Dilution

The historical net tangible book value of our common stock as of March 31, 2004 was a deficit of $44.9 million, or $(57.35) per share. The historical net tangible book value per share of our common stock is the difference between our tangible assets and our liabilities, divided by the number of common shares outstanding. The pro forma net tangible book value of our common stock as of March 31, 2004 was $22.0 million, or $1.76 per share. The pro forma net tangible book value per share of our common stock is the difference between our tangible assets and our liabilities, divided by the number of shares of our common stock outstanding as of March 31, 2004, after giving effect to the automatic conversion of all outstanding shares of our redeemable convertible preferred stock into 11,737,477 shares of our common stock upon the completion of this offering. For new investors in our common stock, dilution is the per share difference between the initial public offering price of our common stock and the pro forma net tangible book value of our common stock immediately after completing this offering. Dilution in this case results from the fact that the per share offering price of our common stock is substantially in excess of the per share price paid by our current stockholders.

As of March 31, 2004, after giving effect to the sale of the shares of our common stock offered by this prospectus at an assumed initial public offering price of $13.00 per share and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, the pro forma net tangible book value per share of our common stock would have been $4.49 per share. Therefore, new investors in our common stock would have paid $13.00 for a share of common stock having a pro forma net tangible book value of approximately $4.49 per share after this offering. That is, their investment would have been diluted by approximately $8.51 per share. At the same time, our current stockholders would have realized an increase in pro forma net tangible book value of $2.73 per share after this offering without further cost or risk to themselves. The following table illustrates this per share dilution:

The following table sets forth, as of March 31, 2004, on a pro forma basis to give effect to the conversion of all shares of our redeemable convertible preferred stock into 11,737,477 shares of common stock, the number of shares of common stock purchased in this offering, the total consideration paid, and the average price per share paid by existing and new stockholders, before deducting underwriting discounts and commissions and our estimated offering expenses:

Excludes (i) an aggregate of 1,151,795 shares of common stock issuable pursuant to stock options outstanding as of March 31, 2004 at a weighted average exercise price per share of $1.28, and (ii) 59,854 shares of common stock issuable pursuant to warrants outstanding as of March 31, 2004, at a weighted average exercise price per share of $4.22.

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Selected consolidated financial data

The following selected consolidated financial data as of December 31, 2002 and 2003, and for each of the three years in the period ended December 31, 2003, are derived from our audited consolidated financial statements appearing elsewhere in this prospectus. The selected consolidated financial data as of December 31, 2000 and 2001 and the period from inception (July 6, 2000) through December 31, 2000, is derived from our audited financial statements, which are not included in this prospectus. The selected consolidated financial data for the three months ended March 31, 2003 and 2004 are derived from our unaudited financial statements appearing elsewhere in this prospectus. The unaudited financial statements include all adjustments, consisting of normal recurring accruals, which we consider necessary for a fair presentation of our financial position and results of operations for these periods.

Operating results for the three months ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ended December 31, 2004 or for any other periods in the future. The data below should be read in conjunction with, and are qualified by reference to, "Management's discussion and analysis of financial condition and results of operations" and our consolidated financial statements and related notes included elsewhere in this prospectus.

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Management's discussion and analysis of financial condition
and results of operations

The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the related notes to those statements and other financial information included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under "Risk factors" and elsewhere in this prospectus, our actual results may differ materially from those anticipated in these forward-looking statements.

Overview

Since our incorporation in July 2000, we have devoted substantially all of our resources to the discovery and development of novel therapies to treat patients with immunological diseases. Our therapies are based upon a unique understanding of the way the immune system recognizes and avoids attacking the body's own tissues and proteins, as well as other antigens that are not harmful to the body. This state of non-aggressive responsiveness to an antigen is called immunological tolerance and is a natural part of a properly functioning immune system. Therapies that induce immunological tolerance represent a fundamentally new approach to treating and potentially curing autoimmune diseases, rejection of transplanted organs, and other conditions associated with adverse or undesirable immune responses. We have established a pipeline of two monoclonal antibody products in human clinical trials and have ongoing efforts to discover and develop other potential products.

