SUGEN INC, 424B4, 1996-10-28

SUGEN INC
424B4, 1996-10-28
BIOLOGICAL PRODUCTS, (NO DIAGNOSTIC SUBSTANCES)

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<PAGE>

Filed pursuant to Rule 424(b)(4)
Registration No. 333-14157

PROSPECTUS

2,000,000 SHARES

S U G E N

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

All of the shares of Common Stock offered hereby are being offered by SUGEN,
Inc. ("SUGEN" or the "Company"). Zeneca Limited has indicated to the Company
that it intends to purchase 509,000 shares in the Offering at the Price to
Public. Vision Pharmaceuticals L.P., an affiliate of Allergan, Inc., has
indicated to the Company that it intends to purchase 250,000 shares in the
Offering at the Price to Public. The Company's Common Stock is quoted on the
Nasdaq National Market under the symbol "SUGN." The last reported sale price of
the Common Stock on October 24, 1996, as reported by the Nasdaq National Market,
was $12.38 per share. See "Price Range of Common Stock."

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

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

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

<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions (1) Company (2)
<S> <C> <C> <C>
Per Share.............................. $12.00 $0.72 $11.28
Total (3).............................. $24,000,000 $1,440,000 $22,560,000
</TABLE>

(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."

(2) Before deducting expenses of $850,000 payable by the Company.

(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 300,000 additional shares of Common Stock on the same terms and
conditions as set forth herein solely to cover over-allotments, if any. If
such option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to the Company will be $27,600,000,
$1,656,000 and $25,944,000, respectively. See "Underwriting."

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

The shares of Common Stock offered by this Prospectus are offered by the
Underwriters subject to prior sale, to withdrawl, cancellation or modification
of the offer without notice, to delivery to and acceptance by the Underwriters
and to certain further conditions. It is expected that delivery of the shares of
Common Stock will be made at the offices of Lehman Brothers Inc., New York, New
York, on or about October 30, 1996.

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

LEHMAN BROTHERS

UBS SECURITIES

HAMBRECHT & QUIST

OCTOBER 25, 1996

<PAGE>
AVAILABLE INFORMATION

The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the Commission's
following Regional Offices: Chicago Regional Office, Citicorp Center 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and New York Regional
Office, 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of
such material can be obtained at prescribed rates from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549. The Commission also makes electronic filings publically
available on the Internet within 24 hours of acceptance. The Commission's
Internet address is http://www.sec.gov. The Commission's site also contains
reports, proxy and information statements, and other information regarding
registrants that file electronically with the Commission.

Additional information regarding the Company and the shares offered hereby
is contained in the Registration Statement on Form S-3 and the exhibits thereto
filed with the Commission under the Securities Act of 1933, as amended (the
"Securities Act"). This Prospectus does not contain all of the information
contained in such Registration Statement and the exhibits and schedules thereto.
Statements contained in this Prospectus regarding the contents of any document
or contract may be incomplete and, in each instance, reference is made to the
copy of such contract or document filed as an exhibit to the Registration
Statement. For further information pertaining to the Company and the shares,
reference is made to the Registration Statement and the exhibits thereto, which
may be inspected without charge at, and copies thereof may be obtained at
prescribed rates from, the office of the Commission at 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents filed by the Company with the Commission pursuant to
the Exchange Act are by this reference incorporated in and made a part of this
Prospectus: (1) the Annual Report on Form 10-K for the fiscal year ended
December 31, 1995, as amended by Amendment Nos. 1 and 2 filed on Form 10-K/A,
(2) the Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, (3)
the Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 and (4)
the description of the Company's Common Stock set forth in the Company's
Registration Statement on Form 8-A filed with the Commission on September 13,
1994.

All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering shall be deemed to be incorporated by reference
herein and to be a part of this Prospectus from the date of filing of such
documents. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.

Copies of all documents which are incorporated herein by reference (not
including the exhibits to such documents, unless such exhibits are specifically
incorporated by reference into such documents or into this Prospectus) will be
provided without charge to each person, including any beneficial owner to whom
this Prospectus is delivered, upon a written or oral request to SUGEN, Inc.:
Attention: Nina W. Ferrari, Manager, Corporate Communications and Investor
Relations, 515 Galveston Drive, Redwood City, California 94063, telephone number
(415) 306-7700.
------------------------

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

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

2
<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS, INCLUDING THE INFORMATION UNDER "RISK FACTORS."
EXCEPT AS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO
EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION.

THE COMPANY

SUGEN is a biopharmaceutical company focused on the discovery and
development of small molecule drugs which target specific cellular signal
transduction pathways. Signal transduction is the process by which a signal from
the exterior of a cell is transmitted to the cell nucleus, resulting in the
activation or suppression of specific genes. Dysfunctional signal transduction
pathways have been implicated in disease areas such as cancer and diabetes as
well as dermatology, ophthalmology and in disorders of the cardiovascular,
immune and neurological systems. The main focus of SUGEN's research and drug
development programs is on specific signalling pathways regulated by tyrosine
kinases ("TKs"), tyrosine phosphatases ("TPs") and serine-threonine kinases
("STKs"). TKs, TPs and STKs can take the form of cell-surface receptors or
intra-cellular signalling molecules. Cell surface receptor TKs, receptor TPs and
receptor STKs are three of the largest known families of receptors in the body
and are key regulators of critical cellular functions including growth,
maturation, migration, metabolism and survival. Aberrant signalling of TKs, TPs
and STKs has been shown to result in a variety of chronic and acute pathological
disorders. SUGEN's founding scientists, Dr. Axel Ullrich of the
Max-Planck-Institut fur Biochemie ("MPI") and Dr. Joseph Schlessinger of New
York University Medical Center ("NYU"), are pioneers in the discovery and
characterization of TKs, TPs and their signalling pathways.

SUGEN is pursuing two separate business models for commercialization of its
products and technologies, one for oncology and one for applications outside of
cancer. In the cancer field, SUGEN is committed to building a vertically
integrated oncology business in North America, with the objective of bringing to
market a family of target-specific signal transduction inhibitors that are
proprietary to SUGEN. In cancer, the Company believes that it will become
standard practice to classify tumors by their molecular trigger, thereby
enabling physicians to prescribe the appropriate signal transduction inhibitor
drug as part of a treatment regimen. SUGEN believes it is a leader in the
research and discovery of novel signal transduction targets for cancer drug
development.

In December 1994, the Company filed its first Investigational New Drug
("IND") application with the U.S. Food and Drug Administration ("FDA") for
SU101, a platelet-derived growth factor receptor ("PDGF TK") signalling
antagonist. Imbalances in the PDGF TK signalling pathway have been implicated by
SUGEN and others in subsets of several cancers including brain, ovarian,
prostate, lung and melanoma. Currently, the Company is sponsoring three separate
Phase I clinical trials and has recently initiated a Phase I/II clinical trial
with SU101.

As of October 15, 1996, SU101 had been administered to a total of 84
patients with advanced malignancies in the four trials. The drug, delivered by
intravenous infusion, is well tolerated and demonstrates a half-life of
approximately two weeks. The lead SU101 Phase I clinical trial has enrolled 39
recurrent glioma patients. The Company has completed enrollment at a dose nearly
thirty times the starting dose for this study without observing clinically
significant toxicities. Of the 34 currently assessable patients in this study,
15 have experienced stable disease or better (beyond the 10 week median time to
disease progression expected for this patient group), with four of these
patients experiencing greater than 50% tumor shrinkage. The duration of response
in these patients has continued for more than 10 months. The lead study will
continue to accrue a limited number of patients under a different dosing
regimen, using a loading dose with maintenance therapy every other week. The
Company believes that data analyzed from this final cohort of patients will
facilitate a multicenter, randomized study in patients with recurrent brain
tumors in first-relapse in early 1997.

SUGEN currently is pursuing six additional proprietary cancer-related drug
development programs. The most advanced of these include the Flk-1 TK
angiogenesis inhibition program that addresses patients with solid tumors, in
which the Company plans to select an IND candidate before the end of 1996 and to
file an IND in 1997, and the GRB-2 inhibitor program in which lead compounds are
now undergoing IN VIVO pharmacology studies. The Company is also working to
develop a second generation PDGF TK signalling inhibitor as an orally
administrable complement to SU101.

3
<PAGE>
SUGEN's cancer drug development strategy is designed to facilitate the rapid
progression from Phase I clinical studies to FDA approval and product launch,
and thus the Company is targeting fast track entry indications for clinical
development even where these constitute a relatively small subset of the
potentially addressable patient population. Once a product has been introduced
to the clinic, SUGEN will work with the National Cancer Institute ("NCI") and
the oncology community to extend the labelling of the drug to other
applications. In order to market its products effectively, the Company intends
to build a U.S. sales force of approximately 50 experienced representatives who
will target the major cancer treatment centers. The Company will also seek to
in-license and market additional late-stage cancer assets that serve to
complement SUGEN products, and intends to work with a partner to develop
genomic-based cancer diagnostics.

SUGEN is committed to pursuing in parallel the clinical development of a
number of target-specific cancer drugs in North America, concentrating each
clinical development program on entry indications in which patients have very
poor prognoses and no satisfactory alternative therapies. For each of its cancer
development programs, the Company seeks to find partners for European and Asian
territories in order to share development costs. This strategy is exemplified by
the collaboration with ASTA Medica Aktiengesellschaft ("ASTA Medica") with
respect to the Pan-Her and Raf inhibitor programs, in which Asta Medica is the
Company's collaboration partner in Europe and South America.

Separate from this strategy, the Company is funding a portion of its ongoing
cancer research through a collaboration with Zeneca Limited ("Zeneca"), a major
international pharmaceutical company. Zeneca is the Company's collaboration
partner and worldwide licensee with respect to five undisclosed cancer drug
discovery and development programs, on which SUGEN will receive milestone
payments and royalties on worldwide sales and will also have the opportunity to
earn profit participation in the North American market by contributing to
clinical development costs. Zeneca has indicated to the Company that it intends
to purchase 509,000 shares in the Offering at the public offering price.

SUGEN is also applying its drug discovery platform to disease areas outside
oncology, including diabetes, dermatology, ophthalmology, neurological disorders
and immunology. In these areas, SUGEN intends to pursue the commercialization of
its technology through joint ventures or collaborations in which SUGEN
contributes validated targets, screening technologies and drug leads while the
partner provides the disease and clinical expertise as well as funding to bring
potential products to market. This strategy is exemplified by a collaboration
agreement entered into in October 1996 with Vision Pharmaceuticals, L.P., an
affiliate of Allergan, Inc. ("Allergan"). Through this collaboration, Allergan
became SUGEN's exclusive corporate partner in the ophthalmic neovascularization
field, with the aim of utilizing SUGEN's proprietary small molecule signal
transduction inhibition technology to develop novel therapies for the treatment
of such major ophthalmic diseases as macular degeneration and diabetic
retinopathy. Allergan has indicated that it intends to purchase 250,000 shares
in the Offering at the public offering price.

SUGEN, Inc. was incorporated in Delaware in 1991. The Company's executive
offices are located at 515 Galveston Drive, Redwood City, California 94063, and
its telephone number is (415) 306-7700. "SUGEN" is a trademark of the Company.
This Prospectus also contains trademarks of companies other than the Company.

4
<PAGE>
THE OFFERING

<TABLE>
<S> <C>
Common Stock offered......................... 2,000,000 shares
Common Stock outstanding after the
Offering.................................... 12,528,572 shares (1)
Use of proceeds.............................. For research and development activities,
including preclinical and clinical testing,
investments in complementary businesses,
general corporate purposes and working
capital
Nasdaq National Market Symbol................ SUGN
</TABLE>

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

<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(AUGUST 16, SIX MONTHS ENDED
1991) TO YEAR ENDED DECEMBER 31, JUNE 30,
DECEMBER 31, -------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
------------- --------- --------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Contract revenue...................... $ -- $ 1,080 $ 5,470 $ 6,270 $ 13,843 $ 6,875 $ 7,908
Costs and expenses:
Research and development............ 408 4,531 10,251 17,079 23,226 10,563 14,332
General and administrative.......... 465 1,591 2,169 3,106 5,086 2,389 2,967
------ --------- --------- ---------- ---------- --------- ---------
Total costs and expenses.......... 873 6,122 12,420 20,185 28,312 12,952 17,299
------ --------- --------- ---------- ---------- --------- ---------
Operating loss........................ (873) (5,042) (6,950) (13,915) (14,469) (6,077) (9,391)
Other income, net................... 45 86 283 251 2,500 1,705 934
------ --------- --------- ---------- ---------- --------- ---------
Net loss.............................. $ (828) $ (4,956) $ (6,667) $ (13,664) $ (11,969) $ (4,372) $ (8,457)
------ --------- --------- ---------- ---------- --------- ---------
------ --------- --------- ---------- ---------- --------- ---------
Net loss per share.................... $ (0.70) $ (3.00) $ (3.89) $ (4.15) $ (1.32) $ (0.51) $ (0.81)
------ --------- --------- ---------- ---------- --------- ---------
------ --------- --------- ---------- ---------- --------- ---------
Shares used in computing net loss per
share................................ 1,177 1,649 1,712 3,296 9,085 8,651 10,486
------ --------- --------- ---------- ---------- --------- ---------
------ --------- --------- ---------- ---------- --------- ---------
Pro forma net loss per share (2)...... $ (0.36) $ (1.37) $ (1.39) $ (2.22)
------ --------- --------- ----------
------ --------- --------- ----------
Shares used in computing pro forma net
loss per share (2)................... 2,274 3,618 4,786 6,143
------ --------- --------- ----------
------ --------- --------- ----------
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------------
AS ADJUSTED
ACTUAL (3)
---------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments..................................... $ 40,238 $ 61,948
Total assets.......................................................................... 46,498 68,208
Capital lease obligations, non-current portion........................................ 3,408 3,408
Accumulated deficit................................................................... (46,618) (46,618)
Total stockholders' equity............................................................ 32,807 54,517
</TABLE>

- ------------------------------
(1) Excludes, as of June 30, 1996, an aggregate of 2,723,154 shares of Common
Stock consisting of the following: 2,132,912 shares of Common Stock
reserved for issuance pursuant to the Company's stock option plans,
pursuant to which options to purchase 1,873,075 shares were outstanding as
of June 30, 1996; 433,644 shares of Common Stock issuable pursuant to
warrants; and 156,598 shares of Common Stock reserved for issuance under
the Company's Employee Stock Purchase Plan. Subsequent to June 30, 1996,
the Company issued (i) 158,232 shares of Common Stock to employees upon
exercise of stock options outstanding prior to June 30, 1996; (ii) 20,410
shares of Common Stock to employees under the Company's Employee Stock
Purchase Plan; and (iii) 191,571 shares of Common Stock to Allergan in
connection with the execution of a collaboration agreement in October 1996.

(2) Pro forma net loss per share information gives effect to the conversion of
all Preferred Stock outstanding from the date of issuance. See Note 1 of
Notes to Financial Statements.

(3) As adjusted to reflect receipt of the estimated net proceeds from the sale
of 2,000,000 shares of Common Stock at a public offering price of $12.00
per share. See "Use of Proceeds" and "Capitalization."

For information on the Company's operating results for the third quarter of
1996, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Recent Operating Results and Developments."

--------------------------
THIS PROSPECTUS CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE THOSE FACTORS DISCUSSED IN "RISK FACTORS" AND ELSEWHERE IN
THIS PROSPECTUS.

5
<PAGE>
RISK FACTORS

THE FOLLOWING RISK FACTORS, INHERENT IN AND AFFECTING THE BUSINESS OF THE
COMPANY, IN ADDITION TO THE INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS
AND INCORPORATED HEREIN BY REFERENCE, SHOULD CAREFULLY BE CONSIDERED BEFORE
PURCHASING THE SHARES OF COMMON STOCK OFFERED HEREBY.

EARLY STAGE OF DEVELOPMENT; TECHNOLOGICAL CHANGE

SUGEN is at an early stage of development and must be evaluated in light of
the uncertainties and complications present in a biotechnology company. The
Company has only been in existence since 1991 and to date only a single drug
candidate (SU101) has entered human clinical testing. To achieve profitable
operations on a continuing basis, the Company, alone or with collaborative
partners, must successfully develop, manufacture, introduce and market its
proposed products. There can be no assurance that the Company will be able to
discover any additional lead compounds or develop any commercial products. The
time necessary to achieve market success for any individual product is long and
uncertain. Products, if any, resulting from the Company's research and
development programs are not expected to be commercially available for a number
of years even if they are successfully developed and proven to be safe and
effective. There can be no assurance that any of the Company's product
development efforts or those of its collaborative partners will be successfully
completed, that regulatory clearances will be obtained or will be as broad as
sought, that the Company's products will be capable of being produced in
commercial quantities at reasonable cost or that any products, if introduced,
will achieve market acceptance.

Drug discovery and development methods based upon TKs, TPs and STKs and
their signalling pathways are relatively new, and there can be no assurance that
these methods will lead to the discovery or development of lead compounds or
commercial products or that the Company will be able to employ these methods of
drug discovery or development successfully. One of the Company's compounds has
been approved for clinical testing, but there can be no assurance that any other
of the Company's current or proposed compounds will be submitted or accepted for
clinical testing. In addition, safety or efficacy of the Company's compounds has
not been demonstrated. As the Company's additional potential lead compounds are
identified, they will require significant additional development, preclinical
and clinical testing, regulatory clearance and additional investment prior to
their commercialization, and there can be no assurance that any of these efforts
will be successful.

FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING

The operations of the Company to date have consumed substantial amounts of
cash, and substantial additional funds will be necessary in order to conduct the
costly and time consuming research and preclinical and clinical testing required
to develop its proposed products and to establish manufacturing and marketing
capabilities. The Company's future capital requirements will depend on many
factors, including, among others, continued scientific progress of its research
and development programs, the ability of the Company to establish collaborative
arrangements, progress with preclinical and clinical trials of its product
candidates, the time and costs involved in obtaining regulatory clearance, the
costs involved in preparing, filing, prosecuting, maintaining and enforcing
patent claims, competing technological and market developments, changes in its
existing research relationships and commercialization activities and
arrangements. The Company estimates that its existing capital resources, after
giving effect to the anticipated net proceeds from this Offering, together with
facility and equipment financing, expected revenues from its current
collaborations and net income from investment activities, will be sufficient to
fund its planned operations into the second half of 1998. The Company
anticipates that the funds from future collaborations will extend this time
period. However, there can be no assurance that the Company will enter into any
such collaboration. Additionally, there can be no assurance that the underlying
assumed levels of revenue and expense will prove accurate. The Company intends
to seek additional funding through collaborative arrangements, public or private
equity or debt financings and capital lease transactions; however, there can be
no assurance that additional financing will be available on acceptable terms or
at all. If additional funds are raised by issuing equity securities, further
dilution to stockholders may result. In addition, in the event that additional
funds are obtained through arrangements with collaborative partners, such
arrangements may require the Company to relinquish rights to certain of its
technologies, product candidates or products that the Company would

6
<PAGE>
otherwise seek to develop or commercialize itself. If adequate funds are not
available, the Company may be required to delay, reduce the scope of or
eliminate one or more of its research or development programs, which would have
a material adverse effect on the Company. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

HISTORY OF OPERATING LOSSES AND ACCUMULATED DEFICIT

The Company has experienced significant operating losses since its inception
in 1991. As of June 30, 1996, the Company had an accumulated deficit of
approximately $47 million. The Company expects to continue to incur significant
additional operating losses over the next several years and expects cumulative
losses to increase substantially as the Company's research and development
efforts, including preclinical and clinical testing, are expanded. The Company's
ability to achieve profitability is dependent on its ability, alone or with
others, to complete successfully the development of its proposed products,
obtain the required regulatory clearances and manufacture and market its
proposed products. There can be no assurance if or when the Company will achieve
profitability.

DEPENDENCE ON COLLABORATIVE RELATIONSHIPS

The Company's strategy for the discovery, development, clinical testing,
manufacturing and commercialization of its proposed products includes entering
into various collaborations with corporate partners, licensors, licensees and
others, and is dependent upon the subsequent success of these outside partners
in performing their responsibilities. Currently, the Company has corporate
collaborations with Zeneca, ASTA Medica and Vision Pharmaceuticals, L.P., an
affiliate of Allergan, Inc. ("Allergan"). Although the Company believes that
Zeneca, ASTA Medica, Allergan and any future corporate partners have or will
have an economic motivation to perform their contractual responsibilities, the
amount and timing of resources to be devoted to these activities by corporate
partners are not within the control of the Company. There can be no assurance
that such partners will perform their obligations as expected or that the
Company will derive any additional revenue from such arrangements over and above
the contractual payment amounts. Moreover, there can be no assurance that SUGEN
will succeed in identifying lead compounds or developing commercial products
from either current or future collaborations.

The term of the Zeneca collaboration expires in January 2000, unless the
parties elect to extend such term. The collaborations with Zeneca, ASTA Medica
and Allergan may be terminated under certain circumstances including, in the
case of the Zeneca collaboration, a change in control of the Company.
Termination of these collaborations could result in the Company relinquishing
rights to certain technology or products jointly developed with the respective
party. In addition, the collaborations may be terminated for material breach.
The termination or material reduction in the scope of the collaborations could
have a material adverse effect on the Company.

In December 1995, the Company received, among other things, a technology
set-up fee of $4 million in connection with the ASTA Medica agreement. During
1996 the Company will recognize a wind-down fee of $4.3 million in connection
with the termination of the Amgen agreement. Through June 30, 1996, the majority
of the set-up and wind-down fees from the ASTA Medica and Amgen collaborations,
respectively, had been recognized as revenues, and the Company will recognize
the remaining part of these fees during 1996. Thereafter, the Company will not
recognize any additional revenue under the Amgen collaboration, and will
recognize additional revenue under the ASTA Medica collaboration only upon
achievement of specified milestones and for contract services for
non-collaboration work. In conjunction with the Allergan collaboration, the
Company received a $2 million initial payment for past research services, will
receive annual research funding and expects to receive additional fees upon the
achievement of specified milestones and royalties on any product sales. In
addition to the Allergan collaboration, the Company will be required to enter
into new collaborations in order to replace the revenues recognized under these
collaborations in 1996. No assurances can be given as to the ability of the
Company to enter such collaborations on a timely basis or at all.

There can be no assurance that Zeneca, ASTA Medica and Allergan or any other
future collaborator will not pursue their existing or alternative technologies
in preference to those being developed in collaboration with the Company.
Furthermore, there can be no assurance that the Company will be able to
negotiate additional collaborative arrangements on acceptable terms, if at all,
or that such collaborations will be

7
<PAGE>
successful. To the extent that the Company chooses not to or is unable to
establish such arrangements, it would require substantially greater capital to
undertake research, development and marketing of its proposed products at its
own expense. In addition, the Company may encounter significant delays in
introducing its proposed products into certain markets or find that the
development, manufacture or sale of its proposed products in such markets is
adversely affected by the absence of such collaborative agreements.

To complement its internal research capabilities, the Company works closely
with Dr. Joseph Schlessinger's laboratory within the Department of Pharmacology
at New York University Medical Center ("NYU"), Dr. Axel Ullrich's Department of
Molecular Biology at Max-Planck-Institut fur Biochemie ("MPI") and Dr. Werner
Risau's laboratory at the Max-Planck-Institut fur Physiologische and Klinische
Forschung ("MPP") (MPI and MPP are collectively referred to herein as
"Max-Planck Society" or "MPS"). While NYU and MPS have made certain contractual
commitments to the Company, they are independent entities and are not under the
control of the Company or its officers or directors. Furthermore, the contracts
between the Company and NYU and MPS (collectively, the "Research Contracts") do
not obligate these institutions to devote any specified level of resources to
the research related to potential products for the Company, nor do the Research
Contracts require the principal researchers, or any member of their respective
research teams, to continue to conduct research related to potential products
for the Company. In addition, under the Research Contracts, NYU and MPS retain
freedom to select the methods to be used by them in pursuing their research.
There can be no assurance that NYU or MPS will continue to conduct research
related to potential products for SUGEN or that they will select research
targets, or the means to address them, in a manner consistent with the Company's
best interests.

The Company's contracts with NYU, MPI and MPP expire in August 1997, August
1997 and October 1999, respectively. There can be no assurance that these
contracts will be renewed, or that any renewal will be made on terms as
favorable to the Company as those contained in the existing contracts. The
termination or expiration of any of the Research Contracts, or the failure by
NYU or MPS to continue to conduct research related to the Company's potential
products under the Research Contracts, could have a material adverse effect on
the Company. See "Business -- Corporate and Clinical Development
Collaborations."

