<PAGE>   1

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

                         COMMISSION FILE NUMBER: 0-27406

                              CONNETICS CORPORATION
             (Exact name of Registrant as specified in its charter)


                 DELAWARE                                   94-3173928
    (State or other jurisdiction of                      (I.R.S. Employer
     incorporation or organization)                     Identification No.)

3400 WEST BAYSHORE ROAD, PALO ALTO, CALIFORNIA                94303
   (Address of principal executive offices)                 (zip code)

       Registrant's telephone number, including area code: (650) 843-2800

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                    COMMON STOCK, $0.001 PAR VALUE PER SHARE
                         PREFERRED SHARE PURCHASE RIGHTS

        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 [ ]

        Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  [X]

        The aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $277,949,776.88 as of February 25, 2000, based
upon the closing sale price on the Nasdaq National Market reported for such
date. Shares of Common Stock held by each officer and director and by each
person who owns 5% or more of the outstanding Common Stock have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.

        There were 27,159,680 shares of Registrant's Common Stock issued and
outstanding as of February 25, 2000.

                       DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates information by reference from the definitive proxy
statement for the Annual Meeting of Stockholders to be held on May 11, 2000.

<PAGE>   2


                                     PART I

ITEM 1. BUSINESS

Special Note: This Report contains forward-looking statements within the meaning
of Section 27A of the Securities Act, and Section 21E of the Securities Exchange
Act. When used in this Report, the words "anticipate," "believe," "estimate,"
"will," "may," "intend" and "expect" and similar expressions identify
forward-looking statements. Although we believe that our plans, intentions and
expectations reflected in these forward-looking statements are reasonable, we
can give no assurance that these plans, intentions or expectations will be
achieved. Forward-looking statements in this Report include, but are not limited
to, those relating to the commercialization of our currently marketed products,
the progress of our product development programs, developments with respect to
clinical trials and the regulatory approval process, developments related to
acquisitions and clinical development of drug candidates, and developments
relating to the growth of our sales and marketing capabilities. Actual results,
performance or achievements could differ materially from those contemplated,
expressed or implied by the forward-looking statements contained in this Report.
Important factors that could cause actual results to differ materially from our
forward-looking statements are set forth in this Report. These factors are not
intended to represent a complete list of the general or specific factors that
may affect us. It should be recognized that other factors, including general
economic factors and business strategies, and other factors not currently known
to us, may be significant, presently or in the future, and the factors set forth
in this Report may affect us to a greater extent than indicated. All
forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by the cautionary statements set forth
in this Report. Except as required by law, we do not undertake any obligation to
update any forward-looking statement, whether as a result of new information,
future events or otherwise.

THE COMPANY

References in this prospectus to "Connetics," "the Company," "we," "our" and
"us" refer to Connetics Corporation, a Delaware corporation. Our principal
executive offices are located at 3400 West Bayshore Road, Palo Alto, CA 94303.
Our telephone number is (650) 843-2800. Connetics(R), Ridaura(R), ConXn(R), and
the interlocking globe design are registered trademarks of Connetics. We also
own the trademarks Luxiq(TM) and OLUX(TM). ACTIMMUNE(R) is a registered
trademark of Genentech, Inc. All other trademarks or service marks appearing in
this Report are the property of their respective companies.

OUR BUSINESS

        Our company is developing a major biotechnology product and building a
commercialization organization targeting the dermatology community. We are a
pharmaceutical company with two principal technology areas. The first area
focuses on the development of ConXn, a recombinant form of a natural hormone
called relaxin known to help lessen the hardening or fibrosis of skin and
connective tissue and to stimulate vasodilation and new blood vessel growth. The
other area focuses on the development and commercialization of products for skin
dermatologic diseases. We believe we have a competitive advantage due to our
expertise in developing products in an efficient manner, our focused marketing
and sales force and our commitment to pursuing the development and
commercialization of innovative products with significant commercial potential.
We currently have clinical trials underway with relaxin for two indications and
we market three products. Our goal is to continue to aggressively pursue
development of relaxin for several indications and to increase revenues with our
existing, as well as future, products.

        We are building our business by developing ConXn, our relaxin product,
for a number of disorders, and are conducting multiple clinical trials of ConXn.
These include a Phase II/III trial for scleroderma, and two Phase I/II trials
for infertility. In addition, we anticipate submitting an application with the
FDA to initiate a phase II trial for peripheral vascular disease. In our
dermatology business, we are offering dermatological products with clinically
proven therapeutic and cosmetic advantages and by providing quality customer
service to dermatologists through our experienced sales and marketing staff. By
having a dual business model of developing ConXn for a variety of disorders at
the same time marketing our current products, we believe we have a diversified
and balanced growth

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company. We plan to strategically market ConXn for indications where a small,
strategic sales force can effectively capture the market, and partner for
indications where a large sales organization is needed to be effective. We have
entered into three partnerships licensing rights for ConXn to certain foreign
countries and have retained the North American rights to the product. We plan to
continue to leverage our expertise in efficiently developing and marketing our
products by continuing to innovate, strategically acquire, in-license or enter
into co-development agreements for commercially attractive pharmaceutical
products.

        PRODUCTS

        The status of our development and commercialization activities is as
follows:

                RELAXIN-BIOTECHNOLOGY PRODUCT DEVELOPMENT PROGRAM

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
PRODUCT          INDICATION                 STATUS                        MARKETING
------------------------------------------------------------------------------------------------
<S>           <C>                      <C>                          <C>
CONXN(R)      Scleroderma              Phase II/III trial           Celltech - Europe
                                       enrollment completed,        Paladin - Canada
                                       results expected             Suntory - Japan(1)
                                       Q IV '00                     Connetics - Rest of World

------------------------------------------------------------------------------------------------
              Infertility(2)           Phase I/II trials initiated  Celltech - Europe
                                       in late 1999                 Paladin - Canada
                                                                    Connetics - Rest of World

------------------------------------------------------------------------------------------------
              Peripheral vascular      IND submitted for treatment  Celltech - Europe
              disease and other        of peripheral vascular       Paladin - Canada
              diseases of the          disease Preclinical          Connetics - Rest of World
              vasculature              development underway for
                                       other indications

------------------------------------------------------------------------------------------------
</TABLE>

                  DERMATOLOGY AND OTHER COMMERCIALIZED PRODUCTS

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
PRODUCT                   INDICATION                STATUS                 MARKETING
------------------------------------------------------------------------------------------------
<S>                  <C>                         <C>               <C>
LUXIQ(TM)            Mild to moderate scalp      Marketed          Connetics - North America
                     dermatoses

------------------------------------------------------------------------------------------------
OLUX(TM)             Moderate to severe scalp    NDA submitted     Connetics - Worldwide
                     dermatoses

------------------------------------------------------------------------------------------------
LIQUIPATCH(TM)       Various diseases of the     In Development    Connetics - North America(3)
                     skin

------------------------------------------------------------------------------------------------
OTHER FOAM           Various diseases of the     In Development    Connetics - North America
FORMULATIONS         skin
(AQUEOUS,
PETROLATUM)

------------------------------------------------------------------------------------------------
RIDAURA(R)           Rheumatoid arthritis        Marketed          Connetics - United States

------------------------------------------------------------------------------------------------
ACTIMMUNE(TM)        Chronic granulomatous       Marketed          Connetics - United States
                     disease                                       until December 31, 2001
                                                                   (royalties thereafter)

------------------------------------------------------------------------------------------------
</TABLE>

(1)  Suntory did not license the tradename ConXn.

(2)  We have co-exclusive rights with Genentech for reproductive indications.
     Celltech and Paladin have options to acquire rights for reproductive
     indications in their territories if we obtain exclusive worldwide rights.

(3)  Soltec reserved rights to certain specific Liquipatch formulations for
     North America.



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CONXN

        ConXn is our tradename for recombinant human relaxin, a cloned version
of the natural hormone, relaxin. We licensed the exclusive worldwide rights to
develop and commercialize recombinant human relaxin from Genentech, except for
co-exclusive rights with Genentech for reproductive indications. Relaxin is
known to have an antifibrotic property, or the ability to lessen or prevent the
creation of dense, firm scar tissue in skin and connective tissue, and an
angiogenic property, or the ability to stimulate and form new blood vessels.
Recent work also indicates that relaxin may have a vasodilatory property, or the
ability to dilate blood vessels. We are pursuing development programs for all
three properties of relaxin; scleroderma and other organ fibroses represent the
target indications for relaxin's antifibrotic properties; infertility, cardiac
ischemia, kidney disease (acute and chronic), wound healing, and peripheral
vascular disease represent opportunities for relaxin's angiogenic properties and
vasodilatory properties.

        Relaxin, identified over 70 years ago, was first described as a
substance that circulates in the blood stream during pregnancy. In the
mid-1950's, animal-derived relaxin was available as a medical treatment for
scleroderma, peripheral arterial disease, and for halting or controlling
pre-term labor. A normal, uncomplicated pregnancy causes increases in maternal
blood volume, heart rate, and cardiac output, as well as decreases in total
vascular resistance. Pregnancy also increases renal perfusion rate. Many of
these maternal physiological adjustments made during pregnancy are attributable
to the biological effects of relaxin. These activities include remodeling of
certain tissue, such as the skin and pelvic girdle, to accommodate the growing
fetus; new blood vessel formation in the endometrial lining of the uterus; and
vasodilation in non-reproductive organs. The natural activities of relaxin may
be useful for the treatment of a variety of diseases, as vasoconstriction,
ischemia, and fibrosis contribute to disease-related morbidity and mortality.

        To date, we have entered into three collaborative relationships for our
relaxin program for markets outside of the United States. We have licensed
rights to develop and commercialize relaxin to Celltech (formerly Medeva) for
Europe, Suntory for Japan, and Paladin for Canada. Our license agreements with
these international companies are financially and commercially valuable as they
offset much of the costs associated with developing relaxin and will make it
possible to commercialize the product in geographical markets outside of our
focus. In combination, the three deals may potentially provide approximately $52
million in license, development, milestone and equity payments, plus royalties
on product sales for the successful development of ConXn for the treatment of
scleroderma. We may receive additional milestone payments for the approval of
additional indications outside of the United States. We may pursue additional
license agreements for other foreign markets, and we currently intend to retain
rights for the United States.

        SCLERODERMA

        The first indication for which we are developing ConXn is scleroderma, a
serious disease involving the excessive formation of connective tissue.
Scleroderma is characterized by thickening and hardening of the skin and, in
severe cases, the internal organs, including the heart, lungs, kidneys and the
organs of the gastrointestinal tract. Scleroderma can cause extensive
disfigurement and quality of life impairment, often making it impossible for
afflicted patients to carry out the most routine daily functions. The
Scleroderma Research Foundation estimates that between 300,000 and 500,000
individuals in the United States, of whom 80% are women, suffer from various
forms of this disease, with approximately 70,000 having a severe form of
scleroderma called progressive systemic sclerosis. We have been granted orphan
drug status in the United States for ConXn for treatment of progressive systemic
sclerosis. The Orphan Drug Act of 1983 provides incentives to develop and
manufacture products for the treatment of rare diseases. Under the Orphan Drug
Act, we may be eligible for tax benefits and be granted a seven-year period of
marketing exclusivity for ConXn for the orphan indication.

        The most serious form of progressive systemic sclerosis, called diffuse
scleroderma, is often fatal. Few therapies exist that ease the pain and
suffering of scleroderma patients. In June 1997, we announced results of a Phase
II trial for ConXn in patients with diffuse scleroderma. The results of the
Phase II trial showed that the administration of 25 micrograms per kilogram of
body weight per day of ConXn caused a statistically significant reduction in
skin score (which is a measure of skin thickening), the primary clinical
endpoint, and positive trends



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were seen in eleven other secondary disease parameters. To our knowledge, ConXn
is the only therapy to show statistically significant efficacy in a Phase II,
double-blind, placebo-controlled trial for scleroderma. Based partly on the
results of the Phase II trial and an earlier Phase I/II trial for scleroderma,
we believe that ConXn may have a beneficial effect on connective tissue turnover
and may serve as a treatment for scleroderma. We completed enrollment (with 239
patients) of a Phase II/III trial of ConXn for the treatment of diffuse
scleroderma in December 1999. We anticipate announcing trial results by the end
of 2000. If the results from this trial are positive, we intend to submit a
biologic license application to the FDA requesting clearance to market ConXn for
the treatment of scleroderma in 2001.

        INFERTILITY

        Despite improvements in infertility therapy, it is believed that a major
cause of infertility is due to the failure of the embryo to implant in the
uterus, or for the embryo and fetus to receive adequate blood flow to develop
and grow. Our scientists and collaborators have accumulated data indicating that
relaxin may be involved in stimulating new blood vessel formation and thickening
of the lining of the uterus, which may enhance embryonic implantation and
pregnancy success. Accordingly, we believe that ConXn may be useful in the
treatment of infertility. In June 1999, we filed an investigational drug
application for use of ConXn in the treatment of infertility, and we initiated
Phase I/II clinical trials during the fourth quarter of 1999. We are conducting
reproductive toxicology tests in animals in parallel with the Phase I/II trials.

        PERIPHERAL VASCULAR DISEASE

        Peripheral vascular disease, which is generally known as PVD, is a
syndrome characterized by inadequate blood flow to the extremities, particularly
the lower limbs. PVD often leads to pain and debilitating ulcers, and in its
more serious manifestations, gangrene and amputation of the affected limb. It is
caused by a variety of serious medical conditions, but the single most common
cause is diabetes mellitus. As the incidence of Type II diabetes is increasing
in both developed and developing nations, and because there are limited
therapeutic options for treatment, PVD is becoming an increasing medical
problem. ConXn has a stimulating effect on dilation of blood vessels and new
blood vessel formation. Preclinical studies and anecdotal reports of improved
blood flow in our scleroderma trials suggest that ConXn may be beneficial in
ischemic wound healing. For these reasons, we believe that it may have a
therapeutic effect on treating PVD. We have recently submitted an IND and intend
to initiate a Phase II clinical trial with ConXn to treat PVD. Atherosclerotic
vascular disease of the lower extremity affects 10 to 15% of patients in the
United States over the age of 50 years, although only about three percent are
symptomatic. It is estimated that more than $13 billion has been spent on
treating peripheral vascular disease in North America and Europe since January
1999.

        ORGAN AND OTHER FIBROSES

        We believe that ConXn may have further potential in treating
organ-specific fibroses, such as pulmonary, liver, and kidney fibroses, and
fibroses stemming from cardiovascular disease. Each of these fibrotic conditions
has a common cause -- the production of too much collagen that the body is
unable to adequately break down. Relaxin's ability to interrupt the production
of and to promote the breakdown of scarred or hardened tissue may make it
effective in the treatment of such diseases, as outlined below. As part of our
upcoming Phase II trial of ConXn in PVD, we plan to evaluate other medical
conditions since PVD frequently coexists with significant coronary ischemic
(meaning an insufficient blood supply to a part of the body) disease, as well as
renovascular disease.



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<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
AFFECTED ORGANS        POTENTIAL INDICATION                      CURRENT THERAPIES
-------------------------------------------------------------------------------------------------
<S>                    <C>                                       <C>
HEART                  Scarring of the heart that occurs in      Angiotensin-converting enzyme
                       heart attacks, atherosclerosis or         inhibitors
                       hypertension

-------------------------------------------------------------------------------------------------
                       Vessel blockage (restenosis) following    Stents, radiation and
                       angioplasty                               thrombolytics

-------------------------------------------------------------------------------------------------
LUNG                   Chronic inflammation and scarring in      Steroids
                       the walls of the lungs

-------------------------------------------------------------------------------------------------
LIVER                  Fibrosis induced by chronic hepatitis     Steroids
                       or cirrhosis of the liver

-------------------------------------------------------------------------------------------------
KIDNEY                 Fibrosis that occurs from diabetes and    Steroids; Angiotension- other
                       diseases leading to impairment of         converting enzyme inhibitors
                       kidney filtration

-------------------------------------------------------------------------------------------------
</TABLE>


DERMATOLOGY

        According to IMS (a market research company that tracks data on
prescriptions filled throughout the United States), the 1998 prescription
dermatology market accounted for an estimated $2.7 billion in annual sales in
the United States and is comprised mostly of products with annual sales of less
than $50 million per product. We believe that most prescription dermatology
products do not generate a level of sales that would typically interest large
pharmaceutical companies. Approximately 6,000 of the 8,500 U.S. dermatologists
account for 90% of the prescriptions written by dermatologists. We believe this
concentrated physician base makes it possible for us to effectively address this
market with our well trained, highly experienced, 51 person sales and marketing
force.

        Dermatological diseases often persist for an extended period of time and
are treated with clinically proven drugs that are currently delivered in a
variety of formulations, including solutions, creams, gels and ointments. We
believe that these existing delivery systems often inadequately address a
patient's needs for efficacy and cosmetic elegance, and that the failure to
address those needs may decrease patient compliance. We believe that our
foam-based dermatology products offer significant advantages over these
conventional therapies. These advantages include improved efficacy due to higher
absorption and more localized delivery of the active agent. In addition, the
foam is cosmetically elegant because it does not stain, is not greasy and dries
quickly. All of these factors may lead to increased patient compliance.

        We focus on developing and commercializing innovative products for
dermatology and other specialty market needs. We have two foam-based products
for the treatment of scalp dermatoses: Luxiq, which we currently market, and
OLUX, which is undergoing FDA review. We believe that the proprietary foam
delivery system has significant treatment and cosmetic advantages over
conventional therapies for scalp dermatoses. These advantages include:

        -  Strong Efficacy: The unique foam formulation liquefies when applied,
           and enables rapid penetration of active dermatologic agent, thus
           enhancing efficacy.

        -  Cosmetic Elegance: The foam formulation when applied is quick drying,
           non-greasy, non-staining and odorless.

        -  Increased Patient Compliance: The formulation's cosmetic elegance and
           increased efficacy may improve patient compliance and satisfaction.



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    LUXIQ FOAM

        Luxiq is a foam formulation of a mid-potency topical steroid with the
active ingredient betamethasone valerate, which is prescribed for the treatment
of steroid responsive scalp dermatoses such as psoriasis, eczema and seborrheic
dermatitis. According to IMS, the 1998 sales of mid and high potency topical
steroid treatments were approximately $450 million in the United States. We
licensed the North American rights from Soltec Research Pty Ltd., a subsidiary
of F.H. Foulding & Co., Ltd., to develop and commercialize Luxiq. In our Phase
III trial, patients treated with Luxiq experienced a statistically significant
improvement over patients treated with placebo or a currently approved
betamethasone valerate mid-potency lotion. In March 1999, we received FDA
clearance for Luxiq and in April 1999 we initiated commercial sales in the
United States. The product is approved for sale in the United Kingdom and is
being marketed in the United Kingdom by a subsidiary of Medeva PLC (an
affiliate of Celltech Group PLC).

    OLUX FOAM

        OLUX is a foam formulation of a super high potency topical steroid with
the active ingredient clobetasol propionate, which is being developed for the
treatment of moderate to severe scalp psoriasis and other steroid-responsive
dermatoses of the scalp. According to IMS, the 1998 sales of super-high potency
steroid treatments were $190 million in the United States. We have licensed
worldwide rights from Soltec to develop and commercialize OLUX. In 1998, we
completed a Phase III clinical trial of approximately 190 scalp psoriasis
patients which compared OLUX to a currently approved clobetasol solution and
placebo during a two week treatment regimen. OLUX trial results showed a 74%
improvement in the global response to treatment as judged by the investigators
for OLUX as opposed to 63% for clobetasol solution and 8% for placebo. Primary
endpoints included changes in the clinical signs of psoriasis: plaque thickness,
scaling, erythema (redness), and the global response to treatment as judged by
the investigator. In July 1999, we submitted a new drug application to the FDA
for OLUX.

    OTHER OPPORTUNITIES

        In December 1999, we entered into a comprehensive licensing agreement
with Soltec for exclusive rights to certain applications of a broad range of
unique topical delivery technologies, including aerosol foam formulations and
Soltec's patented Liquipatch(TM) technology. With this agreement in place,
together with earlier contracts for the foam formulations of betamethasone
valerate (Luxiq), clobetasol propionate (OLUX) and ketoconazole, we are
positioned to pursue simultaneous development of a number of innovative
products, which could result in entries into the acne, actinic keratosis (a type
of skin lesion that is unusually sensitive to ultraviolet light), low-potency
steroid and hair loss markets. Under the terms of the agreement, we paid Soltec
$1 million in cash and stock, and may make future milestone, development and
royalty payments.

