##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 Form 10-Q  x
    Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2004 or  o
    Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the transition period from       to Commission File Number 0-29993 INTRABIOTICS PHARMACEUTICALS, INC. (Exact name of Registrant as specified in its charter)
 DELAWARE
    
    94-3200380(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification Number)
 2483 East Bayshore Road, Suite 100
Palo Alto, CA 94303 (Address of principal executive offices) (650) 526-6800 (Registrants telephone number including area code) Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No o Indicate by checkmark whether registrant is an accelerated filer (as defined in
Rule 12b-2 of Securities Exchange Act of 1934). Yes o No x There were 8,866,127 shares of the Registrants common stock, par value $0.001,
outstanding as of September 30, 2004.




---



TABLE OF CONTENTS INTRABIOTICS PHARMACEUTICALS, INC. FORM 10-Q QUARTER ENDED September 30, 2004 TABLE OF CONTENTS PagePART I.
    
    FINANCIAL INFORMATIONItem 1
    
    Financial Statements (unaudited)Condensed Balance Sheets as of September 30, 2004 and December 31, 2003
    
    
    3Condensed
Statements of Operations for the Three-Month and Nine-Month Periods
Ended September 30, 2004 and 2003
    
    
    4Condensed
Statements of Cash Flows for the Nine-Month Periods Ended September
30, 2004 and 2003
    
    
    5Notes to Condensed Financial Statements
    
    
    6Item 2
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9Item 3.
    
    Quantitative and Qualitative Disclosure About Market Risk
    
    
    16Item 4.
    
    Controls and Procedures
    
    
    16PART II.
    
    OTHER INFORMATIONItem 1
    
    Legal Proceedings
    
    
    17Item 2
    
    Changes in Securities and Use of Proceeds
    
    
    17Item 3
    
    Defaults Upon Senior Securities
    
    
    17Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    
    17Item 5
    
    Other Information
    
    
    17Item 6
    
    Exhibits
    
    
    17SIGNATURES
    
    
    
    
    18EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  2




---



##### Table of Contents



PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements INTRABIOTICS PHARMACEUTICALS, INC. 
   SEPTEMBER 30,
    
    DECEMBER 31,2004
    
    2003(Unaudited)
    
    (Note 1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    3,777
    
    
    $
    14,286Restricted cash
    
    
    250
    
    
    

    250Short-term investments
    
    
    49,305
    
    
    
    12,108Prepaid expenses
    
    
    418
    
    
    
    478Total current assets
    
    
    53,750
    
    
    
    27,122Property and equipment, net
    
    
    60
    
    
    
    20Other assets
    
    
    
    
    
    
    184Total assets
    
    $
    53,810
    
    
    $
    27,326LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    110
    
    
    $
    141Accrued clinical liabilities
    
    
    885
    
    
    
    1,046Accrued employee liabilities
    
    
    99
    
    
    
    101Accrued restructuring charge
    
    
    619
    
    
    
    Other accrued liabilities
    
    
    267
    
    
    
    410Total current liabilities
    
    
    1,980
    
    
    
    1,698Stockholders equity:Convertible preferred stock
    
    
    1,771
    
    
    
    1,771Common stock
    
    
    9
    
    
    
    5Additional paid-in capital
    
    
    280,946
    
    
    
    239,237Deferred stock compensation
    
    
    (128
    )
    
    
    (188
    )Accumulated other comprehensive income (loss)
    
    
    (38
    )
    
    
    2Accumulated deficit
    
    
    (230,730
    )
    
    
    (215,199
    )Total stockholders equity
    
    
    51,830
    
    
    
    25,628Total liabilities and stockholders equity
    
    $
    53,810
    
    
    $
    27,326
 See accompanying notes. 3




---



##### Table of Contents



INTRABIOTICS PHARMACEUTICALS, INC. 
   (UNAUDITED) THREE MONTHS ENDED
    
    NINE MONTHS ENDEDSEPTEMBER 30,
    
    SEPTEMBER 30,2004
    
    2003
    
    2004
    
    2003Operating expenses:Research and development
    
    $
    2,146
    
    
    $
    3,641
    
    
    $
    11,019
    
    
    $
    5,261General and administrative
    
    
    1,070
    
    
    
    1,125
    
    
    
    3,759
    
    
    
    3,833Restructuring charge
    
    
    791
    
    
    
    
    
    
    
    791
    
    
    
    Total operating expenses
    
    
    4,007
    
    
    
    4,766
    
    
    
    15,569
    
    
    
    9,094Operating loss
    
    
    (4,007
    )
    
    
    (4,766
    )
    
    
    (15,569
    )
    
    
    (9,094
    )Interest income
    
    
    221
    
    
    
    28
    
    
    
    408
    
    
    
    99Other expense
    
    
    (175
    )
    
    
    
    
    
    
    (175
    )
    
    
    Net loss
    
    
    (3,961
    )
    
    
    (4,738
    )
    
    
    (15,336
    )
    
    
    (8,995
    )Non-cash deemed dividend related to beneficial conversion
feature of Series A preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,418
    )Non-cash dividends on Series A preferred stock
    
    
    (65
    )
    
    
    (70
    )
    
    
    (195
    )
    
    
    (117
    )Net loss applicable to common stockholders
    
    $
    (4,026
    )
    
    $
    (4,808
    )
    
    $
    (15,531
    )
    
    $
    (10,530
    )Basic and diluted net loss per share applicable to common stockholders
    
    $
    (0.46
    )
    
    $
    (1.46
    )
    
    $
    (2.18
    )
    
    $
    (3.22
    )Shares used to compute basic and diluted net loss per share
applicable to common stockholders
    
    
    8,844
    
    
    
    3,283
    
    
    
    7,121
    
    
    
    3,274
 See accompanying notes. 4




---



##### Table of Contents



INTRABIOTICS PHARMACEUTICALS, INC. 
   (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30,2004
    
    2003Operating activitiesNet loss
    
    $
    (15,336
    )
    
    $
    (8,995
    )Adjustments to reconcile net loss to net cash used in operating activities:Amortization of deferred stock compensation
    
    
    47
    
    
    
    110Depreciation and amortization
    
    
    26
    
    
    
    81Write down of fixed assets
    
    
    28
    
    
    
    Write down of other assets
    
    
    175
    
    
    
    Stock compensation expense (recovery)
    
    
    (249
    )
    
    
    411Change in assets and liabilities:Prepaid expenses
    
    
    60
    
    
    
    2,155Other assets
    
    
    9
    
    
    
    (7
    )Accounts payable
    
    
    (31
    )
    
    
    31Accrued clinical liabilities
    
    
    (161
    )
    
    
    128Accrued employee liabilities
    
    
    (2
    )
    
    
    (44
    )Accrued restructuring charges
    
    
    619
    
    
    
    (64
    )Other accrued liabilities
    
    
    (78
    )
    
