COMBINATORX, INC Securities Registration Statement (S-1/A) BUSINESS

The following is an excerpt from a S-1/A SEC Filing, filed by COMBINATORX, INC on 1/19/2005.

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BUSINESS

Overview

We are a biopharmaceutical company focused on developing new medicines built from synergistic combinations of approved drugs. In less than five years, we have discovered and advanced into clinical trials a portfolio of seven product candidates targeting multiple immuno-inflammatory diseases and cancer, at a total investment, including development of our proprietary screening technology, of less than $50 million.

We are developing our combination drugs in response to the understanding that many diseases affect the body through multiple biological pathways. The activity of a therapeutic compound against one pathway can be insufficiently effective because biological systems often compensate by using a secondary pathway. We believe that by targeting multiple pathways, our combination drug candidates may create synergistic therapeutic effects, which could result in improved treatments for many diseases.

We use our combination high throughput screening, or cHTS, technology, to systematically screen pair-wise combinations from our library of approximately 2,000 United States, European and Japanese approved drugs in cell-based assays corresponding to major diseases such as cancer, rheumatoid arthritis, asthma, psoriasis and diabetes. Using these cell-based assays, our cHTS technology screens the effects of millions of possible dose-specific combinations of existing drugs in each of our selected disease models.

We have discovered pairs of approved drugs which in preclinical studies exhibit a therapeutic effect against a model for a target disease when applied in combination, even though neither drug is indicated for such disease on its own. We have also discovered pairs of drugs where, our preclinical studies suggest the effectiveness or safety of one drug in its primary disease indication may be improved by combining it with another drug that, on its own, is not indicated for that disease.

We believe that our focus on combinations of approved drugs has enhanced and will continue to enhance the speed, efficiency and yield of our drug discovery and development process. We select and prioritize promising combination drug candidates identified by our cHTS technology for clinical development. Because the active pharmaceutical ingredients in our product candidates are themselves approved drugs, we have been able to move seven of our product candidates expeditiously into human clinical studies without the need to first complete many of the extensive preclinical toxicology and pharmacology studies generally required before initiating clinical trials for a new chemical entity. We believe that this approach will allow us to make early development decisions based on studies in patients, rather than only on studies in animals.

Because we have developed a portfolio of product candidates and believe that our drug discovery technology will enable us to identify additional product candidates, we expect to use objective commercial and scientific criteria to select which product candidates to advance to later stage clinical trials. As we obtain results from our clinical trials, we may elect to discontinue or delay trials for certain product candidates in order to refocus our resources on more promising product candidates.

For proof-of-concept clinical trials of each of our product candidates, we have used and plan to use a controlled regimen of commercially available dosages of the active pharmaceutical ingredients of our product candidate designed to simulate our expected commercial formulation. We plan to develop and commercialize our product candidates using formulations whose pharmacology, dosage strength and route of delivery are determined on the basis of the observed activity of their active pharmaceutical ingredients when administered in combination.

We believe that the product candidates discovered using our cHTS technology have the potential to be drugs with new, synergistic mechanisms of action and enhanced medical benefits. Our drug candidates will require the filing of a new drug application, or NDA, with the United States Food and Drug Administration, or FDA, and foreign regulatory agencies in order to obtain regulatory approval

for commercialization. For each of our combination product candidates, we seek patent protection for both the composition of matter of the combination and use of the combination to treat specific diseases.

Five of our product candidates are in proof-of-concept studies in patients, or phase IIa trials, and a sixth product candidate is planned to enter phase IIa clinical trials in 2005. In addition, we are testing our oncology product candidate in patients with advanced cancers who have failed one or more prior therapies. These oncology trials, which we call phase I/II trials, evaluate product safety, response rate, dosage levels and other factors. The following table summarizes our principal clinical and preclinical programs:

Product Candidate Product Description (Components)* Clinical Status
Immuno-Inflammatory
CRx-139 Selective steroid amplifier Phase IIa
(prednisolone, undisclosed (planned for 2005)
selective serotonin reuptake inhibitor) CRx-102 Selective steroid amplifier Phase IIa
(prednisolone, dipyridamole)
CRx-119 Selective steroid amplifier Phase IIa (prednisolone, amoxapine)** CRx-170 Selective steroid amplifier Phase IIa
(undisclosed, undisclosed)
CRx-140 Enhanced calcineurin inhibitor Phase IIa (cyclosporine, undisclosed enhancer agent) CRx-150 Synergistic cytokine modulator Phase IIa
(undisclosed, undisclosed)
Unnamed Multiple product candidates Preclinical Oncology
CRx-026 Dual-action anti-tumor agent Phase I/II
(chlorpromazine, pentamidine)
Unnamed Anti-tumor product candidates Preclinical
(undisclosed, undisclosed)
Metabolic
Unnamed Anti-diabetes product candidates Preclinical
(undisclosed, undisclosed)

º *
º Some drug components are not disclosed because, as a matter of corporate policy, we generally disclose the components of our drug candidates only in connection with scientific publications or meetings.

º **
º This product may include either prednisolone or prednisone.

Immuno-Inflammatory Program

Our portfolio of immuno-inflammatory product candidates is organized into three classes: selective steroid amplifiers, enhanced calcineurin inhibitors and synergistic cytokine modulators.

Selective Steroid Amplifiers. We have four selective steroid amplifier product candidates in clinical trials, CRx-139, CRx-102, CRx-119 and CRx-170. Steroids of the corticosteroid class are powerful anti-inflammatory and immuno-modulating drugs that are used broadly for the treatment of immuno-inflammatory diseases. The utility of these drugs, however, is limited by their substantial adverse side effects, many of which are dose-related. Our selective steroid amplifiers contain a reduced-dose steroid combined with a different second active ingredient which our preclinical studies suggest, when administered, with the reduced-dose steroid, enhances the reduced-dose steroid's anti-inflammatory and immuno-modulatory activity without, we believe, a comparable increase in the steroid's dose-related adverse side effects. We believe that the mechanism of steroid enhancement for each of these selective steroid amplifiers is different, and, therefore, that each product candidate may be useful in treating different immuno-inflammatory diseases, such as asthma, rheumatoid arthritis, atopic dermatitis, psoriasis, inflammatory bowel disease, inflammatory ocular diseases, lupus, polymyalgia rheumatica and multiple sclerosis.

Enhanced Calcineurin Inhibitors. We have one enhanced calcineurin inhibitor product candidate, CRx-140, in clinical trials. Calcineurin inhibitors are potent immuno-modulatory compounds that are used broadly in organ transplantation to prevent transplant rejection. Calcineurin inhibitors are also effective in numerous immuno-inflammatory diseases, such as psoriasis, psoriatic arthritis, inflammatory bowel disease and lupus, but their use for these diseases is limited by adverse dose-related side effects. Our preclinical studies suggest that CRx-140 selectively boosts the immuno-modulatory activity of its reduced-dose calcineurin inhibitor without, we believe, a comparable increase in its adverse side effects. If successful, the improved risk-to-benefit ratios of enhanced calcineurin inhibitors could render them substantially more useful for the treatment of immuno-inflammatory diseases than current calcineurin inhibitor therapy.

Synergistic Cytokine Modulators. We have an oral synergistic cytokine modulator product candidate, CRx-150, in clinical trials. CRx-150 combines two active pharmaceutical ingredients, neither of which is used currently to treat immuno-inflammatory diseases. Our preclinical studies suggest that these ingredients synergistically inhibit cytokines, the protein signaling molecules used by the immune system to regulate immune and inflammatory responses. Drugs that block the activity of key pro-inflammatory cytokines have resulted in advances in the treatment of rheumatoid arthritis, psoriasis, inflammatory bowel disease, and other diseases. Therefore, we believe an oral synergistic cytokine modulator has the potential to be useful for the treatment of many immuno-inflammatory diseases.

Oncology Program

Our oncology product pipeline includes dual-action agents in clinical and preclinical development.