        Under the December 1999 agreement, we received exclusive North American
rights to a number of unique topical delivery systems, including several
distinctive aerosol foams. Similar to our foam delivery system for Luxiq and
OLUX, the new aerosol foams, including water-, ethanol- and petrolatum-based
foams, may offer improved efficacy over traditional formulations due to greater
absorption of the active ingredient to the skin. In addition to the potential
for improved efficacy, the foam formulations represent a cosmetically elegant
alternative to existing dermatologic treatments. Liquipatch is a gel-matrix
delivery system that applies to the skin like a normal gel and dries to form a
very thin, invisible, water-resistant film. This film enables a controlled
release of the active agent to provide longer relief, with the potential of
being less irritating to the skin than other delivery systems. We anticipate
developing one or more new products in the aerosol foam or Liquipatch
formulations, by incorporating leading dermatologic agents, in such a way as to
deliver formulations that are tailored to treat specific diseases or different
areas of the body.

        We anticipate conducting parallel development over the next several
years for prescription pharmaceutical products. We expect to seek partners for
over-the-counter market opportunities and for development and commercialization
outside the United States.

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OTHER COMMERCIALIZED PRODUCTS

    RIDAURA

        Ridaura is an oral formulation of gold salt for the treatment of
rheumatoid arthritis, a chronic autoimmune disease that results in painful
inflammation and erosion of the joints and loss of mobility. It is estimated
that over two million individuals in the United States suffer from this disease.
Ridaura is currently indicated for adults with active rheumatoid arthritis who
are not responsive to, or are intolerant of, treatment with non-steroidal
anti-inflammatory drugs. Ridaura competes on the basis of clinical evidence that
shows the drug slows the progression of damage to joint tissue. Our 1999 sales
of Ridaura declined to approximately $5.7 million from $7.5 million in 1998. We
believe that our sales have declined over this time period, and are likely to
continue to decline, in part due to the introduction of several major rheumatoid
arthritis therapies in late 1998 and 1999.

    ACTIMMUNE

        Interferon gamma is one of a family of proteins involved in the
regulation of the immune system and has been shown to reduce the frequency and
severity of certain infections. In April 1999, our wholly-owned subsidiary
InterMune Pharmaceuticals, Inc., to which we transferred our interferon gamma
program, became an independent company through venture capital funding and a
portion of our original investment in InterMune was returned to us. We
originally licensed Actimmune from Genentech (by an agreement dated May 5, 1998
as amended December 28, 1998, January 15, 1999 and April 27, 1999) the exclusive
rights in the United States and Japan, to Actimmune, Genentech's interferon
gamma product, for the following indications: infections resulting from chronic
granulomatous disease, or CGD; non-cancer dermatological diseases; infectious
diseases; infections in osteopetrosis; pulmonary fibrosis; and asthma. InterMune
will develop commercial uses for Actimmune. We have retained the commercial
revenue rights for Actimmune for the treatment of CGD through December 31, 2001.
Thereafter, InterMune will pay us a royalty on Actimmune sales. In addition, we
have retained the product rights for potential dermatological applications.
InterMune assumed our obligations under the license with Genentech and the
corresponding supply agreement pursuant to which Genentech manufactures and
supplies Actimmune to us. Our sales of Actimmune for the twelve months ended
December 31, 1999 were approximately $4.8 million as compared to zero for the
same period in 1998.

SALES AND MARKETING

        We strive to maintain an experienced, highly productive sales and
marketing organization. In recruiting people to join our sales team, we require
that people have pharmaceutical sales experience, and the majority of our sales
staff has prior experience selling dermatology products. As of December 31,
1999, we had 51 people in our sales and marketing organization, including over
40 sales representatives. Our sales representatives focus on cultivating
relationships of trust and confidence with dermatologists. We use a variety of
advertising, promotional material, specialty publications, participation in
educational conferences and product Internet sites to achieve our marketing
objectives. We supplemented our sales staff in late 1999 - and may continue to
do so from time to time -- with contract sales representatives to increase the
frequency of our sales calls or to assist with the launch of products.

        We intend to maintain control of sales and marketing responsibilities
for our targeted specialty markets in the United States. Outside of our target
markets, we have entered into partnerships to manage product commercialization
activities. For example, in March 1999, we entered into agreements with MGI
Pharma to provide sales support for Ridaura and Luxiq to rheumatologists. The
agreements help us achieve our sales objectives for these products, while
permitting us to focus primarily on the dermatology market. In addition, our
relaxin partners, Celltech for Europe, Suntory for Japan and Paladin for Canada,
will be responsible for commercializing relaxin in their territories should that
product be approved. Currently, all of our product distribution activities are
handled by CORD Logistics, Inc., in the United States.

STRATEGIC AGREEMENTS

        Since Connetics was founded, we have entered numerous strategic
development and commercialization relationships that have substantially expanded
our business. Our main reasons for entering partnerships are to:



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<PAGE>   9

    -  gain access to additional product opportunities;

    -  share the risk and financial cost of developing products;

    -  increase product sales and marketing activities; and

    -  extend development and commercialization activities to foreign markets.

    CELLTECH GROUP, PLC

        In January 1999, we entered into an exclusive license agreement with
Celltech Group PLC (formerly Medeva PLC) for the development, commercialization
and supply of ConXn in Europe. Under the terms of the agreement, Celltech will
pay up to $35.0 million in development, milestone and equity payments for the
successful development of ConXn for the treatment of scleroderma. We may receive
additional milestone payments for the approval of additional indications for
ConXn in Europe. Celltech will be responsible for all development and
commercialization activities in Europe. Celltec will purchase ConXn from us and
pay royalties on European sales of ConXn. Until the earlier of five years after
we launch ConXn in the United States or the end of the first calendar year when
Celltech's European net sales of ConXn exceed $25.0 million, Celltech will
receive 50% of our operating profits from U.S. ConXn sales.

    FLOREY INSTITUTE

        Many of our relaxin patent rights are licensed from The Howard Florey
Institute of Experimental Physiology and Medicine through a sublicense from
Genentech. In January 1998, we entered into a direct agreement with the Florey
Institute that requires us to pay relaxin royalties based on our sales directly
to the Florey Institute in addition to those royalties payable to Genentech, and
according to a modified royalty structure. Under the agreement, we provide
approximately $125,000 of annual research funding to the Florey Institute for up
to five years or until the date of the first sale of a relaxin product (whether
it is sold by us or by our licensees). We have also agreed to pay the Florey
Institute a portion of revenues received from corporate collaborators. If we
fail to use our best efforts to commercialize relaxin, the Florey Institute
could terminate our rights to the Florey Institute patents.

    GENENTECH

        In September 1993, we entered into an agreement with Genentech, which
was subsequently amended in July 1994 and April 1996. The agreement, as amended,
grants to us exclusive rights (for indications other than reproductive
indications), to make, have made, use, import and sell certain products derived
from recombinant human relaxin. Genentech retains co-exclusive rights for
reproductive indications. The agreement also includes technology transfer,
supply, and intellectual property provisions, including a provision requiring us
to meet milestones. Our failure to achieve designated milestones allows
Genentech to terminate the license. Upon termination, we could be required to
license our relaxin technology to Genentech, on a non-exclusive basis.

        In December 1995, we entered into a license agreement with Genentech to
acquire exclusive U.S. development and marketing rights to interferon gamma for
dermatological indications. In May 1998, the agreement was amended in its
entirety and we entered into a new license agreement with Genentech that granted
us an exclusive U.S. license under certain patent rights and know-how to
Actimmune for the treatment of chronic granulomatous disease and several
additional indications. At the same time, we also entered into a supply
agreement with Genentech in which they will manufacture and supply Actimmune to
us. We amended the license agreement effective December 1998, January 1999 and
April 1999 with the cumulative effect of expanding the fields of use for which
the license applies, and adding Japan to the licensed territory.

    INTERMUNE

        In April 1999, our wholly owned subsidiary, InterMune, became an
independent company through venture capital funding and a portion of our
original investment in InterMune was returned to us. We established InterMune to
develop Actimmune in conjunction with our license of Actimmune from Genentech.
We currently hold approximately 7% of the outstanding equity securities of
InterMune.



                                       8
<PAGE>   10

We will receive additional cash and equity payments over the next two years. We
will retain commercial rights to and revenue from Actimmune for chronic
granulomatous disease (CGD) until December 31, 2001 and receive a royalty on
Actimmune sales for CGD thereafter. In addition, we hold an option to purchase
the product rights for potential dermatological applications of Actimmune. On
February 2, 2000, InterMune filed a registration statement for its proposed
initial public offering.

    MGI PHARMA

        In March 1999, we entered into two agreements with MGI Pharma. Under the
terms of the agreements, MGI Pharma will promote Ridaura and Luxiq to the
rheumatology market in the United States. These arrangements take advantage of
MGI Pharma's specialty sales force that calls on rheumatologists in the United
States, and allows us to focus our attention on the dermatology marketplace.

    PALADIN LABS

        In July 1999, we entered into an exclusive license agreement with
Paladin Labs Inc. for the development, commercialization and supply of ConXn in
Canada. Under the terms of the agreement, Paladin will pay up to $3.2 million in
development, milestone and equity payments for the successful development of
ConXn for the treatment of scleroderma. We may receive additional milestone
payments for the approval of additional indications for ConXn in Canada. Paladin
is responsible for all development and commercialization activities in Canada,
and will pay royalties on all sales of ConXn in Canada.

    SOLTEC RESEARCH

        In June 1996, we entered into an exclusive license agreement with Soltec
Research Pty Ltd., a subsidiary of F.H. Faulding & Co., Ltd., to develop and
market a foam formulation of the dermatologic drug, betamethasone valerate, in
North America. This license agreement led to our launch of Luxiq, in April 1999.
In January 1998, we acquired the North American rights to Soltec's proprietary
foam formulation of the drug clobetasol propionate. In June 1999, we expanded
the license to include worldwide rights to the product, which we intend to
market under the tradename OLUX. In July 1999, we submitted an NDA to the FDA
for OLUX for the treatment of moderate to severe scalp dermatoses. In July 1999,
we licensed the exclusive worldwide rights (excluding Australia and New Zealand)
to develop and market ketoconazole foam.

        In December 1999,we entered into a comprehensive licensing agreement
with Soltec for exclusive rights to specified applications of a broad range of
unique topical delivery technologies. We anticipate conducting parallel product
development on several products over the next several years. Under the December
1999 agreement, we received exclusive North American rights to a number of
unique topical delivery systems, including several distinctive aerosol foams.
Similar to our foam delivery system for Luxiq and OLUX, the new aerosol foams
may offer improved efficacy over traditional formulations due to greater
absorption of the active ingredient to the skin. In addition to the potential
for improved efficacy, the foam formulations represent a cosmetically elegant
alternative to existing dermatologic treatments. We anticipate developing one or
more of the new aerosol foams, including water-, ethanol- and petrolatum-based
foams, by incorporating leading dermatologic agents, in such a way as to deliver
formulations that are tailored to treat specific diseases or different areas of
the body.

        Liquipatch, which we also licensed, is a gel-matrix delivery system that
applies to the skin like a normal gel and dries to form a very thin, invisible,
water-resistant film. This film enables a controlled release of the active agent
to provide longer relief, with the potential of being less irritating to the
skin than other delivery systems.

        Under the terms of the December 1999 agreement, we have obligations to
develop new products incorporating the licensed technology on timelines agreed
to by the parties, and we will pay royalties on net sales on those products if
and when they are approved for sale in the licensed territory. We also agreed to
pay Soltec an annual fee in exchange for continuing research and the rights to
future product formulations that Soltec may develop.



                                       9
<PAGE>   11


    SUNTORY

        In April 1998, we entered into an exclusive license agreement with
Suntory for the development, commercialization and supply of relaxin for
scleroderma in Japan. Under the terms of the agreement, Suntory will pay up to
1.6 billion yen, which we estimated to be up to $14.0 million in license,
development and milestone payments, based upon the exchange ratio at the time of
the transaction. Suntory is responsible for all development and
commercialization activities in Japan. Suntory will purchase relaxin materials
from us, make payments based upon development progress in the United States and
Japan and pay us royalties on sales in Japan.

PATENTS AND PROPRIETARY RIGHTS

        Our success will depend in part on our ability and our licensors'
ability to obtain and retain patent protection for our products and processes,
to preserve our trade secrets, and to operate without infringing the proprietary
rights of third parties.

        We own or are exclusively licensed under pending applications and/or
issued patents worldwide relating to ConXn, Luxiq and OLUX, as well as other
technology in the earlier stages of research.

        Our relaxin patent portfolio includes pending applications and issued
patents in the United States and various international equivalents which we own
or license from others Our relaxin patent portfolio includes certain claims
within the following categories:

    -  compositions of matter;

    -  pharmaceutical compositions;

    -  methods of manufacture; and

    -  methods of treatment.

        The issued patents in our relaxin patent portfolio will expire at
various times between 2002 and 2015. Recently, new biological activities of
relaxin have been elucidated, and we are pursuing methods of treatment patents
with our academic collaborators. Moreover, no consistent policy has emerged from
the U.S. Patent and Trademark Office regarding the breadth of claims allowed in
biotechnology patents and, therefore, the degree of future protection for our
proprietary rights is uncertain. In addition, the patent laws of foreign
countries differ from those of the U.S. and the claims allowed may differ from
country to country. Accordingly, the degree of protection, if any, afforded by
foreign patents may be different from that in the U.S.

        One of the European patents licensed to us, which claims gene sequence
encoding human relaxin, was opposed by a third party challenging the ethics of
patents on a human gene sequence. Our licensor successfully defended the
original opposition, resulting in a decision in our favor, but the decision has
been appealed. We cannot assure you that we will be successful on appeal. An
adverse decision could result in a requirement that our licensor amend the
language of the patent in ways that we cannot currently predict, and would
require us to reassess the strength of that patent after it was amended.

        With respect to patent applications that we or our licensors have filed,
and patents issued to us or our licensors, we cannot give any assurances that:

    -  any of our or our licensors' patent applications will issue as patents;

    -  any such issued patents will provide competitive advantage to us; or

    -  our competitors will not successfully challenge or circumvent any such
       issued patents.



                                       10
<PAGE>   12

        Our interferon gamma patent portfolio (which is licensed to InterMune,
but for which we receive revenue and royalty payments pursuant to our agreement
with InterMune) includes issued U.S. patents and other pending U.S.
applications. The issued interferon gamma patents begin to expire in 2009. The
interferon gamma portfolio covers:

    -  compositions of matter;

    -  pharmaceutical compositions; and

    -  methods of treatment.

        In addition to patent coverage, we also rely on trade secrets and
proprietary know-how. We require each of our employees, consultants and advisors
to execute a confidentiality agreement providing that all proprietary
information developed by or made known to the individual during the course of
the relationship will be kept confidential during the term of the relationship
with us and for one to ten years after the relationship ends, and will not be
used or disclosed to third parties except in specified circumstances. The
agreements also provide that all inventions conceived by an employee (or
consultant or advisor, to the extent appropriate for the services provided)
during the course of the relationship, are our exclusive property. The agreement
does not include inventions unrelated to our business and developed entirely on
the individual's own time. We cannot give any assurances that these agreements
will provide meaningful protection or adequate remedies for misappropriation of
our trade secrets in the event of unauthorized use or disclosure of such
information.

        We encourage ongoing scientific research on relaxin by making samples of
recombinant human relaxin available for medical or scientific research studies.
To preserve our rights to the recombinant protein and to the technology in
general, we require each recipient of relaxin samples to sign a materials
transfer agreement. If these agreements are breached, however, remedies may not
be available or adequate and our trade secrets may otherwise become known to
competitors. To the extent that our consultants, employees or other third
parties apply technological information independently developed by them or by
others to our proposed projects, third parties may own all or part of the
proprietary rights to such information, and disputes may arise as to the
ownership of these proprietary rights which may not be resolved in our favor. We
cannot guarantee that such third parties will not attempt to patent their work
or, if patents are issued, that they would be available to license to us.

MANUFACTURING

        We do not have manufacturing facilities for clinical or commercial
production of any of our products, nor do we intend to develop such capabilities
in the near future. We contract with independent sources to manufacture our
products, which enables us to focus on product and clinical development
strengths, minimize fixed costs and capital expenditures, and gain access to
advanced manufacturing process capabilities. Ridaura, in final finished package
form, is manufactured by SmithKline under an agreement with an initial term
through December 2001. Luxiq and OLUX are currently manufactured for us by CCL
Pharmaceuticals. Actimmune is manufactured by Genentech. Boehringer Ingelheim
manufactures relaxin for us for clinical and commercial uses under a long-term
contract.

COMPETITION

        The pharmaceutical and biotechnology industries are highly competitive.
Other products and therapies currently exist on the market or are under
development that could compete directly with some of the products that we are
marketing, or seeking to develop and market. There are numerous pharmaceutical
and biotechnology companies and academic research groups throughout the world
engaged in research and development efforts with respect to therapeutic products
targeted at diseases or conditions that we are also addressing . We believe
ConXn provides opportunities for treatment of life threatening diseases for
which there are few or no current alternatives. It has a good safety profile,
and we believe it will be able to capture a large percentage of the market share
for certain indications. In addition, we believe that the principal competitive
factors in our industry include:

        -  managerial competence in identifying and pursuing product
           in-licensing and acquisition opportunities;



                                       11
<PAGE>   13

        -  ability to obtain timely regulatory approvals from the FDA and
           similar foreign regulatory agencies;

        -  operational competence in developing, protecting, manufacturing and
           marketing products; and

        -  access to financial resources.

        We intend to compete on the basis of the quality and efficacy of our
products, combined with the effectiveness of our marketing and sales efforts.
Competing successfully will depend on our continued ability to attract and
retain skilled and experienced personnel, to identify, secure the rights to, and
develop pharmaceutical products and compounds and to exploit these products and
compounds commercially before others are able to develop competitive products.

        With regard to Ridaura, there are numerous products on the market, and
under development, for the treatment of rheumatoid arthritis. We believe that
our Ridaura sales declined in 1999 in part due to the competition of new
rheumatoid arthritis therapies introduced by Hoechst Marion Roussel, Immunex
Corporation and Monsanto Company.

        Even if we successfully test and develop products, there can be no
assurance that physicians will adopt our products over other products, or that
our products will offer an economically feasible alternative to existing modes
of therapy where they exist.

        Many of our existing or potential competitors, particularly large
pharmaceutical companies, have substantially greater financial, technical and
human resources than we do. In addition, many of these competitors have more
collective experience than us in undertaking preclinical testing and human
clinical trials of new pharmaceutical products and obtaining regulatory
approvals for therapeutic products. Accordingly, our competitors may succeed in
obtaining FDA approval for products more rapidly than we do.

GOVERNMENT REGULATION

        The pharmaceutical and biotechnology industries are subject to
regulation by the FDA under the Food Drug and Cosmetic Act, and by similar
agencies outside of the United States. We expect that all of our pharmaceutical
products will require regulatory approval by governmental agencies before we can
commercialize them. In particular, human pharmaceutical therapeutic products are
subject to rigorous preclinical and clinical testing and other approval
procedures by the FDA in the United States and similar health authorities in
foreign countries. Labeling and promotional activities are subject to scrutiny
by the FDA. Various federal and, in some cases, state statutes and regulations
also govern or influence the manufacturing, safety, labeling, storage, record
keeping and marketing of such pharmaceutical products. Failure to comply with
applicable requirements can result in, among other things, warning letters,
fines, injunctions, penalties, recall or seizure of products, total or partial
suspension of production, denial or withdrawal of approval, and criminal
prosecution. Accordingly, ongoing regulation by governmental entities in the
United States and other countries will be a significant factor in the production
and marketing of any pharmaceutical products that we have or may develop. The
process of obtaining these approvals and the subsequent compliance with
appropriate federal and foreign statutes and regulations are time-consuming and
require the expenditure of substantial resources.

        Generally, in order to obtain FDA approval for a new therapeutic agent,
a company first must conduct pre-clinical studies. The basic purpose of
pre-clinical investigation is to gather enough evidence on the potential new
agent through laboratory experimentation and animal testing, to determine if it
is reasonably safe to begin preliminary trials in humans. The results of these
studies are submitted as a part of an investigational new drug application,
which the FDA must review before human clinical trials of an investigational
drug can start. We have filed and will continue to be required to sponsor and
file investigational new drug applications, or INDs, and will be responsible for
initiating and overseeing the clinical studies to demonstrate the safety and
efficacy that are necessary to obtain FDA approval of our products.



                                       12
<PAGE>   14

        Clinical trials are normally done in phases and generally take two to
five years, but may take longer, to complete. The rate of completion of our
clinical trials depends upon, among other factors, the rate at which patients
enroll in the study. Patient enrollment is a function of many factors, including
the size of the patient population, the nature of the protocol, the proximity of
patients to clinical sites and the eligibility criteria for the study. Delays in
planned patient enrollment may result in increased costs and delays, which could
have a material adverse effect on our business. Phase I trials generally involve
administration of a product to a small number of persons to determine safety,
tolerance and the metabolic and pharmacologic actions of the agent in humans and
the side effects associated with increasing doses. Phase II trials generally
involve administration of a product to a larger group of patients with a
particular disease to obtain evidence of the agent's effectiveness against the
targeted disease, to further explore risk and side effect issues, and to confirm
preliminary data regarding optimal dosage ranges. Phase I and Phase II trials
can sometimes be combined, with the FDA's concurrence, into a Phase I/II trial.
Phase III trials involve more patients, and often more locations and clinical
investigators than the earlier trials. At least one such trial is required for
FDA approval to market a drug. Phase II and Phase III trials can sometimes be
combined, with the FDA's concurrence, into a Phase II/III trial.