    
    (28
    )Net cash used in operating activities
    
    
    (14,893
    )
    
    
    (6,222
    )Investing activitiesCapital expenditures
    
    
    (94
    )
    
    
    Purchase of short-term investments
    
    
    (50,709
    )
    
    
    Sale or maturity of short-term investments
    
    
    13,472
    
    
    
    2,895Net cash (used in) provided by investing activities
    
    
    (37,331
    )
    
    
    2,895Financing activitiesProceeds from issuance of common stock, net of issuance costs
    
    
    41,715
    
    
    
    6Proceeds from issuance of Series A preferred stock and warrants, net
    
    
    
    
    
    
    3,212Net cash provided by financing activities
    
    
    41,715
    
    
    
    3,218Net decrease in cash and cash equivalents
    
    
    (10,509
    )
    
    
    (109
    )Cash and cash equivalents at beginning of period
    
    
    14,286
    
    
    
    10,170Cash and cash equivalents at end of period
    
    $
    3,777
    
    
    $
    10,061Supplemental disclosure of non-cash information:Net deferred stock compensation (cancellations due to employee termination)
    
    $
    (13
    )
    
    $
    (430
    )Beneficial conversion feature on Series A preferred stock
    
    $
    
    
    
    $
    (1,418
    )Issuance of common stock dividend on Series A preferred stock
    
    $
    (195
    )
    
    $
    (117
    )
 See accompanying notes. 5




---



##### Table of Contents



INTRABIOTICS PHARMACEUTICALS, INC. 
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2004
 (Unaudited)
 Note 1. Basis of Presentation and Summary of Significant Accounting Policies The accompanying condensed financial statements are unaudited and have
been prepared by IntraBiotics Pharmaceuticals, Inc. (the Company) in
accordance with the rules and regulations of the Securities and Exchange
Commission for interim financial information, and in accordance with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in the
Companys annual audited financial statements (as required by accounting
principles generally accepted in the United States) have been condensed or
omitted. The interim condensed financial statements, in the opinion of
management, reflect all adjustments (consisting entirely of normal recurring
adjustments) necessary for a fair presentation of the Companys financial
position as of September 30, 2004, the results of its operations for the three
and nine-month periods ended September 30, 2004 and 2003 and cash flows for the
nine-month periods ended September 30, 2004 and 2003. The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the entire fiscal
year. These interim condensed financial statements should be read in
conjunction with the audited financial statements for the year ended December
31, 2003, which are contained in the Companys Annual Report on Form 10-K, and
filed with the Securities and Exchange Commission on March 19, 2004. The
condensed balance sheet as of December 31, 2003 is derived from such audited
financial statements. Use of Estimates The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes, including amounts accrued for clinical trial costs, stock-based
compensation and restructuring charges. Actual results could therefore differ
materially from those estimates under different assumptions or conditions. Note 2. Stock-Based Compensation In February 2003, the Board approved a cancellation and re-grant of
unexercised stock options to purchase 308,835 shares of common stock held by
existing employees and directors of the Company in a one-for-one exchange and
options to purchase 12,500 shares of common stock that were re-granted in
connection with the cancellation of unexercised stock options to purchase
54,166 shares of common stock held by a director of the Company. The newly
granted options have an exercise price equal to the closing price of the
Companys common stock on the Nasdaq National Market on February 5, 2003, or
$2.76 per share. These options generally vest over a four-year period and will
expire in February 2008 if not previously exercised. Variable accounting is
being applied to the newly granted options throughout their term. As permitted by Statement of Financial Accounting Standards No. 123 (SFAS
123), Accounting for Stock-Based Compensation, as amended by Statement of
Financial Standards No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure, the Company has elected to follow APB 25 and
related interpretations in accounting for stock-based employee compensation.
Under APB 25, if the exercise price of an employee or director stock option is
set equal or in excess of the fair market value of the underlying stock on the
date of grant, no compensation expense is recognized. In February 2003, certain
stock options for which the exercise prices had originally been set at less
than the fair market value of the underlying stock on the grant date, were
cancelled and re-granted in a one-for-one exchange. The Company had recorded
deferred compensation for the difference between the original exercise price
and the fair market value of the underlying stock on the grant date as a
component of stockholders equity, and the total was being amortized on a
straight-line basis over the vesting period of the original awards, ranging
from four to six years. The related re-granted options all vest over a
four-year period, and the remaining unamortized deferred compensation as of the
re-grant date is now being amortized over the new four-year vesting schedule,
commencing at the date of re-grant. Options or stock awards issued to non-employees are recorded at their fair
value as determined in accordance with SFAS 123 and the FASBs Emerging Issues
Task Force issue No. 96-18, Accounting for Equity Instruments That Are Issued
to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services, and are recognized over the related service period and are
periodically re-measured as the underlying options vest. 6




---



##### Table of Contents



The following table illustrates the effect on net loss applicable to
common stockholders and net loss per share applicable to common stockholders if
the Company had applied the fair value recognition provisions of SFAS 123 to
stock-based employee compensation (in thousands, except per share amounts): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net loss a pplicable to common stockholders, as reported
    
    $
    (4,026
    )
    
    $
    (4,808
    )
    
    $
    (15,531
    )
    
    $
    (10,530
    )Add: Stock-based employee compensation expense included in
reported net loss
    
    
    43
    
    
    
    300
    
    
    
    (619
    )
    
    
    419Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards
    
    
    (706
    )
    
    
    (384
    )
    
    
    (2,391
    )
    
    
    (1,194
    )Pro forma net loss applicable to common stockholders
    
    $
    (4,689
    )
    
    $
    (4,892
    )
    
    $
    (18,541
    )
    
    $
    (11,305
    )Net loss per share applicable to common stockholders:Basic and diluted  as reported
    
    $
    (0.46
    )
    
    $
    (1.46
    )
    
    $
    (2.18
    )
    
    $
    (3.22
    )Basic and diluted  pro forma
    
    $
    (0.53
    )
    
    $
    (1.49
    )
    
    $
    (2.60
    )
    
    $
    (3.45
    )
 The fair value of the Companys stock options granted to employees was
estimated at the date of grant using the Black-Scholes option pricing model for
the three- and nine-month periods ended September 30, 2004 and 2003 with the
following weighted-average assumptions: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Risk-free interest
rates
    
    n/a
    
    
    3.20
    %
    
    
    3.55
    %
    
    
    2.81
    %Volatility
    
    n/a
    
    
    1.00
    
    
    
    1.00
    
    
    
    1.00Dividend yield
    
    n/a
    
    
    
    
    
    
    
    
    
    
    Expected life of option
    
    n/a
    
    5 years
    
    
    5 years
    
    
    5 years
 Note 3. Comprehensive Loss The components of comprehensive loss in each period presented are as
follows: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net loss applicable to common stockholders
    
    $
    (4,026
    )
    