Novel Dual-Action Anti-Tumor Agent. We have a novel dual-action anti-tumor drug candidate, CRx-026, in clinical trials. CRx-026 contains two active pharmaceutical ingredients, neither of which is indicated currently to treat cancer. Our preclinical studies suggest that chlorpromazine, one active pharmaceutical ingredient of CRx-026, inhibits kinesin spindle protein, or KSP. KSP is a protein essential for cell proliferation, a process that when unregulated results in tumor growth. The other active pharmaceutical ingredient, pentamidine, has been reported in scientific literature to inhibit phosphatases of regenerating liver, or PRL phosphatases. PRL phosphatases may play an important role in regulating cell proliferation and proper chromosome separation during cell proliferation. We believe that, when combined, the active pharmaceutical ingredients in CRx-026 block cancer cell proliferation by inhibiting these two elements of the cancer cell's mechanism for proliferation. We

believe these combined mechanisms may show improved anti-tumor activity over kinesin inhibition alone. In our preclinical studies, CRx-026 reduced tumor growth rates in multiple animal models. Our preclinical studies also suggest that CRx-026 might be usefully added to many current cancer treatment regimens.

Metabolic Diseases and Other Preclinical Programs

Our preclinical pipeline includes multiple drug candidates targeted for potential development in Type II diabetes, oncology and multiple immuno-inflammatory diseases. Our program in Type II diabetes is targeted to discover orally administered product candidates with new combination mechanisms of action that facilitate glucose uptake and overcome insulin resistance.

Industry Background

The pharmaceutical industry historically has been focused on discovering and developing single agent drugs that are selective for isolated disease targets. This approach to drug discovery has proven to be successful in several diseases, particularly in cases where the modification of a single target has a dramatic effect on the outcome of the disease. However, there is growing understanding of the complexity of biological systems. Biologists now recognize that cellular activity occurs across redundant, convergent and divergent pathways. The activity of a therapeutic compound against one pathway can be insufficiently effective because biological systems often compensate by using a secondary pathway. In such cases, if a second compound could complement the activity of the first compound by simultaneously targeting the secondary pathway, the two compounds acting together might overcome the biologic redundancy. Similarly, a drug may have a therapeutic effect by acting against one pathway, but may trigger adverse side effects by its actions on other pathways. In such cases, if a second compound could selectively enhance the first compound's desirable activity without enhancing its undesirable side effects, the combination could improve the first drug's efficacy or safety, or both.

Physicians and the pharmaceutical industry have acknowledged this biological complexity by prescribing or creating combination drugs, which often combine two or more drugs with distinct and complementary modes of action. Traditional combination drugs are often co-formulations of two drugs that have known mechanisms of action, are indicated for the same disease and are often already co-prescribed by physicians. An example of this kind of combination drug is GlaxoSmithKline's asthma drug Advair, which combines Flonase (fluticasone) and Serevent (salmeterol), two active pharmaceutical ingredients that independently target the two major symptoms of asthma, bronchial constriction and inflammation, respectively. Similarly, Merck and Schering-Plough have launched Vytorin, a fixed dose combination of Zocor (simvastatin) and Zetia (ezetimibe), for the treatment of hypercholesterolemia. Simvastatin decreases endogenous liver production of cholesterol while ezetimibe inhibits the absorption of cholesterol in the digestive system.

We believe that traditional combination drugs represent only a small fraction of possible combinations of existing pharmaceutical agents. These traditional combinations typically have been limited to cases where, based on clinical experience or mechanistic understanding, there was an obvious reason to combine the two drugs in a particular indication.

Our Approach

We seek to systematically discover novel, non-obvious combination drugs. In contrast to traditional combination drugs, we screen for combinations that provide new, synergistic mechanisms of action and medical benefits resulting from two compounds working in concert.

To search for new combination therapies, we use our cHTS technology to systematically screen all pair-wise, or binary, combinations of the approximately 2,000 United States, European and Japanese approved drugs in our library in cell-based models corresponding to major diseases such as cancer, rheumatoid arthritis, asthma, psoriasis, diabetes and infectious diseases. We select, as our screening

assays, cell-based models that are generally accepted for researching the diseases we target and that can generate information about the interaction of our combination drug candidates with biological pathways known to be relevant to such diseases. Within these cell-based models, our cHTS technology screens a wide range of doses of each active pharmaceutical ingredient in the binary combination. As a result, our cHTS technology screens the effects of tens of millions of possible dose-specific combinations of existing drugs in our selected cell-based disease models. We believe that, to date, we have only screened a small fraction of the possible cell-based models for major diseases and that there remain numerous additional cell-based disease models available for screening. We have developed solutions to address the unique challenges of combination high throughput screening, for both data generation and data analysis, and have integrated these solutions into our drug discovery technology.

We apply our drug discovery technology as part of our business model for the discovery and development of new drugs. Our approach includes the following actions:

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º Select Our Target Diseases. We have selected and plan to continue to select as our target diseases those conditions that have cell-based assays that model the multiple biological pathways of the disease, significant medical need, large market potential and an established clinical development path. We have chosen to focus our current programs on immuno-inflammatory diseases, oncology and metabolic diseases.

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º Screen Millions of Combinations in Cell-Based Models. For each target disease, we apply our proprietary cHTS technology to test the effects of millions of possible drug and dose combinations in a cell-based model of the target disease.

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º Use Combinations of Approved Drugs. Because we are using combinations of approved drugs, each active pharmaceutical ingredient of our combinations has proven bioactivity in humans, a known safety, pharmacology and toxicity profile as a single agent and the demonstrated ability to be formulated and manufactured as a pharmaceutical product.

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º Discover Potentially Effective Combinations. Using our cHTS technology, we identify drug combinations that suggest synergistic effects against multiple biological pathways in our chosen cell-based disease model. We then seek to confirm these results and the related dose ratios in preclinical models. For each of our target diseases, we have found multiple combinations that we believe demonstrate these synergistic effects in such models. There are numerous additional cell-based models for the diseases we have targeted and other major diseases, and we intend to continue to seek additional synergistic combinations that exhibit indications of potential therapeutic effect.

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º Seek Patent Protection. We seek patent protection for both the composition of matter of the combination product candidate itself and the method of use of the combination to treat specific diseases. We have 37 United States patent applications pending, plus foreign counterparts, covering our clinical and preclinical product candidates, and have two issued United States composition of matter and method of use patents, one on our clinical oncology product candidate and another one on a preclinical oncology product candidate.

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º Select the Most Commercially Promising Combinations. We have selected and advanced, and plan to continue to select and advance, into clinical trials those combinations that we believe, on the basis of their documented therapeutic effects, current safety profiles, delivery methods, dosing levels and other factors, have the greatest potential for successful commercial development.

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º Advance Product Candidates Quickly into Proof-of-Concept Clinical Trials. We seek to advance our product candidates expeditiously into phase I/II and phase IIa clinical trials using commercially available formulations and dosages of approved drugs, without first completing many of the preclinical toxicology and pharmacology studies generally required before initiating clinical studies for a new chemical entity.

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º Make Development Decisions Based on Human Clinical Data. We seek to make critical development decisions regarding which of our product candidates to advance to later stage clinical trials at a relatively early stage in their development on the basis of human clinical data, rather than on preclinical animal data.

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º Develop Formulations. In our current phase I/II and phase IIa proof-of-concept clinical studies, each approved drug comprising a product candidate will be administered in its commercially available form. We seek to control the clinical dosing regimens and to design the scheduled administration of the two active pharmaceutical ingredients in our product candidate, to simulate our expected commercial formulation. We plan to develop, for each of our product candidates that we advance beyond proof-of-concept clinical studies, a customized formulation that will be selected for its pharmacology, dosage strength, and route of delivery based on the activity and pharmacology of the drugs when delivered together in combination.

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º Conduct Further Clinical Trials for Our Formulations and Seek Regulatory Approval. We plan to selectively advance customized formulations of our product candidates into randomized phase IIb clinical trials and, if such trials are successful, phase III clinical trials, on the basis of objective scientific, clinical and commercial criteria. We expect to seek regulatory approval of product candidates which are successful in pivotal clinical trials under a new drug application filed with the FDA and comparable regulatory approvals from foreign regulators.

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º Market Our Approved Products as New Drugs. We will seek to market our approved products, if any, at prices which reflect, if we have successfully executed our business model, their status as a novel pharmaceutical product addressing significant medical needs, through new mechanisms of action, covered by patents and provided in customized formulations.