UNCERTAINTY OF PROTECTION OF PATENTS AND PROPRIETARY RIGHTS; POSSIBLE PATENT
LITIGATION

The Company's success will depend in part on its ability to obtain patents,
maintain trade secrets and operate without infringing on the proprietary rights
of others, both in the United States and in other countries. Patent matters in
biotechnology, and in particular with respect to receptors as screening tools
and/ or the DNA encoding them, are highly uncertain and involve complex legal
and factual questions. Accordingly, the availability of and breadth of claims
allowed in biotechnology and pharmaceutical patents cannot be predicted. As of
September 30, 1996, SUGEN held exclusive rights to at least six issued U.S.
patents and had filed and/or held exclusive licenses to approximately 115 United
States patent applications, as well as related foreign patent applications.
There can be no assurance that the Company will develop products or processes
that are patentable, that patents will issue from any of the pending
applications, or that claims allowed will be sufficient to protect the Company's
technology. There can be no assurance that the Company's patents, if issued,
will not be challenged, invalidated or circumvented, or that the rights granted
thereunder will provide proprietary protection or competitive advantages to the
Company. Competitors have been issued patents, may have filed applications or
may obtain additional patents and proprietary rights relating to products or
processes competitive with those of the Company or which could block the
Company's efforts to obtain patents.

A number of pharmaceutical companies, biotechnology companies, universities
and research institutions have filed patent applications or received patents in
the field of TKs, TPs and STKs and related downstream signalling molecules. The
commercial success of the Company will depend in part on SUGEN not infringing
patents issued to competitors and not breaching the technology licenses upon
which any Company products are based. The Company in the past has been, and from
time to time in the future may be, notified of claims that the Company may be
infringing patents or other intellectual property rights owned by third parties.
Certain patent applications or patents of the Company's competitors may conflict
with the Company's patents and patent applications, and SUGEN is aware that
other companies have filed patent

8
<PAGE>
applications and have been granted patents in the United States and other
countries claiming subject matter potentially useful or necessary to the
Company. Such conflicts could result in a significant reduction in the scope of
the coverage of the Company's issued or licensed patents. In addition, if
patents are issued to other companies which contain competitive or conflicting
claims and such claims are ultimately determined to be valid, the Company may be
required to obtain licenses to these patents or to develop or obtain alternative
technology. If any licenses are required, there can be no assurance that the
Company will be able to obtain any such license on commercially favorable terms,
if at all, and if these licenses are not obtained, the Company might be
prevented from pursuing the development of certain of its potential products.
The Company's breach of an existing license or failure to obtain a license to
any technology that it may require to commercialize its products may have a
material adverse impact on the Company. Litigation, which could result in
substantial costs to the Company, may also be necessary to enforce any patents
issued or licensed to the Company or to determine the scope and validity of
third party proprietary rights. There can be no assurance that the Company's
issued or licensed patents would be held valid by a court of competent
jurisdiction. Even if the outcome of such litigation is favorable, the cost of
such litigation and the diversion of the Company's resources during such
litigation could have a material adverse effect on the Company. An adverse
outcome could subject the Company to significant liabilities to third parties,
require disputed rights to be licensed from third parties or require the Company
to cease using such technology, any of which could have a material adverse
effect on the Company. If competitors of the Company prepare and file patent
applications in the United States that claim technology also claimed by the
Company, the Company may have to participate in interference proceedings
declared by the Patent and Trademark Office to determine priority of invention,
which could result in substantial cost to the Company, even if the eventual
outcome is favorable to the Company.

SU101, a compound generally known by the name leflunomide, is a member of
the isoxazole family of compounds. Leflunomide was discovered more than 15 years
ago. A large pharmaceutical company holds a number of United States and foreign
patents and has filed applications in the United States and abroad covering
compositions of matter and pharmaceutical uses of leflunomide and structurally
related compounds. While the Company believes at this time that it will receive
method of use patent protection on SU101, there can be no assurance that any
such patent protection will be issued. SUGEN believes its research and
development and its clinical trials with SU101 in the United States are
protected from claims of infringement of the United States patents because such
activities are being conducted solely for uses reasonably related to development
and submission of information to the FDA for regulatory approval. Although the
Company cannot predict whether or when SU101 will be approved by the FDA for
marketing in the United States, it believes that certain of the pharmaceutical
company's patents in the United States may have expired when marketing does
begin and that the remaining United States patents are either invalid or will
not be infringed by the manufacture and sale of SU101. However, the Company has
learned that additional patents recently issued in the United States to the
pharmaceutical company covering the use of leflunomide and structurally related
compounds for the treatment of named cancers. The Company presently does not
know if commercialization of SU101 will infringe these additional patents but
believes that the additional patents may be subject to claims of invalidity as
they relate to SU101. If the additional patents were determined to be valid with
respect to SU101, the Company may be required to obtain a license from the
pharmaceutical company in order to manufacture and sell SU101 in the United
States. The Company presently does not intend to commercialize SU101 outside the
United States. There can be no assurance that SU101 will not infringe the
recently issued patents, that the term of the pharmaceutical company's other
existing patents will not be extended, that the claims of the pharmaceutical
company's pending patent applications will not be modified prior to issuance so
as to enhance their validity or scope, or that a court will agree with the
Company's beliefs regarding invalidity and non-infringement of the patents. To
date, the pharmaceutical company has not threatened or commenced legal
proceedings against the Company concerning possible patent infringement. There
can be no assurance that the pharmaceutical company in the future will not
assert claims against SUGEN or that the Company could reach agreement with the
pharmaceutical company for a license for SU101 upon favorable terms or at all,
if required. The inability of the

9
<PAGE>
Company to resolve this matter on favorable terms or at all could have a
material adverse effect on the Company. In any event, the assertion of such
claims, even if resolved favorably to the Company, could result in substantial
costs to the Company.

SUGEN also relies on trade secrets to protect technology, especially where
patent protection is not believed to be appropriate or obtainable. SUGEN
attempts to protect its proprietary technology and processes in part by
confidentiality agreements with its employees, consultants and certain
contractors. There can be no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known or be independently
discovered by competitors. To the extent that the Company or its consultants or
research collaborators use intellectual property owned by others in their work
for the Company, disputes may also arise as to the rights in related or
resulting know-how and inventions.

UNCERTAINTIES RELATED TO CLINICAL TRIALS AND PRODUCT DEVELOPMENT

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

Any drug is likely to produce some toxicities or undesirable side effects in
animals and in humans when administered at sufficiently high doses and/or for
sufficiently long periods of time. There can be no assurance that unacceptable
toxicities or side effects will not occur at any dose level at any time in the
course of toxicological studies or of human clinical trials of the Company's
potential products. The appearance of any such unacceptable toxicities or side
effects in toxicology studies or in clinical trials could cause the Company or
regulatory authorities to interrupt, limit, delay or abort the development of
any of the Company's product candidates and could ultimately prevent their
clearance by the FDA or foreign regulatory authorities for any or all targeted
indications. Even after being cleared by the FDA or foreign regulatory
authorities, a product may later be shown to be unsafe or to not have its
purported effect, thereby preventing its widespread use or requiring withdrawal
from the market. There can be no assurance that any products under development
by the Company will be safe when administered to patients.

The rate of completion of the Company's clinical trials is dependent upon,
among other factors, the rate of patient enrollment. Patient enrollment is a
function of many factors, including the size of the patient population, the
nature of the protocol, the proximity of patients to clinical sites and the
eligibility criteria for the study. Delays in planned patient enrollment may
result in increased costs, delays or termination of clinical trials, which could
have a material adverse effect on the Company. In addition, the Company has a
limited clinical staff and, as a result, will rely on third parties to assist
the Company in overseeing and monitoring the clinical trials, which may result
in delays in completing clinical trials, if at all, if such third parties fail
to perform under their agreements with the Company or fail to meet regulatory
standards in the performance of their obligations under such agreements. There
can be no assurance that the Company will be able to submit a new drug
application as scheduled if clinical trials are completed or that any such
application will be reviewed and cleared by the FDA in a timely manner or at
all.

The Company currently has one drug candidate, SU101, in Phase I/II clinical
trials. There can be no assurance that the Company will be able to complete the
clinical trials of SU101 successfully, or at all, that other drug candidates
entering clinical trials, if any, will successfully complete such trials, or
that the Company will be able to demonstrate the safety and efficacy of such
drug candidates. Clinical trial results that show insufficient safety or
efficacy would have a material adverse effect on the Company.

10
<PAGE>
GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY CLEARANCE

The manufacturing and marketing of the Company's potential products and its
ongoing research and development activities are subject to extensive regulation
by numerous governmental authorities in the United States and other countries.
Failure to comply with applicable FDA or other applicable regulatory
requirements may result in criminal prosecution, civil penalties, recall or
seizure of products, total or partial suspension of production or injunction, as
well as other regulatory action against the Company or its potential products.

Prior to marketing in the United States, any drug developed by the Company
must undergo rigorous preclinical and clinical testing and an extensive
regulatory clearance process implemented by the FDA under the federal Food, Drug
and Cosmetic Act. Satisfaction of such regulatory requirements, which includes
satisfying the FDA that the product is both safe and effective, typically takes
several years or more depending upon the type, complexity and novelty of the
product and requires the expenditure of substantial resources. Preclinical
studies must be conducted in conformance with the FDA's good laboratory practice
("GLP") regulations. Before commencing clinical investigations in humans, the
Company must submit to and receive approval from the FDA of an IND. There can be
no assurance that submission of an IND would result in FDA authorization to
commence clinical trials. Clinical testing must meet requirements for
institutional review board oversight, informed consent and good clinical
practice requirements and is subject to continuing FDA oversight. The Company
does not have extensive experience in conducting and managing the clinical
testing necessary to obtain regulatory approval. Clinical trials may require
large numbers of test subjects. Furthermore, the Company or the FDA may suspend
clinical trials at any time if they believe that the subjects participating in
such trials are being exposed to unacceptable health risks or if the FDA finds
deficiencies in the IND or the conduct of the trials.

Before receiving FDA clearance to market a product, the Company will have to
demonstrate that the product is safe and effective on the patient population
that will be treated. Data obtained from preclinical and clinical activities are
susceptible to varying interpretations which could delay, limit or prevent
regulatory clearances. In addition, delays or rejections may be encountered
based upon additional government regulation from future legislation or
administrative action or changes in FDA policy during the period of product
development, clinical trials and FDA regulatory review. Similar delays also may
be encountered in foreign countries. There can be no assurance that even after
such time and expenditures, regulatory clearance will be obtained for any
products developed by the Company. If regulatory clearance of a product is
granted, such clearance will be limited to those disease states and conditions
for which the product is useful, as demonstrated through clinical studies.
Marketing or promoting a drug for an unapproved indication is prohibited.
Furthermore, clearance may entail ongoing requirements for postmarketing
studies. Even if such regulatory clearance is obtained, a marketed product, its
manufacturer and its manufacturing facilities are subject to continual review
and periodic inspections by the FDA. Discovery of previously unknown problems
with a product, manufacturer or facility may result in restrictions on such
product or manufacturer, including costly recalls or even withdrawal of the
product from the market. There can be no assurance that any compound developed
by the Company alone or in conjunction with others will prove to be safe and
efficacious in clinical trials and will meet all of the applicable regulatory
requirements needed to receive marketing clearance.

Outside the United States, the Company's ability to market a product is
contingent upon receiving a marketing authorization from the appropriate
regulatory authorities. The requirements governing the conduct of clinical
trials, marketing authorization, pricing and reimbursement vary widely from
country to country. At present, foreign marketing authorizations are applied for
at a national level, although within the European Community ("EC") certain
registration procedures are available to companies wishing to market a product
in more than one EC member state. If the regulatory authority is satisfied that
adequate evidence of safety, quality and efficacy has been presented, a
marketing authorization will be granted. This foreign regulatory approval
process includes all of the risks associated with FDA clearance set forth above.

INTENSE COMPETITION; RAPID TECHNOLOGICAL CHANGE

11
<PAGE>
Competition from fully integrated pharmaceutical companies and more established
biotechnology companies is intense and is expected to increase. Most of these
companies have significantly greater financial resources and expertise in
research and development, manufacturing, preclinical and clinical testing,
obtaining regulatory approvals and marketing than the Company. Smaller companies
may also prove to be significant competitors, particularly through collaborative
arrangements with large pharmaceutical and established biotechnology companies.
Many of these competitors have significant products that have been approved or
are in development and operate large, well funded research and development
programs. Academic institutions, governmental agencies and other public and
private research organizations also conduct research, seek patent protection and
establish collaborative arrangements for products and clinical development and
marketing. These companies and institutions compete with the Company in
recruiting and retaining highly qualified scientific and management personnel.
In addition to the above factors, SUGEN will face competition based on product
efficacy and safety, the timing and scope of regulatory approvals, availability
of supply, marketing and sales capability, reimbursement coverage, price and
patent position. There is intense competition for access to libraries of
compounds to use for screening and any inability of the Company to maintain
access to sufficiently broad libraries of compounds for screening potential
targets would have a material adverse effect on the Company. There is no
assurance that the Company's competitors will not develop more effective or more
affordable products, or achieve earlier patent protection or product
commercialization than the Company. See "-- Uncertainty of Protection of Patents
and Proprietary Rights; Possible Patent Litigation."

NEED TO ATTRACT AND RETAIN KEY OFFICERS, EMPLOYEES AND CONSULTANTS

The Company is highly dependent on key members of its scientific and
management staff, the loss of whose services might significantly delay or
prevent the achievement of research, development, or business objectives. The
Company does not maintain "key person" life insurance on the lives of any
officer, employee or consultant of the Company. In addition, the Company relies
on consultants and advisors, including the members of its Science Advisory Board
and Clinical Advisory Board, to assist the Company in formulating its research
and development strategy. Retaining and attracting qualified personnel,
consultants and advisors is critical to the Company's success. In order to
pursue its product development and marketing plans, the Company will be required
to hire additional qualified scientific personnel to perform research and
development, as well as personnel with expertise in clinical testing, government
regulation, manufacturing and marketing. These requirements are also expected to
demand the attention of management personnel and the development of additional
expertise by existing management personnel. The Company faces competition for
qualified individuals from numerous pharmaceutical and biotechnology companies,
universities and other research institutions. There can be no assurance that the
Company will be able to attract and retain such individuals on acceptable terms,
if at all, and the failure to do so would have a material adverse effect on the
Company. See "Management."

POTENTIAL VOLATILITY OF STOCK PRICE

The Common Stock currently trades on the Nasdaq National Market. The
securities markets have from time to time experienced significant price and
volume fluctuations that may be unrelated to the operating performance of
particular companies. In addition, the market price of the Common Stock, like
that of the common stock of many other early stage biotechnology companies, has
been and can in the future be expected to be, highly volatile. Factors such as
the fluctuation in the Company's operating results, announcements of
technological innovations or new commercial products by the Company or its
competitors, progress with clinical trials, governmental regulation, changes in
reimbursement policies, developments in patent or other proprietary rights of
the Company or its competitors, including litigation, developments in the
Company's relationships with current or future collaborative partners, if any,
public concern as to the safety and efficacy of drugs developed by the Company
and its competitors and general market conditions may have a significant effect
on the market price of the Common Stock. See "Price Range of Common Stock."

LACK OF MANUFACTURING EXPERIENCE; RELIANCE ON CONTRACT MANUFACTURERS

12
<PAGE>
products can be manufactured at a cost or in quantities necessary to make them
commercially viable. If the Company were unable to contract for a sufficient
supply of its compounds on acceptable terms, or if it should encounter delays or
difficulties in its relationships with manufacturers, the Company's preclinical
and clinical testing schedule would be delayed, resulting in delay in the
submission of products for regulatory approval or the market introduction and
subsequent sales of such products, which could have a material adverse effect on
the Company. Moreover, contract manufacturers that the Company may use must
adhere to current Good Manufacturing Practices regulations enforced by the FDA
through its facilities inspection program. If these facilities cannot pass a
pre-approval plant inspection, the FDA pre-market approval of the products will
not be granted.

LACK OF MARKETING EXPERIENCE; DEPENDENCE ON THIRD PARTIES

The Company currently has no sales, marketing or distribution capability.
The Company intends to rely on relationships with one or more pharmaceutical
companies with established distribution systems and direct sales forces to
market certain of its proposed products and to market other products directly.
To market any of its products directly, the Company must develop a marketing and
sales force with technical expertise and with supporting distribution
capabilities. There can be no assurance that the Company will be able to
establish in-house sales and distribution capabilities or relationships with
third parties. To the extent that the Company enters into co-promotion or other
licensing arrangements, any revenues received by the Company will depend upon
the efforts of third parties, and there can be no assurance that such efforts
will be successful.

NO ASSURANCE OF MARKET ACCEPTANCE

There can be no assurance that, if approved for marketing, any of the
Company's products under development will achieve market acceptance. The degree
of market acceptance will depend upon a number of factors, including the receipt
of regulatory approvals, the establishment and demonstration in the medical
community of the clinical efficacy and safety of the Company's product
candidates and their potential advantages over existing treatment methods,
pricing and reimbursement policies of government and third-party payors. There
is no assurance that physicians, patients, payors or the medical community in
general will accept and utilize any products that may be developed by the
Company.

UNCERTAINTY OF PHARMACEUTICAL PRICING AND REIMBURSEMENT

The business and financial condition of pharmaceutical and biotechnology
companies will continue to be affected by the efforts of governmental and
third-party payors to contain or reduce the cost of health care. In certain
foreign markets pricing or profitability of prescription pharmaceuticals is
subject to governmental control. In the United States there have been, and the
Company expects that there will continue to be, a number of federal and state
proposals to implement similar government control. In addition, an increasing
emphasis on managed care in the United States has increased and will continue to
increase the pressure on pharmaceutical pricing. While the Company cannot
predict whether any such legislative or regulatory proposals will be adopted or
the effect such proposals or managed care efforts may have on its business, the
announcement of such proposals or efforts could have a material adverse effect
on the Company's ability to raise capital, and the adoption of such proposals or
efforts could have a material adverse effect on the Company's business and
financial condition. Further, to the extent that such proposals or efforts have
a material adverse effect on other pharmaceutical companies that are prospective
corporate partners for the Company, the Company's ability to establish a
strategic collaboration may be adversely affected. In addition, in both domestic
and foreign markets, sales of the Company's proposed products will depend in
part on the availability of reimbursement from third-party payors such as
government health administration authorities, private health insurers and other
organizations. Third-party payors are increasingly challenging the price and
cost-effectiveness of medical products and services. Significant uncertainty
exists as to the reimbursement status of newly approved health care products.
There can be no assurance that the Company's proposed products will be
considered cost effective or that adequate third-party reimbursement will be
available to enable the Company to maintain price levels sufficient to realize
an appropriate return on its investment in product development.

13
<PAGE>
PRODUCT LIABILITY EXPOSURE AND UNCERTAIN AVAILABILITY OF INSURANCE

The use of any of the Company's potential products in clinical trials, and
the sale of any approved products may expose the Company to liability claims
resulting from the use of its products. These claims might be made directly by
consumers, health care providers or by pharmaceutical companies or others
selling such products. SUGEN has obtained limited product liability insurance
coverage for its human clinical trials. However, insurance coverage is becoming
increasingly expensive and no assurance can be given that the Company will be
able to maintain insurance coverage at a reasonable cost or in sufficient
amounts to protect the Company against losses due to liability. There can also
be no assurance that the Company will be able to obtain commercially reasonable
product liability insurance for any product approved for marketing. A successful
product liability claim or series of claims against the Company could have a
material adverse effect on its business, financial condition or results of
operations.

HAZARDOUS MATERIALS

The Company's research and development involves the controlled use of
hazardous materials, chemicals and various radioactive compounds. Although the
Company believes that its safety procedures for handling and disposing of such
materials comply with the standards prescribed by state and federal regulations,
the risk of accidental contamination or injury from these materials cannot be
completely eliminated. In the event of such an accident, the Company could be
held liable for any damages that result and any such liability could exceed the
resources of the Company. The Company may incur substantial costs to comply with
environmental regulations if the Company develops manufacturing capacity.

ANTI-TAKEOVER PROVISIONS

The Company's Certificate of Incorporation and Bylaws require that any
action required or permitted to be taken by stockholders of the Company must be
effected at a duly called annual or special meeting of stockholders and may not
be effected by written consent. Special meetings of the stockholders of the
Company may be called only by the Board of Directors, the Chairman of the Board
or the Chief Executive Officer of the Company. These and other charter
provisions may discourage certain types of transactions involving an actual or
potential change in control of the Company, including transactions in which the
stockholders might otherwise receive a premium for their shares over then
current prices, and may limit the ability of the stockholders to approve
transactions they may deem to be in their best interests. The Board of Directors
also has the authority, without action by the stockholders, to fix the rights
and preferences of and issue shares of Preferred Stock, which may have the
effect of delaying or preventing a change in control of the Company. In
addition, the Board of Directors has adopted a Preferred Share Purchase Rights
Plan (commonly known as a "poison pill"), and the Company's research
collaboration with Zeneca permits Zeneca to terminate the arrangement if a third
party acquires 35% or more of SUGEN's voting stock. These provisions also may
have the effect of delaying or preventing a change in control of the Company.

SHARES ELIGIBLE FOR FUTURE SALE

Substantially all of the Company's shares are eligible for sale in the
public market. The issuance of Common Stock upon the exercise of stock options
and warrants, as well as future sales of such Common Stock or of shares of
Common Stock by existing stockholders, or the perception that such sales could
occur, could adversely affect the market price of the Common Stock. Subject to
certain exceptions, the Company and its officers, directors and certain
stockholders holding an aggregate of approximately 4,786,000 shares of Common
Stock have agreed not to sell or otherwise dispose of any shares of Common Stock
during the 90 day period following the date of this Prospectus without the
consent of Lehman Brothers Inc. on behalf of the Underwriters. Lehman Brothers
Inc., in its discretion, may permit such sales during such period without public
announcement.

14
<PAGE>
USE OF PROCEEDS

The net proceeds to the Company from the sale of 2,000,000 shares of Common
Stock offered hereby are estimated to be approximately $21.7 million at a public
offering price of $12.00 per share and after deducting the estimated offering
expenses. The Company expects to use the net proceeds from the Offering for
research and development activities, including preclinical and clinical testing,
and for general corporate purposes, including working capital. The Company
estimates that its existing capital resources, after giving effect to the
anticipated net proceeds from the offering, together with facility and equipment
financing, expected revenues from current collaborations and net income from
investment activities will be sufficient to fund its planned operations into the
second half of 1998. The Company anticipates that the funds from future
collaborations will extend this time period. However, there can be no assurance
that the Company will enter into any such collaboration.

A portion of the proceeds also may be used to acquire or invest in
complementary businesses, products or technologies. From time to time, the
Company evaluates potential acquisitions of such businesses, products or
technologies in the ordinary course of business. Currently, the Company is
considering modest investments in such complementary businesses in 1996. The
Company has no other present understandings, commitments or agreements with
respect to an investment in or acquisition of other businesses, products or
technologies.

Pending their use, the Company intends to invest the proceeds in interest
bearing investment grade securities. See "Risk Factors -- Future Capital Needs;
Uncertainty of Additional Funding" and "-- History of Operating Losses and
Accumulated Deficit."

PRICE RANGE OF COMMON STOCK

The Common Stock began trading publicly on the Nasdaq National Market under
the symbol "SUGN" on October 4, 1994. Prior to that date, there was no public
market for the Common Stock. The following table sets forth, for the periods
indicated, the high and low sales prices of the Common Stock reported on the
Nasdaq National Market. These prices do not include retail markups, markdowns or
commissions.

<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1994
Fourth Quarter (From October 4, 1994)...................................... $ 8.00 $ 4.75
1995
First Quarter.............................................................. $ 7.75 $ 4.63
Second Quarter............................................................. 8.38 4.63
Third Quarter.............................................................. 13.88 6.88
Fourth Quarter............................................................. 16.00 9.25
1996
First Quarter.............................................................. $ 15.88 $ 11.75
Second Quarter............................................................. 15.25 11.25
Third Quarter.............................................................. 12.75 9.38
Fourth Quarter (through October 24, 1996).................................. 14.50 11.50
</TABLE>

As of October 24, 1996, there were 270 holders of record of the Common
Stock. On October 24, 1996, the last sales price reported on the Nasdaq National
Market for the Common Stock was $12.38 per share. See "Risk Factors -- Potential
Volatility of Stock Price."