In December 2002, we entered into a collaboration agreement with Genentech, Inc. for the development and commercialization of our TRX1 monoclonal antibody. Under this agreement, we are co-developing TRX1 with Genentech, and Genentech will be responsible for the manufacturing and marketing of TRX1. As part of the collaboration, Genentech paid us $5.0 million in the form of an upfront license fee, a milestone payment, and funded research and development, and invested $3.5 million in our offering of Series C convertible preferred stock. Genentech may also make payments to us based on the achievement of additional development and regulatory approval milestones, and for research reimbursement. In addition, we are entitled to royalties on the worldwide net sales of TRX1 and, in the United States, we have the option to participate in a cost and profit sharing relationship with Genentech for TRX1 instead of receiving royalties on domestic net sales.

During the period from inception to December 31, 2002, we were considered to be a development stage enterprise as defined in Statement of Financial Accounting Standards No. 7. In 2003, we have generated significant revenues from planned principal operations and are, therefore, considered to be in the operating stage for the year ended December 31, 2003.

Since our inception, we have incurred substantial losses, and as of March 31, 2004, we had an accumulated deficit of $42.8 million. These losses and accumulated deficit have resulted from the significant costs incurred in the research and development of our products and technologies, including payroll and payroll-related costs, manufacturing costs of preclinical and clinical grade materials, facility and facility-related costs, preclinical study costs, clinical trial

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costs, general and administrative costs, and non-cash stock-based compensation expense. We expect that our losses will continue for the foreseeable future as we continue to expand our research, development, manufacturing, clinical trial activities, and infrastructure in support of these activities. Because a substantial portion of our revenues for the foreseeable future will depend on achieving development and clinical milestones, our revenue may vary substantially from year to year and quarter to quarter. Our operating expenses may also vary substantially from year to year and quarter to quarter based on the timing of manufacturing activities, clinical trial patient accruals, and collaborative activities. We believe that period-to-period comparisons of our results of operations are not meaningful and should not be relied on as indicative of our future performance.

Financial operations overview

Revenues. We do not currently have any commercial products for sale. To date, our revenues have been derived solely from our collaboration agreement with Genentech. We have received an aggregate of $5.0 million in a license fee, a milestone payment, and funded research and development from Genentech. The license fee and milestone payment were deferred and are being recognized as revenue ratably over our expected period of performance, which is three years. Funded research and development revenue of $450,000 was recognized in 2003. Any additional revenues that we may receive in the future are expected to consist primarily of license fees, milestone payments, and research reimbursement payments to be received from Genentech and from other collaborative partners with whom we may enter into agreements.

Research and development expense. Research and development expense consists primarily of salaries and related expenses for personnel, costs of contract manufacturing services, costs of facilities and equipment, fees paid to professional service providers in conjunction with independently monitoring our clinical trials and acquiring and evaluating data in conjunction with our clinical trials, fees paid to research organizations in conjunction with preclinical animal studies, costs of materials used in research and development, consulting, license, and sponsored research fees paid to third parties, depreciation of capital resources used to develop our products, and the legal costs of pursuing patent protection of our intellectual property. We expense research and development costs, both internal and external, as incurred. We expect our research and development expense to increase as we continue to develop our product candidates. From inception through March 31, 2004, we spent an aggregate of $29.6 million, excluding stock-based compensation expense of $3.4 million, on research and development.

We have not documented our internal historical research and development costs or our personnel and personnel-related costs on a project-by-project basis. In addition, we use our employee and infrastructure resources across several projects, and many of our costs are not attributable to an individually named project or are directed to broadly applicable research projects. As a result, we cannot state precisely the costs incurred for each of our clinical and preclinical projects on a project-by-project basis. While we cannot state precisely the internal costs incurred for each of our clinical and preclinical projects on a project-by-project basis, we estimate that, to date, the total out-of-pocket payments made by us to third parties for manufacturing, preclinical studies in non-human primates, and clinical trials associated with TRX1, TRX2, TRX3, and TRX4 are $6.3 million, $43,000, $64,000, and $2.4 million, respectively.

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We expect that a large percentage of our research and development expenses in the future will be incurred in support of our current and future preclinical and clinical development programs. These expenditures are subject to numerous uncertainties in timing and cost to completion. We test potential products in numerous preclinical studies for safety, toxicology, and efficacy. We then may conduct multiple clinical trials for each product. As we obtain results from trials, we may elect to discontinue or delay clinical trials for certain products in order to focus our resources on more promising products. Completion of clinical trials may take several years or more, but the length of time generally varies substantially according to the type, complexity, novelty, and intended use of a product. It is not unusual for the preclinical and clinical development of these types of products to each take seven years or more, and for total development costs to exceed $50 million for each product.