Advantages of Our Approach

Our approach to drug discovery and development has allowed us to discover and advance into clinical trials a portfolio of product candidates across multiple diseases. Our product candidates are combinations of active pharmaceutical ingredients selected because of their preclinical effects on multiple biological pathways. We believe that we can apply our drug discovery technology to any target disease for which we can identify a predictive cell-based model. We believe that we have the ability to discover additional product candidates by applying our drug discovery technology to additional cell-based models for major diseases. In addition, because we have a portfolio of product candidates, we believe that we will be able to make development decisions regarding each individual candidate objectively on the basis of each product candidate's commercial and scientific potential.

By starting with approved drugs, we believe we can reduce certain costs and risks associated with developing drugs which are new chemical entities. First, approved drugs are already established as bioactive in patients. Second, approved drugs have been proven safe for their intended use in animal testing, human clinical trials and human clinical experience, providing us with increased confidence when undertaking further clinical studies focused on new uses in combination. Third, approved drugs have proven manufacturing and formulation routes, which may provide important efficiencies in clinical or commercial scale-up. Fourth, unlike new chemical entities, existing pharmacological information about approved drugs can be used to guide preclinical and clinical studies of our product candidates. Finally, from a regulatory perspective, approved drugs can generally be introduced into proof-of-concept clinical trials more quickly than new chemical entities can be introduced into their first clinical studies.

We believe that approved drugs are a rich source from which to discover new combination product candidates. Many drugs affect molecular pathways beyond those involved in their approved disease indication. Some of these additional targets are known, while others have yet to be discovered. As a result, novel therapeutic synergies can exist between the known mechanisms of action of two drugs, between the known mechanism of action of one drug and the novel mechanism of action of a second

drug, or between the novel mechanisms of action of both drugs. We believe that, if successfully developed, our product candidates may act against their targeted diseases through synergistic mechanisms of action affecting multiple pathways and thereby providing significant new therapeutic benefits.

In the pharmaceutical industry, most early stage drug candidates fail. Our approach seeks to address this high failure rate by pursuing a portfolio strategy for drug discovery and development. By applying our cHTS technology to screen for the biological effects of combinations of approved drugs in disease models, we have identified multiple product candidates for selected major diseases and advanced them expeditiously into proof-of-concept clinical trials.

Our approach is not limited to the development of a single compound or class of compounds, or to a search for compounds which act against a single drug target or class of targets. Rather, we have screened millions of combinations, each consisting of chemical entities known to be biologically active in humans, for indications of potential therapeutic effect in cell-based models for major diseases.

We believe that our portfolio approach gives us multiple chances for success.

Our Strategy

We plan to become a fully integrated biopharmaceutical company focused on discovering, developing, and commercializing new combination drugs to treat immuno-inflammatory diseases, cancer, metabolic diseases and other diseases. We seek to create novel therapeutics built from combinations of approved drugs that act synergistically on multiple biological pathways of major diseases. The key elements of our strategy are to:

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º Advance selected product candidates into later stage clinical development. We plan to selectively advance product candidates into later stage clinical trials, based on the results of proof-of-concept clinical trials and our assessment of their market potential.

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º Develop and commercialize our product candidates either internally or through collaborations with pharmaceutical and biotechnology companies. We plan to determine after phase II clinical trials which product candidates we will retain for internal development and which product candidates we will seek to develop and commercialize with others. We may independently commercialize product candidates that have a development plan and target market size that is manageable for our company. We expect to seek development and commercialization partners for our other product candidates to obtain access to additional development, commercial or financial resources.

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º Continue to deploy our technology and approach to drug discovery in the field of combination drugs. We plan to continue to use our proprietary drug discovery technology and approach to identify additional new combination drug candidates by:

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º applying our drug discovery technology to new disease indications, such as infectious diseases, cardiovascular diseases, central nervous system disorders and other diseases.

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º using medicinal chemistry to find mechanistic and structural analogs of our combination drug candidates that can be developed as new chemical entities. These new chemical entities may be second or third generation product candidates that extend the life cycle of the original combination drug.

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º screening combinations of drugs and compounds that we have selected because we believe they target specific biological pathways that may play an important role in one or more major diseases.

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º capitalizing on our combination drug discovery and development capabilities in an effort to discover or obtain additional product candidates. We seek to accomplish this by entering

into selected discovery research collaborations, such as our collaboration agreements with Spinal Muscular Atrophy Foundation and Accelerate Brain Cancer Cure, or through in-licensing or other arrangements.

Our Product Programs

All of our product programs are focused on diseases with continuing medical need and potentially large commercial markets. Our three principal drug development programs are in immuno-inflammatory diseases, oncology and metabolic diseases.

Our Immuno-Inflammatory Disease Program

Our largest development program is focused on the treatment of immuno-inflammatory diseases. Improper immune function, whether consisting of an inappropriately severe immune response or of an immune system attack on the body's own tissue, can cause serious harm. The diseases which stem from inappropriate immune response, known as immuno-inflammatory diseases, include asthma, rheumatoid arthritis, atopic dermatitis, psoriasis, inflammatory bowel disease, inflammatory ocular diseases, lupus, polymyalgia rheumatica and multiple sclerosis.

We currently have six clinical stage drug development programs focused on immuno-inflammatory diseases. These programs can be grouped into three broad categories: selective steroid amplifiers, enhanced calcineurin inhibitors and synergistic cytokine modulators.

Selective Steroid Amplifiers

Background. Steroids of the corticosteroid class are potent therapies for the treatment of immuno-inflammatory diseases and are prescribed for asthma, rheumatoid arthritis, atopic dermatitis, psoriasis, inflammatory bowel disease, inflammatory ocular diseases, lupus, polymyalgia rheumatica, multiple sclerosis and other diseases. The powerful anti-inflammatory and immuno-modulatory effects of these steroids are often accompanied by serious side effects, such as osteoporosis, hypertension, diabetes and glaucoma. Steroid use remains common for the short-term control of severe inflammatory conditions, but long-term administration is substantially limited due to its dose-related side effects.

We are developing a portfolio of selective steroid amplifier product candidates for the treatment of multiple immuno-inflammatory diseases. With these product candidates, we seek to provide the potent immuno-modulatory activity of steroids with reduced side effects. Steroids target multiple biological pathways and their effects are multi-faceted. The goal of our selective steroid amplifier class of product candidates is to modulate these intersecting pathways in order to selectively amplify desirable aspects of steroid activity. Each of our selective steroid amplifier drug candidates consists of a reduced-dose steroid and a different enhancer agent.

Four of our current product candidates, CRx-139, CRx-102, CRx-119 and CRx-170, are selective steroid amplifiers in clinical development, and several others in this class are in preclinical evaluation. Preclinical investigations of CRx-139, CRx-102, CRx-119 and CRx-170 suggest that these drug candidates have different effects on important components of the immune system, including T-cells and macrophages, and its multiple biological pathways. As a result, each of our selective steroid amplifier product candidates may have a distinct clinical profile and potential utility in multiple or different immuno-inflammatory diseases. For this reason, all four of these drug candidates are being advanced to phase IIa proof-of-concept clinical trials. Based on the outcome of these studies, the product candidate's relative biological activity, tolerability, risk-to-benefit profile, biomarkers and other factors, we may proceed with development of some or all of these product candidates in parallel.

CRx-139

CRx-139 is a selective steroid amplifier comprising the steroid prednisolone and a member of the selective serotonin reuptake inhibitor class, or SSRI, which is a class of widely prescribed anti-depressant drugs. Preclinical data suggest that when administered together in CRx-139, the SSRI synergistically increases the immuno-modulatory activity of a reduced-dose of prednisolone without a comparable increase in its adverse side effects, indicating that CRx-139 may have a superior risk-to-benefit ratio compared to traditional steroids. We believe the increased activity of the reduced-dose steroid in CRx-139 occurs in part through an action involving T-cells, which are important components of the immune system.