    $
    (4,808
    )
    
    $
    (15,531
    )
    
    $
    (10,530
    )Unrealized gain/(loss) on available-for-sale securities
    
    
    18
    
    
    
    
    
    
    
    (40
    )
    
    
    Comprehensive loss
    
    $
    (4,008
    )
    
    $
    (4,808
    )
    
    $
    (15,571
    )
    
    $
    (10,530
    )
 Note 4. Net Loss Per Share Basic and diluted net loss per share applicable to common stockholders is
presented in accordance with Financial Accounting Standards Board Statement No.
128, Earnings Per Share, and is calculated using the weighted-average number
of shares of common stock outstanding during the period. Diluted net loss per
share applicable to common stockholders includes the impact of potentially
dilutive securities (stock options, warrants and convertible preferred stock).
As the Companys potentially dilutive securities were anti-dilutive for all
periods presented, they are not included in the calculations of diluted net
loss per share applicable to common stockholders. The total number of shares
underlying the stock options, warrants and convertible preferred stock excluded
from the calculations of diluted net loss per share applicable to common
stockholders was 3,764,721 and 3,200,874 for the three-month periods ended
September 30, 2004 and 2003, respectively, and 3,632,723 and 2,991,807 for the
nine-month periods ended September 30, 2004 and 2003, respectively. 7




---



##### Table of Contents



Note 5. Commitments At September 30, 2004, the Company has a total of $413,000 in commitments
to its contract manufacturer for drug substance, representing $250,000 due upon
acceptance of an existing drug order, for which delivery is expected in the
fourth quarter of 2004, and $163,000 in fees for storage of iseganan through
December 2007. Regardless of whether the order is accepted and whether the
related $250,000 is paid or not, we intend to both terminate the drug storage
agreement and destroy all iseganan inventory by December 31, 2004, which would
result in a reduction in the drug substance commitments of $150,000. The Company occupies office space in Palo Alto, California under the terms
of a lease, which terminates at the end of June 2005. Under the terms of the
lease, the Company is committed to pay rent of approximately $24,000 in 2004
and $49,000 through June 2005 and has the option to extend the lease term until
December 31, 2005 at the then market rate. Note 6. Stockholders Equity On May 10, 2004, the Company issued and sold 3,000,000 shares of common
stock, $0.001 par value, in an underwritten public offering, and on June 8,
2004, the underwriters exercised their over-allotment option to purchase an
additional 450,000 shares of common stock. The combined sale of 3,450,000
shares resulted in total net proceeds of approximately $41.5 million, based on
a public offering price of $13.00 per share, and after deducting the
underwriting discount and commissions and other offering expenses. Note 7. Restructuring Charge In June 2004, the Company discontinued its clinical trial of iseganan for
the prevention of ventilator-associated pneumonia (VAP), following a
recommendation of the independent data monitoring committee. The Company has
since terminated its iseganan development program, and is focusing efforts on
evaluating various strategic options, which may include mergers, acquisitions,
in-licensing opportunities, and liquidation of the Company. As a result, in
August 2004, the Company implemented a restructuring plan, which includes the
termination of nine employees and various operating lease commitments. When
the restructuring plan is fully implemented, the Company will have six
employees and occupy one office in Palo Alto, California. In accordance with Statement of Financial Accounting Standards No. 146
(SFAS 146), Accounting for Costs Associated with Exit or Disposal
Activities, the Company recorded a restructuring charge of $791,000 during the
three months ended September 30, 2004, of which $681,000 related to involuntary
employee termination benefits and $110,000 related to the termination of
certain operating leases and the write-off of certain leasehold improvements.
As of September 30, 2004, approximately $619,000 of the restructuring charge
remained unpaid and is included under the caption Accrued restructuring
charge on the accompanying balance sheet. The following table displays the
activity in, and balances of, the accrued restructuring charge account for the
three and nine months ended September 30, 2004: Employee
    
    FacilitiesTermination
    
    ConsolidationBenefits
    
    Costs
    
    TotalRestructuring charge
    
    $
    681
    
    
    $
    110
    
    
    $
    791Cash paid or other form of settlement
    
    
    (62
    )
    
    
    (110
    )
    
    
    (173
    )Accrued restructuring charge at September 30, 2004
    
    $
    619
    
    
    $
    
    
    
    $
    619
 The Company expects to record additional expense of $76,000 in the three
months ending December 31, 2004 related to involuntary employee termination
benefits as a part of this restructuring. All liabilities relating to the
restructuring are expected to be settled by December 31, 2004. Note 8. Legal Proceedings Beginning on July 2, 2004, three purported class action shareholder
complaints were filed in the United States District Court for the Northern of
California against IntraBiotics and several of its officers. The actions were
purportedly brought on behalf of purchasers of IntraBiotics common stock
between September 5, 2003 and June 22, 2004 and generally allege that the
defendants made
false or misleading statements concerning the clinical trial of iseganan.
The plaintiffs seek unspecified monetary damages. The Company believes the
suits to be without merit and intends to defend itself vigorously. Due to the
uncertainties surrounding the final outcome of this matter, no amounts have
been accrued at September 30, 2004. 8




---



##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and
results of operations should be read together with our financial statements and
related notes included in our quarterly report on thisForm 10-Qand in our
annual report onForm 10-Kfor the year ended December 31, 2003. This
discussion and analysis contains forward-looking statements that involve risks,
uncertainties and assumptions. The actual results may differ materially from
those anticipated in these forward-looking statements as a result of many
factors, including but not limited to those set forth under Factors That Could
Affect Future Results. All forward-looking statements included in this
document are based on information available to us on the date of this document
and we assume no obligation to update any forward-looking statements contained
in thisForm 10-Q. Overview Since inception, we have devoted substantially all of our efforts to
research and development of anti-microbial drugs, and have generated no product
revenues. From the fourth quarter of 2002 until June 2004, we focused our
efforts on developing iseganan for the prevention of ventilator-associated
pneumonia (VAP). In June 2004, we discontinued our clinical trial of iseganan
for the prevention of VAP following a recommendation of the independent data
monitoring committee. We have since terminated our iseganan development
program, and are now evaluating our strategic options,including mergers,
acquisitions, in-licensing opportunities, and liquidation of the Company. We
have retained the investment banking firm, Lazard, to advise the Company in
evaluating its strategic options. Our future operations and financial condition
will depend on the direction that we elect to pursue. As of September 30, 2004, we had a total of $53.3 million in cash, cash
equivalents, restricted cash and short-term investments, and current
liabilities totaled $2.0 million. We have no long-term debt or other long-term
obligations. Based upon currently projected expenses for the remainder of 2004,
we expect to have available cash and investments of between approximately $46.0
million and $50.0 million at December 31, 2004, after providing for current
liabilities. There can be no assurance that such a range will be achieved, as
actual expenditures may differ significantly from projected expenditures. Our
accumulated deficit as of September 30, 2004 was $230.7 million. We intend that the following discussion of our financial condition and
results of operations will provide information to assist in the understanding
of our financial statements, the changes in certain key items in those
financial statements from year to year, and the primary factors that accounted
for those changes, as well as how certain accounting principles, policies and
estimates affect our financial statements. Critical Accounting Policies General Our discussion and analysis of our financial condition and results of
operations is based upon 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 management to make
estimates and judgments that affect the reported amounts of assets, liabilities
and expenses, and related disclosures. On an ongoing basis, we evaluate these
estimates, including those related to clinical trial accruals, stock-based
compensation and restructuring charges. Estimates are based on historical
experience, information received from third parties and on various other
assumptions that are believed 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 could therefore differ materially from those estimates under
different assumptions or conditions. An accounting policy is deemed to be critical if it requires an accounting
estimate to be made based on assumptions about matters that are highly
uncertain at the time the estimate is made, and if different estimates that
reasonably could have been used, or changes in the accounting estimates that
are reasonably likely to occur periodically, could materially impact the
financial statements. Management believes the following critical accounting
policies reflect its more significant estimates and assumptions used in the
preparation of the financial statements. Clinical Trial Accruals The Companys accrued costs for clinical trial activities are based upon
estimates of the services received and related expenses incurred that have yet
to be invoiced by the contract research organizations (CROs), investigators,
drug processors, laboratories, consultants, or other clinical trial service
providers that perform the activities. Related contracts vary significantly in
length, and may 9