We estimate that clinical trials of the type we generally conduct are typically completed over the following timelines:

The duration and the cost of clinical trials may vary significantly over the life of a project as a result of differences arising during clinical development, including, among others, the following:

•  the number of clinical sites included in the trials;

•  the length of time required to enroll suitable patient subjects;

•  the number of patients that ultimately participate in the trials;

•  the duration of patient follow-up to ensure the absence of long-term adverse events; and

•  the efficacy and safety profile of the product.

An element of our business strategy is to pursue the research and development of a broad pipeline of products. This is intended to allow us to diversify the risks associated with our research and development expenditures. As a result, we believe our future capital requirements and future financial success are not substantially dependent on any one product. To the extent we are unable to maintain a broad pipeline of products, our dependence on the success of one or a few products increases.

None of our products has received FDA marketing approval. In order to achieve marketing approval, the FDA must conclude that our clinical data establish the safety and efficacy of our product. Historically, the results from preclinical testing and early clinical trials (through Phase II) have often not been predictive of results obtained in later clinical trials. A number of new drugs and biologics have shown promising results in early clinical trials, but subsequently failed to establish sufficient safety and efficacy data to obtain necessary marketing approvals.

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Furthermore, our strategy includes the option of entering into collaborative arrangements with third parties to participate in the development and commercialization of our products, such as our collaboration agreement with Genentech. In the event that third parties have control over the preclinical development or clinical trial process for a product, the estimated completion date would largely be under control of that third party rather than under our control. We cannot forecast with any degree of certainty which proprietary products will be subject to future collaborative arrangements or how such arrangements would affect our development plan or capital requirements.

As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will receive cash inflows from the commercialization and sale of a product. Our inability to complete our research and development projects in a timely manner or our failure to enter into collaborative agreements, when appropriate, could significantly increase our capital requirements and could adversely impact our liquidity. These uncertainties could force us to seek additional, external sources of financing from time to time in order to continue with our strategy. Our inability to raise additional capital, or to do so on terms reasonably acceptable to us, would jeopardize the future success of our business.

General and administrative expense. General and administrative expense consists primarily of salaries and other related costs for personnel serving executive, business development, finance, accounting, intellectual property, administrative, and human resource functions. Other costs include facility costs not otherwise included in research and development expense, insurance, and professional fees for legal and accounting services. We expect that our general and administrative expense will increase as we add personnel, increase investor relations activities, obtain insurance coverage appropriate for a public company, and become subject to public company reporting obligations. From inception through March 31, 2004, we spent an aggregate of $8.7 million, excluding stock-based compensation expense of $897,000, on general and administrative expense.

Stock-based compensation expense. We have recorded stock-based compensation expense in connection with the grant of stock options to employees and the grant of stock options and restricted stock to non-employees.

Deferred stock-based compensation for options granted to employees is the difference between the deemed fair value of our common stock and the exercise price on the date such options were granted. We recorded deferred stock-based compensation and additional paid-in capital of $23,000, $356,000, $7.9 million, and $365,000 in the years ended December 31, 2001, 2002, 2003, and the three months ended March 31, 2004, respectively, related to stock options granted to employees. These amounts were recorded as a component of stockholders' deficit and are being amortized as charges to operations over the vesting periods of the options. We recorded amortization of deferred stock-based compensation of $1,000, $46,000, $811,000, and $549,000 for the years ended December 31, 2001, 2002, 2003, and the three months ended March 31, 2004, respectively. For options granted to employees through March 31, 2004, we expect to record additional amortization of deferred stock-based compensation as follows: $1,646,000 in 2004, $2,190,000 in 2005, $2,140,000 in 2006, and $1,390,000 in 2007.

We recorded stock-based compensation expense of $626,000, $568,000, $497,000, $1.1 million, and $343,000 for the years ended December 31, 2001, 2002, 2003, and the three months ended

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March 31, 2004, respectively, for stock options granted and restricted stock issued to non-employees, including our scientific founders, in accordance with Statement of Financial Accounting Standards No. 123 based on the fair value of the equity instruments issued. Stock-based compensation for options and restricted stock issued to non-employees is periodically remeasured as the underlying stock awards vest in accordance with Emerging Issues Task Force Issue No. 96-18 and as a result, the compensation expense to be recognized in the future may increase due to a corresponding increase in our stock price.

Interest income and interest expense. Interest income consists of interest earned on our cash, cash equivalents, and marketable securities. Interest expense consists of interest incurred on lines of credit and the amortization of debt issuance costs.