        After we complete the clinical trials of a product, we must file with
the FDA a new drug application, or NDA, if the product is classified as a new
drug, or a biologic license application, or BLA, if the product is classified as
a biologic. We must receive FDA clearance before we can commercialize the
product. The testing and approval processes require substantial time and effort
and there can be no assurance that any approval will be granted on a timely
basis, if at all. The FDA can take between one and two years to review NDAs and
BLAs, and can take longer if significant questions arise during the review
process. While various legislative and regulatory initiatives have focused on
the need to reduce FDA review and approval times, the ultimate impact of such
initiatives on our products cannot be certain. In addition, if there are changes
in FDA policy while we are in product development, we may encounter delays or
rejections that we did not anticipate when we submitted the NDA or BLA for that
product. We could encounter similar delays in other countries. We can give no
assurances that we will obtain regulatory approval for any products that we
develop, even after committing such time and expenditures to the process. If
regulatory approval of a product is granted, such approval may entail
limitations on the indicated uses for which the product may be marketed.

        Even if FDA regulatory clearances are obtained, a marketed product is
subject to continual review, and later discovery of previously unknown problems
or failure to comply with the applicable regulatory requirements may result in
restrictions on the marketing of a product or withdrawal of the product from the
market, recalls, seizures, injunctions or criminal sanctions.

        The "orphan drug" status of ConXn may provide us with seven years of
market exclusivity in the United States if we are the first to be cleared to
market ConXn for progressive systemic sclerosis. Although this status would
prevent other sponsors from obtaining clearance of the same product for the same
indication, it would not prevent sponsors from seeking or receiving clearance of
other types of products to treat the same indication. One of the requirements
for us to maintain orphan drug status will be that we are able to manufacture a
sufficient supply of the drug. We are dependent on Boehringer Ingelheim for the
manufacture of relaxin on a commercial scale, and any failure by Boehringer
Ingelheim to meet its commitments could jeopardize our period of exclusivity in
the U.S. Moreover, the U.S. Congress has considered and may consider in the
future, legislation that would restrict the duration of the market exclusivity
of an orphan drug and, thus, there can be no assurance that the benefits of the
existing statute will remain in effect.

        In order to develop and market outside the United States, our products
will be subject to foreign regulatory requirements governing human clinical
trials, manufacturing and marketing approval for pharmaceutical products. The
requirements governing the conduct of clinical trials, product licensing,
pricing and reimbursement vary widely from country to country.

THIRD PARTY REIMBURSEMENT AND HEALTH CARE REFORM

        The commercial success of our products will be substantially dependent
upon the availability of government or private third-party reimbursement for the
use of such products. There can be no assurance that Medicare, Medicaid, health
maintenance organizations and other third-party payers will authorize or
otherwise budget such



                                       13
<PAGE>   15

reimbursement. Such governmental and third party payers are increasingly
challenging the prices charged for medical products and services. There can be
no assurance that our products, once marketed, will be viewed as cost-effective
or that reimbursement will be available to consumers or will be sufficient to
allow our products to be marketed on a competitive basis. Furthermore, federal
and state regulations govern or influence the reimbursement to health care
providers of fees and capital equipment costs in connection with medical
treatment of certain patients. We cannot predict the likelihood that federal and
state legislation related to health care reform or lowering pharmaceutical costs
will pass. Our ability to develop or commercialize our product candidates may
also be adversely affected to the extent that these or other proposals or
reforms have a material adverse effect on our ability to secure funding for
development, or on the business, financial condition and profitability of other
companies that are prospective collaborators for certain of our product
candidates. In certain foreign markets pricing of prescription pharmaceuticals
is already subject to government control. Continued significant changes in the
U.S. or foreign health care systems could have a material adverse effect on our
business.

ENVIRONMENTAL REGULATION

        Our research and development activities involve the controlled use of
hazardous materials, chemicals and various radioactive materials. We are subject
to federal, state and local laws and regulations governing the use, storage,
handling and disposal of such materials and certain waste products. Although we
believe that our safety procedures for handling and disposing of such materials
comply with the standards prescribed by state, federal, and local laws and
regulations, the risk of accidental contamination or injury from these materials
cannot be completely eliminated. In the event of such an accident, we could be
held liable for any damages that result and any liability could exceed our
resources. We could be required to incur significant costs to comply with
environmental laws and regulations as our research activities are increased, and
if that were to happen there can be no assurance that our operations, business
and future profitability would not be adversely affected.

DEVELOPMENT

        We have several products that require clinical and manufacturing
development, including our OLUX and other foam products, Liquipatch, and ConXn.
Our development activities involve work related to product formulation,
preclinical and clinical study coordination, regulatory administration,
manufacturing, and quality control and assurance. While many other
pharmaceutical and biotechnology companies conduct earlier stage research and
drug discovery, our focus is on later-stage development to minimize the risk and
time requirements for us to get a product on the market.

        In addition to our in-house staff and resources, we contract a
substantial portion of development work to outside parties. For example, we
typically engage contract research organizations to manage our clinical trials.
We have contracts with vendors to conduct product analysis and stability
studies, and we outsource all of our manufacturing scale-up and production
activities.

        Our product development activities are leveraged by our collaborative
relationships with pharmaceutical partners and academic researchers. In
particular, we have three partners that have responsibility for developing
relaxin in Europe, Japan and Canada. Through our agreements with these partners,
we have joint development committees that collaborate on decision-making and
product development. Also, from time to time we enter agreements with academic
or university-based researchers to conduct various studies for us.

EMPLOYEES

        As of December 31, 1999, we had 112 full-time employees. Of the
full-time employees, 51 were engaged in sales and marketing, 41 were in research
and development and 20 were in general and administrative positions. We believe
our relations with our employees are good.



                                       14
<PAGE>   16


ITEM 2. PROPERTIES

        We currently lease 36,964 square feet of laboratory and office space at
3400 and 3294 West Bayshore Road in Palo Alto, California. We lease this space
under two lease agreements that will expire in January 2002 and January 2003. We
believe that our existing facilities are adequate to meet our requirements for
the near term and that additional space will be available on commercially
reasonable terms if needed.


ITEM 3. LEGAL PROCEEDINGS

        We are not a party to any material legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        No matters were submitted to a vote of security holders during the
fourth quarter of 1999.

                                     PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        Our Common Stock is traded on the Nasdaq National Market under the
symbol "CNCT." The following table sets forth for the periods indicated the low
and high intraday bid prices for our Common Stock.

<TABLE>
<CAPTION>
               ----------------------------------------------------
                                                 HIGH          LOW
                                                -------------------
<S>                                              <C>           <C>
               1999
                   Fourth Quarter                10.50         4.13
                   Third Quarter                  7.75         4.88
                   Second Quarter                 8.00         5.88
                   First Quarter                 10.25         4.50

               1998
                   Fourth Quarter                 5.88         2.00
                   Third Quarter                  4.50         2.13
                   Second Quarter                 6.06         3.25
                   First Quarter                  5.56         3.00
               ----------------------------------------------------
</TABLE>

        On February 25, 2000, the last reported sale price of the Common Stock
on the Nasdaq National Market was $11.875 per share. As of that date, we had
approximately 173 stockholders of record of our Common Stock.

        We have never declared or paid cash dividends on our Common Stock. We
currently intend to retain all available funds for use in our business, and do
not anticipate paying any cash dividends in the foreseeable future.



                                       15
<PAGE>   17


ITEM 6. SELECTED FINANCIAL DATA

        The following selected consolidated financial data has been derived from
our audited consolidated financial statements. This historical data should be
read in conjunction with our consolidated Financial Statements and the related
Notes to Consolidated Financial Statements, and with the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing in Item 7 of this Report.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
                                                                                  DECEMBER 31,
                                                        ----------------------------------------------------------------
                                                          1999          1998          1997          1996          1995
                                                        --------      --------      --------      --------      --------
<S>                                                     <C>           <C>           <C>           <C>           <C>
STATEMENT OF OPERATIONS DATA:
  Revenues:
    Product                                             $ 16,595      $  7,473      $  6,803      $    428      $     --
    License                                               10,311         1,648            --            --            --
                                                        --------      --------      --------      --------      --------
        Total revenues                                    26,906         9,121         6,803           428            --

  Operating costs and expenses:
    Cost of product revenues                               5,229         1,374         1,149            --            --
    License amortization                                   6,160         6,720         7,124           594            --
    Research and development                              21,309        11,446        17,162        13,161         8,271
    Selling, general and administrative                   20,834        11,680         8,966         5,434         2,113
    Charge for pre-approved FDA product rights             1,000         4,000            --            --            --
                                                        --------      --------      --------      --------      --------
        Total operating costs and expenses                54,532        35,220        34,401        19,189        10,384

  Loss from operations                                   (27,626)      (26,099)      (27,598)      (18,761)      (10,384)

  Gain on sale of license rights                              --            --           525            --            --
  Interest income (expense), net                             343          (496)         (862)          247            12
                                                        --------      --------      --------      --------      --------
  Net loss                                              $(27,283)     $(26,595)     $(27,935)     $(18,514)     $(10,372)
                                                        ========      ========      ========      ========      ========

  Basic and diluted net loss per share(1)               $  (1.21)     $  (1.61)     $  (2.69)     $  (2.71)     $  (2.34)
  Shares used to calculate basic and
    diluted net loss per share(1)                         22,619        16,533        10,412         6,825         4,434

BALANCE SHEET DATA:
  Cash, cash equivalents and short-term investments     $ 26,299      $ 23,020      $ 14,346      $ 24,554      $  9,023
  Working capital                                         13,401        12,464         6,687        14,904         5,844
  Total assets                                            30,410        31,394        31,068        47,922        11,796
  Current portion of capital lease obligations,
    capital loans and long-term debt                       1,396           582         2,746         2,408         1,259
  Current portion of notes payable and
     other liabilities                                     2,594         6,822         2,884            --            --
  Non-current portion of capital lease
    obligations, capital loans and long-term debt            799         4,002           649         3,062         4,933
  Other long-term liabilities and notes payable               --         3,781         9,666        10,858         3,467
  Redeemable convertible preferred stock                      --            --           600         2,000            --
  Total stockholders' equity                              14,288        12,452        10,809        21,800            63
------------------------------------------------------------------------------------------------------------------------
</TABLE>

1)   Earnings per share amounts prior to 1997 have been restated as required to
     comply with Statement of Financial Accounting Standards No. 128, "Earnings
     Per Share" and Staff Accounting Bulletin No. 98, "Earnings Per Share."



                                       16
<PAGE>   18


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

        The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes filed with this Report.

OVERVIEW

        We are developing a major biotechnology product for multiple indications
and developing and commercializing dermatology products. We are a pharmaceutical
company focused on two areas. The first area focuses on the development of
ConXn, a recombinant form of a natural hormone called relaxin known to help
lessen the hardening or fibrosis of skin and connective tissue and to stimulate
vasodilation and new blood vessel growth. We currently have clinical trials
under way with relaxin for two indications. The other area of our business
focuses on the development and commercialization of products for skin
dermatologic diseases. We currently market three products.

        We are currently developing ConXn for the treatment of scleroderma,
infertility, peripheral vascular disease and organ fibrosis. We have completed
enrollment in Phase III clinical trials for scleroderma, and in December 1999 we
initiated Phase I/II clinical trials for infertility. We are at earlier stages
of development for peripheral vascular disease and other organ fibroses. In our
dermatology business, we received marketing clearance from the U.S. Food and
Drug Administration (FDA) in March 1999 to sell Luxiq(TM) (betamethasone
valerate) Foam, 0.12%, for the treatment of steroid responsive scalp dermatoses.
Our principal dermatology product under development is OLUX(TM) Foam (clobetasol
propionate) 0.05%, for the treatment of moderate to severe scalp dermatoses, for
which we submitted an NDA in July 1999. We also market Ridaura(R) (auranofin), a
treatment for rheumatoid arthritis, and in January 1999, we began marketing
Actimmune(R) (interferon gamma) for the treatment of chronic granulomatous
disease (CGD), through licensing arrangements with Genentech and InterMune.

        In April 1999, our subsidiary, InterMune, became an independent company.
We established InterMune in 1998 to develop Actimmune for serious pulmonary and
infectious diseases and congenital disorders. On April 27, 1999, InterMune
obtained venture capital funding and we received a cash payment of $4.7 million
(representing a return of a portion of our original investment), and a license
fee payment of $0.5 million. In exchange for the remaining $3.5 million of our
invested capital, we received 960,000 shares of InterMune's Series A-1 preferred
stock, and are entitled to the U.S. net sales of Actimmune up to a predetermined
annual baseline amount through December 2001. We currently hold approximately a
7% equity position in InterMune. On February 2, 2000, InterMune filed a
registration statement for its initial public offering.

        In December 1999, we entered into an agreement to assign our T cell
receptor (TCR) technology and intellectual property to The Immune Response
Corporation (IRC), which owns additional TCR-related intellectual property and
intends to carry forward development of pharmaceutical products using the
technology. Connetics and XOMA (U.S.) LLC, which is also a party to the
transaction, each received a cash payment and IRC common stock, as well as
royalties on future sales of products by IRC. We expanded our dermatology
portfolio in 1999 by entering into two agreements with Soltec Research Pty Ltd.
These agreements give us exclusive North American rights to certain applications
of a broad range of unique topical delivery technologies, as well as exclusive
worldwide rights (excluding Australia and New Zealand) to develop, manufacture
and market ketoconazole foam.

        We have financed our operations primarily through the sale and issuance
of equity securities. We have received additional cash from product revenues,
license agreements and loan facilities. In 1999, we entered into collaborative
arrangements with two new corporate partners for the development of ConXn in
Europe and Canada. For the year ended December 31, 1999, we received a total of
$14.1 million from our corporate partnership arrangements that included license
fees, development milestones and equity investments. We also raised net proceeds
of approximately $21.9 million through a public offering of our common stock in
October 1999. From inception to date, a large portion of our expenditures have
been for research and development activities. Additionally, we have increased
our sales and marketing expenditures due to the promotion efforts of Ridaura and
Luxiq. We



                                       17
<PAGE>   19

have incurred operating losses since our inception and had an accumulated
deficit of $119.8 million at December 31, 1999. We will require additional funds
to continue the development of our products and to fund operating losses that
are expected for the next few years

RESULTS OF OPERATIONS

    REVENUES

<TABLE>
<CAPTION>
    -------------------------------------------------------------------
                                          Years Ended December 31,
                                      ---------------------------------
    Revenues (In thousands)            1999          1998         1997
                                      -------       ------       ------
<S>                                   <C>           <C>          <C>
    Product:
      Luxiq                           $ 6,025       $   --       $   --
      Ridaura                           5,737        7,473        6,803
      Actimmune                         4,833           --           --
                                      -------       ------       ------
        Total product revenues         16,595        7,473        6,803

    License:
      Celltech PLC                      8,000           --           --
      Suntory Limited                     879        1,648           --
      Paladin Labs                        400           --           --
      InterMune Pharmaceuticals           500           --
      Immune Response                     532           --           --
                                      -------       ------       ------
        Total license revenues         10,311        1,648           --

        Total revenues                $26,906       $9,121       $6,803
    -------------------------------------------------------------------
</TABLE>

        Our product revenues in 1999 were $16.6 million compared to $7.5 million
in 1998 and $6.8 million in 1997. The increase in total product sales in 1999
was due to sales of Actimmune, which we began shipping in February, and Luxiq,
which was launched in April. This increase was partially offset by lower sales
of Ridaura. In March 1999 we entered into an agreement with MGI Pharmaceuticals,
Inc. (MGI) to promote Ridaura for us. We expect Ridaura to continue to
experience decreased sales due to competition from new products. The promotion
efforts of Actimmune are managed by InterMune under a transition agreement and
we are entitled to U.S. net sales of Actimmune up to a predetermined baseline
through December 31, 2001. The increase in revenues in 1998 over 1997 was the
result of increased promotional efforts by our sales and marketing organization
and a product price increase. In December 1997, we sold the Canadian rights to
Ridaura to Pharmascience, Inc. Our revenues were $6.5 million on a pro forma
basis to reflect the disposition of Ridaura rights in Canada for 1997.

        License revenues were $10.3 million in 1999 compared to $1.6 million in
1998. In 1999, we recorded $8.0 million in license revenue ($4.0 million of a
license fee and $4.0 million for quarterly reimbursements of product development
costs) in connection with our agreement with Medeva in relation to the
development of ConXn. In addition, we recorded $0.9 million for a milestone
payment made by Suntory and $0.4 million for a license fee paid by Paladin Labs.
Payments made by Suntory and Paladin Labs are associated with collaboration
agreements for ConXn. The $1.6 million license revenue recorded in 1998 was for
a license fee paid by Suntory under the collaboration agreement for ConXn. Also
in 1999, we recorded $0.5 million for a license fee associated with InterMune
and $0.5 million license fee for the assignment of patent rights to IRC. There
was no license revenue in 1997. We expect license revenue to fluctuate
significantly depending on when and whether we or our partners achieve
milestones under existing agreements, and on new business opportunities that we
may identify.



                                       18
<PAGE>   20


    COST OF PRODUCT REVENUES

        Our cost of product revenues includes the costs of Luxiq, Ridaura and
Actimmune, royalty payments on these products based on a percentage of our
product revenues and product freight and distribution costs from CORD. We
recorded cost of product revenues of $5.2 million compared to $1.4 million in
1998 and $1.1 million in 1997. The increase in cost of product revenues in 1999
over 1998 is primarily due to costs associated with the sales of Luxiq and
Actimmune, which began marketing in 1999, and higher product and royalty costs.
The increase in cost of product revenues in 1998 over 1997 resulted from
increased unit sales of Ridaura.

    LICENSE AMORTIZATION

        We recorded amortization expense of $6.2 million in 1999 associated with
the acquisition of product rights to Ridaura, compared to $6.7 million in 1998
and $7.1 million in 1997. The decrease of $0.6 million amortization expense in
1999 compared to 1998 was the result of the asset being fully amortized by the
end of November (eleven months) compared to a full year amortization in 1998.
The decrease in amortization expense of $0.4 million in 1998 compared to 1997
resulted from sale of our Canadian rights to Ridaura in December 1997.

    RESEARCH AND DEVELOPMENT

        Research and development expenses were $21.3 million in 1999, $11.4
million in 1998 and $17.2 million in 1997. The increase in research and
development expenses in 1999 was due to:

        -  the commencement of manufacturing scale-up of ConXn, which accounted
           for approximately 70% of the increase;

        -  conducting Phase II/III trial of ConXn for the treatment of
           scleroderma in 1999;

        -  increasing personnel in our development organization; and

        -  initiation of clinical trials of ConXn for the treatment of
           infertility.

        Research and development expenses were lower in 1998 as compared to 1997
due to lower clinical trial activities.

        We expect research and development expenses to remain at the same level
for the next few quarters, due to scale-up expenses related to ConXn
manufacturing, ConXn clinical trial activities for new disease indications,
preclinical activities associated with technologies acquired from Soltec,
pre-manufacturing start-up costs associated with qualifying a new supplier for
OLUX and possible acquisitions of new technologies and products.

    SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

        Selling, general and administrative expenses were $20.8 million in 1999,
$11.7 million in 1998 and $9.0 million in 1997. The increase in expenses from
1999 over 1998 was due to the following factors:

        -  the increase in our sales and marketing staff to 51 as of December
           31, 1999 compared to 27 for the same period in 1998;

        -  expenses associated with the market launch of Luxiq;

        -  co-promotion fees for Luxiq and Ridaura; and

        -  stock compensation related expenses.



                                       19
<PAGE>   21


In addition, the increase in expenses from 1998 over 1997 was due to the
following factors:

        -  increased sales and marketing activities and costs associated with
           the promotion and marketing of Ridaura;

        -  increases in business development expenses; and

        -  the hiring of additional personnel in the selling, general and
           administrative functions.

    CHARGE FOR PRE-FDA APPROVED PRODUCT RIGHTS

        Under our December 1999 licensing agreement with Soltec for exclusive
rights to certain applications of a broad range of unique topical delivery
technologies in December 1999, we recorded a $1.0 million ($0.5 million cash and
$0.5 million in stock) license fee charge. In 1998, we recorded a $4.0 million
non-cash license fee charge associated with our interferon gamma license
agreement with Genentech. We determined that it was highly uncertain whether the
amount paid for these two licenses would be realized, as they relate to pre-FDA
approved products and are dependent on additional research and development and
do not have alternative future uses. Consequently, we expensed the full purchase
amounts. There were no license fee charges in 1997.