---



##### Table of Contents



be for a fixed amount, a variable amount based on actual costs incurred,
capped at a certain limit, or for a combination of these elements. Activity
levels are monitored through close communication with the service provider,
including detailed invoice and task completion review, analysis of expenses
against budgeted amounts, and pre-approval of any changes in scope of the
services to be performed. Each CRO provides an estimate of costs incurred but
not invoiced at the end of each period for each individual trial. The estimates
are reviewed and discussed with the CRO as necessary, and included in research
and development expenses for the related period. For investigator study grants,
which are paid quarterly on a per-patient basis to the institutions performing
the clinical study, the Company accrues an estimated amount based on patient
enrollment in each quarter. All estimates may differ significantly from the
actual amount subsequently invoiced. No adjustments for material changes in
estimates have been recognized in any period presented. Stock-Based Compensation In February 2003, the Board of Directors approved a cancellation and
re-grant of unexercised stock options to purchase 308,835 shares of common
stock held by existing employees and directors of the Company in a one-for-one
exchange and options to purchase 12,500 shares of common stock that were
re-granted in connection with the cancellation of unexercised stock options to
purchase 54,166 shares of common stock held by a director of the Company. The
options generally vest over a four-year period and will expire in February 2008
if not previously exercised. Variable accounting is being applied to the
re-granted options throughout their term. The related compensation expense
depends on both the cumulative vesting of outstanding options and the price of
the Companys common stock at each quarter end, and therefore may have a
significant impact on the Companys future results of operations. No
adjustments for material changes in estimates have been recognized in any
period presented. As permitted by Statement of Financial Accounting Standards No. 123 (SFAS
123), Accounting for Stock-Based Compensation, as amended by Statement of
Financial Standards No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure, the Company has elected to follow APB 25 and
related interpretations in accounting for stock-based employee compensation.
Under APB 25, if the exercise price of an employee or director stock option is
set equal or in excess of the fair market value of the underlying stock on the
date of grant, no compensation expense is recognized. In February 2003, certain
employee and director stock options for which the exercise prices had
originally been set at less than the fair market value of the underlying stock
on the grant date, were cancelled and re-granted in a one-for-one exchange. The
Company had recorded deferred compensation for the difference between the
original exercise price and the fair market value of the underlying stock on
the grant date as a component of stockholders equity, and the total was being
amortized on a straight-line basis over the vesting period of the original
awards, ranging from four to six years. The related re-granted options all vest
over a four-year period, and the remaining unamortized deferred compensation as
of the re-grant date is now being amortized over the new four-year vesting
schedule, commencing at the date of re-grant. The amount of deferred stock
compensation expense to be recorded in future periods could decrease if
options, for which accrued but unvested compensation has been recognized, are
forfeited prior to vesting. No adjustments for material changes in estimates
have been recognized in any period presented. Options or stock awards issued to non-employees are recorded at their fair
value as determined in accordance with SFAS 123 and the FASBs Emerging Issues
Task Force issue No. 96-18, Accounting for Equity Instruments That Are Issued
to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services, and are recognized over the related service period and are
periodically re-measured as the underlying options vest. The fair values are
estimated using the Black-Scholes option pricing model, and are periodically
re-measured as the underlying options vest. The option pricing model is
dependent on a number of inputs, which may change over time. Other option
pricing models may produce fair values that are substantially different from
the Black-Scholes model. No adjustments for material changes in estimates have
been recognized in any period presented. Restructuring Charge The Company accounts for restructuring charges in accordance with
Statement of Financial Accounting Standards No. 146 (SFAS 146), Accounting
for Costs Associated with Exit or Disposal Activities. The charges in the
income statement include estimated or actual charges for the termination of
employees and various operating leases, and the write-off of leasehold
improvements. Restructuring charges that remain unpaid at each period end are
included under the caption Accrued restructuring charge on the balance sheet.
We continue to monitor actual costs and expected remaining obligations in
connection with our restructuring plan, and revise estimated amounts
accordingly. All estimates may differ significantly from the actual amount
incurred. No adjustments for material changes in estimates have been recognized
in any period presented. 10