Accretion of redeemable convertible preferred stock to redemption value. We accrete our redeemable convertible preferred stock to equal the redemption value at the earliest redemption date. To date, the accretion primarily consists of the increase in the redemption value of the redeemable convertible preferred stock. Our redeemable convertible preferred stock accretion decreases the amount of stockholders' equity available to common stockholders and increases the loss per share of common stock. Upon completion of this offering, the carrying value of the redeemable convertible preferred stock, which includes the accretion to the redemption value and offering costs, will be reclassified to stockholders' equity as the redeemable convertible preferred shares will automatically convert into common shares. Accordingly, there will be no further accretion to the redemption value and offering costs as these shares will no longer be outstanding after this offering.

Results of operations

Three months ended March 31, 2004 compared to three months ended March 31, 2003

Revenues. Revenues for the three months ended March 31, 2004 and March 31, 2003 were $375,000 and $375,000, respectively, representing in both cases the amortization of the license fee and milestone payment received from our collaboration agreement with Genentech.

Research and development expense. Research and development expense increased by $545,000, or 23%, to $2.9 million for the three months ended March 31, 2004 from $2.4 million for the three months ended March 31, 2003. Of this increase, $299,000 was attributable to higher personnel and personnel-related costs as we increased headcount to support our discovery and development programs, $82,000 was due to higher facility and facility-related costs, $110,000 was due to increased usage of lab supplies, and $129,000 was related to higher clinical-related costs in connection with the IND filings for TRX1 and TRX4 and data collection costs related to the investigator-sponsored TRX4 trial. These increases were partially offset by $76,000 less in manufacturing costs due to a decrease in external purification and testing costs. During the remainder of 2004, and thereafter, we expect that research and development expense will increase substantially as we increase the number of products and indications for which we conduct clinical trials and as products move into late stage clinical trials.

General and administrative expense. General and administrative expense increased $169,000, or 22%, to $950,000 for the three months ended March 31, 2004 from $781,000 for the three months ended March 31, 2003. Of this increase, $43,000 was due to higher personnel and personnel-related costs as we continued to build our infrastructure to support our corporate

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growth, $20,000 was related to higher facility and facility-related costs, $69,000 was due to increased professional fees for legal, patent, and corporate communications, and $37,000 was related to increased travel and other costs. During the remainder of 2004, and thereafter, we expect that general and administrative expense will increase substantially as we add personnel, increase investor relations activities, obtain insurance coverage appropriate for a public company, and become subject to public company reporting obligations.

Stock-based compensation expense. Stock-based compensation expense increased $779,000, or 692%, to $891,000 for the three months ended March 31, 2004 from $112,000 for the three months ended March 31, 2003. The increase was primarily due to an increase in the stock price used to measure stock-based compensation associated with restricted stock awards to non-employees and additional stock option grants to employees.

Interest income and interest expense. Interest income decreased $52,000, or 47%, to $60,000 for the three months ended March 31, 2004 from $112,000 for the three months ended March 31, 2003. Interest expense decreased $24,000, or 30%, to $57,000 for the three months ended March 31, 2004 from $81,000 for the three months ended March 31, 2003. The decrease in interest income was attributable to lower average cash balances, and the decrease in interest expense was attributable to lower outstanding borrowings under our lines of credit.

Fiscal year ended December 31, 2003 compared to fiscal year ended December 31, 2002

Revenues. Revenues for the year ended December 31, 2003 increased by $1.9 million to $2.0 million for the year ended December 31, 2003. The increase was attributable to the license fees and milestone payment received from our collaboration agreement with Genentech being amortized for a full year in 2003 and $450,000 received from Genentech in 2003 for funded research and development.

Research and development expense. Research and development expense increased by $795,000, or 7%, to $11.7 million for the year ended December 31, 2003 from $10.9 million for the year ended December 31, 2002. Of this increase, $1.3 million was attributable to higher personnel and personnel-related costs as we increased headcount to support our discovery and development programs, $632,000 was due to higher facility and facility-related costs due to our move to a larger facility in May 2002 resulting in higher rent and operating costs, and $952,000 was related to higher preclinical study costs and clinical trial costs for TRX1 and TRX4. These increases were partially offset by $2.0 million less in manufacturing costs as the majority of costs associated with manufacturing TRX1 for clinical trials was incurred in 2002 and $386,000 as a result of the accelerated depreciation of leasehold improvements for our previous facility which we vacated in May 2002.