DIVIDEND POLICY

The Company has never declared or paid cash dividends. The Company's Board
of Directors currently intends to retain any earnings for use in the Company's
business and does not anticipate paying any cash dividends in the foreseeable
future.

15
<PAGE>
CAPITALIZATION

The following table sets forth the capitalization of the Company at June 30,
1996 and as adjusted for the sale by the Company of the Common Stock offered
hereby at an offering price of $12.00 per share (after deduction of estimated
underwriting discounts and commissions and offering expenses).

<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Capital lease obligations, non-current portion........................................... $ 3,408 $ 3,408
Stockholders' equity:
Preferred Stock, $.01 par value; 20,000,000 shares authorized, issuable in series;
300,000 shares designated as Series A Junior Participating Preferred Stock; none
issued and outstanding................................................................ -- --
Common Stock, $.01 par value; 30,000,000 shares authorized; 10,528,572 shares issued
and outstanding; and 12,528,572 shares issued and outstanding, as adjusted (1)........ 105 125
Additional paid-in capital............................................................. 79,623 101,313
Deferred compensation.................................................................. (303) (303)
Accumulated deficit.................................................................... (46,618) (46,618)
---------- -----------
Total stockholders' equity........................................................... 32,807 54,517
---------- -----------
Total capitalization................................................................. $ 36,215 $ 57,925
---------- -----------
---------- -----------
</TABLE>

- ------------------------
(1) Excludes, as of June 30, 1996, an aggregate of 2,723,154 shares of Common
Stock consisting of the following: 2,132,912 shares of Common Stock reserved
for issuance pursuant to the Company's stock option plans, pursuant to which
options to purchase 1,873,075 shares were outstanding as of June 30, 1996;
433,644 shares of Common Stock issuable pursuant to warrants; and 156,598
shares of Common Stock reserved for issuance under the Company's Employee
Stock Purchase Plan. Subsequent to June 30, 1996, the Company issued (i)
158,232 shares of Common Stock to employees upon the exercise of stock
options outstanding prior to June 30, 1996; (ii) 20,410 shares of Common
Stock to employees under the Company's Employee Stock Purchase Plan; and
(iii) 191,571 shares of Common Stock to Allergan in connection with the
execution of a collaboration agreement in October 1996.

DILUTION

The net tangible book value of the Company at June 30, 1996 was
approximately $32,807,000 or $3.12 per share. Net tangible book value per share
represents the amount of the Company's total tangible assets less total
liabilities, divided by the number of shares of Common Stock outstanding. After
giving effect to the sale by the Company of 2,000,000 shares of Common Stock
offered hereby (at a public offering price of $12.00 per share), the pro forma
net tangible book value of the Company at June 30, 1996 would have been
approximately $54,517,000, or $4.35 per share. This represents an immediate
increase in such net tangible book value of $1.23 per share to existing
stockholders and an immediate dilution of $7.65 per share to new investors. The
following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Public offering price per share.............................................. $ 12.00
Net tangible book value per share before the Offering........................ $ 3.12
Increase per share attributable to new investors............................. 1.23
---------
Pro forma net tangible book value per share after the Offering............... 4.35
---------
Dilution per share to new investors.......................................... $ 7.65
---------
---------
</TABLE>

16
<PAGE>
SELECTED FINANCIAL DATA

The selected financial data set forth below with respect to SUGEN's
statements of operations for each of the three years in the period ended
December 31, 1995 and balance sheet data at December 31, 1994 and 1995, are
derived from the financial statements of SUGEN that have been audited by Ernst &
Young LLP, independent auditors, which are included elsewhere herein and are
qualified by reference to such financial statements and the notes related
thereto. The statement of operations data for the period from inception (August
16, 1991) to December 31, 1991 and the year ended December 31, 1992 and the
balance sheet data as of December 31, 1991, 1992 and 1993 are derived from
financial statements audited by Ernst & Young LLP but not included in this
Prospectus. The balance sheet data at June 30, 1996 and the statement of
operations data for the six months ended June 30, 1995 and 1996 are derived from
unaudited financial statements included elsewhere herein. The unaudited
financial statements include all adjustments, consisting of normal recurring
adjustments, that the Company considers necessary for a fair presentation of the
financial position and results of operations for these periods. Operating
results for the six months ended June 30, 1996 are not necessarily indicative of
the results that may be expected for the entire year ending December 31, 1996.
The data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and the notes related thereto included elsewhere in this Prospectus.

<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Contract revenue (includes amounts from
related party)........................... $ -- $ 1,080 $ 5,470 $ 6,270 $ 13,843 $ 6,875 $ 7,908
Costs and expenses:
Research and development................ 408 4,531 10,251 17,079 23,226 10,563 14,332
General and administrative.............. 465 1,591 2,169 3,106 5,086 2,389 2,967
------ --------- --------- --------- --------- --------- ---------
Total costs and expenses.............. 873 6,122 12,420 20,185 28,312 12,952 17,299
------ --------- --------- --------- --------- --------- ---------
Operating loss............................ (873) (5,042) (6,950) (13,915) (14,469) (6,077) (9,391)
Other income and expense:
Interest income......................... 45 131 339 529 1,988 908 1,288
Interest expense........................ -- (45) (56) (278) (494) (209) (354)
Gain on sale of investment in Selectide
Corporation............................ -- -- -- -- 1,006 1,006 --
------ --------- --------- --------- --------- --------- ---------
Other income, net..................... 45 86 283 251 2,500 1,705 934
------ --------- --------- --------- --------- --------- ---------
Net loss.................................. $ (828) $ (4,956) $ (6,667) $ (13,664) $ (11,969) $ (4,372) $ (8,457)
------ --------- --------- --------- --------- --------- ---------
------ --------- --------- --------- --------- --------- ---------
Net loss per share........................ $ (0.70) $ (3.00) $ (3.89) $ (4.15) $ (1.32) $ (0.51) $ (0.81)
------ --------- --------- --------- --------- --------- ---------
------ --------- --------- --------- --------- --------- ---------
Shares used in computing net loss per
share.................................... 1,177 1,649 1,712 3,296 9,085 8,651 10,486
------ --------- --------- --------- --------- --------- ---------
------ --------- --------- --------- --------- --------- ---------
Pro forma net loss per share (1).......... $ (0.36) $ (1.37) $ (1.39) $ (2.22)
------ --------- --------- ---------
------ --------- --------- ---------
Shares used in computing pro forma net
loss per share (1)....................... 2,274 3,618 4,786 6,143
------ --------- --------- ---------
------ --------- --------- ---------
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------- JUNE 30,
1991 1992 1993 1994 1995 1996
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments..... $ 5,194 $ 12,315 $ 16,984 $ 22,414 $ 53,253 $ 40,238
Total assets.......................................... 5,592 15,306 20,812 28,455 59,243 46,498
Capital lease obligations -- non-current portion...... 33 291 441 2,087 3,651 3,408
Accumulated deficit................................... (828) (5,784) (12,451) (26,270) (37,964) (46,618)
Total stockholders' equity............................ 5,335 11,127 13,230 18,319 43,441 32,807
</TABLE>

- ------------------------------
(1) Pro forma net loss per share information gives effect to the conversion of
all Preferred Stock outstanding from the date of issuance. See Note 1 of
Notes to Financial Statements.

17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THIS PROSPECTUS CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE THE FACTORS DISCUSSED BELOW AS WELL AS THE FACTORS DISCUSSED
IN "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.

OVERVIEW

SUGEN was founded in July 1991 to discover and develop small molecule drugs
that target specific cellular signal transduction pathways. These pathways have
been implicated in diseases such as cancer and diabetes as well as in
dermatologic, immunologic, cardiovascular and neurologic disorders. Through June
30, 1996, substantially all of the Company's revenue has been pursuant to
collaborations with Zeneca, ASTA Medica and Amgen. The Company intends to pursue
its drug discovery programs independently and in collaboration with other
pharmaceutical companies.

In January 1995, the Company established an oncology research collaboration
with Zeneca. The Company received a $5.0 million technology set-up fee, receives
annual research funding and will receive additional fees upon the achievement of
specified milestones. In addition, Zeneca purchased 789,141 shares of Common
Stock at a price of $15.84 per share. In December 1995, the Company established
an oncology product development collaboration with ASTA Medica. The Company
received a $4.0 million technology set-up fee and will receive additional fees
upon the achievement of specified milestones as well as additional consideration
in the form of contract services for non-collaboration work. In addition, ASTA
Medica purchased 431,137 shares of Common Stock for $9.0 million, or $20.88 per
share. In January 1996, the Company and Amgen terminated their research
collaboration one year prior to the scheduled expiration. In connection with the
termination, Amgen paid SUGEN $2.5 million, forgave amounts previously advanced,
and purchased from SUGEN for $200,000, a warrant for the purchase of 200,000
shares of Common Stock with an exercise price of $15.50 per share. In addition,
SUGEN repurchased 235,000 of the 387,878 shares of SUGEN Common Stock held by
Amgen at $11.48 per share. The termination arrangement further provides that the
Company will make royalty and certain other payments to Amgen in the event that
designated potential products are developed and marketed.

In April 1996, the Company established a second multi-project Collaborative
Research and Development Agreement ("CRADA") with the National Cancer Institute
("NCI") for the application of SUGEN's proprietary transcript imaging technology
in order to identify the differences in expression patterns of signal
transduction genes that characterize each of the sixty tumor cell lines which
constitute the NCI's screening panel. Interesting lead compounds from the NCI's
collection will be tested in SUGEN's target-specific signal transduction assays,
and lead compounds from SUGEN also will be tested against the NCI panel. SUGEN
will have the option to license discoveries made through this process for
adoption into SUGEN's drug discovery programs.

The Company has not been profitable since inception and expects to incur
substantial losses for the foreseeable future, primarily due to the expansion of
its research and development programs, including preclinical studies and
clinical trials. The Company expects that losses will fluctuate from quarter to
quarter and that such fluctuations may be substantial. As of June 30, 1996, the
Company's accumulated deficit was $46.6 million. See "Risk Factors -- History of
Operating Losses and Accumulated Deficit."

RECENT OPERATING RESULTS AND DEVELOPMENTS

The Company's revenues for the third quarter of fiscal 1996 were $2.4
million and its net loss was $5.4 million, or $0.51 per share. These results
compared with revenues of $3.4 million and a net loss of $3.7 million, or $0.42
per share, for the same quarter of 1995. As of September 30, 1996, the Company
had cash, cash equivalents and short-term investments of approximately $33.4
million.

In October 1996, the Company established an ophthalmology research
collaboration with Allergan. The Company received a $2.0 million initial payment
for past research services, will receive annual research

18
<PAGE>
funding and expects to receive additional fees upon the achievement of specified
milestones and royalties on any product sales. In addition, Allergan purchased
191,571 shares of Common Stock at a price of $20.88 per share.

RESULTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 1995 AND 1996

The Company's revenues for the six months ended June 30, 1996 were $7.9
million, an increase from $6.9 million during the same period of the prior year.
Revenues for the six months ended June 30, 1996 included contract revenue from
the Zeneca collaboration and the partial recognition of both the $4.0 million
technology set-up fee received in connection with the ASTA Medica collaboration
and the $4.3 million wind-down fee associated with the Amgen termination. The
Company recognizes revenues from set-up and wind-down fees as the related
activities are performed, which is generally over a twelve-month period or less.
Through June 30, 1996, the majority of the set-up and wind-down fees from the
ASTA Medica and Amgen collaborations, respectively, had been recognized as
revenue, and the Company anticipates recognizing the remaining part of these
fees during 1996. Thereafter, the Company will not recognize any additional
revenue under the Amgen collaboration, and will recognize additional revenue
under the ASTA Medica collaboration only upon the achievement of specified
milestones and for contract services for non-collaboration work. As a result,
the Company will be required to enter into new collaborations, in addition to
the Allergan collaboration, in order to replace the revenues recognized under
these collaborations in 1996. No assurance can be given as to the ability of the
Company to enter such collaborations on a timely basis or at all.

Research and development expenses increased to $14.3 million for the six
months ended June 30, 1996 from $10.6 million for the same period last year. The
increase during 1996 was primarily due to the expenses associated with
additional personnel committed to the Company's research and development
programs. In addition, the progression of clinical activities, including
expanded Phase I studies of the Company's lead anti-cancer compound, SU101, and
the advancement of multiple programs through preclinical development contributed
to higher expenses during 1996. The Company expects that its research and
development expenses will continue to grow significantly throughout the
remainder of 1996 and in future years due to the hiring of personnel, additional
preclinical studies, the progression of SU101 clinical trials, the initiation of
new clinical trials and pursuant to requirements under the Company's
collaborations.

General and administrative expenses increased to $3.0 million for the six
months ended June 30, 1996 from $2.4 million in the same period last year. The
increase was primarily due to additional administrative staffing, the associated
recruiting and relocation expenses, as well as costs associated with the
resignation of an officer. The Company expects that its general and
administrative expenses will continue to increase in order to support the
Company's research and development efforts.

Interest income increased to $1.3 million for the six months ended June 30,
1996, from $908,000 in the comparable period in 1995. This increase was due to
higher investment balances arising primarily from issuances of the Company's
capital stock. For the six months ended June 30, 1996, interest expense was
$354,000 compared with $209,000 incurred in the same period last year. This
increase was primarily due to the Company's continued use of capital lease
financing for equipment and property improvements related to the expansion of
its facilities. The Company expects that interest expense will continue to
increase in 1996 and in future years due to the continued use of capital lease
financing for equipment and facility improvements. A $1.0 million gain on the
sale of the Company's investment in Selectide Corporation was included in other
income during the six month period ended June 30, 1995.

YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995

Revenues for the years ended December 31, 1993, 1994 and 1995 were $5.5
million, $6.3 million and $13.8 million, respectively. Revenue in 1993 and 1994
included fees earned pursuant to the Amgen collaboration. Revenues for 1995
included the recognition of a $5.0 million non-recurring technology set-up fee
received upon the execution of the collaboration agreement with Zeneca and the
partial recognition of the $4.0 million technology set-up fee received in
connection with the ASTA Medica collaboration. The increase in revenues in 1995
was primarily due to contract revenue from the Zeneca collaboration.

19
<PAGE>
Research and development expenses for the years ended December 31, 1993,
1994 and 1995 were $10.3 million, $17.1 million and $23.2 million, respectively.
The increase in expenses in 1994 was primarily due to higher expenses associated
with additional research and development efforts and preclinical activities
related to the Company's December 1994 filing of its IND for SU101. The increase
during 1995 was primarily due to the expenses associated with additional
personnel committed to the Company's research and development programs. In
addition, the initiation of Phase I clinical activities and increased funding of
development projects performed by others contributed to the growth in expenses.
The Company increased its funding of research and development projects performed
by others to $4.2 million for the year ended December 31, 1995 from $3.7 million
and $3.2 million in 1994 and 1993, respectively.

General and administrative expenses for the years ended December 31, 1993,
1994 and 1995 were $2.2 million, $3.1 million and $5.1 million, respectively.
The increases were primarily due to increased administrative staffing,
additional costs incurred in connection with corporate development activities
and higher expenses associated with the Company's reporting requirements as a
result of becoming a publicly held company in late 1994.

Interest income for the years ended December 31, 1993, 1994 and 1995 was
$339,000, $529,000 and $2.0 million, respectively. The increases were due to
higher investment balances arising primarily from issuances of the Company's
capital stock. Interest expense for the years ended December 31, 1993, 1994 and
1995 were $56,000, $278,000 and $494,000, respectively. These increases were
primarily due to the Company's use of capital lease financing for property
improvements and equipment related to the expansion of its facilities. A $1.0
million gain on the sale of the Company's investment in Selectide Corporation
was included in other income during 1995.

The Tax Reform Act of 1986 contains provisions that limit the utilization of
net operating loss and tax credit carryforwards if there has been a "change in
ownership" as described in Section 382 of the Internal Revenue Code. Such a
change in ownership may have arisen as a result of the Company's initial public
offering or subsequent sales of securities, including this offering.

LIQUIDITY AND CAPITAL RESOURCES

The Company had cash, cash equivalents and short-term investments of
approximately $40.2 million at June 30, 1996 compared with approximately $53.3
million at December 31, 1995 and $22.4 million at December 31, 1994. The
decrease in cash and investments during the six months ended June 30, 1996 was
primarily due to the net loss for the six month period combined with the
repurchase of the Company's Common Stock from Amgen as discussed above,
partially offset by an increase in accounts payable and accrued liabilities. The
increase in cash and investments during 1995 resulted primarily from (i) $13.0
million received from ASTA Medica, (ii) $16.3 million received upon completion
of a placement of Common Stock in September 1995, (iii) $17.5 million initially
received in connection with the Zeneca collaboration and the purchase of stock
and (iv) other research funding generally received pursuant to the Company's
collaborations. In addition, the Company received net proceeds of $1.5 million
pursuant to the acquisition of the Company's investment in Selectide Corporation
by Marion Merrell Dow, Inc. These proceeds were net of the concurrent repurchase
by SUGEN of the 300,760 shares of Common Stock held by Selectide. These
additions to cash, cash equivalents and short-term investments during 1995 were
partially offset by the Company's operating costs and expenses.

Through June 30, 1996, the Company's principal sources of financing were its
initial public offering of Common Stock, placements of the Company's Preferred
and Common Stock and funds received under the Company's corporate
collaborations. The Company's current principal sources of liquidity are its
research and development collaborations with ASTA Medica, Zeneca and Allergan,
its cash, cash equivalents and short-term investments and capital lease
financing. The Company has a capital lease line of $3.5 million available
through December 1996 for the purchase of equipment and facility improvements,
of which $1.3 million was available at June 30, 1996.

The Company has entered into license and research agreements whereby the
Company funds research projects performed by others or in-licenses compounds
from third parties. Some of the agreements may require the Company to make
milestone and royalty payments. Under these programs, commitments for

20
<PAGE>
research funding are approximately $3.4 million and $2.0 million in 1996 and
1997, respectively. Most of these commitments are cancelable within a three to
six month period and limit the amounts payable by the Company for sponsored
research under the programs after notice of cancellation by the Company.

From time to time, the Company evaluates potential investments in
complementary businesses, products or technologies. Currently, the Company is
considering modest investments in such complementary businesses during 1996. The
Company has no other present undertakings, commitments or agreements with
respect to investments in other businesses.

Net additions of equipment and leasehold improvements for the six months
ended June 30, 1996 decreased to $666,000 from $1.0 million for the same period
in 1995 due to the timing of equipment purchases and facility improvements.
However, total capital spending for 1996 is anticipated to remain comparable to
that of the prior year. Additions of equipment and leasehold improvements (net
of retirements) for the years ended December 31, 1995 and 1994 were $2.6 million
and $2.4 million, respectively, which included $2.6 million and $2.7 million,
respectively, of equipment and leasehold improvements financed through the
Company's master lease agreements. In general, additions for 1995 and 1994
included facility expansion costs, the continued enhancement of the Company's
laboratory capabilities and the costs associated with the Company's ongoing
effort to maintain an up-to-date technology base. Additions in 1995 also
included an investment in bioinformatics. Under these capital leases and certain
operating lease arrangements, the Company has lease commitments of $8.6 million
through 1999. The Company intends to fund future capital expenditures
principally through lease financing arrangements although there can be no
assurance that such financing will be available.

The Company estimates that its existing capital resources, after giving
effect to the anticipated net proceeds from the Offering, together with facility
and equipment financing, anticipated revenues from its current collaborations
and net income from investment activities, will be sufficient to fund its
planned operations into the second half of 1998. The Company anticipates that
the funds from future collaborations will extend this time period. However,
there can be no assurance that the Company will enter into any such
collaboration. In addition, there can be no assurance that the underlying
assumed levels of revenue and expense will prove accurate. Whether or not these
assumptions prove to be accurate, the Company will need to raise substantial
additional capital to fund its operations. The Company intends to seek such
additional funding through collaborative arrangements, public or private equity
or debt financings and capital lease transactions; however, there can be no
assurance that additional financing will be available on acceptable terms or at
all. If additional funds are raised by issuing equity securities, further
dilution to stockholders may result. In addition, in the event that additional
funds are obtained through arrangements with collaborative partners, such
arrangements may require the Company to relinquish rights to certain of its
technologies, product candidates or products that the Company would otherwise
seek to develop or commercialize itself. If adequate funds are not available,
the Company may be required to delay, reduce the scope of or eliminate one or
more of its research or development programs, which could have a material
adverse effect on the Company. See "Risk Factors -- Future Capital Needs;
Uncertainty of Additional Funding."

21
<PAGE>
BUSINESS

OVERVIEW

SUGEN's cancer drug development strategy is designed to facilitate the rapid
progression from Phase I clinical studies to FDA approval and product launch,
and thus the Company is targeting fast track entry indications for clinical
development even where these constitute a relatively small subset of the
potentially addressable patient population. Once a product has been introduced
to the clinic, SUGEN will work with the National Cancer Institute ("NCI") and
the oncology community to extend the labelling of the drug to other
applications. In order to market its products effectively, the Company intends
to build a U.S. sales force of approximately 50 experienced representatives who
will target the major cancer treatment centers. The Company will also seek to
in-license and market additional late-stage cancer assets that serve to
complement SUGEN products, and intends to work with a partner to develop
genomic-based cancer diagnostics.

22
<PAGE>
share development costs. This strategy is exemplified by the collaboration with
ASTA Medica Aktiengesellschaft ("ASTA Medica") with respect to the Pan-Her and
Raf inhibitor programs, in which Asta Medica is the Company's collaboration
partner in Europe and South America.

Separate from this strategy, the Company is funding a portion of its ongoing
cancer research through a collaboration with Zeneca Limited, a major
international pharmaceutical company. Zeneca is the Company's collaboration
partner and worldwide licensee with respect to five undisclosed cancer drug
discovery and development programs, on which SUGEN will receive milestone
payments and royalties on worldwide sales and will also have the opportunity to
earn profit participation in the North American market by contributing to
clinical development costs.

SUGEN is also applying its drug discovery platform to disease areas outside
oncology, including diabetes, dermatology, ophthalmology, neurological disorders
and immunology. In these areas, SUGEN intends to pursue the commercialization of
its technology through joint ventures or collaborations in which SUGEN
contributes validated targets, screening technologies and drug leads while the
partner provides the disease and clinical expertise as well as funding to bring
potential products to market. This strategy is exemplified by a collaboration
agreement entered into in October 1996 with Allergan, Inc. ("Allergan"). Through
this collaboration, Allergan became SUGEN's exclusive corporate partner in
ophthalmic neovascularization field, with the aim of utilizing SUGEN's
proprietary small molecule signal transduction inhibition technology to develop
novel therapies for the treatment of such major ophthalmic diseases as macular
degeneration and diabetic retinopathy.

OVERVIEW OF CELLULAR SIGNAL TRANSDUCTION PATHWAYS

The last decade of research has led to an increased understanding of how
cells communicate with each other to coordinate the growth and maintenance of
the multitude of tissues within the human body. A key element of this
communication network is the transmission of a signal from the exterior of a
cell to its nucleus, which results in the activation or suppression of specific
genes. This process is called signal transduction. An integral part of signal
transduction is the interaction of ligands, receptors and intracellular signal
transduction molecules ("downstream signalling molecules").

Ligands are chemical messengers, usually released by one cell to communicate
with a target cell by binding to specific receptors on the target cell's
surface. A receptor generally takes the form of a protein that straddles a
cell's membrane, with its "ligand binding domain" protruding out of the cell and
its "intracellular domain" anchored inside the cell. When a ligand binds to its
receptor, the newly formed receptor/ligand complex triggers the activation of a
cascade of downstream signalling molecules, thereby transmitting the message
from the exterior of the cell to its nucleus. When the message is received in
the nucleus, it dictates the activation or suppression of specific genes,
resulting in the production of proteins that carry out a specific biological
response. Depending on the specific ligand, receptor and downstream signalling
molecules, the resulting signalling cascade controls diverse and distinct
cellular processes. For example, metabolic changes can be effected by a ligand
such as insulin which, after binding to the insulin receptor, activates a
specific set of downstream signalling molecules within the cell, ultimately
leading to the regulation of glucose uptake and other insulin-associated
functions.

TYROSINE KINASES, TYROSINE PHOSPHATASES AND SERINE-THREONINE KINASES IN SIGNAL
TRANSDUCTION

TKs, TPs and STKs are classes of signalling molecules that are central to
the healthy functioning of all tissues. Some well known TKs include Her2, PDGF
TK, insulin receptor ("insulin TK"), epidermal growth factor receptor ("EGF
TK"), macrophage colony stimulating factor receptor and nerve growth factor
receptor. At present, there are approximately 100 known human TKs, all of which
have been cloned over the last twelve years. TPs were not discovered until 1988,
and at present there are approximately 50 known human TPs.