---



##### Table of Contents



Results of Operations Three- and Nine-Month Periods Ended September 30, 2004 and 2003 Research and Development Research and development expenses primarily include clinical trial
expenses, research and development payroll expense, drug substance expense,
allocated facilities costs and non-cash stock compensation. The expense in the
three months ended September 30, 2004 primarily relates to the winding-down of
the clinical trial of iseganan for the prevention of VAP, which commenced in
September 2003 and was discontinued in June 2004 following a recommendation of
the independent data monitoring committee. Research and development expenses
decreased to $2.1 million in the three months ended September 30, 2004 as
compared to $3.6 million in the same period of 2003. This decrease is primarily
a result of a write-off of $2.4 million of prepaid iseganan drug substance in
the three months ended September 30, 2003, partially offset by higher expenses
related to CROs and investigators in the three months ended September 30, 2004. Research and development expenses increased to $11.0 million in the
nine-months ended September 30, 2004 as compared to $5.3 million in the same
period of 2003. This increase is primarily due to expenses relating to the
discontinued clinical trial of iseganan for the prevention of VAP, with higher
expenses related to investigators, CROs, salaries and lab fees being partially
offset by the write-off of $2.4 million of prepaid iseganan drug substance in
the nine months ended September 30, 2003. We have terminated our iseganan development program and we do not plan to
re-commence or start new clinical trial activities for iseganan. We expect our
research and development expenses in the three months ending December 31, 2004
to be substantially lower than in prior periods, primarily as a result of the
discontinuance of the VAP trial and related reduction in personnel and
facilities discussed below in Restructuring Charge. General and Administrative General and administrative costs primarily include administrative payroll
expense, outside contractors, legal and accounting fees, insurance, non-cash
stock compensation, facilities and other general administrative expenses.
General and administrative expenses were $1.1 million and $3.8 million for the
three and nine months ended September 30, 2004, which approximate the amounts
in the comparable periods of 2003. A reduction in stock compensation expense
of $0.3 million in the three months ended September 30, 2004 as compared to the
comparable period of 2003, was offset by higher consulting and professional
fees. During the nine months ended September 30, 2004, stock compensation was
lower by a total of $0.7 million than the corresponding period of 2003, which
was offset by higher consulting and recruitment fees and other general
expenses. The lower stock compensation expense is primarily as a result of a
net non-cash stock compensation recovery of $0.6 million for the nine months
ended September 30, 2004. The recovery results from variable accounting being
applied to stock options that were re-priced in February 2003 and a decrease in
the Companys common stock price from prior periods. We expect G&A
expenditures to decrease in the fourth quarter of 2004 primarily due to the
reduction in headcount discussed below in Restructuring Charge. Restructuring Charge In June 2004, the Company discontinued its clinical trial of iseganan for
the prevention of VAP, following a recommendation of the independent data
monitoring committee. The Company has since terminated its iseganan
development program, and is focusing its efforts on evaluating various
strategic options, which may include mergers, acquisitions, in-licensing
opportunities, and liquidation of the Company. As a result, in August 2004,
the Company implemented a restructuring plan, which includes the termination of
nine employees and various operating lease commitments. When the restructuring
plan is fully implemented, the Company will have six employees and occupy one
office in Palo Alto, California. In accordance with Statement of Financial Accounting Standards No. 146
(SFAS 146), Accounting for Costs Associated with Exit or Disposal
Activities, the Company recorded restructuring charges of $791,000 during the
three and nine months ended September 30, 2004, of which $681,000 related to
involuntary termination benefits and $110,000 related to the termination of
certain operating leases and the write-off of certain leasehold improvements.
As of September 30, 2004 approximately $619,000 of the restructuring charges
remained unpaid. 11




---



##### Table of Contents



The Company expects to record additional expenses of $76,000 in the three
months ended December 31, 2004 related to involuntary termination benefits as a
part of this restructuring. All liabilities relating to the restructuring are
expected to be settled by December 31, 2004. Interest Income Interest income was $221,000 and $408,000 in the three- and nine-month
periods ended September 30, 2004, as compared to $28,000 and $99,000 in the
comparable periods of 2003. The increase in interest income resulted from an
increase in average interest earning investment balances in the 2004 periods as
compared to the 2003 periods, primarily due to the follow-on public offering
that closed in the second quarter of 2004. Other Expense Other expense of $175,000 during the three and nine months ended September
30, 2004 represents a write-down of the remaining carrying value of certain
redeemable preferred stock received related to the sale of two pre-clinical
programs in 2002. Previously this preferred stock had been included under the
caption Other assets on the balance sheet. Net Loss and Net Loss Applicable to Common Stockholders Net loss applicable to common stockholders was $4.0 million and $15.5
million for the three- and nine-month periods ended September 30, 2004,
respectively, as compared to $4.8 million and $10.5 million in the same periods
of 2003. The loss in the nine months ended September 30, 2003 includes the
impact of a non-cash deemed dividend related to a beneficial conversion feature
on our Series A preferred stock of $1.4 million. The losses also include the
impact of non-cash Series A preferred stock dividends of $65,000 and $195,000
in the three- and nine-month periods ended September 30, 2004, and $70,000 and
$117,000 in the comparable periods of 2003. Preferred stock dividends represent
the 8% annual dividends payable quarterly in common stock to the holders of our
Series A preferred stock. Liquidity and Capital Resources At September 30, 2004, we had cash and cash equivalents of $3.8 million,
representing a decrease of $10.5 million from the balance of $14.3 million as
of December 31, 2003. Short-term investments were $49.3 million at September
30, 2004 as compared to $12.1 million at December 31, 2003. Restricted cash
was $250,000 at both September 30, 2004 and December 31, 2003. We had no debt
outstanding as of September 30, 2004. We invest excess funds in short-term
money market funds and securities pursuant to our investment policy guidelines. Net cash used in operating activities for the nine-month periods ended
September 30, 2004 and 2003 was $14.9 million and $6.2 million. The cash used
consisted primarily of the net loss for each period, adjustments for non-cash
stock compensation and changes in prepaid expenses, accrued restructuring and
clinical liabilities, and other assets. Net cash used in investing activities for the nine-month period ended
September 30, 2004 was $37.3 million and net cash provided by investing
activities for the nine-month period ended September 30, 2003 was $2.9 million.
The cash used in the 2004 period primarily related to the purchase of $50.7
million of short-term investments, being partially offset by proceeds from the
sale or maturity of short-term investments of $13.5 million. The cash provided
by investing activities during the nine months ended September 30, 2003 related
to the sale or maturity of short-term investments. Net cash provided by financing activities for the nine-month periods ended
September 30, 2004 and 2003 was $41.7 million and $3.2 million. The cash
provided in 2004 was primarily related to a public offering that closed in the
second quarter of 2004, in which we sold 3,450,000 shares of common stock at
$13.00 per share. The net proceeds to us were approximately $41.5 million,
after deducting the underwriter discount and commissions and other offering
expenses. The cash provided in 2003 was primarily related to a private
placement transaction in May 2003, in which we sold 350 shares of a newly
created Series A convertible preferred stock and issued warrants to purchase
920,699 shares of common stock, resulting in net proceeds of $3.2 million. Based upon currently projected expenses for the remainder of 2004, the
Company expects to have available cash and investments of between approximately
$46.0 million and $50.0 million at December 31, 2004, after providing for
current liabilities. There can be no assurance that such a range will be
achieved, as actual expenditures may differ significantly from projected
expenditures. 12




---



##### Table of Contents



Contractual Obligations The impact our contractual obligations as of September 30, 2004 are
expected to have on our liquidity and cash flow in future periods are as
follows: Payments Due by PeriodLess than 1
    
    Between 1-3
    
    Between 3-5
    
    More thanContractual Commitments
    
    Total
    
    Year
    
    Years
    
    Years
    
    5 YearsDrug substance (1)
    
    $
    413
    
    
    $
    300
    
    
    $
    100
    
    
    $
    13
    
    
    $
    0Operating leases (2)
    
    
    73
    
    
    
    73
    
    
    
    
    
    
    
    
    
    
    