Clinical Status. We plan to investigate CRx-139 in two phase IIa clinical trials, one in rheumatoid arthritis and one in an inflammatory disease model, severe adult periodontitis. Both of these clinical trials are expected to start in 2005. The rheumatoid arthritis clinical trial is proposed to be a study of up to 220 patients, with a primary endpoint of clinical activity (signs and symptoms of activity in the disease rheumatoid arthritis) and secondary endpoints of biomarker response (changes in a molecular indicator that can be used to estimate the presence or progress of disease or the effects of treatment). For clinical trials, the primary endpoint is the measurable clinical result the trial is designed to obtain. The primary endpoint is the focus of the clinical trial and determines the size of the clinical study needed to determine statistically significant results. Secondary endpoints are additional clinical results that are measured in a clinical trial, which may or may not result in statistically significant clinical data. The inflammatory model clinical trial is proposed to be a study of up to 60 patients with a primary endpoint of biomarker response. These initial clinical development programs are designed to characterize the activity of CRx-139 in a chronic immuno-inflammatory disease. Results from these studies and the studies of our other selective steroid amplifier product candidates will enhance our understanding of CRx-139 and will serve as the basis for determining the development path for CRx-139 in immuno-inflammatory disease.

We have tested CRx-139 in a human pharmacology endotoxemia study, an acute model of inflammatory markers. In this study, healthy male volunteers were injected with endotoxin to cause a systemic immuno-inflammatory reaction. Single doses of CRx-139, a high-dose steroid, a reduced-dose steroid and a placebo were administered to separate groups prior to the injection of endotoxin, and biomarkers were subsequently measured. Since the study evaluated a single dose in healthy volunteers, and not chronic drug therapy leading to steady state levels, the results cannot be used to predict activity in our planned chronic disease phase IIa clinical trials. The study was designed to indicate biological activity in humans, not to provide statistical significance. In the study, CRx-139 inhibited certain pro-inflammatory biomarkers, such as TNF-alpha, IL-6, and C-reactive protein and increased the anti-inflammatory cytokine IL-10. The anti-inflammatory effect of CRx-139, which contains a reduced-dose steroid, was a result intermediate between the results shown by the reduced-dose and high-dose steroid in this study.

CRx-102

CRx-102 is a selective steroid amplifier comprised of the steroid prednisolone and the anti-platelet agent dipyridamole. Preclinical data suggest that when administered together in CRx-102, dipyridamole synergistically increases the immuno-modulatory activity of the reduced-dose prednisolone without a comparable increase in its adverse side effects, indicating that CRx-102 may have a superior risk-to-benefit ratio compared to traditional steroids. We believe the increased activity of the reduced-dose steroid in CRx-102 occurs in part through an action involving macrophages, which are important components of the immune system.

Clinical Status. We are investigating CRx-102 in three phase IIa clinical trials, one in rheumatoid arthritis, one in osteoarthritis, and one in an inflammatory disease model, severe adult periodontitis. The rheumatoid arthritis clinical trial is a study of up to 60 patients that is being conducted in the

United Kingdom with a primary endpoint of biomarker response, and secondary endpoints of clinical activity. The osteoarthritis clinical trial is a study of up to 80 patients in Norway with a primary endpoint of clinical activity and secondary biomarker endpoints. The inflammatory model clinical trial is a study of up to 60 patients with a primary endpoint of biomarker response and is being conducted in Sweden. This initial clinical development is designed to characterize the activity of CRx-102 in a chronic immuno-inflammatory disease. Results from these studies and the studies of our other selective steroid amplifier product candidates will enhance our understanding of CRx-102 and will serve as the basis for selecting the appropriate development path for CRx-102 in immuno-inflammatory disease. We have tested CRx-102 in a similar human acute inflammatory study as our product candidate CRx-139. In this study, CRx-102 increased the anti-inflammatory cytokine IL-10, but did not inhibit pro-inflammatory biomarkers, such as TNF-alpha, IL-6, and C-reactive protein.

CRx-119

CRx-119 is a selective steroid amplifier comprising either the steroid prednisolone or prednisone and the anti-depressant amoxapine. Preclinical data suggest that when administered together in CRx-119, amoxapine synergistically increases the immuno-modulatory activity of the reduced-dose steroid without a comparable increase in its adverse side effects, indicating that CRx-119 may have a superior risk-to-benefit ratio compared to traditional steroids. We believe the increased activity of the reduced-dose steroid in CRx-119 occurs in part through action involving T-cells that differs from the mechanism of action of our product candidate CRx-139.

Clinical Status. We are investigating CRx-119 in two phase IIa clinical trials in the United States, one in rheumatoid arthritis and one in an inflammatory disease model, severe adult periodontitis. The rheumatoid arthritis clinical trial is a study of up to 60 patients, with a primary endpoint of biomarker response and secondary endpoints of clinical activity. The inflammatory model clinical trial is a study of up to 60 patients with a primary endpoint of biomarker response. This initial clinical development is designed to characterize the activity of CRx-119 in a chronic immuno-inflammatory disease. Results from these studies and the studies of our other selective steroid amplifier product candidates will enhance our understanding of CRx-119 and serve as the basis for selecting the appropriate development path for CRx-119 in immuno-inflammatory disease.

CRx-170

CRx-170 is a selective steroid amplifier comprised of an undisclosed steroid and an undisclosed enhancer agent. The steroid component for CRx-170 was selected for potential suitability for respiratory disease and a potential inhaled route of administration. Preclinical data, including an animal model directly relevant to asthma, suggest that, when administered together in CRx-170, the non-steroid component synergistically increases the immuno-modulatory activity of the reduced-dose steroid without, we believe, a comparable increase in its adverse side effects, indicating that CRx-170 may have a superior risk-to-benefit ratio compared to traditional steroids. We believe the increased activity of the reduced-dose steroid in CRx-170 occurs in part through an action involving T-cells that is similar to the method of action of our product candidate CRx-119.

Clinical Status. We are investigating CRx-170 in a phase IIa clinical trial in the United Kingdom in asthma patients. This is a study of up to 16 patients, with a primary endpoint of biomarker response. This initial clinical program is designed to characterize the activity of CRx-170 in a chronic immuno-inflammatory disease and to evaluate its potential utility for diseases involving respiratory inflammation. Results from this study and the studies of our other steroid amplifier product candidates will enhance our understanding of CRx-170 and will serve as the basis for selecting the appropriate development path for CRx-170 in immuno-inflammatory diseases.

Enhanced Calcineurin Inhibitors

Background. Calcineurin inhibitors, like steroids, are potent immuno-modulatory compounds, whose usefulness is limited by their adverse side effects. The primary use of calcineurin inhibitors is in organ transplantation, where they are utilized to prevent organ rejection. Calcineurin inhibitors are also effective in many immuno-inflammatory diseases, such as psoriasis, psoriatic arthritis, inflammatory bowel disease and lupus, but their use is limited by severe dose-related side effects, which include kidney damage and increased blood pressure. As with our selective steroid amplifier program, the calcineurin inhibitor program seeks to increase the therapeutic potential of this compound class with enhancer compounds that selectively enhance the immuno-modulatory effects of a reduced-dose calcineurin inhibitor without a comparable increase in its adverse side effects. Our preclinical studies suggest that our clinical product candidate in this class, CRx-140, has the potential to produce the immuno-suppressive activity of a calcineurin inhibitor without a comparable increase in its adverse side effects. Currently, CRx-140, is in a phase IIa clinical trial. Several other candidates in this category are in preclinical evaluation.

CRx-140

CRx-140 is an enhanced calcineurin inhibitor consisting of a calcineurin inhibitor, cyclosporine, and an undisclosed enhancer agent. Preclinical data suggest that the enhancer agent increases the anti-inflammatory activity of the reduced-dose cyclosporine without a comparable increase in its adverse side effects, indicating that CRx-140 may have a superior risk-to-benefit ratio compared to the traditional calcineurin inhibitors.

Clinical Status. We are investigating CRx-140 in a phase IIa clinical trial in the United States in severe psoriasis patients. The clinical trial is planned to be a study of up to 74 patients, with a primary endpoint of clinical activity. This clinical trial is designed to evaluate the utility of CRx-140 as a treatment for severe psoriasis. Results from this study may also serve as the basis for selecting additional diseases for the development of CRx-140.