Generally, when a ligand binds to receptor TKs, the receptors must dimerize
(join in pairs at the cell surface) to become activated. This coupling activates
a specific enzyme activity which resides within the intracellular domain of each
TK. Upon activation, the TKs commence cross-phosphorylation, a process whereby
phosphates (highly charged particles) are enzymatically added to specific sites
on each of the TKs.

23
<PAGE>
These phosphates serve as attachment sites at which specific downstream
signalling molecules interact with the TKs. Many of these downstream signalling
molecules in turn become phosphorylated themselves, enabling them to recruit
their own substrates and thus pass on the signal. Depending on the specific
ligand and receptor, the resulting signalling cascade leads to changes in gene
expression or affects other cellular systems that ultimately determine if the
cell is to grow, mature, migrate, metabolize or survive.

Complementing TKs are TPs, which were first characterized in detail by Dr.
Edmond Fischer, a 1992 Nobel Laureate, SUGEN collaborator and member of SUGEN's
Science Advisory Board. While the TKs phosphorylate target proteins to exert
their activity, the TPs remove phosphates ("dephosphorylate") from target
proteins, thereby regulating the activity of the TKs. Generally, when a receptor
TK is activated by its ligand, a given biologic response is triggered.
Conversely, when a TP is activated, there is usually down regulation of a given
biologic response. In this manner, TKs can be visualized as the "gas pedal" and
TPs as the "brake pedal" for numerous biological processes. Many cellular
responses are thus regulated by the balance between specific TKs and TPs.

The most abundant kinases in the cell are STKs which phosphorylate serine
and threonine residues. These enzymes control an array of processes in the cell.
Many STKs act downstream in signal transduction cascades initiated by TKs, while
others integrate signals originating from other classes of receptors (e.g., G
protein-coupled receptors). STKs are involved in controlling the cell cycle, the
response of the cell to environmental stress, the development of certain cells
and tissues, and other processes such as metabolism.

DISEASES AND DISORDERS RELATED TO TK, TP AND STK SIGNALLING PATHWAYS

TKs, TPs, STKs and their signalling pathways play key roles in a variety of
normal cellular functions involving virtually every cell type in the body.
Examples include the growth of epithelial cells (skin and lining tissues of
internal organs), angiogenesis, hematopoiesis, proliferation of connective
tissue cells (fibroblasts), survival and differentiation of nerve cells,
regeneration of tissues during wound healing and regulation of the energy
metabolism of all cells. While normal cellular function involves a balance
between kinase and phosphatase activity, imbalances between these molecules have
been shown to result in a variety of chronic and acute pathological conditions,
including cancer and diabetes as well as in dermatologic, immunologic,
cardiovascular and neurologic disorders.

The close association of TKs, TPs and STKs with disease, coupled with
structural characteristics of these molecules, make them attractive targets for
drug discovery and therapeutic intervention. The intracellular domains of these
receptors can be targeted with great selectivity by drugs that inhibit enzyme
activity or that prevent the binding of downstream signalling molecules to the
phosphorylated receptor. Critical points further downstream in the signalling
cascade may also be viable targets since selective intervention at these points
can prevent the message from reaching its final destination in the nucleus.

CANCER

Research over the past 20 years has reinforced the view that cancer is a
disease involving damage, loss or amplification of specific genes. Moreover, of
the numerous oncogenes identified to date, many appear to be abnormal versions
of TK and STK signalling pathway components, such as ligands, TKs or STKs or
downstream signalling molecules. These discoveries have led to the realization
that dysfunctional TK or STK signalling pathways play an integral role in
cancer. More recently, as TPs have been shown to counteract the activity of TKs,
TPs have been implicated as potential tumor suppressor genes.

In 1986, Dr. Ullrich and Dr. Dennis Slamon of the University of California
at Los Angeles Medical Center, a researcher, clinical oncologist and member of
SUGEN's Science Advisory Board, established the clinical relevance of
overexpression of a receptor TK known as Her2 in human breast and ovarian
cancers. In their study of approximately 200 patients it was found that almost
30% of breast and ovarian cancer patients overexpress Her2 and that high levels
of Her2 in a patient's tumor correlated with reduced survival time. Since that
time, subsets of other types of human tumors have been shown to express high
levels of Her2, including gastric and lung cancers. Animal data from several
laboratories has demonstrated that the suppression of Her2 activity has a
significant inhibitory effect on tumor growth, validating Her2 as a target for
cancer therapy in the subset of patients that overexpress this TK. Similarly,
aberrant PDGF TK signalling

24
<PAGE>
has been implicated in studies at SUGEN and elsewhere in subsets of brain,
ovarian and other solid tumors, and overexpression of the EGF TK has been
implicated in subsets of breast, brain, head and neck, lung and gastric cancers.

As a result of the close linkage between TK, TP and STK aberrations and
cancer, SUGEN believes that certain cancers can be recategorized according to
specific TK, TP and STK signalling pathway defects rather than merely by
physical location in the body (e.g., breast, lung, brain). Several observations
support this approach. For example, TK overexpression is not a transient
phenomenon. Cancer cells that exhibit TK overexpression do so continuously. In
addition, in many cases a cancer cell exhibits heavy overexpression of only one
TK. For instance, when cancer cells metastasize from a Her2-dependent tumor and
establish themselves at a remote site in the body, the distal tumor has also
been observed to overexpress Her2. Furthermore, SUGEN has shown that certain
tumor cells that overexpress a TK are more sensitive to TK inhibitors than
normal cells, thus reducing the likelihood of a TK inhibitor affecting normal
cells and causing problematic side effects. The Company believes that these
observations are the basis for a new approach to cancer therapy which might
commence with a sample of biopsy material being sent to a pathology lab for gene
expression profiling, in order to determine the nature of the cellular
abnormality, such as overexpression of a TK. This diagnosis could then be used
to select the appropriate target-specific signal transduction inhibitor for
treatment.

ANGIOGENESIS

Studies conducted by SUGEN in mice have shown that small molecule drug
candidates targeting the Flk-1 pathway can block the formation of blood vessels
("angiogenesis") essential to the growth and spread of most solid tumors. Flk-1
TK receptors, present on endothelial cells which make up blood vessel walls, act
as regulators of cell growth and angiogenesis. Tumors secrete VEGF which binds
to Flk-1 TK receptors resulting in the sprouting of capillaries from the blood
vessel toward the tumor. Blocking Flk-1 TK activity disables the capacity of
most tumors to stimulate formation of blood vessels and thus deprives the tumor
of necessary nutrients. In preclinical studies conducted by researchers at SUGEN
and collaborating labs, small molecule inhibitors of the Flk-1 receptor tyrosine
kinase blocked VEGF-dependent angiogenesis, as well as vascular permeability,
and human endothelial cells were prevented from undergoing cell division that is
required for the formation of new blood vessels. Currently, SUGEN researchers
are testing in advanced preclinical studies a number of potential drug
candidates that inhibit the activity of Flk-1 TK.

Several studies suggest that a tumor's ability to form metastases depends on
the degree of vascularization of the primary tumor. A high degree of
vascularization generally correlates with a poorer prognosis. SUGEN has
demonstrated that by blocking Flk-1 TK activity in a metastasis model it can
block the formation of metastasis to the liver and also prolong life in animals.
Flk-1 TK inhibitors thus are potentially useful to treat metastatic disease in
defined patient populations.

Flk-1 TK may also be an effective therapeutic for treating other diseases
associated with angiogenesis. These include psoriasis, rheumatoid arthritis and
occular neovascularization. Potential ophthalmic applications are in diabetic
retinopathy and macular degeneration.

DIABETES

SUGEN has determined that certain TPs appear to be the body's natural down
regulators of the insulin TK signalling pathway. A drug which selectively blocks
these TPs may restore signalling through the insulin TK pathway, thereby
increasing glucose uptake and metabolism, and may constitute a novel therapeutic
approach to both Type I and Type II diabetes. Such a drug may also offer the
advantage of being orally available.

PSORIASIS

Hyperproliferation of keratinocytes contributes to psoriasis, and work by
SUGEN and its collaborators has demonstrated that EGF TK signalling is required
for the growth of keratinocytes. These studies suggest that a drug which blocks
the EGF TK may be useful in treating psoriasis. Psoriasis is a chronic skin
disorder that affects approximately four million people in the United States,
and annual treatment costs in this

25
<PAGE>
country are estimated at over $1.5 billion. There are few currently available
drugs for this disease that offer satisfactory efficacy and safety. SUGEN's work
in psoriasis is based in part on research done by its collaborators at Hebrew
University of Jerusalem ("HUJ").

NEUROBIOLOGY

TKs, TPs and their signalling pathways are known to play key roles in the
maintenance of the central and peripheral nervous systems. SUGEN has identified
novel TKs and TPs whose expression is restricted to the nervous system and which
may serve as therapeutic targets for intervention in neurodegenerative diseases.

IMMUNOLOGY

The role of TKs in the generation and maintenance of the human immune system
has been established. For example, ZAP-70, an intracellular TK, appears to be a
primary regulator of the generation and function of the T-lymphocyte cell
population of the immune system. This TK and other signal transduction molecules
in the immune system represent potential drug discovery targets for identifying
novel immunosuppressive and immuno-modulating drugs.

SUGEN'S DRUG DISCOVERY TECHNOLOGY

SUGEN's goal is to discover and develop drugs that target specific TKs, TPs,
STKs or related downstream signalling molecules. SUGEN's drug discovery effort
is focused primarily on the discovery of small molecule drugs derived from
synthetic compound libraries and collections of natural product extracts,
including microbes, fungi and plants. As compared to biologic pharmaceuticals
such as proteins, peptides and carbohydrates, small molecules often offer
advantages as potential drugs. Small molecules can more easily penetrate cell
membranes and the blood brain barrier, can often be delivered orally, and can be
less immunogenic. These molecules also tend to involve substantially lower
process development and manufacturing costs. Using inhibition of TK
phosphorylation in a whole cell environment as an initial screening criterion,
SUGEN has been able to identify lead compounds in a number of its programs that
penetrate the cell easily, show minimal cytotoxicity and demonstrate potent and
selective activity on given targets.

At SUGEN, the process of drug discovery includes the following steps,
regardless of disease area: (1) target identification; (2) target validation;
(3) assay design and screening of compounds for leads; and (4) lead
optimization, including crystallography and medicinal chemistry. The Company's
in-house research teams also work closely with NYU, MPI and MPP in target
identification and target validation. In this case, the remaining steps of this
process are conducted primarily by SUGEN or by its corporate partners.

TARGET IDENTIFICATION

SUGEN's genomics efforts are focused exclusively on certain families of
signal transduction genes, which make up approximately one percent of the entire
human genome. These families include the TKs, TPs, STKs, adaptor molecules and
certain other important molecules involved in cellular signalling. Within this
specific area of focus, SUGEN identifies and defines the function of novel genes
and their protein products, and in turn assesses their utility as targets for
therapeutic intervention against diseases of interest to the Company.

SUGEN believes that substantially the entire human genome will be sequenced
within a few years, and most of that sequence data will be available on public
databases. SUGEN's target identification effort, therefore, is focused on
determining the function of novel genes. In this regard, SUGEN has made a
strategic commitment to its bioinformatics platform, representing a bridge
between abundant gene sequence data and disease-relevant discoveries.

SUGEN's bioinformatics program starts with a physical repository of the
approximately 200 known signal transduction genes in addition to numerous other
genes discovered by SUGEN but not published to date. SUGEN also has a
proprietary panel of oligonucleotide primers capable of recognizing genes that
are minimally related to genes already in the SUGEN library. All of this
information is supported by an in-house massively parallel computer processing
platform capable of 68,000 million instructions per second (mips) throughput.
Using sophisticated pattern recognition algorithms, SUGEN is able to mine the
public databases on a daily basis looking for new sequence material of interest,
for the complete sequences of gene

26
<PAGE>
fragments identified from cells of interest, for additional members of newly
discovered families of signal transduction genes, or for homologs of human genes
in non-human genome databases that could provide quick insights into the
function of the new human gene.

SUGEN has used this bioinformatics platform to develop a proprietary
technology called transcript imaging, for which the Company has filed for patent
protection. This technology enables SUGEN researchers to take a small sample of
cells or tissue of interest and to obtain rapidly a systematic analysis of the
expression levels in the sample of every TK, TP and STK in SUGEN's library.
Transcript imaging allows SUGEN to identify quickly the signalling pathways that
play key roles in specific cell types and, more importantly, to compare diseased
cells to healthy cells in order to determine where aberrant signalling may play
a causative role in a disease. For example, if a particular signal transduction
gene is heavily overexpressed in a significant proportion of samples of a
specific tumor type, that gene becomes a potential target for drug development.
If the gene can subsequently be validated as playing a causative role in these
tumors, it may be adopted as a target for drug discovery. SUGEN believes that
transcript imaging also has the potential to become an important diagnostic
tool, but SUGEN will seek to pursue this opportunity in partnership with an
established diagnostics company.

TARGET VALIDATION

A primary challenge in SUGEN's target driven drug discovery is to progress
as efficiently as possible from identifying a potential new target to verify
that a drug which specifically acts on that target could have a significant
therapeutic benefit in the treatment of a given disease. SUGEN terms this
process "target validation," and it is a crucial step before committing
resources to assay development and screening for target-specific drug leads. The
first step in validating a novel target usually involves developing a battery of
proprietary reagents, including truncated or point-mutated genes, anti-sense
constructs and antibodies. In the case of novel receptors, where the natural
ligands and signalling substrates initially may be unknown, the Company employs
a variety of advanced methods for identifying and cloning these molecules. Using
these reagents, the Company then engineers cell lines in which it has clearly
characterized the expression levels and activity of the target gene. These cell
lines can then be used to establish IN VITRO and IN VIVO whether down-regulating
the target will block the disease cascade. If so, the target is considered
validated.

ASSAY DESIGN/SCREENING

From its inception, SUGEN has committed significant resources to building a
strong assay development capability, and the Company regards this capability as
an important component of its proprietary position in the discovery and
development of target specific signal transduction inhibitor drugs. Assay
quality is the most important determinant of any screening program's
productivity, and this becomes even more important in target driven drug
discovery. SUGEN primarily employs engineered whole cell assays rather than
biochemical assays. A majority of SUGEN's assays are designed for
high-throughput robotic screening, and its core assay technologies are broadly
applicable to TKs, TPs and STKs and related signalling molecule targets.

SUGEN's drug discovery process employs a battery of proprietary assays and
models engineered specifically to ensure that the target is present and
functional in a consistent fashion at each step of the screening cascade.
SUGEN's assays are designed to answer the following four questions:

Screen 1 Can a compound block the signalling of the target in
question, within the context of a living cell?

Screen 2 Is the compound sufficiently selective in blocking the
desired target's signalling (i.e., can it block the target
without blocking closely related targets)?

Screen 3 Does the compound exert the desired biological effect on a
living cell (e.g., block cell growth)?

Screen 4 Does the compound exert the desired biological effect
within the context of an IN VIVO disease model?

27
<PAGE>
By employing this proprietary screening cascade, SUGEN hopes to identify
lead compounds which are active in a whole cell environment, are sufficiently
potent and specific to a given target, and are active in an IN VIVO disease
model which is driven by the given target.

Once targets are validated by SUGEN and the assays have been developed and
validated, diverse libraries of synthetic small molecules and natural product
extracts are screened in order to identify potential drug leads. SUGEN currently
has a number of targets moving through its screening assays, and as new targets
are validated SUGEN continues to add to its panels of assays. Each additional
assay enhances the Company's ability to determine the specificity of lead
compounds. Along with assay design and screening, SUGEN has devoted significant
resources to acquiring libraries of structurally diverse compounds from a
variety of sources around the world.

CHEMICAL COMPOUND LIBRARIES. SUGEN has entered into a number of agreements
designed to obtain chemical compounds for screening. These agreements cover a
broad range of chemical entities from sources across the world. The Company
currently has over 25,000 chemical compounds available in-house for screening
and has access to a portion of Zeneca's libraries for selected targets.

NATURAL PRODUCT SOURCES. SUGEN has gained access to commercial and
non-commercial sources of natural products, including microbial, plant and
fungal extracts. These sources represent a worldwide collection network
providing substantial diversity of material, including extracts from Japan,
Europe and North America. The Company is currently negotiating to gain access to
additional sources of extracts from different parts of the world. The Company
currently has over 16,000 natural product extracts available in-house for
screening.

LEAD OPTIMIZATION

The objective of SUGEN's lead optimization program is to increase the
potency, specificity and pharmacologic properties of lead compounds by designing
and synthesizing analogs. Lead optimization uses an iterative process employing
panels of assays to test for TK activity, TK specificity, and IN VIVO
pharmcologic endpoints of lead molecules in order to derive compounds with
clinical utility. All results are entered into a database that allows for
determination of structure and activity relationships leading to synthetic
chemistry efforts that follow important parameters for drug development. This
growing database represents a proprietary source of information on relationships
between small molecules, their specific targets, and the pharmacologic
properties of the compounds which the Company believes will accelerate the
optimization of lead compounds in several SUGEN programs.

SUGEN has recently added crystallographic analysis to its drug discovery
infrastructure. Work being done in Dr. Schlessinger's lab at NYU will allow
SUGEN scientists to direct synthetic chemistry efforts in a manner that relies
upon information derived from models that use SUGEN compounds in association
with the catalytic core of TKs. With this information in hand, the Company
believes that the lead optimization process can be pursued in a more rational
manner since chemistry efforts will be better directed. In this regard, SUGEN is
collaborating with ArQule, Inc. ("ArQule") in certain of its programs, in order
to use ArQule's combinatorial chemistry technology to rapidly synthesize large
numbers of analog compounds around SUGEN's lead compounds, using crystallography
information to direct these efforts. The crystallographic analysis also provides
a rationale to identify novel chemical templates that would provide a cache of
novel compounds with application to the inhibition of TKs and STKs with broad
application.

The Company believes that its ability to improve potency and specificity in
the early stages of drug discovery process and pharmacologic features in the
later stages of lead optimization may reduce the incidence and severity of side
effects and thus may reduce the cost, time and risk associated with bringing
potential products to market.

PRECLINICAL DEVELOPMENT

Wherever possible, SUGEN's IN VITRO and animal models utilize cell lines,
reagents and techniques developed during target validation; therefore, the
appropriateness of the model system is already known prior to drug testing. In
addition, many other tools used during target validation are used again at this
stage of testing. Typically, additional cell lines and animal models will need
to be developed in order to enable the accurate assessment of a compound's
target-specific activity in an in vivo environment.

28
<PAGE>
PRODUCT DEVELOPMENT PROGRAMS
The breadth of involvement of TKs, TPs, STKs and their signalling pathways
in biological functions makes it impractical for the Company to establish drug
discovery programs in all disease areas in which opportunities may emerge. SUGEN
currently is focusing on disease areas that represent significant market
opportunities and where the underlying science is relatively mature. Therefore,
SUGEN concentrates its drug development resources on cancer, diabetes and
psoriasis, with additional focused efforts on cardiovascular, immunologic and
neurologic disorders. The Company believes that these disease areas offer
opportunities for the development of novel pharmaceuticals that will represent
major advances in efficacy and safety over currently available therapies.

The following table outlines SUGEN's research and development programs.
Certain of these programs are being pursued independently, while others are
being undertaken with SUGEN's collaborators.

<TABLE>
<S> <C> <C> <C>
PROGRAM INDICATION STATUS (1) RIGHTS
- -------------------------------------------------------------------------------------------
ONCOLOGY
SU101
PDGF TK Antagonist Malignant glioma and other Phase I/II SUGEN
solid tumors
Orally available PDGF TK Solid tumors Lead compounds SUGEN
Antagonists
Flk-1 TK Antagonist Angiogenesis inhibition Preclinical SUGEN
-- Solid tumors
GRB2 Antagonist Multiple TK-driven tumors Lead compounds SUGEN
Pan-Her Antagonist Breast, ovarian, gastric, lung Lead compounds ASTA Medica
(formerly Her2 Antagonist) head and neck, prostate cancers Europe and South
America
SUGEN
United States and
rest of world
Raf Antagonist Pancreatic, bladder cancers Lead compounds ASTA Medica
Europe and South
America
SUGEN
United States and
rest of world
Met TK Antagonist Stomach, cholorectal and lung Screening SUGEN
cancers
Five undisclosed cancer programs Certain major cancers Research and Zeneca
screening
- -----------------------------------------------------------------------------------------------------------------
OTHER PROGRAMS
SU5271 Psoriasis Preclinical SUGEN
EGF TK Antagonist
Flk-1 TK Antagonist Angiogenesis inhibition in Lead compounds Allergan
(and other targets) ophthalmology
-- Diabetic Retinopathy
-- Macular Degeneration
PDGF TK Antagonist Cardiovascular diseases Lead compounds SUGEN
(and other targets)
Insulin TP Antagonist Diabetes Lead compounds SUGEN
Type I/Type II
Neurology targets Neurodegenerative diseases Research, SUGEN
screening and
lead compounds
Immunology targets Immune suppression, asthma Research and SUGEN
screening
</TABLE>

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

<TABLE>
<S> <C> <C>
(1) "Research"............... Cloning and characterization of novel TKs, TPs, STKs and related downstream
signalling molecules (Target Identification) and validation of the role, if any, of
those molecules in a given disease (Target Validation).
"Screening".............. Screening to identify lead compounds.
"Lead Compounds"......... Evaluating drug leads and/or natural product extracts in relevant IN VITRO cellular
models including genetically engineered cell lines, as well as EX VIVO human tissues
and IN VIVO animal models.
"Preclinical"............ Pharmacology and toxicology testing in preclinical models, drug formulation and
manufacturing scale-up to gather necessary data to comply with applicable regulatory
protocols prior to submission of an IND with the FDA.
</TABLE>

See "Risk Factors" for a discussion of certain risks related to the
development of potential products.

29
<PAGE>
CANCER

Many of the cancers that SUGEN's programs are addressing have patient
subsets with extremely poor prognosis and no alternative for effective
treatment. For example, in certain cancers of the brain, breast, ovary and
pancreas, patient subsets can be defined in advance for which the average
survival time is short. By focusing on these patients initially, the Company
believes that it may be able to demonstrate statistically significant efficacy
with relatively small patient numbers and possibly shortened trial duration if
the compounds prove to be active.

SU101/PDGF TK ANTAGONIST. SU101 is a small synthetic molecule which
inhibits the PDGF TK signalling pathway. PDGF is a growth factor ligand that
stimulates the growth of a variety of cell types through binding to the PDGF TK.
The PDGF TK was first cloned by a group of collaborators led by Dr. Ullrich in
1983. Imbalances in the PDGF TK signalling pathway have been implicated by SUGEN
and others in subsets of several cancers including brain, ovarian, prostate,
lung and melanoma.

To expedite the commercialization of SU101, the Company is focusing its
initial development efforts on malignant glioma, a highly aggressive brain
tumor, and selected other solid tumor patient populations with very poor
prognosis. A subset of each of these cancers appears to be correlated with
aberrant PDGF TK signalling. Malignant glioma patients and refractory ovarian
patients have a mean survival time of approximately nine months and less than 12
months, respectively. Given the poor prognosis for these patients, the Company
believes that establishing clinical efficacy may not require large trials if the
compound is active.

In December 1994, the Company filed its first Investigational New Drug
("IND") application with the U.S. Food and Drug Administration ("FDA") for
SU101, a platelet-derived growth factor receptor ("PDGF TK") signalling
antagonist. Currently, the Company is sponsoring four separate Phase I clinical
trials The following table outlines SUGEN's current clinical trials. The Company
plans to move SU101 into Phase II and Phase II/III trials in early 1997.