    Total contractual commitments
    
    $
    486
    
    
    $
    373
    
    
    $
    100
    
    
    $
    13
    
    
    $
    0
  (1)
    
    Drug substance commitments are to the contract manufacturer of iseganan
bulk drug substance. The commitment represents the potential payment of
$250,000 upon acceptance of an existing drug order, for which delivery is
expected in the fourth quarter of 2004, and $163,000 in fees for storage
of iseganan through December 2007. Regardless of whether the order is
accepted and whether the related $250,000 is paid or not, we intend to
both terminate the drug storage agreement and destroy all iseganan
inventory by December 31, 2004, which would result in a reduction in the
drug substance commitments of $150,000.  (2)
    
    Operating leases relate to the lease for our facilities in Palo Alto,
California. The lease for our premises includes an option to extend until
December 2005 at the then market rate for the building. Under the terms of
the lease, the Company is committed to pay rent of approximately $24,000
in 2004 and $49,000 in 2005.   There were no purchase obligations as of September 30, 2004 that included
material penalties for cancellation. Indemnifications In the ordinary course of business, we enter into contractual arrangements
under which we may agree to indemnify the third party to such arrangement from
any losses incurred relating to the services they perform on behalf of
IntraBiotics or for losses arising from certain events as defined within the
particular contract, which may include, for example, litigation or claims
relating to past performance. Such indemnification obligations may not be
subject to maximum loss clauses. Historically, payments made related to these
indemnifications have been immaterial. In addition, we have entered into
indemnity agreements with each of our directors and executive officers. Such
indemnity agreements contain provisions, that are in some respects broader than
the specific indemnification provisions contained in Delaware law. We also
maintain an insurance policy for our directors and executive officers insuring
against certain liabilities arising in their capacities as such. We expect to
make payments under some of these agreements in connection with the class
action litigation referred to in Part II, Item I  Legal Proceedings (Class
Action Litigation). The amount of such payments cannot be determined at this
time, but they could be material. Future Capital Requirements We expect to continue to incur operating losses and will not receive any
product revenues in the foreseeable future. Our efforts are focused on pursuing
strategic options, including mergers, acquisitions, in-licensing opportunities,
and liquidation of the company. We currently anticipate our cash, cash
equivalents and short-term investments to be sufficient to fund the foregoing
efforts through at least the end of 2005. This forecast is a forward-looking
statement that involves risks and uncertainties, and actual results could vary. Factors That Could Affect Future Results Our business faces significant risks and the risks described below may not
be the only risks we face. Additional risks that we do not know of or that we
currently believe are immaterial may also impair our business operations. If
any of the events or circumstances described in the following risks actually
occurs, our business, financial condition, or results of operations could be
materially adversely affected. We are currently a party to a securities litigation class action lawsuit,
which, if determined adversely, could negatively affect our or limit our
strategic alternatives, our financial results or business. 13




---



##### Table of Contents



We are currently a party to Class Action Litigation that is described in
detail below in Part II, Item 1. Legal Proceedings. The cost of defense and
ultimate disposition of the Class Action Litigation could be material. We will
continue to incur expenses in defending the Class Action Litigation and,
although we believe this litigation is without merit, we may incur monetary
losses in connection with the final disposition of this litigation that may be
material. In addition, the litigation has been, and may continue to be, time
consuming and costly and could divert the attention of our remaining management
personnel. Directors, executive officers, principal stockholders and affiliated entities
beneficially own at least 46% of our capital stock and may be able to exert
control over our activities, and the results of our operations and financial
condition may suffer. As of September 30, 2004, our directors, executive officers, principal
stockholders and affiliated entities beneficially own, in the aggregate, at
least 46% of our outstanding common stock. These stockholders, if they
determine to vote the same, may be able to control the outcome of any matter
requiring approval by our stockholders, including the election of directors and
the approval of mergers or other business combination transactions or terms of
any liquidation. The holders of our Series A preferred stock have voting and other rights that
they could exercise against your best interests. The holders of our Series A preferred stock have rights to designate two
members of our Board and to vote as a separate class on certain significant
corporate transactions. The holders of Series A preferred stock are entitled to
receive cumulative annual dividends of 8% of the original purchase price of
$10,000 per share, payable in common stock. In addition, upon our liquidation
or dissolution (including a merger or acquisition), the holders of our Series A
preferred stock are entitled to receive a liquidation preference in an amount
equal to the greater of (i) $10,000 per share of Series A preferred stock, or
approximately $3.25 million based on the 325 shares of Series A preferred stock
currently outstanding, plus any declared but unpaid dividends or (ii) the
amount that would have been paid had each such share of Series A preferred
stock been converted to common stock. The holders of Series A preferred stock
also have a right of first refusal to purchase their pro rata portion of any
equity securities we propose to offer to any person. Such right of first
refusal is subject to certain customary exclusions, including for shares issued
pursuant to any options or other stock awards granted to employees, directors
or consultants of IntraBiotics, equipment leasing arrangements, debt
financings, strategic financings and public offerings that have been approved
by the Board. The holders of Series A preferred stock may exercise these rights
to the detriment of our common stockholders. The holders of our Series A preferred stock also have the right at any
time to request that we register for resale the shares of our common stock that
they acquire upon conversion of their Series A preferred stock or upon exercise
of their warrants to purchase our common stock, subject to certain limitations.
A registration statement has been filed with the Securities and Exchange
Commission and is currently effective for the resale of the shares of common
stock issuable upon conversion of our Series A preferred stock and upon the
exercise of those warrants. In addition, the holders of our Series A preferred
stock may convert their Series A preferred stock into common stock and sell
those shares of the common stock acquired upon such conversion in the public
market in reliance upon Rule 144, subject in some cases to volume and other
limitations. Future sales in the public market of such common stock, or the
perception that such sales might occur, could adversely affect the prevailing
market price of our common stock. Anti-takeover provisions in our charter documents and under Delaware law may
make an acquisition of us more difficult. Provisions of our certificate of incorporation and bylaws could make it
more difficult for a third party to acquire us, even if doing so would be
beneficial to our stockholders. These provisions:  
    
    provide for a classified board of directors of which approximately one-third of the directors will be elected each year;  
    
    allow the authorized number of directors to be changed only by resolution of the Board;  
    
    require that stockholder actions must be effected at a duly called
stockholder meeting and prohibit stockholder action by written consent;  
    
    establish advance notice requirements for nominations to the Board or
for proposals that can be acted on at stockholder meetings;  
    
    require the approval from the holders of Series A preferred stock,
prior to May 1, 2005, for any merger into or consolidation with any
other corporation (other than a wholly-owned subsidiary corporation or
for the purposes of
changing our domicile) or the completion of any transaction or series of
related transactions in which fifty percent or more 14