Synergistic Cytokine Modulators

Background. Cytokines are protein signaling molecules used by the immune system to regulate immune and inflammatory response. Drugs that block the activity of pro-inflammatory cytokines have resulted in important advances in patient care in numerous diseases, including rheumatoid arthritis, psoriasis, inflammatory bowel disease and others. Our synergistic cytokine modulators product candidates combine approved drugs which are not currently indicated for immuno-inflammatory disease. We seek to find combination product candidates which address the complexity of the immune response by affecting multiple biological pathways to enable a therapeutic effect. Our preclinical studies suggest that the two active pharmaceutical ingredients in our clinical product candidate in this class, CRx-150, interact synergistically to modulate cytokine production.

CRx-150

CRx-150 is an orally administered synergistic cytokine modulator that combines two active pharmaceutical ingredients, neither of which is indicated for the treatment of immuno-inflammatory disease. When administered together, these active pharmaceutical ingredients show the potential in our preclinical studies to synergistically inhibit important disease-relevant cytokines, including the cytokine TNF-alpha.

Clinical Status. We are investigating CRx-150 in two phase IIa clinical trials in the United Kingdom, one in rheumatoid arthritis and one in a model immuno-inflammatory disease, severe adult periodontitis. The rheumatoid arthritis clinical trial is a study of up to 66 patients, with a primary endpoint of biomarker response, and secondary endpoints of clinical activity. The immuno-inflammatory

disease model clinical trial is a study of up to 60 patients with a primary endpoint of biomarker response. This initial clinical development is designed to characterize the activity of CRx-150 in a chronic immuno-inflammatory disease. Results from these studies may enhance our understanding of CRx-150 and will serve as the basis for selecting the appropriate development path for CRx-150 from among the many immuno-inflammatory indications for which a synergistic cytokine modulator may be useful.

Our Oncology Program

Background. Cancer is characterized by the intersection of numerous mechanisms mediating unregulated cell growth. Therefore, it may be possible to intervene at multiple points in cancer cells to provide improved therapeutic effect over single-mechanism interventions. Our anti-tumor drug discovery program seeks to identify drug combinations that may interact synergistically to block cancer cell division, offering the potential for improved therapeutic benefit. Currently, one drug candidate from this product class, CRx-026, has entered clinical development, and several other candidates are in preclinical evaluation.

CRx-026

CRx-026 is our clinical stage novel dual-action anti-tumor drug candidate containing two active pharmaceutical ingredients, chlorpromazine, approved for treatment of psychotic disorders, and pentamidine, approved for treatment of some infectious diseases. Neither one of these two active pharmaceutical ingredients is indicated currently for treating cancer. Our preclinical studies suggest that chlorpromazine inhibits KSP. KSP is a protein essential for cell proliferation, a process that when unregulated results in tumor growth. Pentamidine has been reported in scientific literature to inhibit PRL phosphatases. PRL phosphatases play an important role in regulating cell proliferation and proper chromosome separation during cell proliferation. We believe that when administered together in CRx-026, the active pharmaceutical ingredients in CRx-026, block cancer cell proliferation by inhibiting these two critical elements of the cancer cell's mechanism for proliferating.

In our preclinical studies, CRx-026 has shown the ability to reduce tumor growth rates in multiple animal models. Furthermore, preclinical testing suggests that CRx-026 may have a favorable side effect profile. Our preclinical experiments also demonstrate strong synergistic anti-tumor activity between CRx-026 and multiple classes of approved anti-cancer drugs, including taxanes and vinca alkaloids.

Clinical Status. CRx-026 is in four ongoing phase I/II clinical trials in patients with advanced metastatic solid tumors of multiple types who have failed one or more prior therapies. These trials are designed as open-label, non-randomized trials, investigating dose, safety, tolerability, pharmacokinetics and pharmacodynamics. The trials are designed to explore three different dosing schedules and two dose ratios of pentamidine and chlorpromazine at four different clinical sites in the United States. As of January 15, 2005, in the first two studies, our unaudited clinical data shows that stable disease has been observed in 26% of the 35 patients evaluated, with the highest proportion of stable disease, 67%, observed at the highest dose level completed. The duration of stable disease has ranged from 2-10 cycles of therapy, again with the greatest number of cycles achieved at the greatest dose completed. The primary drug-related side effect observed to date is moderate reversible drowsiness, most likely related to chlorpromazine. This was anticipated given that drowsiness is a known effect of this compound. Our four clinical studies will continue to enroll patients and some patients have not yet completed treatment with CRx-026. In addition, our clinical data on CRX-026 will not be audited until the clinical trial is complete. Therefore, it is premature to predict the overall clinical activity profile of CRx-026 based on our findings to date.

Our Metabolic Disease Program

Our programs in Type II diabetes are at the preclinical stage.

Background. Type II diabetes develops when the body's tissues become resistant to insulin, leading to abnormally high blood glucose levels. Chronically high blood glucose levels, in turn, can lead to severe organ damage to the circulatory system, the nervous system (diabetic neuropathy), the eyes (diabetic retinopathy), and the kidneys (diabetic nephropathy). A number of drug classes are currently utilized to treat Type II diabetes, including insulin, metformin, sulfonylureas, and thiazolidinediones, or TZDs, which increase glucose uptake by muscle, fat, and other tissues. However, these drugs are characterized by imperfect control of glucose levels or undesirable side effects.

Our Preclinical Program. Through our program in Type II diabetes we are seeking to discover orally administered drug candidates with new mechanisms of action that may facilitate insulin-dependent glucose uptake and overcome insulin resistance. We are screening combinations of approved drugs in a cell-based model of insulin-dependent glucose uptake to discover anti-diabetes drug candidates.

We are pursuing two approaches to identify better anti-diabetes drugs:

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º we have launched a program to identify novel mechanism oral anti-diabetes drug candidates, by combining non-diabetes drugs that act synergistically to facilitate glucose uptake and to overcome insulin resistance in peripheral tissues. If successfully developed, our product candidates for diabetes may potentially provide patients a new option for glucose control, or may be combined with other currently prescribed therapies.

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º because we believe that TZDs are characterized by imperfect glucose control and undesirable side effects, we have also launched a program to identify synergistic combinations containing a TZD and a non-diabetes drug that may improve the clinical profile of the existing TZD in an approach similar to our selective steroid amplifiers.

Our Drug Discovery Technology

The pharmaceutical industry has developed sophisticated high throughput screening systems for testing the activity of single compounds. Drug discovery screening involves introducing a chemical compound into a biological test, or assay, designed to model a specific disease to test for favorable biological activity. High throughput screening involves testing large numbers of compounds in assays using automated systems that measure the biological activity of the compound and provide detailed data regarding the results. However, the high throughput screening of combinations of two or more compounds poses a new series of challenges which the industry's existing high throughput screening technologies do not, we believe, effectively address. Our combination high throughout screening technology, or cHTS, is a robotic high throughput screening system, including both customized hardware and software elements that screens millions of dose-specific combinations of approved drugs in cell-based assays for the diseases we are targeting. Chalice, our integrated database and analysis platform, enables the selection and characterization of combination drug hits generated by cHTS for further research and development. We deploy this drug discovery platform to identify synergistic combinations of approved drugs whose active pharmaceutical ingredients have, what we believe to be, desirable chemical, pharmacological and therapeutic properties, which may then be advanced to preclinical and clinical testing.

The number of potentially active combinations is large. Our library of approximately 2,000 United States, European and Japanese approved drugs generates approximately 2,000,000 possible unique binary combinations. Combinations of the approved drugs in this library that are identified by our drug discovery technology can take many forms. In some cases, the combination may produce more activity than either of the single agents can achieve. In other cases, a compound may reduce the dose of a

second compound required to achieve a therapeutic effect without reducing such therapeutic effect. In order to identify and analyze potentially valuable combination effects, cHTS generates a dose matrix for each chemical combination. The dose matrix captures the combined activity of two compounds over a broad range of single agent concentrations. cHTS is capable of generating hundreds of thousands of data points per day in order to efficiently screen in a dose matrix format.

The dose matrix data generated by our cHTS technology requires specialized analyses. We have developed Chalice, our proprietary visualization and analysis tool to collect and merge similar dose matrices before quantitatively benchmarking them to expected combination response patterns. We believe that the comparison models are useful in determining the drug candidate synergy, which helps us determine the novelty of a combination therapy, or to gain insight into the biological mechanism of action of a drug combination. Using these tools, combinations are analyzed, quantitatively scored and visualized in a comprehensive combination effect report, which provides links to available internal and external data on the combination and its constituent compounds.