<TABLE>
<CAPTION>
PROTOCOL START DATE INDICATION TYPE OF STUDY
- ---------------------------------------------------- ---------- --------------------------- ------------------
<S> <C> <C> <C>
Memorial Sloan-Kettering, NY, NY 5/95 Malignant Glioma Phase I (safety)
(refractory)
Cancer Therapy & Research Center, 8/95 Solid Tumors Phase I (safety)
San Antonio, TX
Lombardi Cancer Center, Georgetown 5/96 Solid Tumors Phase I (safety)
University, Washington, D.C.
UCLA Medical Center, Los Angeles, CA & 9/96 Non-small cell lung, Phase I/II (safety
University of Arizona Cancer Center, prostate and ovarian and efficacy)
Tucson, AZ cancers (refractory)
</TABLE>

As of October 15, 1996, SU101 had been administered to a total of 84
patients with advanced malignancies in the four trials. The drug, delivered by
intravenous infusion, is well tolerated and demonstrates a half-life of
approximately two weeks. The lead SU101 Phase I clinical trial has enrolled 39
recurrent glioma patients. The Company has completed enrollment at a dose nearly
thirty times the starting dose for this study without observing clinically
significant toxicities. Of the 34 currently assessable patients in this study,
15 have experienced stable disease or better (beyond the 10 week median time to
disease progression expected for this patient group), with four of these
patients experiencing greater than 50% tumor shrinkage with duration of response
ongoing to date (more than 10 months). The lead study will continue to accrue a
limited number of patients under a different dosing regimen, using a loading
dose with maintenance therapy every other week. Data analyzed from this final
cohort of patients will facilitate the initiation of a multicenter, randomized
study in patients with recurrent brain tumors in first-relapse, anticipated to
commence in early 1997.

In August 1995, the Company entered into a Collaborative Research and
Development Agreement ("CRADA") with the National Cancer Institute (the "NCI")
under which the NCI may participate in the clinical development of SU101, the
Company's lead anti-cancer compound. According to the CRADA, the parties are to
collaborate in the design and execution of clinical trials of SU101 in cancer.
SU101's clinical development will be pursued in several different cancer
indications in which anti-tumor activity was observed

30
<PAGE>
in preclinical studies. The overall goal of the research project with the NCI is
to establish the safety and efficacy of SU101 in adult patients, and to provide
adequate data to support the registration and marketing of SU101 in the United
States as rapidly as possible. SUGEN is to remain responsible for manufacturing,
formulations development and the majority of preclinical testing. SUGEN and NCI
are to share responsibility for monitoring and data collection for these
clinical trials and SUGEN will be responsible for preparing and filing the NDA
for this compound. These joint trials with the NCI will be supplemental to
SUGEN's independent clinical development activities on SU101 and other compounds
in this same class.

SUGEN believes SU101 may have applications in other cancers that involve
aberrant PDGF TK signalling. The PDGF TK also appears to be involved in both
restenosis of blood vessels after clearance by angioplasty, and more broadly in
atherosclerosis. The Company is currently in discussions with potential
corporate partners regarding cardiovascular applications of PDGF TK antagonists.
There can be no assurance that the Company will be able to conclude a
cardiovascular collaboration on acceptable terms.

The Company has filed patent applications in the United States and abroad
claiming the method of treating PDGF TK driven cancers with SU101. While the
Company believes at this time that it will receive method of use patent
protection on SU101, there can be no assurance that any such patent protection
will be issued. Recently, patents were issued in the United States to a large
pharmaceutical company covering the use of leflunomide and structurally related
compounds for the treatment of cancer. The Company presently does not know if
commercialization of SU101 will infringe these patents but believes that these
patents may be subject to claims of invalidity as they relate to SU101. See
"Risk Factors -- Uncertainties of Protection of Patents and Proprietary Rights;
Possible Patent Litigation."

ORALLY ACTIVE PDGF TK ANTAGONIST. SUGEN is committed to developing an
orally active small molecule inhibitor of the PDGF TK signalling pathway. From a
commercialization standpoint, an orally active compound may be complementary to
SU101 in that it may be developed as a chronic oral dosage form; it also may
prove to have a different tumor activity profile to SU101, but this can only be
determined in clinical testing. The Company currently has several small molecule
inhibitors of the PDGF TK signalling pathway which in IN VIVO animal studies
appear to be orally available and may have the potential to treat numerous PDGF
TK driven proliferative disorders, especially cancers. The Company has delayed
commencement of clinical trials with respect to SU102, one of these small
molecule inhibitors, while it evaluates safety, efficacy and pharmacokinetic
parameters of certain alternative compounds.

FLK-1 TK ANTAGONIST. Formation of the body's network of blood vessels, or
angiogenesis, occurs throughout early human development. This process generally
stops once a person reaches adulthood. Exceptions include wound healing and
during the menstrual cycle. Angiogenesis is re-triggered in adults, however,
during certain pathological conditions including tumor formation and metastasis,
and in certain ophthalmic disorders, including diabetic retinopathy and macular
degeneration. The pharmaceutical industry has long sought inhibitors of
angiogenesis for cancer because, theoretically, inhibiting angiogenesis would
starve tumors with few side effects. The potential markets for such a product
include all patients with solid tumor cancers where an angiogenesis inhibitor
could be an important adjunctive therapy, and in patients with metastatic
disease.

SUGEN and its collaborators have identified the Flk-1 TK as a receptor for
vascular endothelial growth factor ("VEGF") and as a major regulator of
angiogenesis. Experiments in mice have confirmed that eliminating Flk-1 TK
activity effectively disables the ability of the majority of tumors to stimulate
formation of blood vessels to nourish themselves, resulting in inhibition of
tumor growth. SUGEN is currently conducting a screening program to identify
small molecule inhibitors of Flk-1 TK and has identified lead compounds that
appear to be potent inhibitors of Flk-1 TK in IN VIVO studies. Inhibitors of
Flk-1 TK might be applicable not only to treat solid tumors and metastasis, but
may also be effective in preventing the vascularization associated with diabetic
retinopathy and macular degeneration.

The Company has established an exclusive research and licensing agreement
with the MPP to support the work of Dr. Werner Risau, a SUGEN consultant and a
director of MPP, and his laboratory. Dr. Risau is

31
<PAGE>
one of the leading researchers in the field of angiogenesis. In collaboration
with the laboratories of Dr. Risau and Dr. Ullrich, SUGEN is conducting further
studies into the mechanisms of angiogenesis, including the identification of
additional TK and TP related signalling pathways involved in angiogenesis.

GRB2 ANTAGONIST. Growth factor receptor binding protein 2 ("GRB2"), a
downstream signalling adaptor molecule, was originally cloned by Dr.
Schlessinger's laboratory. GRB2 has been shown to be an essential element in the
signal transduction pathway of many TKs particularly as a link between TKs and
Ras. (See "-- Raf Antagonist" below) SUGEN is investigating the role of GRB2 in
linking TK signalling to Ras activation in certain TK induced cancers, with the
belief that inhibition of GRB2 might be of therapeutic benefit for a broad range
of cancers typified by an activation of the TK-Ras pathway.

SUGEN has developed proprietary assays for high throughput screening for
GRB2 inhibitors and has now identified a novel class of signal transduction
inhibitors that act by blocking the function of the GRB2 adaptor protein. IN
VITRO studies indicate that SUGEN's GRB2 inhibitors act as cytostatic agents,
causing cancerous cells to cease multiplying or enter programmed cell death
(apoptosis). Preliminary IN VIVO studies indicate efficacy in tumor growth
inhibition.

PAN-HER ANTAGONIST (FORMERLY HER2 ANTAGONIST). Her2 is a TK, first cloned
by Dr. Ullrich, which is believed to play an important role in certain
aggressive breast, ovarian, gastric and lung cancers. Monoclonal antibodies
targeting Her2, including one developed by Dr. Ullrich, are currently in human
clinical trials by others for certain cancers. While the Company believes that
these trials may serve to validate the concept of targeting aberrant TKs in
cancer, SUGEN believes that a small molecule inhibitor of Her2 which also blocks
the closely related Her1 and Her4 receptors (thus, a Pan-Her Antagonist), has
the potential to be a more attractive and viable therapy. SUGEN believes it has
identified a number of highly potent and specific small molecule inhibitors of
Pan-Her. The Company is currently testing several of these molecules in animal
models. The Company is pursuing its Pan-Her Antagonist program in collaboration
with ASTA Medica. See "-- Corporate and Clinical Development Collaborations."

RAF ANTAGONIST. Raf, an STK, is a downstream signalling molecule through
which numerous signalling pathways have been found to converge. Raf is known to
interact with the oncogene Ras, and relay its signals. The Ras oncogene has long
been known to play an integral role in certain cancers, and may be involved in
over 20% of all tumors including approximately 90% of pancreatic tumors.
Moreover, Ras has drawn the attention of the pharmaceutical industry for many
years because of its frequent mutational activation in tumor cells. However,
since its biochemical activity and upstream activators were not well defined,
the search for Ras inhibitors has proved difficult.

Dr. Ulf Rapp, Director of Molecular Biology at the University of Wurzburg,
Germany, a SUGEN consultant and the discoverer of Raf, has demonstrated that
inhibition of Raf blocks the tumor forming potential of Ras. SUGEN has developed
proprietary Raf-based assays and is screening for small molecule inhibitors of
Raf. The Company believes that drugs that inhibit Raf signalling may arrest
tumors driven by excessive Ras activity. The Company is pursuing its Raf
Antagonist program in collaboration with ASTA Medica. See "-- Corporate and
Clinical Development Collaborations."

MET TK ANTAGONIST. Recent reports have shown that overexpression of Met TK
may be implicated in a significant portion of tumors of the lung, stomach and
colon. Moreover, Met TK may play a role in the metastasis of solid tumors. SUGEN
is currently pursuing target validation studies on Met TK and has commenced
screening against this target.

PSORIASIS

Psoriasis is a chronic skin disorder that affects approximately four million
people in the United States, and annual treatment costs in this country are
estimated at over $1.5 billion. There are few currently available drugs for this
disease that offer satisfactory efficacy and safety. Hyperproliferation of
keratinocytes contributes to psoriasis, and work by SUGEN and others has
demonstrated that EGF TK signalling is required for the growth of keratinocytes.
SUGEN's work in psoriasis is based in part on research done by its collaborators
at HUJ.

32
<PAGE>
SU5271/EGF TK ANTAGONIST. SUGEN has initiated a preclinical development
program based on the use of small molecule inhibitors of EGF TK for the
treatment of psoriasis. This represents the first extension of SUGEN's drug
discovery platform into the field of dermatology. A drug candidate, SU5271, has
been selected that is an extremely potent inhibitor of EGF TK signalling, and an
exclusive, worldwide license with rights to sublicense was signed with Zeneca
for dermatologic uses by the Company of this compound. The Company's objective
is to file an IND application for SU5271 by the end of 1996, although there can
be no assurance that this timetable will be achieved.

ANGIOGENESIS INHIBITION IN OPHTHALMOLOGY

A number of ophthalmological disorders involve neovascularization of
different regions of the eye. Since Flk-1 TK is known to be important in other
neovascularization processes (such as in tumors), it may also play a crucial
role in ocular neovascularization. Thus, Flk-1 TK inhibitors might be
therapeutically beneficial for treating ophthalmic disorders. In October 1996,
the Company signed a collaboration agreement with Allergan to identify, develop
and commercialize novel angiogenesis inhibitors for the treatment of ophthalmic
diseases. Target validation strategies will be undertaken for Flk-1 TK and other
angiogenesis targets.

DIABETES

Both Type I and Type II diabetes are characterized by pathologically high
levels of blood glucose due to lack of efficient cellular uptake and metabolism
of glucose. Type I diabetics produce low levels of insulin and is thought to be
caused by the autoimmune destruction of the pancreatic cells that make insulin.
In contrast, Type II diabetics often produce elevated levels of insulin,
although this insulin does not seem to have sufficient effect. All Type I and
some Type II diabetics are treated with insulin. The long-term side effects of
diabetes and insulin therapy can be severe.

Dr. Ullrich was the first to clone both insulin and the TK to which insulin
binds. In a normal state, the body secretes insulin which in turn binds to the
insulin TK. These events activate the insulin TK signalling pathway, resulting
in cellular uptake of glucose and glucose metabolism. In Type I and Type II
diabetes, there is impairment of the TK signalling mechanism.

Certain TPs appear to be involved in down regulating (dephosphorylating) the
insulin TK signalling pathway. SUGEN believes that a small molecule which
specifically inhibits these TPs may increase insulin TK signalling, thereby
increasing glucose uptake and metabolism. The Company believes that such a
discovery may present an important clinical opportunity in both Type I and Type
II diabetes. The Company has initiated screening for TP inhibitors which
potentiate insulin TK signalling and has identified lead compounds. The Company
has also initiated IN VIVO studies with its lead compounds.

NEUROBIOLOGY

TKs, TPs and their signalling pathways are known to play key roles in the
maintenance of the central and peripheral nervous systems. Several known
neurotrophic factors bind to TKs, and thereby regulate differentiation and
survival of neurons. SUGEN has identified novel TKs and TPs whose expression is
restricted to the nervous system and which may serve as therapeutic targets for
intervention in neurological diseases. This program is SUGEN's independent
continuation of the Amgen collaboration which was terminated in early 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

IMMUNOLOGY

The role of TKs in the generation and maintenance of the human immune system
has been clearly established. SUGEN has developed a number of immunology related
assays which it is screening against its library of compounds and extracts. The
primary indications that the Company is focusing on in this area are immune
suppression and asthma.

CORPORATE AND CLINICAL DEVELOPMENT COLLABORATIONS

The Company's corporate partnering strategy is to seek partners whose
development capabilities are complementary with those of the Company and to
identify partners for selected development programs.

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SUGEN is currently pursuing collaboration discussions with a number of major
pharmaceutical companies in the United States, Europe and Japan with respect to
the Company's research and development programs. The Company cannot predict
whether or when any of such discussions will result in final agreements.

ZENECA LIMITED

In January 1995, the Company established a research collaboration with
Zeneca. In this collaboration, Zeneca and the Company seek to discover and
develop novel small molecule signal transduction inhibitors that address
substantial oncology markets. The collaboration covers five undisclosed cancer
programs, but excludes all programs upon which the Company is currently building
its own cancer business. The two companies have agreed upon specific programs to
be included initially in the collaboration, with Zeneca supporting SUGEN's work
on these programs for an initial term of five years. SUGEN performs target
identification, target validation, assay development and screening for initial
leads, while Zeneca scientists will concentrate on lead identification and
optimization and preclinical and clinical development activities. Zeneca will
market collaboration products worldwide. SUGEN has also granted Zeneca a right
of first negotiation to expand this collaboration in order to encompass
additional SUGEN cancer research projects, but has specifically excluded the
cancer related projects that SUGEN already has in development.

Under the terms of the agreement, Zeneca purchased 789,141 shares of Common
Stock at a price of $15.84 per share. This $12.5 million equity investment,
combined with Zeneca's $7.5 million participation in SUGEN's October 1994
initial public offering, increased Zeneca's ownership in the Company to
approximately 20%. Zeneca has committed not to increase its holdings above this
level without the approval of SUGEN's Board of Directors. Zeneca participated in
the Company's September 1995 financing, purchasing an additional 281,875 shares
of Common Stock at $12.00 per share in order to maintain its ownership position.
To date, Zeneca has invested approximately $23.4 million in the Company. Zeneca
has indicated to the Company that it intends to purchase 509,000 shares in the
Offering at the public offering price.

In addition to annual research funding, Zeneca paid a $5 million technology
set-up fee to SUGEN, and will make milestone payments (which may be offset
against royalties over time) tied to the progress of compounds in the
collaboration, and royalties on worldwide sales of any collaboration products.
SUGEN will also have the right to contribute to clinical development costs on
each program, thereby earning participation in the North American profits from
successful products coming out of such programs over and above its royalty
entitlement. Apart from this option, Zeneca will be responsible for all
development expenses. If a third party acquires 35% or more of SUGEN's voting
stock, Zeneca may terminate the collaboration agreement but retain exclusive
royalty-bearing license rights to any collaboration products for which IND
filing preparations are complete and a separate license agreement has been
executed. There can be no assurance that this collaboration will result in any
products being successfully developed.

The agreement provides for SUGEN to be granted access to Zeneca's large
proprietary collection of characterized chemical structures for screening
against SUGEN's signal transduction targets, both within and outside this
collaboration, subject to certain restrictions and a right of first licensing
refusal on Zeneca's part. Zeneca has granted to SUGEN the right of first
negotiation to license from Zeneca oncology products (other than those
specifically excluded under the agreement) which Zeneca decides to license to a
third party.

In January 1996, SUGEN licensed a small molecule inhibitor of the EGF TK
from Zeneca. The compound, SU5271, was licensed from Zeneca as an extension of
the original collaboration agreement SUGEN signed with Zeneca. Under the terms
of this license agreement, Zeneca granted to SUGEN an exclusive, worldwide
license with right to sublicense to the compound in exchange for milestone and
royalty payments. The agreement provides that SUGEN shall have overall control
and responsibility for the preclinical and clinical development, regulatory
strategy, process development and commercialization of SU5271.

NATIONAL CANCER INSTITUTE

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parties are to collaborate in the design and execution of clinical trials of
SU101 in cancer. SU101's clinical development will be pursued in several
different cancer indications in which anti-tumor activity was observed in
preclinical studies. The overall goal of the research project with the NCI is to
establish the safety and efficacy of SU101 in adult patients, and to provide
adequate data to support the registration and marketing of SU101 in the United
States as rapidly as possible. SUGEN is to remain responsible for manufacturing,
formulations development and the majority of preclinical testing. SUGEN and NCI
are to share responsibility for monitoring and data collection for these
clinical trials and SUGEN will be responsible for preparing and filing the NDA
for this compound. These joint trials with the NCI will be supplemental to
SUGEN's independent clinical development activities on SU101 and other compounds
in this same class.

In April 1996, SUGEN entered into a second CRADA with the NCI for the
application of SUGEN's proprietary transcript imaging technology in order to
identify the differences in expression patterns of signal transduction genes
that characterize each of the sixty tumor cell lines which constitute the NCI's
screening panel. Following this transcript imaging analysis of the panel, the
results will be correlated to the data generated over several decades at the NCI
from the screening each year of many thousands of compounds and natural extracts
against the panel. Interesting lead compounds from the NCI's open repository
collection will be tested in SUGEN's target-specific signal transduction assays,
and lead compounds from SUGEN will also be tested against the NCI panel. SUGEN
will have the option to license discoveries made through this process for
adoption into SUGEN's drug discovery programs.

ASTA MEDICA AKTIENGESELLSCHAFT

In December 1995, SUGEN and ASTA Medica entered into a collaboration to
research, develop, manufacture, market and distribute potential oncology
products based upon the Company's Pan-Her Antagonist and Raf Antagonist
programs. Under the terms of the collaboration, ASTA Medica will undertake the
medicinal chemistry and pharmaceutical development work on SUGEN's drug
candidates, and will perform preclinical and clinical development in Europe in
accordance with FDA standards. ASTA Medica paid SUGEN a $4 million technology
set-up fee and will provide additional consideration in the form of contract
services for non-collaboration work. Additionally, ASTA Medica purchased $9
million of Common Stock at a price of $20.88 per share. In due course, SUGEN may
receive milestone payments in the two programs if they are successful. The
agreement provides for ASTA Medica to receive exclusive marketing rights to
collaboration products in Greater Europe (including countries and territories
located in the former Soviet Union) and South America, subject to an obligation
to pay royalties on net sales in such territory to SUGEN. ASTA Medica also has
the right of first offer to manufacture for SUGEN territories. SUGEN retains
market rights in the rest of the world, subject to a royalty payable to ASTA
Medica in most circumstances.

ASTA Medica is an international pharmaceutical company headquartered in
Germany. The Company's research and development is focused on the indications of
cancer, respiratory diseases/allergies, pain and inflammation, as well as
disorders of the central nervous system/epilepsy. ASTA Medica employs
approximately 5,900 individuals worldwide. The company is owned by Degussa, a
German manufacturer of fine chemicals and precious metals.

ALLERGAN

In October 1996, SUGEN entered into a collaboration with Allergan to
identify, develop and commercialize novel angiogenesis inhibitors for the
treatment of ophthalmic diseases. The collaboration will also establish a
comprehensive effort to identify and validate signal transduction targets for
choroidal and retinal neovascularization. Allergan will be the exclusive
corporate partner for SUGEN in ophthalmic disease and will have exclusive rights
to all ophthalmic uses of collaboration products and collaboration know-how
world-wide. In return, Allergan paid SUGEN a $2 million initial fee for past
research services and will fund collaboration research and drug discovery at
SUGEN for at least three years. Allergan also purchased $4 million of Common
Stock at $20.88 per share. SUGEN will also receive payments upon achievement of
certain milestones and royalties with respect to worldwide sales of
collaboration products. In addition, SUGEN will have the right to contribute to
clinical development costs on each program, thereby earning participation in the
North American and European profits from successful products coming out of such

35
<PAGE>

programs over and above its royalty entitlement. Apart from this option,
Allergan will be responsible for all development expenses. Allergan has
indicated to the Company that it intends to purchase 250,000 shares in the
Offering at the public offering price.

See "Risk Factors -- Dependence on Collaborative Relationships" for a
discussion of certain risks related to the Company's collaborations.

RESEARCH COLLABORATIONS

SUGEN's scientific founders are Dr. Joseph Schlessinger, Chairman of the
Department of Pharmacology at NYU, and Dr. Axel Ullrich, Director of the
Department of Molecular Biology at MPI in Martinsreid, Germany. In the fall of
1991, the Company entered into research collaboration agreements with both
institutions. More recently the Company has established additional research
collaborations in the target identification and screening areas. Overall,
SUGEN's collaborations encompass over 150 researchers, the majority of whom are
with MPI, MPP or NYU.

NEW YORK UNIVERSITY MEDICAL CENTER

In September 1991, SUGEN entered into a research and license agreement with
NYU granting the Company an exclusive worldwide license to the commercial uses
of all the TK and TP technology being developed under the leadership of Dr.
Schlessinger. The research program being conducted at NYU centers on an
investigation of the mechanisms underlying the action of TKs and TPs and their
physiological role, as well as identifying, isolating and cloning new TKs and
TPs and the components of the signal transduction pathways emanating from these
proteins. The research program is scheduled to terminate in 1997, however it can
be extended for additional periods of time. SUGEN's license to technology
developed before or during the research program will survive indefinitely unless
NYU terminates the agreement upon insolvency of the Company or due to a material
breach by the Company. Upon termination of the agreement, NYU will own the
rights to the technology it has developed under the agreement. The Company is
obligated to pay royalties to NYU on sales of any products using the NYU
technology. As part of this arrangement, NYU purchased 200,000 shares of Common
Stock of the Company at the Company's formation.

MAX-PLANCK SOCIETY

SUGEN has formed research collaborations with two institutes of the Max-
Planck Society in Germany. These collaborations include licenses from Garching
Innovation GmbH ("Garching"), the licensing arm of the Max-Planck Society.

MAX-PLANCK-INSTITUT FUR BIOCHEMIE. The Company entered into a research and
license agreement with MPI and Garching which terminates in 1997. This agreement
grants SUGEN an exclusive worldwide license to the commercial uses of all the TK
and TP technology being developed under the leadership of Dr. Ullrich. The scope
of the research program includes identification, isolation and cloning of novel
TKs and TPs, characterization of signal transduction pathway components and
investigation of the normal biological role of these proteins as well as their
role in disease. SUGEN's license to technology developed before or during the
research program will survive indefinitely unless MPI terminates the agreement
upon insolvency of the Company or due to a material breach by the Company. Upon
termination of the agreement, MPI will own the rights to the technology it has
developed under the agreement. As with the NYU agreement, the Company is
obligated to pay royalties on sales of any products using this technology. As
part of this arrangement, Garching purchased 200,000 shares of Common Stock at
the Company's formation.

MAX-PLANCK-INSTITUT FUR PHYSIOLOGISCHE UND KLINISCHE FORSCHUNG. In October
1993, SUGEN entered into an agreement with MPP and Garching to support the work
of Dr. Werner Risau, a leading researcher in the area of angiogenesis. This
agreement grants SUGEN the exclusive worldwide right to commercialize Dr.
Risau's research on the inhibition of angiogenesis, vasculogenesis, vascular
permeability, chemotaxis and neurite outgrowth. This research collaboration will
terminate in October 1999. SUGEN's license to technology developed before or
during the research program will survive indefinitely unless MPP terminates the
agreement upon insolvency of the Company or due to a material breach by the
Company. Upon termination of the agreement, MPP will own the rights to the
technology it has developed under the agreement. The Company is obligated to pay
royalties on sales of any products embodying this technology.

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UNIVERSITY OF WASHINGTON

In early 1994, the Company entered into a series of agreements to license
the work of Dr. Edmond Fischer at the University of Washington. Dr. Fischer is a
member of SUGEN's Science Advisory Board and a recipient of the 1992 Nobel Prize
for Medicine for his work in establishing the fundamental importance of
phosphorylation in cellular signalling pathways. The first agreement grants
SUGEN an exclusive worldwide license to patent applications covering one of the
first tyrosine phosphatases to be described in the literature, in exchange for
license fees and milestone and royalty payments. The agreement expires in
February 1997. However, the Company may extend the agreement for an additional
three years by the payment of a nominal fee and may extend the agreement for the
life of any related patents if the Company initiates development of any
compounds generated under the agreement and covered by such patents. The
Washington Research Foundation, a licensing arm of the University of Washington,
may terminate the agreement upon insolvency of the Company or due to a material
breach by the Company. Upon termination, the Washington Research Foundation will
own the rights to the technology licensed under the agreement.