General and administrative expense. General and administrative expense increased $726,000, or 26%, to $3.5 million for the year ended December 31, 2003 from $2.8 million for the year ended December 31, 2002. Of this increase, $447,000 was due to higher personnel and personnel-related costs as we continued to build our infrastructure to support our corporate growth and $282,000 was related to higher facility and facility-related costs due to our move to a new facility in May 2002 resulting in higher rent and operating costs. These increases were partially offset by a decrease in consulting fees of $270,000 related to a market positioning study done in 2002.

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Stock-based compensation expense. Stock-based compensation expense increased $1.6 million, or 260%, to $2.2 million for the year ended December 31, 2003 from $613,000 for the year ended December 31, 2002. The increase was primarily due to an increase in the stock price used to measure stock-based compensation associated with restricted stock awards to non-employees and additional stock option grants to employees.

Interest income and interest expense. Interest income increased $115,000, or 46%, to $365,000 for the year ended December 31, 2003 from $250,000 for the year ended December 31, 2002. Interest expense increased $25,000, or 9%, to $321,000 for the year ended December 31, 2003 from $296,000 for the year ended December 31, 2002. The increase in interest income was attributable to higher average cash balances, and the increase in interest expense was related to additional borrowings under our lines of credit.

Fiscal year ended December 31, 2002 compared to fiscal year ended December 31, 2001

Revenues. Revenues for the year ended December 31, 2002 were $27,000, representing the amortization of amounts received from our collaboration agreement with Genentech that was executed in December 2002. We did not record any revenues during the fiscal year ended December 31, 2001.

Research and development expense. Research and development expense increased $7.1 million, or 187%, to $10.9 million for the fiscal year ended December 31, 2002 from $3.8 million for the fiscal year ended December 31, 2001. Of this increase, $893,000 was attributable to higher personnel and personnel-related costs as we increased headcount to support our discovery and development programs, $1.8 million was due to higher facility and facility-related costs due to our move to a larger facility in May 2002 resulting in higher rent and operating costs, $2.9 million was related to higher manufacturing costs primarily attributable to increased quantities of clinical grade TRX1 material, $327,000 was due to clinical study costs related to our Phase I trial for TRX1, and $495,000 was attributable to higher preclinical study costs related to our development programs.

General and administrative expense. General and administrative expense increased $1.4 million, or 102%, to $2.8 million for the fiscal year ended December 31, 2002 from $1.4 million for the fiscal year ended December 31, 2001. Of this increase, $459,000 was due to higher personnel and personnel-related costs as we continued to build our infrastructure to support our corporate growth, $635,000 was attributable to higher facility and facility-related costs due to our move to a larger facility in May 2002 resulting in higher rent and operating costs, and $270,000 was due to consulting fees for a market positioning study.

Stock-based compensation expense. Stock-based compensation expense decreased $14,000, or 2%, to $613,000 for the fiscal year ended December 31, 2002 from $627,000 for the fiscal year ended December 31, 2001. The decrease was primarily due to the vesting in 2001 of 79,807 shares of restricted stock issued to non-employees, including our scientific founders, partially offset by an increase in the fair value of our capital stock in 2002.

Interest income and interest expense. Interest income increased $85,000, or 52%, to $250,000 for the fiscal year ended December 31, 2002 from $165,000 for the fiscal year ended December 31, 2001. Interest expense increased $256,000 to $296,000 for the fiscal year ended December 31, 2002 from $40,000 for the fiscal year ended December 31, 2001. The increase in interest income was due to increased balances as a result of the proceeds received from our Series B convertible preferred stock offering. The increase in interest expense was primarily attributable to borrowings under our lines of credit and the amortization of debt issuance costs.

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Liquidity and capital resources

We have funded our operations principally with the proceeds of $58.0 million from three redeemable convertible preferred stock offerings over the period from 2000 through the present as follows:

Each share of redeemable convertible preferred stock is convertible into approximately 0.1923 shares of our common stock.

During 2002, we had access to an equipment line of credit and a leasehold improvement line of credit for $1.25 million and $1.75 million, respectively. We also had an $800,000 line of credit that expired in 2001. We borrowed an aggregate of $3.8 million under all of these lines of credit. The borrowings bear interest at approximately 7% and are repayable over 24 to 36 month periods. At the end of the term, we are required to pay an additional 9% to 9.5% of the original advance amount, which is being recorded as additional interest expense over the term of the line of credit, which results in an effective interest rate of approximately 14%. The lines of credit are collateralized by our assets. As of December 31, 2003 and March 31, 2004, approximately $1.0 million and $680,000 was outstanding under these lines of credit.