---



##### Table of Contents



of our voting power
is transferred or the sale, lease or other disposition of all or
substantially all of our assets;  
    
    authorize our Board to issue blank check preferred stock to increase the amount of outstanding shares; and  
    
    limit who may call stockholder meetings. In addition, because we are incorporated in Delaware, we are governed by
the provisions of Section 203 of the Delaware General Corporation Law, which
may prohibit large stockholders from consummating a merger with, or acquisition
of us. These provisions may prevent a merger or acquisition that would be
attractive to stockholders and could limit the price that investors would be
willing to pay in the future for our common stock. Our stock price has been, and will be volatile, and the value of your
investment may continue to decline. During the nine-month period ended September 30, 2004, our closing stock
prices ranged from a low of $3.38 to a high of $18.00, and in 2003 ranged from
a low of $1.71 to a high of $16.95. Announcements regarding strategic
alternatives, including a merger or sale of the company, or acquisition or
license of products or product candidates, in addition to the other risk
factors described in this section, may have a significant impact on the market
price of our common stock. We expect to continue to incur operating losses. Our accumulated deficit as of September 30, 2004 was $230.7 million, and
we expect operating losses to continue at least through the end of 2004. During
this period we intend to incur final costs for the discontinuance of the
clinical trial of iseganan,evaluate our strategic alternatives,including
mergers, acquisitions, in-licensing opportunities, or liquidation of the
Company, possibly pursue one of the alternatives, and defend the Class Action
Litigation. We expect operating losses to continue into 2005, but we cannot
predict the magnitude and duration of such losses, since we are currently
unable to determine which strategic alternative we may elect to pursue or
whether we will be successful in achieving such alternative. We may not be able to complete the strategic alternative we initially elect to
pursue, resulting in increased expenses and a delay in finally completing a
selected alternative. We may select a strategic alternative that we may not be able to complete for
various reasons, including a decision of our principal stockholders not to
approve such alternative, our inability to obtain regulatory approval, actions
of other companies or litigation involving the selected alternative or other
matters. In addition, the pendency and or resolution of the Class Action
Litigation may adversely affect or limit our strategic alternatives, including
adversely affecting our financial results or our ability to liquidate, or
deterring other companies from entering into a merger or acquisition with us. 15




---



##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The primary objective of our investment activities is to preserve our
capital until it is required to fund operations while at the same time
maximizing the income we receive from our investments without significantly
increasing risk. As of September 30, 2004, we own financial instruments that
are sensitive to market risk as part of our investment portfolio. To minimize
this risk, in accordance with our investment policy guidelines, we place
investments with high credit quality issuers and limit the amount of credit
exposure to any one issuer. The average duration of our investment portfolio in
the nine-month period ended September 30, 2004 was less than one year. Due to
the short-term nature of these investments, a 50 basis point movement in market
interest rates would not have a material impact on the fair value of our
portfolio as of September 30, 2004. We have no investments denominated in
foreign currencies and therefore our investments are not subject to foreign
currency exchange risk. However, at each quarter end we may record accruals for
costs incurred by clinical trial investigators in Europe that are denominated
in Euros. An increase or decrease in the related exchange rate prior to payment
will affect our operating results accordingly. Due to the size of these
accruals and the relatively short time before they are paid, we currently do
not use derivative financial instruments to mitigate this exposure, although we
will continue to review this issue in the future. 
 ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures Based on our managements evaluation (with the participation of our
principal executive officer and principal financial officer), as of the end of
the period covered by this report, our principal executive officer and
principal financial officer have concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended, (the Exchange Act)) are effective to ensure
that information required to be disclosed by us in reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms. (b) Changes in internal controls There was no change in our internal control over financial reporting
during our third fiscal quarter ended September 30, 2004 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting. 16




---



##### Table of Contents



PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings (a) Beginning on July 2, 2004, three purported class action shareholder
complaints were filed in the United States District Court for the Northern of
California against IntraBiotics and several of our officers. The actions were
purportedly brought on behalf of purchasers of IntraBiotics common stock
between September 5, 2003 and June 22, 2004 and generally allege that the
defendants made false or misleading statements concerning the clinical trial of
iseganan for the prevention of ventilator-associated pneumonia. The plaintiffs
seek unspecified monetary damages. The Company believes the suits to be without
merit and intends to defend itself vigorously. (b) No legal proceedings were terminated in the third quarter. 
 Item 2. Changes in Securities and Use of Proceeds and Issuer Purchases of Equity Securities None 
 Item 3. Defaults Upon Senior Securities None 
 Item 4. Submission of Matters to a Vote of Security Holders None 
 Item 5. Other Information None 
 Item 6. Exhibits The exhibits listed on the Exhibit Index (following the signature section of
this Quarterly Report) are included, or incorporated by reference, in this
Quarterly Report. 17




---



##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. IntraBiotics Pharmaceuticals, Inc.November 12, 2004
    
    /s/ Henry J. FuchsHenry J. Fuchs, M.D.President and Chief Executive OfficerNovember 12, 2004
    
    /s/ David J. TuckerDavid J. TuckerPrincipal Financial Officer
 18




---



##### Table of Contents



EXHIBIT INDEX 3.1
    
    Certificate of Amendment of Amended and Restated Certificate of Incorporation; and Amended and Restated
Certificate of Incorporation.(12)3.2
    
    Amended and Restated Bylaws (16)3.3
    
    Certificate of Amendment to Amended and Restated Certificate of Incorporation.(15)3.4
    
    Certificate of Designation filed with the Delaware Secretary of State on May 1, 2003.(15)4.1
    
    Amended and Restated Investor Rights Agreement dated October 15, 1999.(1)4.2
    
    Form of Stock Purchase Agreement by and between the Company and each selling stockholder, dated January
29, 2002.(4)4.3
    
    Form of Preferred Stock and Warrant Purchase Agreement, dated February 5, 2003, as amended on February
11, 2003.(11)4.4
    
    Form of Second Amendment to Preferred Stock and Warrant Purchase Agreement of February 5, 2003, dated
April 10, 2003.(13)4.5
    
    Form of Warrant issued by the Company pursuant to Preferred Stock and Warrant Purchase Agreement of
February 5, 2003, as amended of February 11, 2003 and April 10, 2003.(13)4.6
    
    Form of Common Stock and Warrant Purchase Agreement, dated October 6, 2003.(14)4.7
    
    Form of Warrant issued by the Company pursuant to the Common Stock and Warrant Purchase Agreement of
October 6, 2003.(14)10.1
    
    Form of Indemnity Agreement.(1)10.2
    
    Amended and Restated 1995 Stock Option Plan, as amended on November 16, 2002.(10)(12)10.2.2
    
    Amended and Restated Form of Stock Option Agreement and Notice of Grant of Stock Options and Option
Agreement.(1)(10)10.3
    
    2000 Equity Incentive Plan, as amended on February 11, 2003.(10)(12)10.4
    
    Purchase Supply Agreement by and between the Company and PolyPeptide Laboratories A/S dated January 3,
1997.(1)10.5
    