THE HEBREW UNIVERSITY OF JERUSALEM

SUGEN is the exclusive licensee of research being carried out by Dr.
Alexander Levitzki at the HUJ under an agreement entered into in September 1993
and amended in March 1995 and May 1996. The Company's license includes exclusive
rights in certain fields to a series of issued patents and patent applications
and other proprietary know-how covering synthetic small molecule TK inhibitors,
including compounds and methods of treatment, as well as all new compounds which
result from the ongoing work of Dr. Levitzki's team at the HUJ during the
research program. SUGEN's research scientists work closely with Dr. Levitzki and
the chemists in his laboratory, providing activity data on compounds, which in
turn supports the iterative process of lead optimization. SUGEN's rights to the
licensed products that are of continued interest to the Company survive, subject
to certain diligence requirements, upon expiration of the research period or
termination for convenience. SUGEN retains rights to all the licensed products
should the agreement be terminated due to a breach by or insolvency of HUJ. Upon
termination of the agreement due to insolvency of the Company or due to a breach
by the Company, HUJ will own the rights to the technology developed under the
agreement and the Company will be obligated to return all material relating to
the technology. The Company is obligated to make milestone payments and pay
royalties on any sales of licensed products. This research program terminates in
June 1997 and is extendible by the Company for additional periods.

In addition, SUGEN has also entered into sponsored research and exclusive
license agreements with HUJ providing SUGEN with commercial rights to compounds
emanating from programs focused on clinical development of tyrosine kinase
inhibitors in therapeutic areas outside SUGEN's main areas of focus. The aim of
these programs is to develop small molecules for the treatment of psoriasis and
human papilloma virus infection. The sponsored research programs are currently
scheduled to continue through September 1997. The programs require 120 days
notice for cancellation. The contracts provide for limitations on the amount
payable by SUGEN for sponsored research under all of these programs after notice
of cancellation. SUGEN's rights to the licensed products that are of continued
interest to the Company survive, subject to certain diligence requirements, upon
expiration of the research period or termination for convenience. SUGEN retains
rights to all the licensed products should the agreement be terminated due to a
breach by or insolvency of HUJ.

ARQULE

In September 1996, SUGEN entered into a collaboration agreement with ArQule
to develop a proprietary collection of compounds designed to target binding
sites common to many signal transduction molecules found in cell-signalling
pathways. SUGEN provides lead chemical structures and new chemical structure
scaffolds to enable ArQule to use its Directed ArrayTM combinatorial synthesis
technologies to build a novel collection of compounds with potentially broad
applications for the pharmaceutical industry. SUGEN retains exclusive rights to
this collection with respect to TK and STK targets, subject to certain payments
and royalties to ArQule. ArQule retains responsibility for commercializing the
collection for targets in other areas, subject to royalty-sharing arrangements
with SUGEN.

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OTHER SOURCES OF MATERIALS FOR SCREENING

The Company has entered into a number of agreements designed to obtain novel
biochemical and biological compounds and extracts for screening in its
proprietary assay systems. These agreements cover a broad range of chemical
entities from sources across the world. SUGEN also has an agreement with
Panlabs, Inc. of Bothell, Washington for the supply of microbial and fungal
extracts and the isolation and identification of active components from these
extracts. The original agreement was entered into in March 1993, and is
renewable for successive one year periods. The agreement most recently was
amended in early 1996, under which Panlabs will supply the Company with a
significant number of extracts from which the Company can select a portion to be
designated as "selected organisms." SUGEN will own all rights to the selected
organisms and the active compounds produced by them, including any derivatives.
Panlabs is supplying other companies with similar extracts under similar
conditions. In June 1995, SUGEN and Toyama Prefectural University of Tokyo
initiated a collaboration to discover new drugs for the treatment of cancer and
other diseases by inhibiting TKs and TPs and related molecules. A research team
headed by Professor Toshikazu Oki in the University's Biotechnology Research
Center is providing to SUGEN compounds from Toyama's microbial strain libraries
for testing of potential biological activity. In July 1996, SUGEN and the
Institutes of Botany and Microbiology of the Chinese Academy of Sciences
initiated an exclusive collaboration to discover novel signal transduction
inhibitor candidates and pharmacophores. The Institute of Botany and the
Institute of Microbiology are providing to SUGEN extracts from the Institutes'
plant and microbial collections for testing of potential biological activity
against SUGEN's signal transduction targets. Other SUGEN compound sources
include natural product libraries from around the globe, including microbial,
fungal and plant extracts, as well as additional sources of small organic
compounds.

See "Risk Factors -- Dependence on Collaborative Relationships" for a
discussion of certain risks related to the Company's collaborations.

PATENTS AND PROPRIETARY TECHNOLOGY

The Company's success will depend in part on its ability to obtain patents,
maintain trade secrets and operate without infringing on the proprietary rights
of others, both in the United States and in other countries. Patent matters in
biotechnology, and in particular with respect to receptors as screening tools
and/ or the DNA encoding them, are highly uncertain and involve complex legal
and factual questions. Accordingly, the availability of and breadth of claims
allowed in biotechnology and pharmaceutical patents cannot be predicted. As of
September 30, 1996, SUGEN held exclusive rights to at least six issued U.S.
patents and had filed and/or held exclusive licenses to approximately 115 United
States patent applications, as well as related foreign patent applications.
While the Company believes at this time that it will receive method of use
patent protection on SU101, there can be no assurance that any such patent
protection will issue. There can be no assurance that the Company will develop
products or processes that are patentable, that patents will issue from any of
the pending applications, or that claims allowed will be sufficient to protect
the Company's technology. There can be no assurance that the Company's patents,
if issued, will not be challenged, invalidated or circumvented, or that the
rights granted thereunder will provide proprietary protection or competitive
advantages to the Company. Competitors have been issued patents, may have filed
applications or may obtain additional patents and proprietary rights relating to
products or processes competitive with those of the Company or which could block
the Company's efforts to obtain patents.

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companies which contain competitive or conflicting claims and such claims are
ultimately determined to be valid, the Company may be required to obtain
licenses to these patents or to develop or obtain alternative technology. If any
licenses are required, there can be no assurance that the Company will be able
to obtain any such license on commercially favorable terms, if at all, and if
these licenses are not obtained, the Company might be prevented from pursuing
the development of certain of its potential products. The Company's breach of an
existing license or failure to obtain a license to any technology that it may
require to commercialize its products may have a material adverse impact on the
Company. Litigation, which could result in substantial costs to the Company, may
also be necessary to enforce any patents issued or licensed to the Company or to
determine the scope and validity of third party proprietary rights. There can be
no assurance that the Company's issued or licensed patents would be held valid
by a court of competent jurisdiction. Even if the outcome of such litigation is
favorable, the cost of such litigation and the diversion of the Company's
resources during such litigation could have a material adverse effect on the
Company. An adverse outcome could subject the Company to significant liabilities
to third parties, require disputed rights to be licensed from third parties or
require the Company to cease using such technology, any of which could have a
material adverse effect on the Company. If competitors of the Company prepare
and file patent applications in the United States that claim technology also
claimed by the Company, the Company may have to participate in interference
proceedings declared by the Patent and Trademark Office to determine priority of
invention, which could result in substantial cost to the Company, even if the
eventual outcome is favorable to the Company.

SU101, a compound generally known by the name leflunomide, is a member of
the isoxazole family of compounds. Leflunomide was discovered more than 15 years
ago. A large pharmaceutical company holds a number of United States and foreign
patents and has filed applications in the United States and abroad covering
compositions of matter and pharmaceutical uses of leflunomide and structurally
related compounds. SUGEN believes its research and development and its clinical
trials with SU101 in the United States are protected from claims of infringement
of the United States patents because such activities are being conducted solely
for uses reasonably related to development and submission of information to the
FDA for regulatory approval. Although the Company cannot predict whether or when
SU101 will be approved by the FDA for marketing in the United States, it
believes that certain of the pharmaceutical company's patents in the United
States may have expired when marketing does begin and that the remaining United
States patents are either invalid or will not be infringed by the manufacture
and sale of SU101. However, the Company has learned that additional patents
recently issued in the United States to the pharmaceutical company covering the
use of leflunomide and structurally related compounds for the treatment of named
cancers. The Company presently does not know if commercialization of SU101 will
infringe these additional patents but believes that the additional patents may
be subject to claims of invalidity as they relate to SU101. If the additional
patents were determined to be valid with respect to SU101, the Company may be
required to obtain a license from the pharmaceutical company in order to
manufacture and sell SU101 in the United States. The Company presently does not
intend to commercialize SU101 outside the United States. There can be no
assurance that SU101 will not infringe the recently issued patents, that the
term of the pharmaceutical company's other existing patents will not be
extended, that the claims of the pharmaceutical company's pending patent
applications will not be modified prior to issuance so as to enhance their
validity or scope, or that a court will agree with the Company's beliefs
regarding invalidity and non-infringement of the patents. To date, the
pharmaceutical company has not threatened or commenced legal proceedings against
the Company concerning possible patent infringement. There can be no assurance
that the pharmaceutical company in the future will not assert claims against
SUGEN or that the Company could reach agreement with the pharmaceutical company
for a license for SU101 upon favorable terms or at all, if required. The
inability of the Company to resolve this matter on favorable terms or at all
could have a material adverse effect on the Company. In any event, the assertion
of such claims, even if resolved favorably to the Company, could result in
substantial costs to the Company.

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adequate remedies for any breach, or that the Company's trade secrets will not
otherwise become known or be independently discovered by competitors. To the
extent that the Company or its consultants or research collaborators use
intellectual property owned by others in their work for the Company, disputes
may also arise as to the rights in related or resulting know-how and inventions.

COMPETITION

SUGEN is engaged in a rapidly changing field. Other products and therapies
that will compete directly with the products that the Company is seeking to
develop and market currently exist or are being developed. Competition from
fully integrated pharmaceutical companies and more established biotechnology
companies is intense and is expected to increase. Most of these companies have
significantly greater financial resources and expertise in research and
development, manufacturing, preclinical and clinical testing, obtaining
regulatory approvals and marketing than the Company. Smaller companies may also
prove to be significant competitors, particularly through collaborative
arrangements with large pharmaceutical and established biotechnology companies.
Many of these competitors have significant products that have been approved or
are in development and operate large, well funded research and development
programs. Academic institutions, governmental agencies and other public and
private research organizations also conduct research, seek patent protection and
establish collaborative arrangements for products and clinical development and
marketing. These companies and institutions compete with the Company in
recruiting and retaining highly qualified scientific and management personnel.
In addition to the above factors, SUGEN will face competition based on product
efficacy and safety, the timing and scope of regulatory approvals, availability
of supply, marketing and sales capability, reimbursement coverage, price and
patent position. There is intense competition for access to libraries of
compounds to use for screening and any inability of the Company to maintain
access to sufficiently broad libraries of compounds for screening potential
targets would have a material adverse effect on the Company. There is no
assurance that the Company's competitors will not develop more effective or more
affordable products, or achieve earlier patent protection or product
commercialization than the Company.

GOVERNMENT REGULATION

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clearances. In addition, delays or rejections may be encountered based upon
additional government regulation from future legislation or administrative
action or changes in FDA policy during the period of product development,
clinical trials and FDA regulatory review. Similar delays also may be
encountered in foreign countries. There can be no assurance that even after such
time and expenditures, regulatory clearance will be obtained for any products
developed by the Company. If regulatory clearance of a product is granted, such
clearance will be limited to those disease states and conditions for which the
product is useful, as demonstrated through clinical studies. Marketing or
promoting a drug for an unapproved indication is prohibited. Furthermore,
clearance may entail ongoing requirements for postmarketing studies. Even if
such regulatory clearance is obtained, a marketed product, its manufacturer and
its manufacturing facilities are subject to continual review and periodic
inspections by the FDA. Discovery of previously unknown problems with a product,
manufacturer or facility may result in restrictions on such product or
manufacturer, including costly recalls or even withdrawal of the product from
the market. There can be no assurance that any compound developed by the Company
alone or in conjunction with others will prove to be safe and efficacious in
clinical trials and will meet all of the applicable regulatory requirements
needed to receive marketing clearance.

MANUFACTURING

The Company has no manufacturing facilities and relies on other
manufacturers to produce its compounds for research and development, preclinical
and clinical purposes. The products under development by the Company have never
been manufactured on a commercial scale and there can be no assurance that such
products can be manufactured at a cost or in quantities necessary to make them
commercially viable. If the Company were unable to contract for a sufficient
supply of its compounds on acceptable terms, or if it should encounter delays or
difficulties in its relationships with manufacturers, the Company's preclinical
and clinical testing schedule would be delayed, resulting in delay in the
submission of products for regulatory approval or the market introduction and
subsequent sales of such products, which could have a material adverse effect on
the Company. Moreover, contract manufacturers that the Company may use must
adhere to current Good Manufacturing Practices regulations enforced by the FDA
through its facilities inspection program. If these facilities cannot pass a
pre-approval plant inspection, the FDA pre-market approval of the products will
not be granted.

FACILITIES

SUGEN currently leases approximately 48,000 square feet of laboratory and
office space in Redwood City, California. The Company leases this space under
operating leases which last through December 1998, with three and five year
renewal options at the end of the leases. The Company believes that its current
facilities plus anticipated additions are sufficient to meet its needs for the
next several years.

EMPLOYEES

As of September 30, 1996, the Company had 147 full-time employees, including
a technical scientific staff of 109. The Company places an emphasis on obtaining
the highest available quality of staff. The Company has selected and assembled a
group of experienced scientists and managers with skills in a wide variety of
disciplines, including molecular biology, medicinal chemistry and pharmaceutical
development. None of the Company's employees are covered by collective
bargaining arrangements and management considers relations with its employees to
be good.

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MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

Set forth below is information regarding directors and executive officers of
the Company as of October 4, 1996.

<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- -------------------------------------- --- --------------------------------------------------------------------
<S> <C> <C>
Stephen Evans-Freke (1) 44 Chief Executive Officer and Chairman of the Board
Axel Ullrich, Ph.D. 52 Director and Co-Chief Scientist
Joseph Schlessinger, Ph.D. 51 Co-Chief Scientist and Honorary Director
K. Peter Hirth, Ph.D. 45 Executive Vice President and Chairman Research and Development
Committee
Sara A. Courtneidge, Ph.D. 43 Vice President, Research
Christine E. Gray-Smith 47 Senior Director of Finance and Assistant Secretary
Richard D. Spizzirri (2) 63 Director and Secretary
Anthony B. Evnin, Ph.D. (1)(3) 55 Director
Charles M. Hartman (1)(2) 55 Director
Heinrich Kuhn 60 Director
Donald E. Nickelson (1)(2) 63 Director
Bruce R. Ross (1) 55 Director
Glenn S. Utt, Jr. (3) 70 Director
Michael A. Wall (3) 68 Director
</TABLE>

- ------------------------
(1) Member of the Executive Committee

(2) Member of the Audit Committee

(3) Member of the Compensation Committee

STEPHEN EVANS-FREKE, a founder of the Company, has served as Chief Executive
Officer and Chairman of the Board of the Company since its inception. Mr.
Evans-Freke was also a founder of Selectide Corporation, a biotechnology company
based on combinatorial chemistry screening technology, and served as its
Chairman of the Board from 1990 until its acquisition by Marion Merrell Dow,
Inc. in January 1995. From 1976 to 1990, Mr. Evans-Freke was employed by
PaineWebber Incorporated, a brokerage, financial service and investment banking
company, and served most recently as a member of its Board of Directors and
President of PaineWebber Development Corporation, a subsidiary of PaineWebber
Incorporated. He is also involved with various private companies, serving as a
director of Pharmaceutical Partners LLC, President of International Technology
Investment Managers, Inc. and Chairman of International Technology Investment
Managers (Asia) Inc. Mr. Evans-Freke formerly served as a director of Genentech
Development Corporation, Amgen Development Corporation, and a number of other
companies. Mr. Evans-Freke received a degree in Law from Cambridge University.

AXEL ULLRICH, PH.D., a founder of the Company, has served as a consultant to
the Company in his capacity as Co-Chief Scientist and has been a member of the
Board of Directors of the Company since its inception. Since 1988, Dr. Ullrich
has served as Director, Department of Molecular Biology, Max-Planck-Institut fur
Biochemie, a research institute of the Max-Planck Society, a German
government-funded organization of over eighty research institutes.

JOSEPH SCHLESSINGER, PH.D., a founder of the Company, has served as a
consultant to the Company in his capacity as Co-Chief Scientist, as well as an
honorary member of the Board of Directors, since its inception. He has served as
a professor and Chairman of the Department of Pharmacology at New York
University Medical Center since 1990, and as the Ruth and Leonard Simon
Professor in Cancer Research in the Department of Chemical Immunology at the
Weizmann Institute of Science in Rehovot, Israel, since 1984. He was formerly
Director of Research for Rorer Biotechnology, a biotechnology company.

K. PETER HIRTH, PH.D., Executive Vice President and Chairman Research and
Development Committee, joined the Company in March 1992. Dr. Hirth held several
positions with Boehringer Mannheim GmbH, a German pharmaceutical company, from
August 1984 to December 1991, most recently as Vice President and Head of
Immunopharmacology, Allergy, Virology and Microbiology.

42
<PAGE>
SARA A. COURTNEIDGE, PH.D. has served as Vice President, Research of the
Company since November 1994. Dr. Courtneidge was employed by the European
Molecular Biology Laboratory, an international molecular biology research center
in Heidelberg, Germany, from August 1985 to September 1994, first as Group
Leader, and most recently as Senior Scientist, Differentiation Programme. From
January 1981 to July 1985, Dr. Courtneidge was a member of the Scientific Staff
at the National Institute for Medical Research, London, England.

CHRISTINE E. GRAY-SMITH, Senior Director of Finance and Assistant Secretary,
joined the Company in August 1994. From July 1992 to July 1994, Ms. Gray-Smith
served as Vice President and Chief Financial Officer of Worldtalk Corporation, a
messaging integration software company, and from July 1988 to June 1992 she
served as Controller of Power Up Software Corporation, a software development
company. Ms. Gray-Smith, a certified public accountant, previously served as a
principal (senior manager) of Arthur Young & Company, an accounting firm and
predecessor of Ernst & Young LLP.

RICHARD D. SPIZZIRRI has served as a director of the Company since December
1991 and as Secretary since May 1992. Mr. Spizzirri was a partner at the law
firm of Davis Polk & Wardwell from 1967 to December 1994, when he retired. He
continues to serve as senior counsel to Davis Polk & Wardwell and as a director
of Centocor, Inc. and Stuart Entertainment, Inc.

ANTHONY B. EVNIN, PH.D. has served as a director of the Company since
December 1991. Dr. Evnin has been a general partner of Venrock Associates, a
venture capital partnership, since 1975. He serves as Chairman of the Board of
Genetics Institute, Inc. and is also a director of Arris Pharmaceutical
Corporation, Centocor, Inc., Opta Food Ingredients, Inc., Escalon Medical Corp.,
Kopin Corporation, Ribozyme Pharmaceuticals, Inc. and several private companies.

CHARLES M. HARTMAN has served as a director of the Company since December
1991. He has been a general partner of CW Group, a venture capital partnership,
since 1983. He is a director of Ribozyme Pharmaceuticals, Inc., Geron
Corporation and several privately-held life sciences companies as well as The
Hastings Center, a nonprofit organization dedicated to the study of ethics in
medicine and life sciences.

HEINRICH KUHN has served as a director of the Company since December 1991.
Since 1979 he has served as Managing Director of Garching Innovation GmbH, the
technology transfer agency of the Max-Planck Society.

DONALD E. NICKELSON has served as a director of the Company since October
1992. Mr. Nickelson served as President of PaineWebber Group, a brokerage
service and investment banking company, from 1988 until retiring in 1990. He
also served as a director of PaineWebber Group from 1980 until 1993. Mr.
Nickelson serves as Chairman of the Board of Greenfield Industries, Inc. and
also as Trustee of The Mainstay Mutual Funds. He serves as Director of Corporate
Properties 10, Carey Institutional Properties 11, DTI Industries, Harbour Group
and Allied Health Care Products, Inc.

BRUCE R. ROSS was appointed as a director of the Company in August 1994.
From 1980 to March 1994 when he retired, Mr. Ross held various senior management
positions with Bristol-Myers Squibb, an international pharmaceutical company,
including Vice President, Bristol-Myers Oncology Division, President, U.S.
Pharmaceutical Group and Senior Vice President, Policy, Planning & Development.
Mr. Ross is currently the Chief Executive Officer of the National Comprehensive
Cancer Network and currently serves as a director of Cytogen Corporation and the
Fox Chase Cancer Center.

GLENN S. UTT, JR. has served as a director of the Company since December
1991. From 1962 to 1983 when Mr. Utt retired, he served as Executive Vice
President of Abbott Laboratories, Inc., a hospital, laboratory and diagnostic
products company, President of its Pharmaceutical Division and as a member of
its Board of Directors. He is also Chairman of Janmar, Inc.

MICHAEL A. WALL has served as a director of the Company since December 1991.
From 1979 to 1987, when he retired, Mr. Wall served as Chairman of Centocor,
Inc., and continued to serve as a member of its board of directors until 1993.
He has participated as a founder, director, or manager of over a dozen
technology firms since 1955. Mr. Wall is also a director of Kopin Corporation
and is Chairman of the Board of Directors of Alkermes, Inc.

43
<PAGE>
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the ownership
of the Company's Common Stock as of October 4, 1996, by: (i) each director; (ii)
each of the executive officers; (iii) all executive officers and directors of
the Company as a group; and (iv) all those known by the Company to be beneficial
owners of more than five percent of its Common Stock.

<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
PERCENTAGE(1)
------------------------
PRIOR TO AFTER
BENEFICIAL OWNERS NUMBER OF SHARES OFFERING OFFERING
- ------------------------------------------------------------------ ----------------- ----------- -----------
<S> <C> <C> <C>

Zeneca Limited.................................................... 2,071,016 19.0% 20.0%(2)
15 Stanhope Gate
London W1Y 6LN
England
Stephen Evans-Freke (3)........................................... 675,819 6.1 5.2
Anthony B. Evnin, Ph.D. (4)....................................... 30,669 * *
Charles M. Hartman (5)............................................ 437,049 4.0 3.4
Heinrich Kuhn (6)................................................. 247,666 2.3 1.9
Donald E. Nickelson (7)........................................... 45,999 * *
Bruce R. Ross (8)................................................. 30,000 * *
Richard D. Spizzirri (9).......................................... 245,519 2.3 1.9
Axel Ullrich, Ph.D. (10).......................................... 224,333 2.1 1.7
Glenn S. Utt, Jr. (11)............................................ 52,000 * *
Michael A. Wall (12).............................................. 60,721 * *
Sara A. Courtneidge, Ph.D. (13)................................... 33,125 * *
Christine E. Gray-Smith (14)...................................... 19,141 * *
K. Peter Hirth, Ph.D. (15)........................................ 76,279 * *
All executive officers and directors as a group
(14 persons) (16)............................................... 2,410,653 21.2% 18.0%
</TABLE>

- ------------------------
* Less than one percent.

(1)This table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13D and 13G filed with the Securities
and Exchange Commission ("SEC"). Unless otherwise indicated in the footnotes
to this table and subject to community property laws where applicable, the
Company believes that each of the stockholders named in this table has sole
voting and investment power with respect to the shares indicated as
beneficially owned. Applicable percentages are based on 10,898,785 shares of
Common Stock outstanding on October 4, 1996 and 12,898,785 shares of Common
Stock outstanding after completion of this offering, adjusted as required by
rules promulgated by the SEC.

(2)Percent of beneficial ownership after the Offering assumes the purchase of
509,000 shares by Zeneca. See "Underwriting."

(3)Includes (i) 5,333 shares beneficially owned by ITIM Corp., of which Mr.
Evans-Freke is a stockholder and President, (ii) 23,424 shares beneficially
owned by Mr. Evans-Freke as co-trustee of his children's trusts, (iii) 3,955
shares owned by his spouse, (iv) 76,209 shares of Common Stock subject to
repurchase in favor of the Company, and (v) 180,000 shares subject to stock
options exercisable within 60 days of October 4, 1996, of which 164,813 are
subject to a repurchase option in favor of the Company in the event of an
early exercise.