    GAIN ON SALE OF LICENSE RIGHTS

        In December 1997, we sold the Canadian rights to Ridaura to
Pharmascience for a net consideration of $1.3 million. The book value of the
Canadian rights to Ridaura at the time of the sale was approximately $775,000
and accordingly, we recognized a gain of $525,000 from the transaction. We had
no similar transactions in 1999 or 1998.

    INTEREST AND OTHER INCOME (EXPENSE), NET

        Interest and other income was $1.2 million in 1999, $0.8 million in 1998
and $0.9 million in 1997. The increase in interest income in 1999 was due to a
higher investment balance as a result of receiving a total of $14.1 million from
our corporate partnership arrangements and net proceeds of approximately $21.9
million through a public offering of our common stock in October. Cash received
in 1999 was offset in part by cash used in operations and payment of debt
obligations, including payments of approximately $6.7 million of principal and
interest to SmithKline Beecham (SmithKline) for rights to Ridaura and $2.6
million principal and interest payments for a bank loan. The decrease in
interest income in 1998 over 1997 was due to lower average cash and investment
balances resulting from cash used in operations and payment of debt obligations,
including payments of approximately $3.6 million of principal and interest to
SmithKline. These were offset in part by two private placements that raised a
total of $22.7 million in 1998.

        Interest expense was $0.9 million in 1999, $1.3 million in 1998 and $1.7
million in 1997. The decrease in interest expense in 1999 from 1998 was the
result of lower balances for obligations under capital leases and loans, and
notes payable. The decrease in interest expense in 1998 from 1997 was due to
lower imputed interest expense. The imputed interest expenses are attributable
to the non-interest bearing promissory note payable to SmithKline in connection
with the acquisition of Ridaura. The decrease in interest expense in 1998 as
compared to 1997 also resulted from lower interest expense associated with lower
balances outstanding for obligations under capital leases, loans and notes
payable. The decrease in 1998 was offset in part by approximately $0.5 million
in accrued interest payable pursuant to the amended repayment terms of the
SmithKline note.

    NET LOSS

        We incurred net losses of $27.3 million in 1999, $26.6 million in 1998
and $27.9 million in 1997. The increase in net loss in 1999 from 1998 was
primarily due to:

    -  An increase of approximately $9.9 million in development activities
       related primarily to ConXn;

    -  Increasing personnel in the sales and marketing organization;



                                       20
<PAGE>   22

    -  Expenses associated with the launch of Luxiq;

    -  $1.0 million licensing charge in connection with the license of delivery
       technologies from Soltec;

    -  Stock compensation related expenses; and

    -  Co-promotion fees for Luxiq and Ridaura.

These costs were offset in part by a $17.8 million increase in product and
contract revenues, and $0.8 million increase in net interest and other income.

        Excluding the impact of the $4.0 million charge in connection with the
license of interferon gamma in 1998, the decrease in net loss in 1998 from 1997
was primarily due to:

    -  a decrease of approximately $5.7 million in development activities;

    -  contract revenue of $1.6 million in connection with the agreement with
       Suntory for relaxin;

    -  lower amortization costs due to the sale of Canadian rights to Ridaura;
       and

    -  lower interest expense.

These decreases were offset in part by higher selling, general and
administrative expenses.

LIQUIDITY AND CAPITAL RESOURCES

        We have financed our operations to date primarily through proceeds from
equity financings, collaborative arrangements with corporate partners and bank
loans. At December 31, 1999, cash, cash equivalents and short-term investments
totaled $26.3 million compared to $23.0 million at December 31, 1998, and
accounts receivable totaled $1.6 million at December 31, 1999 compared to $0.5
million at December 31, 1998. Our cash reserves are held in a variety of
interest-bearing instruments including high-grade corporate bonds, commercial
paper and money market accounts.

        Cash Flows from Operating Activities. Cash used in operations for 1999
was $14.1 million compared with $12.0 million in 1998 and $23.6 million in 1997.
Net loss of $27.3 million for 1999 was affected by non-cash charges of $6.7
million depreciation and amortization expense and $1.3 million deferred
compensation expense. Cash outflow for 1999 was primarily for operating
activities, including growth in inventory due primarily to carrying three
products, and increases in accounts receivable due to higher product sales. Cash
usage was partially offset by an increase in accounts payable and accrued
liabilities related to higher development, sales and marketing expenses. The
1998 net loss was affected by a number of charges that did not use cash,
including a $4.0 million charge for the write-off of technology licensed in
exchange for common stock, $6.7 million of amortization expense and $0.5 million
of imputed interest expense associated with the acquisition of Ridaura. Cash
outflow for 1998 was primarily for operating activities and approximately $3.6
million in principal and interest payments to SmithKline. The 1997 net loss was
also affected by a number of charges that did not use cash, including $7.1
million of amortization expense and $1.1 million imputed interest expense
associated with the acquisition of Ridaura that were offset in part by a $0.5
million gain recognized from the sale of Ridaura Canadian rights. The cash
outflow from operations also included a $3.0 million payment to SmithKline for
rights to Ridaura in January 1997, offset by $4.8 million cash generated from
Ridaura product sales (net of product costs).

        Cash Flows from Investing Activities. Investing activities, other than
the changes in our short-term investments, consumed $0.9 million in cash during
1999, compared with $0.5 million in 1998 and $0.6 million in 1997. Cash outlays
in 1999 were due to leasehold improvements and equipment expenditures required
for operations. Cash outlays in 1998 included $0.2 million for equipment
expenditures required for operations and $0.3 million for fulfillment of
obligations under the equity and asset purchase agreements with SmithKline. Cash
outlays in 1997 included a $1.0 million payment to SmithKline and equipment and
leasehold improvements expenditures of $0.9 million due to headcount growth,
offset in part by $1.3 million cash generated from the sale of the Canadian
rights to Ridaura.

        Cash Flows from Financing Activities. Cash provided by financing
activities was $18.2 million in 1999 compared to $21.1 million in 1998 and $13.9
million in 1997. Financing activities in 1999 included the receipt of proceeds
of $4.4 million from the sale of common stock to Celltech and Paladin Labs, and
$21.9 million in a public



                                       21
<PAGE>   23

offering of our common stock. This was offset in part by a $6.3 million
principal payment to SmithKline for obligations under a promissory note in
connection with the Ridaura acquisition, $2.3 million pay down on a bank loan
and $0.5 million in payments under capital leases and loans. In 1998 we raised
$22.7 million through private sales of our common stock and obtained $4.0
million through a bank loan, offset in part by $2.8 million in payments on
obligations under capital leases and loans and principal payments of $3.2
million to SmithKline. In 1997, we generated $16.1 million cash primarily from
sales of our common stock and also financed $0.3 million of our equipment
expenditures through a capital loan arrangement. Cash proceeds in 1997 were
offset by $2.5 million in payments on obligations under capital leases and
loans.

        Working Capital. Working capital increased to $13.4 million at December
31, 1999 from $12.5 million at December 31, 1998. The increase in working
capital was due to proceeds from our public offering of common stock and
payments received from our corporate partnering arrangements, offset in part by
our use of cash in operations, higher accounts payable and accrued liabilities
as a result of increased development, sales and marketing expenses, and payment
of debt obligations. The increase in working capital by $5.8 million to $12.5
million at December 31, 1998 from $6.7 million for the same period in 1997 was
primarily due to a higher cash balance as a result of the $22.7 million raised
by the Company through equity sales and $4.0 million bank loan, offset by the
reclassification of the note payable due to SmithKline in 1999 from long term to
current liabilities. In April 1998, we restructured our payment obligations
under the promissory note to SmithKline such that the note previously to be
fully paid by January 1999 was due throughout 1999 and to be fully paid by April
2000.

        As of December 31, 1999, we had an aggregate of $4.8 million in future
obligations of principal payments under capital leases, loans, long-term debt
and other obligations, of which $4.0 million is to be paid within the next year.

        We have an equity line agreement with an investor that may potentially
provide access to capital through sales of our common stock. The three-year
equity line expires in December 2000. During that period, when our stock meets
certain minimum trading volume requirements and trades above $10.00 per share,
then the investor may require us to draw up to $500,000 against the equity line
approximately every three months in exchange for the sale of stock at a discount
to the market price. We also have the right to draw down on the equity line in
exchange for the sale of stock, beyond the $500,000 minimum investment each
quarter.

        We believe our existing cash, cash equivalents and short-term
investments, cash generated from product sales and collaborative arrangements
with corporate partners, will be sufficient to fund our operating expenses, debt
obligations and capital requirements through at least the next 12 months. Our
future capital uses and requirements depend on numerous factors, including the
progress of our research and development programs, the progress of clinical
testing, the time and costs involved in obtaining regulatory approvals, the cost
of filing, prosecuting, and enforcing patent claims and other intellectual
property rights, competing technological and market developments, our ability to
establish other collaborative arrangements, the level of product revenues, the
possible acquisition of new products and technologies and the development of
commercialization activities. Therefore such capital uses and requirements may
increase in future periods. As a result, we may require additional funds prior
to reaching profitability and may attempt to raise additional funds through
equity or debt financings, collaborative arrangements with corporate partners or
from other sources.

        Other than the equity line agreement discussed above, we currently have
no commitments for any additional financings, and there can be no assurance that
additional funding will be available to finance our ongoing operations when
needed or, if available, that the terms for obtaining such funds will be
favorable or will not result in dilution to our stockholders. Our inability
to obtain sufficient funds could require us to delay, scale back or eliminate
some or all of our research and development programs, to limit the marketing of
our products or to license to third parties the rights to commercialize products
or technologies that we would otherwise seek to develop and market ourselves.

IMPACT OF YEAR 2000

        Many computer systems and software applications were not designed to
handle dates beyond the year 1999, and therefore had to be modified prior to
year 2000 in order to remain functional.



                                       22
<PAGE>   24
As with many other companies, we assessed the potential impact on our operations
of the Year 2000 issue, and incurred expenses in anticipation of the transition
from 1999 to 2000.

        During the course of 1999, we completed the testing and upgrading of all
of our information technology and operating systems. Our third party
distribution service system (which includes customer orders, billing, shipping
and inventory management) made its distribution system Year 2000 compliant, and
we converted to the compliant system in 1998. We had formal communications with
each of our significant suppliers and customers to determine the extent of our
vulnerability to those third parties' failure to remediate their own Year 2000
issues. We requested that third party vendors represent their products and
services to be Year 2000 compliant and that they have a program to test for Year
2000 compliance.

        We also developed contingency plans for certain critical business
processes. Our total cost for the Year 2000 project was less than $100,000, was
funded through available cash resources and was not material to our financial
condition to date. We did not experience any material disruptions to our
business as a result of the arrival of the year 2000, and did not incur any
material unplanned expenditures to address any unanticipated Year 2000 issues.

FORWARD-LOOKING STATEMENTS

        The Private Securities Litigation Reform Act of 1995 (the "Act")
provides a safe harbor for forward-looking statements made by or on behalf of
Connetics. This report contains statements that are "forward-looking." All
statements that express expectations, beliefs, intentions or future strategies,
including possible development or future market launching of therapeutic
products; ability to raise funds to finance ongoing operations; and possible
acquisition of new products and technologies, are forward-looking statements
within the meaning of the Act. These statements are made on the basis of our
views and assumptions, as of the time the statements are made, regarding future
events and business performance. There can be no assurance, however, that our
expectations will necessarily come to pass.

        Factors that may affect forward-looking statements. A wide range of
factors could materially affect future developments and performance, including
the following:

    -  We are an early stage company and are subject to uncertainties associated
       with product development and market acceptance. Several of our products
       are in clinical and preclinical development or are pending approval by
       the FDA, and no revenues were generated from products until December
       1996. There can be no assurance that products under development will be
       safe and effective, approved by the FDA, produced in commercial
       quantities at reasonable costs or will gain satisfactory market
       acceptance.

    -  We have a limited operating history and are subject to the uncertainties
       and risks associated with any new business. We have experienced operating
       losses every year since our incorporation and expect to incur additional
       losses for at least the next few years. Losses are expected to fluctuate
       from period to period based on timing of product revenues, clinical
       material purchases, possible acquisitions of new products and
       technologies, scale-up activities and clinical activities. In particular,
       if our current ConXn trial is successful, we would incur significant
       additional expenditures associated with pursuing regulatory approval and
       eventual commercialization of ConXn which would extend the date as of
       which we could first achieve profitability. Therefore, the time for us to
       reach profitability is uncertain and there can be no assurance that we
       will ever be able to generate revenue from our products now under
       development or achieve profitability on a sustained basis.

    -  There are risks related to the management of the marketing and sales of
       our products. Our success depends in part on our ability to effectively
       manage the distribution of our products and to market and sell our
       products successfully. If Luxiq, launched in April 1999, does not sustain
       market acceptance, our financial



                                       23
<PAGE>   25

       condition and results of operations will be adversely affected. Future
       revenues from sales are uncertain as we are subject to patent risks and
       competition from new products.

    -  Our future capital uses and requirements depend on numerous factors,
       including costs associated with the research, development, clinical
       testing and obtaining regulatory approvals of products in our pipeline;
       enforcing patent claims and intellectual property rights; acquisition of
       new products and technologies; commercialization activities and the
       ability to establish collaborative arrangements. Such requirements may
       increase in the future and we may attempt to raise additional funds
       through equity or debt financings, collaborative arrangements or from
       other sources. Future financings could have a dilutive effect on our
       stockholders.

    -  A key element of our strategy is to in-license or acquire additional
       marketed or late-stage development products, which involve risks. A
       portion of the funds needed to acquire, develop and market any new
       products may come from our existing cash, which will result in fewer
       resources available to our current products and clinical programs. There
       can be no assurance that we will be able to raise additional funding to
       finance such acquisitions. In addition, we may have to recruit additional
       qualified employees to manage the development, marketing, sale and
       distribution of newly acquired products. There can be no assurance that
       newly acquired products will achieve the marketing or therapeutic success
       expected of them by us, industry analysts or others at the time of
       acquisition.

    -  Clinical trials are inherently unpredictable and there can be no
       assurance that we will be able to commence any future trials,
       successfully complete them once started, meet development schedules or
       obtain product approval by the FDA on a timely basis if at all. Delays in
       planned patient enrollment may result in increased costs and delays,
       which could have a material adverse effect on our results of operations.

    -  Our success will depend in part on our ability to preserve our trade
       secrets, to operate without infringing the proprietary rights of third
       parties, and to obtain patent protection for our products and processes.
       Products or processes made, used or sold by us may be covered by patents
       held by third parties that could prevent us from practicing the subject
       matter, require us to obtain licenses or redesign our products or
       processes to avoid infringement. The patent positions can be highly
       uncertain and involve complex legal and factual questions. Accordingly,
       the breadth of such claims cannot be predicted. Patent disputes are
       frequent and we could in the future be involved in material patent
       litigation.

    -  Our products for research, preclinical testing and sale have been
       supplied by collaborators and contract manufacturing companies. We
       currently have no manufacturing facilities nor do we intend to develop
       such capabilities in the near future. The failure of any of our contract
       manufacturers to provide products for clinical testing or to manufacture
       products on a commercial scale on a timely basis will have a material
       adverse effect on our results of operations.

        This list of factors that may affect future performance and the accuracy
of forward-looking statements is illustrative, but by no means exhaustive.
Accordingly, all forward-looking statements should be evaluated with the
understanding of their inherent uncertainty.



                                       24
<PAGE>   26


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        We have supply contracts with Boehringer Ingelheim for ConXn and CCL
Pharmaceuticals for Luxiq and OLUX. We also have a collaboration agreement with
Suntory for the development and commercialization of relaxin for the treatment
of scleroderma in Japan. As payments under these contracts are payable in local
currency, our financial results could be affected by changes in foreign currency
exchange rates. We have a bank loan that is sensitive to movement in interest
rates. Interest income from our investments is sensitive to changes in the
general level of U.S. interest rates, particularly since the majority of our
investments are in short-term instruments. Due to the nature of our short-term
investments, we have concluded that there is no material market risk exposure.
Therefore, no quantitative tabular disclosures are required.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following Financial Statements are filed as part of this Report:

<TABLE>
<CAPTION>
-------------------------------------------------------------
                                                    PAGE
-------------------------------------------------------------
<S>                                                  <C>
Report of Ernst & Young LLP, Independent             26
Auditors
Consolidated Balance Sheets                          27
Consolidated Statements of Operations                28
Consolidated Statement of Stockholders' Equity       29
Consolidated Statements of Cash Flows                30
Notes to Consolidated Financial Statements           31
-------------------------------------------------------------
</TABLE>






                                       25
<PAGE>   27


                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS


TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF CONNETICS CORPORATION


    We have audited the accompanying consolidated balance sheets of Connetics
Corporation as of December 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

    In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Connetics Corporation at December 31, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.



                                        ERNST & YOUNG LLP



Palo Alto, California
January 14, 2000




                                       26
<PAGE>   28



                              CONNETICS CORPORATION
                           CONSOLIDATED BALANCE SHEETS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
                                                                                           DECEMBER 31,
                                                                                     ------------------------
                                                                                       1999           1998
                                                                                     ------------------------
<S>                                                                                  <C>            <C>
                                              ASSETS

CURRENT ASSETS:
  Cash and cash equivalents                                                          $   8,460      $  14,708
  Short-term investments                                                                17,839          8,312
  Accounts receivable                                                                    1,608            485
  Other current assets                                                                     817            118
                                                                                     ------------------------
          Total current assets                                                          28,724         23,623

Property and equipment, net                                                              1,505          1,128
Notes receivable from related parties                                                       60            379
Deposits and other assets                                                                  121            104
Licensed assets and product rights                                                          --          6,160
                                                                                     ------------------------
TOTAL ASSETS                                                                         $  30,410      $  31,394
                                                                                     ========================

                               LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable                                                                   $   4,988      $   1,229
  Accrued liabilities                                                                    1,596            879
  Accrued process development expenses                                                   3,296            644
  Accrued payroll and related expenses                                                   1,453          1,003
  Current portion of notes payable and other liabilities                                 2,594          6,822
  Current portion of capital lease obligations, capital loans and long-term debt         1,396            582
                                                                                     ------------------------
          Total current liabilities                                                     15,323         11,159

Non-current portion of capital lease obligations, capital loans and                        799          4,002
  long-term debt
Other long-term liabilities                                                                 --          3,781
Commitments

STOCKHOLDERS' EQUITY:
  Preferred stock, $0.001 par value:
     5,000,000 shares authorized;  none issued or outstanding in 1999 and 1998              --             --
  Common stock, $0.001 par value, and additional paid-in capital:
     50,000,000 shares authorized; shares issued and outstanding:
     26,903,716 in 1999 and 20,577,067 in 1998                                         133,963        105,285
  Notes receivable from stockholders                                                        --            (65)
  Deferred compensation                                                                    (39)          (302)
  Accumulated deficit                                                                 (119,752)       (92,469)
  Accumulated other comprehensive income                                                   116              3
                                                                                     ------------------------
            Total stockholders' equity                                                  14,288         12,452
                                                                                     ------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                           $  30,410      $  31,394
--------------------------------------------------------------------------------------------------------------
</TABLE>

          See accompanying Notes to Consolidated Financial Statements.



                                       27
<PAGE>   29


                              CONNETICS CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
                                                           YEARS ENDED DECEMBER 31,
                                                   -------------------------------------
                                                     1999          1998          1997
                                                   -------------------------------------
<S>                                                <C>           <C>           <C>
REVENUES:
   Product                                         $ 16,595      $  7,473      $  6,803
   License                                           10,311         1,648            --
                                                   -------------------------------------
        Total revenues                               26,906         9,121         6,803
                                                   -------------------------------------

OPERATING COSTS AND EXPENSES:
  Cost of product revenues                            5,229         1,374         1,149
  License amortization                                6,160         6,720         7,124
  Research and development                           21,309        11,446        17,162
  Selling, general and administrative                20,834        11,680         8,966
  Charge for pre-FDA approved product rights          1,000         4,000            --
                                                   -------------------------------------
        Total operating costs and expenses           54,532        35,220        34,401
                                                   -------------------------------------

LOSS FROM OPERATIONS                                (27,626)      (26,099)      (27,598)

Interest and other income                             1,211           808           860
Gain on sale of license rights                           --            --           525
Interest expense                                       (868)       (1,304)       (1,722)
                                                   -------------------------------------
NET LOSS                                           $(27,283)     $(26,595)     $(27,935)
                                                   =====================================

BASIC AND DILUTED NET LOSS PER SHARE               $  (1.21)     $  (1.61)     $  (2.69)
SHARES USED TO CALCULATE BASIC AND DILUTED NET
LOSS PER SHARE                                       22,619        16,533        10,412
----------------------------------------------------------------------------------------
</TABLE>

          See accompanying Notes to Consolidated Financial Statements.