    Development Supply Agreement by and between the Company, PolyPeptide Laboratories A/S and Ferring Peptide
Production AB dated January 3, 1997 and Amendment dated July 1, 1997.(1)10.6
    
    Second Amendment to the License Agreement by and between the Company and The Regents of the University of
California dated June 12, 1996.(1)10.7
    
    Third Amendment to the License Agreement by and between the Company and The Regents of the University of
California dated September 16, 1997.(1)10.8
    
    License and Supply Agreement by and between the Company and Biosearch Italia S.p.A. dated May 8, 1998.(1)10.9
    
    2000 Employee Stock Purchase Plan and related documents.(1)(10)10.10
    
    Loan and Security Agreement by and between the Company and Silicon Valley Bank, dated August 25, 1999.(1)10.11
    
    Research and Technology Agreement by and between the Company and New Chemical Entities dated January 24,
2001.(2)
 19




---



##### Table of Contents



10.12
    
    Letter Agreement by and between the Company and Biosearch Italia dated May 18, 2001.(3)10.13
    
    First Amendment to Research and Technology Agreement by and between the Company and Albany Molecular
Research Inc. (successor to New Chemical Entities Inc.) dated April 13, 2001.(3)10.14
    
    Letter Agreement by and between the Company and Albany Molecular Research Inc. (successor to New Chemical
Entities Inc.) dated June 21, 2001.(3)10.15
    
    Senior Executive Severance Benefit Plan, as amended and restated on August 1, 2002.(8)(10)10.16
    
    Executive Severance Benefit Plan, as amended and restated on August 1, 2002.(8)(10)10.17
    
    Summary of Officer Incentive Bonus Plan.(3)(10)10.18
    
    Release Agreement by and between the Company and Diversa Corporation dated July 27, 2001, including
Warrant to Purchase Common Stock of the Company and Registration Rights Agreement.(6)10.19
    
    Letter Agreement dated November 28, 2001 by and between the Company and Ken Kelley.(5)(10)10.20
    
    Loan Modification Agreement by and between the Company and Silicon Valley Bank, dated April 29, 2002.(7)10.21
    
    Loan Modification Agreement by and between the Company and Silicon Valley Bank, dated June 10, 2002.(7)10.22
    
    2002 Non-Officer Equity Incentive Plan and related documents, as amended on February 3, 2003.(12)10.23
    
    Master Services Agreement by and among the Company, PPD Development,LP and PPD Global Ltd., dated July
29, 2002.(8)10.24
    
    Lease Termination Agreement by and between the Company and EOP-Shoreline Technology Park, L.L.C., dated
November 22, 2002, including Common Stock Purchase Agreement.(9)10.25
    
    Lease Termination Agreement by and between the Company and Bruce H. Carter and Keith M. Carter, dated
October 31, 2002.(12)10.26
    
    Sublease Termination Agreement and Sublease by and between the Company and ReShape, Inc., dated October
31, 2002.(12)10.27
    
    Amendment and Assignment of Lease, Release and Assumption Agreement by and among the Company, PolyFuel,
Inc. and 1245 Terra Bella Partners, LLC, dated December 20, 2002, including Warrant to Purchase Common
Stock of the Company dated December 31, 2002.(12)10.28
    
    Termination of Development Supply Agreement and Purchase/Supply Agreement by and among the Company,
PolyPeptide Laboratories A/S and PolyPeptide Laboratories AB, dated December 6, 2002.(12)10.29
    
    Lease Agreement by and between the Company and Embarcadero CorporateCenter, dated February 10, 2003.(12)10.30
    
    Common Stock and Warrant Purchase Agreement, dated October 6, 2003 (the Purchase Agreement) by and
among the Company and each Investor as defined therein.(14)10.31
    
    Form of warrant issued by the Company in favor of each Investor, as defined in the Purchase Agreement.(14)10.32
    
    2004 Stock Incentive Plan. (16)10.33
    
    First Amendment to Office Lease, dated March 11, 2004, between the Company and Embarcadero Corporate
Center. (16)31.1
    
    Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the
Securities Exchange Act of 1934, as amended.*31.2
    
    Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under
the Securities
 20




---



##### Table of Contents



Exchange Act of 1934, as amended.*32.1
    
    Certifications of Chief Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
   *
    
    Filed hereto  Confidential treatment request has been granted with respect to certain
portions of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission. (1) Incorporated by reference to exhibit to our Registration Statement on Form
S-1 (File No. 333-95461) initially filed with the Securities and Exchange
Commission on January 27, 2000 as subsequently amended. (2) Incorporated by reference to exhibit to our Form 10-Q (File No. 000-29993)
filed with the Securities and Exchange Commission on May 16, 2001. (3) Incorporated by reference to exhibit to our Form 10-Q (File No. 000-29993)
filed with the Securities and Exchange Commission on August 14, 2001. (4) Incorporated by reference to exhibit to our Registration Statement on Form
S-3 (File No. 333-82934) filed with the Securities and Exchange Commission on
February 15, 2002. (5) Incorporated by reference to exhibit to our Form 10-K (File No. 000-29993)
filed with the Securities and Exchange Commission on February 15, 2002. (6) Incorporated by reference to exhibit to our Registration Statement on Form
S-3 (File No. 333-89840) filed with the Securities and Exchange Commission on
June 5, 2002. (7) Incorporated by reference to exhibit to our Form 10-Q (File No. 000-29993)
filed with the Securities and Exchange Commission on August 14, 2002. (8) Incorporated by reference to exhibit to our Form 10-Q (File No. 000-29993)
filed with the Securities and Exchange Commission on November 14, 2002. (9) Incorporated by reference to exhibit to our Form 8-K (File No. 000-29993)
filed with the Securities and Exchange Commission on November 27, 2002. (10) Management contract or compensatory plan, contract or arrangement. (11) Incorporated by reference to Appendix B to the Definitive Proxy Statement
for the Special Meeting of Stockholders (File No. 000-29993) filed with the
Securities and Exchange Commission on March 3, 2003. (12) Incorporated by reference to exhibit to our Form 10-K (File No. 000-29993)
filed with the Securities and Exchange Commission on March 31, 2003. (13) Incorporated by reference to our Form 10-Q (File No. 000-29993) filed with
the Securities and Exchange Commission on May 14, 2003. (14) Incorporated by reference to exhibit to our Form 8-K (File No. 000-29993)
filed with the Securities and Exchange Commission on October 9, 2003. (15) Incorporated by reference to our Form 10-Q (File No. 000-29993) filed with
the Securities and Exchange Commission on November 12, 2003. (16) Incorporated by reference to exhibit to our Registration Statement on Form
S-1 (File No. 333-114451) initially filed with the Securities and Exchange
Commission on April 14, 2004 as subsequently amended. 21