(4)Includes (i) 42 shares beneficially held by Venrock Associates and 15 shares
beneficially held by Venrock Associates II L.P., both of which Dr. Evnin is
a general partner, and (ii) 12,000 shares subject to

44
<PAGE>
stock options exercisable within 60 days of October 4, 1996, of which 5,000
are subject to a repurchase option in favor of the Company in the event of
early exercise. Dr. Evnin disclaims beneficial ownership of the Venrock
shares except to the extent of his partnership interest therein.

(5)Includes 306,666 shares owned by CW R&D II (Financial) Fund, L.P. and
105,050 shares owned by CW Ventures II, L.P. Mr. Hartman is a general
partner of CW Partners II, L.P. ("CWP II") and CW Partners III, L.P. ("CWP
III"). CWP II is a general partner of CW R&D II (Financial) Fund, L.P. CWP
III is a general partner of CW Ventures II, L.P. Mr. Hartman disclaims
beneficial ownership of the shares held by such entities except to the
extent of his partnership interests therein. Also includes 12,000 shares
subject to stock options exercisable within 60 days of October 4, 1996, of
which 5,000 are subject to a repurchase option in favor of the Company in
the event of an early exercise.

(6)Includes (i) 200,000 shares beneficially owned by Max-Planck-Gesellschaft.
Dr. Kuhn is Managing Director of Garching Innovation GmbH, the technology
transfer agency of the Max-Planck Society, and (ii) 22,000 shares subject to
stock options exercisable within 60 days of October 4, 1996, of which 11,875
are subject to a repurchase option in favor of the Company in the event of
an early exercise. Dr. Kuhn disclaims beneficial ownership of the
Max-Planck-Gesellschaft shares.

(7)Includes (i) 667 shares of Common Stock subject to repurchase in favor of
the Company and (ii) 22,000 shares subject to stock options exercisable
within 60 days of October 4, 1996, of which 15,000 are subject to a
repurchase option in favor of the Company in the event of an early exercise.

(8)Includes 26,000 shares subject to stock options exercisable within 60 days
of October 4, 1996, of which 12,800 are subject to a repurchase option in
favor of the Company in the event of an early exercise.

(9)Includes 12,000 shares subject to stock options exercisable within 60 days
of October 4, 1996, of which 5,000 are subject to a repurchase option in
favor of the Company in the event of an early exercise.

(10)Includes 32,333 shares subject to stock options exercisable within 60 days
of October 4, 1996, of which 13,772 are subject to a repurchase option in
favor of the Company in the event of an early exercise.

(11)Includes 12,000 shares subject to stock options exercisable within 60 days
of October 4, 1996, of which 5,000 are subject to a repurchase option in
favor of the Company in the event of an early exercise.

(12)Includes (i) 6,666 shares registered to Mr. Wall as trustee of his
children's trust account, and (ii) 12,000 shares subject to stock options
exercisable within 60 days of October 4, 1996, of which 5,000 are subject to
a repurchase option in favor of the Company in the event of an early
exercise.

(13)Includes 33,125 shares subject to stock options exercisable within 60 days
of October 4, 1996.

(14)Includes 18,141 shares subject to stock options exercisable within 60 days
of October 4, 1996.

(15)Includes 44,470 shares subject to stock options exercisable within 60 days
of October 4, 1996.

(16)Includes shares held by directors and executive officers of the Company, and
entities affiliated with such persons. Also includes 76,876 shares subject
to repurchase in favor of the Company and 470,402 shares subject to stock
options held by executive officers and directors exercisable within 60 days
of October 4, 1996, of which 257,032 are subject to a repurchase option in
favor of the Company in the event of early exercise. See Notes 3 through 15
above.

45
<PAGE>
UNDERWRITING

Under the terms of and subject to the conditions contained in the
Underwriting Agreement, the form of which is filed as an exhibit to the
Registration Statement (the "Registration Statement") of which this Prospectus
forms a part, the underwriters named below (the "Underwriters"), for whom Lehman
Brothers Inc., UBS Securities LLC and Hambrecht & Quist LLC are acting as
representatives (the "Representatives"), have severally agreed to purchase from
the Company, and the Company has agreed to sell to each Underwriter, the
aggregate number of shares of Common Stock set forth opposite the name of each
such Underwriter below:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------------------------------------------------------------------------------------- ----------
<S> <C>

Lehman Brothers Inc........................................................................ 667,000
UBS Securities LLC......................................................................... 666,500
Hambrecht & Quist LLC...................................................................... 666,500
----------
Total................................................................................ 2,000,000
----------
----------
</TABLE>

The Underwriting Agreement provides that the obligations of the Underwriters
to pay for and accept delivery of the shares of Common Stock offered pursuant to
the Offering are subject to certain conditions contained therein, and that, if
any of the foregoing shares of Common Stock are purchased by the Underwriters
pursuant to the Underwriting Agreement, all the shares of Common Stock agreed to
be purchased by the Underwriters pursuant to the Underwriting Agreement must be
so purchased.

The Company has been advised that the Underwriters propose to offer part of
the shares to the public at the public offering price set forth on the cover
page hereof and part to certain dealers at a price that represents a concession
not in excess of $0.36 per share under the public offering price. The
underwriters may allow, and such dealers may reallow a concession not in excess
of $0.10 per share to certain other brokers or dealers. After the initial
offering to the public, the offering price and other selling terms may be
changed by the Representatives.

The Company has granted to the Underwriters an option to purchase up to an
additional shares of Common Stock, exercisable solely to cover over-allotments,
at the offering price to the public less the underwriting discounts and
commissions shown on the cover page of this Prospectus. Such option may be
exercised at any time until 30 days after the date of the Underwriting
Agreement. To the extent that the option is exercised, each Underwriter will be
committed, subject to certain conditions, to purchase a number of the additional
shares of Common Stock, proportionate to such Underwriter's initial commitment
as indicated in the preceding table.

The Representatives have informed the Company that the Underwriters do not
intend to confirm sales of Common Stock offered hereby to any accounts over
which they exercise discretionary authority.

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

In connection with the Offering, certain of the Underwriters and selling
group members (if any) that currently act as market makers for the Common Stock
may engage in "passive market making" in the Common Stock on Nasdaq in
accordance with Rule 10b-6A under the Exchange Act. Rule 10b-6A permits, upon
satisfaction of certain conditions, underwriters and selling group members
participating in a distribution that are also Nasdaq market makers in the
security being distributed to engage in limited market making transactions
during the period when Rule 10b-6 under the Exchange Act would otherwise
prohibit such activity. Rule 10b-6A prohibits underwriters and selling group
members engaged in passive market making generally from entering a bid effecting
a purchase price that exceeds the highest bid for those securities displayed on
Nasdaq by a market maker that is not participating in the distribution. Under
Rule 10b-6A, each underwriter or selling group member engaged in passive market
making is subject to a daily net

46
<PAGE>
purchase limitation equal to 30% of such entity's average daily trading volume
during the two full consecutive calendar months immediately preceding the date
of the filing of the registration statement under the Securities Act pertaining
to the security to be distributed. Passive market making may stabilize the
market price of the Common Stock at the level above that which might otherwise
prevail and, if commenced, may be discontinued at any time.

Zeneca has indicated to the Company that it intends to purchase 509,000
shares in the Offering at the public offering price. Allergan has indicated to
the Company that it intends to purchase 250,000 shares in the Offering at the
public offering price.

The Company's directors, officers and certain stockholders beneficially
owning an aggregate of approximately 4,786,000 shares of Common Stock have
agreed not to offer, sell or otherwise dispose of their shares, with certain
limited exceptions, for a period of 90 days after the date of the Offering
without the prior written consent of Lehman Brothers Inc. on behalf of the
Underwriters. The Company has agreed not to offer, sell, contract to sell or
otherwise issue any Common Stock or other securities, prior to the expiration of
90 days from the date of this Prospectus without the prior written consent of
Lehman Brothers Inc. on behalf of the Underwriters, except for options issuable
under the Company's option plans, Common Stock issuable under the Company's
employee stock purchase plan, and Common Stock issuable upon exercise of
outstanding warrants or options. Lehman Brothers Inc. in its discretion, may
permit such sales during such periods without public announcement.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Cooley Godward LLP, Palo Alto, California. Brobeck,
Phleger & Harrison LLP, San Francisco, California, are acting as counsel for the
Underwriters in connection with certain legal matters relating to the shares of
Common Stock offered hereby.

EXPERTS

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

47
<PAGE>
SUGEN, INC.
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................................................... F-2

Financial Statements:

Balance Sheets........................................................................................... F-3

Statements of Operations................................................................................. F-4

Statement of Stockholders' Equity........................................................................ F-5

Statements of Cash Flows................................................................................. F-6

Notes to Financial Statements............................................................................ F-7
</TABLE>

F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
SUGEN, Inc.

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

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

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

ERNST & YOUNG LLP

Palo Alto, California
February 2, 1996

F-2
<PAGE>
SUGEN, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------ JUNE 30,
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............................................ $ 12,599 $ 8,226 $ 9,113
Short-term investments............................................... 9,815 45,027 31,125
Accounts receivable.................................................. 323 288 212
Prepaid expenses and other current assets............................ 546 746 623
------------ ------------ -----------
Total current assets............................................... 23,283 54,287 41,073

Property and equipment, net............................................ 2,851 4,513 4,193
Other assets........................................................... 404 443 1,232
Investment in Selectide Corporation.................................... 1,917 -- --
------------ ------------ -----------
$ 28,455 $ 59,243 $ 46,498
------------ ------------ -----------
------------ ------------ -----------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 1,072 $ 652 $ 1,795
Accrued liabilities.................................................. 1,591 3,587 5,316
Deferred revenue..................................................... 4,636 6,558 1,616
Capital lease obligations -- current portion......................... 750 1,354 1,556
------------ ------------ -----------
Total current liabilities.......................................... 8,049 12,151 10,283

Capital lease obligations -- non-current portion....................... 2,087 3,651 3,408
Commitments
Stockholders' equity:
Preferred stock, $.01 par value; 20,000,000 shares authorized,
issuable in series; 300,000 shares designated as Series A Junior
Participating Preferred Stock; none issued and outstanding.......... -- -- --
Common stock, $.01 par value; 30,000,000 shares authorized; shares
issued and outstanding: 8,161,700, 10,634,917 and 10,528,572 at
December 31, 1994 and 1995 and June 30, 1996, respectively.......... 82 106 105
Additional paid-in capital........................................... 45,094 81,696 79,623
Deferred compensation................................................ (587) (397) (303)
Accumulated deficit.................................................. (26,270) (37,964) (46,618)
------------ ------------ -----------
Total stockholders' equity......................................... 18,319 43,441 32,807
------------ ------------ -----------
$ 28,455 $ 59,243 $ 46,498
------------ ------------ -----------
------------ ------------ -----------
</TABLE>

See accompanying notes.

F-3
<PAGE>
SUGEN, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEARS ENDED DECEMBER 31, 30,
---------------------------------- ------------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Contract revenue (includes amounts from related
party)......................................... $ 5,470 $ 6,270 $ 13,843 $ 6,875 $ 7,908
Costs and expenses:
Research and development...................... 10,251 17,079 23,226 10,563 14,332
General and administrative.................... 2,169 3,106 5,086 2,389 2,967
---------- ---------- ---------- ---------- ------------
Total costs and expenses.................... 12,420 20,185 28,312 12,952 17,299
---------- ---------- ---------- ---------- ------------
Operating loss.................................. (6,950) (13,915) (14,469) (6,077) (9,391)
Other income and expenses:
Interest income............................... 339 529 1,988 908 1,288
Interest expense.............................. (56) (278) (494) (209) (354)
Gain on sale of investment in Selectide
Corporation.................................. -- -- 1,006 1,006 --
---------- ---------- ---------- ---------- ------------
Other income, net........................... 283 251 2,500 1,705 934
---------- ---------- ---------- ---------- ------------
Net loss........................................ $ (6,667) $ (13,664) $ (11,969) $ (4,372) $ (8,457)
---------- ---------- ---------- ---------- ------------
---------- ---------- ---------- ---------- ------------
Net loss per share.............................. $ (3.89) $ (4.15) $ (1.32) $ (0.51) $ (0.81)
---------- ---------- ---------- ---------- ------------
---------- ---------- ---------- ---------- ------------
Shares used in computing net loss per share..... 1,712,000 3,296,000 9,085,000 8,651,000 10,486,000
---------- ---------- ---------- ---------- ------------
---------- ---------- ---------- ---------- ------------
</TABLE>

See accompanying notes.

F-4
<PAGE>
SUGEN, INC.

STATEMENT OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED
STOCK COMMON STOCK ADDITIONAL
----------------------- ----------------------- PAID-IN DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
---------- ----------- ---------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1992............ 11,133,622 $ 111 1,333,313 $ 13 $ 16,787 $ --
Issuance of Common Stock upon exercise of
stock options........................... -- -- 128,999 2 47 --
Issuance of Series F Preferred Stock for
cash, net of issuance costs of $2....... 275,000 3 -- -- 751 --
Issuance of Series G Preferred Stock for
cash, net of issuance costs of $600..... 2,855,321 29 -- -- 7,938 --
Deferred compensation related to grant of
certain stock options................... -- -- -- -- 365 (365)
Net loss................................. -- -- -- -- -- --
---------- ----------- ---------- ----- ----------- ------
BALANCES AT DECEMBER 31, 1993............ 14,263,943 143 1,462,312 15 25,888 (365)
Issuance of Common Stock upon exercise of
stock options........................... -- -- 115,652 1 75 --
Issuance of Common Stock for cash in
connection with initial public offering,
net of issuance costs of $2,188......... -- -- 2,780,117 28 18,635 --
Conversion of Preferred Stock into Common
Stock in connection with initial public
offering (net of $1 paid for fractional
shares)................................. (14,263,943) (143) 3,803,619 38 104 --
Deferred compensation related to grant of
certain options......................... -- -- -- -- 392 (392)
Amortization of deferred compensation.... -- -- -- -- -- 170
Change in net unrealized losses on
available-for-sale securities........... -- -- -- -- -- --
Net loss................................. -- -- -- -- -- --
---------- ----------- ---------- ----- ----------- ------
BALANCES AT DECEMBER 31, 1994............ -- -- 8,161,700 82 45,094 (587)
Issuance of Common Stock upon exercise of
stock options and in connection with an
employee stock purchase plan............ -- -- 141,824 1 302 --
Placement of Common Stock for cash, net
of issuance costs of $450............... -- -- 1,396,875 14 16,299 --
Issuance of Common Stock for cash to
Zeneca Limited, net of issuance costs of
$150.................................... -- -- 789,141 8 12,342 --
Issuance of Common Stock for cash to ASTA
Medica Aktiengesellschaft, net of
issuance costs of $50................... -- -- 431,137 4 8,946 --
Issuance of Common Stock for services.... -- -- 15,000 -- 139 --
Repurchase of Common Stock for cash from
Selectide Corporation................... -- -- (300,760) (3) (1,426) --
Amortization of deferred compensation.... -- -- -- -- -- 190
Change in net unrealized losses on
available-for-sale securities........... -- -- -- -- -- --
Net loss................................. -- -- -- -- -- --
---------- ----------- ---------- ----- ----------- ------
BALANCES AT DECEMBER 31, 1995............ -- -- 10,634,917 106 81,696 (397)
Issuance of common stock upon exercise of
stock options for cash, net
(unaudited)............................. -- -- 109,382 1 259 --
Issuance of common stock upon exercise of
warrants, net of shares repurchased
(unaudited)............................. -- -- 5,434 -- -- --
Issuance of common stock for cash in
connection with ESPP (unaudited)........ -- -- 13,839 -- 163 --
Repurchase of common stock for cash from
Amgen, Inc. (unaudited)................. -- -- (235,000) (2) (2,695) --
Issuance of warrants for cash to Amgen
Inc. (unaudited)........................ -- -- -- -- 200 --
Amortization of deferred compensation.... -- -- -- -- -- 94
Change in net unrealized losses on
available-for-sale securities
(unaudited)............................. -- -- -- -- -- --
Net loss (unaudited)..................... -- -- -- -- -- --
---------- ----------- ---------- ----- ----------- ------
BALANCES AT JUNE 30, 1996 (UNAUDITED).... -- $ -- 10,528,572 $ 105 $ 79,623 $ (303)
---------- ----- ---------- --- ----------- -----
---------- ----- ---------- --- ----------- -----

TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
------------- -------------
<S> <C> <C>
BALANCES AT DECEMBER 31, 1992............ $ (5,784) $ 11,127
Issuance of Common Stock upon exercise of
stock options........................... -- 49
Issuance of Series F Preferred Stock for
cash, net of issuance costs of $2....... -- 754
Issuance of Series G Preferred Stock for
cash, net of issuance costs of $600..... -- 7,967
Deferred compensation related to grant of
certain stock options................... -- --
Net loss................................. (6,667) (6,667)
------------- -------------
BALANCES AT DECEMBER 31, 1993............ (12,451) 13,230
Issuance of Common Stock upon exercise of
stock options........................... -- 76
Issuance of Common Stock for cash in
connection with initial public offering,
net of issuance costs of $2,188......... -- 18,663
Conversion of Preferred Stock into Common
Stock in connection with initial public
offering (net of $1 paid for fractional
shares)................................. -- (1)
Deferred compensation related to grant of
certain options......................... -- --
Amortization of deferred compensation.... -- 170
Change in net unrealized losses on
available-for-sale securities........... (155) (155)
Net loss................................. (13,664) (13,664)
------------- -------------
BALANCES AT DECEMBER 31, 1994............ (26,270) 18,319
Issuance of Common Stock upon exercise of
stock options and in connection with an
employee stock purchase plan............ -- 303
Placement of Common Stock for cash, net
of issuance costs of $450............... -- 16,313
Issuance of Common Stock for cash to
Zeneca Limited, net of issuance costs of
$150.................................... -- 12,350
Issuance of Common Stock for cash to ASTA
Medica Aktiengesellschaft, net of
issuance costs of $50................... -- 8,950
Issuance of Common Stock for services.... -- 139
Repurchase of Common Stock for cash from
Selectide Corporation................... -- (1,429)
Amortization of deferred compensation.... -- 190
Change in net unrealized losses on
available-for-sale securities........... 275 275
Net loss................................. (11,969) (11,969)
------------- -------------
BALANCES AT DECEMBER 31, 1995............ (37,964) 43,441
Issuance of common stock upon exercise of
stock options for cash, net
(unaudited)............................. -- 260
Issuance of common stock upon exercise of
warrants, net of shares repurchased
(unaudited)............................. -- 0
Issuance of common stock for cash in
connection with ESPP (unaudited)........ -- 163
Repurchase of common stock for cash from
Amgen, Inc. (unaudited)................. -- (2,697)
Issuance of warrants for cash to Amgen
Inc. (unaudited)........................ -- 200
Amortization of deferred compensation.... 94
Change in net unrealized losses on
available-for-sale securities
(unaudited)............................. (197) (197)
Net loss (unaudited)..................... (8,457) (8,457)
------------- -------------
BALANCES AT JUNE 30, 1996 (UNAUDITED).... $ (46,618) $ 32,807
------------- -------------
------------- -------------
</TABLE>

See accompanying notes.

F-5
<PAGE>
SUGEN, INC.

STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------- --------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss............................................................ $ (6,667) $ (13,664) $ (11,969) $ (4,372) $ (8,457)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization..................................... 302 1,009 1,629 713 1,080
Deferred revenue.................................................. 2,031 (395) 1,922 500 (4,942)
Issuance of Common Stock for services............................. -- -- 139 -- --
Gain on sale of investment in Selectide Corporation............... -- -- (1,006) (1,006) --
Changes in operating assets and liabilities:
Accounts receivable............................................. (116) (23) 35 140 76
Prepaid expenses and other current assets....................... (64) (431) (200) (27) 123
Other assets.................................................... (167) (204) (39) (41) (789)
Accounts payable................................................ 624 296 (420) 135 1,143
Accrued liabilities............................................. 541 474 1,996 582 1,729
---------- ---------- ---------- --------- ---------
Net cash used in operating activities............................... (3,516) (12,938) (7,913) (3,376) (10,037)
---------- ---------- ---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments................................. (694) (11,917) (57,118) (25,067) (7,949)
Maturities of short-term investments................................ 3,958 1,643 15,308 5,964 17,236
Sales of short-term investments..................................... -- 998 6,873 2,970 4,418
Purchases of property and equipment, net............................ (792) (1,304) (2,042) (772) (666)
Proceeds from sale of investment in Selectide Corporation........... -- -- 2,923 2,923 --
---------- ---------- ---------- --------- ---------
Net cash provided by (used in) investing activities................. 2,472 (10,580) (34,056) (13,982) 13,039
---------- ---------- ---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of convertible Preferred Stock, net.......... 8,721 -- -- -- --
Proceeds from issuance of Common Stock, net......................... 49 18,738 37,916 11,061 424
Repurchase of Common Stock.......................................... -- -- (1,429) -- (2,698)
Proceeds from issuance of warrant................................... -- -- -- -- 200
Proceeds from lease financing of property and equipment............. 418 1,580 2,109 766 632
Payments under capital lease obligations............................ (211) (491) (1,000) (398) (673)
---------- ---------- ---------- --------- ---------
Net cash provided by financing activities........................... 8,977 19,827 37,596 11,429 (2,115)
---------- ---------- ---------- --------- ---------
Net increase (decrease) in cash and cash equivalents................ 7,933 (3,691) (4,373) (5,929) 887
Cash and cash equivalents at beginning of year...................... 8,357 16,290 12,599 12,599 8,226
---------- ---------- ---------- --------- ---------
Cash and cash equivalents at end of year............................ $ 16,290 $ 12,599 $ 8,226 $ 6,670 $ 9,113
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest.............................. $ 56 $ 278 $ 494 $ 209 $ 354
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Equipment acquired under capital leases............................. $ -- $ 1,090 $ 1,059 $ 256 $ --
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
</TABLE>

See accompanying notes.

F-6
<PAGE>
SUGEN, INC.

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

SUGEN, Inc. (the "Company"), a Delaware corporation founded in July 1991, is
a biopharmaceutical company focusing on the discovery and development of small
molecule drugs which target specific cellular signal transduction pathways.
Dysfunctional signal transduction pathways have been implicated in diseases such
as cancer and diabetes, as well as in dermatologic, immunologic, cardiovascular
and neurologic disorders. The Company pursues its drug discovery programs
independently and in collaboration with other pharmaceutical companies.

INTERIM FINANCIAL INFORMATION

The financial information at June 30, 1996 and for the six months ended June
30, 1995 and 1996 is unaudited but includes all adjustments (consisting only of
normal recurring adjustments) which the Company considers necessary for a fair
presentation of the financial position at such date and the operating results
and cash flows for those periods. The results of the Company's operations for
any interim period are not necessarily indicative of the results of the
Company's operations for a full fiscal year.

USE OF ESTIMATES

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

CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

The Company considers all highly liquid investments with a maturity from
date of purchase of three months or less to be cash equivalents. All other
liquid investments are classified as short-term investments. These instruments
consist primarily of U.S. Treasury bills, U.S. Government agency debt, foreign
debt, corporate notes and commercial paper. The Company limits its concentration
of risk by diversifying its investments among a variety of industries and
issuers.

All debt securities are designated as available-for-sale and are carried at
fair value, with the unrealized gains and losses reported in stockholders'
equity. The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization is included
in interest income. Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are also included in
interest income. The cost of securities sold is based on the specific
identification method. Interest and dividends on securities are included in
interest income.

REVENUE RECOGNITION

Revenue from collaborative agreements is recorded when earned as defined
under the terms of the agreements. Non-refundable fees received upon contract
signing or terminations are recorded as deferred revenue and recognized as
income when the related start-up or wind-down activities are performed, which is
generally over a twelve month period. Periodic research funding payments are
recognized as income when earned. Substantially all of the Company's revenue is
derived from its three collaborations.

RESEARCH AND DEVELOPMENT EXPENSE

Research and development expense consists of independent research and
development costs, the costs associated with work performed under collaborations
and the Company's sponsored funding of research projects performed by others.
Research and development costs include direct and research-related overhead
expenses.

F-7
<PAGE>
SUGEN, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEPRECIATION AND AMORTIZATION

Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the assets, which are
generally three to five years. Leasehold improvements are amortized over the
shorter of their estimated useful lives or the term of the lease.