                                       28
<PAGE>   30


                              CONNETICS CORPORATION
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                                                COMMON STOCK AND
                                                ADDITIONAL PAID                                             ACCUMULATED
                                                   IN CAPITAL                                                 OTHER
                                               ------------------     NOTES       DEFERRED    ACCUMULATED  COMPREHENSIVE
                                               SHARES    AMOUNT     RECEIVABLE  COMPENSATION    DEFICIT    INCOME (LOSS)   TOTAL
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>      <C>            <C>        <C>          <C>             <C>        <C>
BALANCES AT DECEMBER 31, 1996                   9,057   $  61,007      $(75)      $(1,315)     $ (37,814)      $  (3)     $ 21,800

Common stock issued under stock option
  and purchase plans                              185         187        --            --             --          --           187
Common stock issued pursuant to private
  placements, net                               3,560      15,894        --            --             --          --        15,894
Conversion of Series A preferred stock
  and accrued dividends                           442       1,521        --            --           (124)         --         1,397
Amendment to guaranteed market value of
  common stock issued to SmithKline                --      (1,000)       --            --             --          --        (1,000)
Deferred compensation from stock
  incentive program, net of amortization           --         (91)       --           552             --          --           461

Comprehensive loss:
   Net loss                                        --          --        --            --        (27,935)         --       (27,935)
   Unrealized gain on investments                  --          --        --            --             --           5             5
                                                                                                                           --------
Comprehensive loss                                 --          --        --            --             --          --       (27,930)
                                               ------------------------------------------------------------------------------------

BALANCES AT DECEMBER 31, 1997                  13,244      77,518       (75)         (763)       (65,873)          2        10,809
Common stock issued under stock option
  and purchase plans                              337         513        --            --             --          --           513
Conversion of Series A preferred stock
  and accrued dividends                           251         604        --            --             (1)         --           603
Common stock issued pursuant to private
  placements, net                               5,330      22,671        --            --             --          --        22,671
Issuance of common stock and amendment to
  guaranteed market value of common stock
  issued to SmithKline                          1,038        (308)       --            --             --          --          (308)
Common stock issued pursuant to license
  agreements                                      382       4,010        --            --             --          --         4,010
Payment of notes receivable and repurchase
  of common stock                                  (5)        (14)       10            --             --          --            (4)
Deferred compensation from stock
  incentive program, net of amortization           --         291        --           461             --          --           752

Comprehensive loss:
   Net loss                                        --          --        --            --        (26,595)         --       (26,595)
   Unrealized gain on investments                  --          --        --            --             --           1             1
                                                                                                                           --------
Comprehensive loss                                 --          --        --            --             --          --       (26,594)
                                               ------------------------------------------------------------------------------------

BALANCES AT DECEMBER 31, 1998                  20,577     105,285       (65)         (302)       (92,469)          3        12,452
Common stock issued under stock
  option and purchase plans                       542         916        --            --             --          --           916
Issuance of common stock pursuant
  to license agreements                           672       5,120        --            --             --          --         5,120
Issuance of common stock pursuant to
  secondary offering, net                       4,920      21,933        --            --             --          --        21,933
Issuance of common stock and amendment to
  guaranteed market value of common stock
  issued to Genentech                             229          --        --            --             --          --            --
Payment of notes receivable                       (36)       (315)       65            --             --          --          (250)
Deferred compensation from stock incentive
  program, net of amortization                     --       1,024        --           263             --          --         1,287

Comprehensive loss:
   Net loss                                        --          --        --            --        (27,283)         --       (27,283)
   Unrealized gain on investments                  --          --        --            --             --         113           113
                                                                                                                          ---------
Comprehensive loss                                 --          --        --            --             --          --       (27,170)
                                               ------------------------------------------------------------------------------------

BALANCES AT DECEMBER 31, 1999                  26,904   $ 133,963      $ --       $   (39)     $(119,752)      $ 116      $ 14,288
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

          See accompanying Notes to Consolidated Financial Statements.



                                       29
<PAGE>   31


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

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
                                                                            YEARS ENDED DECEMBER 31,
                                                                      -------------------------------------
                                                                        1999          1998          1997
                                                                      -------------------------------------
<S>                                                                   <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                            $(27,283)     $(26,595)     $(27,935)
  Adjustments to reconcile net loss to net cash used by
      operating activities:
      Depreciation and amortization                                      6,665         7,488         7,911
      Technology acquired in exchange for note payable and
         other long-term liability                                          --         4,010            --
      Amortization of deferred compensation                              1,287           752           461
      Accrued interest on notes payable                                     --           519         1,107
      Gain on sale of Canadian rights to Ridaura                            --            --          (525)
  Changes in assets and liabilities:
      Accounts receivable                                               (1,123)        1,042        (1,099)
      Current and other assets                                            (255)           18           (17)
      Accounts payable                                                   3,759          (263)       (2,687)
      Accrued liabilities                                                2,829         1,038          (809)
                                                                      -------------------------------------
  Net cash used by operating activities                                (14,121)      (11,991)      (23,593)
                                                                      -------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of short-term investments                                  (12,852)      (10,969)      (12,152)
  Sales and maturities of short-term investments                         3,438         8,552        16,263
  Capital expenditures                                                    (882)         (176)         (865)
  Sale of Canadian rights to Ridaura                                        --            --         1,300
  Payment for licensed assets and product rights                            --          (308)       (1,000)
                                                                      -------------------------------------
  Net cash provided by (used in) investing activities                  (10,296)       (2,901)        3,546
                                                                      -------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from (payments of) bank loans                                (2,250)        4,000            --
  Payment of notes payable                                              (6,300)       (3,200)           --
  Proceeds from capital loans and long-term debt                            --            --           333
  Payments on obligations under capital leases and capital loans          (531)       (2,836)       (2,470)
  Proceeds from issuance of preferred and common stock, net             27,250        23,184        16,081
                                                                      -------------------------------------
  Net cash provided by financing activities                             18,169        21,148        13,944
                                                                      -------------------------------------
  Net change in cash and cash equivalents                               (6,248)        6,256        (6,103)
  Cash and cash equivalents at beginning of period                      14,708         8,452        14,555
                                                                      -------------------------------------
  Cash and cash equivalents at end of period                          $  8,460      $ 14,708      $  8,452
                                                                      =====================================

SUPPLEMENTARY INFORMATION:
  Interest paid                                                       $    864      $    698      $    615

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
  Conversion of notes payable into common stock                       $    719      $     --      $     --
  Deferred compensation related to stock options, purchase
    rights and purchase plan                                          $    505      $    387      $     --
  Issuance of common stock for licensed assets and product rights     $     --      $  4,010      $     --
  Preferred dividends on redeemable preferred stock, series A         $     --      $      1      $    124
  Conversion of redeemable preferred stock, series A and
    preferred dividends into common stock                             $     --      $    604      $  1,521
-----------------------------------------------------------------------------------------------------------
</TABLE>


          See accompanying Notes to Consolidated Financial Statements.



                                       30
<PAGE>   32


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1999

1.      ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    Organization

        Connetics Corporation was incorporated in the State of Delaware on
February 8, 1993. Since our inception we have principally been involved in
research and development of therapeutics for diseases that involve connective
tissues of the body, obtaining financing, recruiting personnel, securing
operating facilities, and pursuing business development opportunities.

        In December 1996, we acquired exclusive U.S. and Canadian rights to
Ridaura(R), a disease modifying anti-rheumatic drug, from SmithKline Beecham
Corporation and related entities (SmithKline). Ridaura is the first product we
commercialized, and it signified the beginning of our transition from purely
product development to a revenue based sales and marketing company. In December
1997, we submitted a new drug application with the FDA to market Luxiq for the
treatment of steroid responsive scalp dermatoses in North America. In 1998, we
formed a wholly-owned subsidiary corporation, InterMune Pharmaceuticals, Inc.
(InterMune) to further develop and market certain patent rights and know-how to
interferon gamma in the United States through an exclusive license from
Genentech, Inc. (see Note 5). In March 1999, we received marketing clearance
from the FDA to sell Luxiq and in April 1999, we launched Luxiq. There can be no
assurance that any of our other potential products will be successfully
developed, receive the necessary regulatory approvals or be successfully
commercialized. Accordingly, our ability to continue our development and
commercialization activities is dependent upon the ability of our management to
obtain substantial additional financing.

    Liquidity and Financial Viability

        In the course of our development activities, we have sustained
continuing operating losses and expect such losses to continue for the next few
years. Our future capital uses and requirements depend on numerous factors,
including the progress of our research and development programs, the progress of
clinical testing, the time and costs involved in obtaining regulatory approvals,
the cost of filing, prosecuting, and enforcing patent claims and other
intellectual property rights, competing technological and market developments,
our ability to establish collaborative arrangements, the level of product
revenues, the possible acquisition of new products and technologies, and the
development of commercialization activities. Therefore, such capital uses and
requirements may increase in future periods. As a result, we may require
additional funds prior to reaching profitability and may attempt to raise
additional funds through equity or debt financings, collaborative arrangements
with corporate partners or from other sources.

        Other than an equity line agreement (see Note 6), we currently have no
commitments for any additional financings, and there can be no assurance that
additional funding will be available to finance our ongoing operations when
needed or, if available, that the terms for obtaining such funds will be
favorable or will not result in dilution to the our stockholders. Our inability
to obtain sufficient funds could require us to delay, scale back or eliminate
some or all of our research and development programs, to limit the marketing of
our products or to license to third parties the rights to commercialize products
or technologies that we would otherwise seek to develop and market ourselves.

    Principles of Consolidation

        The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary corporation, InterMune, through April
28, 1999, when InterMune became an independent company through capital venture
funding and a portion of our original investment in InterMune was returned to
us. Material intercompany balances and transactions have been eliminated.



                                       31
<PAGE>   33


    Cash, Cash Equivalents and Short-term Investments

        Cash and cash equivalents consist of cash on deposit with banks and
money market instruments with original maturity of 90 days or less at the date
of purchase. Investments with maturities beyond three months at the date of
acquisition and that mature within one year from the balance sheet date are
considered to be short-term investments. Cash equivalents and short-term
investments are classified as available-for-sale and are carried at fair value,
with unrealized gains and losses reported as a separate component of
stockholders' equity. The cost of securities sold is based on the specific
identification method.

        We believe we have established guidelines for investment of its excess
cash relative to diversification and maturities that maintain safety and
liquidity.

    Fair Value of Financial Instruments

        The fair value of our cash equivalents and investments is based on
quoted market prices. The fair value of capital lease obligations, capital loans
and long-term debt is based on current interest rates available to us for debt
instruments with similar terms, degrees of risk, and remaining maturities. The
carrying amount of cash, cash equivalents and short-term investments, notes
receivable from related parties, notes payable, loans and debt are considered to
be representative of their respective fair values at December 31, 1999 and 1998.

    Property and Equipment

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

    Research and Development

        Research and development costs are charged to expense as incurred.

    Revenue Recognition

        Revenues from product sales are recognized upon shipment, net of
allowances for estimated returns, rebates and chargebacks. We are obligated to
accept from customers the return of pharmaceuticals that have reached their
expiration date. To date we have not experienced significant returns of expired
product. We recognize contract revenue under collaborative agreements when
performance obligations have been met and related payments are receivable and
non-refundable, and when collection is assured.

        We have recognized non-refundable license fees received in connection
with collaborative agreements as revenue when received, when the technology has
been transferred and when all of our contractual obligations relating to the
fees had been fulfilled. In December 1999, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 101 - Revenue Recognition in
Financial Statements (SAB 101) which, among other things, describes the SEC
Staff's position on the recognition of certain non-refundable upfront fees
received in connection with research collaborations. We are currently evaluating
the applicability of SAB 101 to our existing collaborative agreements. Should we
conclude that the approach described in SAB 101 is more appropriate, we will
change our method of accounting effective January 1, 2000 to recognize such fees
over the term of the related agreement. The cumulative effect of this change in
accounting principle, if made, would be recognized as a charge to operations in
the quarter ended March 31, 2000. The cumulative effect would be recorded as
deferred revenue and would be recognized as revenue over the remaining
contractual terms of the collaborative research and development agreements.

    Concentrations of Credit Risk

        Financial instruments that potentially subject us to concentration of
credit risk consist principally of investments in debt securities and trade
receivables. Management believes the financial risks associated with these



                                       32
<PAGE>   34

financial instruments are minimal. We maintain our cash, cash equivalents and
investments with high-quality financial institutions. We do not require
collateral on accounts receivable. We contract with independent sources to
manufacture our products. For each of our products, we rely on one manufacturer
for the production of the product. The inability of these manufacturers to
fulfill our supply requirements could negatively impact future results. We sell
our products to distributors in the United States. For the year ended December
31, 1999, three customers represented 29%, 28%, and 18% of total product sales.
For the year ended December 31, 1998, four customers represented 29%, 23%, 18%
and 11% of total product sales. Sales to one customer represent substantially
all products sales for the year ended December 31, 1997.

    Income Taxes

        Income taxes are accounted for under the asset and liability method
where deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled.

    Net Loss Per Share

        In fiscal 1997, we adopted Statement of Financial Accounting Standards
No. 128, "Earnings Per Share" (SFAS 128). This statement requires the
presentation of basic and diluted net income or loss per share. Basic net loss
per common share is computed using the weighted average number of common shares
outstanding during the period. Diluted net loss per share is computed using the
weighted average of common and diluted equivalent shares outstanding during the
period. Because of our net loss position, diluted per share information would be
anti-dilutive and is not presented.

    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. Actual results could differ from those estimates.

    Disclosure about Segments of an Enterprise and Related Information

        We operate in one segment, the development and commercialization of
therapeutics for diseases that involve connective tissues of the body. For the
year ended December 31, 1999 and 1998, all our product sales were to customers
in the United States. For the year ended December 31, 1997, sales to customers
outside the United States (principally in Canada) were $353,000. Revenues by
product are as follows for the years ended December 31:

<TABLE>
<CAPTION>
    ------------------------------------------------------------------------
    (in thousands):                                DECEMBER 31,
                                     ---------------------------------------
                                      1999             1998            1997
                                     ---------------------------------------
<S>                                  <C>              <C>             <C>
    Luxiq                            $ 6,025          $   --          $   --
    Ridaura                            5,737           7,473           6,803
    Actimmune                          4,833              --              --
                                     ---------------------------------------
                                     $16,595          $7,473          $6,803
    ------------------------------------------------------------------------
</TABLE>




                                       33
<PAGE>   35


2.      CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

        The following tables summarize our available-for-sale investments as of
December 31, 1999 and 1998:

<TABLE>
<CAPTION>
    ---------------------------------------------------------------------------------------------
    (in thousands)                                               DECEMBER 31, 1999
                                                   ----------------------------------------------
                                                               Gross       Gross
                                                   Amortized   Unrealized  Unrealized  Estimated
                                                      Cost     Gains       Loss        Fair Value
                                                   ----------------------------------------------
<S>                                                <C>         <C>         <C>         <C>
    Corporate debt                                 $ 14,307    $  --       $(15)       $ 14,292
    Commercial paper                                  6,313        2         --           6,315
    Equity securities                                   433      129         --             562
    Money market funds                                1,005       --         --           1,005
                                                   ----------------------------------------------
          Total                                      22,058      131        (15)         22,174
    Less amount classified as cash equivalents       (4,334)      (1)        --          (4,335)
                                                   ----------------------------------------------
          Total short-term investments             $ 17,724    $ 130       $(15)       $ 17,839
    ---------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
    -------------------------------------------------------------------------------------------------
    (in thousands)                                                 DECEMBER 31, 1998
                                                   --------------------------------------------------
                                                                   Gross        Gross
                                                   Amortized    Unrealized   Unrealized    Estimated
                                                     Cost          Gains        Loss       Fair Value
                                                   --------------------------------------------------
<S>                                                <C>              <C>         <C>         <C>
    Corporate debt                                 $  4,017         $ 3         $(3)        $  4,017
    Commercial paper                                 15,638           3          --           15,641
    Certificate of deposits                             520          --          --              520
    Money market funds                                  391          --          --              391
                                                   --------------------------------------------------
          Total                                      20,566           6          (3)          20,569
    Less amount classified as cash equivalents      (12,255)         (2)         --          (12,257)
                                                   --------------------------------------------------
          Total short-term investments             $  8,311         $ 4         $(3)        $  8,312
    -------------------------------------------------------------------------------------------------
</TABLE>


        The gross realized gains on sales of available-for-sale investments for
the years ended December 31, 1999 and 1998 totaled $588,000 and $398,000,
respectively, and gross realized losses for the same periods totaled $31,000 and
$53,000, respectively. Realized gains and losses were calculated based on the
specific identification method.

3.      PROPERTY AND EQUIPMENT

        Property and equipment consists of the following:

<TABLE>
<CAPTION>
    --------------------------------------------------------------------------
    (in thousands):                                          DECEMBER 31,
                                                        ----------------------
                                                         1999          1998
                                                        ----------------------
<S>                                                     <C>           <C>
    Laboratory equipment                                $ 2,360       $ 1,889
    Computer equipment                                      770           546
    Furniture and fixtures                                  574           417
    Leasehold improvements                                  760           730
                                                        ----------------------
                                                          4,464         3,582
    Less accumulated depreciation and amortization       (2,959)       (2,454)
                                                        ----------------------
    Property and equipment, net                         $ 1,505       $ 1,128
    --------------------------------------------------------------------------
</TABLE>

        Property and equipment includes assets under capitalized leases at
December 31, 1999 and 1998 of approximately $1.0 million. Accumulated
amortization related to leased assets was approximately $1.0 million and



                                       34
<PAGE>   36

$945,000 at December 31, 1999 and 1998. There were no new capitalized leases for
the years ended December 31, 1999 and 1998.

4.      NOTES RECEIVABLE FROM RELATED PARTIES

        We hold notes receivable from our officers totaling $60,000 at December
31, 1999 and $379,000 at December 31, 1998. These notes, which bear interest at
rates ranging from 5.5% to 8.5% annually, are collateralized by certain personal
assets of our officers and are generally due and payable within three to five
years. In addition, we held notes from a stockholder who is also an officer;
those notes were paid in full at December 31, 1999. See Note 8.

5.      RESEARCH AND LICENSE AGREEMENTS

    Product Rights

        In December 1996, we acquired exclusive United States and Canadian
rights to Ridaura, a disease modifying anti-rheumatic drug from SmithKline. The
agreement, which was amended in 1997 and 1998, is referred to as the SKB
Agreement. Under the SKB Agreement, we paid $3.0 million in cash in January
1997, issued a non-interest bearing $11.0 million promissory note (originally
payable in two installments of $6.0 million in January 1998 and $5.0 million
January 1999, but subsequently modified as discussed below), issued 637,733
shares of common stock with a guaranteed value of $9.0 million at December 31,
1997, and are obligated to pay up to $6.0 million in royalty payments based on
future product sales, for a potential aggregate consideration of up to $29.0
million. We discounted the $11.0 million promissory note at inception using an
imputed interest rate of 11%, and the total imputed interest expense
attributable to these payments is $1.6 million. The original amount of the
discounted note, $9.4 million, has been included in current and other long-term
liabilities with imputed interest being recognized over the original term of the
note.

        We determined the useful life of the acquired asset to be three years
and have recorded amortization expense of $6.2 million in 1999, $6.7 million in
1998, and $7.1 million in 1997. Accumulated amortization was $20.6 million at
December 31, 1999, $14.4 million at December 31, 1998 and $7.7 million at
December 31, 1997. In December 1997, we sold our Canadian rights to Ridaura to
Pharmascience, Inc. (Pharmascience), a Canadian corporation, for net
consideration of $1.3 million. The original total purchase price of $21.4
million that had been capitalized was adjusted by the book value of the Canadian
rights of approximately $775,000 to $20.6 million.

        The amendments to the SKB Agreement allow us to defer the principal
payments of $11.0 million according to a revised schedule of four payments in
1998, three payments in 1999, and two payments in 2000.

        We are required to pay interest at prime rate plus 3% per year on the
principal amount outstanding of $5.3 million from January 5, 1999 through April
1, 2000. We paid SmithKline $3.6 million in principal and interest in 1998; we
paid SmithKline $6.7 million in principal and interest in 1999, including the
January 3, 2000 payment, which we pulled-forward and paid in October 1999. At
December 31, 1999, there is a balance of $1.5 million owing on the note, which
we have included in the current portion of notes payable and other liabilities.