At March 31, 2004, cash, cash equivalents, and marketable securities were $21.8 million compared to $27.2 million at December 31, 2003. Our cash and cash equivalents are highly liquid investments with a maturity of three months or less at date of purchase and consist of time deposits and investments in money market funds with commercial banks and financial institutions, short term commercial paper, and government obligations. Also, we maintain cash balances with financial institutions in excess of insured limits. We do not anticipate any losses with respect to such cash balances. Our marketable securities are investments with original maturities of greater than three months and consist of commercial paper, corporate debt securities, and government obligations.

Net cash used in operating activities was $4.9 million for the three months ended March 31, 2004. Net cash used in operating activities for the three months ended March 31, 2004 reflects the net loss of $4.4 million partially offset by non-cash charges for depreciation and amortization of $219,000 and stock-based compensation of $891,000. Net cash provided by investing activities during the three months ended March 31, 2004 was $981,000 and consisted of sales and maturities of marketable securities of $1.2 million offset by expenditures of $175,000 for property and equipment. Net cash used in financing activities for the three months ended March 31, 2004 was $344,000, which consisted primarily of $345,000 of repayments related to our lines of credit offset by $1,000 received upon the exercise of stock options.

Net cash used in operating activities was $9.2 million for the year ended December 31, 2003. Net cash used in operating activities for the year ended December 31, 2003 reflects the net loss of $15.4 million partially offset by non-cash charges for depreciation and amortization of

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$816,000 and stock-based compensation of $2.2 million and the collection of $5.0 million from Genentech, of which $2.5 million was included in accounts receivable at December 31, 2002, $2.0 million was related to a milestone payment received in 2003, and $450,000 was related to funded research and development received in 2003. Included in net cash used in operations for the year ended December 31, 2003 is an increase in other assets of approximately $785,000 for costs relating to this offering. Upon closing of this offering, these costs will be offset against the offering proceeds. Net cash used in investing activities during the year ended December 31, 2003 was $10.3 million and consisted of a decrease in restricted cash of $517,000 for the release of a portion of our facility lease covenant partially offset by expenditures of $661,000 for property and equipment and investments in marketable securities of $10.1 million. Net cash used in financing activities for the year ended December 31, 2003 was $1.3 million, which consisted primarily of $1.6 million of repayments related to our lines of credit partially offset by $131,000 of allowances received from our landlord, $60,000 from the final closing of our Series C convertible preferred stock offering, and $18,000 received from the issuance of common stock.

Net cash used in operating activities was $12.5 million and $3.4 million for the years ended December 31, 2002 and 2001, respectively. The net loss for 2002 of $14.3 million was partially offset by non-cash charges for depreciation and amortization of $1.1 million and stock-based compensation of $613,000. The net loss for 2001 of $5.7 million was partially offset by non-cash charges for depreciation and amortization of $168,000 and stock-based compensation of $627,000. Net cash used in investing activities for the fiscal year ended December 31, 2002 was $4.7 million and consisted of purchases of property and equipment. Net cash from financing activities for the year ended December 31, 2002, was $38.5 million, which consisted primarily of $34.8 million in net proceeds from the issuance of Series C convertible preferred stock, $2.7 million from our lines of credit, and $2.1 million in allowances received from our landlord for the build out of our new facility, partially offset by repayments of $1.0 million related to our lines of credit.

In addition to our lines of credit, we also have contractual obligations related to our facility lease, research services agreements, consulting agreements, and license agreements. The following table summarizes our contractual obligations at March 31, 2004 and the effects such obligations are expected to have on our liquidity and cash flows for the remainder of 2004 and future periods.

We expect to incur losses from operations for the foreseeable future. We expect to incur increasing research and development expenses, including expenses related to the hiring of personnel and additional clinical trials. We expect that our general and administrative expenses will increase in the future as we expand our finance and administrative staff, add infrastructure, and incur additional costs related to being a public company, including directors' and officers' insurance, investor relations programs, and increased professional fees. Our future capital requirements will depend on a number of factors, including the continued progress of our research and development of products, the timing and outcome of clinical trials and

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regulatory approvals, payments received or made under the Genentech agreement and any future collaborative agreements that we may enter into, the costs involved in preparing, filing, prosecuting, maintaining, defending, and enforcing patent claims and other intellectual property rights, the acquisition of licenses to new products or compounds, the status of competitive products, the availability of financing, and our collaborators' success in developing markets for our products. We believe our existing cash and cash equivalents, together with the net proceeds of this offering, will be sufficient to fund our operating expenses, debt repayments, and capital equipment requirements for at least the next two years.

