenant defeasance option. If we exercise either defeasance
option, payment of the notes may not be accelerated because of the occurrence of
events of default.

To exercise either defeasance option as to debt securities of any series,
we must irrevocably deposit in trust with the trustee money and/or obligations
backed by the full faith and credit of the U.S. that will provide money in an
amount sufficient in the written opinion of a nationally recognized firm of
independent public accountants to pay the principal of, premium, if any, and
each installment of interest on the debt securities. We may establish this trust
only if:

- no event of default has occurred and continues to occur;

- in the case of legal defeasance, we have delivered to the trustee an
opinion of counsel to the effect that we have received from, or there has
been published by, the IRS a ruling or there has been a change in law,
which in the opinion of our counsel, provides that holders of the debt
securities will not recognize gain or loss for federal income tax
purposes as a result of such deposit, defeasance and discharge and will
be subject to federal income tax on the same amount, in the same manner
and at the same times as would have been the case if such deposit,
defeasance and discharge had not occurred;

- in the case of covenant defeasance, we have delivered to the trustee an
opinion of counsel to the effect that the holders of the debt securities
will not recognize gain or loss for federal income tax purposes as a
result of such deposit, defeasance and discharge and will be subject to
federal income tax on the same amount, in the same manner and at the same
times as would have been the case if such deposit, defeasance and
discharge had not occurred; and

- we satisfy other customary conditions precedent described in the
applicable indenture.

NOTICES

We will mail notices to holders of debt securities as indicated in the
prospectus supplement.

TITLE

We may treat the person in whose name a debt security is registered as the
absolute owner, whether or not such debt security may be overdue, for the
purpose of making payment and for all other purposes.

GOVERNING LAW

The indentures and the debt securities will be governed by and construed in
accordance with the laws of the state of New York.

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DESCRIPTION OF WARRANTS

WARRANT TO PURCHASE COMMON STOCK OR PREFERRED STOCK

The following summarizes the terms of common stock warrants and preferred
stock warrants we may issue. We urge you to read the detailed provisions of the
stock warrant agreement that we will enter into with a stock warrant agent we
select at the time of issue.

General. We may issue stock warrants evidenced by stock warrant
certificates under a stock warrant agreement independently or together with any
securities we offer by any prospectus supplement. If we offer stock warrants, we
will describe the terms of the stock warrants in a prospectus supplement,
including:

- the offering price, if any;

- the number of shares of common or preferred stock purchasable upon
exercise of one stock warrant and the initial price at which the shares
may be purchased upon exercise;

- if applicable, the designation and terms of the preferred stock
purchasable upon exercise of the stock warrants;

- the dates on which the right to exercise the stock warrants begins and
expires;

- U.S. federal income tax consequences;

- call provisions, if any;

- the currencies in which the offering price and exercise price are
payable; and

- if applicable, any antidilution provisions.

Exercise of Stock Warrants. You may exercise stock warrants by
surrendering to the stock warrant agent the stock warrant certificate, which
indicates your election to exercise all or a portion of the stock warrants
evidenced by the certificate. You must pay the exercise price by cash or check
when you surrender your stock warrant certificate. The stock warrant agent will
deliver certificates evidencing duly exercised stock warrants to the transfer
agent. Upon receipt of the certificates, the transfer agent will deliver a
certificate representing the number of shares of common stock or preferred stock
purchased. If you exercise fewer than all the stock warrants evidenced by any
certificate, the stock warrant agent will deliver a new stock warrant
certificate representing the unexercised stock warrants.

No Rights as Stockholders. Holders of stock warrants are not entitled to
vote, to consent, to receive dividends or to receive notice as stockholders with
respect to any meeting of stockholders, or to exercise any rights whatsoever as
stockholders.

WARRANTS TO PURCHASE DEBT SECURITIES

The following summarizes the terms of the debt warrants we may offer. We
urge you to read the detailed provisions of the debt warrant agreement that we
will enter into with a debt warrant agent we select at the time of issue.

General. We may issue debt warrants evidenced by debt warrant certificates
independently or together with any securities offered by any prospectus
supplement. If we

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offer debt warrants, we will describe the terms of the warrants in a prospectus
supplement, including:

- the offering price, if any;

- the designation, aggregate principal amount and terms of the debt
securities purchasable upon exercise of the warrants and the terms of the
indenture under which the debt securities will be issued;

- if applicable, the designation and terms of the debt securities with
which the debt warrants are issued and the number of debt warrants issued
with each debt security;

- if applicable, the date on and after which the debt warrants and any
related securities will be separately transferable;

- the principal amount of debt securities purchasable upon exercise of one
debt warrant and the price at which the principal amount of debt
securities may be purchased upon exercise;

- the dates on which the right to exercise the debt warrants begins and
expires;

- U.S. federal income tax consequences;

- whether the warrants represented by the debt warrant certificates will be
issued in registered or bearer form;

- the currencies in which the offering price and exercise price are
payable; and

- if applicable, any antidilution provisions.

You may exchange debt warrant certificates for new debt warrant
certificates of different denominations and may present debt warrant
certificates for registration of transfer at the corporate trust office of the
debt warrant agent, which we will list in the prospectus supplement. You will
not have any of the rights of holders of debt securities, except to the extent
that the consent of warrantholders may be required for certain modifications of
the terms of an indenture or form of the debt security and the series of debt
securities issuable upon exercise of the debt warrants. In addition, you will
not receive payments of principal of and interest, if any, on the debt
securities unless you exercise your debt warrant.