        Under the SKB Agreement, the guaranteed value of the common stock was
revised from $9.0 million to $8.0 million based on the fair market value of our
common stock on April 1, 1998, with a maximum of 1,675,512 shares to be issued
in total. In consideration for the adjustment, we paid SmithKline $1.0 million
on December 31, 1997. As of April 1, 1998, the aggregate fair market value of
the shares previously issued under the agreement was less than $8.0 million and,
as a result, we issued an additional 1,037,779 shares of common stock and paid
additional cash consideration of approximately $308,000 to SmithKline in
fulfillment of our obligation to issue equity to SmithKline under the SKB
Agreement.

        Under a related Supply Agreement, SmithKline will manufacture and supply
Ridaura, in final package form, to us for an initial term through December 2001.
Under a Supply Agreement with Pharmascience, we intend, through our relationship
with SmithKline or other future vendors, to supply Ridaura exclusively in Canada
to Pharmascience.



                                       35
<PAGE>   37

    License Agreements:  Genentech

        Relaxin. In September 1993, we entered into an agreement with Genentech,
Inc., which was subsequently amended in July 1994, for an exclusive right to
make, use and sell certain products arising from recombinant human relaxin in a
defined field. In 1994, we incurred a liability of $684,000 for the purchase of
research materials and payment of technology transfer costs under the agreement.
This amount, payable in the form of cash or equity, was originally due on
September 30, 1998, which was extended to April 1, 1999 with interest accruing
on the amount outstanding at an annual rate of 7.5%. In April 1999, we issued
95,815 shares to Genentech with a fair market value of $709,000 to satisfy this
obligation. We will also pay to Genentech royalties on sales of products arising
from relaxin, if any. In April 1996, we acquired worldwide rights to relaxin
from Genentech.

        Interferon Gamma. In December 1995, we entered into a license agreement
with Genentech to acquire exclusive development and marketing rights to
interferon gamma in the United States for dermatologic indications. In May 1998,
we amended and restated this agreement and entered into a new license agreement
that granted us an exclusive license under certain patent rights and know-how to
ACTIMMUNE(R) (interferon gamma) for the treatment of chronic granulomatous
disease (CGD) and several additional indications (non-cancer dermatological
diseases, infectious diseases, osteopetrosis, pulmonary fibrosis and asthma) in
the United States. Under the terms of the agreement, we issued Genentech 380,048
shares of its common stock valued at $2.0 million at the time of closing with a
guaranteed value of $4.0 million at the second closing date, originally set as
December 28, 1998. On December 28, 1998, we amended the second closing date to
any time on or before December 15, 1999. Based on that provision, in December
1999 we issued an additional 228,882 shares of Common Stock to Genentech to
bring the value of the consideration to $4.0 million. We will also be required
to pay Genentech certain development and commercialization milestones and
royalties on sales. We also entered into a Supply Agreement with Genentech
whereby they will manufacture and supply interferon gamma, in bulk form or
finished product. This agreement will terminate on the earlier of May 5, 2001 or
the date on which we enter into a supply agreement with a third party
manufacturer that is mutually approved by both parties. The realizability of the
license is uncertain as it relates to technology that has not resulted in any
FDA approved product, is dependent on additional research and development in
order to be commercialized, and has no alternative future uses. We recorded a
$4.0 million non-cash license fee charge in 1998.

    License Agreements:  Soltec

        In June 1996, we entered into an exclusive License Agreement with Soltec
Research Pty Ltd. (Soltec), to develop and market a foam formulation of the
dermatologic drug, betamethasone valerate, in North America. Under the terms of
the license, we paid and expensed $75,000 ($35,000 was paid in 1996, $22,500 was
paid in January 1998, and $17,500 was paid in April 1999), in licensing fees to
Soltec (based on certain milestones) and will pay royalties on future sales of
products, if any, arising from the licensed technology. We also have an
exclusive option on Soltec's foam formulation for the delivery of other
compounds.

        In July 1999, we received exclusive worldwide rights (excluding
Australia and New Zealand) from Soltec to develop, manufacture and market
ketoconazole foam (a quick-break foam formulation of the antifungal dermatologic
drug, ketoconazole). Under the terms of the agreement, we will pay up to a total
of $277,500 in license fees, of which $120,000 was paid upon signing of
agreement and expensed, $67,500 is due upon the filing of a New Drug Application
("NDA") and $90,000 is due upon FDA approval of product, plus royalties on
future product sales, if any, arising from the licensed technology. In addition,
we will pay Soltec ten percent (10%) of any upfront payments received in
connection with sublicense of the rights to the product.

        In December 1999, we entered into a comprehensive licensing agreement
with Soltec for exclusive rights to certain applications of a broad range of
unique topical delivery technologies, including aerosol foam formulations and
Soltec's patented Liquipatch(TM) technology. We paid Soltec a $500,000 license
fee upon signing of agreement and issued 80,154 shares of our common stock in
January 2000 valued at $500,000. The $1.0 million was charged to expense. In
addition, we will also be required to pay Soltec certain development and
commercialization milestones and royalties on sales.



                                       36
<PAGE>   38


    Agreement with Xoma

        In June 1994, we entered into a Technology Acquisition Agreement with
XOMA Corporation to purchase all rights to T-cell receptor (TCR) vaccines
technology and for the exclusive right to make, use and sell certain products
under a sublicense agreement in exchange for the issuance of two promissory
notes totaling $2.2 million which were repaid in February 1996. In addition to
these notes, we have accrued additional consideration of $500,000 (included in
the current portion of notes payable and other liabilities at December 31,
1999). The $500,000 is payable upon the earlier of the achievement of
commencement of Phase III clinical trials for a product involving the licensed
technology, or June 2000. This obligation was assumed by The Immune Response
Corporation (IRC), pursuant to an agreement we entered into on December 8, 1999.
Under the agreement, we and XOMA assigned our TCR intellectual property to IRC,
which owns additional TCR-related intellectual property and intends to carry
forward development of pharmaceutical products using the technology. Connetics
received a cash payment of $100,000 in 1999 and IRC common stock valued at
$433,000, and will receive additional cash, and royalties on future sales of
products. We are obligated to terminate, dismiss and withdraw all actions and
proceedings to prevent the issuance of, invalidate, revoke or otherwise render
unenforceable any of the patents rights that were taken or initiated prior to
December 8, 1999 within ninety (90) days from the date of the agreement. Once
our obligations are met, the $500,000 accrued liability will be released from
our balance sheet.

    Development, Commercialization and Supply Agreements

        In April 1998, we entered into a development, commercialization and
supply agreement with Suntory Pharmaceuticals (Suntory), a division of Suntory
Limited of Osaka, Japan, for relaxin for the treatment of scleroderma. Under the
terms of the agreement, Suntory will pay us up to approximately $14.0 million in
license fees and milestone payments, be responsible for all development and
commercialization expenses in Japan, and pay royalties on sales in Japan for the
treatment of scleroderma. Payments under this agreement are made to us in
Japanese yen. We have retained rights to all other indications in Japan for
relaxin. Suntory will purchase relaxin materials from us and make milestone
payments based upon development progress in the United States and Japan. On
April 30, 1998, Suntory paid a license fee of $1.5 million (net of $165,000
international withholding tax), and in May 1999, they paid a development fee of
$791,000 (net of $88,000 international withholding tax).

        In January 1999, we entered into a development, commercialization and
supply agreement with Medeva PLC (now Celltech Group PLC) of the United Kingdom
for certain therapeutic indications pertaining to relaxin in Europe. Under the
terms of the agreement, Celltech paid $8.0 million upon closing which included a
$4.0 million contract fee and a $4.0 million equity investment, and will pay
$17.0 million of milestone payments based upon development progress in the U.S.
and Europe and $5.0 million for the development and approval of each indication
in Europe in addition to scleroderma. Celltech is responsible for all
development and commercialization activities in Europe and is required to pay
royalties on sales in Europe. Celltech will reimburse us for 50% of our product
development costs in the U.S. up to a maximum of $1.0 million per quarter for an
estimated total of $10.0 million. Until the earlier of five years after we
launch ConXn in the United States or the end of the first calendar year when
Celltech's European net sales of ConXn exceed $25.0 million, Celltech will
receive 50% of our operating profits from U.S. ConXn sales. Celltech will also
purchase relaxin materials from us. For the year ended December 31, 1999, we
recorded $8.0 million in contract revenues ($4.0 million in contract fee and
$4.0 million for the quarterly reimbursement of product development costs) under
this agreement.

        In July 1999, we entered into a development, commercialization and
supply agreement with Paladin Labs Inc., a Canadian corporation, for ConXn, a
potential therapy for the treatment of scleroderma and organ fibrosis. Under the
terms of the agreement, we received an initial sum of $800,000, which includes
payments for development fees and an equity investment. In addition, we will
receive semi-annual development payments and potential milestone payments of
approximately $2.4 million over the next several years. Paladin is responsible
for all development and commercialization activities in Canada, and will pay
royalties on all sales of relaxin in Canada. For the year ended December 31,
1999, we recorded $400,000 in contract revenue under this agreement.

    Promotion Agreements



                                       37
<PAGE>   39

        In March 1999, we entered into two agreements with MGI Pharma, Inc.
(MGI). Under the terms of the agreements, MGI will promote Ridaura and Luxiq to
the rheumatology market in the United States in exchange for promotional fees.
These arrangements take advantage of MGI's specialty sales force that calls on
rheumatologists in the United States, and allows us to focus our attention on
the dermatology marketplace. For the year ended December 31, 1999, we recorded
$750,000 in promotion fee expense.

6.      FINANCING ARRANGEMENTS

    Long-Term Debt

     On September 24, 1998, we entered into a term Loan and Security Agreement
(the Term Loan) with a bank (the Lender), which was modified on December 22,
1998, under which we borrowed $4.0 million. The Term Loan bears interest at
prime rate plus 1.25% (9.75% at December 31, 1999) with interest only payments
for the first twelve months (through September 23, 1999), and is to be repaid
thereafter in forty-eight (48) equal monthly installments of principal plus
accrued interest. On the first anniversary of the loan, we had the right to
elect whether the aggregate Term Loan outstanding will bear interest at (i) a
floating rate equal to prime rate plus 1.25% or (ii) a fixed rate equal to 4.5
percentage points above the yield of the 48-month Treasury Bill (fixed at the
time of election). We elected for the Term Loan to bear interest at prime plus
1.25%. In October 1999, we made a $2.25 million payment to reduce the principal
loan balance down to $1.75 million. In conjunction with the Term Loan, we
granted the Lender a first priority security interest in our presently existing
intellectual property collateral, as defined in the loan documents. Covenants
governing the Term Loan require the maintenance of certain financial ratios, and
if we do not meet the covenants during the loan period, a restricted cash pledge
must be made against 100% of the outstanding loan balance. Principal maturities
of the debt under the Term Loan at December 31, 1999, are: $1.0 million in 2000
and $750,000 in 2001.

    Structured Equity Line Flexible Financing

        We have entered into a three year Structured Equity Line Flexible
Financing Agreement (the Equity Line) with Kepler Capital LLC (Kepler) that
allows us to access up to $25 million through sales of our common stock.
Kepler's commitment was first effective on December 1, 1997, and will remain
open until December 1, 2000. During any 90-day period within the three-year
term, if our stock meets certain volume restrictions and trades above $10.00,
then up to $500,000 would be drawn against the Equity Line in exchange for the
sale of stock at a discount to an approximate minimum price of $10.00. The
purchase price will be subject to a maximum discount of 15%. As a commitment fee
to Kepler for keeping the Equity Line available, we have issued warrants to
purchase 300,000 shares of common stock (see Note 9), and have an obligation to
issue a third warrant for a maximum additional 25,000 shares on December 1,
2000. As of December 31, 1999, we had not drawn down any amount against the
Equity Line. See Note 16.

7.      CAPITAL LEASE OBLIGATIONS AND CAPITAL LOANS

        We have borrowings under our capital leases and capital loan credit
lines totaling $1.1 million at December 31, 1999. No additional borrowings are
available under capital lease and capital loan credit lines at December 31,
1999. Under the terms of a master lease agreement, ownership of the leased
equipment reverts to us at the end of the lease term.




                                       38
<PAGE>   40


        As of December 31, 1999, we are obligated to make the following future
minimum lease payments under capital leases and principal payments on capital
loans:

<TABLE>
<CAPTION>
    --------------------------------------------------------------------------------------
    (in thousands)                                          CAPITAL LEASES   CAPITAL LOANS
                                                            ------------------------------
<S>                                                              <C>             <C>
    Year ending December 31:
       2000                                                      $54             $168
       2001                                                       39               --
                                                                 --------------------
    Total minimum lease and principal payments, respectively      93             $168
                                                                                 ====
      Less amount representing interest                            9
                                                                 ---
      Present value of future payments                            84
      Less current portion of capital lease obligations           47
                                                                 ---
    Non-current portion of capital lease obligations             $37
    --------------------------------------------------------------------------------------
</TABLE>

        The obligations under the capital leases and loans are secured by the
leasehold improvements and equipment financed, bear interest at fixed rates of
approximately 8% to 19% and are payable in monthly installments through
September 2001.

    Operating Leases

        We lease two facilities under non-cancelable operating leases. The first
lease expires in January 2003; the second lease commenced January 1, 1999 and
expires on January 31, 2002. The future minimum rental payments under the leases
as of December 31, 1999 are as follows (in thousands):

<TABLE>
<CAPTION>
        ---------------------------------------
        YEARS ENDING DECEMBER 31:
        ---------------------------------------
<S>                                      <C>
                2000                     $  934
                2001                        964
                2002                        703
                2003                         56
        ---------------------------------------
                                         $2,657
        ---------------------------------------
</TABLE>

        We recognize rent expense on a straight-line basis over the term of each
lease. Rent expense under operating leases was approximately $882,000, $687,000
and $639,000 for the years ended December 31, 1999, 1998 and 1997, respectively.

8.      NOTES RECEIVABLE FROM STOCKHOLDERS

        We held notes receivable of $65,000 at December 31, 1998 from a
stockholder for the purchase of our common stock. These notes bore interest at
rates ranging from 6% to 7% annually and were secured by the shares of common
stock held by the borrower. At December 31, 1999, all notes were paid in full
including accrued interest.

9.      STOCKHOLDERS' EQUITY

    Warrants

        We have outstanding warrants to purchase up to 1,360,193 shares of our
common stock, at various prices and with varying expiration dates. The following
table summarizes our outstanding warrants; additional details follow the table.



                                       39
<PAGE>   41


<TABLE>
<CAPTION>
        -----------------------------------------------------------------------------------------------
                                                  NUMBER OF       EXERCISE    TERMINATION
                   ACTIVITY                       WARRANTS         PRICE       IN YEARS     EXPIRATION
        -----------------------------------------------------------------------------------------------
<S>                                             <C>            <C>            <C>           <C>
        Issuance of Series B preferred stock       18,395          $4.89           7           2002
        -----------------------------------------------------------------------------------------------
        Master Bridge Loan agreement               22,727          $11.00          5           2000
        -----------------------------------------------------------------------------------------------
        Loan and security agreement                73,071          $5.78           5           2002
        -----------------------------------------------------------------------------------------------
        Issuance of Series A preferred stock       20,000          $7.43           5           2001
        -----------------------------------------------------------------------------------------------
        Structured Equity Line Flexible
            Financing Agreement                   250,000          $8.25           3           2000
        -----------------------------------------------------------------------------------------------
        Commitment Fee pursuant to
            Equity Line Agreement                  50,000      $4.84 - $6.875      5        2003 - 2004
        -----------------------------------------------------------------------------------------------
        Issuance of common stock                  905,000          $9.08           4           2001
        -----------------------------------------------------------------------------------------------
        Consulting services                         6,000          $6.00           5           2003
        -----------------------------------------------------------------------------------------------
        Consulting services                        15,000          $6.063          5           2004
        -----------------------------------------------------------------------------------------------
                                    TOTAL       1,360,193
        -----------------------------------------------------------------------------------------------
</TABLE>

        In July 1995, we issued warrants to purchase 18,395 shares of Series B
Preferred Stock pursuant to a capital lease and capital loan agreement. Each
such warrant was converted into a warrant for the purchase of one share of
common stock and such warrants are exercisable any time through July 2002.

        Under a Master Bridge Loan Agreement with certain of our stockholders in
December 1995, we issued warrants that expire in December 2000 to purchase a
total of 22,727 shares of common stock. Also in December 1995, in connection
with a loan and security agreement with a bank consortium, we issued warrants,
which expire in December 2002, to purchase 73,071 shares of common stock.

        In conjunction with our issuance of 200 shares of Series A Redeemable
Preferred Stock in December 1996, we issued warrants that allow the holders to
purchase up to an aggregate of 20,000 shares of our common stock, with an
expiration date of December 2001.

        In conjunction with the Equity Line (see Note 6), we issued a warrant on
January 2, 1997 to purchase 250,000 shares of common stock. In addition, we are
obligated to pay Kepler a "commitment fee" in the form of an additional warrants
to purchase our common stock, issuable on the first, second and third
anniversaries of the commencement of Kepler's commitment. The agreement provides
that the number of shares covered by each warrant will not exceed 25,000, with
the actual number determined based on a formula set forth in the agreement and
tied to whether or not the equity line has been drawn down. See Note 16.
Consequently, at December 1, 1999, we had an obligation to issue warrants to
Kepler to purchase 50,000 shares of our common stock at an average exercise
price of $5.86. We will be obligated to issue one additional five-year warrant
to Kepler on December 1, 2000, for up to a maximum of 25,000 shares (with the
precise total based on a formula set forth in the Agreement).

        In conjunction with our issuance of 1,810,000 shares in May 1997 to
certain private investors, we issued warrants to purchase 905,000 shares of our
common stock. These warrants will expire May 15, 2001.

        In January 1998, we issued a warrant to a third party to purchase 6,000
shares of common stock as partial compensation for services rendered to us in
connection with a private placement of our common stock on December 15, 1997. We
did not record the fair value of this warrant as the amount was immaterial.

        In July 1999, we issued a warrant to a third party to purchase 15,000
shares of common stock as partial compensation for financial advice pertaining
to investor and media relations. The warrant has an expiration date of July 1,
2004. We recorded the fair value of $66,000 for the issuance of this warrant.

    Dividend Restrictions

        Our loan agreement with a bank lender prohibits us from declaring or
paying a dividend without the bank's prior written consent.



                                       40
<PAGE>   42

    Common Shares Reserved for Future Issuance

        We have reserved shares of common stock as follows:

<TABLE>
<CAPTION>
        --------------------------------------------------------------------------
                                                                DECEMBER 31,
                                                           -----------------------
                                                             1999         1998
                                                           -----------------------
<S>                                                        <C>          <C>
        1994 Stock Plan                                    2,417,877    2,150,495
        1995 Employee Stock Purchase Plan                     89,305      289,538
        1995 Directors Stock Option Plan                     400,000      250,000
        1998 Supplemental Stock Plan                         237,500      500,000
        Non-plan stock options outstanding                    38,488       38,863
        Common stock warrants                              1,360,193    1,295,193
                                                          ------------------------
                                                 TOTAL     4,543,363    4,524,089
        --------------------------------------------------------------------------
</TABLE>


10.     STOCK PLANS

    1994 Stock Plan

        Our 1994 Stock Plan (the Plan) authorizes our Board of Directors (the
Board) to grant incentive stock options, non-statutory stock options, and stock
purchase rights for up to 2,600,000 shares of common stock. At our annual
meeting in May 1999, the stockholders approved the increase of shares in the
Plan to an aggregate of 3,100,000 shares of common stock. The Plan was
terminated on December 31, 1999, and the Board is no longer authorized to grant
options under the 1994 Plan.

        The options under this Plan expire no later than ten years from the date
of grant. The exercise price of the incentive stock options, non-statutory stock
options and options granted to 10% shareholders must be at least 100%, 85%, and
110%, respectively, of the fair value of the stock subject to the option on the
grant date. The price for shares purchased pursuant to stock purchase rights by
10% shareholders must be at least 100% of the fair market value of the stock on
the date of grant.

        The options generally become exercisable as determined by the Board, but
in no event at a rate of less than 20% per year for a period of five (5) years
from date of grant. Shares granted under the Plan pertaining to stock purchase
rights are generally subject to repurchase by us at the original issue price per
share. Our right to repurchase these shares generally expires ratably over a
period of time not greater than five years.

    1995 Director Stock Option Plan

        The 1995 Director Stock Option Plan (the Directors' Plan) was adopted by
the Board in December 1995. A total of 250,000 shares of common stock have been
reserved for issuance under the Directors' Plan. The Directors' Plan provides
for the grant of non-statutory stock options to non-employee directors of
Connetics. At our annual meeting in May 1999, the stockholders approved an
increase in the Directors' Plan to an aggregate of 400,000 shares of common
stock.

        The Directors' Plan provides that each person who first becomes a
non-employee director shall be granted a non-statutory stock option to purchase
30,000 shares of common stock (the First Option) on the date on which he or she
first becomes a non-employee director. Thereafter, on the date of each annual
meeting of our stockholders, each non-employee director is granted an additional
option to purchase 7,500 shares of common stock (a Subsequent Option) if he or
she has served on the Board for at least six months as of the annual meeting
date.