STOCK BASED COMPENSATION

The Company generally grants stock options for a fixed number of shares to
employees with an exercise price equal to the fair value of the shares at the
date of grant. The Company accounts for stock option grants in accordance with
APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and, accordingly,
employs the intrinsic-value method to value stock option grants.

NET LOSS PER SHARE

Net loss per share is computed using the weighted average number of common
shares outstanding. Common equivalent shares from stock options, convertible
preferred stock, and warrants are excluded from the computation as their effect
is antidilutive, except that through June 30, 1994, pursuant to the Securities
and Exchange Commission Staff Accounting Bulletins, common and common equivalent
shares issued during the 12-month period prior to the initial filing of the
registration statement for the initial public offering at prices substantially
below the public offering price have been included in the calculation as if they
were outstanding (using the treasury stock method and the public offering price
for stock options and warrants and the if-converted method for convertible
preferred stock).

The following pro forma per share data is provided to present the
calculation on a consistent basis for all periods presented. It has been
computed as described above and also gives retroactive effect from the date of
issuance to the conversion of convertible preferred stock which automatically
converted to common shares upon the closing of the Company's initial public
offering in October 1994.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1993 1994
---------- ----------
<S> <C> <C>
Pro forma net loss per share.................... $ (1.39) $ (2.22)
---------- ----------
---------- ----------
Shares used in computing pro forma net loss per
share.......................................... 4,786,000 6,143,000
---------- ----------
---------- ----------
</TABLE>

F-8
<PAGE>
SUGEN, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. INVESTMENTS
The following is a summary of available-for-sale securities as of December
31 (in thousands):

<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE SECURITIES
--------------------------------------------------------------------------
1994 1995
----------------------------------- -------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
GAINS/ ESTIMATED GAINS/ ESTIMATED
COST (LOSSES) FAIR VALUE COST (LOSSES) FAIR VALUE
--------- ----------- ----------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. Government agencies................... $ 8,100 $ (154) $ 7,946 $ 20,617 $ 54 $ 20,671
U.S. corporate notes........................ 6,423 (1) 6,422 19,177 59 19,236
Foreign debt securities..................... -- -- -- 7,073 8 7,081
U.S. corporate commercial paper............. 5,071 -- 5,071 2,689 (1) 2,688
Money market funds, certificates of deposit
and other.................................. 2,975 -- 2,975 3,577 -- 3,577
--------- ----- ----------- --------- ----- -----------
$ 22,569 $ (155) $ 22,414 $ 53,133 $ 120 $ 53,253
--------- ----- ----------- --------- ----- -----------
--------- ----- ----------- --------- ----- -----------
Amounts included in:
Cash equivalents.......................... $ 12,599 $ -- $ 12,599 $ 8,227 $ (1) $ 8,226
Short-term investments.................... 9,970 (155) 9,815 44,906 121 45,027
--------- ----- ----------- --------- ----- -----------
$ 22,569 $ (155) $ 22,414 $ 53,133 $ 120 $ 53,253
--------- ----- ----------- --------- ----- -----------
--------- ----- ----------- --------- ----- -----------
</TABLE>

The estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies. However,
the estimates presented herein are not necessarily indicative of the amounts the
Company could realize in a current market exchange.

As of December 31, 1995, the average portfolio duration was approximately
eight months, and the longest contractual maturity did not exceed two years.
Gross realized gains and losses were immaterial during 1994 and 1995.

3. INVESTMENT IN SELECTIDE CORPORATION
In 1992, the Company signed a three-year collaborative agreement with
Selectide Corporation ("Selectide"), a privately-held corporation. In connection
with this agreement, the Company issued 300,760 shares of stock for junior
preferred shares of Selectide valued at $1,917,000, which shares represented
approximately 5% of the voting shares of Selectide as of December 31, 1994.

In January 1995, the Company received approximately $2.9 million from the
sale of its 5% ownership in Selectide to Marion Merrell Dow, Inc., resulting in
a gain of approximately $1.0 million. The Company simultaneously repurchased the
300,760 shares of SUGEN Common Stock formerly held by Selectide for
approximately $1.43 million, or $4.75 per share. The net proceeds to the Company
from these transactions was approximately $1.5 million.

F-9
<PAGE>
SUGEN, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31 (in
thousands):

<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Leasehold improvements............................... $ 1,538 $ 2,731
Office and computer equipment........................ 780 1,675
Laboratory equipment................................. 1,854 2,313
--------- ---------
4,172 6,719
Accumulated depreciation and amortization............ (1,321) (2,206)
--------- ---------
Net property and equipment........................... $ 2,851 $ 4,513
--------- ---------
--------- ---------
</TABLE>

Property and equipment under capital leases amounted to $3.6 million and
$6.2 million as of December 31, 1994 and 1995 with related accumulated
amortization of $1.1 million and $1.9 million, respectively.

5. ACCRUED LIABILITIES
The components of accrued liabilities consist of the following (in
thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------- JUNE 30,
1996
-----------
(UNAUDITED)
<S> <C> <C>
Accrued research and development services..... $ 1,381 $ 2,479
Accrued compensation.......................... 657 758
Accrued professional fees..................... 344 399
Other......................................... 1,205 1,680
------ -----------
$ 3,587 $ 5,316
------ -----------
------ -----------
</TABLE>

6. RESEARCH AND DEVELOPMENT COLLABORATION AGREEMENTS

ASTA MEDICA AKTIENGESELLSCHAFT

In December 1995, the Company established an oncology product development
collaboration with ASTA Medica Aktiengesellschaft ("ASTA Medica") to develop,
manufacture and bring to market SUGEN's oncology products based upon the cell
signal transduction targets known as Pan-Her and Raf. The Company received a
$4.0 million technology set-up fee and will receive additional consideration in
the form of contract services for non-collaboration work, certain milestone
payments tied to the success of the programs and royalty payments on sales in
certain territories. The agreement provides for ASTA Medica to receive exclusive
marketing rights to collaboration products in Greater Europe (including the
former Soviet Union) and South America, subject to royalties to SUGEN. The
Company retains market rights in the rest of the world, subject to royalties
payable to ASTA Medica in most circumstances. Additionally, ASTA Medica
purchased 431,137 shares of SUGEN Common Stock for $9.0 million, or $20.88 per
share.

ZENECA LIMITED -- RELATED PARTY

In January 1995, the Company established a collaboration with Zeneca Limited
("Zeneca") to pursue the research, development and commercialization of novel
anti-cancer drugs targeting cell-surface receptors and intra-cellular signal
transduction pathways. In connection with this agreement, the Company received
an initial $5.0 million technology set-up fee and will receive additional cash
payments for annual research funding, certain milestone payments (which may be
offset against royalties over time) tied to the progress of compounds in the
collaboration and royalties on worldwide sales of any collaboration products.
The Company will also have the right to contribute to clinical development costs
on each program, thereby earning participation in the North American profits
from successful products coming out of such programs over and above its royalty
entitlement.

F-10
<PAGE>
SUGEN, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. RESEARCH AND DEVELOPMENT COLLABORATION AGREEMENTS (CONTINUED)
As a part of the collaboration agreement, Zeneca purchased 789,141 shares of
the Company's Common Stock for $12.5 million, or $15.84 per share. This $12.5
million equity investment, combined with Zeneca's $7.5 million participation in
SUGEN's October 1994 initial public offering, increased Zeneca's equity
investment in SUGEN to $20.0 million and brought Zeneca's ownership in the
Company to approximately 20%.

Zeneca participated in the Company's September 1995 financing (see Note 9),
purchasing an additional 281,875 shares of the Company's Common Stock. This
additional investment maintained Zeneca's ownership level in SUGEN at
approximately 20% and increased its cumulative equity investment in the Company
to $23.4 million. Zeneca has committed not to increase its holdings above this
level without the approval of SUGEN's Board of Directors.

AMGEN INC.

In December 1992, the Company established a research and development
collaboration with Amgen Inc. ("Amgen") to discover and develop therapeutic and
diagnostic products in neurobiology and a subset of hematopoiesis. As part of
this collaboration, Amgen made a $4.0 million equity investment, which converted
into 387,878 shares of the Company's Common Stock at the time of the Company's
initial public offering. For the three year period ended December 31, 1995, the
Company received approximately $18.1 million of research funding from Amgen.

In January 1996, the Company and Amgen reached an agreement to conclude
their research collaboration one year earlier than originally planned due to
their changed research priorities over the three years. Under the terms of this
wind-down agreement, Amgen made a final cash payment to the Company of $2.5
million (of which $1.1 million was advanced in December 1995) and forgave
certain advance payments already made to the Company for future research work
which will be recorded as wind-down revenue in 1996. Amgen also granted back to
SUGEN exclusive worldwide rights to 22 propriety signal transduction targets
discovered in the course of the collaboration, subject to royalty payments back
to Amgen with respect to potential future product sales. In addition, in January
1996 the Company redeemed 235,000 shares of its Common Stock from Amgen at a
price of $11.48 per share, thereby reducing Amgen's current holdings of the
Company's Common Stock to 152,878 shares. Amgen also purchased in January 1996
for $200,000 a seven-year warrant to purchase 200,000 shares of Common Stock at
an exercise price of $15.50 per share.

7. LEASES
In September 1995, the Company secured a new $3.5 million capital lease line
to fund facility improvements and equipment associated with the Company's
research, development and administrative facilities. As of December 31, 1995,
the Company had approximately $1.9 million available under this lease line.

The Company leases its office and laboratory facilities under operating
leases through 1998 having renewal options ranging from three to five years.
Rent expense for this and other operating leases amounted to $667,000, $1.1
million and $1.4 million for 1993, 1994 and 1995, respectively.

F-11
<PAGE>
SUGEN, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

7. LEASES (CONTINUED)
Future minimum payments under capital and operating leases at December 31,
1995 are as follows (in thousands):

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- -----------
<S> <C> <C>
Year ended December 31:
1996............................................ $ 1,990 $ 1,414
1997............................................ 2,035 1,243
1998............................................ 1,604 926
1999............................................ 633 24
--------- -----------
Total minimum lease payments.................... 6,262 $ 3,607
--------- -----------
-----------
Amount representing interest.................... (1,257)
---------
Present value of minimum lease payments......... 5,005
Less current portion............................ (1,354)
---------
Non-current portion............................. $ 3,651
---------
---------
</TABLE>

8. COMMITMENTS UNDER RESEARCH AND DEVELOPMENT PROGRAMS
The Company enters from time to time into license and research agreements
whereby the Company funds research projects performed by others or in-licenses
compounds from third parties. Some of the agreements may require the Company to
make milestone and royalty payments.

Under these programs, commitments for research funding are approximately
$4.0 million and $2.6 million in 1996 and 1997, respectively. Most of these
commitments are cancelable within a three to six month period and limit the
amounts payable by the Company for sponsored research under the programs after
notice of cancellation. Related research and development expenses under these
programs were $3.2 million, $3.7 million and $4.2 million for 1993, 1994 and
1995, respectively.

9. STOCKHOLDERS' EQUITY

PREFERRED SHARE PURCHASE RIGHTS PLAN

In July 1995, the Board of Directors approved a Preferred Share Purchase
Rights Plan ("Rights Plan"). The Rights Plan provides for the distribution of a
preferred stock purchase right as a dividend for each share of the Company's
Common Stock. This right entitles stockholders to purchase stock in the Company
or in an acquirer of the Company at a discounted price in the event of certain
hostile efforts to acquire control of the Company. The rights may only be
exercised, if at all, until the earlier of July 31, 2000, or the occurrence of
certain events, and may be redeemed by the Company. At December 31, 1995, the
rights were not exercisable.

In connection with the Rights Plan, 300,000 shares of the authorized
Preferred Stock were designated as Series A Junior Participating Preferred Stock
("Junior Preferred Stock"), of which one share is equivalent to 100 shares of
Common Stock. Each share of Junior Preferred Stock shall entitle the holder
thereof to 100 votes on all matters submitted to a vote of the stockholders and
shall rank, with respect to the payment of dividends and the distribution of
assets, junior to all series of any other class of the Company's Preferred
Stock. Subject to the rights of the holders of any shares of Preferred Stock
with respect to dividends, the holders of shares of Junior Preferred Stock, in
preference to the holders of Common Stock, shall be entitled to receive, when,
as and if declared by the Board of Directors, quarterly dividends. As of
December 31, 1995, no dividends had been declared and no shares were
outstanding.

F-12
<PAGE>
SUGEN, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

9. STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK

In September 1995, the Company sold 1,396,875 shares of its Common Stock at
a price of $12.00 per share, resulting in net proceeds of approximately $16.3
million.

In October and November 1994, the Company completed its initial public
offering of 2,780,117 shares of Common Stock. The net proceeds to the Company
were approximately $18.7 million. Upon effectiveness of the registration
statement relating to the offering, all of the Preferred Stock outstanding
automatically converted into 3,803,619 shares of Common Stock. The total number
of shares of Common Stock outstanding was 10,634,917 as of December 31, 1995, of
which 25,001 were subject to repurchase.

At December 31, 1995 the Company has reserved 2,484,731 shares of Common
Stock for issuance upon exercise of warrants and options and 170,437 common
shares for issuance under the Employee Stock Purchase Plan.

WARRANTS

The following warrants to purchase shares of common stock were issued in
connection with various license and equipment lease financing arrangements (also
see Note 6):

<TABLE>
<CAPTION>
WARRANTS OUTSTANDING AT DECEMBER 31, 1995
- ----------------------------------------------------------
NUMBER OF PRICE PER AGGREGATE
SHARES SHARE PRICE EXPIRATION DATE
- ----------- ----------- ------------ ------------------
<C> <C> <C> <S>
10,665 $ 4.69 $ 49,992 December 2001
40,000 3.75 150,000 December 1999
36,847 10.31 379,985 July 2000
7,200 11.25 81,000 December 1999
133,333 11.25 1,499,996 July 1997
13,598 12.87 175,006 December 2001
</TABLE>

EMPLOYEE STOCK PURCHASE PLAN

In April 1994, the Company adopted an Employee Stock Purchase Plan ("ESPP")
under which 200,000 shares of Common Stock were reserved for issuance. All
employees of the Company, except those having a 5% or greater ownership stake in
the Company, are eligible to participate in the ESPP provided that on the first
day of an offering period they have been employed by the Company for at least 30
days and are customarily employed by the Company at least twenty hours per week
and at least five months per calendar year. Offerings will generally be for six
months, with the purchase price per share equal to the lower of 85% of the
market value on the date granted (the beginning of the offering period) or on
the date purchased. The next offering period ends on March 31, 1996. As of
December 31, 1995, 29,563 shares had been issued under the ESPP.

1992 STOCK OPTION PLAN

The 1992 Stock Option Plan (the "Plan") provides for the grant of options to
purchase shares of Common Stock to employees, including officers, directors, and
consultants, upon terms determined by the Board of Directors. The options
granted under this Plan may be either incentive stock options or nonstatutory
stock options. As of December 31, 1995, an aggregate of 2.1 million shares of
Common Stock had been reserved for issuance under this Plan, of which 400,000
shares are subject to stockholders' approval.

Options granted under this Plan expire no later than ten years from the date
of grant. The option price shall be at least 100% of the fair market value on
the date of grant for incentive stock options. Nonstatutory options may be
granted as low as 85% of the fair market value on the date of grant. The options
generally become exercisable over a period of three to four years from the date
of grant. Options may be granted with different vesting terms from time to time
as approved by the Board of Directors. The Plan has been

F-13
<PAGE>
SUGEN, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

9. STOCKHOLDERS' EQUITY (CONTINUED)
amended, subject to stockholders' approval, to provide for automatic vesting of
options granted upon a change of control, as defined. The Company has granted
certain performance-based options which fully vest upon the Company meeting
certain milestones.

Activity under the Plan through December 31, 1995 is as follows:

<TABLE>
<CAPTION>
SHARES OUTSTANDING STOCK OPTIONS
AVAILABLE ---------------------------------------------
FOR GRANT OF NUMBER OF AGGREGATE
OPTIONS SHARES PRICE PER SHARE PRICE
------------ ---------- ----------------- --------------
<S> <C> <C> <C> <C>
Balance at December 31, 1992....................... 431,911 368,089 $0.38 to $0.75 $ 156,533
Options granted.................................... (293,013) 293,013 $1.13 329,640
Options exercised.................................. -- (128,999) $0.38 to $1.13 (49,508)
Options canceled................................... 16,618 (16,618) $0.38 to $1.13 (11,178)
------------ ---------- --------------
Balance at December 31, 1993....................... 155,516 515,485 $0.38 to $1.13 425,487
Shares authorized.................................. 400,000
Options granted.................................... (403,703) 403,703 $1.13 to $7.50 2,018,202
Options exercised.................................. -- (115,652) $0.38 to $1.13 (76,167)
Options canceled................................... 29,614 (29,614) $0.38 to $6.00 (30,119)
------------ ---------- --------------
Balance at December 31, 1994....................... 181,427 773,922 $0.38 to $7.50 2,337,403
Shares authorized.................................. 900,000
Options granted.................................... (798,137) 798,137 $5.00 to $15.00 6,675,597
Options exercised.................................. -- (112,261) $0.38 to $6.56 (137,038)
Options canceled................................... 16,370 (16,370) $0.75 to $7.13 (83,666)
------------ ---------- --------------
Balance at December 31, 1995....................... 299,660 1,443,428 $0.38 to $15.00 $ 8,792,296
------------ ---------- --------------
------------ ---------- --------------
</TABLE>

As of December 31, 1995 options to purchase 599,432 shares of Common Stock
were exercisable, of which 205,679 shares would be subject to repurchase if all
were exercised.

Through December 31, 1994 the Company recorded deferred compensation expense
for the difference between the exercise price and the deemed fair value for
financial statement presentation purposes of the Company's Common Stock for
certain options granted in 1993 and 1994. This deferred compensation expense
aggregated $757,000 and is being amortized over the related vesting period.

1994 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN

In April 1994, the Board of Directors approved the 1994 Non-Employee
Directors' Stock Option Plan (the "Directors' Plan") to provide for the
automatic grant of options to purchase shares of Common Stock to each person who
is elected as a director of the Company and who is not otherwise employed by the
Company (a "Non-Employee Director").

Options granted under the Directors' Plan to Non-Employee Directors upon
their initial election to the Board will vest and be exercisable in five equal
annual installments commencing on the date one year after the date of the grant.
Vesting is contingent upon the continuous service of the director. The
Directors' Plan has been amended to provide for automatic vesting of options
granted upon a change of control, as defined. Options granted annually to
existing Non-Employee Directors vest in full on the date ten days prior to the
date of the first annual meeting of stockholders of the Company subsequent to
the date of the grant. The exercise price of options granted under the
Directors' Plan must equal or exceed the fair market value of the Common Stock
on the date of grant. Under this plan, 230,000 shares of Common Stock have been
reserved for issuance, of which 130,000 shares are subject to stockholders'
approval. As of December 31, 1995, options for 73,000 shares had been issued and
were outstanding, of which 20,000 shares were exercisable.

F-14
<PAGE>
SUGEN, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

9. STOCKHOLDERS' EQUITY (CONTINUED)
LONG-TERM OBJECTIVES STOCK OPTION PLAN FOR SENIOR MANAGEMENT

In July 1995, the Board of Directors adopted a Long-Term Objectives Stock
Option Plan for Senior Management (the "Long-Term Plan"). Under this plan,
225,000 shares of Common Stock were initially reserved. In December 1995, the
Board of Directors approved an amendment to the Long-Term Plan increasing the
number of shares authorized for issuance by 45,000 to a total of 270,000 shares;
the Long-Term Plan will be presented to stockholders for approval in 1996. The
options vest and become exercisable upon the achievement of specific objectives
over time. However, if the specific objectives are not met by December 31, 1997,
the Board of Directors may, in its sole discretion, determine that significant
progress toward achievement of the objectives has been demonstrated and
therefore grant vesting of a portion of the options with the unvested portion
canceled. Any such vesting of all or a portion of these options may result in
compensation expense, which will equal the difference between the exercise price
of the option and the fair market value of the Company's Common Stock at the
time of vesting. As of December 31, 1995, options for 270,000 shares were
outstanding, none of which were vested or exercisable.

10. INCOME TAXES
As of December 31, 1995, the Company had federal net operating loss
carryforwards of approximately $29 million. The federal net operating loss
carryforwards will expire at various dates beginning on 2006 through 2010.

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes.

Significant components of the Company's deferred tax assets for federal and
state income taxes as of December 31 are as follows (in thousands):

<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Net operating loss carryforwards.......................................................... $ 7,100 $ 10,300
Research credits (expires 2006-2010)...................................................... 900 1,500
Capitalized R&D........................................................................... 300 600
Deferred revenue.......................................................................... 1,700 800
Other -- net.............................................................................. 400 2,300
---------- ----------
Total deferred tax assets................................................................. 10,400 15,500
Valuation allowance for deferred tax assets............................................... (10,400) (15,500)
---------- ----------
Net deferred tax assets................................................................... $ -- $ --
---------- ----------
---------- ----------
</TABLE>

Due to the Company's lack of earnings history, the deferred tax assets have
been fully offset by a valuation allowance. The valuation allowance increased by
$2.0 million and $5.4 million during 1993 and 1994, respectively.

Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the ownership change provisions of the
Internal Revenue Code of 1986. The annual limitation may result in the
expiration of net operating losses and credits before utilization.

11. RELATED PARTY TRANSACTIONS
In 1992, the Company entered into a collaboration and licensing agreement
with Selectide. The chairman of the Board of Directors and chief executive
officer of the Company was also the chairman of the Board of Directors of
Selectide (see Note 3).

In 1995, the Company entered into a collaboration agreement with Zeneca (see
Note 6). As of December 31, 1995, Zeneca owned approximately 20% of the
Company's outstanding Common Stock.

F-15
<PAGE>
SUGEN, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

11. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company provided secured loans to certain key employees and officers to
assist in the down payments for the purchase of their personal residences, all
of which are forgivable after specified years of employment. Included in Other
Assets are approximately $140,000 of loans receivable from certain key employees
and officers at December 31, 1995.

12. EVENTS SUBSEQUENT TO DECEMBER 31, 1995 (UNAUDITED)

OPTION EXERCISE AND STOCKHOLDER NOTE

In August 1996 an officer of the Company exercised options to purchase
132,333 shares of common stock at prices ranging from $6.00 to $7.50 per share.
As consideration for the purchase, the officer issued a full recourse Promissory
Note (the "Note") to the Company. The Note bears interest of 6.84% per annum and
is due and payable on August 29, 2001. However, in the event that the officer's
continuous status as an employee, director or consultant with the Company is
terminated for any reason prior to the payment in full of the Note, the Note
shall be accelerated and all remaining unpaid principal and interest shall
become due and payable on the 90th day following such termination. In addition,
the officer has pledged the shares purchased with this Note as collateral.

LONG-TERM OBJECTIVES STOCK OPTION PLAN

As described in Note 9, the Board of Directors adopted the Long-Term
Objectives Stock Option Plan Senior Management (the "Long-Term Plan") in July
1995. In August 1996 the Company amended the options on 180,000 shares of Common
Stock then outstanding to modify the vesting provisions. The amendment resulted
in deferred compensation which will be amortized over approximately five years.
However, recognition of the deferred compensation may be accelerated upon the
achievement of certain milestones.

RESEARCH AND DEVELOPMENT COLLABORATION

In October 1996, the Company established an opthamology research and
development collaboration with Allergan, Inc. The Company received a $2.0
million initial payment for past research services, will receive annual research
funding and expects to receive additional fees upon the achievement of specified
milestones and royalties on any product sales. In addition, Allergan, Inc
purchased 191,571 shares of SUGEN common stock at a price of $20.88 per share.

F-16
<PAGE>
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES
OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY
JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Available Information.......................... 2
Incorporation of Certain Documents by
Reference..................................... 2
Prospectus Summary............................. 3
Risk Factors................................... 6
Use of Proceeds................................ 15
Price Range of Common Stock.................... 15
Dividend Policy................................ 15
Capitalization................................. 16
Dilution....................................... 16
Selected Financial Data........................ 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 18
Business....................................... 22
Management..................................... 42
Security Ownership of Certain Beneficial Owners
and Management................................ 44
Underwriting................................... 46
Legal Matters.................................. 47
Experts........................................ 47
Index to Financial Statements.................. F-1
</TABLE>

2,000,000 Shares

S U G E N

Common Stock

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

PROSPECTUS

OCTOBER 25, 1996

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

LEHMAN BROTHERS

UBS SECURITIES

HAMBRECHT & QUIST

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