Product candidate selection includes external information about the compounds drawn from Chalice. Published chemical, therapeutic, and pharmacological data on the drug library or proprietary collections of compounds is incorporated into our database to assist us in assessing each compound's suitability as a component in a new combination drug candidate. Before proceeding into animal studies, we require that new combinations first pass in silico tests, where candidate compounds are compared against a database that aggregates published safety and pharmacology information and data about the compounds in our library. This in silico step is intended to ensure, to the extent possible based on published information, that the active pharmaceutical ingredients in our potential combinations have safety profiles we believe to be appropriate for the disease indication we are interested in, are compatible from a drug-drug interaction perspective, can potentially be formulated in the appropriate route of administration, that the combination has not previously been discovered and meets additional key development and commercial criteria.

Collaborations

We intend to seek collaborations with pharmaceutical and biotechnology companies to support the full development and commercialization of selected product candidates to obtain access to additional development, commercial or financial resources or a large sales force. We also plan to engage in selected discovery research collaborations to explore new therapeutic areas or compound libraries. We intend to seek these collaborations to diversify our therapeutic reach and compound diversity and to expand our product pipeline.

Spinal Muscular Atrophy Foundation

In August 2004, we entered into a research and development collaboration agreement with the Spinal Muscular Atrophy Foundation, or SMA Foundation . Pursuant to the agreement, we are obligated to perform research aimed at identifying and advancing to initial new drug application stage at least one combination drug candidate for the treatment of spinal muscular atrophy, a neuromuscular disease that is the leading genetic cause of death among infants and toddlers. We will screen a library of compounds and cooperate with SMA Foundation to select the most promising candidates for further testing. We are required to provide periodic reports informing SMA Foundation of all results and discoveries made in the course of our research under the agreement. We bear the responsibility for the clinical development of any drug candidate for which we file an initial new drug application, and we must use commercially reasonable efforts to develop and commercialize a potential product derived from a drug candidate. Upon our achievement of certain research and development milestones under the agreement, SMA Foundation is required to make milestone payments to us, which, if all the research and development milestones under the agreement are achieved, may amount to a total of $2,040,000. Through December 31, 2004, we have received $190,000 in research funding. If at any point

in the future we receive an aggregate of $100,000,000 in revenues on products containing any drug candidates, their analogs or derivations, developed under the agreement, we will be required to donate to the SMA Foundation, or to another non-profit entity designated by SMA Foundation, an amount equal to 200% of all the payments made by SMA Foundation to us under this agreement. We will own all intellectual property we develop through this collaboration and have commercial rights to all discovered products, in both cases if we achieve clinical development milestones and are not in a material uncured breach of the agreement. This agreement with the SMA Foundation may be terminated by either us or SMA Foundation following an uncured breach by the other party. Unless earlier terminated, the term of the agreement is expected to be two years or as long as is required to complete our research.

Accelerate Brain Cancer Cure

In September 2004, we entered into a collaboration agreement with Accelerate Brain Cancer Cure, Inc., or ABC2, a non-profit foundation dedicated to advancing new therapies for brain cancer. Pursuant to this agreement, we are using our cHTS technology to screen combinations in a glioblastoma multiforme cell line to identify potentially therapeutic drug candidates for treatment of a deadly form of brain cancer. The cell line we have undertaken to screen under the ABC2 agreement is provided to us by agreement with Duke University. Pursuant to the agreement with Duke University, Duke owns the intellectual property rights to any new discoveries resulting solely from research conducted by Duke personnel, we own the intellectual property rights to any new discoveries resulting solely from research conducted by our personnel, and we and Duke will jointly own the intellectual property rights to any new discoveries resulting from research conducted by both our personnel and Duke personnel. In the event that Duke owns intellectual property rights to a discovery made pursuant research conducted under the agreement, we will have an option to acquire an exclusive license to Duke's intellectual property rights to the discovery. In exchange for our screening pursuant to the terms of the ABC2 agreement, we have received from ABC2 $54,000 in funding to conduct this research and will receive an additional $54,000 upon completion of our research. ABC2 may terminate the agreement and the program in the event ABC2 determines, in its sole discretion, that we are not operating substantially in compliance with the terms of the ABC2 agreement, or for any other material reason. Upon such termination, ABC2 may withhold payment of funds, or declare the funding terminated and require us to return any unused funds.

Sosei

In April 2002, we entered into a research collaboration agreement with Sosei Co., Ltd. Sosei is a private Japanese biopharmaceutical company focused on drug development. Sosei's Drug Re-Profiling Platform, or DRP, aims to reevaluate hundreds of Japanese compounds for which development or active marketing in Japan has been suspended for reasons other than toxicity. Sosei has assembled its library of DRP compounds by building a consortium of Japanese pharmaceutical companies who have granted Sosei rights to re-profile and commercialize such compounds. We will assess both the single agent and combination activity of Sosei's DRP compounds in multiple therapeutic areas, including immuno-inflammatory disease, infectious disease, metabolic disease, and cancer. The objective of the collaboration is to discover novel combination drugs and to validate novel indications for DRP compounds that have often only been screened against a limited number of disease targets. We, Sosei, and the originating Japanese pharmaceutical companies have agreed to jointly own the intellectual property relating to any new combinations developed through the collaboration and divide commercial rights to such combinations among the designated markets. Neither we nor Sosei have any payment obligations until any products under the agreement are commercialized. Upon commercialization of any product under the agreement, the parties must negotiate, with respect to such product, an exclusive, perpetual, royalty-bearing license in the designated markets with other customary terms and conditions. Unless earlier terminated, the agreement will expire in April 2005.

Patents and Other Proprietary Rights

Our success depends on our ability to protect our intellectual property and other proprietary rights. We rely upon a combination of patent, trademark, trade secret, copyright and unfair competition laws, assignment of inventions and non-disclosure agreements and other contractual provisions to protect our intellectual property and other proprietary rights.

The United States Patent and Trademark Office has issued us two patents. One patent, which expires in June 2021, covers pharmaceutical compositions containing the active pharmaceutical ingredients in, and the method of use of, CRx-026, our novel dual action anti-cancer drug candidate. The other patent, which expires in January 2021, covers pharmaceutical compositions containing the active pharmaceutical ingredients in, and method of use for, another anti-cancer combination that is not currently designated for development. We have also been issued a total of three patents related to our drug discovery technology, one each in New Zealand, Taiwan and South Africa. The patents issued in New Zealand and South Africa expire in July 2021, and the patent issued in Taiwan expires in August 2022. As of January 18, 2005, we have 36 pending patent applications in the United States and 182 pending foreign patent applications that are counterparts to certain of the United States issued patents and patent applications. Of these patent applications, 6 are provisional applications. Twenty of our pending United States patent applications and 139 of our pending foreign patent applications relate to our current portfolio of seven product candidates and five of our pending United States patent applications and 25 of our pending foreign patent applications relate to our drug discovery technology.

It is our current practice to seek the issuance of extensive claims in our patent applications that cover the combination drug candidates we develop, including claims directed to the following:

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º pharmaceutical compositions containing the active pharmaceutical ingredients in the combination;

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º pharmaceutical compositions containing structural, functional, or mechanistic analogs of the active pharmaceutical ingredients in the combination;

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º methods of treating diseases by administering the active pharmaceutical ingredients in the combination or their analogs; and

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º pharmaceutical compositions, including the active pharmaceutical ingredients in the combination or their analogs and instructions for the treatment of diseases.

Further, as we learn more about the most promising dose ratios, pharmacokinetic and pharmacodynamic parameters and mechanism of action information for our drug candidates, we intend to evaluate the filing of additional patent applications to supplement the core composition of matter and method of use patents we have been issued and are currently seeking.

We also intend to pursue patents covering our product discovery platform. To date, our drug discovery technology directed patent applications have included claims directed to the protection of our screening methodologies, the accompanying informatics and computational biology techniques, and various research applications of the discovery platform. Currently, we have five pending United States patent applications directed to our combination drug screening methods and the underlying informatics and computational biology. The screening methods we have claimed in these applications include ranking of single agents for activity in new indications, screening pair-wise and higher order (i.e., three or more) combinations of compounds, formatting plates for optimizing information content and systematically screening combinations.