        Under the Directors' Plan, the First Option is exercisable in
installments as to 25% of the total number of shares subject to the First Option
on each of the first, second, third and fourth anniversaries of the date of
grant of the First Option; each Subsequent Option becomes exercisable in full on
the first anniversary of the date of grant of that



                                       41
<PAGE>   43
 Subsequent Option. The exercise price of all stock options granted under the
Directors' Plan shall be equal to the fair market value of a share of our common
stock on the date of grant of the option. Options granted under the Directors'
Plan have a term of ten years. At December 31, 1998, 165,000 shares had been
granted and were outstanding at a weighted average price of $6.07. At December
31, 1999, 217,500 shares had been granted, of which 180,000 shares were
outstanding at a weighted average price of $6.34, with 220,000 shares available
for future grants.

    1998 Supplemental Stock Plan

        On November 5, 1998, the Board approved the 1998 Supplemental Stock Plan
(the Supplemental Plan) that provided the Board the authority to grant
non-statutory stock options to employees and consultants for up to 500,000
shares of common stock. Effective May 19, 1999, the Board is no longer
authorized to grant options under the Supplemental Plan.

        Officers and directors of Connetics were not eligible for grants under
the Supplemental Plan. The options granted under this Plan expire no later than
ten years from the date of grant. The exercise price of the non-statutory stock
options is at least 100% of the fair value of the stock subject to the option on
the grant date. The options generally become exercisable at such times as
determined by the Board, but in no event at a rate of less than 20% per year for
a period of five (5) years from date of grant.

    2000 Stock Plan

        In February 1999, the Board approved, and in May 1999 the stockholders
approved, a new 2000 Stock Plan (the 2000 Plan). The Plan became available on
January 1, 2000, and was initially funded with 808,512 shares, which equals
three percent (3%) of shares outstanding on December 31, 1999. On the first day
of each new calendar year during the term of the 2000 Plan, the number of shares
available will be increased (with no further action needed by the Board or the
stockholders) by a number of shares equal to the lesser of three percent of the
number of shares of common stock outstanding on the last preceding business day,
or an amount determined by the Board.

    Non-Plan Stock Options

        We may from time to time grant options outside one of our qualified
plans (Non-Plan Stock Options). As of December 31, 1998, a total of 64,612
Non-Plan Stock Options had been granted and options to purchase 38,863 shares
were outstanding at a weighted average price of $4.74 per share. At December 31,
1999, a total of 139,612 Non-Plan Stock Options had been granted with options to
purchase 38,488 shares were outstanding at a weighted average price of $4.79 per
share.




                                       42
<PAGE>   44




        Activity under the Plan, the Directors' Plan, Supplemental Stock Plan
and Non-Plan Stock Options is summarized as follows:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
                                                             OUTSTANDING OPTIONS
                                                          -------------------------
                                        SHARES                             WEIGHTED
                                      AVAILABLE            NUMBER          AVERAGE
                                         FOR                 OF            EXERCISE
                                        GRANT              SHARES           PRICE
-----------------------------------------------------------------------------------
<S>                                   <C>                 <C>               <C>
Balance, December 31, 1996               470,161          1,033,186         $2.04
  Additional shares authorized           500,000                 --            --
  Options granted                       (865,023)           904,635         $6.15
  Options exercised                           --           (147,629)        $0.67
  Options canceled                        58,349            (58,349)        $4.64
                                      ----------          ---------
Balance, December 31, 1997               163,487          1,731,843         $4.33
  Additional shares authorized         1,225,000                 --            --
  Options granted                     (1,033,000)         1,033,000         $3.68
  Options exercised                           --           (185,328)        $0.80
  Shares repurchased                       4,356                 --         $0.44
  Options canceled                       247,135           (247,135)        $5.27
                                      ----------          ---------
Balance, December 31, 1998               606,978          2,332,380         $4.22
  Additional shares authorized           499,250                 --            --
  Options granted                     (1,160,608)         1,160,608         $6.18
  Options exercised                           --           (316,993)        $2.38
  Options canceled                       274,380           (302,130)        $5.81
                                      ----------          ---------
BALANCE, DECEMBER 31, 1999               220,000          2,873,865         $5.05
-----------------------------------------------------------------------------------
</TABLE>

        The following table summarizes information concerning outstanding and
exercisable options at December 31, 1999:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
                                 OPTIONS OUTSTANDING                   OPTIONS EXERCISABLE
                      -------------------------------------------  ---------------------------
                                     WEIGHTED
     RANGE             NUMBER        AVERAGE         WEIGHTED       NUMBER         WEIGHTED
      OF                 OF       REMAINING LIFE     AVERAGE         OF            AVERAGE
EXERCISE PRICES        SHARES       (IN YEARS)    EXERCISE PRICE    SHARES      EXERCISE PRICE
----------------------------------------------------------------------------------------------
<S>                   <C>              <C>           <C>           <C>              <C>
 $0.44 - $ 3.25         692,711        7.19          $ 1.83          462,535        $ 1.13
 $3.38 - $ 4.31         621,446        8.03          $ 4.00          288,105        $ 4.01
 $4.50 - $ 6.50         731,360        9.60          $ 6.10           69,875        $ 4.77
 $6.75 - $ 7.50         710,391        8.12          $ 7.17          331,947        $ 7.07
 $7.75 - $11.00         117,957        6.41          $10.11          107,810        $10.21
 --------------       ---------        ----          ------        ---------        ------
 $0.44 - $11.00       2,873,865        8.18          $ 5.05        1,260,272        $ 4.33
----------------------------------------------------------------------------------------------
</TABLE>


        For the years ended December 31, 1999, 1998 and 1997, we recorded
deferred compensation expense for the difference between the exercise price and
the deemed fair value of our common stock, related to shares issued pursuant to
stock purchase rights and options granted in 1996 and 1995. These options were
granted to provide additional incentives to retain management and key employees.
This deferred compensation expense is being amortized over the related vesting
period, generally a 48-month period.

    1995 Employee Stock Purchase Plan

        The Board adopted the 1995 Employee Stock Purchase Plan (the Purchase
Plan) in December 1995. We have reserved 500,000 shares of common stock for
issuance under the Purchase Plan. The Purchase Plan is administered by the
Compensation Committee of the Board. Employees (including officers and employee
directors) of Connetics are eligible to participate if they are employed by us
or any such subsidiary for at least 20 hours per week and more than 5 months per
year. The Purchase Plan permits eligible employees to purchase common stock
through payroll deductions, which may not exceed 15% of an employee's
compensation, at a price equal to the lower



                                       43
<PAGE>   45

of 85% of the fair market value of our common stock at the beginning or end of
the offering period. We issued 200,233 shares under the plan in 1999 and 156,609
shares in 1998. At December 31, 1999, we had 89,305 shares reserved for future
issuance. For the years ended December 31, 1999 and 1998, we recorded $221,000
and $323,000 in stock compensation expense relating to this plan.

    Pro Forma Information

        In accordance with the provisions of SFAS 123, we apply APB Opinion No.
25 and related interpretations in accounting for our stock option plans and,
accordingly, do not recognize compensation cost for options granted with
exercise prices not less than fair value on the date of grant. If we had elected
to recognize compensation cost based on the fair value of the options granted at
grant date and including stock purchases under the Purchase Plan as prescribed
by SFAS 123, our net loss and net loss per share numbers would have been
increased to the pro forma amounts indicated in the table below for the years
ended December 31:

<TABLE>
<CAPTION>
        ---------------------------------------------------------------------------------
        (in thousands except per share amounts)      1999           1998          1997
                                                   --------------------------------------
<S>                                                <C>            <C>           <C>
        NET LOSS:
            as reported                            $(27,283)      $(26,595)     $(27,935)
            pro forma                              $(29,473)      $(27,964)     $(29,287)
        NET LOSS PER SHARE:
            as reported                            $  (1.21)      $  (1.61)     $  (2.69)
            pro forma                              $  (1.30)      $  (1.69)     $  (2.81)
        ---------------------------------------------------------------------------------
</TABLE>


        We estimate the fair value of each option grant on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions:

<TABLE>
<CAPTION>
    -------------------------------------------------------------------------------------------
                                           STOCK OPTION PLANS           STOCK PURCHASE PLAN
                                        -------------------------    --------------------------
                                        1999     1998      1997       1999      1998     1997
                                        -------------------------------------------------------
<S>                                     <C>      <C>       <C>        <C>       <C>      <C>
    Expected stock price volatility     76.0%    90.0%     60.0%      76.0%     76.6%    60.0%
    Risk-free interest rate              5.71%    4.74%     5.77%      5.70%     5.05%    5.63%
    Expected life (in years)             3.7      3.8       4.1        0.5       0.5      0.5
    Expected dividend yield              0.0%     0.0%      0.0%       0.0%      0.0%     0.0%
    -------------------------------------------------------------------------------------------
</TABLE>

        The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because our stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, our management
does not believe that the existing models necessarily provide a reliable single
measure of the fair value of its options. The weighted average fair value of
options granted was $3.84 in 1999, $2.44 in 1998 and $3.12 per share in 1997.

        The effects on pro forma disclosures of applying SFAS 123 are not likely
to be representative of the effects on pro forma disclosures of future years.

    1997 Stockholder Rights Plan

        In May 1997, we adopted a stockholder rights plan (the Rights Plan) that
provides existing stockholders with the right to purchase one one-thousandth of
a share of our Series B Participating Preferred Stock, $0.001 par value, at an
exercise price of $49 per one one-thousandth of a preferred share in the event
of certain changes in our ownership. We will be entitled to redeem the rights at
$0.01 per right at any time on or before the tenth day following acquisition by
a person or group of 15% or more of our common stock. The Rights Plan may serve
as a deterrent to certain abusive takeover tactics that are not in the best
interest of stockholders. At December 31, 1999, and 1998, a total of 90,000
shares were designated under the Rights Plan and no shares were issued and
outstanding.



                                       44
<PAGE>   46


11.     EARNINGS PER SHARE

        The following table sets forth the computation of basic and diluted
earnings per share for the years ended December 31:

<TABLE>
<CAPTION>
   ----------------------------------------------------------------------------------------------------
   (in thousands except per share amounts)                         1999          1998           1997
                                                                 --------      --------       ---------
<S>                                                              <C>           <C>            <C>
   NUMERATOR:
      Net loss                                                   $(27,283)     $(26,595)      $(27,935)
      Preferred stock dividends                                        --            (1)          (124)
                                                                 --------      --------       --------
      Numerator for basic and diluted earnings per share --
        loss to common stockholders                               (27,283)      (26,596)       (28,059)

   DENOMINATOR:
      Denominator for basic and diluted earnings per share --
        weighted-average shares                                    22,619        16,533         10,412

   BASIC AND DILUTED NET LOSS PER SHARE                          $  (1.21)     $  (1.61)      $  (2.69)
   ----------------------------------------------------------------------------------------------------
</TABLE>

        Options to purchase 2,873,865 shares of common stock at exercise prices
ranging from $0.44 to $11.00 and warrants to purchase 1,360,193 shares of common
stock at exercise prices ranging from $4.89 to $11.00 were outstanding during
1999 but were not included in the computation of diluted earnings per share as
their effect would be antidilutive.

12.     INCOME TAXES

        As of December 31, 1999, we had federal and state net operating loss
carryforwards of approximately $96.1 million and $14.8 million. We also had
federal and California research and development tax credit carryforwards of
approximately $3.1 million and $2.1 million. The federal net operating loss and
credit carryforwards will expire at various dates beginning in the year 2008
through 2019, if we do not use them. The California state net operating losses
will expire at various dates beginning in 2000 through 2003, if we do not use
them.

        Our ability to use our net operating loss carryforwards and credits may
be subject to an annual limitation due to the "change in ownership" provisions
of the Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before we are able to use them.

        Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets for financial reporting and
the amount used for income tax purposes. Significant components of our deferred
tax assets for federal and state income taxes are as follows:

<TABLE>
<CAPTION>
    ---------------------------------------------------------------------------------
    (in thousands)                                                  DECEMBER 31,
                                                                  1999        1998
                                                                ---------------------
<S>                                                             <C>         <C>
    Deferred tax assets
      Net operating loss carryforward ....................      $ 33,500    $ 26,600
      Capitalized research and development ...............         4,200       3,100
      Research credit ....................................         4,600       3,300
      Other - Net ........................................         3,200       2,500
                                                                ---------------------
      Total Deferred Tax Assets ..........................        45,500      35,500
      Valuation allowance ................................       (45,500)    (35,500)
                                                                ---------------------
    Net deferred tax assets ..............................      $     --    $     --
    ---------------------------------------------------------------------------------
</TABLE>

        Due to our lack of earnings history, the net deferred tax assets have
been fully offset by a valuation allowance. The net valuation allowance
increased by $10.0 million and $9.6 million for the years ended December 31,
1999 and 1998, respectively.



                                       45
<PAGE>   47

13.     INTERMUNE

        On April 28, 1999, our wholly-owned subsidiary InterMune became an
independent company through venture capital funding and a portion of our
original investment in InterMune was returned to us. We established InterMune to
develop Actimmune for serious pulmonary and infectious diseases and congenital
disorders shortly after we in-licensed Actimmune from Genentech in May 1998. We
retained approximately a 10% equity position in InterMune, which is now
approximately a 7% equity position, received a license fee payment of $500,000,
a $4.7 million return of invested capital, and will receive an additional return
of invested capital of $3.5 million in the form of cash and equity over the next
two years. We have retained commercial rights to and revenue from Actimmune for
chronic granulomatous disease up to a predetermined annual baseline that is
preset for three years (January 15, 1999 through December 31, 2001) and will
receive a royalty on Actimmune sales thereafter. In addition, we have retained
the product rights for potential dermatological applications of Actimmune.

14.     SUBSEQUENT EVENT (UNAUDITED)

        Structured Equity Line Flexible Financing. In January 2000, our stock
traded over $10.00 per share for the first time since the Equity Line Agreement
became available in December 1997. Consequently, Kepler exercised its right to
require us to draw down $500,000 against the equity line in exchange for our
common stock, and we issued 58,438 shares to Kepler at a purchase price of
$8.556 on February 10, 2000.



                                       46
<PAGE>   48


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

We have had no disagreements with our independent public accountants on
accounting and financial disclosure.

                                    PART III

ITEM 10. OUR DIRECTORS AND EXECUTIVE OFFICERS

        The information required by this Item 10 regarding directors of the
Company is incorporated into this item by reference to the information set forth
under "Election of Directors" and "Further Information Concerning the Board of
Directors" in the Company's definitive Proxy Statement ("2000 Proxy Statement")
to be filed with the Securities and Exchange Commission and relating to the
Company's annual meeting of stockholders to be held May 11, 2000.

The following table shows information about our executive officers as of March
1, 2000:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
NAME                         AGE                    POSITION
--------------------------------------------------------------------------------------------
<S>                          <C>    <C>
Thomas G. Wiggans            47     President, Chief Executive Officer and Director
--------------------------------------------------------------------------------------------
John L. Higgins              29     Executive Vice President, Finance and Administration and
                                    Chief Financial Officer
--------------------------------------------------------------------------------------------
C. Gregory Vontz             39     Executive Vice President and Chief Commercial Officer
--------------------------------------------------------------------------------------------
Krisztina Zsebo, Ph.D.       44     Executive Vice President, Product Development
--------------------------------------------------------------------------------------------
Robert G. Lederer.           54     Sr. Vice President, Commercial Operations
--------------------------------------------------------------------------------------------
Katrina J. Church.           38     Vice President, Legal Affairs, Corporate Counsel and
                                    Secretary
--------------------------------------------------------------------------------------------
</TABLE>

        Thomas G. Wiggans has served as President, Chief Executive Officer and
as a director since July 1994. From February 1992 to April 1994, Mr. Wiggans
served as President and Chief Operating Officer of CytoTherapeutics, a
biotechnology company. From 1980 to February 1992, Mr. Wiggans served in various
positions at Ares-Serono Group, a pharmaceutical company, including President of
its U.S. pharmaceutical operations and Managing Director of its U.K.
pharmaceutical operations. From 1976 to 1980 he held various sales and marketing
positions with Eli Lilly & Co., a pharmaceutical company. He is currently a
director the Biotechnology Industry Organization, and Chairman of its Emerging
Company Section. He is also a director of Paladin Labs, a public Canadian
pharmaceutical company, and another private pharmaceutical company. Mr. Wiggans
received a B.S. in Pharmacy from the University of Kansas and an M.B.A. from
Southern Methodist University.

        John L. Higgins has served as Chief Financial Officer since September
1997, and as Executive Vice President, Finance and Administration, since January
2000. He served as Vice President, Finance and Administration from the time he
joined Connetics through December 1999. Prior to joining Connetics, he was a
member of the executive management team at BioCryst Pharmaceuticals, Inc. Before
joining BioCryst in 1994, Mr. Higgins was a member of the health care banking
team of Dillon, Read & Co. Inc., an investment banking firm. He is a director of
InterMune Pharmaceuticals, Inc. He received his A.B. from Colgate University.

        C. Gregory Vontz joined the Company as Executive Vice President, Chief
Commercial Officer in December of 1999. Before joining the Company, Mr. Vontz
spent 12 years with Genentech, Inc., most recently as Director of New Markets
and Healthcare Policy. Before joining Genentech, Inc. in 1987, Mr. Vontz held
sales positions with Merck, Sharpe & Dohme. Mr. Vontz received his B.S. in
Chemistry from the University of Florida and his M.B.A. from the Haas School of
Business at University of California at Berkeley.

        Krisztina Zsebo, Ph.D. has served as Executive Vice President, Research
and Product Development since January 2000. Prior to joining Connetics, she was
Vice President of Biopharmaceuticals and Implant Division at ALZA. Before
joining ALZA, she was a member of the executive management team at Cell Genesys,
and prior to that, she was at AMGEN from 1984-1992.



                                       47
<PAGE>   49

        Robert G. Lederer joined the Company as Senior Vice President, Marketing
and Sales in July 1998, and his title was changed to Senior Vice President,
Commercial Operations in January 1999. Before joining the Company, Mr. Lederer
spent 15 years with Serono Laboratories, most recently as the Executive Vice
President for Business Operations. Before joining Serono, Mr. Lederer held sales
and management positions with Becton Dickinson and Genovese Drugs. Mr. Lederer
received his B.A. from St. John's University in New York.

        Katrina J. Church has served as Vice President, Legal Affairs and
Corporate Counsel since June 1998, and as Secretary since September 1998. Prior
to joining Connetics, Ms. Church served in various positions at VISX,
Incorporated, most recently as Vice President, General Counsel. Before joining
VISX in 1991, Ms. Church practiced law with the firm Hopkins & Carley in San
Jose, California. Ms. Church received her J.D. from the New York University
School of Law, and her A.B. from Duke University.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item 11 regarding compensation of Connetics'
directors and executive officers is incorporated into this item by reference
(except to the extent allowed by Item 402(a)(8) of Regulation S-K) to the 2000
Proxy Statement section entitled "Executive Compensation and Related
Information."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item 12 regarding beneficial ownership of the
Common Stock by certain beneficial owners and by management of the Company is
incorporated into this item by reference to the 2000 Proxy Statement section
entitled "Common Stock Ownership of Certain Beneficial Owners and Management."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item 13 regarding certain relationships and
related transactions with management of the Company is incorporated into this
item by reference to the 2000 Proxy Statement section entitled "Certain
Relationships and Related Transactions."

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)     1.     Financial Statements. See Index to Consolidated Financial
               Statements at Item 8 on Page 25 of this Report.

        2.     Financial Statement Schedules. Financial statement schedules are
               omitted because they are not applicable or are not required as
               the information required to be set forth therein is included in
               the financial statements or notes thereto.

        3.     The Exhibits filed as a part of this Report are listed in the
               Index to Exhibits.

(b)     REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the fourth
        quarter of 1999.

(c)     EXHIBITS. See Index to Exhibits.

(d)     FINANCIAL STATEMENT SCHEDULES. See Item 14(a)(2), above.



                                       48
<PAGE>   50


                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

                                  Connetics Corporation
                                  a Delaware corporation


                                  By: /s/  JOHN L. HIGGINS
                                      ------------------------------------------
                                      John L. Higgins
                                      Executive Vice President, Finance and
                                      Administration and Chief Financial Officer

Date: March 1, 2000







                                       49
<PAGE>   51


                                POWER OF ATTORNEY

        Each person whose signature appears below constitutes and appoints
Thomas G. Wiggans and John L. Higgins, and each of them, his attorneys-in-fact,
each with the power of substitution, for him in any and all capacities, to sign
any amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith with the Securities and
Exchange Commission, granting to said attorneys-in-fact, or his substitute or
substitutes, the power and authority to perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.

        Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons in the capacities and
on the dates indicated.


<TABLE>
<CAPTION>
SIGNATURE                                          TITLE                        DATE
---------                                          -----                        ----
<S>                                  <C>                                   <C>

PRINCIPAL EXECUTIVE OFFICER:

/s/  THOMAS G. WIGGANS               President, Chief Executive Officer    March 1, 2000
-----------------------------        and Director
Thomas G. Wiggans

PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:

/s/  JOHN L. HIGGINS                 Executive Vice President, Finance     March 1, 2000
--------------------------           and Administration and Chief
John L. Higgins                      Financial Officer

CHAIRMAN OF THE BOARD:

/s/  G. KIRK RAAB                    Director                              March 1, 2000
--------------------------
G. Kirk Raab

ADDITIONAL DIRECTORS:

/s/  ALEXANDER E. BARKAS             Director                              March 1, 2000
--------------------------
Alexander E. Barkas

/s/  EUGENE A. BAUER                 Director                              March 1, 2000
--------------------------
Eugene A. Bauer

/s/  BRIAN H. DOVEY                  Director                              March 1, 2000
--------------------------
Brian H. Dovey

/s/  JOHN C. KANE                    Director                              March 1, 2000
--------------------------
John C. Kane

/s/  THOMAS D. KILEY                 Director                              March 1, 2000
--------------------------
Thomas D. Kiley

/s/  JOSEPH J. RUVANE, JR.           Director                              March 1, 2000
--------------------------
Joseph J. Ruvane, Jr.
</TABLE>




                                       50
<PAGE>   52


                              CONNETICS CORPORATION
                                INDEX TO EXHIBITS
                                  [Item 14(c)]

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Exhibit
Number      Description
--------------------------------------------------------------------------------
<S>         <C>
3.1*        Form of Amended and Restated Certificate of Incorporation
            (previously filed as an exhibit to Form S-1 Registration Statement
            No. 33-80261)

3.2*        Form of Bylaws (previously filed as an exhibit to Form S-1
            Registration Statement No. 33-80261)

3.3*        Amendment to the Company's Amended and Restated Certificate of
            Incorporation, as filed with the Delaware Secretary of State on May
            15, 1997 (previously filed as an exhibit to the Company's Report on
            Form 8-K dated May 23, 1997)

3.4*        Certificate of Designation of Rights, Preferences and Privileges of
            Series B Participating Preferred Stock, as filed with the Delaware
            Secretary of State on May 15, 1997. Reference is made to Exhibit
            4.2.

4.1*        Form of Common Stock Certificate (previously filed as Exhibit 4.1 to
            the Company's Report on Form 10-K dated March 30, 1999)

4.2*        Preferred Shares Rights Agreement, dated as of May 20, 1997, between
            the Company and U.S. Stock Transfer Corporation, including the
            Certificate of Designation of Rights, Preferences and Privileges of
            Series B Participating Preferred Stock, the form of Rights
            Certificate and the Summary of Rights attached thereto as Exhibits
            A, B and C, respectively (previously filed as an exhibit to
            Registration Statement on Form 8-A filed on May 23, 1997)

10.1*       Form of Indemnification Agreement with the Company's directors and
            officers (previously filed as an exhibit to the Company's Form S-1
            Registration Statement No. 33-80261)

10.2(M)*    1994 Stock Plan, as amended, and form of Option Agreement
            (previously filed as Exhibit 4.1 to the Company's Form S-8
            Registration Statement No. 333-85155)

10.3(M)*    1995 Employee Stock Purchase Plan, as amended, and form of
            Subscription Agreement (previously filed as an exhibit to
            Post-Effective Amendment No. 1 to Form S-8 Registration Statement
            No. 333-04985)

10.4(M)*    1995 Directors' Stock Option Plan, as amended, and form of Option
            Agreement (previously filed as Exhibit 4.1 to the Company's Form S-8
            Registration Statement No. 333-85155)

10.5+*      License Agreement dated September 27, 1993, between Genentech, Inc.
            and Connetics, Amendment dated July 14, 1994, and side letter
            agreement dated November 17, 1994 (previously filed as an exhibit to
            Form S-1 Registration Statement No. 33-80261)

10.6*       Assignment and Assumption Agreement, dated June 3, 1994, by and
            between Connetics and XOMA Corporation (previously filed as an
            exhibit to Form S-1 Registration Statement No. 33-80261)

10.7+*      Technology Acquisition Agreement dated June 3, 1994 by and between
            Connetics and XOMA Corporation, and License Agreement dated February
            27, 1990 by and between Arthur A. Vandenbark, Ph.D. and XOMA
            Corporation (previously filed as an exhibit to Form S-1 Registration
            Statement No. 33-80261)

10.8+*      Agreement on Interferon Gamma-1B dated December 8, 1995 by and
            between Connetics and Genentech, Inc. (previously filed as an
            exhibit to Form S-1 Registration Statement No. 33-80261)
</TABLE>


                                       51
<PAGE>   53

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Exhibit
Number      Description
--------------------------------------------------------------------------------
<S>         <C>
10.9*       Business Loan Agreement, dated July 18, 1995, among Connetics,
            Silicon Valley Bank and MMC/GATX Partnership No. 1 (previously filed
            as an exhibit to Form S-1 Registration Statement No. 33-80261)

10.10+*     Research Collaboration and Assignment Agreement, dated July 1, 1994,
            between the Company and Dr. Arthur A. Vandenbark (previously filed
            as an exhibit to Form S-1 Registration Statement No. 33-80261)

10.11*      Consulting Agreement dated November 17, 1993 between Connetics and
            Brian Seed (previously filed as an exhibit to Form S-1 Registration
            Statement No. 33-80261)

10.12*      Consulting Agreement dated November 17, 1993 between Connetics and
            Eugene Bauer (previously filed as an exhibit to Form S-1
            Registration Statement No. 33-80261)

10.13(M)*   Employment Agreement dated June 9, 1994 between Connetics and Thomas
            Wiggans (previously filed as an exhibit to the Company's Form S-1
            Registration Statement No. 33-80261)

10.14(M)*   Loan Agreements between the Company and Thomas Wiggans dated July
            15, 1994 and August 1, 1994 (previously filed as an exhibit to Form
            S-1 Registration Statement No. 33-80261)

10.15(M)*   Letter Agreement with G. Kirk Raab dated October 1, 1995 (previously
            filed as an exhibit to Form S-1 Registration Statement No. 33-80261)

10.16*      Facility Master Lease between the Company and Renault & Handley
            dated February 9, 1994 (previously filed as an exhibit to Form S-1
            Registration Statement No. 33-80261)

10.17*      Loan and Security Agreement dated December 21, 1995 by and among the
            Company, Silicon Valley Bank and MMC/GATX Partnership No. 1
            (previously filed as an exhibit to Form S-1 Registration Statement
            No. 33-80261)

10.18+*     Agreement on Relaxin Rights in Asia dated April 1, 1996 between the
            Company and Mitsubishi Chemical Corporation (previously filed as an
            exhibit to the Company's Quarterly Report on Form 10-Q for the
            fiscal quarter ended June 30, 1996)

10.19+*     Soltec License Agreement dated June 14, 1996 (previously filed as an
            exhibit to the Company's Quarterly Report on Form 10-Q for the
            fiscal quarter ended June 30, 1996)

10.20(M)*   Form of Directors and Officers Change in Control Agreement
            (previously filed as an exhibit to the Company's Quarterly Report on
            Form 10-Q for the fiscal quarter ended September 30, 1996)

10.21*      Warrant, dated December 4, 1996 between Connetics and a certain
            purchaser (previously filed as an exhibit to the Company's Report on
            Form 8-K dated December 4, 1996)

10.22+*     Asset Purchase Agreement dated December 2, 1996 between Connetics,
            SmithKline Beecham Corporation, SmithKline Beecham Pharma Inc.,
            SmithKline Beecham Properties, Inc. and SmithKline Beecham
            Inter-American Corporation (previously filed as an exhibit to the
            Company's Report on Form 8-K dated January 15, 1997)

10.23*      Stock Issuance Agreement dated December 31, 1996 between Connetics
            and SmithKline Beecham Properties, Inc (previously filed as an
            exhibit to the Company's Report on Form 8-K dated January 15, 1997)

10.24*      Secured Promissory Note dated December 31, 1996 issued to SmithKline
            Beecham Corporation (previously filed as an exhibit to the Company's
            Report on Form 8-K dated January 15, 1997)

10.25*      Security Agreement dated December 31, 1996 between Connetics and
            SmithKline Beecham Corporation (previously filed as an exhibit to
            the Company's Report on Form 8-K dated January 15, 1997)
</TABLE>


                                       52
<PAGE>   54

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Exhibit
Number      Description
--------------------------------------------------------------------------------
<S>         <C>
10.26+*     Supply Agreement dated December 31, 1996 between Connetics and
            SmithKline Beecham Corporation (previously filed as an exhibit to
            the Company's Report on Form 8-K dated January 15, 1997)

10.27*      Structured Equity Line Flexible Financing Agreement dated January 2,
            1997 between Connetics and Kepler Capital LLC (previously filed as
            an exhibit to the Company's Annual Report on Form 10-K for the
            fiscal year ended December 31, 1996)

10.28*      Registration Rights Agreement dated January 2, 1997 between
            Connetics and Kepler Capital LLC (previously filed as an exhibit to
            the Company's Annual Report on Form 10-K for the fiscal year ended
            December 31, 1996)

10.29(M)*   Form of Notice of Stock Option Grant to G. Kirk Raab for stock
            option issued in January 1997 (previously filed as an exhibit to
            Post-Effective Amendment No. 1 to Form S-8 Registration Statement
            No. 333-04985)

10.30*      Common Stock and Warrant Purchase Agreement dated May 15, 1997 by
            and among Connetics, Genentech, Inc. and certain investors
            (previously filed as an exhibit to Form S-3 Registration Statement
            No. 333-21941)

10.31*      Registration Rights agreement dated May 15, 1997 by and among
            Connetics and certain investors (previously filed as an exhibit to
            Form S-3 Registration Statement No. 333-21941)

10.32*      Form of Common Stock Purchase Warrant issued to certain investors on
            May 15, 1997 (previously filed as an exhibit to Form S-3
            Registration Statement No. 333-21941)

10.33*      Amendment dated November 13, 1997 to Secured Promissory Note dated
            December 31, 1996 issued to SmithKline Beecham Corporation
            (previously filed as an exhibit to Form S-1 Registration Statement
            No. 333-41195)

10.34*      Letter Agreement dated November 26, 1997 between Connetics and
            Gerard Klauer Mattison & Co., Inc. (previously filed as an exhibit
            to Form S-1 Registration Statement No. 333-41195)

10.35*      Omnibus Agreement with SmithKline Beecham Corporation and related
            entities dated December 18, 1997 (previously filed as an exhibit to
            Form S-1 Registration Statement No. 333-41195)

10.36*      Canadian Asset Purchase Agreement with Pharmascience, Inc. dated
            December 19, 1997 (previously filed as an exhibit to Form S-1
            Registration Statement No. 333-41195)

10.37*      Supply Agreement with Pharmascience, Inc. dated December 19, 1997
            (previously filed as an exhibit to Form S-1 Registration Statement
            No. 333-41195)

10.38*+     License Agreement dated January 1, 1998 between Connetics and Soltec
            Research Pty Limited (previously filed as an exhibit to the
            Company's Annual Report on Form 10-K for the fiscal year ended
            December 31, 1997)

10.39*+     Agreement on Relaxin dated January 19, 1998 by and between Connetics
            and Howard Florey Institute of Experimental Physiology and Medicine
            (previously filed as an exhibit to the Company's Annual Report on
            Form 10-K for the fiscal year ended December 31, 1997)

10.40*      Common Stock Purchase Agreement dated April 10, 1998 by and among
            Connetics and certain investors (previously filed as Exhibit 10.1 to
            the Company's Report on Form 8-K dated May 6, 1998)

10.41*+     Agreement dated as of April 23, 1998 between Connetics and Suntory
            Limited (previously filed as Exhibit 10.1 to the Company's Report on
            Form 10-Q for the quarter ended June 30, 1998)
</TABLE>



                                       53
<PAGE>   55

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Exhibit
Number      Description
--------------------------------------------------------------------------------
<S>         <C>
10.42*+     Second Omnibus Agreement with SmithKline Beecham Corporation and
            related entities dated April 28, 1998 (previously filed as an
            exhibit to the Company's Current Report on Form 8-K filed May 6,
            1998)

10.43*+     License Agreement dated as of May 5, 1998 between Connetics and
            Genentech, Inc. (previously filed as Exhibit 10.2 to the Company's
            Report on Form 10-Q for the quarter ended June 30, 1998)

10.44*+     Supply Agreement dated as of May 5, 1998 between Connetics and
            Genentech, Inc. (previously filed as Exhibit 10.3 to the Company's
            Report on Form 10-Q for the quarter ended June 30, 1998)

10.45*      Stock Purchase Agreement dated May 5, 1998 between Connetics and
            Genentech, Inc. (previously filed as Exhibit 10.4 to Form S-3
            Registration Statement No. 333-69055)

10.46*      Common Stock Purchase Agreement dated November 20, 1998 by and among
            Connetics and certain investors (previously filed as Exhibit 10.1 to
            Form S-3 Registration Statement No. 333-69055)

10.47*      Registration Rights Agreement dated November 20, 1998 by and among
            Connetics and certain investors (previously filed as Exhibit 10.2 to
            Form S-3 Registration Statement No. 333-69055)

10.48*(M)   Secured Loan Agreement and associated documents dated January 9,
            1998, between Connetics and John L. Higgins (previously filed as
            Exhibit 10.55 to the Company's Annual Report on Form 10-K for the
            year ended December 31, 1998)

10.49*(M)   Letter of Employment dated July 1, 1998 from Connetics to Robert G.
            Lederer (previously filed as Exhibit 10.56 to the Company's Annual
            Report on Form 10-K for the year ended December 31, 1998)

10.50*(M)   Loan Agreement and associated documents dated August 21, 1998,
            between the Company and Robert G. Lederer (previously filed as
            Exhibit 10.57 to the Company's Annual Report on Form 10-K for the
            year ended December 31, 1998)

10.51*      Loan and Security Agreement between Silicon Valley Bank and the
            Company dated September 24, 1998, as modified December 22, 1998
            pursuant to a Loan Modification Agreement (previously filed as
            Exhibit 10.58 to the Company's Annual Report on Form 10-K for the
            year ended December 31, 1998)

10.52*(M)   Restricted Common Stock Purchase Agreement dated November 5, 1998
            between the Company and Kirk Raab (previously filed as Exhibit 10.59
            to the Company's Annual Report on Form 10-K for the year ended
            December 31, 1998)

10.53*(M)   1998 Supplemental Stock Plan (previously filed as Exhibit 10.60 to
            the Company's Annual Report on Form 10-K for the year ended December
            31, 1998)

10.54*      Industrial Building Lease dated November 20, 1998, by and between
            the Company and West Bayshore Associates, a general partnership, et
            al. (previously filed as Exhibit 10.61 to the Company's Annual
            Report on Form 10-K for the year ended December 31, 1998)

10.55*+     Relaxin Scale-up and Bulk Supply Agreement effective as of December
            1, 1998, by and between the Company and Bender + Co. Ges.m.b.H.
            (previously filed as Exhibit 10.62 to the Company's Annual Report on
            Form 10-K for the year ended December 31, 1998)

10.56*      Amendment No. One to License Agreement, effective December 28, 1998,
            between Connetics and Genentech (previously filed as Exhibit 10.63
            to the Company's Annual Report on Form 10-K for the year ended
            December 31, 1998)
</TABLE>



                                       54
<PAGE>   56

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Exhibit
Number      Description
--------------------------------------------------------------------------------
<S>         <C>
10.57*      Amendment No. One to Stock Purchase Agreement, effective December
            28, 1998, between Connetics and Genentech (previously filed as
            Exhibit 10.64 to the Company's Annual Report on Form 10-K for the
            year ended December 31, 1998)

10.58*+     Relaxin Development, Commercialization and License Agreement dated
            January 11, 1999 by and between Connetics and Medeva
            Pharmaceuticals, Inc. (previously filed as Exhibit 10.65 to the
            Company's Annual Report on Form 10-K for the year ended December 31,
            1998)

10.59*      Common Stock Purchase Agreement, dated January 11, 1999, by and
            between Connetics and Medeva PLC (previously filed as Exhibit 10.66
            to the Company's Annual Report on Form 10-K for the year ended
            December 31, 1998)

10.60*      Registration Rights Agreement, dated January 11, 1999 by and between
            Connetics and Medeva PLC (previously filed as Exhibit 10.67 to the
            Company's Annual Report on Form 10-K for the year ended December 31,
            1998)

10.61*      Promotion Agreement effective as of April 1, 1999 between the
            Company and MGI Pharma, Inc. (previously filed as Exhibit 10.1 to
            the Company's Quarterly Report on Form 10-Q for the fiscal quarter
            ended March 30, 1999)

10.62*      Co-promotion Agreement effective as of April 1, 1999 between the
            Company and MGI Pharma, Inc. (previously filed as Exhibit 10.2 to
            the Company's Quarterly Report on Form 10-Q for the fiscal quarter
            ended March 30, 1999)

10.63*      Amendment No. Two to License Agreement, effective as of January 15,
            1999, between the Company and Genentech, Inc. (previously filed as
            Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the
            fiscal quarter ended March 30, 1999)

10.64*      Amendment No. Three to License Agreement, effective as of April 27,
            1999, between the Company and Genentech, Inc. (previously filed as
            Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the
            fiscal quarter ended March 30, 1999)

10.65*(M)   Restricted Common Stock Purchase Agreement dated March 9, 1999
            between the Company and Kirk Raab (previously filed as Exhibit 10.5
            to the Company's Quarterly Report on Form 10-Q for the fiscal
            quarter ended March 30, 1999)

10.66*(M)   Restricted Common Stock Purchase Agreement dated March 9, 1999
            between the Company and Thomas G. Wiggans (previously filed as
            Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the
            fiscal quarter ended March 30, 1999)

10.67*      Collaboration Agreement dated April 27, 1999 between the Company and
            InterMune Pharmaceuticals, Inc. (previously filed as Exhibit 10.7 to
            the Company's Quarterly Report on Form 10-Q for the fiscal quarter
            ended March 30, 1999)

10.68*      Series A-1 and A-2 Preferred Stock Purchase Agreement dated April
            27, 1999 among the Company, InterMune Pharmaceuticals, Inc., and
            various other investors (previously filed as Exhibit 10.8 to the
            Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
            March 30, 1999)

10.69*      Transition Agreement dated April 27, 1999 between the Company and
            InterMune Pharmaceuticals, Inc. (previously filed as Exhibit 10.9 to
            the Company's Quarterly Report on Form 10-Q for the fiscal quarter
            ended March 30, 1999)

10.70*+     Relaxin Development, commercialization and License Agreement dated
            July 7, 1999 between the Company and Paladin Labs Inc. (previously
            filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
            for the fiscal quarter ended June 30, 1999)
</TABLE>



                                       55
<PAGE>   57

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Exhibit
Number      Description
--------------------------------------------------------------------------------
<S>         <C>
10.71*      Common Stock Purchase Agreement dated July 7, 1999 between the
            Company and Paladin Labs Inc. (previously filed as Exhibit 10.2 to
            the Company's Quarterly Report on Form 10-Q for the fiscal quarter
            ended June 30, 1999)

10.72*      Registration Rights Agreement dated July 7, 1999 between the Company
            and Paladin Labs Inc. (previously filed as Exhibit 10.3 to the
            Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
            June 30, 1999)

10.73*      License Agreement (Ketoconazole) dated July 14, 1999 between the
            Company and Soltec Research Pty Ltd. (previously filed as Exhibit
            10.4 to the Company's Quarterly Report on Form 10-Q for the fiscal
            quarter ended June 30, 1999)

10.74*      2000 Stock Plan and form of Option Agreement (previously filed as
            Exhibit 4.4 to the Company's Form S-8 Registration Statement No.
            333-85155)

10.75(c)    Agreement dated December 9, 1999 between the Company and Soltec
            Research Pty Ltd.

21.1        Subsidiaries

23.1        Consent of Ernst & Young LLP, Independent Auditors

24.1        Power of Attorney (see page 50)

27.1        Financial Data Schedule (EDGAR filed version only)
</TABLE>

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

*      Previously filed.

(M)    This item is a management compensatory plan or arrangement required to be
       listed as an exhibit to this form pursuant to Item 601(a)(10)(iii) of
       Regulation S-K.

(c)    We have omitted certain portions of this Exhibit and have requested
       confidential treatment of such portions from the SEC.

+      We have requested and the SEC has granted confidential treatment for
       certain portions of this Exhibit.









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