Exercise of Debt Warrants. You may exercise debt warrants by surrendering
to the debt warrant agent the debt warrant certificate, with payment in full of
the exercise price. Upon the exercise of debt warrants, the debt warrant agent
will, as soon as practicable, deliver to you the debt securities in authorized
denominations in accordance with your instructions and at your sole cost and
risk. If you exercise fewer than all the debt warrants evidenced by any debt
warrant certificate, the agent will deliver to you a new debt warrant
certificate representing the unexercised debt warrants.

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PLAN OF DISTRIBUTION

We may sell the securities through underwriters or dealers, through agents,
or directly to one or more purchasers. We will describe the terms of the
offering of the securities in a prospectus supplement, including:

- the name or names of any underwriters, if any;

- the purchase price of the securities and the proceeds we will receive
from the sale;

- any underwriting discounts and other items constituting underwriters'
compensation;

- any initial public offering price;

- any discounts or concessions allowed or reallowed or paid to dealers; and

- any securities exchange or market on which the securities may be listed.

Only underwriters we name in the prospectus supplement are underwriters of
the securities offered by the prospectus supplement.

If we use underwriters in the sale, they will acquire the securities for
their own account and may resell them from time to time in one or more
transactions at a fixed public offering price or at varying prices determined at
the time of sale. We may offer the securities to the public through underwriting
syndicates represented by managing underwriters or by underwriters without a
syndicate. Subject to certain conditions, the underwriters will be obligated to
purchase all the securities of the series offered by the prospectus supplement.
Any public offering price and any discounts or concessions allowed or reallowed
or paid to dealers may change from time to time.

We may sell securities directly or through agents we designate from time to
time. We will name any agent involved in the offering and sale of securities and
we will describe any commissions we will pay the agent in the prospectus
supplement. Unless the prospectus supplement states otherwise, our agent will
act on a best-efforts basis for the period of its appointment.

We may authorize agents or underwriters to solicit offers by certain types
of institutional investors to purchase securities from us at the public offering
price set forth in the prospectus supplement pursuant to delayed delivery
contracts providing for payment and delivery on a specified date in the future.
We will describe the conditions to these contracts and the commissions we must
pay for solicitation of these contracts in the prospectus supplement.

We may provide agents and underwriters with indemnification against certain
civil liabilities, including liabilities under the Securities Act, or
contribution with respect to payments that the agents or underwriters may make
with respect to such liabilities. Agents and underwriters may engage in
transactions with, or perform services for, us in the ordinary course of
business.

All securities we offer other than common stock will be new issues of
securities with no established trading market. Any underwriters may make a
market in these securities, but will not be obligated to do so and may
discontinue any market making at any time without notice. We cannot guarantee
the liquidity of the trading markets for any securities.

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LEGAL MATTERS

Piper Marbury Rudnick & Wolfe LLP, Baltimore, Maryland, will provide us
with an opinion as to legal matters in connection with the securities we are
offering.

EXPERTS

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC under the Securities Act a registration
statement on Form S-3. This prospectus does not contain all of the information
contained in the registration statement, certain portions of which have been
omitted under the rules of the SEC. We also file annual, quarterly and special
reports, proxy statements and other information with the SEC under the Exchange
Act. The Exchange Act file number for our SEC filings is 000-22962. You may read
and copy the registration statement and any other document we file at the
following SEC public reference rooms:

<TABLE>
<S> <C> <C>
Judiciary Plaza 500 West Madison Street 7 World Trade Center
450 Fifth Street, N.W. 14th Floor Suite 1300
Rm. 1024 Chicago, Illinois 60661 New York, New York 10048
Washington, D.C. 20549
</TABLE>

You may obtain information on the operation of the public reference room in
Washington, D.C. by calling the SEC at 1-800-SEC-0330. We file information
electronically with the SEC. Our SEC filings are available from the SEC's
Internet site at http://www.sec.gov, which contains reports, proxy and
information statements and other information regarding issuers that file
electronically. Our common stock is listed on the Nasdaq National Market under
the symbol "HGSI." You may read and copy our SEC filings and other information
at the offices of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C.
20006.

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INCORPORATION BY REFERENCE

The SEC allows us to "incorporate by reference" the documents we file with
it, which means that we can disclose important information to you by referring
you to those documents. The information incorporated by reference is considered
to be part of this prospectus, and information in documents that we file later
with the SEC will automatically update and supersede information in this
prospectus. We incorporate by reference any filings we make with the SEC after
the date of this prospectus under Sections 13(a), 13(c), 14 or 15(d) of the
Exchange Act. We also incorporate by reference the documents listed below:

- Annual Report on Form 10-K for the year ended December 31, 1999;

- Quarterly Reports on Form 10-Q for the three months ended March 31, 2000
and June 30, 2000;

- Current Reports on Form 8-K filed on February 2, 2000, March 3, 2000,
March 13, 2000, March 24, 2000 and September 21, 2000; and

- Description of Common Stock contained in Form 8-A filed pursuant to the
Exchange Act.

We will provide a copy of the documents we incorporate by reference, at no
cost, to any person who receives this prospectus. To request a copy of any or
all of these documents, you should write or telephone us at: 9410 Key West
Avenue, Rockville, Maryland 20850, (301) 309-8504, Attention: Senior Vice
President and Chief Financial Officer. See "Where You Can Find More Information"
for other ways to obtain these documents.
------------------------

We furnish our stockholders with annual reports that contain audited
financial statements and quarterly reports for the first three quarters of each
year that contain unaudited interim financial information.

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