Our informatics patent applications also include claims to methodologies for identifying combination activity, including automated synergy measurements, and for tracking and managing combination screening experiment information. Our computational biology patent application focuses

on the methods of using a biological system's response to chemical combinations to extract information about the biological system, its interconnectivity and its functions. Four foreign patents have issued.

The patent position of pharmaceutical or biotechnology companies, including ours, is generally uncertain and involves complex legal and factual considerations. Our success depends, in part, on our ability to protect proprietary products, methods and technologies that we develop under the patent and other intellectual property laws of the United States and other countries so that we can prevent others from using our inventions and proprietary information. The laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States, and many pharmaceutical or biotechnology companies have encountered significant problems in protecting and defending their proprietary rights in foreign jurisdictions. Our patent applications may be challenged or may fail to result in issued patents. Moreover, an issued patent does not guarantee us the right to practice the technology or commercialize the patented product. Our existing patents and any future patents we obtain may be challenged, invalidated or circumvented, or may not be sufficiently broad to prevent others from practicing our technologies or developing competing products, which could limit our ability to stop competitors from marketing related products or restrict the length of term of patent protection that we have for our products. Furthermore, others may independently develop similar or alternative technologies or design around our patents. If any parties should successfully claim that our proprietary products, methods and technologies infringe upon their intellectual property rights, we may be prevented from commercializing our patented products and practicing our patented technology or be forced to pay damages.

In all of our activities, we rely on proprietary materials and information, trade secrets, and know-how to conduct research and development activities and to attract and retain collaborative partners, licensees, and customers. We attempt to protect our trade secrets by entering into confidentiality agreements with third parties, employees, and consultants. Our employees and consultants are also asked to sign agreements requiring that they assign to us their interests in patents and other intellectual property arising from their work for us. We also require all employees sign an agreement not to engage in any conflicting employment or activity during their employment with us, and not to disclose or misuse our confidential information.

Government Regulation

FDA Regulation of Drugs and Biologics

In the United States, federal and state statutes and regulations govern, among other things, the research, development, testing, manufacture, storage, record keeping, reporting, labeling, distribution, promotion, and marketing of pharmaceutical products. At the federal government level, the FDA is principally responsible for regulating drugs and biologics, including the product candidates we have under development. Failure to comply with applicable regulatory requirements may subject a company to administrative or judicially imposed sanctions, such as warning letters, product recalls, product seizure, injunctions, civil penalties, disgorgement of past or future profits, criminal prosecution, suspension of production, license suspension or revocation, withdrawal of an approval, or FDA refusal to approve pending marketing applications.

The steps ordinarily required before a new pharmaceutical product may be marketed in the United States begin primarily with preclinical testing. Preclinical tests include laboratory evaluation of product chemistry, toxicology and other characteristics. Animal studies are used to assess the potential safety of the product. Many preclinical studies are regulated by the FDA under the good laboratory practice, or GLP, regulations. Violations of these regulations can, in some cases, lead to invalidation of the studies, requiring such studies to be replicated if the data are to be submitted to the FDA in support of a marketing application for a new drug.

The results of the preclinical development work, together with other information as required by the FDA, are summarized in an investigational new drug application, or IND, which must be submitted to the FDA before the drug may be provided to clinical investigators for use in humans in clinical trials. An IND also sets forth the plan for investigating the drug, including the protocols for each planned study. FDA regulations provide that human clinical trials may begin 30 days following submission of an IND, unless the FDA advises otherwise or requests additional information, clarification, or additional time to review the application. Clinical trials cannot begin until any concerns raised by the FDA have been resolved.

Each clinical trial must also be approved by an independent institutional review board, or IRB, which is typically associated with the institution or research facility at which the investigator will conduct the trial, before the trial may begin. The IRB must approve the protocol and the procedures for obtaining the informed consent of the study participants. An IRB will consider, among other things, ethical factors, the safety of human subjects, and the possible liability of the institution in which the study will be conducted. The IRB is required to conduct continuous review of the trials at intervals appropriate to the degree of risk involved and may suspend or terminate its approval if the trials are not being conducted in accordance with the IRB's approval or there has been unexpected serious harm to subjects.

During the conduct of a clinical trial, the company is required to monitor the investigators' compliance with the clinical study protocol and other FDA requirements, including the requirements to submit reports to the sponsor, the IRB, and the FDA, and to keep detailed records regarding study findings and use and disposition of the study drug. Although monitoring can help reduce the risk of inadequate compliance by study investigators, it cannot eliminate this risk entirely. Inadvertent regulatory noncompliance by the investigator, or intentional investigator misconduct, can jeopardize the usefulness of study results and, in rare circumstances, require the company to repeat a study. The company must report to the FDA any adverse event that is both unexpected and serious and for which there is a reasonable possibility that the event may have been caused by the drug. In addition, the company must within seven days report to the FDA any unexpected fatal or life-threatening event that may have been caused by the drug. The FDA may stop the trials by placing a "clinical hold" on such trials because of concerns about, for example, the safety of the product being tested. Such holds can cause substantial delay and in some cases may require abandonment of a product candidate.

Clinical testing in humans involves the administration of the investigational drug to healthy volunteers or to patients under the supervision of a qualified principal investigator, usually a physician, pursuant to an FDA-reviewed protocol. Human clinical trials typically are conducted in three sequential phases, but the phases may overlap. Phase I clinical trials consist of testing the product in a small number of patients or normal volunteers, primarily to evaluate the drug's safety, at one or more dosage levels, as well as to study the drug's pharmacokinetic and/or pharmacodynamic profile. In phase II clinical trials, in addition to safety, the efficacy of the product is evaluated in a patient population. Phase III clinical trials typically involve additional testing for safety and clinical efficacy in an expanded population at multiple geographically dispersed sites.

When two or more drugs are combined in a single dosage form, as many of our product candidates will be, the data submitted to FDA must ordinarily show that each component makes a contribution to the claimed effects and that the dosage of each component (amount, frequency, duration) is such that the combination is safe and effective for a significant patient population requiring such concurrent therapy as defined in the labeling for the drug. This FDA policy may necessitate more elaborate and expensive clinical trials than would be required for a single-agent pharmaceutical because the trials may need to be designed to study the combined agent, each drug as a single agent and a placebo.

When FDA approval is sought for a new use of a previously approved drug, the sponsor must demonstrate that the drug is safe and effective for the proposed use. However, because pre-existing information on the drug's safety is available, the safety data required for FDA approval of a previously approved drug is ordinarily less than the safety data required to support approval of a new drug. Since our products are combinations of previously approved products, the FDA may not require us to submit some types of safety data, such as data from certain types of animal and human pharmacokinetic studies. The FDA's specific requirements will be determined on a case-by-case basis for each product candidate. It is possible that our product candidates could present new safety issues because the previously approved drugs are being used in combinations or because the proposed combination products are being used under different circumstances than the components are used as single agents. For example, the combination might be proposed for long-term use for a chronic condition while the single agents are used short-term for acute conditions. In such a case, the FDA may require additional animal or human studies to address any safety issues.

Upon completion of clinical trials, a company seeking FDA approval to market a new drug must file a new drug application, or NDA, with the FDA, or in the case of a biological product, a biological license application, a BLA. To approve an NDA, the FDA must determine, based on the information submitted in the application, that the drug is safe and effective for its intended uses. To approve a BLA, the FDA must determine that the product is safe, pure, and potent and that the facilities in which the product is manufactured or otherwise handled meet the applicable standards. In addition to reports of the preclinical and clinical trials conducted under IND, the NDA or BLA includes information pertaining to the product's safety and efficacy, preparation of the drug substance, analytical methods, drug product formulation, manufacturing details, and proposed product packaging and labeling. In addition, the manufacturing facility must also pass an FDA Current Good Manufacturing Practices, or cGMP, inspection before the marketing application can be approved.