Currently we have no availability under our credit facilities. In April 2004, we signed a letter of intent with a commercial lender to borrow $3.0 million to fund our anticipated property and equipment purchases for fiscal 2004. The agreement will be repayable over 36 months and will bear interest at approximately 6.5%. In addition, we will grant the lender a warrant to purchase approximately 10,500 shares of our common stock. We expect to finalize the agreement by June 30, 2004. To the extent our capital resources are insufficient to meet future capital requirements, we will need to raise additional capital or incur additional indebtedness to fund our operations. We cannot assure you that additional equity or debt financing will be available on acceptable terms, if at all. If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate our research and development programs, reduce our commercialization efforts, or obtain funds through arrangements with collaborative partners or others that may require us to relinquish rights to certain product candidates that we might otherwise seek to develop or commercialize independently. Any future equity funding may dilute the ownership of our equity investors.

Critical accounting policies and estimates

Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, accrued expenses, and the valuation of common stock related to stock-based compensation. We based our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.

Revenue recognition. We recognize revenue relating to our collaborative arrangements in accordance with the SEC's Staff Accounting Bulletin No. 104, or SAB 104, "Revenue Recognition in Financial Statements" and Emerging Issues Task Force ("EITF") Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." Revenues under such collaborative arrangements may include non-refundable license fees, milestones, and research and development payments.

Where we have continuing performance obligations under the terms of a collaborative arrangement, non-refundable license fees are recognized as revenue over the period in which

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we expect to complete our performance obligations. We have estimated the period over which we will complete our performance obligations under our collaboration agreement with Genentech to be three years. If this estimated performance period changes, then we will record an adjustment to the cumulative revenue recognized under the agreement and will record the remaining unrecognized non-refundable license fees over this new performance period. Significant judgments and estimates are involved in determining the estimated development period and different assumptions could yield materially different results.

Revenues from milestones related to an arrangement under which we have continuing performance obligations, if deemed substantive, are recognized as revenue upon achievement of the milestones. A milestone is considered substantive, if all of the following conditions are met: the milestone is non-refundable; achievement of the milestone was not reasonably assured at the inception of the arrangement; substantive effort is involved to achieve the milestone; and the amount of the milestone appears reasonable in relation to the effort expended, the other milestones in the arrangement, and the related risk associated with the achievement of the milestone. If any of these conditions are not met, the milestone payment is deferred and recognized as revenue as we complete our performance obligations. Revenues from milestones related to an arrangement under which we have no continuing performance obligations are recognized as revenue upon achievement of the milestones.

Payments received from collaborative partners for research and development efforts performed by us are recognized as revenue over the contract term as the related costs are incurred. We recognize such revenue only if we believe that collection of these amounts is reasonably assured. This assessment involves judgment on our part. If we do not believe that collection of amounts billed, or amounts to be billed to our collaborators, is reasonably assured, then we defer revenue recognition.

Accrued expenses. As part of the process of preparing financial statements, we are required to estimate accrued expenses. This process involves identifying services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for such service as of each balance sheet date in our financial statements. Examples of estimated accrued expenses include professional service fees, such as lawyers and accountants, contract service fees, such as amounts paid to clinical monitors, data management organizations, and investigators in conjunction with clinical trials, and fees paid to contract manufacturers in conjunction with the production of clinical materials. In connection with such service fees, our estimates are most affected by our understanding of the status and timing of services provided relative to the actual level of services incurred by such service providers. The majority of our service providers invoice us monthly in arrears for services performed. In the event that we do not identify certain costs that have begun to be incurred or we under or over estimate the level of services performed or the costs of such services, our reported expenses for such period could be overstated or understated. The date on which certain services commence, the level of services performed on or before a given date, and the cost of such services are often judgmental. We make these judgments based upon the facts and circumstances known to us in accordance with generally accepted accounting principles.