Submission of a NDA or BLA does not assure FDA approval for marketing. After the application is submitted, the FDA initially determines whether all pertinent data and information have been submitted before accepting the application for filing. After the application is accepted for filing, the FDA begins its substantive review. The FDA typically will request a review of the data in the NDA or BLA and recommendation regarding approval by an advisory committee consisting of outside experts. The FDA may accept or reject the advisory committee's recommendations, or accept them with modifications. The application review process generally takes a year or longer to complete, although reviews of drugs that meet a medical need for serious or life-threatening diseases may be accelerated or prioritized for a six-month review. The FDA may deny approval of an application. Any such denial may require extensive additional testing, which could take years to complete, in order to make the application approvable, or the denial may be based on considerations that cannot be favorably resolved through additional testing. In some circumstances, the FDA may approve an application even though some unanswered questions remain about the product, if the applicant agrees to conduct post-marketing studies. The FDA may impose other conditions of approval as well. Expedited or accelerated approvals may require additional larger confirmatory clinical studies to be conducted following approval.

Product approval may be withdrawn if compliance with regulatory requirements is not maintained or if post-marketing adverse events associated with the product are reported that cannot be addressed satisfactorily through changes to the product's labeling or warnings to healthcare professionals. The FDA requires reporting of certain safety and other information that becomes known to a manufacturer of an approved product. The company may become aware of such information from reports of adverse events suspected to be related to the product, voluntarily provided to the company and/or to the FDA by physicians and other healthcare professionals, or from published scientific data. In some circumstances, the FDA may require the company to make changes to its approved product labeling or to issue safety warnings to healthcare professionals or the public, which may have a negative impact on

product sales. Manufacturing and sale may also be disrupted or delayed in the event of failure to comply with all required current Good Manufacturing Practices, as determined by FDA investigators in periodic inspections of manufacturing facilities. Upon approval, a drug or biological product may only be marketed for the approved indications, in the approved dosage forms, and at the approved dosage. The nature of marketing claims that we will be permitted to make in the labeling and advertising of our products will be limited to those specified in an FDA approval.

Foreign Regulations

Outside the United States, our ability to market a product is contingent upon receiving 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 Union, centralized procedures are available to companies wishing to market a product in more than one European Union member state. If the regulatory authorities are 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 and potential delays associated with FDA approval set forth above.

Other Regulations

In addition to regulations enforced by the FDA, we also are subject to regulation under the Occupational Safety and Health Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act, and other present and potential future federal, state, and local statutes and regulations. Our research and development involves the controlled use of hazardous materials, chemicals, and various radioactive compounds. Although we believe that our safety procedures for storing, handling, using, and disposing of such materials comply with the standards prescribed by applicable regulations, the risk of accidental contaminations or injury from these materials cannot be completely eliminated. In the event of such an accident, we could be held liable for any damages that result, and any such liability could materially affect our ongoing business.

Competition

The development and commercialization of pharmaceutical products is highly competitive. We intend to compete in the discovery and development of new drugs by applying our proprietary combination high throughput screening technology to discover new drug candidates using combinations of existing drugs. We will be competing against a wide range of pharmaceutical and life science companies that have greater resources than us, including existing research and development programs in the markets we plan to target. We must compete with these companies both in regard to the discovery technology we use to identify potential product candidates and in regard to the development and commercialization of our product candidates themselves.

In regard to our discovery technology, we seek to create barriers to entry for other pharmaceutical companies by filing patent applications for our technology and by protecting our trade secrets. These efforts to deter competitors may be limited if we do not succeed in achieving patent or other intellectual property protection, such protection is limited in scope, or to the extent that third parties can utilize different high throughput screening methods not covered by any issued patents we may receive. Many companies have already developed and employ high throughput screening technologies. Should these companies seek to apply these technologies to the discovery of combination drugs, our drug discovery technology may be rendered obsolete or noncompetitive.

In regard to our product candidates, we seek to create barriers to entry by filing patent applications on the composition and use of the drug combinations we discover. If we obtain the patent

protection we are seeking for our product candidates, we believe that we will be able to use these patents to prevent other pharmaceutical companies from marketing products covered by our patents. We also believe that, if obtained, we should be able to use our patents to prevent the makers of either of the drugs included in our combination products from marketing their drug for use together with the other drug that comprises the product. We also plan to develop, for each of our product candidates that we advance beyond proof-of-concept clinical studies, a customized formulation that will be selected for its pharmacology, dosage strength, and route of delivery based on the activity and pharmacology of the drugs when delivered together in combination. Where appropriate, we will seek to protect these formulations by patent applications or as trade secrets. We intend to seek regulatory approval for our product candidates as new drugs, and the expense and time involved in seeking regulatory approval for a new drug may deter potential competitors.

Our ability to deter competitors will be limited to the extent that we are unable to obtain patent protection for our product candidates or patent or trade secret protection for our formulations. Competitors may also be able to use similar component drugs or different combinations of our component drugs to develop combination products that are not covered by our patents. In addition, the approved drugs that are combined to produce our product candidates are likely to be commercially available at lower prices, so physicians may be able to prescribe the individual drugs already approved and marketed by other companies instead of our combination products, and it would be difficult or impossible for us to enforce our patents, if obtained, to prevent this practice.

In addition to potential competition from other combination drugs, all of our product candidates will face competition from single agent pharmaceuticals. The target markets for our product candidates, including immuno-inflammatory diseases, oncology and metabolic diseases, are all very competitive, with existing approved products holding substantial market share and other product candidates being developed by other pharmaceutical companies.

Principal competitive factors impacting drug development and commercialization include:

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º improved patient outcomes;

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º acceptance of products by physicians and other healthcare providers;

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º research and drug development capabilities;

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º intellectual property positions;

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º sales and marketing capabilities; and

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º availability of capital resources to fund research, development and commercialization activities.

Many of the companies competing against us have financial and other resources substantially greater than our own. In addition, many of our competitors have significantly greater experience in clinical testing, obtaining FDA and other regulatory approvals and in the manufacture and commercialization of products.

Manufacturing

We have no manufacturing capabilities. We rely and plan to continue to rely on third parties to manufacture bulk compounds for research, development, preclinical, and clinical trials. We believe that there are several manufacturing sources available to us on commercially reasonable terms to meet our clinical requirements.

We plan to rely on third parties to manufacture commercial quantities of any products we successfully develop, if any. Among the conditions for FDA approval of a pharmaceutical product is the requirement that the manufacturer's quality control and manufacturing procedures conform to current Good Manufacturing Practice, which must be followed at all times. The FDA typically inspects

manufacturing facilities every two years. In complying with current Good Manufacturing Practice regulations, pharmaceutical manufacturers must expend resources and time to ensure compliance with product specifications as well as production, record keeping, quality control, reporting, and other requirements. We plan to seek suitable third party manufacturing arrangements for the commercial production of a product candidate.

Sales and Marketing

We currently have no marketing, sales or distribution capabilities. In order to commercialize products that are approved for commercial sale, if any, we must either develop a sales and marketing infrastructure or collaborate with third parties that have sales and marketing experience.

We may elect to establish our own sales force to market and sell a product for which we obtain regulatory approval if we expect that the geographic market for the product is limited or that the prescriptions for the product will be written principally by a relatively small number of physicians. If we decide to market and sell any products ourselves, we do not expect to establish direct sales capability until shortly before the products are approved for commercial sale.

We plan to seek third party support from established pharmaceutical and biotech companies for those products that would benefit from the promotional support of a large sales and marketing force. In these cases we would seek to promote our products in collaboration with marketing partners or rely on relationships with one or more companies with large established sales forces and distribution systems.

Employees

As of January 15, 2005, we employed 70 persons, of whom 25 hold Ph.D. or M.D. degrees. Approximately 51 employees are engaged in research and development, and 19 employees are engaged in business development, intellectual property, finance, and other administrative functions. Our workforce is non-unionized, and we believe that our relations with employees are good.

Facilities

We currently lease and occupy 23,500 square feet of laboratory and office space in Boston, Massachusetts. The lease expires in August 2006. On December 8, 2004, we executed a non-binding letter of intent to lease approximately 43,000 square feet of laboratory and office space at a new location in Boston, Massachusetts that also contemplates relieving us from our obligations in our current lease. As a result, we expect to occupy this new office space in October 2005. We believe that our current space is adequate for our needs through 2005, however, we believe the new space will accommodate our growing needs as we expand our business. We also believe we will be able to obtain additional space, as needed, on commercially reasonable terms.

Legal Proceedings

We are currently not a party to any material legal proceedings.