Stock-based compensation. We have elected to follow APB Opinion No. 25, Accounting for Stock Issued to Employees , and related interpretations, in accounting for our stock-based compensation plans, rather than the alternative fair value accounting method provided for under SFAS No. 123, Accounting for Stock-Based Compensation . In the notes to our financial

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statements, we provide pro forma disclosures in accordance with SFAS No. 123 and related pronouncements. We account for transactions in which services are received in exchange for equity instruments based on the fair value of such services received from non-employees or of the equity instruments issued, whichever is more reliably measured, in accordance with SFAS No. 123 and EITF 96-18, Accounting for Equity Instruments that Are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services . The factor which most affects charges or credits to operations related to stock-based compensation is the fair value of the common stock underlying stock options for which stock-based compensation is recorded. If our estimates of the fair value of these equity instruments are too high or too low, it would have the effect of overstating or understating expenses, respectively. Because shares of our common stock have not been publicly traded, market factors historically considered in valuing stock and stock option grants include pricing of private sales of our redeemable convertible preferred stock and the effect of events that have occurred between the time of such grants, economic trends, perspective provided by investment banks, and the comparative rights and preferences of the security being granted compared to the rights and preferences of our other outstanding equity.

Recent accounting pronouncements

In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities, and interpretation of ARB 51 . The primary objectives of FIN No. 46 are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights (variable interest entities), and to determine when and which business enterprise should consolidate the variable interest entities. This new model for consolidation applies to an entity which either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance the entity's activities without receiving additional subordinated financial support from other parties. FIN No. 46 also requires enhanced disclosure requirements related to variable interest entities. FIN No. 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period ending after December 15, 2003 to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The adoption of this standard did not impact the Company's consolidated financial statements.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. The adoption of SFAS No. 149 in the third quarter of 2003 did not impact the Company's consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim

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period beginning after June 15, 2003. The adoption of SFAS No. 150 did not impact the Company's consolidated financial statements.

In June 2003, the EITF issued EITF 00-21, "Revenue Arrangements with Multiple Deliverables." EITF 00-21 establishes an approach to be used in determining when a revenue arrangement that involves multiple deliverables should be divided into separate units of accounting for revenue recognition purposes, if separation of an arrangement is appropriate, and how the arrangement consideration should be allocated to the identified accounting units. This statement is effective for arrangements entered into or modified after June 30, 2003. The adoption of EITF 00-21 did not have a material effect on the Company's consolidated financial statements.

In December 2003, the Staff of the Securities and Exchange Commission (SEC or the Staff) issued SAB 104, Revenue Recognition, which amends SAB 101, Revenue Recognition in Financial Statements. SAB 104's primary purpose is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superseded as a result of the issuance of EITF 00-21. Additionally, SAB 104 rescinds the SEC's Revenue Recognition in Financial Statements Frequently Asked Questions and Answers (the FAQ) issued with SAB 101 that had been codified in SEC Topic 13, Revenue Recognition. Selected portions of the FAQ have been incorporated into SAB 104. While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The adoption of SAB 104 did not have a material impact on the Company's consolidated financial statements.

In March 2004, the EITF issued EITF 03-06, Participating Securities and the Two-Class Method under FASB Statement No. 128, Earnings per Share . EITF 03-06 is intended to clarify what is a participating security and how to apply the two-class method of computing earnings per share, or EPS, once it is determined that a security is participating, including how to allocate undistributed earnings to such a security. EITF 03-06 is effective for reporting periods beginning after March 31, 2004 and will require the restatement of previously reported EPS. The Company is evaluating the impact of EITF 03-06 on the Company's consolidated financial statements.

Quantitative and qualitative disclosures about market risk

As part of our investment portfolio, we own financial instruments that are sensitive to market risks. The investment portfolio is used to preserve our capital until it is required to fund operations, including research and development activities. None of these market risk sensitive instruments are held for trading purposes. We do not have derivative financial instruments in our investment portfolio.

Interest Rate Risk

We invest our cash in a variety of financial instruments, principally money market instruments, investment grade corporate bonds and notes and securities issued by the U.S. government and its agencies. These investments are denominated in U.S. dollars. All of our interest-bearing securities are subject to interest rate risk, and could decline in value if interest rates fluctuate. Substantially all of our investment portfolio consists of marketable securities with active secondary or resale markets to help ensure portfolio liquidity, and we have implemented guidelines limiting the term to maturity of its investment instruments. Due to the conservative nature of these instruments, we do not believe that we have a material exposure to interest rate risk.

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